3rd International Financial Fraud Convention - London on 1998
Presentation by Mr Tony Kwok Man-wai,
Independent Commission Against Corruption, Hong Kong
to the Third International Financial Fraud Convention
at Queen Elizabeth II Conference Centre, London
24 - 26 March 1998
Internal Threat - Bribery and Corruption
Ladies and gentlemen,
I am honoured to speak at this the 3rd International Financial Fraud Convention. Whilst talking on the subject of 'Bribery and corruption', I would like to take this opportunity to give you an update on the change of sovereignty in Hong Kong and how we are standing up to the recent financial turmoil in the region.
Hong Kong is justifiably proud of its status in the international financial community. Our banking system is the 2nd largest in Asia after Japan. Hong Kong continues to be the world's fifth largest foreign exchange centre. In terms of market capitalization Hong Kong's securities market is among the top ten largest of the world and 2nd in Asia. We are the leading fund management companies in Hong Kong. Over 40 international fund houses have set up their Asia-Pacific Headquarters in Hong Kong.
A Healthy Financial Regulatory Framework
The interational community has been concerned about the financial and economic downturn in the region and Hong Kogn cannot pretend to be unaffected. But the Hong Kong economy is backed by strong fundamentals. The Hong Kong dollar has remained stable and is backed by a large fiscall reserve of HK$445 billion [about £35 billion]. Our stock market has recovered from its low in October 1997. Its decline in US dollar terms (which is about 20% since the beginning of the year) is among the least in the region. Our property market is undergoing healthy correction and should contribute to enhancing Hong Kong's competitiveness. The International Monetary Fund's forecast for Hong Kong's 1988 growth rate is about 4.1%, which is still a healthy figure. As assets prices adjust Hong Kong will become more competitive and we are confident that Hong Kong will recover fastest.
In my personal opinion, there are two reasons why we can stand up against this financial crisis. The first is our relatively corruption-free business environment. Our financial markets are regulated closely by several agencies. First, there is the Hong Kong Monetary Authority which regulate bank and financial institutions. The Securities and Futures Commission and the Hong Kong Stock Exchange regulate publicly-listed companies and securities firms. In law enforcement, the police force's Commercial Crimes Bureau focuses on fraud investigation and the Independent Commission Against Corruption (the ICAC) is involved when such frauds are facilitated by corruption.
You probably wonder what I man by corruption-facilitated frauds. It is usually when bribes are paid to those in key positions so that a fraud can occur. Usually a company's shareholders are the victims but in a wider context the whole economy of a community can suffer. Corruption attacks the fabric of a company. Experience tells us that corruption can snowball into huge magnitude causing dire consequences. Cheque kiting is a good example. A company had a cash flow problem. Bribes were paid to corrupt bank officers to operate a cheque kite in order to provide cash for the company. It began with a moderate amount to ease the cash flow problem but could snowball into many times the original sum. The collapse of the cheque kite can bring about the collapse of a bank. This is the price of corruption.
ICAC's Role in Combatting Corruption-facilitated Fraud
Perhaps I should now outline the ICAC's role. The ICAC was established in 1974 after a public outcry when one police chief superintendent under investigation for corruption fled to the United Kingdom. In the 70s, corruption is a way of life in Hong Kong but after 24 years now, Hong Kong is regarded as one of the cleanest places to do business. To do our job we adopted a three-pronged attack on corruption: investigation, prevention and education. Not only do we deal with public sector corruption, we have followed a very proactive strategy in dealing with private sector corruption. A special section of the Prevention of Bribery Ordinance makes it an offence for any agent or employee of a company to solicit or accept advantages in relation to his principal's affairs, unless he has the permission of his princial to so accept. This is a simple and effective piece of legislation and we use this provision to prosecute, for example, the former chairman of the Hong Kong Stock Exchange and the internationally famous Bank Bumiputra case when the former chairman of the bank had been held in this country for a record 7 years pending extradition to Hong Kong. When he was finally extradited, he almost immediately pleaded guilty! So in terms of the law we have a very good and powerful offence that helps us keep corruption under control. At the same time we are probably one of the few countries who spends a great deal of promotion resources to encourage people to make complaints in this area. Even so, our efforts to combat corruption do not stop at investigation.
On the prevention side we have set up an Advisory Services Group that helps private sector companies when they come tous for advice. In the last 13 years or so we have helped almost 2,000 private sector companies who realised that good systems control prevents corruption and helps their bottom line. We also actively follow up on our investigations to see if there is any assistance we can offer to private sector firms to plug corruption loopholes. The main areas in which businesses could encounter corruption loopholes include purchasing; accounting; sales and marketing, inventory and stock control. Approval of loans in banks, for example, is an area that is most easily affected by corruption. A manager might accept bribes for granting credit facilities that are not supported by adequate security or prematurely writing-off debts. In such cases preventive measures could include escalating to higher authority in case exceptions need to be made, and setting down clear procedures for issuing reminders on doubtful debts and keep management fully informed.
On the educational front, in recent years the ICAC has been actively promulgating the adoption of corporate codes of conduct to private sector companies. There is evidence that companies can improve their performances by adopting corporate codes of conduct that apply to all staff. It would make company policies clearer, especially those guidelines to staff as to the limitations to accept gifts and other advantages, declaration of conflicts of interest on personal investments etc. Through our efforts, about 70% of all publicly-listed and large corporations in Hong Kong (about 1,800 in actual number) has adopted a code, which is a very healthy figure by world standards. We are actively promoting this to small and medium enterprises this year through various intermediary associations.
In addition, we work closely together with the Securities and Future Commission, HK Securities Institute, Institute of Bankers, HK Federation of Insurers to organise many educational activities such as seminars, conference on professional ethics. Practical guides and a training video are also produced.
Continued Effectiveness of ICAC
In going about our work on all three fronts of investigation, prevention and education the ICAC has been unaffected by Hong Kong change of sovereignty. The "One country, two systems concept promulgated by the Sino-British Joint Declaration is indeed working. It is probably boring news to reporters but the fact is that Hong Kong has largely remained unchanged and all the systems of Government, including the Independent Commission Against Corruption, continue to function.
The misconception about the corruption situation, namely that the Hong Kong Special Administrative Region could be overwhelmed by the rampant corruption of the old days after the change of sovereignty, hasn't materialized. The level of corruption reports in 1997 remained steady, indeed it showed a marginal decrease of 1% over 1996. The percentage of those prepared to identify themselves (68%) when reporting corruption, which is a sign of the public confidence on ICAC, is also steady. Another misconception, the one about the effectiveness of the ICAC, is simply not supported by facts. ICAC cases continue to hit the headlines, minor corruption are not overlooked, and we have not experienced any pressure from anyone concerning our independent work. As the Head of Operations of the ICAC, I am happy to say that ICAC remains active and effective in ensuring that Hong Kong has a clean and efficient civil service and a level playing field for the business sector. All these are Hong Kong's competitive advantages which will enable Hong Kong, as an economic entity, to continue to be one of the star performers in the Asian region and maintains its international status as one of the world leading financial centres.
In going about our task to combat corruption in Hong Kong we realised that corruption and fraud recognise no boundaries. The banking system has enabled money to be transferred quickly making it very difficult to trace. The corrupt are quick to exploit divergent laws, languages and bureaucratic systems in various jurisdictions. The need for the development of international liaison and cooperaton between anti-corruption law enforcement agencies has become increasingly bigger. The ICAC enjoys excellent working relationship with law enforcement agencies worldwide. These include the Metropolitan Police in this country, Australian Federal Police, the Federal Bureau of Investigation in United States and also the Royal Canadian Mounted Police, to name a few. All of these channels for international cooperation are supplemented by our attendance at key international conferences such as the Internatonal Anti-Corruption Conference, or fraud conventions like this one. Moreover, we host a Asian Pacific Regional Seminar on Corruption-Related Crimes in Hong Kong every year.
As Hong Kong is now part of Mainland China, we have established good working relationship with procuratorates in the Mainland, which are the anti-corruption authorities in China. We now have a Mutual Case Assistance Scheme with the Procuratorate to arrange for interviews with witnesses and for officers to conduct investigations in the Mainland. In the past ten years 500 witnesses have been interviewed under this scheme, which greatly assisted our efforts in combatting cross-boundary corruption. We also regularly assist Mainland-funded companies in Hong Kong to formulate codes of conduct and organises training seminars for them on corrupt/fraud prevention (so far, 80% of the member companies of the HK Chinese Enterprises Association, the umbrella organisation for Mainland-funded companies in Hong Kong, have adopted such codes). Hence it is through our formal and informal channels of contact that we maintain close cooperation with various law enforcement agencies overseas and on the Chinese Mainland.
In giving you an update on the ICAC's work and how our financial services system continues to provide effective safeguards for investors, I hope to point out that we are constantly on the lookout for any red flags of corruption.
We actively liaise with private sector companies so that signs of corruption are quickly identified and nipped in the bud. Our purpose and reason to engage in such a proactice approach is simple: Hong Kong would not be the Hong Kong of today if we had been awash with corruption. We would probably still be an economic backwater town if corruption and its related crimes were allowed to prosper. The Hong Kong story in fighting corruption is one of hard-won success with the support of the whole community. That community remains determined not to let corruption rear its ugly head again.