Chinese Underground Banking is big business and poses a threat to accountants and agents. Anyone dealing with Chinese clients can help combat this danger and mitigate this risk by conducting client due diligence procedures and identifying sources of funds and wealth, says Anne Davis, director of professional standards at the IFA


 

Chinese Underground Banking is booming, which is causing increasing concern in the UK.

As a type of informal value transfer system (IVTS), Chinese Underground Banking is commonplace within the Chinese community. Pre-dating Chinese commercial banking and postal systems, IVTS involves the transfer of value between countries without actually moving any funds. However, it has also long been regarded as a medium for money laundering by criminals in the UK and across the globe.

The UK is hot property

The NCA sees the likely reason behind the rise in the business – worth millions, if not billions of pounds – as being driven, at least in part, by the Chinese government’s policy and regulations regarding personal foreign exchange transactions and the removal of capital from China.

Moving money out of China is very difficult and there are significant restrictions on what money leaving the country can be spent on; Chinese law has a strict control on the purposes for which citizens can obtain foreign currency, ordinarily with a $50,000 annual limit for individuals. Additionally, since 2017, the maximum allowed value of overseas withdrawals by a private individual using a Chinese bank card is around $14,000.

Chinese nationals are not permitted to buy property over here unless they can prove to the authorities that they are emigrating with the intention of making that property their primary residence. This has fuelled demand for those who have money in China to transfer to the UK. In particular, the UK property market is seen as attractive by Chinese buyers.

In terms of supply, criminals want to transmit the value of their proceeds of crime out of the UK. Therefore, Chinese underground banking provides a money laundering method for criminals to wash their dirty money without any funds being transferred from one country to another.

Daigou

This has caused ‘underground money shops’ to pop up, to facilitate the movement of money out of China.

This is not just a problem limited to home soil either; underground money shops are often involved in money laundering operations across the globe. ‘Collectors’ are based overseas, collecting cash from anyone who wants monies remitted out of China whether that be for reasons such as criminal purposes, gambling or investment contrary to the rules, and carry out a form of retail commerce.

This notorious practice, known as Daigou, involves goods in demand in China that are purchased in the UK on behalf of Chinese citizens and exported to China for sale there, with some using bribery of customs officials to evade controls. This is typically carried out via ‘mule accounts’ opened by Chinese students in the UK, with recent cases including individuals who were caught receiving hundreds of thousands of pounds from criminal gangs to be distributed among students offered as a way of earning extra cash. In two particular cases, Santander Bank alerted the authorities to suspicious cash deposits adding up to £57m ($80.5m) to more than 600 accounts set up by students, while Barclays found more than 14,000 ‘compromised’ accounts.

Fraudulent claims

It is extremely important that accountants who are providing services to Chinese clients who have transferred monies out of China are aware of the risk that they may be handling, or facilitating the handling, of the proceeds of crime. As part of due diligence procedures and a requirement of the money laundering regulations, it is crucial to understand the source of funds and wealth.

Further problems concerning the growing issue of Daigou have been seen in the rise in VAT reclaims. Many Daigou claims are incorrectly or fraudulently lodged for many reasons, such as: goods purchased with criminal proceeds; forged or fabricated invoices; no proof of export; goods bought by third parties; multiple invoices submitted for the same goods and insufficient detail on invoices to verify goods and export.

With criminals discovering more ways to go ‘underground’ to launder dirty money into the UK and beyond, the sector needs to be acutely aware of the illicit methods used to get money out of China and immediately report any knowledge or suspicions of money laundering by any of their Chinese clients to the National Crime Agency.

For more information, see the NCA publication on Chinese Underground Banking, and Daigou, a summarised version of alerts issued by the Accountancy AML Supervisors’ Group, produced by the National Crime Agency in conjunction with the Joint Money Laundering Intelligence Taskforce.