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: ECON EFIN PREL KJUS MC
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