SCENESETTER FOR UNDER SECRETARY JOSEPH'S VISIT TO

C O N F I D E N T I A L SECTION 01 OF 04 HONG KONG 003911

SIPDIS

NOFORN
SIPDIS

STATE FOR UNDER SECRETARY JOSEPH
STATE FOR EAP/CM, EB/TRA
STATE FOR ISN/CPI RUGGIERO
TREASURY FOR DAS GLASER/SHARMA
NSC FOR STEPHENS

E.O. 12958: DECL: AFTER KOREAN REUNIFICATION
TAGS: ECON EFIN EWWT HK KN MC OVIP PARM PREL PTER
SUBJECT: SCENESETTER FOR UNDER SECRETARY JOSEPH'S VISIT TO
HONG KONG OCTOBER 18-20

Classified By: Consul General James Cunningham. Reasons:
1.4 b,d.


1. (SBU) Summary: We look forward to your visit next
month. Hong Kong works closely with us on the
security front. Your visit provides a timely
opportunity to push ahead our agenda with Hong Kong in
three linked areas:

-- Our shared commitment to secure trade, particularly
through improving container screening programs.

-- Our work to ensure that Hong Kong maintains its
effective counter-proliferation and export control
regimes, autonomous from the PRC.

-- Our efforts to ensure Hong Kong's (and Macau's)
vigilance against money laundering and illicit
financial activities related to North Korea.

End Summary.

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SECURE TRADE
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2. (SBU) A key theme for your visit would be our
shared commitment to secure trade. As the largest
source of U.S.-bound containers, Hong Kong was among
the first in Asia to participate in the Container
Security Initiative (CSI). Cooperation between Hong
Kong Customs and Department of Homeland
Security/Customs and Border Protection on CSI is
exemplary and paved the way for CSI programs in
Shanghai and Shenzhen. Two port operators, Hong Kong
International Terminal and Modern Terminal, have each
established a pilot of the Integrated Container
Inspection System (ICIS),which combines radiological
mapping, x-ray images, container tagging and makes a
digital record for each container passing through its
portals. Hong Kong's port operators, along with the
Government (HKG),are considering whether to purchase
this integrated port security system, but are waiting
for U.S. government guidance as to whether the ICIS
system meets U.S. requirements. The Port Security
Improvement Act of 2006 passed by the U.S. Senate on
September 14 directs the Department of Homeland
Security to designate three foreign ports for the
establishment of pilot integrated scanning systems
that couple non-intrusive imaging and radiological
detection equipment. In this regard, Hong Kong
appears to be a world leader and we should encourage
them to continue their efforts as they move toward the
shared goal of strengthening port/container security.

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PROLIFERATION AND EXPORT CONTROLS
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3. (SBU) Hong Kong is a cooperative partner in
preventing the transfer of goods through its ports
that could be used by the DPRK in its missile and WMD
programs. Hong Kong authorities emphasize that their
Anti-Terrorism, Weapons of Mass Destruction, Narcotics
and Serious Crime ordinances provide the necessary
legal powers to act and convict persons engaging in
illicit activities involving the DPRK. Hong Kong
maintains an effective, highly autonomous, and
transparent export control regime. In September, the
Bureau of Industry and Security (BIS) Assistant
Secretary Darryl Jackson congratulated the Hong Kong

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government for obtaining a conviction of a Hong Kong
company for violations of Hong Kong's Strategic Goods
Law in a case for which BIS provided Hong Kong key
information. Hong Kong continues to be an important
partner in protecting the smooth functioning of the
global trading system. Its contributions reflect
understanding of its role as a premier transportation
center.

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MONEY LAUNDERING
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4. (C) The Treasury Department's 2005 designation of
Macau's Banco Delta Asia (BDA) as an institution "of
primary money laundering concern" under Section 311 of
the Patriot Act reverberated throughout the region.
Macau authorities, cognizant of the attention the BDA
designation had generated worldwide and the possible
negative effects on investment and tourism revenues,
immediately assumed control of BDA. In March 2006,
Macau's legislature passed Anti-Money Laundering and
Counter-Terrorism bills and in September announced the
formation of a Financial Investigation Unit. Macau
authorities are cooperating with U.S. Treasury/IRS
Officials in the ongoing investigation of BDA. In
September, investigators completed the task of
scanning and digitizing 220,000 BDA documents and are
now beginning the process of examining the data. In
early September, Chief Executive Edmund Ho told the CG
that Macau is willing to extend its control over BDA
for another six months, but both Ho and the PRC's
Ministry of Foreign Affairs Commissioner in Macau Wan
Yongxiang told the CG that they hoped the BDA case
would be resolved quickly. Asia's financial world will
be watching carefully how our government resolves this
case.


5. (C) Hong Kong's Monetary Authority (HKMA) appointed
a manager to oversee BDA's Hong Kong subsidiary, Delta
Asia Credit (DAC). The ultimate disposition of DAC
will depend on how Macau decides to treat BDA. As the
second largest financial market in Asia, after Japan,
Hng Kong?s cooperation in preveting financial
transactions related to the DPRK's WMD and missile
programs is crucial. HKMA has implemented a rigorous
AML/CTF regime in line with international standards.
HKMA has alerted Hong Kong banks to exercise vigilance
regarding North Korean financial transactions and HKMA
officials have conducted reviews of North Korean
transactions moving through Hong Kong banks. In
September, as we briefed them on UNSCR 1695, Hong Kong
Monetary and Police authorities expressed their
willingness to continue to support these efforts.
They urged the U.S. Government to provide specific,
detailed, evidentiary information so that they can
more effectively monitor, investigate, stop and
prosecute illicit activities related to North Korea?s
missile and WMD programs. More general information on
patterns and trends would also be very useful, said
the Hong Kong officials.

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Itinerary
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6. (SBU) We are arranging meetings with Hong Kong's
Chief Executive Donald Tsang, Secretary for Security
Ambrose Lee and Hong Kong Monetary Authority Chief
Executive Joseph Yam on October 19.


7. (U) We have also arranged for you to give a
luncheon speech to members of the Asia Society. The
topic of your speech, "Defensive Measures: Combatting
Weapons of Mass Destruction and Missile Proliferation"
fits in well with our ongoing efforts here in Hong
Kong.


8. (SBU) On October 20, we are arranging for the
Treasury officials in your delegation to travel to
Macau to meet with Chief Executive Edmund Ho,
Secretary of Administration Florinda Chan, Macau

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Monetary Authority Chairman Anselmo Teng and Financial
Investigation Unit Head Deborah Ng.

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Politics
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9. (C) We have requested a meeting with Chief

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Executive (CE) Donald Tsang, who heads the government
of the Hong Kong Special Administrative Region
(HKSAR). Tsang took office on June 21, 2005,
following an interim election to fill the remaining
two years of the term of former Chief Executive Tung
Chee Hwa. Tung resigned in March 2005 due to
widespread dissatisfaction over his management and
political style. During his first eighteen months in
office, Tsang has enjoyed high public approval
ratings, reflecting confidence in Tsang's
administrative competence, his deliberate outreach
efforts and Hong Kong's robust economy.


10. (C) Your visit comes as Tsang prepares for what
should be an easy reelection campaign. Under Hong
Kong's partially democratic electoral system, in
December various constituencies will select the 800
members of the Chief Executive Election Commission,
which in turn will select the next Chief Executive in
March 2007. Barring any severe political, economic,
or social crisis, Tsang -- who enjoys strong support
from the central government in Beijing -- will win
reelection by a wide margin, and possibly will run
unopposed. Many in the pan-democratic opposition
parties had hoped that former Chief Secretary Anson
Chan, a retired, highly respected career civil
servant, would contest the election on their behalf,
but she has declined to do so. Now, they will select
one of their leaders to attempt to gain at least one
hundred nominations from the Election Commission,
which would force Donald Tsang to face an opponent and
presumably to debate the future of democratic reform
and other issues; both Tsang and Beijing would prefer
to avoid such debate. Further progress toward
universal suffrage, required by Hong Kong's Basic Law,
has been deferred until at least 2012.

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Economics
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11. (U) Hong Kong is a valuable United States partner
on trade liberalization and other economic issues.
Hong Kong's transparent regulatory regimes, modern
financial systems, rule of law, open society, and long
experience with capitalism serve as a model for
mainland China's own development. Hong Kong is a
global nexus of people, goods and finance. Like the
United States, Hong Kong is confronting the challenges
of continuing to effectively move goods, people and
money and providing reliable and secure communications
systems, while at the same time controlling the spread
of WMD, drugs and diseases such as Avian Flu.


12. (U) Hong Kong suffered a series of economic
shocks after the 1997 handover, including the Asian
Financial Crisis, the migration of its manufacturing
sector to mainland China, and the SARS outbreak.
These economic crises dented public confidence in the
first post-handover government headed by Tung Chee
Hwa. The economy rebounded in 2003 amidst strong
growth in China, increased tourism, and a healthy
global economy. The Hong Kong government is deepening
its economic interaction with the Pearl River Delta
(PRD) in Southern China to maintain its position as a
gateway to China. Services industries make up 90
percent of Hong Kong's GDP (US$ 180 billion in 2005)
with a focus on financial and professional services,
transportation and logistics and tourism. Hong Kong
faces sharpening competition from mainland rivals in
services industries; however, its strong rule of law
record, modern practices and transparent society
suggest that it will remain a key finance and services
hub.


13. (U) Hong Kong consistently advocates for open
global trade. In the U.S. - Hong Kong trade arena,
textiles, civil aviation and IPR continue to be key
issues. We have negotiated an MOU with Hong Kong to
combat illegal transshipments of Chinese textiles. We
urge Hong Kong to further liberalize its civil

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aviation market, which Cathay Pacific continues to
dominate. Hong Kong has dramatically improved its
enforcement of IPR, but there are ongoing concerns
about pending changes to the Copyright Law, end-user
software piracy, and pharmaceutical-related
infringements.

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Environment
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14. (U) Hong Kong's air quality has deteriorated
dramatically over the past ten years due to pollution
that can be traced to the tremendous growth of
factories across the border in the Peal River Delta of
mainland China. There is growing concern among Hong
Kong residents that pollution is having an
increasingly negative impact on health, quality of
life and the economy.

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Avian Influenza
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15. (SBU) Hong Kong has experienced two human
outbreaks of the highly pathogenic H5N1 subtype of the
AI virus. The city's earliest case of bird-to-human
transmission was in 1997 when eighteen people were
infected with H5N1; six died. In the 2003 outbreak,
two Hong Kong citizens died while traveling in Southern
China. Between 1997 and 2005, Hong Kong slaughtered
over 4 million birds to prevent spread of AI. Although
there have been no recent human cases in Hong Kong,
since January the virus has resurfaced in a number of
native wild birds and in two chickens, which may have
come from mainland China. Health experts believe that
H5N1 is present in Hong Kong's natural environment.


16. (SBU) Hong Kong has some of the world's leading AI
researchers, extensive experience in dealing with
SARS, and a well-organized AI response plan. The
Centre for Health Protection (CHP) leads the HKG's AI
preparations. After SARS, the HKG formed the CHP to
deal with infectious disease threats. The HKG plans
to acquire 20 million doses of Tamiflu by 2007 and is
talking to manufacturers about purchasing a H5N1
vaccine when it is produced. Continually updating its
AI response plan, the HKG works with the private
sector and community groups.
Cunningham