National security law: Hong Kong banks told by HKMA to report suspicious transactions

Chad Bray
·6-min read

Banks operating in Hong Kong have been told to report financial transactions believed to violate the city’s controversial national security law (NSL) as they would suspected incidents of money laundering or terrorism financing, according to the city’s top financial regulator.

In a document posted on its website, the Hong Kong Monetary Authority (HKMA) advised banks to file suspicious transaction reports for dealings that may be related to violations of the national security law to the city’s Joint Financial Intelligence Unit, an investigative division of the Hong Kong Police Force and the Customs & Excise Department.

“The obligation for reporting under the NSL will be triggered when an [authorised institution] ‘knows’ or ‘suspects’ that any property is offence-related property,” the HKMA said in an updated frequently asked questions document on its website.

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The advice, updated on September 30, encourages banks to report those transactions as they would for suspected violations of the city’s organised and serious crimes, drug trafficking and anti-terrorism laws, according to the HKMA, which also acts as the city’s de facto central bank. The obligation will apply to both local and international banks in the city.

In general, banks are required to implement effective anti-money-laundering and counterterrorism financing systems, including “detecting and reporting suspicious transactions to law enforcement agencies for investigation,” a HKMA said in a statement. “There is no change to the relevant international standards and the HKMA’s requirements with respect to suspicious transaction reporting,” it added.

The Hong Kong Association of Banks, which drafted the frequently asked questions advice alongside the HKMA, did not respond to a request for comment on Tuesday. The Financial Times reported the change earlier on Tuesday.

Beijing adopted the national security law for the city on June 30, the day before the 23rd anniversary of the handover of Hong Kong and an annual march by opposition activists.

The law targets acts of secession, subversion, terrorism and collusion with foreign forces and was adopted following months of anti-government protests in the city. Critics said the law infringes on freedoms guaranteed under the Basic Law, the city’s mini constitution.

The national security law is the latest flashpoint between Washington and Beijing as relations between the world’s two biggest economies become increasingly strained over a variety of issues, including technology and trade.

The United States sanctioned 11 Hong Kong and mainland officials over the law in August and has threatened to sanction financial institutions that engage in “significant transactions” with individuals identified by the US as undermining the city’s autonomy. China’s foreign ministry vowed last week to enact its own “countermeasures” in response.

Hong Kong national security law official English version:

Hong Kong chief executive Carrie Lam Cheng Yuet-ngor and other city leaders have argued the sweeping national security law is necessary and similar to efforts by other countries to fight terrorism. Lam is one of the officials sanctioned by the US over the law.

“All those countries which are pointing their fingers at China have their own national security legislation in place,” Lam said in a video address defending the law’s passage in June.

International counterterrorism efforts by the US and other countries have included enhanced reporting requirements for banks and other financial institutions regarding suspicious transactions that may be tied to terrorism financing, drug trafficking or money laundering activities.

Global banks operating in Hong Kong must “carefully walk a tightrope” to avoid running afoul of US sanctions and not damaging their businesses in mainland China, as the country further opens up its financial sector, according to Fitch Ratings.

Police officers display a purple flag warning anti-government protesters in Causeway Bay on October 1 that they may be violating the city’s controversial national security law. Photo: Sam Tsang
Police officers display a purple flag warning anti-government protesters in Causeway Bay on October 1 that they may be violating the city’s controversial national security law. Photo: Sam Tsang

Not complying with US sanctions requests could threaten the ability of foreign banks to access the US financial system. At the same time, the national security law prohibits sanctions against mainland China or Hong Kong.

“So far, foreign banks do not appear to be deterred from maintaining operations in China or Hong Kong, and they continue to see growth opportunities in China, including from the Belt and Road initiative,” Fitch analysts Monsur Hussain and Grace Wu said in a research note on September 22. “But this could expose them to reputational or conduct risks resulting in penalties from their home country authorities if they are perceived to be helping clients evade sanctions and tariffs.”

The city’s three currency-issuing lenders, Bank of China (Hong Kong), HSBC and Standard Chartered, did not respond or immediately have a comment for the story. American bank Citigroup, which also has a large retail operation in Hong Kong, declined to comment.

A senior banking executive said earlier this year that the city’s lenders would look to the HKMA for guidance if there is a discrepancy, and local rules would take precedence when dealing with customers in Hong Kong.

In August, the HKMA said “unilateral sanctions” imposed by foreign governments that are not part of an international financial sanctions programme “have no legal status in Hong Kong”, sparking confusion and anxiety among some members of the city’s banking community.

“In assessing whether to continue to provide banking services to an individual or entity designated under a unilateral sanction, which does not create an obligation under Hong Kong law, boards and senior management of [authorised institutions] should have particular regard to the ‘treat customers fairly’ principles,” the regulator said in the August 8 circular.

As the threat of US sanctions loomed this year, some lenders in Hong Kong severed ties with blacklisted city officials or strengthened their review of any transactions going forward with those individuals and their families, according to people familiar with the matter.

Lam herself said she is having trouble using her credit cards since the sanctions were announced, but called the situation a “meaningless inconvenience”. Commissioner of police Chris Tang Ping-keung transferred his mortgage from HSBC to BOC (HK) days ahead of the sanctions designation.

But that has not stopped international criticism of HSBC, Standard Chartered and other lenders that publicly supported the law this year in the hopes that it would bring stability to an economy racked by months of protests and the coronavirus pandemic.

Anti-government protesters detained by police officers on July 1 in Causeway Bay. Photo: Xiaomei Chen
Anti-government protesters detained by police officers on July 1 in Causeway Bay. Photo: Xiaomei Chen

US Secretary of State Mike Pompeo accused HSBC in August of maintaining banking relationships with individuals facing American sanctions “for denying Hongkongers’ freedom”, while cutting off access to others. He has not identified the individuals.

HSBC declined to comment, but chief executive Noel Quinn previously said: “We follow the laws and regulations of all of the countries in which we operate and will continue to do that.”

The bank faced a separate backlash last year after it closed a bank account associated with Spark Alliance HK, which raised money via crowdfunding to help post bail for anti-government protesters.

HSBC said at the time that the corporate account was not being used for its stated purposed and it was closed in November 2019 “following a fund transfer instruction from the customer”. Police later arrested four people on charges of suspected money laundering and froze about HK$70 million (US$9 million) raised to support activists.

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