Source: 2003
Released by the Bureau for International Narcotics and Law Enforcement Affairs
Hong Kong is not a major transit/transshipment point for illicit drugs because of its efficient law enforcement efforts, the availability of alternate transport routes, and the development of port facilities elsewhere in southern China. Some traffickers continue to operate out of Hong Kong to arrange shipments from nearby drug-producing countries via Hong Kong to the international market, including to the United States. The government of the Hong Kong Special Administrative Region (HKSARG) actively combats drug trafficking and abuse through legislation and law-enforcement, treatment and rehabilitation, preventive education, and international cooperation. The 1988 UN Drug Convention, to which the People's Republic of China (PRC) is a party, applies to Hong Kong.
Hong Kong's position as a key port city in close proximity to the Golden Triangle historically has made it a natural transit/transshipment point for drugs moving from Southeast Asia to the international market, including to the United States. Hong Kong's role as a transit/transshipment point has diminished due to law-enforcement efforts and the availability of alternate routes in Southern China. Despite this diminished role, some drugs continue to transit Hong Kong to the United States and the international market. Some drug-traffickers continue to use Hong Kong as their base of operation.
Hong Kong law enforcement officials continue to maintain an excellent cooperative liaison relationship with their U.S. law-enforcement counterparts in the fight against drugs. According to Hong Kong authorities, Hong Kong is not a producer of illicit drugs and drugs seized in Hong Kong are smuggled in mostly for local consumption and to a lesser extent for further distribution in the international market.
Hong Kong experienced an overall decrease in drug abuse in 2003. According to the Hong Kong Central Registry of Drug Abuse (CRDA), drug abuse in the first half of 2003 (January-June 2003) decreased by 15.9 percent compared to the same period in 2002. For young persons under 21, there was a 37.9 percent decrease in drug abuse in the first half of 2003. Overall use of psychotropic substances, such as ketamine, ecstasy and cannabis also decreased in 2003.
Policy Initiatives. A new regulation strengthening the Places of Public Entertainment Ordinance was enacted in 2002 and went into effect in January 2003. The new regulation enabled the HKSARG to control more strictly the issuance of party permits for unlicensed entertainment venues where psychotropic substances abuse is prevalent. To enhance the efficiency and effectiveness of existing legislative provisions on restraint and confiscation of drug proceeds, the Drug Trafficking and Organized Crimes Ordinance was strengthened in January 2003. The amendment lowers the threshold for initiating restraining and confiscation orders against persons or properties suspected of drug trafficking. The Hong Kong government will soon complete a review of the Dangerous Drugs Ordinance to strengthen efforts against psychotropic substance abuse.
Law Enforcement Efforts. Hong Kong's law-enforcement agencies, the Hong Kong police and Hong Kong Customs and Excise Department (HKCED), place high priority on meeting the objectives of the 1988 UN Drug Convention. Their counternarcotics efforts focus on the suppression of drug trafficking and the control of precursor chemicals. The Hong Kong police have adopted a three-level approach to combat narcotics distribution. At the headquarters level, the focus is on high-level traffickers and international trafficking. The regional police force focuses on trafficking across police district boundaries. Responsibility for eradicating street-level distribution lies with the district-level police force. HKCED's chemical control group, in cooperation with the U.S. DEA office in Hong Kong, closely monitors the usage of precursor chemicals and tracks the export of suspicious precursor chemical shipments to worldwide destinations.
In May 2003 officials from the U.S. Department of Homeland Security began assisting HKCED to screen U.S.-bound cargoes from Hong Kong as part of the Container Security Initiative (CSI). While CSI primarily screens for weapons of mass destruction, it is expected to have the residual benefits of identifying narcotics and reducing traffickers' use of containerized cargo to transport drugs. HKCED installed additional fixed x-ray vehicle inspection systems at the Lok Ma Chau control point in 2003. The narcotics canine unit of HKCED has 34 officers and 27 detector dogs for deployment at the airport and land and sea boundary points.
Corruption. There is no known narcotics-related corruption among senior government or law enforcement officials. Nor are there any known senior government officials engaging in, encouraging, or facilitating the illicit production or distribution of such drugs or substances, or laundering money related to illegal drug transactions. Hong Kong has a comprehensive anticorruption ordinance that is effectively enforced by the Independent Commission Against Corruption (ICAC), which reports directly to the Chief Executive.
Agreements and Treaties. As of October 2003, Hong Kong had mutual legal assistance agreements with the U.S., France, Australia, the United Kingdom, New Zealand, Italy, South Korea, Switzerland, Canada, the Philippines, Portugal, Ireland, the Netherlands, Ukraine, and Singapore. Agreements were concluded with Ukraine and Singapore in 2003. The 1988 UN Drug Convention, to which the PRC is a party, was made applicable to Hong Kong. The U.S. and Hong Kong cooperate in extradition matters under a surrender of fugitive offenders agreement.
Drug Flow/Transit. Some drugs continue to flow through Hong Kong for the overseas market, including the United States. Traffickers use land routes through Mainland China to smuggle heroin into Hong Kong for transit to the overseas market. There were several seizures of drugs in 2003 transiting Hong Kong to the United States. Most notable were seizures of Guam-bound couriers and parcels on direct flights from Hong Kong. Ethnic Chinese drug trafficking organizations used Hong Kong as a transit point to move methamphetamine from Southern China to Guam and Saipan to take advantage of the lucrative market in these areas.
In an effort to eradicate Hong Kong's role as a transit/transshipment point for illicit drugs, the HKSARG maintains a database of information on all cargoes, cross- border vehicles, and shipping. The Air Cargo Clearance System, the Land Border System, and the Customs Control System are all capable of quickly processing information on all import and export cargoes, cross-border vehicles, and vessels.
Domestic Programs. The Hong Kong government's primary preventive education efforts continue to focus on youth and young adults. In cooperation with three non-governmental organizations, counternarcotics talks were delivered to over 100,000 students during the 2002/2003 school year. The Narcotics Division of the Hong Kong Security Bureau provides funds to community organizations, schools, and district organizations under the "Beat Drugs Fund" and the "Community Against Drugs" program for counternarcotics projects, some of which target psychotropic substance abusers and high-risk youth. The government also launched a publicity campaign through the media, including the Internet, to better educate youth on dangers of drug use.
Phase II of the Drug InfoCenter--comprising a library, multi-purpose room, and a volunteers room--will be commissioned in early 2004. The Drug InfoCenter will serve as a focal point for drug education and community counternarcotics programs in Hong Kong. Phase I of the InfoCenter opened in 2000.
Cultivation and Production. Hong Kong is not a producer of illicit drugs.
The U.S. government and the HKSARG continue to promote sharing of proceeds from joint counternarcotics investigations. In May 2003, Hong Kong began participating in the U.S. Container Security Initiative (CSI), which should also help curb the usage of containerized cargo by drug traffickers. In 2003, Hong Kong sent seven law-enforcement officials to the International Law Enforcement Academy (ILEA) in Bangkok, Thailand. These officials participated in "Supervisory Criminal Investigator Course," "Airport Programs and Controlled Deliveries Course," and "Narcotics Unit Commander Course."
The Road Ahead. The Hong Kong government has proven to be a reliable and competent partner in the fight against drug trafficking and abuse. Hong Kong's law-enforcement agencies, arguably among the most effective in the region, continue to cooperate with their U.S. counterparts. The U.S. government will encourage Hong Kong to maintain its active role in counternarcotics efforts.
Hong Kong is a major international financial center. Its low taxes and simplified tax system, sophisticated banking system, the availability of secretarial services and shell company formation agents, and absence of currency and exchange controls facilitate financial activity but also make it vulnerable to money laundering. The primary sources of laundered funds are narcotics trafficking (particularly heroin, methamphetamine, and ecstasy), tax evasion, fraud, illegal gambling and bookmaking, and illegal alien smuggling. Laundering channels include Hong Kong's banking system, and its legitimate and underground remittance and money transfer networks. Hong Kong is substantially in compliance with the Financial Action Task Force's (FATF) Forty Recommendations on Money Laundering, and has pledged to adhere to the Revised 40 FATF Recommendations. Overall, Hong Kong has developed a strong anti-money laundering regime, though improvements should be made. It is a regional leader in anti-money laundering efforts. Hong Kong has been a member of the FATF since 1990. It served as President of the FATF for the 2001/2002 term and served on the FATF's Steering Group from 2001 to 2003.
Money laundering is a criminal offense in Hong Kong under the Drug Trafficking (Recovery of Proceeds) Ordinance (DTRoP) and Organized and Serious Crimes Ordinance (OSCO). The money laundering offense extends to the proceeds of drug-related and other indictable crimes. Money laundering is punishable by up to 14 years' imprisonment and a fine of HK$5,000,000 ($643,000).
Money laundering reporting requirements apply to all persons, including banks and nonbank financial institutions, as well as to intermediaries such as lawyers and accountants. All persons must report suspicious transactions of any amount to the Joint Financial Intelligence Unit (JFIU). The JFIU does not investigate suspicious transactions itself, but receives, stores and disseminates suspicious transactions reports (STRs) to the appropriate investigative unit. Typically, STRs are passed to either the Narcotics Bureau or the Organized Crime and Triad Bureau of the Hong Kong Police Force, or to the Customs Drug Investigation Bureau of the Hong Kong Customs and Excise Department.
Financial regulatory authorities issue anti-money laundering guidelines to institutions under their purview and monitor compliance through on-site inspections and other means. Hong Kong law enforcement agencies provide training and feedback on suspicious transaction reporting.
Financial institutions are required to know and record the identities of their customers and maintain records for five to seven years. Hong Kong law provides that the filing of a suspicious transaction report shall not be regarded as a breach of any restrictions on the disclosure of information imposed by contract or law. Remittance agents and money changers must register their businesses with the police and keep customer identification and transaction records for cash transactions equal to or over $2,564 (HK$20,000). Hong Kong does not require reporting of the movement of currency above a threshold level across its borders or reporting of large currency transactions above a threshold level.
There is no distinction made in Hong Kong between onshore and offshore entities, including banks, and no differential treatment is provided for nonresidents, including on taxes, exchange controls, or disclosure of information regarding the beneficial owner of accounts or other legal entities. Hong Kong's financial regulatory regimes are applicable to residents and nonresidents alike. The Hong Kong Monetary Authority (HKMA) regulates banks. The Insurance Authority and the Securities and Futures Commission regulate insurance and securities firms, respectively. All three impose licensing requirements and screen business applicants. There are no legal casinos or Internet gambling sites in Hong Kong.
In Hong Kong, it is not uncommon to use solicitors and accountants, acting as company formation agents, to set up shell or nominee entities to conceal ownership of accounts and assets. Hong Kong is a global leader in registering international business companies (IBCs), with nearly 500,000 registered in 2002. Many of the IBCs created in Hong Kong are owned by other IBCs registered in the British Virgin Islands. Many of the IBCs are established with nominee directors. The concealment of the ownership of accounts and assets is ideal for the laundering of funds. Additionally, some banks permit the shell companies to open bank accounts based only on the vouching of the company formation agent. However, solicitors and accountants have filed a low number of suspicious transaction reports in recent years, and have become a focus of attention to improve reporting, as a result.
The open nature of Hong Kong's financial system has long made it the primary conduit for funds being transferred out of China, which maintains a closed capital account. Hong Kong's role has been evolving as China's financial system gradually opens. In November 2003, for instance, China's State Council allowed China's Central Bank, the People's Bank of China, to provide clearing arrangements for banks in Hong Kong to take deposits in the mainland Chinese currency, the yuan, and offer personal banking business in yuan on a trial basis for the first time. This could bring some financial transactions related to China out of the money-transfer industry and into the more highly regulated banking industry. However, this new yuan-denominated banking also carries the risks associated with money laundering.
Under the Drug Trafficking (Recovery of Proceeds) Ordinance (DTRoP) and the Organized and Serious Crimes Ordinance (OSCO), a court may issue a restraining order against a defendant's property at or near the time criminal proceedings are instituted. Both ordinances were strengthened in January 2003, through a legislative amendment lowering the evidentiary threshold for initiating confiscation and restraint orders against persons or properties suspected of drug trafficking. Property includes money, goods, real property, and instruments of crime. A court may issue confiscation orders at the value of a defendant's proceeds from illicit activities. Cash imported into or exported from Hong Kong that is connected to narcotics trafficking may be seized, and a court may order its forfeiture. As of December 1, 2003, the value of assets under restraint was $164 million, and the value of assets under confiscation order, but not yet paid to the government was $12.98 million, according to figures from the Hong Kong Joint Financial Intelligence Unit. It also reported that as of December 1, 2003, the amount confiscated and paid to the government since the enactment of DTRoP and OSCO was $49.1 million, and a total of 96 persons had been convicted of money laundering over that period. Hong Kong has shared confiscated assets with the United States.
In July 2002, the legislature passed several amendments to the DTRoP and OSCO to strengthen restraint and confiscation provisions. These changes, which became effective on January 1, 2003, include the following: no longer requiring actual notice to an absconded offender; requiring the court to fix a period of time in which a defendant is required to pay a confiscation judgment; permitting the court to issue a restraining order against assets upon the arrest (rather than charging) of a person; requiring the holder of property to produce documents and otherwise assist the government in assessing the value of the property; and creating an assumption under the DTRoP, to be consistent with OSCO, that property held within six years of the period of the violation, by a person convicted of drug money laundering, is proceeds from that money laundering.
Since legislation was adopted in 1994 mandating the filing of suspicious transaction reports (STRs), the number of STRs received by Hong Kong's Joint Financial Intelligence Unit has continually increased. In the first ten months of 2003, a total of 10,149 STRs were filed, compared to a total of 10,871 for the twelve months of 2002. Notwithstanding the trend of increased filings, the Hong Kong Joint FIU hopes to further improve the quality and quantity of STRs by setting up two intelligence analysis teams in April of 2004 in the financial intelligence unit (FIU). They will be tasked with analyzing STRs to develop information that could aid in prosecuting money laundering cases -- the number of which has also increased since 1996, soon after the passage of OSCO (1994). In the first nine months of 2003, there were 656 money laundering investigations, compared to 687 cases for all of 2002. In terms of actual prosecutions for money laundering, there were 25 during the first nine months of 2003, compared to 32 for the entire year of 2002. Of the 25 cases prosecuted in this period, 24 of them were prosecuted under OSCO, while only one was prosecuted under DTRoP. From 1996 to September 30, 2003, a total of 163 money laundering cases were prosecuted under OSCO, while only 18 cases were prosecuted under DTRoP.
In July 2002, Hong Kong's legislature passed the United Nations (Anti-Terrorism Measures) Ordinance that criminalizes the supply of funds to terrorists. This legislation was designed to bring Hong Kong into compliance with UNSCR 1373 and the FATF's Special Recommendations on Terrorist Financing. Hong Kong introduced additional legislation in May 2003 to implement UNSCR 1373 and the Financial Action Task Force (FATF) Special Recommendations on Anti-Terrorist Financing. The United Nations (Anti-Terrorism Measures) (Amendment) Bill was submitted to Hong Kong's Legislative Council in May. After the first reading of the bill, it was referred to the Bills Committee for consideration. The bill aims to implement the remaining requirements of the international conventions against terrorism under UNSCR 1373 and the FATF Special Recommendations.
Hong Kong's financial regulatory authorities have directed the institutions they supervise to conduct record searches for terrorist assets using U.S. Executive Order 13224 and United Nations lists. By late 2003, Hong Kong had applied eight of the twelve international antiterrorism conventions, and the government had submitted legislation to Hong Kong's Legislative Council to apply two more. The People's Republic of China has yet to ratify two conventions -- the International Convention for the Suppression of the Financing of Terrorism and the Convention on the Physical Protection of Nuclear Material. As such, they have yet to be applied in Hong Kong, since the PRC represents Hong Kong on defense and foreign policy matters, including UN affairs.
In 2003, Hong Kong financial authorities arranged outreach activities to raise awareness of terrorism financing in the financial community. For instance, Hong Kong's bank regulatory agency restructured its bank examinations to focus more on antiterrorism financing. Also, the Hong Kong Monetary Authority (HKMA) drafted a best practice guide for use by financial institutions on how to guard against money laundering in alternative remittance systems and wire transfers. The HKMA, the Securities and Futures Commission (SFC), and the Insurance Authority also circulated new regulations and best practice guides regarding the reporting of terrorist-related property. The Hong Kong government has modified its regulations in line with the FATF's updating of its recommendations. On February 1, 2002, the FATF held a Special Forum on Terrorist Financing at the close of the FATF Plenary meeting in Hong Kong, which was attended by FATF members and members of the FATF-style regional bodies. Hong Kong continued to serve as a FATF Steering Group member until June 30, 2003, during which time it participated in the FATF's Terrorist Financing Working Group, which clarified recommendations on freezing terrorist assets and on combating the abuse of alternative remittance systems and nonprofit organizations.
Domestically, Hong Kong's judicial system tried one terrorism-related case in 2003, pursuant to Section 11(2) of the United Nations antiterrorism measures ordinance. The case concerned a man claiming to be a terrorist who made a hoax bomb threat at a hotel. The man had a previous record of psychiatric treatment, and was sentenced to serve a six-month hospital order. Also, in 2002 and 2003, Hong Kong authorities cooperated with U.S. law enforcement in a case involving the exchange of drugs for Stinger missiles allegedly for use by al-Qaida in 2002. In a sting operation coordinated with the U.S., the suspects came to Hong Kong to finalize the deal, and were arrested in 2002. Hong Kong extradited them to the U.S. in 2003. The Hong Kong police also assisted the U.S. in additional terrorism investigations in 2003. In one such case, Hong Kong provided law enforcement assistance in a case involving seven people charged with conspiracy to provide material support to terrorist organizations.
In 2003, Hong Kong took part in the International Monetary Fund's Financial Sector Assessment Program (FSAP), which aims to strengthen the financial stability of a jurisdiction by identifying the strengths and weaknesses of its financial system and assessing compliance with key international standards. As part of the FSAP, a team of IMF and World Bank-sponsored legal and financial experts assessed the effectiveness of Hong Kong's antiterrorist financing regime against the FATF Forty Recommendations and the FATF Eight Special Recommendations on Terrorist Financing. In its assessment published in June 2003, the IMF described Hong Kong's anti-money laundering measures as "resilient, sound, and overseen by a comprehensive supervisory framework."
At the October 2002 meeting of the Asia/Pacific Group on Money Laundering (APG), the Hong Kong delegation noted that underground banking and remittance agents remain major mechanisms through which criminals transfer proceeds of crimes across borders. Another major area of concern for Hong Kong is the laundering of criminal proceeds by nonfinancial services professionals.
Through the PRC, Hong Kong is subject to the 1988 UN Drug Convention. It is an active member of the FATF and Offshore Group of Banking Supervisors and also a founding member of the APG. Hong Kong's banking supervisory framework is in line with the requirements of the Basel Committee on Banking Supervision's "Core Principles for Effective Banking Supervision." Hong Kong's JFIU is a member of the Egmont Group and is able to share information with its international counterparts. Hong Kong cooperates closely with foreign jurisdictions in combating money laundering. Hong Kong's mutual legal assistance agreements provide for the exchange of information for all serious crimes, including money laundering, and for asset tracing, seizure, and sharing. Hong Kong signed and ratified a mutual legal assistance agreement with the United States that came into force in January 2000.
As of October 2003, Hong Kong had mutual legal assistance agreements with a total of fifteen other jurisdictions: Australia, Canada, the U.S., Italy, the Philippines, the Netherlands, Ukraine, Singapore, Portugal, Ireland, France, the United Kingdom, New Zealand, the Republic of Korea, and Switzerland. Hong Kong has also signed surrender of fugitive offenders agreements with 13 countries -- including the U.S. -- and has signed transfer of sentenced persons agreements with seven countries, including the U.S. Hong Kong authorities exchange information on an informal basis with overseas counterparts, with Interpol, and with Hong Kong-based liaison officers of overseas law enforcement agencies. An amendment to the Banking Ordinance in 1999 allows the HKMA to disclose information to an overseas supervisory authority about individual customers, subject to conditions regarding data protection. The HKMA has entered into memoranda of understanding with overseas supervisory authorities of banks for the exchange of supervisory information and cooperation, including on-site examinations of banks operating in the host country.
Hong Kong should strengthen its anti-money laundering regime by establishing threshold reporting requirements for currency transactions and putting into place "structuring" provisions to counter evasion efforts. Hong Kong should also establish cross-border currency reporting requirements and encourage more suspicious transactions reporting by lawyers and accountants, as well as business establishments, such as auto dealerships, real estate companies, and jewelry stores. Hong Kong should also take steps to thwart the use of "shell" companies, IBCs, and other mechanisms that conceal the beneficial ownership of accounts by more closely regulating corporate formation agents.