In August 2023, the Metropolitan Police broke up a £55 million money laundering ring operating in Hackney. This complex scheme involved several individuals who laundered large sums of money through “Chinese underground banking systems” and other informal value transfer systems (IVTS). The group used a network of couriers and anonymous transactions to facilitate the movement of illicit funds, ultimately leading to their conviction and the seizure of significant assets. The criminals involved were sentenced to a total of almost 25 years in prison.

This high-profile case underscores the growing use of underground banking systems for laundering criminal proceeds, raising serious concerns for solicitors involved in financial transactions. For legal professionals, understanding these informal banking systems is essential, as they can inadvertently become entangled in money laundering activities if they fail to conduct proper due diligence.

Why Solicitors Must Be Aware of Chinese Underground Banking Systems

As demonstrated in the Met Police’s £55 million money laundering case, criminals exploit Chinese underground banking systems to move large sums of money internationally. These informal systems allow individuals and businesses to bypass formal banking channels, avoiding detection and legal oversight. While these systems may seem appealing due to their efficiency and speed, they are frequently linked to money laundering and other illicit activities.

Chinese underground banking has deep historical roots, evolving from ancient systems of debt settlement. In the modern world, it has become a preferred method for moving funds without using traditional financial institutions. Chinese nationals may seek to use these informal systems to get around strict currency controls, which generally limit transfers out of China to USD 50,000 per year. This creates a major anti-money laundering (AML) compliance challenge for solicitors, as the funds in an informal banking arrangement can originate from and get mixed up with unverified and potentially illegal sources.

See also: Chinese underground banking – A compliance risk hiding in plain sight

The Risks for Solicitors

For solicitors, the risks of interacting with funds linked to Chinese underground banking systems are significant. As shown in the Hackney case, money launderers can transfer criminal proceeds under the guise of legitimate transactions. Solicitors must be aware of the potential for such activities and conduct rigorous checks to ensure compliance with UK anti-money laundering laws.

Key risks include:

1. Criminal charges: Facilitating a money laundering transaction is a principal offence under the Proceeds of Crime Act, which carries heavy penalties. Funds originating from underground banking systems can be extremely difficult to trace, and so are particularly hazardous for solicitors. It is vital to verify the source of funds.
2. Regulatory action: The SRA’s AML auditors are likely to pick up on instances where the source of funds has not been properly established, along with policies controls and procedures which do not put in place adequate safeguards to financial crime risks. The regulator has been very active in bringing action against firms in default. 
3. Penalties: Failure to comply with AML regulations can result in severe penalties, including fines and potential criminal charges. The SRA now enjoys unlimited fining power in cases involving financial crime, with its latest consultation on financial penalties suggesting that the starting point for the most serious fines will be £100,000 for individuals (£500,000 for firms).

How to Protect Your Practice

Solicitors can protect themselves from the risks associated with Chinese underground banking by taking the following steps:

• Risk Assessment: Consider the extent to which Chinese underground banking poses a risk to your practice in your firm-wide risk assessment (FWRA) under Regulation 18 of the Money Laundering Regulations. Where you identify a potential exposure, put in place a plan to mitigate the risk through your policies, controls and procedures.
• Due Diligence: Always verify the source of funds, particularly when dealing with transactions involving China or other high-risk jurisdictions. Collect detailed documentation and question clients on the origins of the funds they wish to transfer. Apply enhanced due diligence (EDD) where the client is evasive or you have concerns about the source of funds.
• Monitor for Red Flags: Stay vigilant for unusual patterns in financial transactions, including money received from unrelated third parties, clients refusing to disclose key details about the source of their funds, multiple small transfers from different accounts, the involvement of third-party intermediaries, and sums transferred just below the reportable limit of USD 50,000.
• Training: This is an area which received little attention in mainstream AML training courses. Staff should be trained on the basic mechanics of Chinese underground banking so that they can identify red flags and warning signs.
• Report Suspicious Activity: If there is any suspicion that the funds may be connected to money laundering, file a Suspicious Activity Report (SAR) with the relevant authorities.

The Metropolitan Police’s recent £55 million money laundering bust in Hackney serves as a stark reminder of the importance of AML compliance for solicitors, and the difficulty of establishing source of funds. With criminals increasingly exploiting Chinese underground banking systems and other IVTSs, solicitors must remain vigilant and ensure that they thoroughly investigate the source of all funds involved in transactions. Only by doing so, can they protect their practice from being drawn into criminal activity and ensure compliance with professional and legislative AML rules.