Hong Kong is taking the fight to money launderers — but the ‘air bubble’ is hard to stamp out

Illustrating the importance of finance to Hong Kong, nearly 200 banking institutions had assets of HK$22.7 trillion ($2.89 trillion) at the end of 2017 — an amount almost equivalent to nine times the size of its economy, according to the assessment.

Keith Williamson, managing director and head of disputes and investigations in Hong Kong and China for turnaround firm Alvarez & Marsal, said that authorities must balance the need for openness and accessibility with regulation that’s tight enough to deter money launderers.

“It’s a difficult balancing act to perform,” Williamson, an expert in forensic and investigative accounting, told CNBC.

So-called suspicious transaction reports have nearly tripled in the five years to 2017, partly due to stepped-up monitoring and better compliance since the 2012 implementation of a local ordinance against money laundering and terrorist financing.

The report described coping with the increase as a “challenge.” Analysts agree the system is under strain.

Angus Young, a specialist in regulation, governance and compliance who teaches at Hong Kong Baptist University, gives authorities high marks for implementing anti-money laundering legislation and for awareness of the problem.

But Hong Kong suffers from a lack of qualified specialists, especially at non-banks such as local securities firms as well as at regulators, who are capable of analyzing complex transactions amid the toughened compliance and risk requirements, Young said. That combined with general weaknesses in compliance and training leaves Hong Kong in a “vulnerable” state overall, he said.

“What I feel is that it underrepresents the true possibility of financial crimes, especially in anti-money laundering,” he said of the government’s assessment.

Young also said that while efforts to profile money launderers can be successful, so is their ability to adapt to changed circumstances.

“So it’s basically like an air bubble under the carpet,” he said. “Once you press down on one side of the carpet the air bubble moves to the other.”

The situation surrounding terrorist financing is less of a concern, according to the report, which described Hong Kong as having a “medium-low” risk level.

The report was issued ahead of a visit by the Paris-based Financial Action Task Force, the global standard bearer for fighting money laundering and terrorist financing, planned for later this year.

The United States has in recent years pushed for a stronger global regime against money laundering and terror financing and has used sanctions and penalties to spread the message, Williamson said, which has caused governments to beef up their financial defenses.

“So I don’t think it’s just a local reaction to the challenges that there are here,” he said of Hong Kong’s stance. “It’s clearly in line as well with an increased regulatory regime around this globally.’