U.S. and Hong Kong (1985-1997)

TREASURY OFFICIAL U.S.-HONG KONG LAW ENFORCEMENT RELATIONS

Following is the official text of Simpson's remarks, as prepared for delivery:

(begin text)

STATEMENT OF JOHN P. SIMPSON
DEPUTY ASSISTANT SECRETARY OF THE TREASURY
FOR REGULATORY, TARIFF, AND TRADE ENFORCEMENT
BEFORE THE
SUBCOMMITTEE ON EAST ASIAN AND PACIFIC AFFAIRS
SENATE COMMITTEE ON FOREIGN RELATIONS

April 10, 1997

Mr. Chairman and members of the Subcommittee, on behalf of the Treasury Department and its law enforcement bureaus, I would like to thank you for the opportunity to come before you today to describe our law enforcement efforts based in Hong Kong to provide you with our best assessment of the impact of the reversion, and to apprise you of our preparations in anticipation of it.

Hong Kong is an important trading partner, as well as an ally in the fight against international criminal activity such as drug-trafficking and money laundering. Accordingly, it is important that progress on customs and other law enforcement matters under Treasury Department jurisdiction not be interrupted as a consequence of the reversion. Indeed, as I discuss in greater detail later in my statement our law enforcement efforts in Hong Kong have yielded considerable results. And while there is work yet to be done, we took forward to the benefits of continuing cooperation with Hong Kong,

Currently, the Treasury Department's law enforcement efforts in Hong Kong focus on two areas: customs-related matters, and counterfeiting, and other financial crimes that affect the United States. Both the United States Customs Service and the United States Secret Service have Hong Kong offices that handle these matters. Other Treasury agencies play a role in Hong Kong as well. Let me describe some of these activities.

U.S. CUSTOMS ACTIVITIES IN HONG KONG

The U.S. Customs Service office in Hong Kong is staffed by four special agents, three foreign service national investigators, and two foreign service national administrative specialists. This office is currently responsible for Customs matters in Hong Kong, Macau, the Philippines, Pakistan, Afghanistan, and Taiwan. In anticipation of reversion, however, coverage of Taiwan will be transferred to another Customs office, most likely Singapore.

Before further describing the nature of Customs' operational activities in Hong Kong, I would like to mention an important policy development in the customs area. On June 13, 1996, a Customs Mutual Assistance Agreement between the United States and Hong Kong was signed. This agreement enhances and formalizes mutual cooperation practices already in effect, but serves to underscore the joint commitment of Hong Kong and the United State to prevent and repress offenses against the customs laws of both countries. We think this is an important agreement, and it is our understanding that it will continue in effect after July 1, 1997.

Returning to operational aspects of Customs' Hong Kong activities, I would note that staff of the U.S. Customs Hong Kong office work closely and effectively with local authorities on investigations -- including undercover operations -- involving illegal textile transshipments, violations of intellectual property rights of U.S. companies, money laundering, child pornography, smuggling of stolen U.S. vehicles, firearms trafficking, and matters involving the illegal trafficking in nuclear, biological and chemical weapons, and dual-use materials. Indeed, we are pleased to note that in the past two years, Customs has made substantial progress in heightening the level of cooperation, working with Hong Kong authorities on increasingly complex investigations.

U.S. Customs' Relationships with Hong Kong Law Enforcement Authorities

The government agencies that Customs works most closely with are Hong Kong Customs & Excise, the Royal Hong Kong Police, and the Crown Counsel. All of these are sound working relationships. I might also add that U.S. Customs maintains a strong working relationship with the U.S. Drug Enforcement Administration's Hong Kong office, and the two offices have been successful in supporting each other's efforts to combat international narcotics trafficking.

The Hong Kong office has also provided training to law enforcement officials within its service area, including training in money laundering investigations, interdiction and detection techniques, and controlled deliveries of interdicted contraband. Although this training is limited, it can often significantly enhance the productivity of our relationships with local law enforcement agencies.

I would also note that, in addition to its law enforcement mission, Customs' Hong Kong office assists the business community and the general public on a variety of customs matters. During 1996, for example, the office received 13,000 telephone inquiries, 15,000 taxed and written inquiries, and over 2,000 personal visits concerning a variety of customs-related questions.

U.S. Customs Service-Hong Kong Joint Activities

As I mentioned earlier, U.S. Customs maintains close working relationships with a number of Hong Kong government agencies. These working-level relationships with local law enforcement authorities have resulted in highly successful joint activities, some of which I would like to describe for you briefly.

Task Force on Smuggling of Stolen Automobiles

In the past year, at the request of U.S. Customs, Hong Kong Customs & Excise, the Royal Hong Kong Police, and the Marine Police formed a task force to assist us in the recovery of stolen U.S. vehicles transiting through Hong Kong. The objective of the task force: to identify shipments of cars stolen in the United States and transiting Hong Kong destined for the People's Republic of China (PRC). This joint effort recently led to the seizure of 20 cars that had been stolen in the United States, and the arrest of 13 persons in Hong Kong.

Joint Money Laundering Investigations

For the last two years, we have been working closely with Hong Kong Customs & Excise and the Crown Counsel's Office in the development of money laundering cases involving the proceeds of drug trafficking.

Textile and Apparel Transshipment

In the matter of PRC-origin textiles and apparel transshipped through Hong Kong -- a subject of interest to many members of Congress -- significant progress has been made in this last year. As a result of U.S. Customs negotiations with Hong Kong Customs & Excise and the Hong Kong Trade Department, a new export license control system for textile shipments was implemented in Hong Kong. U.S. Customs will now be able to send teams of its own special agents and import specialists to work with Hong Kong Customs & Excise on factory visits in order to verify the origin of textile and apparel shipments declared to be of Hong Kong origin.

Within die past six months, U.S. Customs and Hong Kong Customs & Excise have established a more definitive and proactive approach to the investigation of transshipped textiles originating in the PRC and exported from Hong Kong as products of Hong Kong. We do not expect that reversion will change this initiative, and Hong Kong government officials at the highest levels are committed to continuing to work with us to combat illegal transshipments.

Opportunities for Increased Cooperation

Notwithstanding our successes, we continue to look for opportunities to enhance the levels of cooperation with our partners in Hong Kong and in fight of reversion, to engaging officials of the PRC in helpful and constructive ways. In the areas of intellectual property protection and forced labor, for example, we can recount achievements, but look forward to making additional progress. Let me be a bit more specific.

Intellectual Property Protection

With respect to the protection of intellectual property rights of U.S. companies, the level of cooperation and information exchange with Hong Kong Customs & Excise has increased during the past year. The result has been more active and more effective enforcement activities, both in Hong Kong and in the U.S. It is highly important to us that these activities continue unimpeded after July 1.

Forced Labor

Another issue of concern, and one that may be impacted by reversion, is the scope of activity in Hong Kong to identify transshipment through Hong Kong to the United States of products manufactured in the PRC using prison labor. If our ability to stop transshipment of these products through Hong Kong is diminished in any way -- and we hope it will not be -- it will be -come even more important that we be able to address the problem directly at the source. Accordingly, Memoranda of Understanding with the PRC were developed in 1992 and 1994 to allow U.S. Customs officers accredited to the U.S. Embassy to visit sites that are suspected of using forced or convict labor to produce goods for export to the United States. U.S. law prohibits the importation of such goods.

While the execution of the Memoranda of Understanding was an important step forward, and while we appreciate the willingness of the PRC Government to enter into these agreements, there have been difficulties in implementation. Customs officers posted to the U.S. Embassy in Beijing have not been allowed to visit all sites suspected of the use of forced labor. Standing alone this is a matter of concern to us, but our concern will be heightened if we lose our ability to interdict transshipments through Hong Kong.

Hong Kong's Involvement in International Customs Activities

Before turning to other aspects of the Treasury law enforcement mission in Hong Kong, I would like to mention some of Hong Kong's current activities on the international customs front. Hong Kong is an active member of the World Customs Organization (WCO), the Subcommittee on Customs Procedures in the Asian Pacific Economic Cooperation, and the Customs Administrators of the Pacific Basin. We hope that Hong Kong Customs & Excise will continue to contribute to the work of these international and regional customs organizations as a separate entity.

Of particular importance is Hong Kong's role in hosting the Regional Intelligence Liaison Office of the WCO. This is the Asian regional office of a global network designed to share operational intelligence on customs matters and link the region both to WCO headquarters in Brussels, and to WCO member countries around the world. Japanese and Australian Customs officers, along with officers of Hong Kong Customs & Excise, are currently staffing this office.

U.S. SECRET SERVICE ACTIVITIES IN HONG KONG

I would now like to turn to another major aspect of Treasury law enforcement in Hong Kong -- the activities of the United States Secret Service. In June of 1996, the United States Government expanded its law enforcement focus in Hong Kong when it opened a Secret Service office there. This office is under the direction of the Honolulu field office. From the Hong Kong office, the Secret Service monitors certain activities occurring in Hong Kong, Macao, Mongolia, and the People's Republic of China, that potentially affect the United States.

Attacking Counterfeiting

The need for a full-time presence in Hong Kong became evident during the period June 1992 through August 1993, when the Secret Service first assigned agents to Hong Kong on a temporary basis. During that period, the agents participated in the arrests of over 100 individuals involved in counterfeiting U.S. currency and multiple "access device fraud," commonly referred to as credit cud fraud. Cooperative efforts with Hong Kong authorities during that period resulted in the seizure of over $10 million in counterfeit U.S. currency.

In addition to its experience with temporary assignments to Hong Kong, the Secret Service discovered in fiscal year 1993 almost 6,000 counterfeit U.S. notes that had originated in Hong Kong. Statistics for fiscal year 1994 were similar. This placed Hong Kong among the top ten foreign sources of counterfeit U.S. financial instruments.

Hong Kong is, and will likely continue to be, a major financial center, with depositing banks throughout Southeast Asia. It is in part for this reason that Hong Kong has become a leading area for the manufacture and distribution of counterfeit currency and credit cards. Indeed, over the last three years, more than $7.5 million in counterfeit U.S. currency has been seized in Hong Kong.

Stopping Access Device Fraud

Hong Kong has also been -- and continues to be -- a major center for the production and distribution of counterfeit credit cards. Although some of the production operations have been suppressed, many others are still active within Hong Kong, Macau, and the PRC. Recently, in connection with suppression of a counterfeit,credit card plant in the PRC, authorities seized 3,900 unembossed and uncoded counterfeit credit cards, more than 3,400 uncut blank credit cards, and more than 8,000 counterfeit holograms of various credit card issuers. A considerable amount of production equipment and materials was also seized.

Suppressing Fictitious Financial Instruments

In addition to the counterfeit currency and access device fraud problems described above, there is also evidence of the production of fictitious U.S. financial instruments, including items such as bonds and high dollar-value Federal Reserve instruments being produced in the region. Last October, the Hong Kong Resident Agent in Charge seized from an individual in Taiwan ten fictitious ten million dollar bonds - a seizure of $100 million in fictitious U.S. dollar bonds. Instruments of this type continue to be brought to the attention of the Hong Kong office of the Secret Service.

Secret Service Relationships with Hong Kong and Chinese Law Enforcement Authorities

In pursuit of its efforts to combat the types of financial crimes described above, the Secret Service office in Hong Kong works closely with several law enforcement agencies in the region, including the Hong Kong Police, the Macau Judiciaria, the Independent Commission Against Corruption,

the Public Security Bureau of the PRC, and the Ministry of Justice Investigative Bureau in Taiwan. Responsibility for activities in Taiwan will be taken over by the Honolulu field office after July 1.

The Secret Service has enjoyed a close and cooperative working relationship with the Royal Hong Kong Police for a number of years, and establishment of a full-time presence in Hong Kong has lent additional support to Secret Service efforts to strengthen liaison activities with the PRC. I would also note with respect to the Secret Service's working relationship with the PRC that on several occasions, the Secret Service has requested that the PRC authorities assist with investigations that directly involved criminals operating from within China. Such direct cooperation between U.S. and PRC law enforcement has culminated in a number of successes, with recent cases resulting in a number of arrests, as well as the suppression of the counterfeit credit card plant in China, mentioned earlier.

The United States and the PRC have also cooperated on the training front. At the request of the Director of the Economic Protection Bureau of the Chinese Ministry of Public Security, for example, Secret Service agents provided training in the detection of counterfeit notes to PRC law enforcement officials. PRC law enforcement has also requested, through INTERPOL, that the Secret Service conduct additional financial investigative training for its personnel.

ADDITIONAL TREASURY LAW ENFORCEMENT ACTIVITIES IN HONG KONG

In addition to the considerable efforts of the U.S. Customs Service and the U.S. Secret Service, there are other important Treasury Department law enforcement activities pertaining to Hong Kong that I would like to mention.

Financial Crimes Enforcement Network

The Financial Crimes Enforcement Network (FinCEN) has maintained an active relationship with authorities in Hong Kong over the last several years. Among other things, FinCEN has worked closely with Hong Kong representatives in furthering the goals of the Asia Secretariat of the Financial Action Task Force (FATF). FinCEN has briefed visiting senior officers of the Royal Hong Kong Police and the Hong Kong Customs & Excise Service and, on two occasions, has provided extended programs for visitors from those two agencies. FinCEN has also provided speakers and training materials for annual training courses hosted by the Royal Hong Kong Police on international financial crime.

Within Asia, Hong Kong is a leader in efforts to combat money laundering, and generally meets all international anti-money laundering standards. Indeed, Hong Kong's anti-money laundering regime is significantly more advanced than that of the PRC. FinCEN has, however -- in collaboration with other U.S. government agencies and the Financial Action Task Force -- been working with the PRC Government in its efforts to draft money laundering legislation. We look forward to Hong Kong's continued leadership on the anti-money laundering front after July 1, and we look forward to working with it in this regard.

Internal Revenue Service

For the past two years, the Internal Revenue Service, Criminal Investigation, has had a criminal investigator (special agent) in Hong Kong on a part-time basis. The special agent has assisted on 12 active IRS criminal investigations and has developed significant contacts with the Hong Kong and local law enforcement communities. Internal Revenue Service, Criminal Investigation anticipates that shortly, it will make a request to place a special agent in Hong Kong on a permanent basis. The Criminal Investigation office in Hong Kong will cover the region to include Hong Kong, Singapore, Thailand, and the PRC.

The Criminal Investigation presence in Hong Kong is to assist prosecutions of money laundering investigations in both the region and in the United States. Several law enforcement agencies in the region have expressed an interest in receiving training from Criminal Investigation special agents, to include financial investigative techniques and money laundering investigative techniques. These courses will be similar to the ones taught successfully around the world. Our assigned special agent will be tasked with some of the informal training, as well as collecting information as to what countries need specific types of training courses.

Notwithstanding the absence of a tax treaty between the United States and Hong Kong both the law enforcement agencies in Hong Kong, and our special agents, have been able to assist each other in money laundering investigations.

FUTURE LAW ENFORCEMENT COOPERATION WITH HONG KONG AND PREPARATIONS FOR REVERSION

Continued close cooperation between U.S. law enforcement agencies and their Hong Kong counterparts is a key element of our vision of post-reversion Hong Kong. To that end, we have continued to develop our relationships with the Hong Kong government and business communities. Our agencies' presence and active involvement in Hong Kong have fostered increased communication both within Hong Kong and the PRC, and we believe that these contacts will be important to ensure strong and continuing working relationships with Hong Kong after reversion.

The PRC has committed to one country-two systems. We have worked well with Hong Kong and can, assuming continuity of this arrangement, continue to do so.

Thank you Mr. Chairman.

(end text)