Hong Kong cleanliness and KYC need confirmed by appeal judgment

Stephen Mulrenan

The recent judgment by the Hong Kong Court of Final Appeal against disgraced businessman Carson Yeung has reinforced the territory’s status as a clean financial centre, according to legal commentators. A five-judge panel recently upheld Yeung’s 2014 conviction for laundering more than HK$700 million (US$90 million), with the former Birmingham City Football Club chairman now serving the remainder of his six-year sentence. But, in addition to supporting Hong Kong’s transparency claims, the judgment has also reminded companies of the need to implement a rigorous know-your-customer (KYC) process.

Yeung’s lawyer Clare Montgomery QC had warned Hong Kong’s Court of Final Appeal of the dangers of upholding a conviction that was based on “belief” rather than actual evidence that money laundering proceeds were from indictable offences.

However, in their final written judgment, the appeal judges clarified the intent of Hong Kong’s courts was to also be able to examine proceeds with reasonable grounds to be considered dubious.

Colin Cohen, senior partner at Hong Kong law firm Boase Cohen & Collins, commented on the judgment, saying: “It has always been the position in Hong Kong that the prosecution does not have to prove the predicate offence, it need only to show that the flow of funds into an account was unusual and that the defendant would have reasonably known they were from the proceeds of crime.”

He added: “It means, in practice, that a defendant would need to give evidence and explain why he took the view that the money was clean. Carson Yeung tried to do this in his District Court trial but was disbelieved by the judge.”

Hong Kong’s District Court convicted Yeung in 2014 for laundering HK$721 million through five bank accounts at Wing Lung Bank and HSBC between 2001 and 2007. Deposits were made by various sources including securities firms and a casino in Macau, all of which Yeung described as “legitimate” payments.

“There have been cases in Hong Kong where people have allowed their bank accounts to be used for money transfers in exchange for a commission on the sums going in and out,” said Cohen. “But the law is clear, it is not acceptable to simply turn a blind eye and claim you were not aware of the source of the money. If you have any doubts whatsoever, you must report it to the authorities.”

As companies around the world get an increased taste for all things compliance, they need to start considering how their customer base can actually cause them potential liability or possibly reputational damage. Historically, this area of KYC checks was limited to looking at money laundering risks and identifying the source of customer funding. But now the risks are much larger and deeper. They encompass risks around ownership, sanctions, government dealings, illegal on-sale and export/import controls, potential corrupt dealings, and, in what appears to be the latest and most tragic development, human trafficking.

The days of companies relying on indemnification or warranty clauses in terms and contracts in order to disassociate themselves from customer misconduct are over. Given that organisations can suffer serious reputational damage if they engage with high-risk customers, many are advised to implement an effective KYC screening programme.

For organisations that are generally not regulated, the specific requirements for a KYC process will differ across varying industries and will often depend on an organisation’s risk profile and its customers. Irrespective of geography and industry, there are a few basic elements to any robust KYC programme.

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