The National Crime Agency has described Chinese underground banking as ‘the most prevalent money laundering threat faced across the Western world’.
With this in mind, conveyancing firms should be on high alert and aware of the unique risks involved and how to navigate them. The area of focus is the methods in which money is moved out of China and the issues are often conflated and misunderstood in practice.
There is a distinct difference between the client exploiting foreign exchange controls by misleading authorities and issues relating to underground banking where criminal proceeds are introduced into the transaction. The latter often involves criminal gangs in the UK and this illegality can occur even where the original funds may have been raised by the client through legitimate means.
Legal Sector Affinity Group (LSAG) guidance
This is an area of focus which is high on the agenda of legal sector regulators and in March of this year, the LSAG issued guidance covering the key risks facing UK law firms due to their clients’ circumvention of Chinese currency controls and what firms and practitioners need to be aware of.
The guidance covers various methods used to bypass currency controls which bring their own unique issues to be considered:
- Misleading documentation
- Splitting funds
- Underground banking and underground currency exchange
- Criminal daigou
- Red Flags
Exploiting foreign exchange controls
Whilst exploitation of the Chinese foreign exchange controls is not in itself a crime in the UK, there still needs to be a degree of consideration with each case. It is important to communicate to clients and establish why the official reason stated for an overseas transfer does not match the actual use of the funds to properly assess the risks against the firm’s own policy and procedure on the issue.
Caution should be applied where the client is insisting on translating their own bank statements and/or supporting due diligence documents like, for instance, the official Chinese government overseas transfer form, a required document for explaining the purpose of a transfer.
Conveyancers also need to be mindful of the practice of ‘splitting’ e.g., sending monies under the $50,000 threshold to several family members with the total being recombined once it reaches the UK.
A common misconception of note is that once a client has circumvented China’s foreign exchange restrictions and have placed monies in a UK bank account for over six months, then it is considered ‘legitimate’. This is not the case.
Legal sector regulators have not gone as far as to warn firms never to act where there has been the circumvention of foreign exchange controls but they have proffered caution and some firms have taken the decision to avoid these transactions altogether.
Underground banking or informal value transfer systems (IVTS) are used in most parts of the world to conduct legitimate remittances (most often by individuals seeking to send money to and from family members in their country of origin). However, IVTS can be an attractive means of money laundering and, in some instances, terrorist financing primarily but not exclusively because of the following:
- There is no audit trail left behind of any transactions made
- Like crypto currency, it’s a service available to de-banked or unbanked customers
- Senders are not required to provide identification documents
- Avoidance of high banking fees
The National Crime Agency report on underground banking states that some IVTS providers are readily able to source ‘mule’ accounts in the UK, the majority of these bank accounts being set up by Chinese students studying in the UK. Whilst not all of these accounts are used for money laundering, there are many criminal gangs reaching out through a variety of social media platforms, principally ‘WeChat’.
The modus operandi is for students who have been recruited to set up multiple bank accounts with several different banks then cede control of these accounts to the money laundering group. In one instance, a money laundering gang was able to assume control of over 600 different accounts from the same bank with Barclays previously reporting over 14,000 compromised accounts.
One high-profile confiscation of funds in the UK involved a Chinese student who was stopped at Edinburgh airport with around £100,000 worth of euros and dollars and was ‘unable to provide a reasonable explanation’ with regards to the origins of the money. It is known that Chinese students are targeted to act as money mules, though other methods of transfer are more sophisticated.
An issue more specific to underground banking is the practice of daigou or ‘surrogate shopping’. This relates to the practice of buying goods which are in demand in China and shipping them to China for resale, skipping applicable excise duty. This can involve bribery of customs officials and, again, the use of student ‘mule’ accounts to facilitate the process. This is potentially identifiable through a client’s bank details if it shows numerous high-value purchases from expensive retail brands. Firms should be vigilant in monitoring for this as the problem of daigou purchases has also been linked to an increase in potentially fraudulent VAT reclaims.
Suspicious activity reporting
Ultimately, it is expected that all relevant source of funds and due diligence checks are carried out and if there is the suspicion of criminal enterprise then this should be reported. Even if a firm withdraws from an instruction because they’re unable to complete due diligence, they should consider their reporting obligations.
Red flags, risks and mitigations
The LSAG sets out various red flags in their guidance indicating suspicious activities that can be found on a client’s banking transactions and supporting documentation.
Their stated examples are as follows:
- Transfers received that are just below the threshold of currency controls that apply in China
- Multiple/lump sums received from third-party individuals or companies with no obvious connection to the transaction
- Multiple payments made to high-value goods retailers/brands, which may suggest that the person is a daigou participant
- Multiple sums received in unusually similar or rounded figures
- Information given in support of transfers that appears false or contradictory
- The client insisting on translating their own bank statements and/or supporting due diligence documents
The LSAG guidance on this issue is essential reading if you are dealing with a matter involving funds from China. Firms should consider implementing a clear procedure and training on this issue specifically so that conveyancers are aware of the unique challenges faced.