VZCZCXRO6430
RR RUEHCN RUEHGH RUEHVC
DE RUEHHK #0459/01 0720928
ZNY SSSSS ZZH
R 120928Z MAR 08 ZDK REF GUANGZHOU SVC
FM AMCONSUL HONG KONG
TO RUEATRS/DEPT OF TREASURY WASHDC
RUEHC/SECSTATE WASHDC 4372
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEHMO/AMEMBASSY MOSCOW 0483
RUEHUL/AMEMBASSY SEOUL 3290
RUEHKO/AMEMBASSY TOKYO 4892
RUEAWJA/DEPT OF JUSTICE WASHINGTON DC
RHEHNSC/NSC WASHDC S E C R E T SECTION 01 OF 05 HONG KONG 000459
SIPDIS
SIPDIS
STATE FOR EAP/CM, EAP/K, EEB/ESC; TREASURY FOR
GLASER/FOWLER; DOJ FOR SCHWARZ/WEBER
E.O. 12958: DECL: 03/10/2033
TAGS:
SUBJECT: BDA - MACAU'S DISGRACED BANK LACKS COMMITMENT TO
PREVENT MONEY LAUNDERING
REF: A. 07 HONG KONG 2430
B. 07 HONG KONG 2567
C. 07 HONG KONG 2904
HONG KONG 00000459 001.2 OF 005
Classified By: E/P Chief Laurent Charbonnet, Reasons 1.4 b/d
1. (C) Summary: In the course of a March 3-7 Government
Accountability Office (GAO) visit, Hong Kong and Macau
government officials and private sector players criticized
section 311 of the Patriot Act as a blunt and unwieldy tool
and the U.S. handling of the Banco Delta Asia (BDA) case as
non-transparent. While all recognized the need for
mechanisms to prevent money laundering, they agreed that the
September 2005 announcement effectively shut BDA out of the
financial system before it had the opportunity to address
Treasury concerns and that the path to redemption was never
clear. Macau and Hong Kong regulators prefer to resolve
problems in less public ways that allow for corrective
measures and do not threaten the reputation of local
financial systems. Efforts to raise the standard of BDA's
Anti-Money Laundering (AML) regime have made only modest
progress. A lack of qualified compliance personnel, limited
funds for technology solutions, uncertainty about the bank's
future, an insular bank culture, and what appears to be a
lack of commitment by bank management have conspired to limit
improvements. BDA's AML protocols remain far below industry
norms and prospects for improvement look slight. End Summary.
2. (C) Comment: It is clear that BDA's AML protocols were
virtually non-existent prior to its designation and remain
far below local standards today. While the Administrative
Committee (AC) appointed to manage BDA made some efforts to
raise AML standards and implement FATF 40 recommended
procedures at BDA, these efforts effectively stopped once the
bank returned to the original owners. Senior BDA management
continues to feel victimized and appears unwilling to devote
real resources to changing the culture of the bank or raising
AML compliance standards. Grumbling from the major
shareholder, Stanley Au, has set the tone for the rest of the
bank management and staff. Until there is evidence that the
culture of the bank has changed to embrace AML procedures and
other international banking standards, there appears little
reason to consider any review of BDA's Section 311 status.
BDA may be able to survive for the timebeing in the hothouse
of Macau's sizzling economic boom, even without correspondent
banking relationships and access to international currency
business. End Comment.
============================================= =
GAO Looks at Global Section 311 Implementation
============================================= =
3. (U) Government Accountability Office (GAO) officials,
accompanied by Econoff, met with Consul General Cunningham
and members of the U.S. Consulate General in Hong Kong, Hong
Kong and Macau government officials, and private sector
companies to discuss implementation of Section 311 of the USA
Patriot Act against Banco Delta Asia (BDA), a Macau bank that
maintained a substantial number of North Korean accounts
linked to money laundering of proliferation proceeds. BDA is
part of the Delta Asia Group. (Note: Section 311 of the
Patriot Act allows U.S. Treasury to designate foreign
jurisdictions or institutions as posing a "primary money
laundering concern" and impose additional record-keeping,
reporting and identification requirements on institutions or
their customers. Treasury can also prohibit the opening of
correspondent accounts with banks in the U.S. End Note.)
Section 311 has been imposed 16 times since the measure was
passed in 2002, most recently against BDA in 2005, according
to GAO materials.
4. (C) The GAO team's questions focused on the process of
implementing Section 311, how government and private
entities, including the listed bank, interacted with U.S. and
local authorities and what steps BDA took to respond to
Treasury's concerns about its AML regime and ownership.
During the team's discussions, private and public sector
interlocutors repeatedly raised two points: 1) the 311
process is a valuable tool, but in its application to BDA was
an overly blunt instrument that did not allow the bank the
opportunity to address Treasury concerns, nor was there a
clear and consistent message about what the bank needed to do
HONG KONG 00000459 002.2 OF 005
to escape sanctions; and 2) BDA is not demonstrating any
substantive commitment to improve its AML regime and internal
controls. The final GAO report on the 311 process is likely
to be made public by September 2008.
======================================
Section 311 a Blunt Tool in BDA's Case
======================================
5. (C) Interlocutors (with the exception of BDA officials)
agreed that Section 311 is a valuable tool, but argued that
it was not used as effectively as possible in this case.
Deloitte Touche Tomatsu (DTT), the Macau Monetary Authority
(AMCM), the Hong Kong Monetary Authority (HKMA), the
Administrative Committee (AC) appointed by AMCM to run the
bank after its assets were frozen, and Ernst & Young (E&Y)
criticized the process by which Treasury announced its notice
of proposed rule-making, noting that the notice led
immediately to a bank run and the near-immediate suspension
of all of BDA's correspondent banking relationships. AMCM
and the Macau government were notified only 24 hours in
advance of the announcement; BDA's Chief Operations Officer
claimed to have learned of the action only when told by AMCM,
making it impossible for the bank to take steps to cooperate
with the relevant authorities to address concerns before
effectively being shut down.
6. (C) Clint Stinger, DTT's head of Forensic and Dispute
Services, applauded the effect of the announcement on other
banks in the region, noting that as banks rushed to reduce
their risk exposure by cutting any business ties with BDA,
compliance officers and regulators began paying much closer
attention to customer due diligence rules. For BDA, however,
the announcement of proposed rulemaking was an immediate
disaster. There appeared to be no effort to exert pressure
on BDA to change its behavior prior to the announcement, said
Stinger. He noted also that the proposed and final rulings
listed different concerns about the bank, suggesting that
there was no clear road to redemption for BDA.
===========================================
Banking Regulators Prefer Quiet Cooperation
===========================================
7. (C) DTT's criticisms were echoed, albeit in milder
fashion, by AMCM and HKMA, who suggested that additional
advance notice of the 311 designation of BDA would have given
the regulators more time to prepare to take concerted
measures to protect the banking system in both locales. HKMA
noted that 311 was a very heavy tool, in that as soon as a
proposed rule is announced, the full effect of the
designation is felt by the subject institution or
jurisdiction. Arthur Yuen, Executive Director for Banking
Supervision at HKMA, suggested that Treasury could work
through banking regulators to resolve concerns before taking
such severe actions. He added that the allegations against
BDA and Delta Asia Group's Hong Kong-based financial services
company, Delta Asia Credit (DAC), were never explicitly made
public. Doing so could prevent potential loss of confidence
in the banking system. In this case, BDA and DAC are small,
but designation of a large institution could have real
effects on an economy, particularly in a small jurisdiction
like Macau or Hong Kong, said Yuen. He suggested closer
cooperation with international partners, like HKMA, could
achieve the same objectives with less potential for lasting
damage.
8. (C) AMCM's Chief Executive Anselmo Teng noted that the
Macau authorities were surprised by the decision to announce
the proposed rule as no one from the U.S. government had
previously discussed concerns about BDA with AMCM. He added
that AMCM had been aware of BDA's North Korea business since
2001 and had advised the bank to reduce its risk exposure by
scaling back this business, but that AMCM monitoring had
shown no evidence of money laundering. AMCM responded to the
run on BDA by appointing an Administrative Committee (AC) of
outside legal, regulatory and banking experts, charging them
with keeping the bank operational and improving BDA's AML
regime. Macau authorities cooperated closely with the U.S.
Treasury to facilitate the investigation of BDA and the
transfer of funds from designated accounts to North Korea.
Teng added that it was unfortunate that BDA had to be
HONG KONG 00000459 003.4 OF 005
returned to its original ownership. Ideally, the bank could
have been sold to another owner, but given that the Ernst &
Young audit found no evidence of malfeasance and no criminal
charges had been brought against the original owner, Stanley
Au, the AMCM was required by law to return the bank to Au's
control after two years. AMCM continues to closely monitor
BDA's performance and will conduct an audit of the bank's AML
procedures in 2008.
============================================= ===
AC Criticizes Non-Transparent 311 Implementation
============================================= ===
9. (C) Members of the Administrative Committee (AC)
appointed by AMCM were sharply critical of the 311 process as
applied to BDA. Heculino De Sousa, CEO of Banco Nacional
Ultramarino (BNU) and an AC member said that the announcement
of the proposed rule prompted immediate reactions from
customers and correspondent banks, giving BDA no opportunity
to defend itself or make necessary changes to address
Treasury concerns. The AC members expected that their
appointment and efforts to improve AML procedures would give
correspondent banks enough comfort to resume business
dealings with BDA, but that was not the case. De Sousa
complained that the AC had taken significant steps to address
BDA's AML weaknesses, including hiring E&Y and DTT to review
the bank's AML regime and draft improvements, but claimed
that Treasury never communicated directly or indirectly
conditions for the rule to be revoked. The AC was surprised
by Treasury's announcement of the final rule in March 2007.
It was clear then, he said, that the disposition of the North
Korean funds and the ownership of the bank were the real
issues, not the AML regime.
============================================= ==
BDA's Pre-311 AML Regime Virtually Non-existent
============================================= ==
10. (C) When the AC took control of the bank, their first
priority was to review AML controls, hire a compliance
officer and devise a plan to improve BDA's AML compliance.
Rob Morris, Ernst & Young's head of Investigation and Dispute
Services, led a team hired by the AC to conduct an audit of
BDA's internal AML practices. While E&Y found no evidence of
criminal malfeasance, Morris was highly critical of the lack
of AML-related controls at the bank. Records were not
computerized, there was no regular reporting of suspicious
transactions or accounts, and staff lacked training in basic
customer due diligence protocols.
11. (C) The AC also engaged DTT to develop a new,
international-standard AML regime. DTT based their
recommendations on the Financial Action Task Force (FATF) 40
recommendations, HKMA regulations, and standard international
practice. When a compliance officer was finally installed at
BDA, DTT conducted risk assessment training with the members
of BDA's senior management and conducted four reviews of the
bank's AML policy implementation. Head of Forensic Services
Stinger said that DTT cooperated closely with the AC, and
characterized the bank staff as engaged but uncertain about
AML training. He added that there was clearly no champion
within the bank for improved AML policies and that he did not
see the cultural change necessary to ensure that any AML
improvements would remain in place.
12. (C) The AC had considerable difficulty finding anyone
willing to take responsibility for compliance at BDA. After
more than a year of searching, Carla Jacinto, a Portuguese
lawyer at the Macau firm Jorge Neto Valente (and a junior
colleague of AC member Maria de Lourdes Costa), reluctantly
took the position in November 2006. Jacinto, who had no
previous banking experience, began by conducting a review of
BDA's AML compliance procedures. While the bank had
procedures on the books, these were often disregarded by the
staff, she said. Jacinto and her assistant drafted new AML
policies based on the DTT report and conducted training for
bank staff. The strong internal culture and the uncertainty
about the future ownership of the bank made the staff
reluctant to change past operational practices, according to
Jacinto. She advised the AC that the bank needed to upgrade
its technology in order to comply with modern AML
requirements and hired a Hong Kong banking software developer
HONG KONG 00000459 004.2 OF 005
to provide some additional reporting capabilities, but the
cost of installing comprehensive systems was prohibitive.
Jacinto stepped down when the bank was returned to its
original ownership but did some training of returning
management. She characterized the BDA management as aware of
the need for improved AML compliance but she was not
confident that they were aggressively implementing new
measures.
13. (C) Paulyne Yao, Managing Director of TA Consultants,
(the software developer hired by the AC to upgrade BDA's AML
reporting capabilities) explained that her company has been
providing IT services to banks and financial institutions in
Hong Kong for almost 30 years and counts many of the large
international banks among its clients. BDA purchased a
retail banking transaction accounting system from TA
Consultants in 1994, but installed only three minor upgrades
between 1994 and 2006. In August 2006, the AC requested AML
reporting software and TA Consultants installed a simple
enhancement allowing bank staff to run elementary daily
reports of unusually large or otherwise suspicious
transactions. Yao noted that BDA had provided a list of
requests, but in the end had chosen the least costly and
sophisticated option. BDA's IT systems are far below the
industry standard for Hong Kong and Macau, she said.
=====================================
BDA's Questionable Commitment to AML
=====================================
14. (C) Since the bank reverted to the control of its
primary shareholder Stanley Au in September 2007, DTT has not
conducted additional reviews of the bank's AML practices,
despite meeting with the senior management to brief them on
DTT's work to date. Although DTT still has a contractual
obligation to finish its report, BDA has not requested
additional reviews nor have they asked that the report be
completed. The bank has brought back most of its previous
management, meaning an updated report would require new
reviews of all the senior management. The contract requires
the final report to be provided not only to the bank but also
to FinCen, perhaps one reason BDA has not been aggressively
following up, suggested Stinger.
15. (C) BDA's Chief Operating Officer Kenneth Wong told the
GAO team that the senior management had no role in the
operations of the bank while the AC was in charge, but
confirmed that most of the senior managers returned when the
Macau government handed the bank back to Stanley Au. The
group now has two compliance officers responsible for
improving AML systems in BDA, said Wong. (Note: these two
are long-time staff of BDA, and one, Bosco AuYeung, served as
Group Compliance Officer prior to the Section 311
designation.) All staff and management have been required to
participate in training sessions and take a 10 question quiz
on the bank's AML procedures. Those who fail the quiz must
take the training again until they pass. BDA management is
planning for compulsory yearly training courses beginning in
2008.
16. (C) Delta Asia's Group Compliance Officer Bosco AuYeung
discussed BDA's current AML procedures, including the
creation of daily reports, including comparing
account-holders names against terrorist lists from OFAC and
the UN. When matches are found, the bank reviews the records
to determine whether the account holders are likely to be the
persons listed on the watch lists. So far, the bank hasn't
identified anyone, said AuYeung. The bank has also sent out
forms to 30,000 BDA customers requesting additional data to
comply with "Know Your Customer" guidelines and had received
several back, he said. TA Consultants and other companies
have approached BDA to offer comprehensive AML software
packages, but BDA has not made any purchases.
17. (C) Wong noted that since the final ruling on Section 311
was announced in March 2007, BDA has not been allowed to
conduct any foreign currency business, including Hong Kong
dollars. BDA is currently limited to doing business only in
Macau and only in local currency (the pataca). Their
business now focuses on providing mortgage and consumer loans
to the local market. Wong said BDA's deposits had grown by
almost 20% in the last six months. Macau's booming economy
HONG KONG 00000459 005.2 OF 005
(2007 real GDP growth topped 28%) means that BDA can still
make a profit in Macau. But it is not clear how BDA will
survive when Macau's growth slows from this unsustainable
rate.
Cunningham
