"Hong Kong On The Move"
American and Hong Kong Perspectives on The First 10 Years Of The HKSAR
Washington, D.C., 22 October 2007

"A Free and Secure Trading Environment"
Keeping Hong Kong "Clean": Hong Kong’s Approach to Combating Money Laundering and Terrorist Financing

Simon Topping
Executive Director, Hong Kong Monetary Authority

Ten years ago, when the Hong Kong SAR was established, anti-money laundering, or AML, was all about identifying so-called "dirty money", money deriving from criminal activities, particularly the drugs trade.  These days it is a much more complex issue, and when we talk about AML we are talking not just about the proceeds of criminal activities, but also, firstly, the laundering of the proceeds of corruption and, secondly, the financing of terrorism.  Currently, there is a desire to further extend AML to cover the proliferation of weapons of mass destruction.  This much wider focus has led to jurisdictions which take such matters seriously having to devote a great deal of attention to putting in place appropriate legislation and guidance, oversight and enforcement.

Like the United States, the Hong Kong SAR is certainly one of the jurisdictions that does take such matters seriously.  Over the last ten years we have consistently placed great emphasis on ensuring that Hong Kong has a state-of-the art approach towards dealing with AML.  Recognising that this is a global issue that requires the combined efforts of all, we have also worked hard to build close ties with other like-minded jurisdictions.  This has meant, in particular, working very closely with our counterparts in the relevant agencies in the United States.

But let me step back a little and talk first about how the international standards on the prevention of money laundering and terrorist financing have developed over the last ten years.  The main actor in this area has without doubt been the Financial Action Task Force on Money Laundering, or FATF.  Their 40 Recommendations on Money Laundering and Nine Special Recommendations on Terrorist Financing are the basis for the increasingly elaborate systems to counter money laundering and terrorist financing that Member jurisdictions have put in place to make it more and more difficult for criminals and terrorists to make use of the global financial system.  Hong Kong is proud to have been a very active member of the FATF for many years.  Indeed, we served as FATF President in 2001/02, and play an active role in FATF plenary and working group meetings.  We also participate in two other important AML groups, the Asia Pacific Group on Money Laundering, and the Egmont Group.  Such participation is important if we are to help drive forward the AML agenda in the region and internationally. 

A second major agent for change in the terrorist financing area in recent years has been the United Nations.  Again, Hong Kong has taken very seriously its obligations in this area, and the necessary legislation has been passed to enable us to implement relevant UN Resolutions.  Legislation has also been passed to criminalise facilitation of the development, acquisition and stockpiling of Weapons of Mass Destruction.

A third agent, of course, is the US government itself, which has taken a number of important steps in recent years to turn up the heat on money launderers, terrorists and WMD proliferators.  The USA PATRIOT Act has of course re-defined the landscape in this area.  But equally important in enabling us all to maintain our vigilance against "undesirables" has been the sharing of intelligence, both by the publication of lists of names by way of Executive Orders, and other means.

What I have just outlined may make it sound as if all this cooperation is on a very formal basis, and rooted in legislation, UN Resolutions, and Executive Orders.  Certainly there needs to be a sound legal basis for cooperation, but such cooperation goes far beyond fulfilling legal obligations.  For example, there is very close contact on a regular basis between the relevant parties in the United States and Hong Kong.  At the HKMA, for example, we have close contact with the various regulatory agencies, but also, where appropriate, with State Department and the Department of the Treasury.  There is also close liaison where appropriate with the US consulate in Hong Kong.  There are many such contacts on all levels between policy-makers, regulators, and law enforcement in the United States and Hong Kong.

But making AML effective is about more than legislation, and about more than cooperation between jurisdictions.  It is about ensuring that those who are the first line of defence against money laundering and terrorist financing - in other words the financial institutions and certain non-financial businesses and professions - have effective systems and controls to guard against criminal use of the financial system.  Being the banking regulator in Hong Kong, the HKMA has issued detailed and comprehensive statutory guidelines to ensure that banks conduct appropriate customer due diligence, vet transactions, maintain appropriate records, and report anything suspicious to the appropriate authorities, generally the Joint Financial Intelligence Unit, or JFIU.  We believe that this system, which is modelled very closely on the FATF requirements, is very effective, although we are certainly very aware of the need to keep controls up-to-date, reflecting the fact that new and clever ways of making criminal use of the banking system are being devised all the time.

With this is mind, it is one of our guiding principles that we should work very closely with the banking industry in developing AML guidance, as it is the industry that knows what the real issues are, and is best placed to help develop practical guidance for dealing with these issues.  The HKMA chairs a standing group known as the Industry Working Group on AML, a group that comprises representatives of some twenty institutions, ranging from indigenous banks to major US and European banks.  This has proved invaluable in considering how best to deal with complex issues such as politically exposed persons, or PEPS, which relates back to the issue I referred to earlier of corruption-related money laundering, and misuse of corporate vehicles, which is another particularly important issue on the minds of those concerned with AML.  Some of these issues may have a particular Hong Kong slant, but they are basically the same issues being dealt with in the United States and elsewhere.

Another reason for working so closely with the industry is to help remind us that when we introduce new AML regulation, however worthy it may be, it has the effect of increasing cost for the industry and it could affect their business.  That will not put us off introducing new requirements which we believe are necessary, but it should make us think about the best way of doing so, i.e. in a manner that is cost-effective and that is business-friendly.  This is an important point.  There is no point having the best AML controls in the world if all it achieves is to drive all the business to a less well-regulated centre just around the corner.  And this, of course, is why it is important for those of us who have good AML controls, such as the United States and Hong Kong, to work diligently on helping raise the standards across the globe, so that there are no easy places for the money launderers to go.

In conclusion, the last ten years have seen the Hong Kong SAR making unstinting efforts to keep Hong Kong clean from criminal misuse of our financial system.  At the same time, we have been supportive of the initiatives led by major economies such as the United States to counter terrorism and WMD proliferation.  We trust that there will continue to be close cooperation between Hong Kong and the United States in this important area, in furtherance of our common interest in promoting security and in suppressing criminal and terrorist-related activities.