116TH INTERNATIONAL TRAINING COURSE
VISITING
EXPERTS’
PAPERSVISITING
EXPERTS’ PAPERSCOMPONENTS OF AN EFFECTIVE
ANTI-MONEY LAUNDERING REGIMEPeter Yam Tat-wing *I. INTRODUCTION
Organized crime cannot be tackled
effectively unless there is an efficient andeffective partnership between the different
bodies within a jurisdiction tasked with law
enforcement - in its widest sense. Once theorganized crime becomes transnational innature, this partnership becomes bothmore important and more complex,
necessitating co-operation not only
between different law enforcement bodies
but also between different jurisdictions.
This is particularly so in perhaps the mosttransnational of all crimes today - money
laundering.
This paper examines the individualcomponents necessary to provide ajurisdiction with an effective money
laundering regime. Effective, in thiscontext, means a regime which allows forthe confiscation of the proceeds of crime
and the prosecution of those criminals who
undertake money laundering, whether forthemselves or on behalf of other criminals.
The paper will draw heavily on theexperience gained by law enforcement
bodies in the Hong Kong Special
Administrative Region. Hong Kong passed
its first anti-money laundering legislationin 1989, making it one of the firstjurisdictions in Asia to do so. Since thattime, the legislation has been continuallydeveloping as practical experience reveals
its deficiencies. Both prosecutors andpolice in Hong Kong have gained* Assistant Commissioner (Crime), Hong Kong Police
Force Headquarters, Hong Kong

experience, not only in enforcing the law
and dealing with their overseas
counterparts, but in dealing with privatebodies and Government regulators whichhave a no less important role to play. Using
this background, the paper will draw out
some of the best practices which have been
identified in both Hong Kong and otherjurisdictions. Other practices will offer acontrast in approaches to certain problems.
The best method to combat so called
underground banks, for example, is still
being debated and a number of different
approaches have been or are being tried invarious jurisdictions around the world.
To this end, the paper will examine thefollowing areas:• Legislation• The role of a financial intelligence unit
• The role of regulators• International co-operation• Investigation of money laundering
Before examining any of these areas,
however, it is necessary to look briefly at
the size of the problem - how much money
is being laundered and where is it coming
from?
II. ESTIMATING THE MAGNITUDE
OF MONEY LAUNDERING
It is almost impossible to put an accurate
figure on the amount of money being
laundered each year; criminals, after all,do not publish accounts. Estimates of therevenue generated from narcotics
trafficking in the USA alone range from
US$40 billion to US$100 billion1.

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RESOURCE MATERIAL SERIES No. 58
The Financial Action Task Force (FATF)
estimates that narcotics trafficking is the
single largest source of criminal proceeds,
followed by the various types of fraud 2.
Smuggling, gambling and, increasingly
nowadays, trafficking in human beings also
generate significant amounts of criminal
proceeds. Often overlooked, however, is thehuge amounts of money generated by tax
evasion. Many people do not think of tax
evasion as being a source of criminal
proceeds; indeed, in some jurisdictions tax
evasion is not a crime per se. However one
only has to consider the huge industry
which has grown up around so called tax
havens, or off-shore financial centres, torealise that tax evasion - and its legallyambiguous sibling, tax avoidance - is big
business.
In summary, therefore, whilst it is notpossible to accurately quantify the amountof money laundering going on in any one
country or region, it is possible to conclude
that the amount of money being launderedis huge.
III. REQUIREMENTS FOR
EFFECTIVE LEGISLATION
Effective anti-money laundering
legislation must address a number ofpoints. The following are regarded as
essential:• Money laundering must be a criminal
offence;• The law must allow for theconfiscation of a criminal’s assets,
and must allow for terms ofimprisonment to be imposed whereassets have been placed beyond thereach of the courts;
1

Financial Action Task Force Annual Report 19992000
2 Financial Action Task Force Annual Report 19992000

6• Jurisdictions must be able to apply
for the confiscation of assets held
abroad and to reciprocate on similar
requests from abroad;• There must be some provision madefor asset sharing between
jurisdictions where there has been a
successful joint prosecution andconfiscation;• There must be a system in place forthe reporting of financialtransactions, whether suspicion or
threshold-based, to a financial
intelligence unit (FIU);• There must be regulation of financial
service providers commonly used formoney laundering such as banks,
securities brokerages, remittanceagents and company formation
agents.
In addition to these, legislation may beconsidered to allow for the civil confiscationof assets.
A. The Money Laundering Offence
The money laundering offence should
ideally consist of two elements - firstly,some form of dealing with the proceeds ofcrime and, secondly, the criminal intent
with which it is done. It must also list thepredicate offences which generate theproceeds of crime.
Money laundering can be viewed in two
ways. What may be termed the ‘traditional’
definition of money laundering involves
some form of complicated and sophisticatedprocess by which the proceeds of crime arehidden, disguised or made to appear as if
they were generated by legitimate means.
Using this definition in law, however, would
cause immense problems in trying to provethe criminal’s intent to, say, disguise theproceeds; if police subsequently find theproceeds, would that then mean that they
were not disguised and therefore theoffence was not committed? Obviously this116TH INTERNATIONAL TRAINING COURSE
VISITING EXPERTS’ PAPERS
possibility must be avoided.
The ‘legal’ definition of money
laundering used in Hong Kong is far wider
and simpler than the ‘traditional’
definition. It means, simply, anytransaction involving the proceeds of crime.
This is inclusive of both the ‘traditional’
definition and also of any transaction
involving the proceeds of crime in which
there has been no attempt to hide or
disguise its source. Thus the drug dealer
who receives money and deposits it in his/her own bank account is money laundering,as he/she is carrying out transactions
knowing they involve the proceeds of crime.
Experience in Hong Kong has shownthat the most difficult part of a money
laundering case is in proving the criminal
intent of the money launderer. Clearly, aperson who deals with the proceeds of crime
without knowing, or at least suspecting, theillegal origin of those proceeds should not
be guilty of an offence. Setting the level ofcriminal intent at too high a level, however,can cause problems for the investigator.
For example, a law that requires proof thatthe money launderer knew the property
with which he/she was dealing was theproceeds of crime will result in very few
prosecutions as evidence of such knowledge
is difficult to come by in the absence of aconfession. It can be argued that there isvery little point in having a law which isalmost impossible to use in practice. The
net result is that the criminals continue
money laundering as the law is unable toprosecute them or even act as a deterrent.
The relevant section of the Hong Kong law
is worded as follows:”...a person commits an offence if,
knowing or having reasonablegrounds to believe that any property,
in whole or in part directly or
indirectly represents any person’s
proceeds of an indictable offence, hedeals with that property. 3 [italics
added]
Judicial decisions on this section of thelaw have construed having reasonablegrounds to believe as meaning that areasonable person, knowing thecircumstances which the defendant knew,
would have believed that the property was
the proceeds of crime. This is an advanceon having to prove the defendant’s actual
knowledge or belief as it allows for theprosecution of someone who had turned awilful blind eye to the possible origins of
the property in question.
It has been proposed that a further
offence be created under Hong Kong law
to deal with those people who deal with theproceeds of crime, suspecting them to besuch but falling short of having areasonable person’s belief. If the proposal
is passed into law, this lower mental
element would be reflected by a lower
sentence than that imposed on those withreasonable grounds to believe.
A final consideration when drafting aneffective money laundering law is the needfor the law to apply to as wide a range ofpredicate offences as possible. Obviously
the law must apply to all serious crimes
such as drug trafficking, fraud, kidnapping
etc., which generate substantial criminal
proceeds. Additionally, in recent years
there has been a growing awareness thattax evasion should be included as apredicate offence. If it is not included, theproblem then arises of money launderers
claiming that they handled crime proceedsin the belief that they were dealing in theproceeds of tax evasion - and are therefore
not guilty of the offence of money
laundering.

3

S.25A, Organized & Serious Crimes Ordinance,
Chapter 455, Laws of Hong Kong

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RESOURCE MATERIAL SERIES No. 58
B. Restraint & Confiscation ofAssetsIn addition to a money laundering
offence, effective legislation must also
provide for the restraint and confiscationof a criminal’s assets. The provisions for
restraining assets must allow for restraint
without the suspect becoming aware of it in the common law system, this is done by
way of an ex parte application, without thepresence of a defence representative. This
allows for the restraint order to be served
on financial institutions as soon as theinvestigation turns overt, thus depriving
the suspect or his associates of an
opportunity to dispose of the assets.
Knowingly failing to comply with arestraint order should be a criminal offence.
The provisions for confiscating assets
should ideally allow not just for theconfiscation of the assets whichinvestigators find, but also those assets
which the defendant may have successfully
hidden. Thus a defendant with only US$2
million in located assets, but whom it canbe proved has benefited from crime by over
US$10 million, can be ordered to pay backthe full amount of his/her profits. If thebalance is not subsequently paid, the law
should allow for a custodial sentence to be
imposed in lieu of payment.
C. Overseas Confiscation Orders
The trans-national nature of organizedcrime is reflected in the fact that criminals
will often keep their assets in different
countries. It is essential, therefore, thatlegislation provides for this by allowing for
confiscation orders issued in overseas
jurisdictions to be enforced domestically. In
this regard, the FATF recommends:“There should be authority to take
expeditious action in response torequests by foreign countries to
identify, freeze, seize and confiscateproceeds or other property of

8corresponding value to such proceeds,
based on money laundering or thecrimes underlying the laundering
activity.”4
D. Asset Sharing
Once an overseas confiscation order isenforced domestically, fairness dictatesthat the overseas jurisdiction be allowed
to share the confiscated assets. Provisionmust therefore be made, both by law andby policy, for assets to be shared between
jurisdictions. This may not always bepracticable where only a small amount ofproperty has been confiscated, as theadministrative costs involved would
outweigh the value of the assets to beshared. Government policy, therefore,should set a realistic threshold over andabove which foreign governments may beallowed to apply for and receive a share of
the assets commensurate with the work
done by each side in that particular case.
E. Reporting of Financial
Transactions
Most jurisdictions which have enacted
money laundering legislation haveincorporated a requirement for some formof reporting of financial transactions to acentral body - usually a financial
intelligence unit (see Part IV below). The
reporting requirement can take one of threeforms:• Mandatory reporting of certaintransactions over a particular value
threshold - for example, cashtransactions and international
remittances over US10,000;• Suspicious transaction reporting;• Both threshold and suspicioustransaction reporting.
Both threshold and suspicion based
reporting have pros and cons; the former
4

FATF Recommendation No. 38

116TH INTERNATIONAL TRAINING COURSE
VISITING EXPERTS’ PAPERS
picks up a wealth of detail about anindividual’s spending habits which can be
useful to an investigator conducting afinancial profile or asset tracing on asuspect. It also, however, results in a great
many reports which, because of the sheer
volume, are rarely examined in any detailand present administrative problems dueto the large numbers received. Suspicioustransaction reporting does not provide thevast database of financial transactions
which threshold reporting provides but canallow investigators to better concentrate
their resources on genuinely suspicious
activity.
Another factor to consider are thecategories of people or institutions which
are required to report financialtransactions. Reporting of transactions
over a certain threshold would entail all
businesses being required to make suchreports if their customers exceed thethreshold. Suspicious transaction
reporting can be more selective - although
Hong Kong law requires all persons toreport suspicious transactions, otherjurisdictions require only banks and otherfinancial institutions to make such reports.
F. Regulation of Financial Services
Providers
An effective law must also provide forthe regulation of those companies which
provide financial services to the public.
Most jurisdictions will have comprehensive
laws and regulations to govern theoperation of financial institutions such as
banks, insurance companies and stock
brokers. Less well regulated, but equallyimportant in the battle against money
laundering, are what may be termedintermediaries.
An ‘intermediary’ is a person or company
which introduces a third party’s money tothe regulated financial system. The mostwidely recognised form of intermediary is

the company formation agency, which willallow a customer to purchase a ‘shell’ or‘shelf ’ company and will then operate thecompany - and, more importantly, its bankaccount - on the customer’s behalf. Often
the identity of the beneficial owner of the
shelf company is not disclosed to the bankand, as the signatories to the shelfcompany’s bank account are the staff of thecompany formation agency, the bank has
no record of the real owner of the banka c c o u n t . N o t s u r p r i s i n g l y, t h i sarrangement has proved attractive tomoney launderers the world over as itallows for effective anonymity on the partof the beneficial owner of the shelf company
and its bank account.
Some of the more responsible off-shore
tax havens, where the bulk of company
formation agents operate, are considering
legislation to regulate the activities of suchagents. Usually this legislation takes theform of a licensing regime under which
company formation agents are only allowed
to operate if they demonstrate that they
apply basic anti-money laundering
measures to their business practices.
Another form of intermediary is theremittance agent - also known as
underground banks. Different jurisdictions
around the world have approached the
problem of remittance agents in different
ways. In some jurisdictions their activities
are completely illegal; in others they areleft completely unregulated. Hong Kong
has recently passed legislation requiring
remittance agents to register with theGovernment, verify the identity of certain
customers and make and retain records ofcertain transactions. It is hoped that the
new law will, at the least, ensure that
remittance agents will keep records which
will allow investigators to trace an audit
trail and identify the persons involved. The
new law is also expected to act as adeterrent as it will make the remittance9

RESOURCE MATERIAL SERIES No. 58
sector less attractive to money launderers.
G. Civil Confiscation of Assets
The confiscation of assets describedabove concerns the assets of convictedcriminals. Some jurisdictions, however,
have also incorporated a form of civil
confiscation into their legislation. Civil
confiscation allows for the confiscation ofproperty where it can be shown on thebalance of probabilities, that is, a lesser
standard of proof than the criminal
standard of beyond reasonable doubt, thatthe property was the proceeds of, or wasused in connection with, or was intended
to be used in connection with, a crime.
Confiscation is not dependant upon anyone
being convicted of any crime.
IV. THE ROLE OF A FINANCIALINTELLIGENCE UNIT
Financial Intelligence Units (FIUs) canbe part of a police force or customs agency,
a separate Government agency or a
department of a central bank. Whichever
form they take, their role should at least
include the following:• Collection, collation anddissemination of transaction reports(whether they be threshold or
suspicion based);• Provision of feedback and training tomakers of suspicious transactions
reports.
Collection, collation and disseminationof reports can be done in a number ofdifferent ways and will not be discussed
here.
The provision of feedback and training
is an often overlooked, but vital, part of an
FIU’s duties. The effectiveness of a
suspicious transaction reporting systemrelies on both the quantity and quality of
the reports made. This in turn depends on

10

how well staff of financial institutions(which in practice make the vast majorityof reports) can identify transactions which
are genuinely suspicious. Without proper
training, both the quantity and quality of
the reports will remain at a low level.
Although banks and other financial
institutions provide basic training to theirstaff, input from the FIU is vital if they
are to be kept up to date on the latest trends
and methodologies for laundering money.
The following practices can be consideredwhen planning training and feedback:• Lectures to bank compliance officers
and front line staff;• Provision of training material or
vetting of a bank’s training material
to ensure it is up to date and covers
all relevant legislation;• Provision of real life sanitised cases
to illustrate particular methods ofmoney laundering and highlightsuspicious activity indicators;• Wo r k i n g g r o u p s c o n s i s t i n g o fmembers of both financial
institutions and the FIU to highlight
best practices;• An FIU web site to increase publicawareness of the legal requirements
to report suspicious transactions;• Qualitative and quantitative
analyses of suspicious transaction
reports made by individual
institutions.
In addition, makers of suspicioustransaction reports should be informed,
whenever practical, of the progress andultimate outcome of the investigation
generated by their report, particularly
where the report has led to a successful
case.
V. THE ROLE OF REGULATORS
Banks and other financial institutions
recognise the dangers which money

116TH INTERNATIONAL TRAINING COURSE
VISITING EXPERTS’ PAPERS
laundering can present to the financial
system. More importantly, they are awareof the damage which could be caused totheir reputations if they were to be foundlaundering money due to their own
negligence or lax procedures; the recent
Bank of New York scandal illustrates thispoint. Whilst most financial institutions
are very responsible, not all of them devote
sufficient time, effort or resources tocombating money laundering. This iswhere regulators of financial institutions
have a vital role to play.
The role of a regulator, in an anti-money
laundering context, is three-fold. Firstly,
to draw up anti-money laundering
guidelines for financial institutions tofollow. These guidelines should include
such matters as establishing the true
identity of account holders, record keeping,training and reporting of suspicioustransactions (if required by law). Secondly,
the regulator should ensure that thefinancial institutions have appropriate
policies and practices in place which
conform with the guidelines. Thirdly, theregulator should check that the guidelines
are being adhered to through regular visits
to the financial institutions and spot
checks. Prior to visiting a financial
institution, the regulator should also liaise
with the financial intelligence unit to checkthat the institution’s rate of suspicioustransaction reporting is in line withexpectations, bearing in mind the type andsize of the financial institution.
A range of measures should be available
to the regulator to sanction those financial
institutions which fail to comply fully withthe regulator’s guidelines.
VI. INTERNATIONAL COOPERATIONInternational co-operation, in the formof enforcement of external confiscation

orders and asset sharing, has already been
touched upon in Part III above. This formof co-operation relates to cases where asuspect has already been arrested and hisor her assets restrained. Equally, if not
more important, is international cooperation during the investigation phase.
FATF Recommendation no. 32 states:“Each country should make efforts toimprove a spontaneous or “uponrequest” international informationexchange relating to suspicioustransactions, persons andcorporations involved in thosetransactions between competentauthorities”.
Recommendation No. 37 goes on to state:“There should be procedures formutual assistance in criminal mattersregarding the use of compulsory
measures including the production ofrecords by financial institutions andother persons, the search of persons
and premises, seizure and obtainingof evidence for use in money
laundering investigations andprosecutions and in related actions inforeign jurisdictions.”
There is a distinction to be made here
between the exchange of intelligence inmoney laundering matters and therendering of assistance to anotherjurisdiction in obtaining evidence. The
swift exchange of intelligence between
enforcement agencies and FIU’s of different
jurisdictions at the investigation phase isvital if trans-national money laundering is
to be tackled effectively. Treaties governing
mutual legal assistance in criminal matters
are designed primarily for collecting
evidence for use in a court of law, not theswift exchange of intelligence.

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RESOURCE MATERIAL SERIES No. 58
VII. INVESTIGATION OF MONEY
LAUNDERING
Experience in Hong Kong has shownthat whilst confiscating the assets of acriminal is usually a relatively
straightforward, albeit time consuming
process, proving a case of money
laundering is a good deal harder. Although
the exact wording of money laundering
laws varies from jurisdiction to jurisdiction,
there will generally be two elements to theoffence which have to be proved:• Dealing in property;• Knowing or believing the property to
be the proceeds of crime.
The first element, dealing in property,
is normally the easiest to prove, although
investigators should be aware that justbecause someone’s bank account is being
used does not mean that person isconducting the transactions - a ‘stooge’ is aperson paid to open an account and thenhand over the account books to a second
person for their use. This MO is common
in loan sharking syndicates. ATM cards
and telephone banking are other examplesof banking facilities which can be used bypersons who are not the account holder.
It is, however, the second element,
knowing or believing, that presents mostproblems. A money launderer will seldom
admit that he or she knows or believes theproperty was the proceeds of crime.
However, skilful investigation and the useof circumstantial evidence can negate adefence of ignorance as to the illicit originof the property.
A. Investigation Techniques
1. Surveillance
Surveillance can be useful to prove thata suspect had no apparent legitimate
source of income. For example, he/she wasnever seen going to work in a company,

12

factory, etc. Surveillance can also be usefulin identifying where a suspect keeps his/her assets - financial transactions that thesuspect performs whilst undersurveillance, such as visiting a bank or an
ATM, may identify which bank the suspect
has an account with.
2. Telephone Intercepts
Lawfully obtained telephone intercepts
which can be used in evidence can provide
invaluable assistance to the investigator inproving that a suspect was aware of thecriminal nature of the funds with which
he/she was dealing.
3. Undercover Operations
As with telephone intercepts, use ofundercover agents can provide direct
evidence of a suspect’s knowledge or belief
as to the illicit source of the money. These
operations can be relatively simple ones,
targeting remittance agents or company
formation agents, or they can be as
sophisticated as setting up a ‘shop front’operation to launder money on behalf ofcriminals.
4. Controlled Deliveries
The use of controlled deliveries in drug
operations, whereby a drug shipment isdelivered from one country to another
under the control of the authorities, is awell established tactic. Controlled
deliveries of money is less common but canbe similarly effective when combined withother resources such as surveillance andtelephone intercepts.
B. Circumstantial Evidence
Circumstantial evidence, whereby proofof guilt can be inferred from indirect
evidence, can also be crucial in proving amoney laundering case. The investigator
may be able to show, for example, that adefendant had no legitimate income, thathe/she often performed his/her transactions
using cash, that his/her banking habits

116TH INTERNATIONAL TRAINING COURSE
VISITING EXPERTS’ PAPERS
were not those to be expected from a normal
person and that he/she was associated withpeople he/she knew to be criminals. Noneof these facts on their own would be enoughto establish guilt, but if they are put
together and presented to a court, the jury
may feel that the inescapable inference isthat the defendant was guilty of money
laundering.
VIII. CONCLUSION
Tackling money laundering will never be
easy. The ease with which money can be
moved around the world, the ingenuity ofmoney launderers in finding new ways to
disguise their ill gotten gains, theprevalence of tax havens and shelfcompanies and the excessive secrecy of
certain jurisdictions all combine to ensurethat tracing the flow of dirty money andprosecuting the money launderer willremain one of the hardest tasks in criminal
investigation. This task will be madesomewhat easier, however, if the various
anti-money laundering components
mentioned above are welded together toform a cohesive anti-money laundering
strategy. A workable and comprehensive
law, close international co-operation, an
effective FIU and strong regulation of thefinancial sector, combined with imaginative
and thorough investigation, are vital ifmoney laundering and its inherent dangers
to society are to be effectively combated.

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