The announcement in June by Hong Kong’s securities regulators related to the spike in breaches of the Anti-Money Laundering (AML) rule is provoking discussions in the Greater China financial community as to how these crackdowns impact Hong Kong’s future economic growth. As it stands, the IMF recently cut Hong Kong’s economic growth forecast from 2.7% to 2.2% for 2016.
No doubt there are many factors related to this decline, including close ties with China’s own declining economic growth. However, another significant impact factor of note is the rise of money laundering activities in the region. It has long been known that money laundering can have significant negative impact on economic growth, so any rise in money laundering is a worrying trend.
AML breaches in Hong Kong are clearly on the rise. The latest annual report of the Securities and Futures Commission (SFC) highlights a 253% increase in the number of cases of non-compliance with AML guidelines between 2013/14 (88) and 2015/16 (223). In addition SFC fines totaled US$11.2 million in 2015/16, a 58% increase over the previous period.
No doubt the rise in the number of breaches and fines is directly related to the increased effort of the Securities and Futures Commission of Hong Kong in monitoring this issue. I would argue that, contrary to fears expressed by some that this intensifying effort would hold back growth, the SFC action would in fact help spur Hong Kong’s expansion in the long run.
While capital inflows are typically beneficial to an economy, laundered money can distort property markets, trade and other sectors vital to the long-term development of both the originating and beneficiary markets
Rise of illicit financial flows
There will always be less desirable elements of the financial community looking to make a quick profit from bypassing AML regulations. It’s worth examining the underlying drivers behind this trend.
With wealth creation in Asian economies intensifying, the rise in money laundering and tax evasion has also increased. Five of the top 10 countries in the world with the highest amount of illicit financial outflows are in Asia, creating a parallel economy of unaccounted-for money, in a sense.
The rise of illicit financial flows from China is typically highlighted as the main culprit. Global Financial Integrity, a non-partisan US based think tank that tracks these types of flows, traced outflows of over US$1.4 trillion from China between 2004 and 2013. The money is said to relate to tax evasion, crime, corruption and other illicit activity.
Hong Kong is a major recipient of these capital flows. The challenge here is that while capital inflows are typically beneficial to an economy, this type of capital flows can distort property markets, trade and other sectors vital to the long- term development of both the originating and beneficiary markets.
Press stories on how property prices are being driven up in Sydney, New York, Hong Kong, Vancouver and other major cities by Chinese money are no doubt conversation starters for many local residents looking to buy property in these markets.
Local regulators feel the pressure from their constituents and are obliged to understand if the rise in property prices is because of laundered money. The US Treasury Department issued a Geographic Targeting Order in early January requiring title insurance companies to report all real-estate closings of US$3 million or more. The names of the major individual owners were required to be listed in order to “combat money laundering in the real estate sector.”
Hong Kong has similarly seen increases in property prices, putting significant pressure on local residents in being able to buy affordable housing and creating rising social inequality and unrest.
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