The war on dirty money is a war worth fighting. Whether it be narcotics, illicit arms sales or terrorist networks, all leave a paper trail and all can be traced. The United States has upped the ante by threatening 'draconian' action against governments and financial institutions that channel terrorist funds. Hong Kong sits awkwardly in this international nexus and stands to be drawn directly into the US offensive. Yesterday a US senator speaking on television cited the SAR as a target. On the face of it Hong Kong has little to worry about. Cleaning up its act in the 1990s, stringent legislation was introduced, charging the Monetary Authority with compelling banks to report suspicious transactions. From 1996 to 2000, 85 people were prosecuted for money laundering offences and 49 of them were convicted. Up to March of this year, assets valued at $427 million were confiscated. The number of suspicious transaction reports made to the police and Customs increased from about 5,600 in 1998 to more than 6,000 last year. The main international body monitoring money laundering has dropped the SAR from its list of non-compliant countries. Hong Kong's efforts in combating the problem has been recognised by its election as president of the Financial Action Task Force, an international organisation that promotes anti-money laundering messages, for 2001-2002. Yet, the suspicion remains that Hong Kong is still a major money laundering centre by virtue of its openness and simple tax regime. As one of the world's major banking centres, relatively small transactions do not stand out. With neither off-shore earned income or investments being subject to tax, the Inland Revenue does not have the mandate or organisational apparatus to chase illicit funds as happens elsewhere. Allegations that up to $50 billion was funnelled through Po Sang Bank's local Tsim Sha Tsui branch raises breathtaking questions about the size of illicit funds going through the SAR. To a great extent, money laundering and offshore finance remains the dirty secret that governments everywhere tacitly tolerate. Yet, the events of September 11 have changed the rules and Hong Kong needs to show a hard resolve to tackle a festering sore if it is to stay out of the firing line.