URGENT legislation will be introduced to prevent Hongkong from being flooded with drug money if the Government loses its appeal next month against a High Court ruling which struck down the territory's laws on handling illicit funds. The principal assistant secretary for monetary affairs, Mr Raymond Li Ling-chung, said that without an effective law obliging banks to report suspicious transactions the fight against money laundering would be severely impeded. ''Money laundering includes many steps, but at the end of the day the funds end up in banks,'' he said. Last August, the High Court threw out the territory's only legal restraint against money laundering when Mr Justice Gall ruled that Section 25 of the Drug Trafficking (Recovery of Proceeds) Ordinance contravened the Bill of Rights. Fearful of law suits by irate clients charging breach of confidentiality, some banks have since stopped reporting suspicious transactions to the Financial Investigation Group under the police narcotics bureau. About 24 reports have been made since August, compared to an average of 30 a month before the ruling. The Government has been given leave to appeal against the ruling and senior assistant Crown prosecutor Mr Steve Bailey will argue the case before the Privy Council from March 22 to 27. Mr Li said if the Privy Council decision was not favourable, alternative legislation would be drafted immediately to prevent drug dealers from taking advantage of any legal vacuum. ''But according to legal advice we are confident we can win the case,'' he said. A police source said the ruling against Section 25 had sent the wrong message to drug traffickers that Hongkong was not serious about stamping out money laundering. ''If the legislation that makes it a criminal offence has been ruled inconsistent with the Bill of Rights then [dealers] are probably on fairly safe ground if they want to take advantage of that,'' he said. Mr Li said that in the meantime, the Government was working under the assumption that money laundering would be a criminal offence by the end of the year when efforts to curb illicit funds would be extended to the insurance and securities sectors.