A Special Place

February 24th, 2011

Hong Kong is a special place. Not that I’ve been there, although I hear it’s quite beautiful and unique.  I’m actually referring to the jurisdiction’s extremely special place in the financial and political world.  Hong Kong is a special administrative district of China, which means it has autonomy over its laws, currency, and government.  Residents of Hong Kong even need a passport-like document to cross the boarder to the north into China.  Nonetheless, the economies of the two remain deeply intertwined.

In several senses, Hong Kong is considered one of the freest places in the world.  Hong Kong consistently rates at the top of the Heritage Foundation’s Index of Economic Freedom and has done so this year.  Hong Kong has almost no tariffs nor capital controls nor barriers to foreign investment.  It has one of the lowest tax rates in the world.  The jurisdiction has flexible labor regulations and very low corruption, it currently ranks 13th out of 178 on Transparency International’s Corruption Perceptions Index.

Hong Kong is quite tiny—its population barely hits 7 million, which makes it about the size of Virginia; though in land area is about half of Rhode Island’s. Despite its miniature stature, it plays a dominant role in the international financial arena.  The Hong Kong dollar is the ninth most traded currency in the world.  As a dominant offshore financial center, Hong Kong is among the top ten holders of non-resident deposits by private entities.

Does that sound too good to be true?

Well, actually, it is all true. But in many ways it is “too good.” I don’t have a problem with the low taxes or the lack of tariffs or capital controls. Those factors, and the rush of foreign investment, may well have contributed to the place’s economic success over the last two decades.  And I have no problem with that economic success, nor with the success of its financial dominance.  But I do have a problem with the lack of transparency and oversight.

In the 1990s, Hong Kong was a major center for drug shipments between Asian countries.  That changed early this decade, as drug traffickers found simpler routes and law-enforcement officials stepped up their efforts.  Though Hong Kong receded in importance as a hub for physical shipments of drugs, it has risen as an international financial center and has become a dominant Asian and worldwide hub for the profits of that trade.  The CIA has warned Hong Kong provides a “conduit for money laundering,” particularly from funds of the heroin and methamphetamine trades.

But Hong Kong’s enforcement activities have been improving.  And this week we learned Hong Kong seized a record amount of illicit funds in 2010, close to $25 million, which was double the amount of their confiscation in 2009.  The government figures also showed Hong Kong convicted 17% more individuals of money laundering, from 307 in 2009 to 360 last year.  Moreover, Hong Kong has introduced new legislation to combat money laundering and terrorist financing.

It seems Hong Kong is making a valid effort at progression in this area, a move which is most welcome.  Given the center’s growth rate over the last two decades, it seems likely that Hong Kong will continue to dominate international finance.  It is important Hong Kong adheres to the international community’s expectations of appropriate behavior when it comes to money laundering.  As such, we welcome these steps forward.

Written by Ann Hollingshead

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