DELTA ASIA CREDIT: HONG KONG GOVERNMENT FIGHTS BACK

C O N F I D E N T I A L HONG KONG 001016 SIPDIS STATE FOR EAP/CM, EAP/K, EEB/IFD AND EEB/ESC, TREASURY FOR TFFC DAS GLASER AND OASIA, BEIJING FOR TREAS ATTACHE E.O. 12958: DECL: 06/03/2019 TAGS: EFIN ECON KN MC HK SUBJECT: DELTA ASIA CREDIT: HONG KONG GOVERNMENT FIGHTS BACK REF: A. HONG KONG 918 ¶B. 05 STATE 168932 Classified By: Consul General Joe Donovan for reasons 1.4 (b) and (d) ¶1. (C) Summary: Econ Unit Chief and Econ Officer delivered the newly declassified version of the 2005 non-paper on Banco Delta Asia (originally delivered in September 2005) to Hong Kong Monetary Authority (HKMA) Banking Supervision Department Executive Director Nelson Man on June 4. Man is confident the Hong Kong courts will uphold HKMA's October 2008 decision to de-license Banco Delta Asia's (BDA) Hong Kong's affiliate, Delta Asia Credit (DAC). Nevertheless, HKMA is taking the case very seriously. Man fears an unfavorable decision, combined with the public criticism HKMA is currently facing for allowing Hong Kong banks to sell complex structured financial products to retail investors, would lead to a loss of confidence in HKMA's banking supervision regime. HKMA will submit its answer to DAC's allegations on June 5, highlighting the grounds for its 2008 decision. HKMA will also introduce as part of its rebuttal a summary of the recently declassified non-paper in ref B. Man said the Court will review submissions from both sides before scheduling arguments later this summer. End Summary. Confident in sure win... -------------- ¶2. (C) HKMA Executive Director Nelson Man said June 4 he is confident HKMA will overcome legal challenges to its October 2008 decision to revoke DAC's banking license. Upon delivery of the declassified document, Man explained that HKMA's response to DAC's challenge will introduce evidence showing that DAC was not "a fit and proper entity to conduct meaningful" banking operations in Hong Kong. HKMA plans to provide evidence of DAC's record of non-compliance with Hong Kong banking regulations and a summary of a recently declassified non-paper contained in reference B (paragraphs 8 and 12, redacted). This non-paper was delivered in September 2005 and notified HKMA of Treasury's intention to identify BDA as an institution of primary money laundering concern under section 311 of the Patriot Act. The Court will review submitted affidavits before scheduling legal arguments, Man said. ... but concerned about implications for defeat -------------- -- 
¶3. (C) Although Man believes this case will not receive much public attention, he expressed concerns about the implications of an "unlikely" judicial loss. HKMA's senior management has been under continuous pressure from the press and Legislative Council to take responsibility for allowing the sale of complex structured products by bank investment arms to unsophisticated retail investors. If the court overturns HKMA's decision to de-license DAC, it would add fuel to a public debate over the quality of HKMA's bank supervision regime, which the HKMA feels is already too heated. A decision in favor of DAC would almost certainly lead to internal audits and reforms of HKMA's policy-making guidelines. The Arguments -------------- ¶4. (C) According to Man, DAC contends that it has always followed the requirements of Hong Kong's Banking Ordinance and that HKMA's de-licensing decision was based on U.S. Treasury Department actions taken against BDA. Man explained HKMA's response will show the HKMA decision was not based on U.S. Treasury's guidance but made only after three years of carefully considering all available facts, to include DAC's historic non-compliant record in Hong Kong and HKMA's assessment of the business impact on BDA by the U.S. Treasury ruling. HKMA's Grounds for De-Licensing -------------- ¶5. (C) Man defended HKMA's decision to revoke DAC's banking license as in keeping with Hong Kong's Banking Ordinance requirements to prohibit entities not "fit and proper" to continue meaningful banking operations in Hong Kong. Man cited several examples of DAC's non-compliant record, including its failure to notify HKMA in advance of material transactions, DAC's practice of accepting deposits for BDA in violation of Hong Kong banking rules, and its failure to comply with HKMA advice that owner Stanley Au remove himself from management responsibilities well before the U.S. Treasury decision on BDA. HKMA will also cite the detrimental business impact resulting from the U.S. Treasury actions against DAC's Macau affiliate, BDA, which effectively barred both companies from the international banking system. The U.S. Treasury Department decision to designate BDA as an institution of money laundering concern did not directly influence HKMA's decision to revoke DAC's banking license, Man said. But as DAC is now unable to establish banking relations or currency clearance mechanisms, and is unable to access the international financial system, HKMA believes DAC cannot continue meaningful banking operations in Hong Kong. DONOVAN