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“Ivory laundering”: What you should know about developments in Hong Kong

The Hong Kong Legislative Council (“Legco”) is currently considering passing stricter regulation and penalties for illicit animal and plant trafficking, and in particular elephant ivory trading. These measures were first publicly proposed in June 2016, however have only recently been translated into any meaningful bill.

In this post, we summarise the proposed amendments and how regulation in this space may actually affect you and your business. We describe some of the practical issues you should consider if you have clients who are engaged in ivory trade or even more generally, antique or international trade of goods.   This is particularly relevant to those in trade finance.

Hong Kong: an unwanted centre of illegal ivory trade

Hong Kong is undoubtedly a wildlife trafficking hub. As at 2015, it had the most ivory for sale than any other city in the world. Its position as a hub for wildlife trafficking is a unique combination of cultural, geographical, economic and political factors.  Most notably, it is Asia’s desire for such animal and plant goods, coupled with Hong Kong’s role as a trade centre that has elevated it to this unwanted position. Testimony to this is a major collaborative report that indicates that wildlife seizures at the border between Hong Kong and China are greater than at any other boarder in China.

Current regulatory position

Hong Kong has adopted the United Nations Convention on International Trade in Endangered Species of Wild Fauna and Flora (“CITES”). This has been implemented through legislation in Hong Kong which regulates the import, export and possession of certain endangered animal and plant species and products, including ivory.

In regard to ivory, the legislation draws a distinction between ivory that pre- or post-dates 1975 (as per CITES). Ivory that pre-dates CITES (known ‘Pre-Convention ivory’) can be traded international and sold in Hong Kong. Pre-Convention ivory must be registered, so that it can be tracked and monitored by the government.

Post-Convention ivory cannot be traded internationally however it can be sold commercially if a licence is held. There is strong evidence to suggest that Post-Convention ivory is illegally smuggled into Hong Kong and sold by using the legitimate tusks as a front: a practice known as “ivory laundering”.  The result of this is that stockpiles of ivory have not varied significantly between 2010 and 2014. This practice continues largely because government authorities lack the resources and technology to identify and monitor ivory trade effectively. For example, differences between Pre- and Post-Convention ivory cannot be detected in many cases because there is no local laboratory in Hong Kong with the technology to confirm the age of a piece using radio-carbon dating.

Hong Kong’s proposed changes

In early 2016, Hong Kong began the long process to reconsider its position in respect of ivory trade. The process was kickstarted by an updated CITES resolution, which provided that parties to the CITES resolution take all necessary legislative and regulatory measures to close their domestic markets for commercial trade in raw and worked ivory as a matter of urgency.

Pressure to shut down the ivory trade mounted when the People’s Republic of China announced its complete ban of commercial processing and sale of ivory by the end of 2017.  The effect of the Chinese ban on Hong Kong is significant – it exacerbates the risks of an ongoing role as a hub for illicit ivory trade, and also puts it out of steps with its neighbours and other key countries.

There are two key areas of reform:The following describes the key aspects of the bill (the “Bill”).

Further details

A. Increased penalties

The Bill proposes to provide increased penalties for illicit wildlife trade including ivory trade.  The rationale is that stronger penalties will act as a deterrent against wildlife trade and will send a message that Hong Kong is committed to the protected of endangered species. Below is a brief comparison of the existing penalties against those proposed under the Bill.  The proposed amendments seek to address criticism that current offences are disproportionate to the huge financial rewards from illicit trading. It is hoped that with increased penalties, illicit trading will not be viewed as a low risk high return enterprise, and a risk worth taking.

Under the current regulatory framework, endangered species and penalties are divided into three categories (found in Appendices 1-3 of the relevant ordinance).

The Bill (in its current form) has not adopted one of the initially proposed suggestions to make an offence “indictable”, and within the meaning of “organized crime’” under Hong Kong law. This is disappointing as it would have provided more ‘bite’ to the proposed penalties, and regulatory controls of ivory trade. We say this because had the suggestion been accepted, it would have meant that:

  • the proceeds of illicit trading would clearly fall within the ambit of Hong Kong’s anti-money laundering and counter-terrorist financing (“AML/CTF”) regime; and
  • animal trafficking would be treated in a similar fashion to bribery, tax evasion and illegal gambling.

Despite the above, illicit wildlife trading may nevertheless trigger money laundering concerns for financial institutions. This is because ivory trade (and generally illicit wildlife trafficking) are typically part of global organised crime syndicates that include poachers, traders, and middle-men. In many cases, trafficking involves money laundering, counterfeiting of permits, licences, coercion, bribery, and are part of larger international syndicates that are also involved in drug trafficking or other serious crimes. We discuss in greater detail below.

B. Three-stage plan to eradicate ivory trade

The second major reform is to introduce a three-stage plan to specifically ban ivory trade in and out of Hong Kong.

LegCo aims to regulate the trade of the remaining legal stockpile through a system of licensing, and to monitor this stockpile until it becomes exhausted in an effort to strike a balance between allowing current ivory sellers to transform their business while winding down all ivory trade.

The three stages are as follows:

Possession of non-commercial ivory is not captured by the proposed changes. Similarly, the trade of “antique ivory” will be continue to be permitted. Antique ivory is ivory that was created or shaped before 1 July 1925, and has been significantly altered from its natural state.

Timing

The first reading of the Bill occurred on 14 June 2017, with further parliamentary debate to follow. We do not anticipate that subsequent readings of the Bill will result in material changes. If that is correct, it is our estimate is that the Bill will be passed late Q4 2017 / early Q1 2018.

Why does this matter to you?

You will see a clear impact on your business if you are involved in the actual sale, trading or shipment of ivory or its by-products.

It is easy to assume the above does not affect financial institutions – however this overlooks the important role financial institutions play in facilitating the trade of animal/plant products. In many instances, financial institutions provide traders with the services including financing, letters of credit, loans, bank accounts and FX conversions. Our previous alert considers a number of other trade-based services that financial institutions may provide in the context of international trade.

The key messages are:

  • check whether your controls actually contemplate wildlife trafficking;
  • consider whether your data providers include relevant and up-to-date information about wildlife trafficking – for example, in negative news searches and other reports; and
  • ensure relevant staff understand what they are looking for, including relevant typologies involving financial institutions.

Further recommendations are set out below. While there is currently legitimate and legal forms of ivory trade, it is important to be mindful of the risks associated with clients that are involved in trade of animal products and antiques (especially ivory). This is especially the case in light of the proposed reforms where there may be heighten money laundering risks arising by virtue of such dealings. As stated above, illicit wildlife trading is often wrapped up in more broader money laundering, organised and serious crimes.

It remains a risk that financial institutions may be inadvertently embroiled in money laundering, proceeds or crime offences or sanctions issues through their dealings with companies that have a link to ivory or antique trading.

More broadly, there may be reputation considerations and the need to assess how ongoing dealings sit alongside financial institutions’ positions in regard to corporate social responsibilities.

What should financial institutions do?

There are a number of steps that a financial institution may take to minimise the risk associated with dealing with ivory traders (or more broadly animal/plant traders).

It is important to assess your risk exposure, understand your current obligations in respect of dealing with animal trading and money laundering generally, and to develop tools and programs that are commensurate to those associated risks.

Further, as a financial institution, you may want to:

  • follow the progress of this issue;
  • confirm which, if any, of your clients are licensed ivory traders – and whether they will obtain a new licence to sell Pre-Convention ivory (see Stage 2);
  • get to know your client’s business if they engage in animal/plant trading: what is their current stockpile, what are their sales figures etc; and
  • consider amending risk ratings which take into account the above.

Technology also has an important role to play

There are several other developments that are worth keeping an eye on – these include technological tools such as blockchain that can track the provenance of goods, as well as advanced data analytics and artificial intelligence tools that can help you spot issues early.  We are already seeing the adoption of these technologies for various sensitive industries and large businesses are incredibly well positioned either to adopt them, or insist that their clients do so.

Information in this article is based on public information. We strongly recommend obtaining appropriate professional advice before implementing compliance controls or assessing a potential sanctions matter. This article is current as at the date of publishing, but may be subject to change due to regulatory developments.

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About the Author

Evan ManoliosEvan is a registered foreign lawyer in the Hong Kong Banking & Finance team, specialising in licensing, bancassurance, fintech, and regulatory risk and compliance. When not in the office, Evan is either enjoying a Hong Kong's amazing restaurants, or outdoors trying burn off the damage to go again.View all posts by Evan Manolios

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