Prevention of Money Laundering and Terrorist Financing 22

Prevention of Money Laundering and Terrorist Financing 22 June 2005 1

Outline of our Legal Seminar l What is Money Laundering and Terrorist Financing l The Legislation on money laundering in Hong Kong l Basic policies to combat money laundering and terrorist financing l The general trend and development in anti-money laundering in other jurisdictions (Break Time) 2 l Guidelines for banking practice l Practices in other trades and industries l Case studies l Summary & Conclusion l Questions and Answers Session

What is Money Laundering? l 3 ‘Money Laundering’ covers all procedures which change the identity of illegally obtained money so that it appears to have originated from a legitimate source.

3 Stages of Money Laundering 4 l Placement ( 使用 ) – physical disposal of dirty cash l Layering ( 分層 ) – series of transfers of funds to disguise the origin l Integration ( 混合 ) – use layered funds to purchase clean legitimate assets

What is Terrorist Financing? l 5 ‘Terrorist Financing’ refers to the carrying out of transactions involving funds or property that are owned or controlled by terrorists or transactions that are linked to terrorist activities

The legislation on Money Laundering and Terrorist Financing in Hong Kong 6 l Drug Trafficking (Recovery of Proceeds) Ordinance (“DTROP”) (Cap. 405) 第 405章販毒(追討得益)條例 l Organized and Serious Crimes Ordinance (“OSCO”) (Cap. 455) 第 455章有組織及嚴重罪行條例 l United Nations (Anti-Terrorism Measures) Ordinance (“UNATMO”) (Cap. 575) 第 575章 聯合國(反恐怖主義措施)條例 l United Nations Sanctions (Afghanistan) Regulation under the United Nations Sanctions Ordinance (“UNSO”) (Cap. 537) 第 537章 聯合國制裁條例

Drug Trafficking (Recovery of Proceeds) Ordinance (“DTROP”) (Cap. 405) 第 405章販毒(追討得益)條例 l 7 Provisions for investigating suspected assets, freezing assets on arrest and confiscation of proceeds from drug trafficking

Drug Trafficking (Recovery of Proceeds) Ordinance (“DTROP”) (Cap. 405) 第 405章販毒(追討得益)條例 l S. 25 specifies a criminal offence if a person commits an offence if he “deals with” property knowing or having reasonable grounds to believe it represents a person’s proceeds of drug trafficking – Dealing includes: l l l 8 receiving or acquiring the property concealing or disguising the property disposing of or converting the property bringing the property into or removing it from HK using the property to borrow money, or as security

Drug Trafficking (Recovery of Proceeds) Ordinance (“DTROP”) (Cap. 405) 第 405章販毒(追討得益)條例 – Max penalty l on conviction upon indictment - HK$5, 000 fine and imprisonment for 14 years l On summary conviction HK$500, 000 fine and imprisonment for 3 years 10

Drug Trafficking (Recovery of Proceeds) Ordinance (“DTROP”) (Cap. 405) 第 405章販毒(追討得益)條例 – 11 In practice, it is likely to cover situations where one enters into/is otherwise concerned in an arrangement to facilitate the movement of the proceeds of drug trafficking/the obtaining of credit secured on those proceeds/assisting in the investment of those proceeds on behalf of that client

Drug Trafficking (Recovery of Proceeds) Ordinance (“DTROP”) (Cap. 405) 第 405章販毒(追討得益)條例 l S. 25 A(1) – imposes an obligation on a person who knows/suspects that any property represents proceeds from drug trafficking to disclose such knowledge/ suspicion to an “authorized officer” ( 獲 授權人 ). – 12 Max penalty l HK$50, 000 fine and imprisonment for 3 months

Drug Trafficking (Recovery of Proceeds) Ordinance (“DTROP”) (Cap. 405) 第 405章販毒(追討得益)條例 13 – An authorized officer includes any police officer, any member of the Customs & Excise Department ( 海關 ). and Joint Financial Intelligence Unit (“JFIU”) ( 聯合財富情報組 ) – The JFIU has been established by and is operated by the Police and Customs & Excise Department. It functions as the local and international advisor on money laundering matters generally.

Drug Trafficking (Recovery of Proceeds) Ordinance (“DTROP”) (Cap. 405) 第 405章販毒(追討得益)條例 JFIU contact details Joint Financial Intelligence Unit ( 聯合財富情報組 ) 16/F, Arsenal House West Wing, Hong Kong Police Headquarters, Arsenal Street, Hong Kong or GPO Box 6555 Hong Kong Post Office, Hong Kong Telephone : (852) 2866 3366 or (852) 2860 3404 Fax : (852) 2529 4013 Email : jfiu@police. gov. hk 14

Drug Trafficking (Recovery of Proceeds) Ordinance (“DTROP”) (Cap. 405) 第 405章販毒(追討得益)條例 l 15 S. 25 A(2) provides that if a person who has made the necessary disclosure under S. 25 A(1) does any act in contravention of S. 25(1) and the disclosure relates to that act he does not commit an offence if – the disclosure is made before he does that act and the act is done with the consent of an authorized officer or – the disclosure is made after the person does the act and the disclosure is made on the person’s own initiative and as soon as it is reasonable for him to make it

Drug Trafficking (Recovery of Proceeds) Ordinance (“DTROP”) (Cap. 405) 第 405章販毒(追討得益)條例 l S. 25(A)(3) – 16 Disclosure made under the Ordinance shall not be treated as a breach of any confidentiality obligations imposed by contract etc. Accordingly, no liability for damages will attach upon such disclosure

Drug Trafficking (Recovery of Proceeds) Ordinance (“DTROP”) (Cap. 405) 第 405章販毒(追討得益)條例 l 17 S. 25 A(4) – Disclosure can be made by person in employment to appropriate person in accordance with procedures made by employer. Such disclosure is equivalent to disclosure to an authorized officer

Drug Trafficking (Recovery of Proceeds) Ordinance (“DTROP”) (Cap. 405) 第 405章販毒(追討得益)條例 l S. 25(A)(5) – Person who knows or suspects that a disclosure has been made under S. 25 A(1) must not disclose to any other person any matter likely to prejudice any investigation. Otherwise, he commits an offence – 18 Max penalty l on conviction upon indictment HK$500, 000 fine and imprisonment for 3 years. l On summary conviction HK$100, 000 fine and imprisonment for 1 year

Drug Trafficking (Recovery of Proceeds) Ordinance (“DTROP”) (Cap. 405) 第 405章販毒(追討得益)條例 l 19 S. 26 – No witness in any civil or criminal proceedings shall be obliged to reveal the identity of the person making the disclosure except in proceedings for an offence under section 25, 25 A and 26 of the DTROP, or where court takes the view that justice cannot be fully served without revealing the identity of the person making the disclosure

Organized and Serious Crimes Ordinance (“OSCO”) (Cap. 455) 第 455章有組織及嚴重罪行條例 l 20 S. 25 – Extends the money laundering offence to cover the proceeds of all indictable offences in addition to drug trafficking – Examples of indictable offences ( 可公訴罪行 ) include any crime or offence for which a magistrate is authorized or empowered or required to commit the accused person to prison for trial before the court e. g. theft, robbery, kidnapping

Organized and Serious Crimes Ordinance (“OSCO”) (Cap. 455) 第 455章有組織及嚴重罪行條例 l S. 3 to S. 5 – 21 An authorized officer may apply to court for order requiring information material to be produced/ search warrant to be granted

Organized and Serious Crimes Ordinance (“OSCO”) (Cap. 455) 第 455章有組織及嚴重罪行條例 l 22 S. 25, S. 25 A and S. 26 – modelled upon S. 25, S. 25 A and S. 26 of DTROP – Reference to “drug trafficking” becomes reference to “indictable offences” – Same penalties apply as in DTROP

United Nations (Anti-Terrorism Measures) Ordinance (“UNATMO”) (Cap. 575) 第 575章 聯合國(反恐怖主義措施)條例 23 l UNATMO is directed towards all terrorists. l UNATMO criminalizes the supply of funds and making funds or financial (or related) services available to terrorists or terrorist associates, permit terrorist property to be frozen and subsequently forfeited

United Nations (Anti-Terrorism Measures) Ordinance (“UNATMO”) (Cap. 575) 第 575章 聯合國(反恐怖主義措施)條例 24 l “Terrorist” means a person who commits, or attempts to commit, a terrorist act or who participates in or facilitates the commission of a terrorist act l “Terrorist associate” means an entity owned or controlled, directly or indirectly, by a terrorist

United Nations (Anti-Terrorism Measures) Ordinance (“UNATMO”) (Cap. 575) 第 575章 聯合國(反恐怖主義措施)條例 l 25 “Terrorist act” is defined as the use or threat of action that would have the effect of: – causing serious violence against a person – causing serious damage to property – endangering a person’s life – creating a serious risk to the health or safety of the public or a section of the public – seriously interfering with or seriously disrupting an electronic system or – seriously interfering with or seriously disrupting an essential service, facility or system, whether public or private and

United Nations (Anti-Terrorism Measures) Ordinance (“UNATMO”) (Cap. 575) 第 575章 聯合國(反恐怖主義措施)條例 – the use or threat is: l l 26 intended to compel the Government or to intimidate the public or a section of the public and made for the purpose of advancing a political, religious or ideological cause

United Nations (Anti-Terrorism Measures) Ordinance (“UNATMO”) (Cap. 575) 第 575章 聯合國(反恐怖主義措施)條例 l 28 A list of “terrorists” or “terrorist associates” is published in the Gazette from time to time pursuant to S. 10 of the United Nations Sanctions (Afghanistan) Regulation and S. 4 of the UNATMO

United Nations (Anti-Terrorism Measures) Ordinance (“UNATMO”) (Cap. 575) 第 575章 聯合國(反恐怖主義措施)條例 29 l S. 12(1) requires a person to report his knowledge or suspicion of terrorist property to an authorized officer who includes a police officer, a member of C&E, Immigration and ICAC l Failure to disclose will constitute an offence and attracts a fine of HK$50, 000 max. and 3 -months imprisonment l Similar to DTROP and OSCO, disclosure pursuant to the UNATMO shall not be regarded as breach of confidentiality obligations imposed by contract etc.

United Nations Sanctions (Afghanistan) Regulation under the United Nations Sanctions Ordinance (“UNSO”) (Cap. 537) 第 537章 聯合國制裁條例 l 30 UNSO provides for a prohibition on making funds available to “designated” terrorists

Basic policies to combat money laundering and terrorist financing All relevant institutions should: 31 l issue a statement of policies and procedures for dealing with money laundering and terrorist financing reflecting the current statutory and regulatory requirements l regularly review the policies and procedures on prevention of money laundering and terrorist financing to ensure their effectiveness l adopt customer acceptance policies and procedures which are sensitive to the risk of money laundering and terrorist financing

Basic policies to combat money laundering and terrorist financing 32 l conduct customer due diligence (“CDD”) depending on different types of customers, business relationships or transactions l ensure that the content of relevant industry Guidance Note is understood by all employees l promote employees’ awareness and vigilance to guard against money laundering and terrorist financing

Basic policies to combat money laundering and terrorist financing Policies should cover the following aspects: l Communication of group policies on anti-money laundering and terrorist financing l Account opening and customer identification l Maintenance of records l Compliance with relevant legislation l Co-operation with relevant law enforcement authorities, including timely disclosure of information l Internal audit to ensure compliance with policies, procedures, and controls on anti-money laundering 33

Systemic Approach to Identifying Suspicious Transactions recommended by JFIU 34 l Step one: Recognition of a suspicious financial activity indicator or indicators l Step two: Appropriate questioning of the customer l Step three: Review of information already known about the customer in deciding if the apparently suspicious activity is to be expected from the customer l Step four: Consideration of Steps 1 -3 above to make a subjective decision on whether the customer’s financial activity is genuinely suspicious or not

Points to note on CDD l l Client identification Take all necessary steps to establish true identity of client – Individual/origin/background/profile – Corporations l identification of directors/searches/credit reference /identification of shareholders l l 35 beware of companies with nominee shareholders and bearer shares/ownership structures/place of incorporation/nature of business and activities Determine risk profile of customers - PEPs, casinos, NCCT’s (details of which can be found on FATF website)

Points to note on CDD l Client identification - to continue – Examples of low risk customers include: l l 36 financial institutions authorized and supervised by the HKMA, the Securities and Futures Commission and the Office of the Commissioner of Insurance public companies subject to regulatory disclosure requirements – Trust accounts/Nominee accounts/Client accounts – Reliance on intermediaries for CDD – Periodic reviews of existing information

Points to note on CDD l Additional CDD measures – – – 37 obtain self-declarations and comprehensive profile information re source of funds anticipated account activity etc.

Record Keeping l Keep records to enable a sufficient audit trail to be followed l Keep records for at least such periods prescribed by the relevant industry regulators i. e. HKMA and other relevant legislation l For each account – – – 38 beneficial owner volume, origin and destination of funds flowing through the account person giving instructions

Record Keeping l For selected transactions – – 39 origin of the funds form in which funds were transferred person giving instructions destination of funds

Procedures for disclosures 40 l Coordinate through a central point, say, senior compliance officer l Keep register of reports made to compliance department and to JFIU

Education and Training l 41 Put programmes in place for training staff on an ongoing basis

The General trend and development in anti-money laundering and terrorist financing The position in other jurisdictions: l 1988 - UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substance 42 l 1989 - Establishment of FATF 33 members, 31 countries governments and 20 observers - Forty Recommendations drawn up in 1990 l 1996 - Recommendations were revised (1 st Revised) FATF endorsed by 130 countries

The General trend and development in anti-money laundering and terrorist financing 43 l 1997 - DTROP S. 25, UNSO – 8. 9. 97 Law Society - Money Laundering Guidance Notes for Solicitors - cir 97280(SD) DTROP and OSCO l 2000 - OSCO – HKMA Guideline on Prevention of Money Laundering

The General trend and development in anti-money laundering and terrorist financing 44 l 2001 – September - 9. 11 Event – October - expanding FATF mandate to terrorist financing l 2002 – UNATMO, DTROP Cap 405 (1. 1. 2003)

The General trend and development in anti-money laundering and terrorist financing 45 l 2003 – Financial Action Task Force (Revised) FATF Forty Recommendations extending the effects to lawyers [Recognized by International Monetary Forum (IMF) and World Bank] – Money Laundering Cir 03 -428 (SD) l 2004 - S 25 A DTROP – 22. 10. 2004 FATF further amendments

The General trend and development in anti-money laundering and terrorist financing l 46 2005 – Law Society Money Laundering Cir 05291 (SD) 30. 5. 2005 – Bill – OUR TALK ON 18 JUNE 2005

Members of Financial Action Task Force l l l 47 Argentina Australia Austria Belgium Brazil Canada Denmark European Commission Finland France Germany l l l l l Greece Gulf Cooperation Council Hong Kong, China Iceland Ireland Italy Japan Luxembourg Mexico l l l Netherlands New Zealand Norway Portugal Singapore Spain Sweden Switzerland Turkey United Kingdom United States

Effect of the Laws/Regulations Overview 48 l Drug Trafficking (Cap 405) l Organized and Serious Crimes (Cap 455) l United Nations (Anti-Terrorism Measures) Ordinance (Cap 575) l United Nations Sanctions (Afghanistan) Regulation under the UNSO (Cap 537) Authorized Agent S 25 A – 做臥底, 可以透 -不可露 S 25 A, S 3 to 5 – Confidentiality or Professional Privilege

Drug Trafficking [DTROP] S 25 Other Indictible Offences in addition to drug trafficking S 25 [OSCO] Organized and Serious Crimes Ordinance in receipt of restraint Order or Property of a Reference of a defence under OSCO S 12(1) 49 Terrorists and their Acts. Gazetted. [UNATMO] [UNSO]

Guidelines for Banking Practices l Hong Kong Monetary Authority Guidelines – 50 Applies directly to all banking and deposit taking activities in Hong Kong carried out by authorized financial institutions

Hong Kong Monetary Authority Guidelines 51 – HKMA Guidelines Section 5. 21 effectively pass the responsibility for the verification of customer identity and apparent legitimacy from the bank to the intermediary – A know-your-customer policy and procedure (“KYC policy”) for financial institutions – A sample of KYC Questionnaire for client is shown in the attached file.

Examples of Suspicious Transactions l l l 52 Unusually large cash deposits Substantial increases in cash deposits Individual or company whose account shows virtually no normal banking or business related activities Fictitious information provided for account opening Back-to-back deposit/loan transaction with subsidiaries/ affiliates of overseas financial institutions in known drug trafficking areas Investment management services requested by clients where source of funds is unclear or not consistent with the client’s apparent standing

Examples of Suspicious Transactions l l l 53 Building up of large balances, not consistent with known turnover of customer’s business, and subsequent transfer to accounts held overseas Unexplained electronic fund transfers Changes in employee characteristics e. g. lavish life styles Any dealing with an agent where identity of ultimate beneficiary or counterparty is undisclosed Customers repay problem loans unexpectedly Request to borrow against assets where the origin of the assets is not known

The Securities Industry 54 l Equally vulnerable to money laundering and terrorist financing l Likely to be used in “Layering” stage whereby cash can be transformed into various forms of assets such as securities, bonds, futures contracts etc l Securities are highly liquid and therefore prove attractive to money launderers

SFC Guidance Note - April 2003 55 l Provide comprehensive guidance to the securities industry in developing appropriate policies and procedures to combat money laundering and terrorist financing l For use primarily by corporations licensed under SFO and associated entities which are not authorized financial institutions

Consultation paper on Proposed Revised Prevention of Money Laundering and Terrorist Financing Guidance Note (April 2005) 56 – To bring in line with new set of anti money laundering and anti terrorist financing recommendations issued by FATF in June 2003 and Oct 2004 – To provide guidance on areas of practical application e. g. identification of individual customers , measures to mitigate risk posed by non face to face customers

Examples of suspicious transactions 57 l Large or unusual settlements of transactions in cash or bearer form l A client who deals with a broker only in cash rather than through banking channels l Requests by customers for investment management services where the amount of funds is not consistent with the customer’s apparent standing l FATF issued a paper in April 2002 on guidance for financial institutions in detecting terrorist financing l Gazette notices

The Insurance Industry l 58 Similar to the securities industry, the insurance industry has its own guidance note in Nov 2000 to guard against money laundering. The Guidance Note is supplemented by 2 further guidance notes published in June 2003.

Insurance Industry Guidance Note l 59 The Guidance Note and other supplements apply to all authorized insurers, insurance agents and insurance brokers carrying on a long-term business which are not financial institutions authorized by the HKMA

Insurance Industry Guidance Note l 60 The Guidance Note: – explains what is money laundering and terrorist financing – sets out the principal HK legislation governing these matters – sets out policies and procedures in dealing with possible money laundering together with detailed guidance on customer verification and retention of records; and – gives examples of suspicious transactions

Examples of Suspicious Transactions 61 l Purchase of large single-premium insurance policies and their subsequent rapid redemption l Request for early encashment of single premium policies, for cash or settlement to an individual third party l A money launderer may arrange with groups of people to assign any legitimate claims on their policies to be paid to money launderer

Legal Industry l Law Society Guidance Notes For Solicitors (Circular 97 -280 attached) – – Aware of the legislation alert to any unusual circumstances make further enquiries of their clients where appropriate Institute anti-money laundering procedures l l 62 appoint a compliance officer staff training establish internal reporting procedures establish record keeping procedures

Law Society Guidance Notes For Solicitors l 63 The Office Manual of K. C. Ho & Fong are in compliance to the Law Society Guidance Note. Extracts from our office manual are attached

Case Study - Case 1 l Based on: – HKMA Guidelines Section 5. 21 states: “Where the applicant for business who is acting on behalf of another person is an intermediary with which the financial institution has an established business relationship and where the institution is fully satisfied as to its reputation, conduct and good faith, it shall be reasonable for the institution to accept a written assurance from the applicant for business that evidence of the underlying principals has been obtained, recorded and retained, and that the applicant is satisfied as to the source of funds” The guidelines effectively pass the responsibility for the verification of customer identity and apparent legitimacy from the bank to the intermediary – 64

Case 1. . . Company B, subsidiary of major accounting firm The case Mr. A, qualified • Buy 2 shelf companies C and D – both registered in Western Samoa • No enquirers on beneficial owners of the shelf companies, relying on professional relationship with Mr. A • Open bank accounts in name of company C and company D with a bank in HK l. Bank made no background enquiries due to its established accountant professional relationship with Company B. 65

Case 1. . . The case Transactions on Company C’s bank account l “Over HK$3 million cash deposit l “No identification on depositor l “No withdrawals made ever 66 Origin of the funds • Over $90 million traced including the $3 million in the bank account of company C. • Beneficial owner of company C arrested in UK for dealing in proceeds of drug trafficking

Case 1. . . The case Transactions on company D’s bank account l Mr. F, beneficial owner of Co D used C$550 K cash from another bank (vis T/T – transaction cost HK$7, 000) - Bank account of co. D in HK (vis T/T in A$ - transaction HK$10, 825) - Bank in Western Samoa l Mr. F also used another C$192 K cash to buy US$140 K worth of T/chq ___________________________ Origin of the funds… l Mr. F arrested in Australia charged with conspiracy to traffic in dangerous drugs and dealing in the proceeds of drug trafficking 67

Case 1 l l l l 68 Indicators of money laundering in the case: Use of shelf companies and company formation agencies Inconsistent account activity with no normal business transactions Account used as temporary repository (layering) Large cash deposits with no explanation as to source of the money Uneconomical transactions Involvement of off-shore financial centre (Western Samoa)

Case Study - Case 2 l Based on: – – 69 SFC Guidance Note on Money Laundering (Section 4. 5. 4) expects staff of SFC regulated institutions to: “(know) enough about a customer’s business and financial circumstances to recognize that a transaction, or series of transactions, is unusual”

Case 2. . . The case Mr. Y $7 M draw cheque on Co. X Bank 1 Address : public housing unit Occupation : not recorded Business address: not recorded $15 M cashier order $1. 0 M cash withdrawn $2 M cash withdrawn Co. X (controlled by Mr. P) 70 Active trading of shares of company N $7 M cashier order Company N’s shares price rose by 27% in 2 months $1. 6 M cash deposit $17 M cashier order Bank 2

Case 2. . . Mr. Y draw $7 M cheque on Co. X Bank 1 71 • Sudden large sums of money passing through the account • No information on Mr. Y’s business activity to explain source of funds • Unusual for low cost handling required to have big amount passing through the accounts in relatively short time Bank 2

Case 2. . . Investigation by Police and SFC: Mr. Y (member of triad society) • Mr. P (Senior member of triad society) • Beneficial owner of Co. X • Major beneficiary of $1. 6 M profit generated from Mr. Y’s dealing in Co. N’s shares Note Insufficient evidence to substantiate criminal charges However, strong suspicion that Mr. Y and Mr. P had conspired to “create false trading” in Co. N shares 72

Case 2 Stock broker should have noticed and made a STR: l 73 SFC Guidance Note 4. 5. 4: – “Mr. Y’s account was opened specifically to deal in the shares of Co. N” – “Little information on Mr. Y or his business to explain the trading of the shares with substantial turnover and frequency – Investigated by JFIU but not prosecuted – Reminded by JFIU to set up anti-money laundering systems and reporting procedures

Summary and Conclusion l 74 Note the following tips: – Purpose of anti-money laundering and antiterrorist financing legislation l against crimes – Establish Internal Policy – How to identify suspicious acts l read the relevant industry guidance carefully

Summary and Conclusion 75 – More importantly talk to your supervisor/ manager about any suspicious acts/ transactions of clients – Record / File Notes / Document Handling should be well-organized and preserved at Godown / Storage – Good and sensible judgement

Prevention of Money Laundering and Terrorist Financing 76 l Any Questions? l Comments?

Contacts of K. C. HO & FONG Office address 18 th Floor, Henley Building, No. 5 Queen’s Road Central Telephone : 2810 0707 Fax : 2845 3650/2840 1308 E-mail: office@kcho-fong. com l l l 77 Mr Junius Ho Partner Direct line: 2523 3846 Ms Anna Chong Consultant Direct line: 2180 8683 Miss Peggy Liu Consultant Direct line: 2185 7777