HONG KONG PLANS FOR ANTI-MONEY LAUNDERING

C O N F I D E N T I A L HONG KONG 003154

SIPDIS

NOFORN
SIPDIS

DEPARTMENT FOR EAP, EAP/CM


NSC FOR DWILDER. KTONG
TREASURY FOR DAS GLASER, OASIA/INA/KOEPKE AND DOHNER
BEIJING FOR FINATT LOEVINGER
STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON/SCHINDLER;
SAN FRANCISCO FOR CURRAN/LUNG;
NEW YORK FRB FOR DAGES/CLARK

E.O. 12958: DECL: 08/04/2031
TAGS: EFIN ECON KJUS PGOV PREL CH HK
SUBJECT: HONG KONG PLANS FOR ANTI-MONEY LAUNDERING
LEGISLATION IN LATE-2008

REF: A. HONG KONG 0314

B. HONG KONG 2514

C. DEPT OF TREASURY 8408 181408Z JULY 06

CLASSIFIED BY: ACTING CONSUL GENERAL MARLENE SAKAUE; REASONS 1.4 (B, D)


1. (C) SUMMARY: FOLLOWING REF B INDICATIONS THAT THE HONG
KONG GOVERNMENT (HKG) LIKELY WILL NOT PASS NEW ANTI-MONEY
LAUNDERING (AML) LEGISLATION UNTIL AFTER THE MARCH 2007 CHIEF
EXECUTIVE ELECTION, WE MET RECENTLY WITH COMMISSIONER FOR
NARCOTICS ROSANNA URE AND HONG KONG MONETARY AUTHORITY (HKMA)
DEPUTY CHIEF EXECUTIVE WILLIAM RYBACK TO LEARN MORE ABOUT HKG
PLANS. ACCORDING TO URE, THE JUNE 2006 FINANCIAL ACTION TASK
FORCE (FATF) MUTUAL EVALUATION DISCUSSION OF THE UNITED
STATES -- WHICH SHE DESCRIBED AS FOCUSED ON HAVING IN PLACE A
DETAILED LEGAL AND REGULATORY FRAMEWORK -- HAD RESHAPED HKG
THINKING ABOUT HOW TO PROCEED. FOLLOWING FURTHER
CONSULTATIONS WITH INDUSTRY GROUPS IN SEPTEMBER 2006, THE HKG
WILL BEGIN TO DRAFT ITS AML LEGISLATION WHILE PREPARING FOR
ITS OWN FATF MUTUAL EVALUATION AND MONITORING OTHER MEMBERS'
REVIEWS IN 2007. IN ADDITION TO NOTING DIFFICULT DISCUSSIONS
WITH THE LEGISLATIVE COUNCIL (LEGCO) OVER COVERT SURVEILLANCE
LEGISLATION, URE UNDERSCORED TWO "SENSITIVE" POLITICAL EVENTS
-- THE 2007 CHIEF EXECUTIVE AND 2008 LEGCO ELECTIONS -- THAT
WOULD ALSO AFFECT THE LEGISLATIVE PROCESS. SHE DID NOT
EXPECT ACTUAL PASSAGE OF THE NEW BILL BEFORE LATE 2008.
SEPARATELY, RYBACK BRIEFED US ON THE NEW INDUSTRY WORKING
GROUP (IWG),FOCUSED ON THE FINANCIAL INDUSTRY, THAT HE
LEADS. WHILE HE DOES NOT VIEW MONEY LAUNDERING AS A MAJOR
PROBLEM IN HONG KONG, RYBACK WOULD LIKE TO SEE THE HKG AND
OTHER INDUSTRY SECTORS DOING MORE TO ENSURE THAT MONEY
LAUNDERING DOES NOT BECOME A MORE SERIOUS PROBLEM IN THE
FUTURE. END SUMMARY.


2. (SBU) HONG KONG COMMISSIONER FOR NARCOTICS ROSANNA URE
RECENTLY BRIEFED THE ACTING CG ON THE HKG'S PLANS TO DRAFT
NEW AML LEGISLATION. THE NARCOTICS DIVISION, PART OF THE
SECURITY BUREAU, IS RESPONSIBLE, INTER ALIA, FOR SETTING
OVERALL POLICY AND COORDINATING IMPLEMENTATION OF AML AND
COUNTER-TERRORIST FINANCING (CTF) MEASURES WITH CONCERNED
AGENCIES, INCLUDING THE DEPARTMENT OF JUSTICE, THE POLICE
FORCE, AND THE CUSTOMS AND EXCISE DEPARTMENT, AS WELL AS
FINANCIAL REGULATORS SUCH AS THE HONG KONG MONETARY AUTHORITY
(HKMA),THE SECURITIES AND FUTURES COMMISSION, THE INSURANCE
AUTHORITY, AND THE BANK AND NON-BANK FINANCIAL SECTORS.

BACKGROUND
--------------


3. (C) DURING A JUNE 5 MEETING WITH VISITING U.S. TREASURY
DEPUTY ASSISTANT SECRETARY DANIEL GLASER (REF B),URE
COMMENTED THAT HONG KONG'S NEW LEGISLATION TO EXTEND AML
REQUIREMENTS TO DESIGNATED NON-FINANCIAL BUSINESSES AND
PROFESSIONS, PURSUANT TO FINANCIAL ACTION TASK FORCE (FATF)
STANDARDS, PROBABLY WOULD NOT BE SUBMITTED TO LEGCO UNTIL
COMPLETION OF TWO EVENTS: THE 2007 CHIEF EXECUTIVE ELECTION,
AND FATF MUTUAL EVALUATION OF HONG KONG SCHEDULED IN 2007.
URE REMARKED THAT THE HKG WANTED TO TAKE INTO ACCOUNT FATF'S
RECOMMENDATIONS BEFORE COMPLETING THE DRAFT LEGISLATION.
DURING HIS VISIT, DAS GLASER ALSO DISCUSSED WITH RYBACK AND
OTHER HKMA OFFICIALS PLANS FOR A NEW INDUSTRY WORKING GROUP
ON AML IMPLEMENTATION.

CLOSELY WATCHING FATF
--------------


4. (C) HAVING RECENTLY RETURNED FROM THE JUNE FATF DISCUSSION
COVERING MUTUAL EVALUATION OF THE UNITED STATES, URE
DESCRIBED ITS IMPACT ON HKG PLANS FOR ITS NEW AML
LEGISLATION. SHE REMARKED THAT FATF APPEARED TO HAVE FOCUSED
MORE ON A MEMBER'S COMPLIANCE WITH REGARD TO ESTABLISHMENT OF
ITS LEGAL AND INSTITUTIONAL FRAMEWORK, THAN ON EFFECTIVENESS
OF IMPLEMENTATION AND RESULTS. SPECIFICALLY, THE HKG
DELEGATION HAD BEEN STRUCK BY CRITICISM THAT THE USG'S LEGAL
FRAMEWORK NEEDED MORE DETAIL, DESPITE AN ASSESSMENT THAT U.S.
EFFECTIVENESS AND RESULTS WERE GOOD. THAT CRITICISM, TAKEN
TOGETHER WITH THE HKG'S DIFFICULT AND COMPLICATED
NEGOTIATIONS WITH LEGCO ON NEW COVERT SURVEILLANCE
LEGISLATION, HAD LED URE AND HER COLLEAGUES TO CONSIDER
REVISING THEIR APPROACH TO THE NEW AML BILL. THE HKG NOW


BELIEVED IT SHOULD MAKE THE LEGISLATION MORE DETAILED, AS URE
SAID AUSTRALIA RECENTLY HAD DONE. THIS WAS NOT THE HKG'S
PREFERRED COURSE, WHICH GENERALLY WAS TO LEAVE AS MUCH
FLEXIBILITY AS POSSIBLE IN THE LAW, AND THEN USE MORE EASILY
AMENDED REGULATIONS TO PROVIDE THE NECESSARY DETAIL.
FURTHER, URE COMMENTED THAT FATF HAD CRITICIZED COUNTRIES
THAT EITHER HAD LACKED CERTAIN MEASURES, OR HAD PASSED
LEGISLATION TOO RECENTLY TO ALLOW A SOUND ASSESSMENT OF
IMPLEMENTATION. URE ASSERTED THAT THE HKG DOES NOT WANT TO
GO THROUGH DIFFICULT NEGOTIATIONS WITH LEGCO, ONLY TO THEN
FACE FATF CRITICISM.


5. (C) URE THEN OUTLINED HOW THE LEGISLATIVE PROCESS WOULD
LIKELY PROCEED. FIRST, THE HKG WOULD CARRY OUT SESSIONS WITH
INDUSTRY GROUPS IN SEPTEMBER 2006. SOME GROUPS WOULD BE MORE
DIFFICULT THAN OTHERS. BANKS WERE VERY KNOWLEDGEABLE AND
EXPERIENCED IN THIS FIELD, BUT EVEN THEY HAD SOME SERIOUS
CONCERNS ABOUT "POLITICALLY EXPOSED PEOPLE" (PEPS) AND HOW TO
IDENTIFY PEPS IN FOREIGN COUNTRIES. JEWELERS, ON THE OTHER
HAND, MIGHT HAVE A TRADE GROUP TO REPRESENT THEIR COMMERCIAL
INTERESTS, BUT HAVE NOT FOCUSED ON AML ISSUES. AFTER THESE
CONSULTATIONS WITH INDUSTRY GROUPS, THE HONG KONG DEPARTMENT
OF JUSTICE WOULD DRAFT THE LEGISLATION, WITH SUBSTANTIAL
GUIDANCE FROM THE SECURITY BUREAU. AS THIS PROCESS WENT
FORWARD, URE SAID THE HKG WOULD ALSO MONITOR CLOSELY FATF
MUTUAL EVALUATIONS OF COUNTRIES IN THE REGION, INCLUDING
SPECIFICALLY THOSE WITH SYSTEMS BASED ON COMMON LAW. SHE
CITED PLANNED 2007 REVIEWS OF JAPAN, SINGAPORE, AND THE U.K.,
WHICH SERVED AS A MODEL FOR HONG KONG'S CURRENT SYSTEM, AS
CASES OF PARTICULAR INTEREST. URE NOTED THE FATF REVIEW
QUESTIONNAIRE FOR HONG KONG WOULD BE DELIVERED IN MID-2007,
FOLLOWED BY THE REVIEW ITSELF IN LATE 2007, WITH PREPARATION
OF THE FATF REPORT BY MAY 2008 FOR CONSIDERATION AT THE JUNE
2008 PLENARY.

"SENSITIVE EVENTS" IN HONG KONG
--------------


6. (C) URE HIGHLIGHTED "SENSITIVE EVENTS" ON THE HORIZON:
THE 2007 CHIEF EXECUTIVE (CE) AND 2008 LEGCO ELECTIONS.
WHILE THE CE ELECTION, PREPARATIONS FOR WHICH ALREADY WERE
WELL UNDERWAY, PROBABLY WOULD NOT IMPINGE UPON THE
LEGISLATION, THE HKG HAD LEARNED FROM DEALING WITH ITS DRAFT
COVERT SURVEILLANCE BILL THAT IT COULD NEED AS LONG AS ONE
YEAR TO SHEPHERD CONTROVERSIAL LEGISLATION THROUGH LEGCO.
WITH THAT IN MIND, URE SAW LITTLE UTILITY IN SUBMITTING AN
AML BILL TO THE CURRENT LEGCO IN 2007, ONLY TO HAVE TO REPEAT
THE PROCESS WITH A NEWLY-ELECTED LEGISLATURE IN 2008. CITING
IN PARTICULAR MARGARET NG OF THE CIVIC PARTY, URE ALSO HOPED
THAT NEW LEGCO REPRESENTATIVES IN 2008 MIGHT BE LESS
CRITICAL, LESS SUSPICIOUS, AND MORE COOPERATIVE THAN CURRENT
MEMBERS. BY WAITING UNTIL 2008, THE HKG WOULD BE ABLE TO USE
THE FATF REVIEW REPORT TO GIVE COVER AND LEGITIMACY TO ITS
LEGISLATIVE PROPOSAL. WITH ALL THESE CONSIDERATIONS IN MIND,
URE DID NOT EXPECT ENACTMENT OF LEGISLATION BEFORE LATE 2008
AT THE EARLIEST.


7. (C) NOTE. RECENTLY, LEGISLATORS FROM SEVERAL PARTIES,
INCLUDING VARIOUS MEMBERS OF THE DEMOCRATIC PARTY (DP),
AUDREY EU OF THE CIVIC PARTY, MIRIAM LAU OF THE LIBERAL
PARTY, AND EMILY LAU OF THE FRONTIER, HAVE CRITICIZED THE
TSANG ADMINISTRATION FOR DELAYS IN SENDING TO LEGCO UNPOPULAR

SIPDIS
BILLS THAT COULD PLAY INTO THE CHIEF EXECUTIVE'S REELECTION
CAMPAIGN AND 2008 LEGCO ELECTIONS. DP CHAIRMAN LEE WING-TAT
STATED PUBLICLY THAT, WHILE THE HKG HAD INDICATED LAST
OCTOBER THAT IT WOULD SEND 23 BILLS TO LEGCO, ONLY 11 HAVE
BEEN TABLED. LEE GAVE TWO EXAMPLES OF IMPORTANT BUT
CONTROVERSIAL LEGISLATION EXPERIENCING DELAYS: THE
PREVENTION OF BRIBERY AMENDMENT ORDINANCE AND THE ANTI-RACIAL
DISCRIMINATION ORDINANCE. DP LEGISLATOR SIN CHUNG-KAI
REMARKED THAT LEGCO REVIEW OF IMPORTANT BILLS COULD TAKE UP
TO TWO YEARS, AND HKG DELAYS WOULD MAKE IT DIFFICULT TO
ADDRESS THEM BEFORE LEGCO MEMBERS' TERMS EXPIRE IN MID-2008.
OTHER LOCAL COMMENTATORS HAVE EXPRESSED SIMILAR CRITICISMS.

INDUSTRY WORKING GROUP
--------------


8. (C) ALTHOUGH HKMA DEPUTY CHIEF EXECUTIVE RYBACK BELIEVES
THAT MONEY LAUNDERING IS NOT A MAJOR PROBLEM IN HONG KONG, HE


WOULD LIKE TO SEE THE HKG DO MORE TO ENSURE THAT MONEY
LAUNDERING DOES NOT BECOME A MORE SERIOUS PROBLEM IN THE
FUTURE. HE CHAIRS A NEW INDUSTRY WORKING GROUP (IWG),WITH
NINETEEN PARTICIPATING HONG KONG BANKS, TO COORDINATE AML/CTF
ISSUES. MEETING QUARTERLY TO REVIEW NEW TRENDS AND
STRATEGIES, THE IWG FIRST MET ON JUNE 12. RYBACK WAS PLEASED
WITH THE PARTICIPANTS' ACTIVE APPROACH TO THE DISCUSSIONS.
HE WAS DISAPPOINTED, HOWEVER, THAT OTHER IMPORTANT INDUSTRY
SECTORS -- SUCH AS ACCOUNTING, REAL ESTATE, JEWELRY, AND
LEGAL SERVICES -- WERE NOT INVOLVED. IN HIS VIEW, THE
SECURITY BUREAU COULD BE DOING MORE TO PROMOTE DISCUSSION OF
AML/CFT ISSUES. (ASKED ABOUT ENGAGEMENT WITH NON-BANK
SECTORS, URE SAID THESE CONSULTATIONS WOULD BEGIN WITH A
SERIES OF SEMINARS IN SEPTEMBER.)

HONG KONG BANKS' IMPROVED RISK MANAGEMENT
--------------


9. (C) RYBACK, APPOINTED AS ONE OF HKMA'S THREE DEPUTY CHIEF
EXECUTIVES IN AUGUST 2003, IS RESPONSIBLE FOR BANKING,
DEVELOPMENT, AND SUPERVISION ISSUES. HE TOLD US THAT HE HAS
FOCUSED ON ENHANCING TWO SPECIFIC AREAS: THE HKMA'S CAPACITY
TO PERFORM AML RISK PROFILING AND, SECOND, RISK-BASED
MANAGEMENT OF HONG KONG BANKS, WHICH HE NOW BELIEVED WAS
WORLD-CLASS. IN JANUARY, THE HKMA ESTABLISHED A SPECIALIZED
AML EXAMINATION TEAM TO CONDUCT BOTH IN-DEPTH EXAMINATIONS OF
ALL THE BANKS, AS WELL AS BENCHMARKING EXAMINATIONS IN
HIGH-RISK AREAS, SUCH AS CORRESPONDENT BANKING, PRIVATE
BANKING, AND REMITTANCES. BY REFUSING TO ISSUE RISK PRICING
GUIDANCE, RYBACK SAID HKMA HAS FORCED THE BANKS TO HIRE THEIR
OWN CREDIT RISK MANAGERS AND IMPROVE THEIR RISK PRICING
CAPACITIES. RYBACK EXPRESSED SOME CONCERN, HOWEVER, THAT
WHEN HKMA MANAGEMENT CHANGES (HE PLANS TO DEPART IN A YEAR)
BANKS COULD RETURN TO SOME OF THEIR EARLIER PRACTICES.

SAKAUE