HKMA STILL WAITING TO PULL THE PLUG ON BDA'S HK

C O N F I D E N T I A L HONG KONG 000576 SIPDIS SIPDIS STATE FOR EAP/CM AND EAP/K, TREASURY FOR GLASER, DOHNER AND MOGHTADER, NSC FOR WILDER AND TONG E.O. 12958: DECL: 03/28/2018 TAGS: EFIN ECON HK SUBJECT: HKMA STILL WAITING TO PULL THE PLUG ON BDA'S HK BRANCH REF: A. HONG KONG 459 ¶B. 07 HONG KONG 2430 ¶C. 07 HONG KONG 2567 ¶D. 07 HONG KONG 2904 Classified By: E/P Chief Laurent Charbonnet, Reasons 1.4 b/d ¶1. (C) Summary: Banco Delta Asia's (BDA) Hong Kong-based sister company Delta Asia Credit (DAC) is still unable to conduct business. It remains under management appointed by the Hong Kong Monetary Authority (HKMA) and DAC's former leadership is now working in Macau with BDA. HKMA says it is continuing the process of revoking DAC's license, but will proceed cautiously in the face of expected legal challenges and concerns that the U.S. may reconsider BDA's Section 311 designation. Alternatives to revoking DAC's license have been discussed and rejected by HKMA senior management. Senior HKMA officials are planning to push forward with public action to revoke DAC's banking license in the next few months. End Summary. ¶2. (C) Econ Unit Chief met with HKMA Executive Director for Banking Supervision Arthur Yuen on March 27 to discuss the status of BDA's Hong Kong-based sister institution Delta Asia Credit. While DAC remains legally open under HKMA-appointed manager KPMG, no other banks will process DAC payments, rendering it effectively inoperable as a financial institution. As one of the requirements for a banking license is continued viable operations, DAC no longer qualifies under Hong Kong law. ¶3. (C) HKMA is continuing the process of revoking DAC's license, said Yuen, and has been in communication with Stanley Au's legal representatives (Au is the legal owner of the Delta Asia Credit Group which includes BDA and DAC). Au's legal counsel, the law firm of Clifford Chance, has been adept at finding ways to extend the process, he said. While Hong Kong law allows the HKMA to revoke a banking license for cause, it also requires the HKMA to give the targeted institution a reasonable opportunity to rebut the allegations against it. ¶4. (C) Au's lawyers have been informed of HKMA's plan to revoke the license, as required under Section 23 of the Hong Kong Banking Ordinance. HKMA is proceeding cautiously, however, as they expect Au will file a lawsuit against HKMA when DAC's license is finally revoked. We are trying to give them every opportunity to make their case, in order to protect HKMA against allegations of acting capriciously, said Yuen. It is likely that the decision to officially apply to the Financial Secretary for revocation will be made in the next few months. ¶5. (C) Yuen noted that the process to revoke a Hong Kong banking license takes a considerable length of time under the best of circumstances. Once HKMA decides to revoke the license, it must consult with the Hong Kong Financial Secretary before the revocation takes effect. The designated SIPDIS institution may then appeal the decision to the Executive Council (ExCo),which will request submissions from both sides for consideration before rendering a decision. That ExCo decision may then be appealed for judicial review before the revocation is finalized. The process is likely to take at least several months and provoke sensationalist press coverage, said Yuen. ¶6. (C) When asked if HKMA had considered letting DAC continue to exist indefinitely as a non-functioning financial institution under KPMG management, Yuen replied that many options, including indefinite continuation of the status quo, had been considered. HKMA's senior management rejected that option as an inappropriate use of government power and money and supports moving forward with license revocation, barring new information. ¶7. (C) Yuen asked if the U.S. Treasury is considering lifting the Patriot Act Section 311 designation of Banco Delta Asia (BDA). HKMA is concerned that action to revoke DAC's license could lead to embarrassment if the U.S. Treasury were to subsequently rethink BDA's designation. Econoff responded that there is no evidence to suggest that BDA has made substantive improvements in its AML practices nor has the ownership of the bank demonstrated any commitment to improving BDA's AML compliance regime- (ref A). Without a very public effort by BDA to embrace world-class AML compliance standards, there is no reason for U.S. Treasury to consider lifting BDA's Section 311 designation. Cunningham