On 14 May 2021 Bloomberg reported that the U.S. Department of Justice and the Internal Revenue Service had launched a probe into crypto exchange platform Binance Holdings Ltd. over suspected money laundering. While most would be aware of the lack of regulation of crypto exchanges in the US, this news shows that the authorities have other weapons to deal with this seemingly unfettered type of financial activity. In Hong Kong, likewise, existing legislation provides the law enforcement agencies with powerful weapons to cope with trading of crypto when it involves money laundering issues.
Legal basis for money laundering offences
Section 25(1) of the Organized and Serious Crimes Ordinance (Cap. 455)(“OSCO”) criminalizes money laundering activities in Hong Kong. The provision provides that “a person commits an offence if, knowing or having reasonable grounds to believe that any property in whole or in part directly or indirectly represents any person’s proceeds of an indictable offence, he deals with that property.”
One might astonish that as long as one does not actually know that funds represent crime proceeds, he would not be guilty of the offence. This perception is incorrect because the provision provides another limb, “having reasonable grounds to believe” for the prosecution to charge the suspect. In other words, when a person knew or “ought to have known” that the funds representing crime proceeds, he could be convicted: HKSAR v Pang Hung Fai (2014) 17 HKCFAR 778. One could be presumed to have the knowledge of money laundering necessary to secure a conviction.
An interesting point to note is that in order to convict a person of this offence, the prosecution does not have to prove the proceeds being dealt with were in fact the proceeds of an indictable offence: Oei Hengky Wiryo v HKSAR (No. 2)(2007) 10 HKCFAR 98. In this case, it was held that the prosecution can secure a conviction for money laundering only by proving an actual knowledge or a reasonable belief that the suspect should have in relation to the tainted funds.
The importance of internal control and self-reporting
Hong Kong currently has an opt-in scheme for cryptocurrency trading — “SFC Sets Out New Regulatory Approach For Virtual Assets”. Mandatory licensing is also on the horizon — see “FSTB Consultation Paper On New Licensing Regime For Virtual Assets Services Providers”. Nonetheless, as at this writing, trading of crypto currency is not subject to any regulation in Hong Kong. Traders or person in charge of those activities should however be aware of their obligations of knowing their clients and to ascertain the source of funds to avoid any risk of being prosecuted for money laundering offences. The AML obligations will continue to apply regardless of any cryptocurrency specific regulatory regime.
As section 25(1) OSCO provides a wide basis for the prosecution to charge suspects for money laundering, it is important for crypto currency exchange platforms in Hong Kong to put in place an internal control system monitoring the daily flow of funds. When suspicious transfers are detected, the person in charge of the exchange platforms should report to the police immediately. The reason is that after a timely disclosure has been made, section 25A(2)(1) OSCO will provide the reporting person with a valid defence.