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