Download The Fight Against Money Laundering

THE FIGHT AGAINST MONEY
LAUNDERING
David Carse
Deputy Chief Executive
Hong Kong Monetary Authority
28 November 2001
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Outline

The anti-money laundering framework

The role of the HKMA

Terrorist financing
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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 believe that any property in whole
or in part directly or indirectly represents any
person’s proceeds of drug trafficking or an
indictable offence, he deals with that property.
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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.
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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.
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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.
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Financial Action Task Force on
Money Laundering (“FATF”)
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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).
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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
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Joint Financial Intelligence Unit
(“JFIU”)



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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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 antiterrorist legislation.
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FATF special recommendations (1)

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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.
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FATF special recommendations (2)
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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.
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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.
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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.
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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”.
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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.
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