In Hollywood mob movies, money laundering typically involves a complex web of sham businesses (preferably including a lap-dancing club), but a court case in Hong Kong last week told a different story.
Luo Juncheng, a 22-year-old delivery man from Guangdong, was convicted in Hong Kong’s High Court of laundering HK$13 billion, having deposited up to HK$50 million a day at Chiyu Banking Corp, a local subsidiary of Bank of China’s Hong Kong operation.
During an eight-month period starting in 2009, Luo was able to make 4,800 deposits and 3,500 transfers out of the account, including cross-border transfers from Macau, according to The Standard. It is the biggest money-laundering case in Hong Kong history.
Reports noted that the police froze Luo’s accounts after “noticing” suspicious activity, but it is unclear how the transfers came to their attention in the first place — though a tip-off seems most likely.
The fact that a mainland Chinese resident was able to deposit billions of dollars into a Hong Kong bank account is a good indicator of how easily money flows out of China.
It has also raised questions about the effectiveness of the oversight provided by the Hong Kong Monetary Authority (HKMA), but not all of the blame lies with regulators.
“HKMA’s [anti-money laundering] rules are up to scratch compared with international standards,” said Christopher Clarke, a partner at DLA Piper in Hong Kong. “The issue is not with the law but the quality of enforcement by local institutions.”
In practice, most of the oversight of anti-money laundering rules is done by the banks (and other institutions) themselves — and staying on the right side of the rules is relatively easy, according to Clarke.
“If a bank employee is aware of a suspicious transaction, they should report it to their in-house anti-money laundering reporting officer [AMLRO],” he said. “To minimise the risk of liability, all the bank needs to do is for the AMLRO to complete a form and send it to the Joint Financial Intelligence Unit [JFIU].”
This means banks — especially those with big branch networks — have to spend considerable sums on regularly training staff to make sure they understand how to identify a suspicious transaction and the need to report it, but the reporting process itself is straightforward.
Bank of China Hong Kong has defended the controls it maintains across its network. “We put in place vigorous internal control systems and take all reasonable measures to ensure that proper safeguards exist to control and mitigate [money laundering and terrorist financing] risks,” it told The Standard.
That may seem surprising given the small size of Chiyu’s business — it has 24 branches in Hong Kong and around HK$36 billion in deposits, according to a financial statement from June 30, 2012.
Hong Kong’s anti-money laundering guidelines have long required banks to report suspicious transactions, but an evaluation in 2008 identified a number of weaknesses.
Among other things, the Financial Action Task Force found that customer due diligence and recordkeeping requirements for financial institutions did not have statutory backing, regulators lacked supervisory and enforcement powers, and there were no criminal or supervisory sanctions to deal with cases of non-compliance.
In January 2012, the Securities and Futures Commission announced a new set of guidelines as part of Hong Kong’s first specific anti-money laundering legislation, which came into force in April last year.
The new rules give regulators more teeth, but the system still relies to some extent on banks maintaining effective controls. The hope is that the threat of sanctions will encourage them to take that responsibility more seriously.
