China’s underground bank – a hidden compliance risk in plain sight

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The Law Society recently hosted a webinar on Chinese underground banking. Speakers included representatives from the National Economic Crime Centre, the NCA, the Law Society of Scotland and the SRA.

How many lawyers are aware of the risks involved in managing money subject to exchange restrictions?

What is Chinese Underground Banking?

This article focuses on China, but other jurisdictions (including Vietnam) have currency restrictions in place. The situation does not only apply to China.

Chinese law states that an individual cannot transfer more than $50,000 (USD) out of the country. Chinese nationals must comply with these currency restrictions.

According to British law, it is not a crime to transfer more than $50,000 (USD) out of China. So, for the purposes of our Money Laundering Regulations and the Proceeds of Crime Act, there is no problem receiving that money in the UK.

However, since there is no legitimate way to get this money out of China, criminal gangs often step in to provide a “service”.

There may be a perfectly legitimate person with clean money in China trying to send funds to the UK. Maybe they want to buy a UK business, make an investment or help a relative with a property deposit.

Because currency restrictions remove the ability to move money through the banking system, people are forced to be more creative. This is where the problems often start, with legitimate funds tied to a criminal enterprise.

Examples include:

  • Drug traffic
  • people trafficking
  • immigration-related organized crime
  • cigarette smuggling
  • corruption
  • evasion of import/export duties and VAT when bulk purchasing Western luxury goods “on behalf” of Chinese nationals
  • use of “mule” bank accounts (often Chinese students studying in the UK)

The funds that then arrive in the UK account, which may be in cash or by transfer from a company, do not come from China but from the criminal network in the UK. This is when the UK’s anti-money laundering laws come into effect.

This poses serious problems for any law firm acting for a client based in China, or receiving funding from others based in China.

How to verify that the funds are legit

  • Check that the funds are coming through a registered money service provider. A legitimate business is regulated by HMRC, which facilitates checks and is subject to money laundering regulations.
  • Check the usual documentation to prove the legitimacy of the funds such as bank statements, payslips, savings, etc. Do not accept customer-provided translations. Any translation must be independent of the client or donor. Use Google Translate if necessary.
  • Check family relationships. If the client receives help from a group of relatives, verify that they are in fact all related. A member of the criminal network can pose as a relative.
  • Check the request for funds (transfer) form, particularly if the funds are already in a UK account. Be sure to check that the reason given for the transfer of funds matches the reason the customer gave you. The form (in its various iterations) must be completed to transfer money.
  • If companies are involved in the transfer, check their legitimacy.

Red flags

Here are some red flags in addition to the normal money laundering flags. This list is not exhaustive:

  • Lump sums from one or more companies with no apparent link to the customer.
  • Several high value goods purchased. It is a way of transferring value rather than money.
  • Unusually rounded figures in deposits/transfers.
  • Doubtful sources.
  • The information on the funds transfer form is false or contradicts what you were told.
  • Client (or third party) insisting on translating their own documents.

As with any money laundering issue, if you have a suspicion and cannot obtain evidence to dispel your suspicion, reports will need to be made to the NCA.

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