A branch of the Bank of China in central Milan, Italy (file photo)
The annual defense authorization bill passed by the U.S. Congress last month contains an important mandate in addition to guiding U.S. defense policy and military buildup. The bill specifically names China and requires the Treasury Department to use a year to study money laundering risks from China and develop strategies to prevent those risks.
Analysts see this as highlighting further scrutiny of China by the U.S. executive and legislative branches, as well as the U.S. government’s concern that China is not being transparent enough in building its financial regulatory system.
In many Western countries, people are surprised to see Chinese tycoons buying $2 million mansions for cash in suburban Los Angeles, or foreign students opening the doors of their Lamborghinis on the streets of Vancouver, and Chinese faces passing through major luxury stores. Everyone wonders, where did they get the money?
How big is the risk of money laundering from China? What are the ways in which criminals launder money? Has China done anything to prevent money laundering? We have consulted with experts in the banking and legal sectors to answer these questions.
Illegal money flowing out of China
“First we need to be clear about the definition of money laundering, and that is the illegal flow of money out of China,” Graham Barrow, a British anti-money laundering expert, told Voice of America.
The term money laundering comes from the use of coin-operated laundries by Chicago gangster Al Capone in the early 20th century to rationalize the proceeds of his crimes, that is, to convert money obtained through criminal or illegal means into legal funds through a financial operation process.
Money laundering has become a growing problem in the international community. According to the United Nations Office on Drugs and Crime (UNODC), money laundering worldwide accounts for 5 percent of the world’s gross domestic product, or $2 trillion annually.
In the past, international efforts to combat money laundering focused on Central and Eastern Europe and the former Soviet Union, Barrow said. Now, however, “the international community is seeing that China – a capitalist society under a communist regime – has created a huge underground money laundering and is moving assets offshore, and that has become a big problem,” he said.
The U.S. State Department lists China as a major money laundering country in its 2020 annual report on global drug control. “The usual money laundering methods include smuggling of large amounts of cash, trade laundering, use of shadow companies, alteration of invoices, acquisition of real estate, gambling and laundering through illegal underground money laundering,” the report reads.
The National Defense Authorization Act requires the Treasury secretary to assess China’s illicit financial risks based on data audited by the U.S. Government Accountability Office. The report will examine the risks posed by the Chinese government and Chinese companies, including financial institutions, and whether the government’s relatively weak regulatory measures have contributed to these financial crimes.
Money Laundering Routes
So, what are the common ways to launder money in China?
The first is the bribery of officials to launder money. Attorney Gao Guangjun, a New York-based attorney familiar with the operations of the Communist Party’s Ministry of Public Security, told VOA that some corrupt officials pay off bureaucracies to move money in the name of national security. “We know that the original Vice Minister of State Security, Ma Jian, was arrested on one of the undisclosed charges of helping top CCP officials to launder money,” he added.
Beijingers walk past a Dior billboard outside a shopping mall. (Nov. 30, 2016)
The second is laundering money with expensive luxury goods, which exists in what we often hear about proxy shopping. Illegal money is shipped overseas in the form of luxury goods and then liquidated. This can also be done through underground money changers. “The people who do the underground moneychanging in China can be said to be black and white,” Gao Guangjun said, “which means that if you give him RMB in China, you immediately receive your cash in the U.S., or elsewhere.”
A third form is through a large number of corporate entities. Barrow, a British anti-money laundering expert, said they have observed that in Western countries such as the U.K. and the U.S., some people create shell companies using the same names as their Chinese companies. And criminals are able to move money freely within the same company.
“For example, if I open a company in the U.K., that company has the exact same name as my Chinese company. I use the name of the UK company when I open an account in Hong Kong. But it’s very difficult for the bank to tell whether the funds coming in are from my Chinese company or my British company,” he said, “and once the funds are in Hong Kong, it’s even easier to transfer them because it’s a major financial center.”
Barrow added that the U.K. has identified 30,000 such companies whose legal persons are Chinese nationals and whose company names are the same as those of these people in China. “We found all these British companies dormant and I can’t really think of a reason why one person would need to set up so many companies,” he said.
Increased regulation
Over the past year or two, China’s anti-money laundering regulation has drawn international attention. China’s central bank – the People’s Bank of China – issued fines totaling more than $53.9 million to financial institutions that violated anti-money laundering laws in the first six months of 2020, which exceeded the total fines imposed in 2019.
The significant increase in penalties reflects the Chinese government’s approach to the issue. Previously, financial institutions would only be penalized once, regardless of the number of rules they violated. Now, however, multiple violations will be punished multiple times. The highest fine imposed by China’s central bank was more than RMB 100 million.
FATF International poster
Experts believe that this is related to China’s membership in the International Financial Action Task Force (FATF). This organization was established in 1989 at a meeting of seven Western heads of state to establish policies and codes of conduct for anti-money laundering operations worldwide. China joined the international organization in 2007, when it passed its first anti-money laundering law.
“There should be this consensus among Chinese Communist Party officials that if you want to really participate in the international financial community, then you have to do something. Because the FATF review report will affect Beijing’s ability to effectively maneuver around the web of power,” Barrow said.
In its 2019 assessment of China’s anti-money laundering regulation, the Financial Action Task Force noted that China imposes too few penalties for money laundering.
In all of 2018, China had only 47 money laundering cases involving 52 people. As the world’s second-largest economy, a figure of only a few dozen trials is unthinkable, Barrow said with a laugh.
Yet lawyer Gao Guangjun said the current tough regulation is aimed more at ordinary people, while top officials remain difficult to control.
“The regulation is certainly much tougher. But unfortunately this severity is only for those general public. It used to be that you could withdraw $50,000 to travel to the West and send your kids to school, but now it’s much tougher. Some people have to go to the bank many times to withdraw $500,” he said, “but for high officials, it’s not a problem at all. They still launder money in their own various ways, and that’s why you see a lot of so-called high-ranking officials who are investing overseas, buying houses, it’s all very quick cash transactions.”
Recent Comments