The Law Society recently held 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 solicitors are aware of the risks of dealing with money subject to currency restrictions?
What is Chinese underground banking?
This article concentrates on China, but other jurisdictions (including Vietnam) have currency restrictions in place. The situation does not just apply to China.
Chinese law states that an individual may not transfer more than $50,000 (USD) out of the country. Chinese nationals must comply with these currency restrictions.
It is not a crime under UK law to transfer more the $50,000 (USD) out of China. So for the purposes of our Money Laundering Regulations and Proceeds of Crime Act, there is no problem receiving that money into the UK.
However, since there is no legitimate means of getting that 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 over to the UK. Perhaps they want to buy a British business, make an investment, or help a relative with a property deposit.
Because the 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 intertwined with criminal enterprise.
- drug trafficking
- people trafficking
- organised immigration crime
- cigarette smuggling
- evasion of import/export duties and VAT when buying western luxury goods in bulk ‘on behalf of’ Chinese nationals
- use of ‘mule’ bank accounts (often Chinese students studying in the UK)
The monies that subsequently arrive in the UK account, which may be via cash or transfer from a company, are not from China but from the criminal network in the UK. This is when UK AML laws kick in.
This poses serious problems for any law firm acting for a China-based client, or who is receiving funds from others based in China.
How to check funds are legitimate
- Check that the funds are coming via a registered Money Services Provider. A legitimate business is regulated by HMRC, making checks easier and they are subject to the Money Laundering Regulations.
- Check the usual documentation to prove the legitimacy of funds such as bank statements, wage slips, savings etc. Do not accept translations provided by the client. Any translation must be independent of the client or giftor. Use Google Translate if you have to.
- Check family relationships. If the client is receiving help from a group of relatives, check that they are in fact all related. A member of the criminal network may pose as a relative.
- Check the Application for Funds (transfer) Form, particularly if the monies are already in a UK account. Ensure to check that the reason given for the transfer of monies matches the reason the client has given you. The form (in its various iterations) has to be completed to transfer money.
- If there are any businesses involved in the transfer, check their legitimacy.
Here are a few red flags in addition to the normal money laundering flags. This list is not exhaustive:
- Lump sums from a company/companies with no apparent connection with the client.
- Multiple high value goods purchased. This is a way of transferring value rather than money.
- Unusually rounded figures in deposits/transfers.
- Questionable sources.
- Information on the Transfer of Funds form being false or contradicting what you have been told.
- Client (or third party) insisting on translating their own documents.
As with any money laundering issue, if you are suspicious and cannot get evidence to allay your suspicions, reports will need to be made to the NCA.