LegCo Paper No. CB(1) 2148/95-96
(These minutes has been seen by the Administration)
Ref : CB1/PL/FA/1

LegCo Panel on Financial Affairs

Minutes of Special Meeting
held on Monday, 29 July 1996 at 8:30 a.m.
in the Chamber of the Legislative Council Building

Members present :

    Dr Hon HUANG Chen-ya, MBE (Chairman)
    Hon Eric LI Ka-cheung, OBE, JP (Deputy Chairman)
    Hon Martin LEE Chu-ming, QC, JP
    Hon Ronald ARCULLI, OBE, JP
    Hon CHIM Pui-chung
    Hon James TO Kun-sun
    Dr Hon Philip WONG Yu-hong
    Hon Andrew CHENG Kar-foo
    Hon Ambrose LAU Hon-chuen, JP
    Dr Hon LAW Cheung-kwok

Members absent :

    Dr Hon David LI Kwok-po, OBE, LLD (Cantab), JP
    Hon Paul CHENG Ming-fun
    Hon NGAN Kam-chuen
    Hon SIN Chung-kai
    Hon Mrs Elizabeth WONG CHIEN Chi-lien, CBE, ISO, JP

Public Officers Attending :

Items II

Mr M J T Rowse
Deputy Secretary for the Treasury
Mr H S WONG
Commissioner of Inland Revenue
Miss Vivian SUM
Acting Principal Assistant Secretary (Revenue)
Mr Y Y CHU
Chief Assessor
Inland Revenue Department

Item III
Mrs Lessie WEI
Acting Secretary for Financial Services
Mr Stephen CHUNG
Acting Principal Assistant Secretary for Financial Services

Item IV
Mrs Lessie WEI
Acting Secretary for Financial Services

Attendance by Invitation :

Item IV
Hong Kong Monetary Authority (HKMA)
Mr Y K CHOI
Acting Deputy Chief Executive (Banking)
Mr Raymond LI
Executive Director (Banking Policy)

Staff in Attendance :

Ms Sarah YUEN
Senior Assistant Secretary (1)1
Miss Anita SIT
Senior Assistant Secretary (1)6

I. Confirmation of minutes of meeting

(LegCo Paper No. CB(1) 1904/95-96)

The minutes of the meeting held on 3 June 1996 were confirmed.

II. Work plan of Inland Revenue Department (including the taxation arrangements for using a company to buy or sell properties)

(Appendices I to III to LegCo Paper No. CB(1) 1901/95-96 and Appendices II to III to LegCo Paper No. CB(1) 1902/95-96)

2. Mr H S WONG briefed members on the work plan of the Inland Revenue Department (IRD) as set out in the information paper.

Property speculation using companies

3. A member observed that in the Administration’s paper, property resales within two years of purchase were regarded as speculative resales. He said that this way of defining speculative resales deviated a lot from the manner in which IRD had assessed property transactions for taxation purposes, whereby six factors surrounding the transactions had to be taken into account. He enquired if the Administration intended to change the present assessment policy by adopting the simple definition used in the paper. In response, Mr WONG explained that it was only for presenting a general picture of speculation in the residential property market to the Panel that that the simple way of classifying speculative resales was used. He assured that the tax assessment for individual property transactions would continue to be based on the so-called six Badges of Trade.

4. Some members expressed reservation about the alleged prevalence, as recently reported in the media, of using company share transfers instead of transferring the underlying properties to avoid stamp duty in property sales. They pointed out that practically it was difficult to find a buyer for the shares of a company that had been the subject matter of a transfer in the past, especially if the company concerned was not a reputable business, as the buyer would be subject to a high risk of hidden liabilities of the previous shareholders of the company. Besides, it was much more difficult to obtain bank loans to finance the purchase of company shares than obtaining bank mortgage loans.

5. Referring to the statistics on property speculation, the Chairman observed that about 30% of the speculative resales in 1995-96 were made by companies and about 40% of the total profits generated were taken up by companies. From this perspective, it appeared that corporate speculators played an important part in residential property speculation. He enquired if there was any information to suggest that certain companies did not carry any business other than being used as a means for property speculation. In response, Mr WONG said that IRD did not have any information, nor had it got such statistics in hand on the proportion of companies which had sold properties through major company share transfer on more than one occasion within a short time span. The compilation of such statistics would incur considerable resources. The Chairman said that such information was important for apprehending the actual situation of residential property speculation in Hong Kong.

IRD’s role in inquiries on criminal activities

6. On whether IRD had a policy of providing assistance to the Police and the Independent Commission Against Corruption (ICAC) in their inquiries if that was possible through exercising IRD’s statutory powers, Mr M J T Rowse advised that the Administration had not had any policy of using IRD as a tool for other law enforcement authorities. He affirmed that the primary objective of IRD provided under the relevant legislation was to pursue taxes so as to maximise Government revenues. Mr WONG acknowledged that IRD sometimes received information about suspected criminal elements from the media and other sources including Government departments. He remarked that IRD however would decide on whether a tax inquiry should be initiated purely from the point of view of an enforcement authority of the taxation laws.

7. Regarding comprehensive double taxation agreements (DTAs), one of the work programmes being pursued by IRD, a member expressed concern about the tax secrecy of individual taxpayers concerned. He enquired how the confidentiality of the general tax information of individuals could be preserved when IRD entered into DTAs with other countries. In response, Mr Rowse assured that the administration was fully alive to this area of concern of members. In the air services agreements which already had covered double taxation, the problem of general disclosure of tax information did not arise. The exchange of information as laid down in the agreements was restricted to information about flights and passenger take-up. There was no clause on general exchange of information. Besides, the clause dealing with double taxation did not make any reference to the exchange of tax information. If the Administration was to move on to comprehensive DTAs, preservation of secrecy of tax information would certainly be a material consideration. In any case, all the DTAs were subject to the endorsement of the Executive Council prior to implementation, and would be gazetted in the form of subsidiary legislation, which was required to be tabled before the Legislative Council.

Combating tax avoidance

8. On the results of the legislative and administrative measures taken to address the use of service companies for tax avoidance purposes, Mr WONG informed members that IRD had completed assessment of 289 cases involving disguised employment (Type I cases) and 102 cases involving the payment of inflated management fees by professional firms (Type II cases). As a result, IRD had successfully recovered $42 million tax money from Type I cases and $18 million from Type II cases. At present, 400 Type I cases and 800 Type II cases were under assessment. At members’ request, Mr WONG agreed to provide a written confirmation of the above.

(Post-meeting note: The Commissioner of Inland Revenue has confirmed that the figures were accurate at the time they were quoted.)

9. As regards the results of the measures to address tax avoidance by trades operating on cash transactions, Mr WONG advised that in a sample survey conducted in 1994, only about 40% of the firms surveyed maintained adequate records. In another survey conducted after the enactment of new provisions in section 51(C) of the Inland Revenue Ordinance (IRO) in 1995, it was found that about 75% of the same firms maintained adequate records. The actual overall situation would be known by late 1996 when all the tax returns should have been submitted to IRD.

10. Addressing a member’s concern that many trades and professions were anxious about the enforcement arrangements for the new provisions in section 51(C) of IRO requiring the keeping of adequate records for taxation purposes, Mr WONG advised that while IRD was dedicated to enforcing the new provisions, it was ready to discuss with the various trades and professions with a view to drawing up specific arrangements that were agreeable to both sides.

11. Regarding the insurance industry, Mr WONG advised that the consultant representing the industry had had two discussions with IRD. The industry was mainly concerned about how they could comply with the new section 51(C) of IRO in respect of their past business records. He would personally meet the representatives from the three associations of the industry the next day to further discuss the matter. On the specific arrangements being drawn up for the industry, Mr WONG advised that IRD appreciated that many of the people engaged in the industry had not kept detailed business records for years before the enactment of the new section 51(C). IRD also appreciated that certain types of expenses were necessary for insurance underwriters/agents to carry their business and agreed that these expenses should be tax exempted. In this regard, IRD would set a certain percentage of the operating returns as tax exemptable expenses and the percentage would vary according to the positions held by individual insurance underwriters/agents in their companies.

12. In response to a member’s enquiry, Mr WONG advised that according to the provisions in IRO, IRD had the powers to make tax inquiries to recover taxes from a person over a six-year period, and in suspected tax evasion cases, over a ten-year period. He acknowledged that quite a number of trades and professions expressed concern about IRD’s tax inquiries after the enactment of the new section 51(c) and many of them had expressed their wishes to draw up agreeable arrangements with IRD. He informed members that apart from the insurance industry, he would also meet the medical and dental professionals on that night to discuss the matter. It had been agreed that the representatives from the insurance associations and the medical and dental professions would fully inform their colleagues of any agreed arrangements with IRD after the meetings. Mr WONG undertook to keep the Panel informed of the arrangements between IRD and professions/trades.

IRD

13. Members held the view that IRD should enforce the new provisions in an open and fair manner and no particular persons or professions or trades should be given preferential treatment. The Chairman remarked that although specific arrangements might be drawn up for individual trades and professions to take account of their respective special circumstances, there should not be great disparities among these arrangements such that the principles underlying the provisions in section 51(C) were sacrificed. Mr WONG assured that the provisions of the legislation would be strictly adhered to in drawing up the arrangements.

III. Bullion trading

(Appendix I to LegCo Paper No. CB(1) 1902/95-96 and LegCo Paper No. CB(1) 1908/95-96)

14. Mrs Lessie WEI briefed members on the history and the present market situation of bullion trading in Hong Kong, and the nature of the abuses reported recently.

15. On the suggestion to establish a mechanism to handle complaints related to bullion trading including a complaint hotline and a special task force to make inquiries/referrals, Mrs WEI said that although there was no specific mechanism or body to receive complaints concerning bullion trading at present, people who were defrauded in bullion trading related activities could lodge complaints with the Financial Services Branch (FSB) or the Securities and Futures Commission.

16. A member disagreed with Mrs WEI’s assertion that the investing public knew the proper channels to lodge complaints against frauds in bullion trading. He and some other Legislative Council Members had recently received a number of this type of complaints and enquiries. It was found that many small investors did not know the proper complaint channels, and for some who were not knowledgeable about the operation of the market, they were even not sure if they had been defrauded. He urged the Administration to establish a special mechanism to apprehend the situation of abuses in bullion trading without further delay. In response, Mrs WEI said that FSB was liaising with the Home Affairs Department and the Labour Department with a view to strengthening public education in this respect. FSB would publish an information pamphlet on this matter to publicise a telephone number for lodging complaints. The pamphlet would be widely distributed through the Labour Department’s and the Home Affairs Department’s district offices. She also assured that the telephone designated to receiving complaints and enquiries related to bullion trading would be manned by an officer with relevant and adequate knowledge.

17. A member pointed out that FSB had been too restrained in educating the public about different types of financial investment. He opined that FSB should establish a well publicised channel for complaints related to all types of financial investment. He suggested that a hotline should be set up in FSB not dedicated to complaints related to bullion trading only, but to all complaints related to financial investment. FSB upon receipt of various complaints could simply make referrals to the relevant statutory bodies for follow-up. Such a complaint hotline would help the Administration better comprehend the overall situation of abuses in the financial markets. Mrs WEI agreed to consider the suggestion.

FSB

18. On another suggestion of setting up a special task force to handle complaints related to all kinds of financial investment, Mrs WEI said that as there already existed relevant statutory bodies to take charge of different types of financial instruments, she did not consider such a body necessary. While bullion trading was not subject to regulation by any statutory body, the telephone line mentioned above would serve to fill the gap.

19. A member referred to his previous experience of accompanying a victim of frauds in bullion trading to report to the Police. He found that the frontline police officers were not forthcoming and showed difficulty in comprehending the case. Another member pointed out that victims of these fraud cases could not resort to legal aid to initiate civil litigation as the legal aid did not cover this type of fraud cases. Furthermore, few police officers except those in the special units for serious organised commercial crimes were trained and had the necessary knowledge to handle these cases. Hence, like the situation of rampant frauds in leveraged forex trading a few years ago, bullion trading was an area with a big loophole in law enforcement making it susceptible to abusive activities. The member opined that if the Administration had decided not to legislate for bullion trading, it should provide all the necessary support to the Police to combat this type of frauds, or the loophole would remain and people would continue to fall victim to the frauds. Taking note of the members’ remarks, Mrs WEI said that FSB would liaise with the Police and the Security Branch on this matter. FSB was ready to assist in providing relevant background information and in examining related documents presented as evidence.

FSB

20. A member observed that very similar tactics were used in the reported abuses in bullion trading as those used in the rampant frauds in leveraged forex trading a few years ago. Sharing the member’s observation, Mrs WEI said that in view of the fact that criminal elements persistently switched to activities for which there was less regulation, FSB considered that the most effective way of addressing the problem should be focusing on combating the criminal elements involved rather than enacting legislation to regulate investment activities.

21. At members’ request, Mrs WEI agreed to check with the Police and other relevant parties on the records of complaints against abuses in bullion trading over the past five years. She took note of members’ remark that these cases might have been categorised as general deceit and fraud cases by the Police, rather than as specific bullion trading frauds. The Chairman requested that specific information be given on the numbers of complaints lodged, cases filed in the court, cases resulted in convictions, and companies that had been convicted but were still operating the same business at present. A member suggested that FSB wrote to Legislative Council Members, Municipal Council members and District Board members to gather information in this connection.

FSB

IV. Personal data privacy of bank customers

(Appendix IV to LegCo Paper No. CB(1) 1901/95-96)

22. Mr Y K CHOI briefed members on the actions taken by the Government on the issue of confidentiality of customer information kept by authorised institutions as set out in the information paper.

23. Members referred to a press report tabled at the meeting on a few banks having been defrauded in the cashing of money orders using fake company chops and signatures. They expressed concern about the adequacy and effectiveness of banks’ internal security systems in respect of customers’ information, since the incidents involved apparent leakage of bank customers’ information. In response to members’ enquiries, Mr CHOI advised that the incidents were under Police inquiries. Following the incidents, HKMA had discussed with the concerned banks about identifying the problems. In these incidents, the banks received money orders with signatures and company chops that resembled the ones contained in the banks’ records. As the amounts set out in the money orders were not large, the banks had not cross-checked with the relevant customers by telephone (which was the practice for cashing money orders involving larger amounts). Subsequently, HKMA had written to all banks to alert them of the incidents and ask them to review the procedures for cashing money orders. He said that the banks concerned had revised the relevant procedures and implemented measures to strengthen their information security systems.

24. Some members opined that the incidents revealed serious loopholes in the banks’ information security systems and in the current procedures for handling money orders. A member urged HKMA to thoroughly review the security systems and relevant procedures. He also suggested that confirmation with customers by telephone before cashing money orders be made a standard practice of banks. Mr CHOI said that HKMA would follow up with banks on this matter but remarked that there might be difficulties for banks to confirm with customers for all money orders in view of the large number of transactions everyday.

25. Regarding the outsourcing of data processing operations by authorised institutions and its implications for data confidentiality, a member queried the basis for the conclusion in paragraph 14 of the information paper that the recent incidents of accidental disclosure of customer information by authorised institutions represented lapses in control rather than systemic weaknesses. In reply, Mr CHOI said that in these incidents, the monthly statements of two different customers were mistakenly put into one envelope and mailed to one of the customers. Having thoroughly investigated the incidents, HKMA found that the mistakes were attributable to some mechanical problems and had suggested to the concerned service provider means to prevent recurrence of similar incidents. He assured that HKMA had thoroughly examined the systems of controls of the existing two companies offering the outsourcing services and found that the systems were very reliable.

26. It was noted in the information paper that customer data might be held on the computer systems managed by service providers, but providers should not have unrestricted access to these data. In response to members’ enquiry about the control systems available to ensure integrity of customer information and about the responsibility for the integrity, Mr CHOI advised that the authorised institutions were wholly responsible for the integrity of customer information irrespective of whether there was outsourcing of data processing operations. Institutions intending to outsource their data processing operations were required to discuss their plans with HKMA in advance and to satisfy HKMA that there were adequate systems of controls in place before they proceeded with such plans. Mr Raymond LI added that guidelines on outsourcing of data processing would be included in the Code of Banking Practice which was being prepared by a working group comprising representatives from HKMA and industry associations. The working group would consult the Privacy Commissioner, whose appointment would commence on 1 August 1996, on the relevant parts of the Code before they were finalised. The Chairman requested and HKMA agreed to keep the Panel informed of the progress in this regard.

HKMA

27. In connection with the issues of personal referees and debt collection agencies, a member raised concern about employers of Philipino domestic workers being harassed by debt collecting agencies for the debts owed by their domestic workers. Mr CHOI advised that HKMA had already issued guidelines to banks advising that they should not disclose information of third parties to debt collecting agencies nor allow their debt collecting agencies to resort to other parties to recover debts. Those employers mentioned by the member might report the abuses of the debt collecting agencies to the authorised institutions concerned. If the debt collecting agencies were not employed by authorised institutions, the employers should report to the Police. In response to the Chairman, Mrs WEI advised that third parties being disturbed by agencies employed by registered money-lenders should also report to the Police. As to whether FSB would issue guidelines to registered money-lenders on the conduct of debt collecting agencies they employed, Mrs WEI said that FSB would examine the situation together with the Police to see what appropriate action might be taken. She would report to the Panel in this regard.

FSB

28. On a complaint reported in the press that some bank documents with customer information were once found in a dustbin outside the bank concerned, Mr CHOI advised that the bank had confirmed that its staff had never disposed of any documents with customer information outside the bank. It was suspected that the documents were taken out by a renovation worker as the bank’s office was under renovation on those few days. The bank acknowledged that there might have been slippage in its security controls, and was considering if the case should be reported to the Police.

V. Any other business

Congratulations to Miss LEE Lai-shan

29. Members agreed that as this was the first public meeting of the Legislative Council held after Miss LEE Lai-shan attained a gold medal in the Windsurfing (Mistral Women) Event in the 1996 Atlanta Olympics, the Panel would send a letter to congratulate Miss LEE on her victory subject to the agreement of the President of the Legislative Council.

(Post-meeting note: A letter of congratulations was sent to Miss LEE by the President on behalf of all Members on 29 July 1996. A copy of the letter was circulated for members’ information vide LegCo Paper No. CB(1) 1920/95-96 dated 30 July 1996.)

20. There being no other business, the meeting ended at 10:45 am.

LegCo Secretariat
30 September 1996

Last Updated on 18 Aug, 1998