Source: 2005
Released by the Bureau for International Narcotics and Law Enforcement Affairs
I. Summary
Hong Kong is not a major transit/transshipment point for illicit drugs destined for the international market 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, preventative education, research work and international cooperation. The 1988 United Nations convention against illicit trafficking in narcotics drugs and psychotropic substances, to which the People's Republic of China (PRC) is a party, applies to Hong Kong. Prior to its reversion to the PRC in 1997, Hong Kong was also a party to this convention.
II. Status of Country
Hong Kong's position as a key port city in close proximity to the golden triangle and Mainland China historically made it a natural transit/transshipment point for drugs moving from southeast Asia to the international market, including to the united states. In recent years, Hong Kong's role as a major transit/transshipment point has diminished due to law enforcement efforts and the availability of alternate routes in southern china. Despite the diminished role, some drugs continue to transit Hong Kong to the United States and the international market. Drug-traffickers continue to use Hong Kong as their base of operations, including many investors involved in international drug trafficking activity who reside in Hong Kong.
Hong Kong law enforcement officials continue to maintain cooperative liaison relationships with U.S. Counterparts in the fight against drugs. Hong Kong is not a producer of illicit drugs. According to Hong Kong authorities, drugs seized in Hong Kong are smuggled in mostly for local consumption and to a lesser extent for further distribution in the international market, including the United States. Hong Kong experienced an overall decrease in drug abuse in 2004. According to the Hong Kong central registry of drug abuse (CRDA), in the first three quarters of 2004 (January-September), 12,003 drug abusers were reported, a drop of 6.5 percent from the 12,838 reported in the same period in 2003. Heroin was the most commonly abused drug, involving some 72 percent of the 12,003 persons for whom drug information was reported in the first three quarters of 2004. Of the overall total, 17 percent abused ketamine, while 11 percent took triazolam/midasolam and 7 percent used cannabis. In 2004, the total number of arrests for drug offenses in Hong Kong declined by 8.08 percent, compared to 2002.
The Hong Kong government again gave a high priority to tackling psychotropic substance abuse in 2003 and 2004. The Hong Kong government has identified the continuing prevalence of psychotropic substance abuse and the growing trend of young people to experiment with drugs as their major area of concern in the battle against drug abuse and trafficking. Although there was a 14 percent increase in the number of young people arrested for drug offenses from 2003 to 2004 (from 1213 to 1384), the total was less than the 1577 arrested in 2002.
III. Country Actions Against Drugs in 2004
Policy Initiatives. In policy-making and coordination efforts, the Hong Kong government's narcotics division of the security bureau acts on the advice of the action committee against narcotics (ACAN). ACAN is a non-statutory advisory body comprised of 17 members from the fields of social work, education, medicine and community service. The Hong Kong commissioner for narcotics and an official representing the director of health also serve on ACAN. ACAN works to ensure policy coordination among the various Hong Kong government departments in the effort to stop illegal trafficking of drugs and abuse.
The Hong Kong government issued a revised code of practice for dance party organizers in January 2003 to provide guidance to the organizers of these events on the prevention of drug abuse and other crimes. Under the amended regulations, organizers of dance parties are required to obtain a "places of public entertainment license" from the food and environmental hygiene department for holding such parties in premises that are not otherwise licensed.
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; and the district level police force has responsibility for eradicating street-level distribution.
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. HKCED also does mid-high level narcotics investigations in addition to export monitoring.
In 2003, due to high profit margins, Guam emerged as a new market for mainland China-produced "ice" (crystal methamphetamine). In February 2003, a joint investigation between Hong Kong customs and U.S. DEA led to the seizure of 2.8 kilograms of ice from a parcel that arrived in Guam from Hong Kong and was bound for the United States. In 2004, a similar shipment bound for the United States was seized in Hong Kong.
In 2004, several cocaine seizures in Hong Kong of approximately 60 kilograms have exceeded the combined cocaine seizures of 2002 and 2003 by a wide margin. It appears that cocaine abuse is becoming more prevalent in the East Asia region.
The narcotics bureau of the Hong Kong police cooperates with the PRC, Canada, Australia, the United States, and countries throughout Southeast Asia in combating international drug trafficking. Both the Hong Kong police and HKCED maintain excellent regional cooperation with DEA and regional law enforcement agencies to target significant drug organizations.
Corruption. There is no known narcotics-related corruption among senior government or law enforcement officials of the Hong Kong SAR. 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.
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. The heavy volume of vehicle and passenger traffic at the land boundary between PRC and Hong Kong continues to pose difficulties in the fight against the trafficking of drugs into Hong Kong.
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.
International Cooperation. Hong Kong maintains close links with the United Nations, the world health organization (WHO), Financial Action Task Force (FATF), INTERPOL and the World Customs Organization (WCO) as well as individual governments around the world in combating narcotics trafficking and abuse. Hong Kong has "mutual legal assistance in criminal matters treaties" with the United States, Australia, France, the United Kingdom, New Zealand, Italy, South Korea, Switzerland, Canada, the Philippines, Portugal, Ireland, the Netherlands, Ukraine, Singapore and Belgium. Hong Kong has also signed surrender of fugitive offenders agreements with 13 countries including the U.S., and transfer of sentenced persons agreements with seven countries, including the U.S. Hong Kong law enforcement agencies enjoy a close and cooperative working relationship with their mainland counterparts and counterparts in many countries. Through their established liaison channels they exchange operational intelligence on drug trafficking, money laundering and control of precursor chemicals.
Because of the unique "one country, two systems" environment in which Hong Kong operates, Hong Kong's law enforcement and customs operations around the time of reversion (July 1997) operated less efficiently with their mainland counterparts than they do now. In the last few years, liaison information sharing and data-networking functions, such as customs information, have been formalized and have been successful in increasing the levels of inter-system cooperation and efficiency. Because intermittent drug trafficking through Hong Kong often involves mainland China aspects, foreign law enforcement agencies in Hong Kong such as the U.S. DEA have benefited from the increased level of PRC-Hong Kong cooperation.
Domestic Programs. In 2003, the Hong Kong government's preventative education policy efforts continued to focus on youth and parents. The Hong Kong government has provided a comprehensive drug prevention program throughout Hong Kong's education system. The narcotics division worked closely with the Action Committee Against Narcotics (ACAN) to promote counternarcotics education among youth. In 2004, school drug education programs were extended to non-Chinese speaking children (including English School Foundation (ESF) and international schools and local schools serving students of South Asian origin). The Hong Kong government's narcotics bureau also partners with youth organizations and uniform groups such as Junior Police Call, the Hong Kong Red Cross and the Scout Association of Hong Kong to promote the counternarcotics message to youths through the train-the-trainer approach. Corporate volunteers also helped the Hong Kong government promote the counternarcotics message during the year. For example, one of Hong Kong's largest electric power companies distributed counternarcotics leaflets to customers as bill inserts. In June, the Hong Kong Government formally opened the Drug InfoCentre (DIC), funded by the Hong Kong Jockey Club. The DIC is the first exhibition centre in Hong Kong dedicated to counternarcotics education.
The Hong Kong government collects information on drug abuse cases through the Central Registry of Drug Abuse (CRDA) from reports sent to it by law enforcement, treatment agencies and welfare organizations. The information is used for statistical analysis and research purposes. CRDA's reports are published regularly on the trends and major characteristics of drug abusers. In November 2003, the CRDA began a computer system redevelopment project to enhance the functionality of the system, however, that project has not yet been completed.
On the research front, two studies commissioned by ACAN were completed in 2004. The first, which was a three-year longitudinal study of chronic drug abusers in Hong Kong, was disseminated to drug treatment and rehabilitation agencies. The second report was designed to obtain information on abusers who cross the border into the mainland to abuse drugs. Among the report's findings was that one of the most popular reasons for abusing drugs in the mainland was the lower prices. The narcotics division has exchanged and discussed the findings with relevant authorities from Guangdong province, PRC and Macau.
Cultivation and Production. Hong Kong is not a producer of illicit drugs.
IV. U.S. Policy Initiatives and Programs.
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 U.S. law enforcement believes will increase the potential for identifying shipments of narcotics. Hong Kong is also an active participant in The International Law Enforcement Academy (ILEA).
The Road Ahead. The Hong Kong government has proven to be a reliable and valuable partner in the fight against drug trafficking and abuse. Hong Kong law enforcement agencies, arguably among the most effective in the region, continue to cooperate with the U.S. counterparts. The U.S. Government will continue to 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 the 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, methamphetamines, and ecstasy), tax evasion, fraud, illegal gambling and bookmaking, and commercial crimes. 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 Forty 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 the 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 ordinances apply to all persons, including banks and non-bank 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 reflecting the revised set of FATF Forty Recommendations 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. However, the Narcotics Division is drafting a bill for the legislature,s consideration in 2005, that would authorize Hong Kong Customs officials to stop and question passengers about money they are bringing into or taking out of Hong Kong. The draft bill will also mandate that Customs officials maintain records of individuals carrying more than $15,000 across the border, even if it is not related to a crime.
The bill will not mandate currency declarations at the border, but will widen the Hong Kong Government,s ability to seize cash being laundered from all "serious crimes," instead of only cash stemming form narcotics-trafficking or related to terrorism. Under the bill, bankers, lawyers, accountants, real estate agents, precious metals dealers, and other professionals may face criminal sanctions if they assist in money laundering through a failure to "know their customers." The new bill will involve a statutory requirement to obtain sufficient information about the client --- including the beneficial ownership of corporate clients and the source of wealth of individuals. This measure extends beyond current regulations, which already make the failure to report suspicious transactions an offense.
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. On February 25, 2004, Hong Kong banks began to offer Chinese currency- (renminbi or RMB-) based, deposit, exchange, and remittance services. Later in the year, Hong Kong banks began to issue RMB-based credit cards, which could be used both in mainland China and in Hong Kong shops that had signed up to the Chinese payments system, China UnionPay. This change brought many financial transactions related to China out of the money-transfer industry and into the more highly regulated banking industry, which is better equipped to guard against 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 November 1, 2004, the value of assets under restraint was $171 million, and the value of assets under confiscation order, but not yet paid to the government, was $14.36 million, according to figures from the JFIU. It also reported that as of November 1, 2004, the amount confiscated and paid to the government since the enactment of DTRoP and OSCO was $49.5 million, and a total of 119 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: there is no longer a requirement of actual notice to an absconded offender; there is no longer a requirement that the court fix a period of time in which a defendant is required to pay a confiscation judgment; the court is allowed to issue a restraining order against assets upon the arrest (rather than charging) of a person; the holder of property is required to produce documents and otherwise assist the government in assessing the value of the property; and an assumption is created 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 JFIU has continually increased. In the first ten months of 2004, a total of 12,006 STRs were filed, compared to a total of 11,671 for the twelve months of 2003.
A new Financial Investigations Division, established in the Narcotics Bureau, is supporting the investigations of STRs. The new division contains a section dedicated to money laundering investigations related to drug trafficking and terrorist financing. The division provides the main link with overseas and local law enforcement agencies on investigations and intelligence exchange concerning money laundering and terrorist finance. It also contains the JFIU, including a new intelligence analysis team.
The new division will analyze 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 terms of actual prosecutions for money laundering, there were 40 during the first 10 months of 2004, compared to 29 for the entire year of 2003.
In July 2002, Hong Kong,s legislature passed the United Nations (Anti-Terrorism Measures) Ordinance that criminalizes the supply of funds to terrorists. On July 3, 2004, the Legislative Council passed the United Nations (Anti-Terrorism Measures)(Amendment) Ordinance. This law is intended to implement UNSCR 1373 and the FATF Special Nine Recommendations on Terrorist Financing that were in place in July, 2004. It extends the Hong Kong Government,s freezing power beyond funds to the non-fund property of terrorists and terrorist organizations. Furthermore, it prohibits the provision or collection of funds by a person intending or knowing that the funds will be used in whole or in part to commit terrorist acts. 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 the UNSCR 1267 Sanctions Committee,s consolidated list.
The People,s Republic of China represents Hong Kong on defense and foreign policy matters, including UN affairs. After the PRC becomes a party to a UN terrorism treaty, the Hong Kong Government submits implementing legislation to Hong Kong,s Legislative Council. After passage, the HKG executes the relevant UN treaty. The PRC has yet to ratify the UN International Convention for the Suppression of the Financing of Terrorism.
In 2004, 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, the Hong Kong Monetary Authority (HKMA) issued a new supplementary guideline in June 2004 on the latest "know your customer" principles, taking into account the October 2001 Basel Committee on Banking Supervision. The guideline also incorporates the FATF Special Nine Recommendations on Terrorist Financing and Hong Kong,s new United Nations (Anti-Terrorism) Ordinance. The instruction also requires banks to verify fund sources, before accepting money from any of: offshore companies established with the intention of disguising beneficial ownership, correspondent banks from FATF-designated non-cooperative countries or territories, and prominent politicians and heads of state.
The new rule also requires banks to maintain a database of terrorist names, and requires management information systems that detect unusual patterns of activity in customer accounts. The Securities and Futures Commission (SFC) and the Office of the Commissioner of Insurance (OCI) are revising their guidance notes on the prevention of money laundering and terrorist financing, to reflect the new requirements in the revised FATF Forty Recommendations and international securities and insurance guidance. The Hong Kong government has modified its regulations in order to make its regulations consistent with the revised FATF recommendations.
Other bodies governing segments of the financial sector are also active in anti-money laundering efforts. The Hong Kong Estates Agents Authority, for instance, has drawn up specific guidelines for real estate agents on filing suspicious transaction reports, and the Law Society of Hong Kong and the Hong Kong Institute of Certified Public Accountants are in the process of drafting such guidance.
In a major 2004 money laundering case, a High Court jury charged two of six defendants in a case involving $2.6 billion-$3.8 billion laundered annually for five years. The Hong Kong Independent Commission against Corruption (ICAC) alleged that the Guardecade Money Changing firm had collected funds from mainland Chinese commercial tax evaders and had transferred the proceeds to accounts in Hong Kong and overseas. One of the defendants, who worked in a bank, was acquitted of money laundering, but was found guilty of bribery by the High Court. The High Court will retry two other of the acquitted defendants. The trial will begin February 17, 2005.
The Hong Kong police also assisted the United States in terrorism investigations in 2004. 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 anti-money laundering regime against the FATF Forty Recommendations and the FATF Special Nine Recommendations on Terrorist Financing. The team described Hong Kong,s anti-money laundering measures as "resilient, sound, and overseen by a comprehensive supervisory framework."
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 December 2004, Hong Kong had mutual legal assistance agreements with a total of 16 other jurisdictions: Australia, Canada, the United States, Italy, the Philippines, the Netherlands, Ukraine, Singapore, Portugal, Ireland, France, the United Kingdom, New Zealand, the Republic of Korea, Belgium, and Switzerland. Hong Kong has also signed surrender-of-fugitive-offenders agreements with 13 countries, and has signed transfer-of-sentenced-persons agreements with seven countries, including the United States.
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.
The Government of Hong Kong should further 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 mandatory cross-border currency reporting requirements and continue to encourage more suspicious transaction reporting by lawyers and accountants, as well as by 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.