VZCZCXYZ0002
PP RUEHWEB

DE RUEHHK #1016/01 1560640
ZNY CCCCC ZZH
P 050640Z JUN 09
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC PRIORITY 7761
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
INFO RUEHBJ/AMEMBASSY BEIJING PRIORITY 3223

C O N F I D E N T I A L HONG KONG 001016 
 
SIPDIS 
 
STATE FOR EAP/CM, EAP/K, EEB/IFD AND EEB/ESC, 
TREASURY FOR TFFC DAS GLASER AND OASIA, 
BEIJING FOR TREAS ATTACHE 
 
E.O. 12958: DECL: 06/03/2019 
TAGS: EFIN ECON KN MC HK
SUBJECT: DELTA ASIA CREDIT: HONG KONG GOVERNMENT FIGHTS BACK 
 
REF: A. HONG KONG 918 
     ¶B. 05 STATE 168932 
 
Classified By: Consul General Joe Donovan for reasons 1.4 (b) and (d) 
 
¶1. (C) Summary: Econ Unit Chief and Econ Officer delivered 
the newly declassified version of the 2005 non-paper on Banco 
Delta Asia (originally delivered in September 2005) to Hong 
Kong Monetary Authority (HKMA) Banking Supervision Department 
Executive Director Nelson Man on June 4.  Man is confident 
the Hong Kong courts will uphold HKMA's October 2008 decision 
to de-license Banco Delta Asia's (BDA) Hong Kong's affiliate, 
Delta Asia Credit (DAC).  Nevertheless, HKMA is taking the 
case very seriously.  Man fears an unfavorable decision, 
combined with the public criticism HKMA is currently facing 
for allowing Hong Kong banks to sell complex structured 
financial products to retail investors, would lead to a loss 
of confidence in HKMA's banking supervision regime.  HKMA 
will submit its answer to DAC's allegations on June 5, 
highlighting the grounds for its 2008 decision.  HKMA will 
also introduce as part of its rebuttal a summary of the 
recently declassified non-paper in ref B.  Man said the Court 
will review submissions from both sides before scheduling 
arguments later this summer.  End Summary. 
 
Confident in sure win... 
------------------------ 
 
¶2. (C) HKMA Executive Director Nelson Man said June 4 he is 
confident HKMA will overcome legal challenges to its October 
2008 decision to revoke DAC's banking license.  Upon delivery 
of the declassified document, Man explained that HKMA's 
response to DAC's challenge will introduce evidence showing 
that DAC was not "a fit and proper entity to conduct 
meaningful" banking operations in Hong Kong.  HKMA plans to 
provide evidence of DAC's record of non-compliance with Hong 
Kong banking regulations and a summary of a recently 
declassified non-paper contained in reference B (paragraphs 8 
and 12, redacted).  This non-paper was delivered in September 
2005 and notified HKMA of Treasury's intention to identify 
BDA as an institution of primary money laundering concern 
under section 311 of the Patriot Act.  The Court will review 
submitted affidavits before scheduling legal arguments, Man 
said. 
 
... but concerned about implications for defeat 
--------------------------------------------- -- 
 
¶3. (C) Although Man believes this case will not receive much 
public attention, he expressed concerns about the 
implications of an "unlikely" judicial loss.  HKMA's senior 
management has been under continuous pressure from the press 
and Legislative Council to take responsibility for allowing 
the sale of complex structured products by bank investment 
arms to unsophisticated retail investors.  If the court 
overturns HKMA's decision to de-license DAC, it would add 
fuel to a public debate over the quality of HKMA's bank 
supervision regime, which the HKMA feels is already too 
heated.  A decision in favor of DAC would almost certainly 
lead to internal audits and reforms of HKMA's policy-making 
guidelines. 
 
The Arguments 
------------- 
 
¶4. (C) According to Man, DAC contends that it has always 
followed the requirements of Hong Kong's Banking Ordinance 
and that HKMA's de-licensing decision was based on U.S. 
Treasury Department actions taken against BDA.  Man explained 
HKMA's response will show the HKMA decision was not based on 
U.S. Treasury's guidance but made only after three years of 
carefully considering all available facts, to include DAC's 
historic non-compliant record in Hong Kong and HKMA's 
assessment of the business impact on BDA by the U.S. Treasury 
ruling. 
 
HKMA's Grounds for De-Licensing 
------------------------------- 
 
¶5. (C) Man defended HKMA's decision to revoke DAC's banking 
license as in keeping with Hong Kong's Banking Ordinance 
requirements to prohibit entities not "fit and proper" to 
continue meaningful banking operations in Hong Kong.  Man 
cited several examples of DAC's non-compliant record, 
including its failure to notify HKMA in advance of material 
transactions, DAC's practice of accepting deposits for BDA in 
violation of Hong Kong banking rules, and its failure to 
comply with HKMA advice that owner Stanley Au remove himself 
from management responsibilities well before the U.S. 
Treasury decision on BDA.  HKMA will also cite the 
detrimental business impact resulting from the U.S. Treasury 
actions against DAC's Macau affiliate, BDA, which effectively 
barred both companies from the international banking system. 
The U.S. Treasury Department decision to designate BDA as an 
institution of money laundering concern did not directly 
influence HKMA's decision to revoke DAC's banking license, 
Man said.  But as DAC is now unable to establish banking 
relations or currency clearance mechanisms, and is unable to 
access the international financial system, HKMA believes DAC 
cannot continue meaningful banking operations in Hong Kong. 
 
 
DONOVAN