Hong Kong Asias laundromat

Added 16th June 2015

Hong Kong Asias laundromat

Majcher, a former Eurobond trader in London who became a top covert operator for Canada's RCMP, was particularly critical about the sale of licenses for backdoor listings.

A backdoor listing involves a private company buying a publicly-listed company and injecting its assets into it to become a listed entity, avoiding the regulatory and financial requirements of an IPO.

"In New York or London, no one pays the stock exchanges $50m-$60m to get a backdoor listing. But in Hong Kong you have to pay the consideration for the listing," said Majcher, speaking at the Foreign Correspondent's Club on money laundering in Hong Kong.

"People are spending hundreds of millions of dollars from China to buy these licenses to do these backdoor listings."

He said the payment for listing consideration is not reflected in financial statements. "That's gobs of money that never gets reported anywhere." 

Listed companies in Hong Kong are often nothing more than vehicles or conduits, and "Hong Kong is the only place in the world where you have this valuable trade, which is nothing more than acquiring vehicles."

Mis-valuation game

A related issue is the potential for money laundering through asset mis-valuation, he said.

"Why would a major Chinese company want to do a backdoor listing? Why not an IPO? The reason is they may not have been paying taxes for years. If they go through an IPO, they must disclose the fair value of assets."

Majcher said one tactic is a backdoor listing using a third-party valuation company to make, for example, a $1bn asset worth $100m on paper.

"A billion dollar asset is moved out of China for $100m. It gets funneled into a listed Hong Kong company, the management goes to do secondary financing and the real value of the company shows up."

If authorities question management, the reasonable response is that the market has determined the company's worth.

Exploiting shortcomings

Majcher said Hong Kong's legal and regulatory environment has holes that effectively encourage money laundering.

Hong Kong's Court of Final Appeal no longer can convict someone of money laundering unless they can prove the accused knowingly laundered the proceeds of crime, Majcher said. To provide legal proof, either an undercover police operation or wiretaps would be necessary, and both take time and money and are hit and miss.

Moreover, a lack of proportionality in Hong Kong law effectively encourages money laundering activity among individuals and institutions, he said. 

A financial institution found guilty of facilitating money laundering faces up to two years in jail and up to a HK$1m ($129,000) fine. A person defying the quota for the number of powdered milk cans allowed to be taken out of Hong Kong faces up to two years in jail and a HK$500,000 fine. 

The offenses are starkly unequal but the penalties are similar, providing individuals with an incentive to give money laundering a crack, since the potential profit is multiples more than simple powdered milk can smuggling. 

"Asia's laundromat"

Hong Kong also lacks stringent financial reporting regulations, which is being taken advantage of, he said.

"You cross a border somewhere in the world and you have to fill out a card that asks if you are bringing in more than $10,000 in cash or equivalents. Except in Hong Kong, which is conspicuously absent from that type of reporting. That's why [Hong Kong] is Asia's laundromat. They don't ask you where money is coming from when it comes across the border."

He cited two cases of individuals laundering billions of dollars over a long period of time without falling under suspicion. 

One, an impoverished woman from a village in China, brought in $6.8bn, making 4800 deposits in several Hong Kong banks over a three-year period, earning tens of thousands of dollars. 

Eventually she was caught by a fluke when one of the accounts she had been laundering money in came up in a separate fraud case years later. 

"She gets a 10-year jail sentence and no one from the banking community lost one dollar or spent one day in jail. So there's a lack of proportionality around who gets away with it and who doesn't."

Conflict of interest?

Majcher also questioned what he said was a business partnership between the Hong Kong Monetary Authority and the Hong Kong Association of Banks through a joint venture called Hong Kong Interbank Clearing Ltd (HKICL).

"Through that private entity [the HKICL], all settlements for forex are done and they also do settlements for movement of securities through Hong Kong. These are profit centers.

"The HKMA is the primary regulator and watchdog over all banks and over the cash remittance business in Hong Kong. The problem is it both regulates and partners with the banks. 

That arrangement creates a situation where "the chief regulatory body is also involved in a business enterprise with the very people it is supposed to regulate.  

"In my experience, you get more objective oversight from a third-party not involved in the process."

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