Financial institutions in Hong Kong and
Singapore need to review and monitor their anti-money laundering (AML) and
know-your-customer (KYC) procedures and policies regularly to prevent abuses by
politically exposed persons (PEPs),said industry officials. Their comments
followed recent reports that banks in the two cities may have been used to
launder millions of dollars for NambarEnkhbayar, Mongolia”s former president.

“This is a timely reminder for institutions to ensure that they have
robust systems and procedures in place regarding client acceptance, on-going
monitoring of … accounts and timely reporting of suspicious or unusual
transactions to the authorities,” said Christopher Wilson, a partner with
Deloitte in Hong Kong. He told Thomson Reuters that the Hong Kong institutions
involved may have breached the territory”s Anti-Money Laundering and
Counter-Terrorist Financing (Financial Institutions) Ordinance (AMLO), which
became effective on April 1, 2012, as well as the 1994 Organised and Serious
Crime Ordinance (OSCO), with regard to reporting of suspicious transactions.

Former Mongolian President Enkhbayar was imprisoned last month in Ulan Bator,
after having been under investigation by Mongolia”s six-year-old
anti-graftbody, the Independent Authority Against Corruption (IAAC). The IAAC
has claimed that some of Hong Kong and Singapore”s biggest banks were used for
money laundering by a syndicate connected to Enkhbayar. The IAAC alleges that
shell companies and bank accounts in Hong Kong and Singapore have been used by
some wealthy Mongolians, including Enkhbayar, to transfer funds illegally out
of the country.

Mongolia”s economy is currently undergoing a mining and resources boom, as
countries and multinational businesses seek access to its copper, gold, uranium
and coal reserves. In such instances, some politically connected officials may
turn to corruption in order to benefit personally from the high demand.

Dealing with PEPs and those that act on their behalf is a key aspect of a
bank”s compliance regime. Banks are required to screen such customers carefully
and monitor their accounts for suspicious transactions.

“Get your foreign branches to report to a central point any relevant
trials and ensure that all offices check defendants against current
accountholders and in the case of PEPs, former account holders,” said
Nigel Morris-Cotterill, head of the regional Anti-Money Laundering Network. He
added while there was no formal cut-off point, few prosecutors or regulators
would expect a bank to go back more than 10 years. “When a link is found,
report it to the local [financial intelligence unit] without delay and act on
suchinstructions as they may give,” said Morris-Cotterill.

Holding money for PEPs has been become increasingly difficult in recent years,
said Bryane Michael, a visiting fellow at the University of Hong Kong”s Centre
for Comparative and Public Law. “Hong Kong financial institutions have
systems in place to deal with their special risks,” he said.

In the case of Enkhbayar, Hong Kong”s banks and in-house council would need to
watch out for any restitution requests from Ulan Bator, he said. However,
Mongolia has no official law enforcement agreements with Hong Kong.

“We live in a world where the proceeds of crime can relatively easily be
obtained upon request from law enforcement agencies like the Mongolian
IAAC,” said Michael. He added: “If the proceeds of corruption have
found their way into Hong Kong private banking accounts and shell company
accounts, in-house counsel will deal to deal with requests related to
discovery, search, seizure, and confiscation of those assets, if agreed [to] by
Hong Kong”s senior officials.”

Due diligence

Enkhbayar”s case highlighted the dangers of dealing with PEPs and their
associates, said Matthias Feldmann, a partner with law firm Clifford Chance in
Hong Kong. “Dealing with PEPs requires enhanced due diligence (EDD) for
AML purposes, including under the new AMLO. But in practice it is not always
easy to investigate whether an account holder is a PEP,” he said. This was
because the definition of PEPs not only included the political person, but also
their family — spouses, partners or children, as well as “close
associates,” he told Thomson Reuters.

While Hong Kong”s AMLO contains wide ranging obligations on banks to apply EDD
for PEPs, their family and close associates, it was not easy to discern when
banks were dealing with PEPs or their close associates thereof.

“These cases show how important it is to subject such account
relationships to enhanced scrutiny,” said Feldmann.

Enkhbayar and his associates reportedly sent Mongolian state funds to two Hong
Kong shelf companies through state steel factory contracts. One of his
associates was the sole director of the two companies. A common practice for
corrupt officials is to have relatives get licences in the names of offshore
companies, only to transfer shares to overseas owners to thwart
regulationsseeking to control the trading of licences.

Jay Jhaveri, World-Check”s (a Thomson Reuters company) head of Asian operations
in Singapore, said it was unlikely Enkhbayar went through conventional channels
to open an account.

“He didn”t stand in line and chat with a teller or relationship manager to
… establish a banking relationship. Who”s fronting for him? Was it his wife,
one of his four children, a sibling, a parent or some crony? Most likely
someone around him conducted business on his behalf,” he said.

Jhaveri said that if the former president had actually embezzled state assets
and banked these funds with banks in highly regulated jurisdictions, then the
banks in question had failed in their due diligence and KYC obligations.
“The on-boarding of customers should not be treated a trivial
process,” he warned.

Hiding behind veils

Major financial centres such as Hong Kong and Singapore are often sought
bylaunderers to launder funds. It was, therefore, crucial to conduct EDD to
ensure that the monies banked from places such as Mongolia and Myanmar were not
derived from the proceeds of crime, stressed Jhaveri.

“Banks should not be falling short in their obligations to know their
clients and their sources of wealth. Financial institutions are obliged to know
the ultimate beneficial owners of all accounts, personal, corporate and trust
accounts,” he said.

However, he acknowledged that establishing companies, especially “shelf
companies”, in some jurisdictions could take mere minutes. “Companies that
provide corporate secretarial services, which are largely unregulated, can
provide veils and layers of confidentiality that are often difficult to
pierce,” warned Jhaveri. “There are apparently several thousand
British Virgin Islands-registered companies that have accounts with banks in
Hong Kong. BVI companies are easily established and the list of shareholders
and directors are not necessarily accessible by the public.”

Additionally, the ultimate beneficial owners of such companies are rarely, if
ever, disclosed in any document open for public scrutiny.

“It is therefore incumbent upon the bank to conduct adequate levels of due
diligence on the ultimate beneficial owner and all other stakeholders in the
company when establishing a banking relationship. So, if a former head of
state, like the president of Mongolia, is found guilty of money laundering and
taking kickbacks it means that somewhere along the line a banker and a bankhave
fallen short in their due diligence and KYC obligations,” said Jhaveri.

Penalties

The penalties can be steep, said Manhim Yu, director Ernst & Young Advisory
Services in Hong Kong. “The financial penalties, reputational damage and
regulatory sanctions such as “cease and desist” orders also threaten to impact
businesses in the long run,” he told Thomson Reuters.

For its part, Hong Kong has toughened its local AML laws, requiring
transactions potentially involving PEPs, terrorism or narcotics to be reported
to the Joint Financial Intelligence Unit, which is operated jointly by the Hong
Kong Police Force and Customs and Excise Department.

A spokeswoman for the Hong Kong Monetary Authority (HKMA) told Thomson Reuters
that Mongolian authorities had not approached them. “Like other major
international financial centres, Hong Kong is a member of the Financial Action
Task Force and has imposed a robust AML and counter-financing of terrorism
regime according to the relevant international standards,” she said. She
added that authorised institutions (AIs) were required to comply with the AMLO
and its guidelines. “The HKMA monitors AI compliance with AML legal and
regulatory requirements through on-site examinations,” she said.

Enkhbayar, who served as prime minister and then president for a decade until
2009, has argued that the case against him is politically motivated, and
remains in jail pending an appeal against his four-year jail term.

“What is clear is that the nature of anti-corruption laws are such that
they can easily be used for political purposes, as much as they can be used for
good,” said Alex Duperouzel, managing director of ComplianceAsia, a
consultancy in Hong Kong.

By Ajay Shamdasani 

www.trust.org/trustlaw