Ref : CB2/BC/22/98

Members present :

Hon James TO Kun-sun (Chairman)
Hon Cyd HO Sau-lan
Hon Albert HO Chun-yan
Hon Mrs Selina CHOW LIANG Shuk-yee, JP
Hon Gary CHENG Kai-nam, JP
Hon SIN Chung-kai


Members absent :

Hon David CHU Yu-lin
Hon Ronald ARCULLI, JP

Public Officers attending :

Ms Mimi LEE
Principal Assistant Secretary for Security (Narcotics)

Mr Geoffrey FOX
Senior Assistant Law Draftsman

Miss Leonora IP
Government Counsel

Mr Henrique KOO
Chief Superintendent
Narcotics Bureau

Mr Gareth WILLIAMS
Superintendent
Narcotics Bureau

Mr CHAN Wing-kin
Acting Superintendent
Customs Drug Investigation Bureau

Clerk in attendance :

Mrs Sharon TONG
Chief Assistant Secretary (2)1

Staff in attendance :

Mr Stephen LAM
Assistant Legal Adviser 4

Miss Betty MA
Senior Assistant Secretary (2) 1

I. Election of Chairman

1. Mr James TO was elected Chairman of the Bills Committee.

II. Meeting with the Administration

2. At the invitation of the Chairman, Principal Assistant Secretary for Security (Narcotics) (PAS(S)N) briefed members on the legislative proposals. She said that since 1990, Hong Kong had been an active member of the Financial Action Task Force on Money Laundering (FATF). The FATF conducted two assessments of Hong Kong's anti-money laundering regime in 1994 and 1998. In its latest assessment, FATF pointed out that though Hong Kong had implemented most of its 40 Recommendations, there were loopholes in the existing system. At present, money changers and remittance agents were not subject to any regulation. Instead, the Administration had issued administrative guidelines to money changers and remittance agents advising them to adopt anti-money laundering measures such as customer identification, record-keeping and reporting of suspicious transactions. Subsequent to the issue of those guidelines, the Police surveyed some of those institutions and found that the situation was not very satisfactory. As a result of an increase in the awareness of anti-money laundering, suspicious transaction reports on money laundering increased by more than ten-fold in the past four to five years. It was found that most of the information kept by money changers and remittance agents under the administrative guidelines was generally insufficient for the purpose of investigation into suspected money laundering operations. Against this background, the Administration proposed amendments to the Organized and Serious Crimes Ordinance (OSCO) (Cap.455) and to adopt measures in line with the best international practice in combating money laundering.

3. PAS(S)N highlighted the key features of the legislative proposals as follows -

1. A register would be kept to enable the Government to keep a comprehensive and up-to-date list of money changers and remittance agents for the propose of enforcing the new requirements. All money changers and remittance agents would be required to inform a designated public officer of their names and business addresses; and

2. All money changers and remittance agents would be required to keep records of transactions, including the identity of customers, for transactions amounting $20,000 or more. The records should be kept for not less than six years.

4. PAS(S)N added that the Administration had consulted the money changing and remittance trade on the proposed requirements. The Hong Kong Bar Association, the Law Society of Hong Kong and the Privacy Commissioner for Personal Data had also been consulted. Their comments had been incorporated in the Bill.

Scope of the legislative amendments

5. Mr SIN Chung-kai asked whether money changing and remittance service were regarded as financial activities; if so, he enquired about the rationale for not regulating these activities under ordinances in relation to financial matters. PAS(S)N said that according to FATF, money changers and remittance agents were regarded as non-bank financial institutions. The purpose of the Bill was to regulate money changers and remittance agents in order to counter money laundering. As there was indication on the increasing use of money changers and remittance agents in money laundering operations, FATF advised that the 40 Recommendations, where appropriate, should apply to these two businesses, amongst others. She further said that at present, remittance agents and money changers in Hong Kong were not subject to any specific anti-money laundering regulations. All persons, including money changers and remittance agents, were required to report suspicious transactions under the Drug trafficking (Recovery of Proceeds) Ordinance (Cap.405) and OSCO. Amendments were proposed to OSCO because it had a wider coverage in relation to possible money laundering offences bearing in mind that the primary objective of the legislative proposals was to combat money laundering. The legislative proposals sought to introduce a basic regulation of money changers and remittance agents by keeping a register which would enable the Administration to keep a comprehensive and up-to-date record of the trade. Senior Assistant Law Draftsman (SALD) added that notwithstanding amendments were proposed to OSCO, it did not necessarily mean that the information gathered by money changers and remittance agents could not be used for instituting prosecutions against other criminal offences.

6. Responding to Mr CHENG Kai-nam, PAS(S)N said that the Bill would affect all illegal activities in relation to possible money laundering offences, including handling of proceeds of drug trafficking.

7. Responding to Mr Albert HO, Chief Superintendent (Narcotics Bureau), Hong Kong Police Force (CSP(NB)) said that the Bill intended to cover monetary transactions only.

8. Referring to the queries raised in the Legal Service Division report on the Bill (LC Paper No. LS 150/98-99), Miss Cyd HO enquired about the Administration's response. PAS(S)N said that the Administration had already provided a written reply to the queries raised. She then took members through the Administration's reply letter dated 19 April 1999 (which was at the Annex to LC Paper No. LS 150/98-99).

Operation of Joint Financial Intelligence Unit

9. The Chairman asked who would be the responsible officer for maintaining the register. PAS(S)N replied that at present, the Joint Financial Intelligence Unit (JFIU), which was jointly staffed by the Police and the Customs personnel, was the central unit for receiving suspicious transaction reports in the form of disclosure in Hong Kong. The current thinking was, upon the enactment of the Bill, the Chief Superintendent (Narcotics Bureau) of the Hong Kong Police Force, who supervised the work of JFIU, would be appointed as the designated public officer responsible for maintaining the register. The arrangement would streamline the existing working procedures as JFIU would be responsible for intelligence collection as well as investigations.

10. On the Chairman's enquiry about the operation of JFIU, CSP(NB) said that under the existing practice, when JFIU received reports on suspicious transaction records from financial institutions, it would analyze the reports and then made necessary referrals to the relevant enforcement departments for follow-up.

Public Consultation

11. Mrs Selina CHOW indicated support for the legislative proposals in principle. She however expressed concern about the impact of the proposed requirements on the operation of the trade. In this connection, she requested for more information on how the money changers and remittance agents were consulted on the proposed requirements through questionnaires in 1998 and their feedback, in particular the opposing views.

12. PAS(S)N responded that the Police had issued administrative guidelines to money changers and remittance agents in 1997 advising them to adopt anti-money laundering measures such as customer identification, record-keeping and reporting of suspicious transactions. She pointed out that the legislative proposals were drawn up on the basis of the administrative guidelines. As regards the questionnaires issued in 1998, PAS(S)N said that the respondents were asked whether they supported the proposed requirements in principle, whether they kept any records of their customers and the details of the records kept, such as the average amount of each transaction. Views on setting a threshold and other comments were also invited. The findings indicated that a set of detailed guidelines should be drawn up to assist them in client identification and record keeping. PAS(S)N further said that as the money changers and remittance agents did not have any trade association, the Administration approached individual money changers and remittance agents for their views. A total of 92 money changers and 87 remittance agents were consulted. A response rate of 36% from money changers and 52% from remittance agents had been registered respectively. More than 72% of the money changers and 66% of the remittance agents who responded to the questionnaires supported the proposals. Their major concern was about the proposed threshold. She stressed that the trade was fully consulted before drawing up the Bill.

13. While appreciating the efforts made by the Administration to collect views from the trade, Mrs Selina CHOW expressed concern whether the trade's views had been fully reflected. Given that failure to comply with the proposed requirements would be subject to criminal sanction, Mrs CHOW considered that the Administration should be cautious in introducing the requirements. In response to Mrs Selina CHOW's request, PAS(S)N agreed to provide a copy of the questionnaire issued to the money changers and remittance agents and the summary findings of the views received from the trade during consultation.

Adm

14. Responding to the Chairman, PAS(S)N agreed to provide the respective daily average transaction handled by money changers and remittance agents as revealed in the questionnaires.	Adm

15. The Chairman pointed out that in some companies, remittance service accounted for only a minor part of their business, and hence it would not be easy for the Administration to locate them and seek their views on the proposed requirements. PAS(S)N said that the Administration had issued a letter to the Hong Kong General Chamber of Commerce in early 1999 seeking its members' views on the proposed requirements. No response had been received so far.

16. To solicit views from the trade on the Bill, members agreed to issue a press release and to place an advertisement on two local newspapers.	Clerk

(Post-meeting note : The advertisement was placed on the South China Morning Post and the Hong Kong Economic Times on 27 July 1999.)

17. Mr SIN Chung-kai asked whether the relevant monetary bodies were consulted in respect of the proposed legislative amendments as they were related to financial matters. PAS(S)N replied that the Administration had consulted the Securities and Futures Commission, the Office of the Commissioner of Insurance and the Financial Services Bureau prior to drawing up the legislative amendments.
Definition of remittance agent

18. Mr Albert HO remarked that the definition of "remittance agent" was unclear. He asked whether a person was within the meaning of remittance agent if he provided remittance service occasionally. PAS(S)N pointed out that it was specified in the Bill that a remittance agent meant a person who provided a service to another person or persons as a business. The crucial point was that the remittance service provided must be a chargeable service irrespective of the number of transactions carried out in a certain period of time. The Administration would spell out the definition clearly in the administrative guidelines. SALD added that if the remittance service was offered totally free of charge, such transaction would not be covered by the Bill.

19. The Chairman expressed concern that one could receive other form of reward in providing remittance service. Hence, this might give rise to a loophole in the Bill. SALD explained that should there be a benefit, irrespective of its form and nature, arising from a transaction, such transaction would be regarded as a business. He pointed out that from the practical point of view, if any person claimed that he was providing remittance service in excess of $20,000 free of charge in order to avoid complying with the proposed statutory requirements, it would arouse the suspicious of the enforcement agencies.

20. The Chairman pointed out that it was not uncommon in dealing business with the Chinese enterprises in the Mainland that a person might provide service to another person or persons without asking for a benefit with a view to promoting their mutual relationship. He asked whether providing remittance service in such context fell within the meaning of remittance agent. SALD said that if a person provided remittance service to another person without asking for a benefit, he was not providing a remittance service under the Bill. PAS(S)N added that at the Panel on Security meeting held in March 1999, the Administration proposed that statutory requirements should be imposed on all persons carrying on money changing or remittance businesses to identify customers and keep transactions records. However, members considered such proposal too stringent as the provision of remittance service did not necessarily involve business transactions. The Administration had therefore taken into account members' views and the practical considerations in proposing the current legislative amendments, and limited the scope of the definition of "remittance agent".

21. Mr Albert HO considered that using the concept of benefit as a criterion for determining whether a remittance service would be covered by the Bill was not good enough given the complexity involved in corporate business transactions. He suggested that a company, instead of an individual, be used as a legal entity in the Bill. PAS(S)N responded that the Administration had reservations about the suggestion as it would present an even larger loophole. She pointed out that quite a number of remittance service were provided by individuals.

22. Mrs Selina CHOW shared with PAS(S)N's concern that it would create a loophole in the Bill if the provision of remittance service by individuals was not subject to regulation. Mrs CHOW asked whether frequency of providing remittance service could be a consideration for determining whether one was a remittance agent. PAS(S)N responded that there were practical difficulties in relation to Mrs CHOW's suggestion. On some occasions, even one single remittance transaction might involve a huge amount of money. CSP(NB) added that based on the Force's operational experience, though some of the remittance agents involved in remittance transaction once only, the transacted amount reached several million dollars.
Overseas experience

23. In response to Mr Albert HO's enquiry on how the proposed requirements under the Bill compared with those in other FATF member countries or regions, PAS(S)N said that the proposed requirements were in line with those adopted by other FATF's member jurisdictions. Of the 26 FATF member jurisdictions, half of them had adopted various degree of regulation governing money changers and remittance agents. She cited that, for example, money changers in Australia were required to report transactions if the amount exceeded A$10,000 and to report every telegraphic transfer transaction irrespective of the amount involved. In France, there was no registration system for money changers and remittance agents. However, both money changers and remittance agents were required to submit periodical reports to the Banking Commission. In Singapore, there was a licensing system under which money changers and remittance agents were required to keep records of transactions and to identify customers. As for UK, a threshold was set at £10,000, above which money changers and remittance agents were required to identify customers and to keep records of such transactions.

Enforcement of the proposed requirements

24. Mrs Selina CHOW enquired how the Administration could be able to know the existence of those persons providing remittance service to another persons not as a business. CSP(NB) said that the legislative amendments were considered sufficient for combating money laundering as it provided an audit trail of the businesses or transactions conducted. For those remittance transactions which were not regarded as a business, e.g. remittance on behalf of friends, the service providers should be able to provide identification information regarding the senders and recipients. The Chairman considered that the rationale was understandable from the anti-money laundering point of view.

25. Given that there was no licensing system in place, Mr Albert HO asked how the Administration monitored the implementation of the proposed requirements. PAS(S)N responded that the Administration would spell out as much details as possible in its administrative guidelines for the trade. It would step up its publicity efforts for the trade through the media, visits by enforcement agencies and other means, when the proposed requirements came into operation. Publicity efforts wold be targetted at those money changers and remittance agents which carried out money changing and remittance transactions as their principal business. The Administration would also place the administrative guidelines and the relevant publicity material onto the Internet.

26. Mr SIN Chung-kai opined that money changers or remittance agents would observe the requirements closely if they were regulated by a licensing system. He asked whether it was due to the opposition from the monetary bodies that the Administration did not introduce a licensing system for money changers and remittance agents. PAS(S)N said that there were at present no licensing and registration systems for both money changers and remittance agents. The Money Changers Ordinance was considered by the Trade and Industries Bureau as sufficiently effective to achieve the purpose of protecting consumer interests in exchange transactions. The Administration did not see any need to introduce a licensing system for the purpose of countering money laundering or consumer protection, which might unnecessarily increase the operators' running costs. A notification system, as currently proposed, was considered sufficient, appropriate and readily acceptable to the trade concerned.

27. Mr SIN Chung-kai pointed out that on some occasions, either an operator or an employee of a money changer or remittance agent might fail to keep the required records due to negligence. He enquired about the respective criminal liability of the employer and employee. PAS(S)N said that the Administration had taken into account this factor in proposing the penalty and criminal liabilities. SALD said that the penalty for not observing the statutory requirements would definitely be heavier under a licensing system than a notification system. Under a notification system, even when a money changer or remittance agent was convicted for not complying with the statutory requirements, he could continue with his business. SALD added that the criminal liability proposed under new section 24D in the Bill was the same as section 11 of the Money Changers Ordinance. It would be a defence for the employer if he had taken reasonable steps to prevent the commission of the offence.

28. Responding to Mr SIN Chung-kai, SALD said that it would depend very much on the circumstances of each case in determining whether the employer or the employee would be prosecuted for a breach of the statutory requirements. SALD considered that given the Money Changers Ordinance had been in force for over ten years, the application of section 11 of the Ordinance might assist members' understanding on instituting prosecutions in this regard. CSP(NB) agreed to provide the figure for prosecutions under section 11 of the Money Changers Ordinance.		Adm

29. At the request of the Chairman, SALD agreed to provide examples of business activities which were similar to the proposed notification system for the money changers and remittance agents, i.e. the trade was required to notify the relevant authorities and keep records in respect of the activities engaged instead of obtaining an operating licence.		Adm

30. PAS(S)N added that as far as the recommendation of FATF was concerned, a notification system along the line the Administration had proposed could serve the purpose. PAS(S)N agreed to provide further information on overseas experience where money changers and remittance agents were not regulated by a licensing system, but by a mechanism similar to the current proposal.	Adm

III. Date of next meeting

31. The next meeting would be held on 8 September 1999 at 10:45 am.

32. The meeting ended at 12:30 pm.

Legislative Council Secretariat
2 September 1999