David Ogilvie argues that prioritizing the quantity of data over quality will not be enough to resolve this problem
Hong Kong’s battle against illegal money is struggling because the systems that fight it are overwhelmed by the sheer volume of suspicious transactions.
Not long ago Hong Kong’s Financial Services and the Treasury Bureau released their landmark report assessing the money-laundering and terrorist-financing risks the city is currently facing. The paper outlined a financial sector suffering under a flood of suspicious transaction reports, or STRs, and a struggling government bureau, the Joint Financial Intelligence Unit, tasked with organizing investigations into them. In 2017, the number of STRs received by the JFIU was over 92,000, meaning that the unit has faced a 400 percent increase since 2012. This is perhaps no real surprise.
A raft of new money-laundering and terrorist-financing laws have been passed in Hong Kong since the global financial meltdown of 2009, ensuring that financial institutions have invested huge resources in these areas over the last few years. HSBC, for example, spent approximately US$800 million on compliance programs globally in the first three quarters of 2017 — a 12 percent increase over the previous year — which included the hiring of over 1,800 compliance staff since the end of 2016. This is despite an almost 20 percent fall in first-quarter profits. The number of STRs filed with the JFIU is likely to increase exponentially over the next few years in the face of ever more stringent regulations, despite recent calls by some to loosen restraints and let the financial sector run free again.
The gap between the rise in the number of STR filings and actual money-laundering convictions seems to indicate that the JFIU is unable or unwilling to offer adequate feedback to financial institutions about the quality of the reports being provided to them
Does the growth in the number of STR filings mean that Hong Kong is indeed winning the war against the dirty money that has flowed into this city since the dawn of its financial sector? At first glance, perhaps yes. Financial institutions are doing everything they can to avoid being penalized by the local authorities, helping to drive a sincere effort to stamp out money-laundering and terrorist-financing activities. More available resources have inevitably led to a more careful scrutiny of a larger number of accounts and transactions. And yet the quantity of STR filings is not indicative of a winning strategy. Instead, one must look at the quality of these reports.
Perhaps inevitably, financial institutions are accused of over-reporting suspicious activities including, for example, when there is an unusually large transaction that contradicts the expected activity of the account. The financial institutions themselves do not have sufficient resources to investigate every “unusual” transaction, but they do bear legal responsibility if the transaction is subsequently investigated and found to be dubious: Thus they fear they must vigilantly report to the JFIU. This no doubt accounts for why the number of money-laundering investigations instigated by the JFIU increased by 10 percent in 2017 over the previous year, but the number of prosecutions arising from these filings has actually gone down approximately 40 percent since 2014. Moreover, of these prosecutions, none has led to the maximum 14-year sentence imposed on money-laundering offenses.
Part of the reason for this is that the vast majority of the prosecutions have not been for money laundering itself, but for so-called “predicate” offenses such as drug dealing, illegal gambling, prostitution, human trafficking, loansharking, fraud, and so on. Another reason put forward is that the JFIU is suffering an unfortunate brain drain as senior management figures move over to internal roles within the private sector, where their expertise is increasingly in demand. Indeed, many at the JFIU are said to view the organization as a mere stepping stone toward a more lucrative future career.
How then can the local authorities claim they are gaining the “upper hand” in the fight against money laundering? The gap between the rise in the number of STR filings and actual money-laundering convictions seems to indicate that the JFIU is unable or unwilling to offer adequate feedback to financial institutions about the quality of the reports being provided to them. More generally, it is difficult to gauge how effective STRs have become in actually combating money laundering locally: To gauge this is to understand how the increase in STR filings has actually resulted in successful criminal convictions for money laundering. At the end of the day, the current administration is not well placed to draw out the most pertinent risks from the data provided or to identify emerging trends to help drive shared strategic prioritization of threats. Instead, the JFIU can often appear to be involved in a box-ticking exercise, emphasizing instead the collection of data and the level of compliance of the various stakeholders. The correlation between STR filings and actual money-laundering convictions remains, for the time being, largely a mystery.
It is perhaps only after acknowledging this that the government can truly start getting to grips with Hong Kong’s increasingly damaging reputation as a funnel for the ill-gotten gains of global fraudsters, drug-trafficking cartels, racketeers, people smugglers, and others.
The author is a risk management expert resident in Asia for 15 years.
Copyright 1995 - 2023. All rights reserved. The content (including but not limited to text, photo, multimedia information, etc) published in this site belongs to China Daily. Without written authorization from China Daily, such content shall not be republished or used in any form.