MONEY LAUNDERING
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Panama Papers

How Russian money launderers boosted the clean-up drive in Hong Kong

David Ogilvie says Hong Kong’s secrecy rules and US-dollar peg make it an attractive destination for money launderers, and only all-round cooperation can help stop the flow

PUBLISHED : Tuesday, 18 July, 2017, 2:18pm
UPDATED : Tuesday, 18 July, 2017, 7:11pm

A shocking report in March by the Organised Crime and Corruption Reporting Project revealed that up to US$80 billion may have been funnelled out of Russia from 2010 to 2014, via amenable banks in Latvia and Moldova. Involved were all corners of the Russian elite, from oligarchs to shadowy figures linked to the FSB, Russia’s main security agency.

A silence has since fallen over this scandal which has enveloped some of Hong Kong’s largest financial institutions. But this should not minimise what these allegations mean for the city’s efforts in fighting the laundering of financial crime proceeds.

Banks in Hong Kong have invested increasingly vast sums in anti-money laundering resources. HSBC spent US$800 million on compliance resources in the first quarter of 2017, a 12 per cent increase over the previous year, despite a nearly 20 per cent fall in first-quarter profits. With banks facing further regulatory pressures, this trend is unlikely to be reversed any time soon. Perhaps the most surprising revelation unveiled by the investigation is the role that Hong Kong has played.

Hong Kong’s currency issuing banks processed money laundered by Russian criminals

Over the four-year period, US$717 million is believed to have been routed through the Bank of China’s Greater China branches, US$545 million through HSBC’s global network (with the majority transferred via Hong Kong), US$51 million through Hang Seng Bank in Hong Kong and mainland China, and US$29 million passed through Standard Chartered in Hong Kong.

Hong Kong’s corporate secrecy rules ensure that a fund’s origin can ... remain opaque

To understand why Hong Kong has become so attractive for the movement of ill-gotten Russian roubles, one must look at the effects recent global sanctions have had on Russia. Firstly, Hong Kong’s corporate secrecy rules ensure that a fund’s origin can face minimal scrutiny and so remain inherently opaque. Recent Panama Paper leaks indeed revealed how wide-scale the use of shell companies originating from the Greater China region has actually become.

Sanctions have also had a major de-dollarisation effect on Russia. But criminal organisations are in no mood to switch their roubles into another currency, and our US-dollar peg ensures that the Hong Kong dollar remains an attractive substitute. There is no reason why this should not continue.

Disclosure rules won’t slow Hong Kong’s money-laundering wheels

In response to the investigation, each bank pledged more resources to tackle the issues and said public-private cooperation must be strengthened to help gather critical information on customers.

It is true that unilateral action cannot resolve these issues, given how interconnected the global banking system is. Cooperation and information-sharing between local authorities and financial institutions, as well as between these institutions themselves, must become a priority.

David Ogilvie is a risk management consultant and freelance writer