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					                                    Money laundering

                                     money trail
                                     Steven Sieker and Travis Benjamin
                                     explain how money-laundering laws
                                     affect accountants, auditors and those
                                     providing tax advice

                                               ombating money laundering         the proceeds while imposing stringent
                                               and related terrorist financing    obligations to disclose knowledge or
                                               is tougher in a post-9/11         suspicion of tax evasion to the authorities.
                                     world. Most jurisdictions have enacted
                                     comprehensive legislation to punish         Tax evasion
                                     money launderers and their accomplices.     Section 82 of the Inland Revenue
                                     Hong Kong has implemented anti-             Ordinance applies to any person who in
                                     money-laundering rules as elaborate as      order to evade tax or assist someone else
                                     those anywhere in the world and recent      to do so:
                                     cases show the police, prosecutors and          • Omits from a return any sum which
                                     judiciary assiduously apply the laws.             should be included.
                                         Money laundering is not the exclusive       • Makes any false statement or entry
                                     preserve of terrorists, smugglers and             in any return.
                                     drug traffickers, however. Hong Kong’s            • Makes any false statement in
                                     legal definition of money laundering is            connection with a claim for any
                                     broad, encompassing money linked to               deduction or allowance.
                                     any indictable offence in Hong Kong,             • Signs any statement or return
                                     including tax evasion.                            furnished without reasonable
                                         This broad definition imposes                  grounds for believing them to
                                     obligations and dangers for auditors,             be true.
                                     accountants and tax advisors because            • Gives a false answer whether
                                     of their intimate knowledge of clients’           verbally or in writing to
                                     financial affairs. The laws prohibit                any question or request
                                     helping clients evade taxes and handle            for information.

[ 22 ] A Plus   +   December 2006
    • Prepares or maintains or authorizes       Property is defined in the ordinance        may be implicated if their activities are
      the preparation or maintenance of     to include anything valuable.                  said to conceal ill-gotten funds.
      any false books of account or other       What gets tricky is that local case law
      records or falsifies or authorizes     suggests the test for “reasonable grounds      Failing to disclose
      the falsification of any books of      to believe” is subjective and objective.       Notwithstanding these issues, the
      account or records.                   Case law shows proof is required for           circumstance most likely to create
    • Makes use of any “fraud… or           a reasonable citizen to conclude that          obligations for accountants pertains
      contrivance,” whatsoever or           particular property was tainted by a           to section 25A(1) of the OSCO – it
      authorizes the use of any such        criminal offence (e.g. tax evasion), and        imposes a positive obligation to report
      fraud… or contrivance.                that the defendant knew it.                    any knowledge or suspicion that property
    In addition to tax evasion, several         In a practical context, where              is related to an indictable offence (which,
common law offences come into the            accountants might reasonably believe           once again, includes tax evasion). While
scope of money laundering, such as          that property constitutes the proceeds of      it is possible that an accountant, auditor
revenue fraud, conspiracy to defraud        tax evasion or another criminal activity,      or tax consultant would not know that
and false accounting, all of which are      they fall within the scope of section          property represents the proceeds of tax
indictable offences in Hong Kong.            25(1) of OSCO.                                 evasion or some other criminal offence,
                                                The implication for accountants is         they might suspect it.
The long arm of OSCO                        that when they consider it is plausible              When it comes to suspicion, case
The Organized and Serious Crimes            that property represents the proceeds of       law suggests that “suspicion” implies
Ordinance (OSCO) is the money               “tax evasion,” even if it is not, they will    something less sophisticated than having
laundering statute with the broadest        commit an offence under section 25(1)           reasonable grounds to believe. The
reach and defines money laundering           by dealing with it.                            burden of proof for suspicion is lower
in section 25(1): A person commits an           “Dealing” with property is defined in       than it is for reasonable grounds. Where
offence if, knowing or having reasonable     section two of OSCO and means, among           accountants have some factual basis
grounds to believe that any property in     other things, concealing or disguising         to suspect any property represents the
whole or in part represents any person’s    the property (whether by concealing or         proceeds of tax evasion or some other
proceeds of an indictable offence, he        disguising its nature, source, location,       indictable offence, they must disclose
deals with that property.                   disposition, movement or ownership or          their knowledge or suspicion to an
    It names two offences connected to       any rights with respect to it or otherwise).   authorized officer promptly.
money laundering:                               Accountants completing tax                       All professionals – including
    • Dealing with property known or        computations or preparing audited              accountants – have reporting
      believed to represent the proceeds    accounts may deal with the proceeds of         responsibilities under OSCO. They
      of an indictable offence.              tax evasion in so far as their activities      cannot negate potential criminal liability
    • Failing to disclose to the            serve to conceal or disguise the nature,       by simply refusing to deal with suspicious
      authorities any knowledge or          source, location, disposition, movement        property – non-compliance is an offence.
      suspicion that property represents    or ownership or any rights associated
      the proceeds of an indictable         with any property, with the deliberate         Extraterritorial application                               PHOTO-ILLUSTRATIONS BY EMILIO RIVERA III

      offence or was used, or intended       objective of assisting someone else to         Another trap waiting for professionals is
      to be used, in connection with an     evade tax. Forensic accountants or those       the extraterritorial application of OSCO.
      indictable offence.                    engaged in financial or tax due diligence       The scope of OSCO extends not only to

                                                                                                                  December 2006   +   A Plus [ 23 ]
                                               Money laundering

     property representing the proceeds of      the background of companies and            criminal activity, there is an obligation
     indictable offences committed in Hong       individuals before taking them on as       to report this knowledge or suspicion
     Kong. It applies also to property which    clients.                                   to an authorized officer as soon as it
     represents the proceeds of conduct             According to the Financial Action      is reasonable to do so. An authorized
     overseas which would constitute an         Task Force (FATF), an international        officer is any Hong Kong police
     indictable offence if it had occurred in    body of which Hong Kong is a               officer or member of the Hong Kong
     Hong Kong (under section 25(4) of          prominent member, the growth of            Customs & Excise Service. In practice
     the OSCO).                                 anti-money-laundering regulation and       such reports are made to the Joint
          Section 82 of the IRO says tax        advances in technology have led money      Financial Intelligence Unit. However,
     evasion is an indictable offence and        launderers to use increasingly complex     as the JFIU frequently and publicly
     one local court convicted a Hong           commercial arrangements. These             comments, very few Hong Kong
     Kong resident under OSCO section           require the services of professionals,     accounting firms or law firms file
     25(1) for dealing with the proceeds of     including accountants. The FATF’s          suspicious transaction reports with
     mainland tax evasion. The rationale        recent recommendations impose more         the JFIU.
     is that the law allows Hong Kong to        burdensome obligations on accountants
     prosecute reprehensible conduct            and lawyers, whom the FATF calls           Conclusion
     abroad even if the laws in that            “gatekeepers” whom launderers use to       Hong Kong’s anti-money-laundering
     jurisdiction do not cover the offence.      get access to legitimate markets.          laws are comprehensive and vigorously
     The danger is that professionals may           Accountants creating corporate         enforced. Through awareness,
     find they have a reporting obligation       vehicles and trusts, and helping with      accountants and other professionals
     under Hong Kong law in the many            financial transactions and reporting, are   can protect themselves from becoming
     instances where there is a suspicion       acting as gatekeepers.                     involved in criminal offences and
     that a crime, particularly tax evasion,        In light of these FATF                 the obvious risks to their reputation.
     has been committed in a different           recommendations, the Hong Kong             Avoiding these risks means being
     jurisdiction, e.g. on the mainland.        Law Society has issued new guidance        proactive in reporting suspicious
                                                to solicitors.                             transactions to the authorities. It also
     Compliance                                     To reiterate: If a person knows or     means being proactive in proper training
     Prevention is the best cure and it is a    suspects that any property represents      and reporting procedures to identify
     good idea for professionals to review      the proceeds of tax evasion or other       problems and deal with them. A+

                                                                                              Steven Sieker is a partner with
                The FATF calls accountants                                                    Baker & MacKenzie in Hong Kong and
                                                                                              Travis Benjamin a registered foreign
                ‘gatekeepers’ whom launderers use                                             lawyer with the same firm.

                to get access to legitimate markets.

[ 24 ] A Plus   +   December 2006
Soft target?
Ironically, while it is forensic    Suspicious transaction reports in Hong Kong by profession                                        “Do you want
accountants who are in                                                                                                          your sector involved
                                       Profession           2002        2003         2004           2005              2006
the forefront of efforts to                                                                                                     in money laundering?”
                                          Banking         10,587       11,393      13,570          12,449            8,275
detect and combat money                                                                                                         he asked, in response
laundering and fraud in                Legal sector          10           4            13              5                5       to the question,
general, the accountancy               Accounting             2           1             1              0                0       “Why should
profession is the target of              Securities          48          66            76            150               58       accountants report?”
criticism when it comes                                                                                                              But Jill Wong,
                                         Insurance           88          72           144            560               77
to reporting suspicious                                                                                                         a consultant to law
transactions which may relate             Finance            53          47            70             29               32       firm Clifford Chance,
to such crimes.                         Secretarial          19          10             2             11                3       suggests that some
      “Hong Kong is a                                                                                                           of the suspicious
regional leader in anti-money          Remittance                                                                               transaction reports are
laundering,” says Clint                    agents                                                                               just filed by bankers
                                                             56          57           132            268             1,025
                                       and money
Stinger, director of forensic                                                                                                   and others as a
and dispute services at                                                                                                         defence. “We need
Deloitte Touche Tohmatsu.                  Others             8          18            21             33               26       good quality reports,”
      “Transactional due                    Total         10,871       11,678      14,029          13,505            9,464      she says.
diligence is a hot issue                                                              Source: Joint Financial Intelligence Unit
                                                                                                                                     Many accountants
in Hong Kong,” he adds.                                                                                                         reportedly baulk at
Examples would be high-risk candidates             of the Financial Action Task Force, show              the paperwork involved in compiling and
for listing, like a casino or a mainland           that there were only two suspicious                   filing these reports, saying they lack staff
financial institution. They must all conduct        transactions reported by Hong Kong                    to handle this.
anti-money-laundering due diligence                accountants in 2002 and only one case                        Samantha Suen, managing director
exercises to demonstrate their commitment in both 2003 and 2004. There have been                         of KCS Ltd., says she thinks there are
to combating money laundering.                     none since then.                                      various reasons for the low reporting rate
      Investigations by forensic                        Contrast this with the diligence of              for suspicious transactions.
accountants like Stinger are one of                bankers, who filed 10,587 suspicious                          “Professionals may not think that it is
the reasons why Hong Kong is in the                transaction reports in 2002, 11,393 in                fair for them to act as whistle blowers,”
lead. But Detective Inspector David                2003, 13,570 in 2004, 12,449 in 2005                  she suggests.
Cope of Hong Kong’s Joint Financial                and 8,275 to date in 2006.                                   “Also, the word ‘suspicious’ is quite
Intelligence Unit (JFIU) told a conference              “This is a worldwide problem,” said              broad in meaning and different people
on anti-money laundering and fraud                 Cope. “We’re not picking on Hong                      may interpret it differently.”
prevention held in the SAR in October              Kong accountants.”                                            Kyran McCarthy, associate director
that accountants were “the prime                        Accountants are seen by the                      of Deloitte & Touche Forensic Services,
example of a sector which is ignorant              JFIU as “a weak link,” “a soft target”                argues against indiscriminate filing.
of their requirements” to file suspicious           for money launderers: “Criminals go for               “If you can’t articulate why you are
transaction reports under anti-money-              the easy win – they aren’t stupid.” They              suspicious you may want to investigate
laundering legislation.                            will go for the sole practitioner, the small          and do more fact gathering before
      Statistics compiled by the JFIU,             accounting firms according                             reporting,” he suggests.
which was set up at the recommendation to the detective inspector.

                                                                                                                                December 2006   +   A Plus [ 25 ]

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