U.S. Wary of Hong Kong’s Bank Secrecy : Haven for Asian Cash Suspected of Aiding Money-Laundering

Late last year, Ronald Fook Shiu Li, chairman of the Far East Stock Exchange and a member of one of the most illustrious families in the business community here, was asked what sort of money was being brought into the colony.

“The beauty of it is that we don’t pry into private matters,” Li replied. “We know money from Southeast Asia is being laundered here. We don’t care. Hong Kong is fast becoming the Switzerland of the Orient.”

Now, Hong Kong’s role as the see-no-evil financial haven of East Asia has suddenly begun to attract the attention of U.S. authorities.

In late August, the U.S. Treasury Department imposed the largest civil penalty ever under the Bank Secrecy Act, a fine of $2.25 million, on Crocker National Bank for its failure to report $3.98 billion in cash deposits to the Internal Revenue Service.

Deprived of Leads

The overwhelming part of this cash, $3.4 billion, had been flown from six Hong Kong banks to Crocker’s main office in San Francisco.

How those masses of American dollars got to the Hong Kong banks is a matter of dispute.

In announcing the fine, Assistant Secretary of the Treasury John M. Walker Jr. strongly suggested that the money may have come from criminal activity. By failing to report the cash transactions, Walker said, Crocker “deprived Treasury of potentially important law-enforcement leads that could have been useful in drug, tax, money-laundering and other investigations.”

Walker’s remark has angered executives at Crocker and banking and government officials in Hong Kong, who say there is no good reason to assume that the huge dollar deposits were the result of drug trafficking or any other illicit activity. They say there are many other factors, related to the politics and finance of East Asia in general and of Hong Kong in particular, that could account for the cash shipments.

“These were perfectly normal banking transactions,” said David Turner, an official of the Hongkong & Shanghai Banking Corp. who is serving as managing director of the government-run Overseas Trust Bank, one of the six banks named by the Treasury Department. “Money was being sent to the United States in the ordinary course of business.”

An American banking expert, who asked that he not be identified by name, said: “Treasury is looking at this cash in a Caribbean or Latin American context. This place isn’t the Cayman Islands. It’s the third-largest financial center in the world. You have to look on this with an Asian perspective and a Hong Kong perspective.”

Thousands of Transactions

The unreported $3.98 billion in cash deposits for which Crocker was fined dates back to 1980 and includes 7,877 separate transactions--an average of about $500,000 in cash at a time. The transactions violated the Federal Bank Secrecy Act, which requires that financial institutions in the United States report to the Treasury all currency transactions of more than $10,000 within 15 days after they occur.

Hong Kong banking officials say the cash is flown to the U.S. West Coast to take advantage of airline schedules, permitting the money to be deposited and begin collecting interest in the American bank on the same day it leaves Hong Kong. A daily Pan American flight leaving Hong Kong at 1:30 p.m. arrives in San Francisco (having crossed the International Date Line) at 10:15 a.m. the same day. No flight to New York offers the same banking benefit.

Hong Kong has no controls at all on the movement of currency. Its banking regulations are much looser and its guarantees of secrecy for depositors are much stricter than those that apply to banks in the United States.

Gordon C. S. Leung, Hong Kong’s assistant commissioner of banking, said in an interview that law-enforcement officials can occasionally gain access to banking records here by proving to a court that their need for the information is reasonable. Nevertheless, American bankers here say that even if the guarantees of secrecy here are not perfect, they are very tight by American standards.

“There’s nothing like our reporting requirements to the Securities and Exchange Commission or the Federal Reserve for banks operating here,” one American banker said, “and it’s much tougher to subpoena records here. After all, one of the main reasons Hong Kong is such a financial center is because there is this secrecy.”

How did the Hong Kong banks happen to have all those dollar bills? Because of the lack of controls, the bank secrecy and the prevailing Hong Kong ethos of not asking too many questions, nobody here can say for sure.

Last year, U.S. investigators pointed to the flow of American cash out of Hong Kong as proof that Hong Kong has become a transit point for drug money. The U.S. President’s Commission on Organized Crime said that 65% of American currency repatriated from Hong Kong is in denominations of $100 or less, “telltale signs of drug traffic and money laundering.”

“Consistent increases in U.S. currency repatriated from Hong Kong to the United States from 1982 to the first half of 1984 parallel the consistent increase in Southeast Asian heroin marketed in the United States from 1981 to 1983,” the commission said.

Yet Hong Kong bankers, government officials and foreign diplomats here argue that such statements overlook what was happening in Hong Kong and the rest of East Asia in the first half of the 1980s.

Peak of Capital Flight

The period mentioned by the commission, from 1982 to 1984, was the peak time for capital flight from Hong Kong caused by the negotiations between China and Britain over the future of the colony. These negotiations began in 1982 and ended late last year with the signing of an agreement transferring Hong Kong to China in 1997.

Furthermore, in the early stages of this period, the value of the Hong Kong dollar plummeted and there was a rush, if not a panic, to convert savings and assets to U.S. dollars. (In September, 1983, the Hong Kong dollar was pegged at 7.80 to the U.S. dollar.)

As the Hong Kong currency began declining in value, Hong Kong shops began quoting prices in U.S. dollars, and Hong Kong banks began competing for deposits by advertising U.S. dollar accounts. In early 1982, U.S. dollar accounts made up only 17% of all bank deposits in Hong Kong; by last year, the figure was nearly 50%.

The capital flight and the conversion to U.S. dollars took place within a Hong Kong society that has traditionally carried out far more business in cash than is done in the United States.

“Hong Kong is just a much more cash-oriented economy,” an American diplomat here said. “People here tend to have cash under the mattress, or else gold. We have cases in the American Consulate here where a consular officer will ask a little old lady from the New Territories what assets she has, and she will pull out a bag full of gold jewelry. It makes the consular officials very nervous.”

Those who defend the Hong Kong banks say that all these factors contributed to a big increase in cash--that is, in American greenbacks--at the Hong Kong banks.

Sold Assets for Cash

“People were selling goods, even their toy factories, and insisting on getting cash in U.S. dollars for them,” an American official here said. “When you deposit cash like that in the bank, then the bank has surplus dollars to dispose of.”

Officials here say the U.S. dollar outflows from Hong Kong are also a natural consequence of the fact that Hong Kong is the main financial center for other countries in the region.

“Many countries in Southeast Asia use Hong Kong as a kind of remitting center for all sorts of transactions, both business and personal,” Leung said. “The volume is high indeed.”

According to this theory, when wealthy businessmen in the Philippines or Taiwan want to get money out to invest in the United States or to send money to relatives there, they do so through Hong Kong. And when Overseas Chinese entrepreneurs in Malaysia or Indonesia become fearful of possible discrimination against them, they may move their money out to Hong Kong. Since all these other countries have exchange controls, a suitcase full of U.S. dollars is a convenient, quiet way of moving money.

Where this money flowing in from the rest of Asia comes from is another question--and it is just the sort of question that Hong Kong has never been particularly eager to ask. But some bankers and government officials here are willing to concede the possibility that at least some of this money may have been obtained in less-than-respectable ways.

Center of Hot Money

“Hong Kong is the center of hot money from all the Southeast Asian countries,” said David K. P. Li, director of the Bank of East Asia and chairman of the Hong Kong Bankers’ Assn.

Speaking of his bank, Li said: “We are careful here in who we deal with. But there are banks and there are banks. Different people have different standards. We probably have lost a lot of opportunity for making money by being so careful. We prefer it that way.”

An American banker here, who did not wish to be identified, put it differently.

“For banking, Hong Kong is a wild and woolly place,” he said. “Banking here is very, very competitive. It’s tough. There are banks that are apparently willing to play fast and loose with credit, and even with the law.”

This banker said he felt it is possible that Hong Kong is being used as a tax haven by some American companies. The tax rate in Hong Kong is 15%.

“If you can move money here for tax reasons and then somehow get it back to the United States, there are lots of profits to be made,” he said.

Other developments have contributed to Hong Kong banking’s notoriety. Hong Kong has had two recent bank collapses, one in late 1983 and the other last June. In both cases, the Hong Kong government was forced to take over a local bank that had become insolvent. In both instances, bank executives were charged with misappropriation of funds.

This year’s banking failure was the more spectacular. It involved the Overseas Trust Bank, the fourth-largest locally incorporated bank in Hong Kong, which had 120,000 depositors and 44 branches in the colony. The bank was founded by an Overseas Chinese businessman in Malaysia and was run after his death by his son, Patrick Chang Chen Tsong.

Early this summer, Hong Kong officials declared the bank insolvent and closed it. That night, Chang was arrested at Hong Kong’s Kai Tak Airport as he was about to leave the colony with $154,000 in U.S. dollars and another $1.4 million in securities in his briefcase. A government investigation showed that since 1981, the Overseas Trust Bank had channeled “many hundreds of millions” of Hong Kong dollars out of the bank to Malaysia, Singapore and Sri Lanka. Chang is now awaiting trial here. The cost to Hong Kong taxpayers of the government’s bail-out of the bank is estimated at more than $250 million U.S.

Curiously, the list of the six Hong Kong banks that were sending unreported cash deposits to Crocker included both the Overseas Trust Bank and the Hang Lung Bank, the institution taken over by the government two years ago. Also on the list was the Hong Kong Industrial & Commercial Bank, a subsidiary of the Overseas Trust Bank. It, too, is now being run by the Hong Kong government.

The other three Hong Kong banks involved in the Crocker transactions, Wing Hang Bank, Wing Lung Bank and Hang Seng Bank, had no connection to the recent bank failures. Hang Seng is a subsidiary of the Hong Kong & Shanghai Banking Corp., the largest bank in the colony. There are now about 140 banks in Hong Kong, about half of them foreign-owned.

Hasn’t Made Inquiries

Asked whether there might be a connection between the cash transactions with Crocker and the events leading up to the Overseas Trust Bank’s insolvency, Turner, who has been assigned by the Hong Kong government to serve as managing director of both the Overseas Trust Bank and the Hong Kong Industrial & Commercial Bank, replied: “I don’t know, myself. I haven’t made inquiries.”

He went on: “As far as we’re concerned, under the new management we buy and sell foreign currency notes at OTB. There is a lot of business in U.S. dollars. We buy more U.S. dollars than we sell and every so often we ship the excess dollars to the United States. There’s nothing illegal about it as far as Hong Kong banks are concerned. It’s unfortunate that Crocker didn’t report it.”

Leung, Hong Kong’s assistant banking commissioner, said he doesn’t believe there was any link at all between the bank insolvencies and the shipments of dollars to the United States. He said the three banks taken over by the government simply “happened to be among the six banks dealing with Crocker.”

Leung was particularly incensed that the Treasury Department had published the names of the six Hong Kong banks. “We certainly feel this was unfair,” he said. “It implied that the Hong Kong banks were involved in some illegal activities.”

The banking official said the Hong Kong banks are irate about being named by the Treasury Department but are afraid to complain in public here for fear of how such an action might affect them.

“We have had some banking problems here, and some of the banks are afraid that if they call attention to themselves, it might start a run on their banks,” he said.

U.S. officials here say they have not yet received any official complaint from the Hong Kong government about the Treasury Department’s listing of the six Hong Kong banks. But a senior official in the Hong Kong government made it plain that the view here is that the Treasury Department and Assistant Secretary Walker should have left the Hong Kong banks alone unless they had evidence of illegal activity.

“He (Walker) shot his mouth off,” the Hong Kong official said. “The U.S. Consulate here was rather apologetic about the whole thing.”