Money laundering case puts banking laws under spotlight

The conviction of Hong Kong's biggest money launderer has raised questions about whether banking regulations are strong enough

PUBLISHED : Friday, 25 January, 2013, 12:00am
UPDATED : Tuesday, 30 July, 2013, 9:06pm

When Luo Juncheng first walked into the offices of Hong Kong's Chiyu Bank in August 2009, he was a teenager setting up an account for a company he had bought off the shelf three days earlier. When he returned 10 days later, he set up a personal account with a meagre HK$500 deposit.

During the next eight months, some HK$13 billion moved in and out of those accounts, largely by internet transfer, at a rate of HK$50 million per day.

Luo, described in the Court of First Instance case that ended on Wednesday as a school dropout who worked as a factory delivery man in Shenzhen before quitting to care for his ill mother, is now dubbed Hong Kong's biggest money launderer, with a judge calling for a review of sentencing guidelines after handing down a 10-1/2-year term.

Madam Justice Esther Toh Lye-ping said the case was aggravated because it involved money transfers across borders, from the mainland and Macau.

But the case, and the fact Luo, now 22, was able to make 4,800 deposits and 3,500 transfers out of his Chiyu account has raised the question of whether Hong Kong's regulations are strong enough to prevent people using internet banking to transfer massive sums across the border.

Big banks the world over are under scrutiny for failure to prevent money laundering. HSBC last month agreed to pay a record US$1.92 billion in fines to settle a money laundering and terrorist financing investigation by US authorities.

Christopher Cheung Wah-fung, the legislator representing the financial services sector, said Hong Kong, as a free market, may be especially vulnerable to money laundering activities.

"All the financial firms need to be alert to money laundering activities, such as frequent internet transactions involving huge sums," Cheung said.

The issue is becoming more acute amid a crackdown by the incoming government on the mainland, Cheung said, with new state leaders keen to have top officials declare their assets. This has led some officials and their families to try to go into hiding overseas, while others attempt to move ill-gotten assets beyond Beijing's reach through the banking system, with Hong Kong and Macau as waypoints.

"These types of activities damage the interests of the country. If these officials used Hong Kong as a base to transfer money from the mainland to the city and then to overseas markets, it would seriously undermine the reputation of Hong Kong as an international market. The regulators and the banks should pay more attention to these malpractices," Cheung said.

The court case shed little light on where the money Luo laundered came from - his defence said he was working for a family friend known as Uncle Pang, who had funded medical treatment for Luo's father before he died in 2002 - or who the recipients were.

There was also no indication of how police became aware of Luo's activities.

Chiyu Bank did not responded to queries from the Post, but its parent company Bank of China (Hong Kong) stressed the group had complied with all laws against money laundering.

"The [group], including Chiyu Banking Corporation, complies with all relevant laws and regulations of Hong Kong, as well as the jurisdictions where we operate, in combating money laundering and terrorist-financing activities," it said. The bank refused to comment on the specifics of the case for legal reasons.

"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 activities," a spokeswoman said.

Chiyu, founded by tycoon Chen Jiageng in 1947, received investment from Bank of China (Hong Kong) in 1970 and is now a member of the group. It has 24 branches in Hong Kong, one branch and one sub-branch in Xiamen , and one branch in Fuzhou . It offers internet banking services for Hong Kong and mainland customers.

On its website, Chiyu says it offers "one-stop cross-border banking services to customers in Hong Kong and mainland China, helping customers to capture every investment and business opportunity in cross-border trades, supporting them to accumulate wealth".

The Luo case demonstrates some of the problems in Hong Kong's anti-laundering regime before the new Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance was introduced in April of last year.

The law was introduced after criticism by the Financial Action Task Force, an international body, which found that the city did not meet international standards for the prevention of money laundering

Under the ordinance, all banks and financial institutions, brokers, insurance companies and money changers have to conduct more rigorous checks on suspicious cash transactions.

The range of penalties includes a public reprimand, a fine of up to HK$10 million or, in the most serious cases, criminal prosecution resulting in a maximum prison sentence of seven years. The new law imposes a single set of requirements on all financial firms to carry out rigorous due diligence checks on a customer's background, keep records and have procedures for staff to report suspicious cases to the police.

A spokeswoman for the Hong Kong Monetary Authority could not comment on an individual case. But she said all banks, regardless of their size, are required to continuously monitor business relationships by examining the activities of their customers.

"The HKMA monitors banks' compliance with the legal and regulatory requirements under the anti-money-laundering ordinance through its policy of continuous supervision, including on-site examinations," the spokeswoman said.

Edward Chow Kwong-fai, deputy chairman of the Business and Professionals Federation of Hong Kong, says Hong Kong's anti-money-laundering regime is tough enough, particularly under the new law.

"The new money laundering law has tough requirements for banks and financial firms to have details and proceed to check the background of the clients. That is very tough already," Chow said. "What needs to be strengthened is to make sure the HKMA does sufficient monitoring, while banks should also have their internal guidelines to ensure staff report suspicious transactions."

Hong Kong Investment Funds Association chief executive Sally Wong shared Chow's view. "The Securities and Futures Commission has issued a set of guidelines, which give practical guidance as to how financial institutions can implement their own policies, systems and controls to meet the requirements under the new anti-money-laundering ordinance. Fund managers are subject to very rigorous anti-money-laundering requirements," she said.

But lawmaker Cheung says enforcement is the key issue. "Even if we have a tougher law in place, it still needs all the financial staff to fulfil their duty to check on suspicious dealings, and the regulators have to carry out the proper enforcement to crack down on money laundering," Cheung said.