China has proven to be a center for illegal financial activities- including money laundering over the past few years. According to studies, over 200 million yuan are lost to Chinese Money Laundering from the economy every year, and at least 1 trillion yuan is involved in money-laundering operations at any given time! So, why is Chinese Money laundering so rampant?
How does Chinese Money Laundering Works?
Criminals in China use many innovative methods to carry out illegal processes. Chinese money launderers commonly register shell companies as fronts for illegal financial activities. Shell companies do not require any disclosure of ownership. This makes them ideal to conceal the illegal activities of other organizations. These companies do not have any active operations, assets, or locations. However, these companies can still make investments and open bank accounts. Money is then laundered using these ‘tools’.
The Chinese have a term called ‘fei qian’, which means flying money. This refers to a number of transfer methods used to bypass regulations put in place by Anti Money Laundering authorities. Criminals use these methods to facilitate the transfer of money abroad, after which the true owner retrieves them.
Use of Money Mules and other techniques
Recent cases have even uncovered foreign students and Government officials acting as money laundering mules. Once abroad, they communicate with local Chinese informants, who give them cash to deposit into their bank accounts or transfer some amount of money into the mule’s account. Informants pull in innocent victims by promising them monetary compensation and other benefits. The informant gives them the details of Chinese bank accounts. Once the money is transferred to them, the ‘money mules’ are directed to transfer the funds into the accounts of the fraudster. Criminals bring black money from abroad back to China discretely like this.
The money is also split into smaller amounts and disguised as gifts to friends and family abroad. This is usually in sums of under $50,000. It is then either transferred to another singular account or withdrawn once it reaches the intended accounts. The likelihood of the funds being flagged for suspicious activity and broadening the chain is thus decreased. This also helps to avoid the high taxation of luxury goods. This is also a form of tax evasion and is illegal.
Chinese money laundering actors also develop pour a large number of funds into Cryptocurrency. Fraudsters obtain this money by scamming foreigners into investing their money in malicious apps and web pages. People can store and trade with cryptocurrency anonymously. This makes it easy to transfer funds from one place to another using this medium. Scammers then convert the money into cryptocurrency and transfer it to users in China. Criminals can then safely access and withdraw the money.
Shadow Banking
Non-Banking Financial Institutions in China may also unknowingly play a part in such transactions. This includes transactions done in institutes like pawn shops, foreign currency exchanges, insurance firms, and micro loaning organizations. These firms provide services that are similar to banks but under looser regulations. Activities done in such a manner have been termed ‘shadow banking’.
Many people even use their connections to facilitate the transport of luxury goods via international travelers. Chinese citizens use ‘buy on behalf’ to avoid heavy import duties from being levied on the goods.
China is also no stranger to Trade-Based Money Laundering, which uses large shipments of goods to disguise fraudulent operations Millions of goods are transported via shipping links through China and the EU. Criminals pay off traders and freight-forwarders to manipulate their shipments to accommodate their money-laundering activities. There are many ways to do this, with overcharging or undercharging of goods being the most common.
AML Regulations in China
So, how can authorities detect these activities? Following the complex money trails created by these criminals can be extremely difficult. The best way to prevent these activities from happening is by putting an analytic system in place, which can accurately identify the links between suspicious companies, individuals, and bank accounts.
Highly illegal activities usually generate this black money. Crimes like human trafficking, drug dealing, and the exchange of counterfeit goods are rampant in China. In order to cover up the sources of these funds, powerful Chinese criminals exploit their foreign connections to complicate their transactions. Once the money travels through foreign accounts and back to the mainland, it becomes virtually untraceable.
China itself has proven to have a strong understanding of AML laws. Unfortunately, the banks themselves do not reflect this in practice. It is mandatory for all financial institutions in China to comply with Chinese Money Laundering regulations. The institutions receive thorough training on how to identify any suspicious activities, and how to stop them. However, with technology becoming more developed every day, it is quite difficult to keep up with all the new ways scammers utilize it to hoard money.
All institutions must perform thorough identity checks on all their clients. Customers who wish to remain anonymous must also be verified as legitimate. AML systems analyze all suspicious transactions made in a bank. They will then determine whether there are any anomalies. And finally, all institutions must have well-established AML departments with a trained officer present at all times.
Conclusion
Though all of these regulations are in place, people with money and power will always find a way to go around them. Many officials accept payments to turn the other way, facilitating corruption. Chinese mobsters and gangs also have powerful contacts overseas, who help them carry out these operations.
Even though China is the second-largest economy in the world, money laundering causes millions of Yuan to disappear from the system. The disappearance of such funds contributes heavily to economic instability, increase in debt, and spreading of corruption and other anti-social activities. For China to retain its position as a powerful economy, weeding out money laundering activities is of utmost importance. Financial institutions must regularly update their AML regulations to keep up with the changing technology. This will help them stay one step ahead of money-laundering fraudsters.
