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