THE FIGHT AGAINST MONEY LAUNDERING

1. THE FIGHT AGAINST MONEY LAUNDERING David CarseDeputy Chief Executive Hong Kong Monetary Authority 28 November 2001

2. Outline • The anti-money laundering framework • The role of the HKMA • Terrorist financing

3. What is money laundering? • The process to change the identity of illegally obtained money so that it appears to have originated from a legitimate source. • Legal definition – a person commits an offence if, knowing or having reasonable grounds to believethat any property in whole or in part directly or indirectly represents any person’s proceedsof drug trafficking or an indictable offence, he deals with that property.

4. Stages of money laundering • Placement – the physical disposal of cash proceeds derived from illegal activity. • Layering – separating illicit proceeds from their source by creating complex layers of financial transactions designed to disguise the audit trail and provide anonymity. • Integration – use of layered funds to purchase “clean, legitimate” assets thus placing the laundered proceeds back into the economy in such a way that they re-enter the financial system appearing to be normal business funds.

5. Why is it important to fight money laundering? • Reduce the incentive to commit crime and the means to finance further crime. • Avoid reputational, legal and financial risks to banks and other intermediaries.

6. HK’s involvement in the fight against money laundering • Domestically – Narcotics Division of the Security Bureau is the policy co-ordinator, supported by the Police, Customs & Excise Department, Department of Justice, and the financial regulators. • Internationally – Hong Kong is a member of the Financial Action Task Force on Money Laundering.

7. Financial Action Task Force on Money Laundering (“FATF”) • An inter-governmental body whose purpose is to develop international standards to combat money laundering. • Standards are embodied in FATF’s 40 Recommendations. • FATF tries to identify weaknesses in anti-money laundering systems around the world. • Has begun to name and shame “Non-Cooperative Countries or Territories” that do not apply the FATF standards. • Hong Kong is currently the President of the FATF (July 2001-June 2002).

8. The legislative framework in HK • Relevant pieces of legislation in HK are - • Drug Trafficking (Recovery of Proceeds) Ordinance • Organised and Serious Crimes Ordinance • The effect of these is to - • criminalise money laundering • require reporting of suspicious transactions • allow for freezing and confiscation of proceeds of drug trafficking or serious crime

9. Joint Financial Intelligence Unit (“JFIU”) • Jointly operated by the Police and Customs and Excise Department. • Responsible for receiving suspicious transaction reports in relation to possible money laundering activities. • Refers suspicious transaction reports to appropriate enforcement units for further investigation after preliminary assessment. • Provides advice on tackling money laundering generally.

10. The role of the HKMA • As supervisor, our role is to verify that banks have in place adequate policies, procedures and controls to combat money laundering. • This is consistent with our role to promote the stability of the system and protect depositors.

11. How do we fulfil our role? • Issuance of guidelines on effective controls against money laundering. • On-site examinations of banks’ controls. • Reviews of banks’ controls by external auditors. • Off-site reviews and prudential meetings. • Participation in the global effort, through the Basel Committee and FATF.

12. Key requirement of effective controls: “Know Your Customer” • Banks should establish and verify the identity of their customers, including the beneficial owner of an account. • Banks should also have a good understanding of the customer’s background, business and source of wealth. • This is necessary to identify transactions that fall outside the regular pattern of an account’s activity. • However, also raises compliance costs and civil liberties issues.

13. Latest HKMA initiative • HKMA has recently issued further guidance to banks. • Follows a recent case of cross-border money laundering involving a money changer in HK. • Latest guidance relates to “know your customer”, ongoing monitoring of accounts, and role of the compliance officer and internal audit.

14. Key lessons • Don’t assume that a transaction is not suspicious simply because the customer deals in money. • Don’t assume that money changers registered with the Police are regulated and therefore automatically OK. • Don’t focus simply on cash transactions. • In relation to funds sourced from outside HK, ask two key questions - • is it reasonable to assume that the funds came from legitimate sources? • has the money been remitted through proper channels? • Compliance officers should be more proactive.

15. Terrorist financing (1) • Definition - “the wilful provision or collection of funds…with the intention that the funds should be used or in the knowledge that they are to be used, in order to carry out terrorist acts.” • Following 11 September there have been intensified efforts to track down and freeze terrorist funds. • Aim is to starve terrorists of funds and to deny them access to the international financial system.

16. Terrorist Financing (2) • Various lists of terrorist suspects have been published. • UN Security Council has passed a Resolution (No 1373) on measures to combat terrorism. • FATF has issued a set of Special Recommendations on Terrorist Financing. • A number of jurisdictions have passed anti-terrorist legislation.

17. FATF special recommendations (1) • Ratify and implement relevant UN instruments (including Resolution 1373). • Criminalise terrorist financing and associated money laundering. • Freeze and confiscate terrorist assets. • Report suspicious transactions linked to terrorism. • Provide assistance to other countries’ law enforcement and regulatory authorities for relevant investigations.

18. FATF special recommendations (2) • Impose anti-money laundering requirements on alternative remittance systems. • Strengthen customer identification measures in wire transfers. • Ensure non-profit organisations cannot be misused to finance terrorism. • Achieve compliance by end-June 2002. • Possible counter-measures against jurisdictions that do not comply.

19. The situation in Hong Kong (1) • Regulations are in place to implement previous UN Resolutions in relation to the Taliban and Usama bin Laden - • prohibit the making of funds available to individuals or entities connected with the above • require their funds to be frozen. • Process to implement Resolution 1373 in HK is currently underway - • this will enable terrorist funds in general to be frozen.

20. The situation in Hong Kong (2) • HKMA has circulated the various lists of terrorist suspects to banks - • other regulators have done the same for their institutions. • We have asked them to check their records and report any suspicious accounts and transactions to the JFIU and the HKMA.

21. Practical difficulties • Multiplicity of lists of suspects • Commonality of names and multiplicity of aliases • Terrorist money may derive from non-criminal sources • may not be caught by existing money laundering legislation • need to shift focus from source of funds to use of funds • How to apply measures against “terrorism” in general that are not linked to specified individuals or places. • How to deal with underground money transfers. • How to pick up relatively small sums that may be linked to terrorism but are not intrinsically “suspicious”.

22. Conclusions • Despite the practical difficulties, banks around the world have no option but to take the fight against money laundering very seriously. • It is the right thing to do. • In addition, given the current mood, there is a risk that non-compliant banks, and the financial centres within which they operate, could be ostracised from the world financial system.