“It’s bad form to mention money-laundering. Instead, you should talk about asset-management structures and tax beneficial schemes”
– John Sweeney
Introduction – What is Money Laundering in Hong Kong?
“Money laundering? I wouldn’t even know what soap to use”
– Mitt Romney
In the simplest term, money laundering is the process of hiding the source of money generated from illegal income (e.g. a crime) by processing such ‘dirty money’ through what appears to be legitimate business activities. In Hong Kong, money laundering is simply described as dealing with proceeds from and/or suspected to have derived from a crime. At present, Hong Kong’s Anti-Money Laundering (“AML”) laws are encapsulated in the following four legislations:
- Organised and Serious Crime Ordinance (Cap. 455) (“OSCO”);
- United Nations (Anti-Terrorism Measures) Ordinance (Cap. 575) (“UNATMO”);
- Drug Trafficking (Recovery of Proceeds) Ordinance (Cap. 405) (“DTROPO”); and
- Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (Cap. 615) (“AMLO”)
(Collectively “Hong Kong’s AML Laws”)
At present, whilst OSCO, UNATMO and DTROPO are the legislations which criminalize money laundering activities, AMLO is implemented in order to close the loop by imposing upon financial institutions (e.g. banks) and other regulated institutions or professions (e.g. law firms) various customer diligence (aka Know Your Client or KYC) procedures and record keeping process.
Usually, Hong Kong’s AML cases are prosecuted by a multitude of law enforcement departments including the Hong Kong Police Force (usually in drug trafficking cases), Customs and Excise Departments (in smuggling cases), Independent Commission Against Corruption (ICAC) (usually for fraud and corruption related matters), Joint Financial Intelligence Unit (JFIU) as well as regulators the likes of the Hong Kong Monetary Authority and Securities and Futures Commission.
The maximum penalty for an individual convicted for AML related offences under OSCO or DTROP is a fine of HK$5,000,000 and imprisonment for up to 14 years.
What are the Elements of Money Laundering?
According to s.25 of OSCO, an individual commits a money laundering offence if he is found to have dealt with property (both cash and other forms (e.g. art, chattels, etc.)) when “having reasonable grounds to believe that any property in whole or in part directly or indirectly represents any person’s proceeds of an indictable offence, he deals with that property.” Accordingly, the elements that a prosecutor must prove include:
1. Factual Elements
such action may include receiving, acquiring, concealing, disguising, disposing, converting, bringing into or removing from Hong Kong or using such proceeds to borrow money and be dealt with as securities.
Letting a criminal (or a suspected one) deposit money from unclear source into your bank account and later withdrawing it (e.g. putting a new source on top of the criminalized funds).
means any form of property located in Hong Kong or elsewhere and includes both movable and immovable property.
Cash deposits, direct payments, artworks (valuation of which are commonly fictional, etc.)
1.3 Proceeds of a Crime:
the property (usually in the form of proceeds) are realized as a result of a criminal act.
Cash payments from a fraud scheme. Fraudsters now use third-party bank accounts. As a result, individual should have proper query whenever a deposit is made into their account to make sure it is not tainted.
2. Mental Elements
2.1 Reasonable Grounds to believe: there is a two-stage test that Hong Kong’s prosecutor will usually employ which includes:
2.1.1 Evaluation of facts or circumstances personal to each defendant as to whether the defendant should have reason to suspect the property might have been tainted.
2.1.2 Whether a reasonable person who shared the defendant’s knowledge would have bound to believe that the property was tainted. In this case, even if a person genuinely believe that the property is not tainted (but a normal person would) (e.g. the logic employed by the individual is illogical), that person may still be held liable.
It should be noteworthy that under the OSCO and DTROP, there are extraterritorial applications of the laws. As such, where the proceeds are the result of a drug trafficking offence overseas, Hong Kong’s AML Laws will automatically kick into effect.
Global ALM Laws Discussed
With money laundering being the common enemy of the governments around the globe, Hong Kong is surely not the only one which puts so much efforts in combating money laundering.
As mentioned above, AMLO is implemented to impose customer diligence procedures and record keeping process on financial institutions and other regulated institutions or professions. The customer due diligence or enhanced customer due diligence procedures, as may be required, entail verifying identity of costumers or persons purporting to act on their behalf, identifying beneficial owners and obtaining information as to the purpose and nature of the intended transaction.
United Kingdom (“UK”) and European Union (“EU”) Compared
Turning to the United Kingdom, notwithstanding Brexit, the Money Laundering and Terrorist Financing Regulations 2019, one of the AML legislations of the United Kingdom, implemented the European Union Fifth Money Laundering Directive (“5MLD”), and it came into effect in January 2020.
While customer due diligence and enhanced customer due diligence are still expected under 5MLD, the scope of persons subject to the regime is widened to include custodian wallet providers, providers engaged in exchange services between virtual currencies and fiat currencies, art dealers engaging in transactions of a certain stipulated amount, auditors, external accountants and tax advisors as a principal professional activity and estate agents acting as intermediaries in leasing property with a monthly rent exceeding a certain stipulated amount.
United States of America (“USA”) Compared
Customer due diligence and enhanced customer due diligence procedures can also be found in the AML laws of the United States. In particular, the Congress passed the Anti-Money Laundering Act 2020, which brought changes to the AML laws.
Similar to 5MLD, the Anti-Money Laundering Act expanded the coverage of the regulated areas under the Bank Secrecy Act to include antiques dealt by art dealers and virtual currencies. Perhaps the highlight of the Anti-Money Laundering Act is its emphasis on using innovative approaches like machine learning and other enhanced data analytics processes in modernizing the AML regime.
Combating money laundering is top of the agenda of governments around the globe. Hong Kong, which has been enhancing its AML regime, ought to
(i) keep reviewing its AML laws and ensure they do not create loopholes; and
(ii) make reference to other contemporary jurisdictions.
The potential persons to be subject to the AML laws and the technologies to be employed are definitely topics Hong Kong may want to further look into at this juncture.