Standard Chartered Bank

Banks learn about the difference in US and HK money-laundering rules

Monetary Authority says while it does not use the same tools as its US counterparts, it insists the standards in HK are just as rigorous

PUBLISHED : Monday, 25 August, 2014, 3:34am
UPDATED : Tuesday, 26 August, 2014, 2:55pm

Standard Chartered is the latest global bank with extensive operations in Hong Kong to learn the hard way that financial regulators in the city and the United States take a very different approach to the enforcement of anti-money laundering efforts.

The New York Department of Financial Services last week fined Standard Chartered US$300 million after its New York branch failed to flag high-risk transactions from clients in Hong Kong and the United Arab Emirates.

In December 2012, HSBC Holdings agreed to pay US$1.92 billion in fines to settle charges related to money laundering and terrorist financing levelled by US authorities.

The Hong Kong Monetary Authority has never fined any banks for such breaches, although the court has imposed heavy penalties on individuals for money laundering. The steepest punishment was meted out to Luo Juncheng, who was jailed for 10½ years in January last year for laundering more than HK$13 billion involving online transactions between Hong Kong and the mainland over eight months.

The HKMA says that while it has different supervisory tools to that of its US peers, it insists the standards in Hong Kong are just as high. Both jurisdictions are members of the Financial Action Task Force (FATF), requiring banks under their watch to have measures in place to report or monitor their customers to prevent the bank networks being used for illegal transfers.

"Different jurisdictions face different money laundering and terrorist-financing threats, therefore in practice, different regulators have different measures tailor made to their local market operations," an HKMA spokeswoman said.

She cited the concerns in US about money laundering related to Mexican drug cartels.

In contrast, worries about illegal cross-border transactions are closer to home for Hong Kong. The city has adopted a risk-based supervisory approach that requires more bank vigilance over large transfer volumes.

"Hong Kong, as a major commercial and trading hub in Asia, naturally has a very large volume of cross-border transactions," the spokeswoman said. "Using different supervisory tools doesn't mean we have a weaker regime. We have a wide range of powers under the banking ordinance which allow us to ensure continuing enhancement on banks' anti-money-laundering and counter-terrorism controls.

"HKMA is empowered to restrict banks' business and remove their management teams in extreme scenarios."

She said the HKMA had doubled the resources to ensure banks comply with the anti-money laundering rules and report suspicious transactions to the Joint Financial Intelligence Unit, which is run by the police and customs. Local banks reported 12,931 suspicious transfers in the first five months of this year.

Hong Kong introduced an anti-money laundering law in 2012 after the FATF in 2008 pointed out the city did not meet global standards without such a law. The law adds requirements for banks to step up due diligence on customers, with the provision of fines of up to HK$10 million for each breach found against a bank of its anti-money-laundering responsibilities.

Graham Lim, a partner at law firm Jones Day, said regulators in the US - in contrast to their Hong Kong counterparts - had decades of experience tracking suspect transactions.

"KYC [know-your-client] type rules in the US have been around since the 1970s, with a sharp uptick since 911 and the enactment of the [anti-terrorism] Patriot Act. The US has a unique and deeper history compared to most other countries, including Hong Kong," Lim told the South China Morning Post. "The regulators all have the same objective in mind but with different legal rules … and enforcement histories, you're going to see differences in the way these regulators work."

A specialist involved in cross-border bank transactions said that when a bank conducted a transaction between Hong Kong and New York, a gap in compliance spending existed between the two jurisdictions.

Financial centres such as New York exacted increasingly high compliance spending from banks, said the specialist, who asked not be named. The cost is lower in Hong Kong and banks here are unlikely to spend in order to meet foreign regulations.

Patrick Rozario, a director and head of risk advisory services at accounting firm BDO, said Hong Kong would be hard pressed to match the US on combating money laundering and terrorist financing. "The legal systems between Hong Kong and the US are very different. The businesses conducted by the lenders in the two markets are also different. Hence, the regulators also adopt different approaches," he said.

Christopher Cheung Wah-fung, the legislator for the financial services sector, said: "The US regulator does not understand Asian business practices and culture. I do not see why we should follow the US way of regulation."

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