06 August 2024
Earlier this summer, the United States announced santions1 against several Hong Kong based companies for their role in facilitating the trade of Russian sourced gold. Over the last two years, Hong Kong has seen its Russian gold imports quadruple2, surpassing the UAE as the largest hub for Russian gold. While Hong Kong itself has not imposed restrictions on Russian gold, many countries including the US and UK have issued import bans3 on it. This leaves Hong Kong based firms vulnerable to secondary sanctions, as well as to money laundering schemes attempting to move the proceeds of Russian traded gold through the international financial system.
Due to its close proximity to mainland China, as well as its role as a leading international trade and finance hub4, Hong Kong is exposed to a range of sanction and trade-based risks. Firms may look to use Hong Kong’s ports and airports to attempt to circumvent international sanctions or trade restrictions, including to access key markets such as China and Russia. Moreover, criminals also may look to use Hong Kong’s financial system to launder the proceeds of these sanction evasion schemes. This extends beyond gold, to other commodities such as technology and oil. There have been recent cases of Hong Kong based companies being linked to the trafficking of Iranian sanctioned oil, for example. In one case5, a Hong Kong company acted as a front for millions of dollars’ worth of transactions linked to the sale of Iranian oil in China.
A New York Times investigation6 last month also found that an array of shell companies with the same Hong Kong address have acquired millions of restricted chips and sensors for military technology companies in Russia, many of which under sanctions by the US and other countries. Chipmakers in countries such as the US sell their products to international distributors and then are no longer legally required to track where their goods go from there. Russia has increasingly turned to international distributors therefore, with Hong Kong firms playing a notable role in this supply chain network. Some of these firms are directly owned by Russian oligarchs with links to Russia’s military industrial base, according to the New York Times’s analysis.
One shell company at the Hong Kong address, Saril Overseas, had no record of exports to Russia until six months after the war began. The company is owned by Russian businessman Alexey Chichenev, according to the New York Times.
Hong Kong’s heightened sanction evasion risk demonstrates key features of the region that leave it exposed to financial and trade-based crimes more generally. Hong Kong’s open economy and global business and financial ecosystem leaves it vulnerable to abuse by criminals looking to commit crimes such as money laundering, cyber fraud, and smuggling of illicit goods. Before carrying out business in Hong Kong, it is important for firms to understand what financial crime risks factors they should be aware of in order to carry out proper due diligence and make informed decisions. Understanding the local and international dynamics at play in the region, including sanction risks, will help firms carry out effective risk management. Our new Hong Kong Country Risk Report provides a comprehensive analysis of this financial crime landscape.
Looking at the nexus between the trade of Russian sourced gold and Hong Kong based trade and financial firms provides some key insights into emerging trends and risks specific to the region.
What are key trends to look out for?
Lower levels of transparency in supply chains
As multinational banks and trade companies remove themselves from the trade in sanctioned commodities such as Russian sourced gold, smaller and more obscure firms take over the trade and financing of these commodities. These firms are often less transparent with their due diligence supply chain and often lack the in-depth compliance oversight of larger firms. This trend can be applied beyond sanctions and export controls, such as to riskier commodities like minerals sourced in countries with high levels of conflict or deforestation.
Cemented status as a transshipment hub
Hong Kong’s geographical location and logistics and transportation infrastructure leaves it vulnerable to abuse by criminals looking to smuggle commodities or products through the region. Hong Kong’s close proximity to mainland China increases this risk, as criminals may look to use Hong Kong as a transshipment hub for entering the Chinese market. There have been recent cases7, for example, where Hong Kong has been used as a transshipment hub for diverting Western-made technology to companies affiliated with the Russian government.
Use of front companies and other corporate vehicles
In one case, the US found a Hong Kong-based front company had been used in evasion schemes of international sanctions, as well as in other transnational organised crime schemes. One key risk is the use of front companies for proliferation or terrorist financing. Hong Kong based front companies, for example, have been linked to8 the facilitation of tens of millions of dollars’ worth of proliferation activities for the Islamic Revolutionary Guard Corps (IRGC) and the Iranian regime’s missile programme. See the Themis Search image below for details on this network.
Heightened exposure to international corruption
Hong Kong is exposed to international corruption due to its interconnectedness with international markets and businesses, as well as its role as a financial hub serving high net worth individuals and political elites. This corruption exposure is heightened by the risk of oligarchs and criminals looking to engage in sanction evasion and transshipment schemes in the region.
Impact of environmental crime and the trade of illicit commodities - Criminals have used Hong Kong as a trade hub for a range of commodities illicitly sourced through illegal mining or land clearing, such as illicit gold and timber. These illicit environmental activities, which are often linked to sanction and trade-based crimes, have considerable impact on local ecosystems and communities and on our environment at large. Illegal logging9 is a particularly high risk for Hong Kong, with mainland China a key market for illegally sourced timber. As already noted, Illegal mining and trafficking of non-renewable resources is another key risk, as Hong Kong serves as a transit point for the trade of illicitly sourced minerals, including gold from sanctioned or conflict-affected areas. Read our recent report, Financial Crimes and Land Conversion: Uncovering the Risk for Financial Institutions, to learn more about the unique risks of illegal deforestation and land clearing.
Illicit financial flows and complex, multi-layered laundering networks
Hong Kong’s role as an international financial centre leaves it vulnerable to the illicit financial flows associated with sanction and trade related crimes. Authorities have found complex, multi-layered laundering schemes using Hong Kong based firms moving and hiding illicit proceeds of crimes. This year, the US sanctioned10 a gold laundering network using numerous Hong Kong-based trading companies to route payments related to the sale of Russian origin gold through the international financial system back into the Russian financial system. See the Themis Search image below for details on this network.
What to learn more about financial crime risks in Hong Kong?
Our new report delves into the latest trends across various financial crimes, offering a detailed examination of how these threats evolve and their impact on the socio-economic fabric of Hong Kong. Our threat-based research covers a broad spectrum of interlinking crimes, enabling a comprehensive understanding of financial crime dynamics. Some other key risk areas we cover in the report include:
- Fraud – The growing frequency of cyberfraud in the region, including investment fraud, phishing scams, deepfake and synthetic media fraud, generative AI fraud, and government impersonation fraud.
- Cybercrime – The surge in cyber-attacks against both private and public sector actors, including the impact of geopolitics and emerging technologies such as AI.
- Modern Slavery – The role of Hong Kong as both a transit and destination hub for modern slavery and human trafficking, particularly forced labour victims in industries such as construction and shipping.
- Tax Crimes – The vulnerability of Hong Kong to abuse by individuals and corporations looking to evade taxes through offshore structures, legal arrangements, or corporate vehicles.
For a comprehensive analysis, our Hong Kong Country Risk Report offers detailed insights and practical guidance for navigating these challenges effectively.
Written by Eliza Thompson, Financial Crime Researcher, Themis
References
1. https://home.treasury.gov/news/press-releases/jy2404
2. https://www.bloomberg.com/news/articles/2023-11-15/hong-kong-ousts-dubai-as-biggest-hub-for-russian-gold-trading
3. https://www.nytimes.com/2022/06/27/business/russian-gold-imports-ban.html
4. https://www.longfinance.net/programmes/financial-centre-futures/global-financial-centres-index/
5. https://www.justice.gov/opa/pr/justice-department-announces-terrorism-and-sanctions-evasion-charges-and-seizures-linked
6. https://www.nytimes.com/2024/07/25/technology/russia-sanctions-chips.html
7. https://home.treasury.gov/news/press-releases/jy2318
8. https://home.treasury.gov/news/press-releases/sm759
9. https://illuminem.com/illuminemvoices/hong-kongs-role-in-illegal-deforestation-of-the-amazon-rainforest-in-brazil
10. https://home.treasury.gov/news/press-releases/jy2404