MONEY LAUNDERING

Russian hot money flows into Hong Kong after West slaps sanctions on Moscow

Western sanctions against Moscow over conflict in Ukraine sees firms turning to the city for their financing needs, but some banks are wary

PUBLISHED : Monday, 15 September, 2014, 4:40am
UPDATED : Monday, 15 September, 2014, 9:22am

Russian money is flowing into Hong Kong as investors look for a safe haven from Western sanctions – but investors are running into obstacles with banks, which are nervous about money laundering, analysts say.

In the first seven months of this year, there has been a net outflow of US$28 billion from Russia, in contrast to net inflows of US$36 billion for the whole of last year, according to CrossBorderCapital, a London firm that monitors global liquidity flows.

"A number of banks in Hong Kong have been unwilling to provide financing to certain Russian individuals and corporate entities over the last six months, who failed to pass the banks' anti-money-laundering procedures," said Hugo Williamson, managing director of IPSA International, a global risk consultancy.

This was because Russian depositors and Russians seeking loans faced significant scrutiny by banks in Hong Kong, as the banks sought to minimise the risk of money laundering, said Williamson.

"With this increased interest in Asian money markets comes the increased risk to Asia of possible money laundering by certain Russian criminal or corrupt interests."

Russians have looked to China, Hong Kong and Singapore for finance
Hugo Williamson, IPSA International

The Hong Kong Monetary Authority said that while it "monitors many aspects of the economic and financial environment", it did not have specific information on the inflows of funds broken down by origin.

"Russians are known as significant borrowers, but Western banks have over the last year been unwilling to loan money to Russian clients. It is estimated that Russian interests have close to US$150 billion in debt repayments this year, and thus Russians have looked to China, Hong Kong and Singapore for sources of finance," Williamson said.

It was more difficult for Russians to open a bank account in Hong Kong compared to other nationalities, said Ashley Galina Dudarenok, managing director of Alarice International, a Hong Kong consultancy that advises multinationals on their strategies for Hong Kong and China.

In the past few months, Russians had come to Hong Kong to establish companies and open bank accounts, said Dudarenok. "They do not mind going through all the trouble because they really want to have a presence here."

For example, Russian mobile operator Megafon has decided to convert 40 per cent of its cash, totalling US$1.3 billion on June 30, to Hong Kong dollars. Novatek, Russia's second-largest natural gas firm, is similarly converting US currency to Hong Kong dollars, say Russian media.

"Russian corporates operate in a US dollar-based economy," said Nikos Asimakopoulos, senior associate at Alaco, a risk consultancy in Britain. The transition to the Hong Kong currency is made seamless by the city's US dollar peg.

"This is clearly a move to keep the companies' cash flows outside American sanctions. Interestingly, the receiving banks in Hong Kong are not Western banks but Chinese financial institutions," Asimakopoulos said.

Hong Kong respected UN sanctions, but there was normally no obligation under city laws for financial institutions to comply with sanctions issued by other jurisdictions, said an HKMA spokeswoman.