Fund houses in HK: at risk from money laundering?

Retail banks in the city have been tainted by recent money-laundering cases, leading some to suggest that asset managers are susceptible to being used for such activities.
Fund houses in HK: at risk from money laundering?

Recent money-laundering cases that unveiled some $2.6 billion in money illegally stashed in retail banks in Hong Kong have cast a pall over the city's reputation as a global financial centre.

In January a 22-year-old delivery man from Guangdong province faced the courts for laundering HK$13.1 billion ($1.7 billion), in what is the largest money-laundering case to emerge in Hong Kong. In another case, a public housing tenant, also from the mainland, was jailed in March for laundering HK$6.7 billion in Hong Kong.

Meanwhile, Carson Yeung, owner of UK football club Birmingham City, is currently on trial in the territory for alleged money-laundering in relation to $720 million in funds.

Some are now questioning whether fund houses in the territory are also susceptible as channels for money laundering, though no cases have yet emerged involving asset managers. Nonetheless, such firms may be being used for tax evasion, especially by mainland Chinese, says Lynia Lau, a Hong Kong-based partner at law firm Clyde and Co.

Because of China's relatively high personal income tax of up to 45% and corporate profit tax of up to 33% – along with other taxes, charges, duties and fund contributions required by various regulators in China – the cost of “clean” money (on which such tax and duties have been paid) remitting out of the country through proper channels will be extremely high, says Lau.

“That I think is the reason why it's so attractive for the money to go through informal channels,” Lau says, noting that such funds may eventually land in Hong Kong and Singapore financial institutions, such as fund firms, potentially resulting in tax evasion.

She argues that Hong Kong will seem attractive to money launderers – or at least Chinese would-be tax evaders – due to its relatively strong secrecy laws and the lack of a wide range of investment vehicles in China.

Another issue relates to financial institutions’ pay structures. With some fund executives compensated according to the amount of assets they bring in, they may be ‘encouraged to ignore’ certain policies to help achieve targets, say market participants.

US fund houses seek to hire people with knowledge, experience and relationships in Asia, but they are often also individuals who have historically “not been the best” in complying with Western anti-money laundering or anti-corruption procedures, says David Thelander, co-leader of the asset management practice at risk consultancy Promontory based in San Francisco.

That said, such deficiencies are not necessarily surprising, due not only to limited resources, but because it’s easy for differences of understanding to emerge when different time zones and languages are involved, notes Ronald Gould, Hong Kong-based managing director at Promontory. “Firms need controls to deal with this.”

However, some argue that there is not much scope for money laundering via fund houses in Hong Kong, suggesting that nearby casino hub Macau is a more likely option.

“Quite frankly, if you look at the options available to money launderers, I just don’t think people will say ‘I’ll launder-money by investing it into a fund and then redeem it in two years time’,” says Jane McBride, a Hong Kong-based partner at law firm Deacons.

“Particularly if you are in Hong Kong, you will go on a ferry to Macau, gamble the funds and take the winnings and claim that you won the money in Macau, because you can easily source it back to Macau,” she adds. “So you put another barrier between you and the illegal original source of the funds.”

Still, she says firms should take the proper precautions. The practical issue, notes McBride, is not so much finding which investors into a fund are money laundering, but making sure appropriate customer due diligence is being done on each investor to which the fund is marketed.

“I do expect some asset managers will get into trouble for not following the rules because they didn’t go through the procedural requirements properly [because they think money laundering won’t happen in fund houses],” she adds.

*The full story will be run in AsianInvestor June issue

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