MONGOLIAN EX-PRESIDENT LAUNDERING CASE SHOWS ASIAN BANKS NEED A TIGHT PEP REGIME, SAY OFFICIALS
“This is a timely reminder for institutions to ensure that they have robust systems and procedures in place regarding client acceptance, on-going monitoring of … accounts and timely reporting of suspicious or unusual transactions to the authorities,” said Christopher Wilson, a partner with Deloitte in Hong Kong. He told Thomson Reuters that the Hong Kong institutions involved may have breached the territory’s Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (AMLO), which became effective on April 1, 2012, as well as the 1994 Organised and Serious Crime Ordinance (OSCO), with regard to reporting of suspicious transactions.
Former Mongolian President Enkhbayar was imprisoned last month in Ulan Bator, after having been under investigation by Mongolia’s six-year-old anti-graft body, the Independent Authority Against Corruption (IAAC). The IAAC has claimed that some of Hong Kong and Singapore’s biggest banks were used for money laundering by a syndicate connected to Enkhbayar. The IAAC alleges that shell companies and bank accounts in Hong Kong and Singapore have been used by some wealthy Mongolians, including Enkhbayar, to transfer funds illegally out of the country.
Mongolia’s economy is currently undergoing a mining and resources boom, as countries and multinational businesses seek access to its copper, gold, uranium and coal reserves. In such instances, some politically connected officials may turn to corruption in order to benefit personally from the high demand.
Dealing with PEPs and those that act on their behalf is a key aspect of a bank’s compliance regime. Banks are required to screen such customers carefully and monitor their accounts for suspicious transactions.
“Get your foreign branches to report to a central point any relevant trials and ensure that all offices check defendants against current account holders and in the case of PEPs, former account holders,” said Nigel Morris-Cotterill, head of the regional Anti-Money Laundering Network. He added while there was no formal cut-off point, few prosecutors or regulators would expect a bank to go back more than 10 years. “When a link is found, report it to the local [financial intelligence unit] without delay and act on such instructions as they may give,” said Morris-Cotterill.
Holding money for PEPs has been become increasingly difficult in recent years, said Bryane Michael, a visiting fellow at the University of Hong Kong’s Centre for Comparative and Public Law. “Hong Kong financial institutions have systems in place to deal with their special risks,” he said.
In the case of Enkhbayar, Hong Kong’s banks and in-house council would need to watch out for any restitution requests from Ulan Bator, he said. However, Mongolia has no official law enforcement agreements with Hong Kong.
“We live in a world where the proceeds of crime can relatively easily be obtained upon request from law enforcement agencies like the Mongolian IAAC,” said Michael. He added: “If the proceeds of corruption have found their way into Hong Kong private banking accounts and shell company accounts, in-house counsel will deal to deal with requests related to discovery, search, seizure, and confiscation of those assets, if agreed [to] by Hong Kong’s senior officials.”
Due diligence
Enkhbayar’s case highlighted the dangers of dealing with PEPs and their associates, said Matthias Feldmann, a partner with law firm Clifford Chance in Hong Kong. “Dealing with PEPs requires enhanced due diligence (EDD) for AML purposes, including under the new AMLO. But in practice it is not always easy to investigate whether an account holder is a PEP,” he said. This was because the definition of PEPs not only included the political person, but also their family — spouses, partners or children, as well as “close associates,” he told Thomson Reuters.
While Hong Kong’s AMLO contains wide ranging obligations on banks to apply EDD for PEPs, their family and close associates, it was not easy to discern when banks were dealing with PEPs or their close associates thereof.
“These cases show how important it is to subject such account relationships to enhanced scrutiny,” said Feldmann.
Enkhbayar and his associates reportedly sent Mongolian state funds to two Hong Kong shelf companies through state steel factory contracts. One of his associates was the sole director of the two companies. A common practice for corrupt officials is to have relatives get licences in the names of offshore companies, only to transfer shares to overseas owners to thwart regulations seeking to control the trading of licences.
Jay Jhaveri, World-Check’s (a Thomson Reuters company) head of Asian operations in Singapore, said it was unlikely Enkhbayar went through conventional channels to open an account.
“He didn’t stand in line and chat with a teller or relationship manager to … establish a banking relationship. Who’s fronting for him? Was it his wife, one of his four children, a sibling, a parent or some crony? Most likely someone around him conducted business on his behalf,” he said.
Jhaveri said that if the former president had actually embezzled state assets and banked these funds with banks in highly regulated jurisdictions, then the banks in question had failed in their due diligence and KYC obligations. “The on-boarding of customers should not be treated a trivial process,” he warned.
Hiding behind veils
Major financial centres such as Hong Kong and Singapore are often sought by launderers to launder funds. It was, therefore, crucial to conduct EDD to ensure that the monies banked from places such as Mongolia and Myanmar were not derived from the proceeds of crime, stressed Jhaveri.
“Banks should not be falling short in their obligations to know their clients and their sources of wealth. Financial institutions are obliged to know the ultimate beneficial owners of all accounts, personal, corporate and trust accounts,” he said.
However, he acknowledged that establishing companies, especially ‘shelf companies’, in some jurisdictions could take mere minutes. “Companies that provide corporate secretarial services, which are largely unregulated, can provide veils and layers of confidentiality that are often difficult to pierce,” warned Jhaveri. “There are apparently several thousand British Virgin Islands-registered companies that have accounts with banks in Hong Kong. BVI companies are easily established and the list of shareholders and directors are not necessarily accessible by the public.”
Additionally, the ultimate beneficial owners of such companies are rarely, if ever, disclosed in any document open for public scrutiny.
“It is therefore incumbent upon the bank to conduct adequate levels of due diligence on the ultimate beneficial owner and all other stakeholders in the company when establishing a banking relationship. So, if a former head of state, like the president of Mongolia, is found guilty of money laundering and taking kickbacks it means that somewhere along the line a banker and a bank have fallen short in their due diligence and KYC obligations,” said Jhaveri.
Penalties
The penalties can be steep, said Manhim Yu, director Ernst & Young Advisory Services in Hong Kong. “The financial penalties, reputational damage and regulatory sanctions such as ‘cease and desist’ orders also threaten to impact businesses in the long run,” he told Thomson Reuters.
For its part, Hong Kong has toughened its local AML laws, requiring transactions potentially involving PEPs, terrorism or narcotics to be reported to the Joint Financial Intelligence Unit, which is operated jointly by the Hong Kong Police Force and Customs and Excise Department.
A spokeswoman for the Hong Kong Monetary Authority (HKMA) told Thomson Reuters that Mongolian authorities had not approached them. “Like other major international financial centres, Hong Kong is a member of the Financial Action Task Force and has imposed a robust AML and counter-financing of terrorism regime according to the relevant international standards,” she said. She added that authorised institutions (AIs) were required to comply with the AMLO and its guidelines. “The HKMA monitors AI compliance with AML legal and regulatory requirements through on-site examinations,” she said.
Enkhbayar, who served as prime minister and then president for a decade until 2009, has argued that the case against him is politically motivated, and remains in jail pending an appeal against his four-year jail term.
“What is clearis that the nature of anti-corruption laws are such that they can easily be used for political purposes, as much as they can be used for good,” said Alex Duperouzel, managing director of ComplianceAsia, a consultancy in Hong Kong.
By Ajay Shamdasani
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