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