Dirty cash: the rising threat of Chinese Underground Banking

Over the past few years, the problem of Chinese Underground Banking has grown exponentially across the globe including here in the UK, states the National Crime Agency (NCA). As a form of informal value transfer system (IVTS), Chinese Underground Banking is commonplace within the Chinese community. Involving the transfer of value between countries without actually moving any funds, the IVTS pre-dates Chinese commercial banking and postal systems, but is now being misused by criminals for commodity-based money laundering such as trafficking drugs and humans in the UK and in many other countries.

A question of demand and supply

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. $50,000 is clearly not enough to buy a UK residence, and 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. So, there is a 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.

Going underground

This has triggered the set-up of ‘underground money shops’ to facilitate the movement of money out of China. This isn’t 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 a way of earning extra cash. In two particular cases, Santander Bank alerted the authorities to suspicious cash deposits adding up to £57m to more than 600 accounts set up by students, while Barclays found more than 14,000 ‘compromised’ accounts.

Red flags

According to the NCA, examples of some of the tell-tale signs that indicate accounts are being used for money laundering include cash deposits funding the account or transfers from multiple accounts (mule accounts feeding a destination account) or a payment which is broken down into a large number of small amounts (known as ‘structuring’ or ‘smurfing’). These are often made at branches, in many dispersed locations. It has also been known that in some cases, the recipients have opened multiple accounts with numerous banks into which the cash is deposited.

So, with the seriousness of such criminality and its repercussions not hard to fathom, it is vitally important that accountants who are providing services to Chinese clients who have transferred monies out of China need to be aware of the risk that they may be handling, or facilitating the handling, of the proceeds of crime. Understanding the source of funds and wealth is crucial as part of due diligence procedures, a requirement of the money laundering regulations.

There have also been further consequences of the growing problem of Daigou reflected by the rise in VAT reclaims. One such example was exploitation of the HM Revenue & Customs (HMRC) VAT 407 retail export scheme, which allowed VAT to be reclaimed on goods purchased in retail stores in the UK that were intended for export. In addition, some high-end stores provided a service to customers to assist in reclaiming VAT under this scheme, and also shipped the goods on behalf of their customers. Despite post-Brexit regulation brought in on January 1, 2021 which saw the end of the scheme, customers were still able to lodge a claim under the scheme until March 31, 2021.

Many Daigou claims are incorrectly or fraudulently lodged for a number of 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. The list goes on.

With criminals becoming savvier and finding 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.

Further information: NCA publication on Chinese Underground Banking and ‘Daigou’ and summarised version of alerts issued by the Accountancy AML Supervisors’ Group (ASSG), produced by the National Crime Agency (NCA) in conjunction with the Joint Money Laundering Intelligence Taskforce (JMLIT).