Money laundering makes sense when it's good for business

PUBLISHED : Tuesday, 04 May, 2010, 12:00am
UPDATED : Tuesday, 04 May, 2010, 12:00am

After nearly two years of making little headway on strengthening the city's anti-terrorism and anti-money laundering policies, Hong Kong officials are scrambling to show progress before a report to international watchdogs is due in June.

South China Morning Post, May 2

Let me tell you about a cheeky money-laundering scam, a big one that has been going on for a long time unhindered.

We have annual exports of HK$2.6 trillion, which is about half as much again as the size of our economy. Very little of this, however, comes from within Hong Kong. Almost 98 per cent consists of re-exports from across the border and we have long given up the pretence that we do any work on these goods before they go on board ship at our port.

We do make some alterations to the paperwork, however. Between the border and the port, the value of these goods magically rises an average of about 17.5 per cent in a rabbit-out-of-the-hat trick that we call the rate of re-export margin.

Why should these goods be repriced in this roundabout way?

Simple. The manufacturer across the border, poor fellow, just cannot make any money from his factories. He ships his goods to Hong Kong at cost and therefore does not pay a 40 per cent mainland profits tax, much as he would like to do so.

Similarly, he does not pay any tax in Hong Kong as our taxman does not treat the paper shuffle here as a profit generating activity. Our manufacturer therefore pockets a 17.5 per cent profit without paying a sliver of tax.

We have a name for this sort of thing. We call it money laundering and if you haul out your calculator and work out 40 per cent unpaid tax on 17.5 per cent profit margins on HK$2.54 trillion annually of re-exports, you get to a figure of HK$178 billion a year.

The nitty-gritty reality is undoubtedly less than this but it still gives us good reason to claim Hong Kong as the finest laundry shop in the world. We wash in huge size, we wash white and we never have customer complaints about lost laundry.

And before you start pronouncing your 'tut-tuts' about evasion of Beijing's legitimate tax levies, bear in mind that if Beijing did in fact collect the money, it would most likely be squandered on circuses like the World Expo in Shanghai or on overbuilt and underused transport projects.

With the laundry shop at work, however, the money is rerouted to the mainland through hands that do not waste it. It goes as foreign capital investment, where it has built up an industrial base that accounts for more than half of the country's exports. Let's hear three cheers for money laundering, one of the pillars of China's economic success.

Do not link this to terrorist financing. Terrorists do not need much finance and what they want they can get through traditional channels that anti-laundering agencies have never plugged. It is a cheap excuse for American war hawks to blame the unwinnable nature of their wars in the Middle East on laundered funding of their opponents.

What we mostly have with money laundering is a victimless crime, one in which no one is killed, no one is hurt and no one is robbed. Most commonly it features a foreign government short of tax revenues that it thought it was owed although the lawyers can still dispute this as the country's tax code is 200,000 pages thick.

We don't have tax troubles of this sort in Hong Kong. Our tax codes are relatively simple and our collections sound, so why should we trouble ourselves with the self-inflicted headaches of other governments?

But, no, our government is now also being pressured to conform to international standards in limiting the amount of cash that we can carry across our borders.

Try depositing yuan cash with HSBC some day. The teller will put the banknotes in a plastic bag and inform you that they won't be credited to your account until they have been checked for counterfeits. That's how little these things are trusted. Tell her that you got them from HSBC originally and she'll say: 'Oh, then you won't have any problem.'

It's true, which is why many people who go to regions of China that still rely heavily on a cash economy like to have their cash on hand before they make the trip, a wise precaution.

This wisdom may no longer meet with approval in Belgium or Canada, however. Carrying more yuan across the border than is required for tourist cash purchases could soon put you under suspicion of being a terrorist or a drug trafficker.

I like our traditional way of dealing with this problem - make lots of affirmations of virtue along with many promises of compliance as in 'Hong Kong officials are scrambling to show progress'.

And then?

Well, what's for lunch today?

Yes, I'm a traditionalist, I am.