Newsletters Business Crime & Financial Services 8th Mar 2016

Money Laundering & Exchange Controls

There are presently sound reasons for those with wealth in China to want to move that wealth overseas:

  • In August 2015 the Chinese government devalued its currency (CNY) by approximately 4.4% in an effort to make their exports less expensive;
  • In 2015, despite the successful bid to win reserve status for CNY at the IMF, the Yuan weakened by 4.5%, the biggest decline since 1994;
  • In the first four trading days of 2016 Beijing allowed the CNY to weaken by 0.8%;
  • In the first week of trading of 2016 the Chinese markets experienced a crash that was widely reported. The markets themselves, dominated by small retail investors without access to large amounts of information and largely closed to foreign investors, are prone to volatility.

Currency regulations are strict in China and are designed to prevent large sums of money from leaving the country. To take money out of China legitimately an application must be made to the State Administration of Foreign Exchange to show proof of income taxes paid in China. This policy prevents too much money suddenly leaving the country and also allows the government to ensure that tax has been paid on the money that is being taken out. Individuals leaving China are required by law to declare amounts of CNY 20,000 (£2090) or the equivalent of $5,000 (the maximum amounts permitted) in foreign currency.

Chinese nationals can only convert $50,000 each year into foreign currency and are banned from transferring money directly. As a result a variety of techniques are used to circumvent the restrictions. Most are illegal:

  • Bulk cash smuggling;
  • Trade-based money laundering;
  • Manipulating invoices;
  • The purchase of valuable assets;
  • The investment of illicit funds in lawful sectors;
  • The legitimate use of mortgages to purchase foreign properties;
  • Gambling;
  • The exploitation of the formal and underground financial systems;
  • Smurfing (where multiple people send money on one person’s behalf);
  • Illegal fundraising activity;
  • Cross-border telecommunications fraud;
  • Corruption in the banking, securities, and transportation sectors.

A lack of transparency in regulation, in government and in banking itself, means that there has long been good reason for vigilance when dealing not only with funds that emanate from China but with funds in CNY altogether. Since 2006 China has taken steps to enhance its Anti Money Laundering (‘AML’) regime, starting with the Rules for AML by Financial Institutions (The People’s Bank of China Decree No.1 [2006].) In 2007 it became a member of the Financial Action Task Force (‘FATF”.) In 2012, the People’s Bank of China (‘PBOC’) required financial institutions to add money laundering risk scoring to each of their customers. Then in 2014, the Chinese government issued the “Measures on the Administration of Freezing Assets Related to Terrorist Financing.” All steps taken to try to stem the flow of money laundering within China seem to have had only modest success.

The US Bureau of International Narcotics and Law Enforcement (which monitors international money laundering) noted that “China leads the world in illicit capital flows” with over $1tr of illicit money leaving China in 9 years. The Bureau’s report not only states that China is a leading source of illegal money transfers but registers its concern that it consistently fails (despite its FATF status) to cooperate with other countries in resolving cross border money laundering.

Against this background other, recent, developments are grounds for concern for those dealing with funds emanating from the People’s Republic of China (‘PRC’):

  • In June 2015 the Italian authorities sought to indict four senior managers within the Milan branch of the Bank of China (and nearly 300 others) over a £3.2bn money-laundering scheme. The trial is set to start in March this year;
  • Operation Skynet (part of China’s anti corruption drive in March 2015) has as its target 100 corruption suspects living outside China said to have misappropriated public funds;
  • On 22nd January 2016 The Agricultural Bank of China uncovered embezzlement by staff at the bank of around $578m;
  • On 1st February 2016 Chinese police arrested more than 20 people over a suspected ‘Ponzi’ scheme in which nearly a million investors lost an estimated $7.6bn.

The movement of money out of China and into the Australian property market has caused concern there. Australia was criticised by the FATF for its failure to implement AML regulations to bring solicitors and estate agents within the AML regime. It is not limited to Australia. Bloomberg reported in November last year that the Chinese spent almost $30bn on property in the US and UBS estimated that $324bn moved out of China in 2014. With the cap at $50,000 it is plain that a substantial proportion of this money must be illegitimate.

Although China has pledged to remove its currency controls by 2020 anyone within the regulated sector should consider whether there is a need for enhanced due diligence when dealing with transactions that may have circumvented Chinese exchange controls – and a need for an awareness of the other above issues surrounding financial transactions when engaging in transactions with a link to PRC or PBOC.

This is particularly true in Hong Kong where at present (and until the Court of Final Appeal hears the Carson Yeung appeal in May) the Courts have held in HKSAR v Wong Ping Shui & Another (2001) 4 HKCFAR 29 and Oei Hengky Wiryo v HKSAR (No 2) (2007) 10 HKCFAR 98 that the prosecution do not have to prove that the funds were in fact criminal property, all that is required is that the defendant knows or has reasonable grounds to believe the property represents the proceeds of an indictable offence.

At its lowest, having reasonable grounds to believe that property emanating from PRC was the proceeds of an indictable offence would be enough to secure a conviction, and with the present state of reports of financial irregularity and money laundering, there may said to be a good evidential basis for ‘reasonable grounds.’

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