The term Money Laundering covers all procedures to change, obscure or conceal the beneficial ownership
28 pages
English

The term Money Laundering covers all procedures to change, obscure or conceal the beneficial ownership

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“I lens”- March Issue Commissioner Speaks th“I lens”, now in its 15 issue, is instrumental in enhancing the regulatory transparency. As the new Commissioner of Insurance, I shall endeavour to use this effective channel of communication to strengthen the liaison with the insurance industry and members of the general public. Criminals have tremendous creativity in abusing a transaction of insurance and there is a trend of increasing complexity in their illicit exploits. Insurance-related crime is not a misdemeanour damaging an insurance institution’s reputation only, but also affects all of us by driving up the costs of insurance. In building up a robust cross-functional regulatory regime, we work closely with law enforcement agencies, international organizations and other financial regulators to facilitate reporting of any suspicious transactions. I wish this newsletter would help raise the public awareness of our efforts to help fight against any crimes related to insurance. Richard Yuen Commissioner of Insurance 1Editor’s Note Hong Kong is ranked the world’s freest economy. The freedom of fund movements facilitates the development of our financial markets, but at the same time it makes us vulnerable to money laundering and terrorist financing risks. In fighting against this crime, Hong Kong prides itself as a regional leader and was serving as the Presidency of the Financial Action Task Force on Money Laundering for ...

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“I lens”- March Issue
   Commissioner Speaks  “I lens”, now in its 15th is instrumental in enhancing the regulatory issue, transparency. As the new Commissioner of Insurance, I shall endeavour to use this effective channel of communication to strengthen the liaison with the insurance industry and members of the general public.  Criminals have tremendous creativity in abusing a transaction of insurance and there is a trend of increasing complexity in their illicit exploits. Insurance-related crime is not a misdemeanour damaging an insurance institution’s reputation only, but also affects all of us by driving up the costs of insurance. In building up a robust cross-functional regulatory regime, we work closely with law enforcement agencies, international organizations and other financial regulators to facilitate reporting of any suspicious transactions.  I wish this newsletter would help raise the public awareness of our efforts to help fight against any crimes related to insurance.  Richard Yuen Commissioner of Insurance     
 
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Editor’s Note  Hong Kong is ranked the world’s freest economy. The freedom of fund movements facilitates the development of our financial markets, but at the same time it makes us vulnerable to money laundering and terrorist financing risks. In fighting against this crime, Hong Kong prides itself as a regional leader and was serving as the Presidency of the Financial Action Task Force on Money Laundering for 2001/02. The Commissioner for Narcotics, Mrs. Rosanna Ure, is about to give us a brief account of how we build up an effective anti-money laundering system through law enforcement and international cooperation.    Senior Staff Postings  With effect from 1 December 2003, Mr. Richard Yuen Ming-fai has assumed the post of Commissioner of Insurance vice Mr. Benjamin Tang who was appointed the Director of Audit.  Mr. Yuen has rich experience in public administration and has served in various government bureaux and departments. In recent years, Mr. Yuen worked for the former Economic Services Branch as Deputy Secretary for Economic Services and was Private Secretary to the Chief Executive from 1999 to 2002. Before taking up the post of Commissioner of Insurance, Mr. Yuen was Deputy Director in the Chief Executive’s Office.
 
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Feature
Mrs. Rosanna Ure the head of the Narcotics Division of the Security Bureau. is Before being appointed as the Commissioner for Narcotics, Mrs. Ure was the Director of Hong Kong Economic and Trade Office (Canada). She has also worked in various government branches/bureaux and departments including Civil Service Branch (now known as Civil Service Bureau), Home Affairs Department, Office of Members of the Executive and Legislative Councils (now Legco Secretariat), and Independent Commission Against Corruption.  Global Fight Against Money Laundering and Terrorist Financing Mrs. Rosanna Ure  What is Money Laundering  The primary motive of criminals engaging in illicit activities is to benefit from the proceeds so generated. Consequently, criminals of every kind – from drug traffickers, smugglers, illicit arms dealers to corrupt officials – must launder the money flowing from their crimes to conceal such proceeds from being target of investigation and seizures. They make their ill-gotten wealth look clean by moving it around, and legitimizing it in the world’s financial systems. Attacking criminals where it hurts most – in their pockets – bypreventing them from profiting from their crimes is an effective deterrent.  Operational Principles and Estimated Size of Money Laundering  The operational principles of money laundering are a three-stage process, which require, firstly, moving the funds from any direct association with the predicate
 
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offences; secondly, disguising the trail in order to foil pursuit; and thirdly, making the money available to criminals once again while keeping its source secret. As a necessary consequence of almost all profit generating crime, money laundering can occur practically anywhere in the world. Because the objective of money laundering is to get the illegal funds back to the individual who generated them, money launderers usually prefer to move funds through areas with stable financial systems. All major financial centres, including Hong Kong, are thus vulnerable to money laundering risks.  The International Monetary Fund has made a guesstimate that the aggregate size of money laundering worldwide could be somewhere between two and five percent of the global gross domestic product.  International Efforts in Combating Money Laundering  In response to mounting concern over laundering of illicit drug trafficking proceeds, the 1988 United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances was the first international attempt to address the issue of money laundering by making it an internationally recognized crime. It gave law enforcement authorities the right to trace, freeze and confiscate assets. The United Nations Convention against Transnational Organized Crime 2000 went one step further by imposing an obligation on the signatories to establish the laundering of proceeds of crimes as criminal offences, and to take measures contained in the Convention to combat money laundering.  Financial Action Task Force on Money Laundering  On the formulation of anti-money laundering policies and measures, the Financial  4
Action Task Force on Money Laundering (FATF”) is the international standard setter. The FATF was set up after a G-7 Summit held in Paris in 1989. It is an inter-governmental body that brings together the policy-making power of legal, financial and law enforcement experts from its members. It monitors members’ progress in implementing anti-money laundering measures; reviews and reports on money laundering trends, techniques and counter-measures; and promotes the adoption and implementation of FATF anti-money laundering standards globally.  The FATF membership is currently made up of thirty-one countries and governments, and two regional organizations1. It also works in close cooperation with a number of international and regional bodies involved in combating money laundering such as the United Nations, Egmont Group of Financial Intelligence Units, the International Monetary Fund, the World Bank, etc. Hong Kong has been a member of the FATF since 1990.2    Forty Recommendations  The FATF issued in 1990 a report containing a set of Forty Recommendations, which provides a comprehensive blueprint of the actions needed to fight against money laundering. Based on enforcement experience, the application of the Recommendations was, among others, extended beyond drug trafficking to serious crimes in 1996.                                                   Note1 : The 31 members and two regional organizations are : Argentina; Australia; Austria; Belgium; Brazil; Canada; Denmark; Finland; France; Germany; Greece; Hong Kong, China; Iceland; Ireland; Italy; Japan; Luxembourg; Mexico; Kingdom of the Netherlands; New Zealand; Norway; Portugal; Russian Federation; Singapore; South Africa; Spain; Sweden; Switzerland; Turkey; United Kingdom; United States; European Commission and Gulf Cooperation Council.  Note2 recognition of Hong Kong’s efforts against money laundering, it was selected as the President of the In : FATF for the term 2001/02.  5
The Forty Recommendations have now been endorsed by more than 130 countries, and are widely accepted as the leading international anti-money laundering standard. They are intended to cover all aspects of a national anti-money laundering system, including the criminal justice system, law enforcement, financial system and its regulation, and international cooperation. They provide an international standard against which many countries have been assessed through mutual evaluation and self-assessment procedures.  Amongst all types of financial institutions, insurers and insurance intermediaries carrying on long term business are vulnerable to money laundering crime and thus are subject to the Forty Recommendations.  Latest Review of the Forty Recommendations
Money laundering methods and techniques change as new counter-measures are implemented. Therefore, the FATF, under the presidency of Hong Kong, launched another round of review of the Forty Recommendations in 2001. After extensive discussions and consultations, the revised Forty Recommendations were formally agreed at the June 2003 Plenary in Berlin. Major revisions include:
 
zspecifying a list of crimes that must underpin the money laundering offence; zexpansion of the customer due diligence process of financial institutions;  enhanced measures for higher risk customers and transactions, including z correspondent banking and politically exposed persons; zextension of anti-money laundering measures to designated non-financial businesses and professions (casinos; real estate agents; dealers of precious
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metals/stones; accountants; lawyers, notaries and independent legal professions; trust and company service providers); zinclusion of key institutional measures, notably regarding international cooperation;  zimprovement of transparency requirements through adequate and timely information on the beneficial ownership of legal persons such as companies, or arrangements such as trusts; zextension of many anti-money laundering requirements to cover terrorist financing; and zprohibition of shell banks.
 The revised set of Forty Recommendations sets a new standard, which FATF members, including Hong Kong, will immediately start working to implement. The FATF also encourages other countries and jurisdictions to do likewise. The FATF will also be moving promptly to assess members’ compliance with this standard as part of its programme of work for 2003/04. This will occur through a process of self-assessment and is to be followed by mutual evaluations which could start by the end of 2004.  Special Recommendations on Countering Terrorist Financing  Whilst money laundering has always been about concealing the true source of the proceeds of organized crime, the heinous events of 11 September also highlighted the need for a comprehensive and bold strategy to prevent and suppress the funding of terrorist activities. The FATF has spearheaded this global fight since 2001 by deploying its expertise in combating money laundering to help deal with terrorist financing. Under Hong Kong’s presidency, FATF expanded its remit to include the  7
combating of terrorist financing and adopted the eight Special Recommendations on Terrorist Financing in October 2001 as the benchmark to measure the efforts of the countries/territories in countering financing of terrorism. These recommendations are a set of international standards designed to deny terrorists’ access to the international financial system, to track down the assets of terrorists, and to pursue individuals and countries suspected of participating in, or supporting, terrorism.  The eight Special Recommendations focus on: ensuring that terrorist financing is specifically listed as a criminal offence in a country’s legislation; the seizure of terrorist assets; the reporting of suspicious financial transactions linked to terrorism; international cooperation; and measures to prevent the misuse of wire transfers and other remittance systems. They also cover ways to prevent legal entities such as non-profit organizations from being used as a source of terrorist funds.  Hong Kong’s Role in the Global Fight  Hong Kong has participated actively in various FATF activities and other international efforts in countering money laundering since becoming a member of the organization in 1990. Besides taking part in its plenary meetings, Hong Kong has also played an active role in the self-assessment, mutual evaluation, typologies and Non-Cooperative Countries and Territories (NCCT) exercises of the FATF, all of which aim at raising international standards and practices for combating money laundering.    Apart from being its president in 2001/02, Hong Kong also served as a member of the Steering Group of the FATF, an advisory body which sets the direction and  8
priority of the work of the Task Force, from October 2000 to June 2003.  Hong Kong is also a founding member of the Asia/Pacific Group on Money Laundering (APG), one of the FATF-style Regional Bodies. The Group was set up in 1997 to facilitate adoption, implementation and enforcement of internationally accepted anti-money laundering standards by jurisdictions in the region. As an active member contributing to the Group’s work, Hong Kong was a co-chair of the APG Working Group on Alternative Remittance and Underground Banking Systems and joined other APG members to participate in the mutual evaluation of Cook Islands and Thailand in 2001 and 2002 respectively.  Conclusion  Money laundering and terrorist financing pose significant reputational and financial risks to financial institutions. The establishment of an effective regime to tackle this crime requires cross-functional coordination amongst international bodies, financial regulators and an array of financial institutions including insurers and insurance intermediaries. The Government’s mission is to ensure that Hong Kong’s regime is in step with the international standards.  Note: This newsletter aims to provide readers with the general knowledge of insurance. Any views expressed in the feature article represent the personal views of the writer, which may not be necessarily shared by the Insurance Authority.
 
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Cover Story   Measures to Counter Money Laundering and Terrorist Financing  Globalization of the world economy and rapid development in information technology allow funds to move across international borders with speed and ease. Criminals can take advantage of such developments to transfer their illicit proceeds around the world. This makes combat of money laundering a more urgent and difficult task. The “911” incident further alerted the world of the danger of terrorist financing.  To benefit from “dirty money”, criminals have to disguise the illicit origins, thereby avoid the trails of incriminating evidence. In addition to using banks, money launderers may also make use of securities firms, insurers and shell corporations to exploit their crime committing opportunities.   As for the insurance industry, money launderers often seek to purchase life and investment-linked insurance products in an effort to integrate their illegitimate money in the financial system. A typical money laundering process involves three phases, namely placement, layering and integration. The Anti-money Laundering Guidance Note issued by the International Association of Insurance Supervisors (“IAIS”) gives an illustration to this process:  
 
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 The Financial Action Task Force on Money Laundering ("FATF") highlights in its typology report the vulnerability of insurance industry to money laundering risks:  Some insurers failed to identify indicators of money laundering, such as payments for insurance products by unrelated third parties or through use of consecutively numbered cheques or money orders.  Insurance brokers with no or little training in anti-money laundering issues were utilized to place cash funds into various financial institutions.  policies allowed a customer to over-fund an insurance policy,Certain insurance moving funds into and out of the policy at a cost of early withdrawal penalty. When such funds are reimbursed, the money launderer has successfully obscured the link between the funds and the original criminal activity that generated them.
 As a prudential regulator, the Office of the Commissioner of Insurance (“OCI”) strives to ensure that the insurance industry has an effective framework to deter, detect and report cases of money laundering. To provide guidance for insurance  11
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