For discussion
FCR(97-98)116
on 30 March 1998

ITEM FOR FINANCE COMMITTEE

HEAD 151 - GOVERNMENT SECRETARIAT : SECURITY BUREAU
Subhead 700 General other non-recurrent
New item "Sharing of confiscated drug trafficking proceeds with the United States Government"

Members are invited to approve a new commitment of $16,919,000 for paying the United States Government a 40% share of assets at a value of $42,296,000 which the Hong Kong Government confiscated from an absconding drug trafficker in 1994.

PROBLEM

We need to pay to the United States Government (USG) a 40% share of the assets confiscated by the Hong Kong Government (HKG) from an absconding drug trafficker named CHAN Ching-wai in 1994.

PROPOSAL

2. The Secretary for Security (S for S) proposes to create a new commitment of $16,919,000 for making the payment to the USG.

JUSTIFICATION

USG's Assistance in the Case of CHAN Ching-wai

3. The USG first initiated in the United States (US) investigations into CHAN Ching-wai's drug trafficking and money laundering crimes. In November 1989, we arrested CHAN Ching-wai in Hong Kong. He skipped bail in December 1989 and has not been apprehended since. Despite HKG's restraint of CHAN Ching-wai's assets, the Administration encountered difficulty at that time in making a domestic confiscation order against Chan's assets as the then Drug Trafficking (Recovery of Proceeds) Ordinance had not provided for confiscation of the assets of absconding defendants.

4. The Ordinance, however, provided for confiscation of assets through external confiscation orders. To resolve the stalemate over Chan's case, the HKG requested the USG to make an external confiscation order against Chan's assets in Hong Kong. This would require the USG applying for a civil forfeiture order based on CHAN Ching-wai's illicit activities in the US, and filing a civil action in the US seeking forfeiture of CHAN Ching-wai's assets located in Hong Kong. In 1992, the USG accepted the HKG's request. Action by the USG provided the HKG with a sufficient basis to maintain the restraint order against persons in control of CHAN Ching-wai's assets in Hong Kong. The restraint order has deprived CHAN Ching-wai of the use of those assets and prevented the assets from being transferred out of Hong Kong. In September 1993, the HKG successfully registered, on the USG's behalf, the forfeiture order the USG had obtained as an external confiscation order under the Drug Trafficking (Recovery of Proceeds) Ordinance. In late 1993, we commenced confiscation of Chan's assets in Hong Kong pursuant to the external confiscation order. The proceedings were completed in 1994 with total assets valued at $42,296,384 confiscated.

Request for Sharing of Confiscated Assets

5. In 1996, the USG made a formal request for a 50% share of the assets confiscated by the HKG in the case of CHAN Ching-wai. In view of the assistance given by the USG as outlined in paragraph 4 above, the Committee on Asset Sharing is of the view that we should favourably consider the asset-sharing request of the USG, on the following grounds -

1. forfeiture procedures brought by the USG have led to the confiscation and realisation of the drug trafficker's assets in Hong Kong;

2. the USG is likely to attach higher priority to breaking drug rings through international co-operation involving governments which are willing to share confiscated assets with them; and

3. other countries have agreed to share confiscated assets with the US in similar circumstances.

Ratio of Sharing

6. The USG has provided substantial investigative and prosecutorial assistance resulting in the HKG's successful confiscation of Chan's assets. Resources devoted to this case on our side are far less significant than those of the USG, as we were involved mainly in establishing and maintaining contacts with the US authorities in the process. Notwithstanding this, we should follow the general practice of deducting 20% of the total confiscated assets in any particular case to cover the administrative costs incurred on our side, and only the remaining assets should be shared with the requesting jurisdiction(s) according to the significance of their contribution to the work resulting in confiscation. We therefore propose a 50:50 share with the USG of the assets confiscated in the CHAN Ching-wai case, after the deduction of administrative costs on our side. That is to say, the USG will have a 40% share of the gross assets confiscated in the case.

FINANCIAL IMPLICATIONS

7. We have already credited to the General Revenue the proceeds of $42,296,384 from assets confiscated in CHAN Ching-wai's case. We propose to make a lump-sum payment of 40% of the confiscated assets to the USG, i.e. $16,918,554, rounded up to $16,919,000, in 1998-99. Subject to Members' approval of the proposal, we will provide the necessary supplementary provision in 1998-99 under delegated authority.

BACKGROUND INFORMATION

8. We have been co-operating with foreign jurisdictions in suppressing drug trafficking and combating money laundering. In such mutual assistance, we feel that the financial gain arising from assets confiscated from drug traffickers should be nothing more than an additional benefit. However, in recognition of the importance of foreign jurisdictions' contribution in combating the drug problem, we have adopted the following policy and arrangements on the sharing of assets confiscated from drug traffickers -

1. we will consider requests to share assets on a case-by-case basis having regard to the circumstances surrounding each cooperation and the extent of assistance given by the requesting jurisdictions;

2. to ensure reciprocal sharing treatment, we will only consider those requests from government with which we have entered into an agreement on mutual legal assistance in criminal matters, or previously a bilateral agreement on the suppression of drug trafficking;

3. a Committee on Asset Sharing, chaired by S for S or his representative and comprising representatives of concerned government bureaux and departments, will decide on requests for asset sharing in cases involving assets valued above HK$10 million. We will not entertain any request for a share of assets where the total value is HK$10 million or less;

4. we will deduct 20% of the gross confiscated assets in all cases to cover our administrative costs involved. The amount to be handed over to the requesting jurisdiction will thus range from zero to a maximum of 40% depending on its constribution. In other words, we will retain at least 60% of the gross assets confiscated in any particular case. Moreover, our calculation will include assets forfeited in the requesting jurisdiction(s), if any; and

5. under the Drug Trafficking (Recovery of Proceeds) (Designated Countries and Territories) Order, we will hold the confiscated assets in a Deposit Account for a period of five years, or until they are shared, whichever is the shorter, before transferring them to the General Revenue.

9. The Finance Committee discussed the proposal to share CHAN Ching-wai's assets with the USG, vide FCR(97-98)41, at its meeting on 17 October 1997. Members considered it necessary for the proposal to be first discussed by the Panel on Security of the Provisional Legislative Council and we withdrew the proposal. Subsequently we briefed the Security Panel about our policy and arrangements on sharing of assets confiscated from drug traffickers at its meeting on 20 November 1997. Members of the Panel generally agreed with the policy and arrangements, and were of the view that the HKG should adhere to the general practice of deducting 20% of the gross assets confiscated in any particular case to cover administrative costs, regardless of how substantial the requesting jurisdiction's contribution might be in the case. Following that, we have put forward the proposal to the USG which has no objection to our proposed deduction of administrative costs from the confiscated assets before sharing.

10. The Committee on Asset Sharing, having considered the circumstances of CHAN Ching-wai's case, agreed in February 1998 that the USG should have a 40% share of Chan's assets confiscated in Hong Kong. However, as the assets of CHAN Ching-wai were confiscated in 1994, before the Deposit Account arrangement was introduced, we had already credited the proceeds from Chan's assets amounting to $42,296,384 to the General Revenue. We therefore need to create a commitment under the General Revenue Account for paying the USG its share of the confiscated assets.

11. Hong Kong has co-operated with the US on 15 drug cases which have resulted in drug assets amounting to about $360 million being frozen or confiscated in Hong Kong. The USG has so far made two requests to us for sharing of confiscated assets. The present case is one of them and we are considering the other request.

Security Bureau
March 1998