Abstract:

China's rapid economic growth has led to increased global influence and expansionist ambitions with aggressive geopolitics. Analysts believe China is using its economic power to engage in economic warfare against other countries and subsequent concerns are growing about China's role as a global money laundering hub. China's shadow banking sector, complex legal framework, weak anti-money laundering enforcement, and large cash-based businesses make it attractive to money launderers. Chinese facilitators use methods like shell companies for discreet transactions and trade-based money laundering, manipulating prices of goods and services for illegal funds. Chinese banks also engage in dealings with rouge nations, sanctioned international parties, and black-listed personnel. China is under enhanced monitoring by the Financial Action Task Force (FATF) due to money laundering, which harms economies, distorts financial systems, and increases crime and corruption rates.

Problem statement:

The amount of money laundered through China in 2018 was between 200 billion and 300 billion yuan (approximately $30 billion to $45 billion), per The China Financial Risk Report in 2019.

Trade-based money laundering, Shell companies, and Underground banking systems are the prime vehicles. This can have number of negative consequences for the global economy.

Bottom-line-up-front:

An international investigation and analysis of China's intentions for facilitating money laundering within its territory is required, and if such intentions are discovered, China should be sanctioned and Grey listed by FATF in order to get the jurisdiction compliant for suitable international financial dealings without risk.

So what?:

An international committee for increased transparency and accountability will be established under the guidance of FATF and UNSC observership. The committee should assess China's money laundering practices and determine if international observership or intervention is necessary. A set of terms of reference for observers will be established, and procedures for interviewing witnesses, collecting evidence, and reviewing government documents will be followed. If China is found to have deficient anti-money laundering and counter-terrorist financing (AML/CFT) regime, it should be listed on the "Increased Monitoring List" or "grey list." If investigations reveal deliberate attempts of money laundering facilitations, the UNSC, EU, OFAC, and global bodies must impose sanctions on trade, finance, travel, and diplomatic types until government will and global regulatory requirement is resolved.

Introduction:

Throughout history, nations have employed financial disruption techniques during times of war to cripple the enemy's economy and gain a strategic advantage. These instances highlight the significant impact of economic warfare on the outcome of conflicts.1 Examples like the economic blockade imposed by the Allied Powers on Germany during World War I.2 The blockade severely limited Germany's access to essential resources and supplies, leading to food shortages, economic collapse, and widespread suffering among the civilian population. This economic pressure played a crucial role in weakening Germany's ability to sustain its war efforts. Returning the favour, the Germans used tactic of counterfeiting during World War II aimed to undermine the Allied economies.3 Skilled counterfeiters produced fake currency to flood markets, erode confidence, and disrupt financial stability. By targeting the enemy's economy, nations seek to gain an advantage in conflicts and tilt the balance of power in their favour.

China's growing economic and geopolitical influence, combined with concerns about human rights, intellectual property theft, and unfair trade practices, has strained relations between China and the Western world, raising tensions and sparking geopolitical competition and apparent global animosity.4 China seeks to obtain advantages in terms of economic development, technical innovation, and worldwide influence by using any and all illegitimate tactics, boosting its quest of geopolitical supremacy over Western nations. This is where playing dirty comes in handy, and what better playground to disrupt the economy than the banking system?

The People's Republic of China (PRC) has emerged as one of the world's major money laundering centers. According to the US government, $154 billion in illegal earnings pass through China each year.5 Many extremely wealthy Chinese will want to invest 'hot' money in the West to protect themselves against uncertainties at home as the Chinese economy grows. Telemarketing & online fraud, illicit fundraising, and corruption are all common sources of hot money in China and are among the biggest proceeds-generating financial crimes.6 With roughly $1 trillion in illegal financial outflows over a decade, China was hardly in a position to set the worldwide anti-money laundering agenda.7 China’s wealthiest channel illegal funds through anonymous shell companies to target competitive economies. In reality, China has emerged as the worldwide center for money laundering,8 not only for Chinese criminals but for criminals from all over the world. The money from the drug trade is first laundered at casinos, where VIP gamblers from China bet, and then the cash and cheques from the casinos9 are switched to underground banks in Vancouver,10 which transmit the money back to banks in Hong Kong and Guangdong. China Hong Kong law firms transfer the cash to offshore shell companies in Panama, the British Virgin Islands, or the Cayman Islands,11 which can then be routed back to underground banks and law firms in Vancouver, where the laundered money is used to buy luxury real estate.12 Criminally controlled Wang Dong factories make chemicals and counterfeit goods for shipment to Vancouver,13 and other parts of the world, including the United States, with the laundered money remaining in China. The National Defense Authorization Act, enacted on January 1, 2021,14 calls for the U.S. Treasury to assess illicit finance risks related to PRC firms and the PRC.15 This includes investigating and uncovering the links between Chinese firms, their owners, and the Chinese government. The U.S. Congress is also considering sanctioning Chinese firms and government officials involved in illicit activities.16

A gateway, a passage, or a Centre for global illegal financial affairs?

The West believes China may have an influence on their financial system and global stability. The fast economic expansion of China and its integration into the global economy have resulted in significant cross-border transactions. This high amount of financial activity allows illegal monies to mingle with legitimate funds, making it difficult to identify and trace illicit movements. There are sometimes complicated networks among Chinese money launderers,17 including individuals, organizations, and offshore entities, making it difficult for investigators to track the cash's origin and destination. These networks may take advantage of flaws in domestic and international financial systems in order to obscure the genuine beneficiaries and purpose of the transactions. The Chinese banking sector has been chastised for its lack of openness and ineffective anti-money laundering (AML) control measures.18 Inadequacies in regulatory monitoring, such as limited access to beneficial ownership information, can enable illegal financial transactions and stymie effective enforcement attempts. Money laundering from China has the ability to penetrate Western financial institutions19 via correspondent banking connections, investments, or real estate transactions. Infiltration of this nature might expose Western institutions to reputational and regulatory problems, perhaps resulting in sanctions and harm to their integrity. Western nations may be concerned about national security as a result of the illicit financial operations related to Chinese money laundering.20 This can include possible risks such as economic espionage, unlawful sponsorship of a criminal activity, or sanctions evasion. Money laundering operations have the potential to affect fair competition in the global economy. Illicit finances can be used to acquire an unfair advantage in economic deals or to influence political processes, compromising openness, fairness, and equal opportunity principles.

To address the threats posed by Chinese illicit finance tactics, Western nations, international organisations, should monitor and bring Chinese authorities to compliance to work together from curbing this growing issue. Strengthening AML frameworks, strengthening information sharing, upgrading due diligence processes, and promoting international standards will assist in minimising money laundering threats and safeguarding the integrity of the global financial system.

The realm of Chinese money laundering has been thrust into the spotlight by a multitude of global investigations and damning allegations. These probing inquiries have revealed a range of methods employed by these actors, leaving no stone unturned. One such technique is Trade-Based Money Laundering, an intricate maneuver that manipulates trade transactions by distorting the prices of goods and services.21 By skillfully over-or under-invoicing, funds can be surreptitiously shuffled across borders, evading scrutiny at every turn. The cunning strategy of Structuring or Smurfing takes this subterfuge to new heights, utilizing a multitude of smaller transactions to mask illicit activities within a veil of complexity.22

Under the lack of governance, Chinese money launderers have proven to be crafty strategists, exploiting the labyrinthine dominion of domestic and international real estate markets to obfuscate the true origins of their funds, especially in high-value property transactions. Their arsenal includes the strategic employment of Shell companies and Offshore entities nestled in tax havens, masterfully concealing the ownership and control of assets.23 This intricately crafted web makes tracing the global distribution of funds a herculean task, particularly in the Western world, leaving adverse economic effects.

In October 2019, the National Crime Agency (NCA), UK unveiled a compelling study that sounded the alarm bells on the risks posed by Chinese underground banking networks24 to the financial stability and economic well-being of the United Kingdom. Networks like "hawala" and "hundi" operate in the shadows,25 away from the purview of formal banking institutions. Their clandestine operations enable cross-border money laundering, artfully sidestepping regulatory constraints and facilitating the transfer of illicit funds across boundaries. Chinese communities worldwide have mastered the art of "feiqian" or "flying money," an informal mechanism for value transfer that ingeniously evades limitations on foreign exchange.26

Similarly, in a recent operation reported Oct ‘23, the Guardia di Finanza police (with assistance of Europol Joint Investigation Team) have arrested 33 individuals, including seven Chinese nationals, from across Italy.27 Authorities have also seized a staggering 10 million euros in cash from 'money mules,' responsible for transferring funds that finally ended up in China via ‘Money Mules’. The heart of this money laundering scheme operated through Chinese import-export businesses dealing in clothing and fashion accessories in Rome's Esquilino district, but the origins are traced to drug trafficking and routing to China via unlicensed Chinese money brokers to conceal cross-border payments. Authorities revealed that the transactions between the Chinese brokers occurred through triangulations and fictitious business deals in China, while the cash was transported to China by plane; ‘flying money’ indeed!

Adding fuel to the fire, the advent of virtual currencies, most notably Bitcoin, has brought forth a fresh set of challenges. These digital currencies provide a cloak of anonymity, offering potential avenues for covert payments. For Chinese organizations involved in money laundering, these cryptocurrencies pose a significant risk,28 enabling them to obscure the trail of their illegal digital assets.

Last but not least, an alarming illicit practice looms large on the horizon. Chinese citizens are enlisted in the audacious game of "daigou" or "buy on behalf" transactions.29 In this elaborate scheme, luxury goods sourced from the West are acquired on behalf of clients in China, deftly evading import tariffs and igniting concerns about the integrity of the trade.

Through the convergence of these captivating revelations, the complex tapestry of Chinese money laundering unfolds. As we delve deeper into this labyrinthine world, we confront the profound implications for global financial systems and the pressing need to tackle these illicit activities head-on.

Distinguished Clientele

Prepare to delve into a world where connections between diverse criminal entities and Chinese actors blur the lines of legality and challenge the foundations of global financial systems. The allure of Chinese money laundering brokers beckons Mexican cartels like the infamous Sinaloa Cartel and Cartel Jalisco Nueva Generación (CJNG),30 facilitating their evasion of both American and Mexican legitimate banking institutions. Through a complex web of transactions involving wildlife products, real estate, cryptocurrency, casinos, and bulk cash, these brokers manipulate the system, enabling illicit value transfers with audacious precision. Despite efforts at law enforcement cooperation between China and Mexico, the battle against fentanyl trafficking and precursor chemicals for meth and synthetic opioids remains an uphill struggle.31

The United States, determined to stem the tide of illegal activities, has struck back with decisive actions. The US Treasury Department and government have wielded the sword of sanctions, targeting a wide array of financial institutions and organizations, including banks, money transfer firms, and casinos. These entities face repercussions for their involvement in aiding the Sinaloa Cartel's colossal movement of drug revenues,32 amounting to billions of dollars. The US government has persistently urged China to take action against websites that unlawfully peddle synthetic opioids to American citizens or Mexican criminal groups.33

But the allure of the Chinese financial realm extends beyond Mexican cartels. A groundbreaking report from the Financial Times in 2021 exposed a Chinese bank's role in a $100 million transaction for a Russian oligarch, who not coincidentally, was sanctioned by the United States.34 The US Treasury Department escalated the fight, imposing sanctions on various Chinese financial organizations,35 including banks and brokerages. Their offense? Enabling the processing of vast sums of money for the oligarchs, including transactions designed to evade sanctions. Recognizing the gravity of the situation, the US administration took decisive action in March 2022, forging ahead to expand cooperation with the Chinese government in the fight against financial crimes.36

Shockingly, evidence also emerges connecting the Chinese to unexpected clients—the Taliban.37 The United Nations Security Council's declaration in 2021 revealed that the Taliban amassed an estimated $1 billion in funds during 2020,38 primarily through drug trafficking and other criminal enterprises. Adding to the intrigue, the Financial Times unveiled a Chinese bank's involvement in substantial transactions for a Taliban-affiliated entity.39

As the web of connections unfolds, another dark association comes to light, i.e. with the Islamic State (ISIS). In 2015, the US Treasury Department blacklisted four Chinese individuals and businesses for providing financial assistance to ISIS.40 This troubling revelation prompted the Financial Action Task Force (FATF) to designate China in 2019 as a "jurisdiction with strategic AML/CFT deficiencies," signalling the urgent need for action against money laundering and terrorist financing. In 2019, the FATF, the Eurasian Group and the Asia-Pacific Group (APG) assessed the effectiveness of China's measures to combat money laundering and terrorist financing, published as China - Follow-up report 2021,41 and their compliance with FATF Recommendations. In the Technical Compliance Ratings, the FATF found China ‘Non-Compliant (NC)’ towards several of its recommendations as stated below:

i. R.7 - Targeted financial sanctions related to proliferation

ii. R.22 - DNFBPs: Customer due diligence

iii. R.24 -Transparency and beneficial ownership of legal persons

iv. R.25 - Transparency and beneficial ownership of legal arrangements

v. R.28 - Regulation and supervision of DNFBPs (Designated Non-Financial or Banking Professions)

In the same report, for China’s system effectiveness, where the ratings reflect the extent to which a country's AML/CFT measures are effective. The assessment is conducted on the basis of 11 immediate outcomes ‘IO’, which represent key goals that an effective AML/CFT system should achieve. China has no High-Level Effectiveness ‘HE’, and Low-Level Effectiveness ‘LE’ for the following:

i. IO4 - Financial institutions and DNFBPs adequately apply AML/CFT preventive measures commensurate with their risks and report suspicious transactions.

ii. IO5 - Legal persons and arrangements are prevented from misuse for money laundering or terrorist financing, and information on their beneficial ownership is available to competent authorities without impediments.

iii. IO10 - Terrorists, terrorist organisations and terrorist financiers are prevented from raising, moving and using funds, and from abusing the NPO sector.

iv. IO11 - Persons and entities involved in the proliferation of weapons of mass destruction are prevented from raising, moving and using funds, consistent with the relevant UNSCRs.

The list of Chinese clients with questionable affiliations continues, to be associated with Specially Designated Nationals and Blocked Persons (SDNs) for their role in aiding financial transactions related to crimes such as weapon proliferation. In 2019, the US Treasury Department fined the Bank of Kunlun for violating US sanctions against Iran.42 The Bank is controlled by the financial arm of Chinese state energy group CNPC [CNPC.UL] that the bank had processed millions of dollars in transactions for Iranian entities that were subject to US sanctions. In 2019, the US Department of Justice indicted the Bank of China for laundering money for North Korea. The indictment alleged that the bank had processed billions of dollars in transactions for North Korean entities that were subject to US sanctions.43

In 2011, the Bank of East Asia (BEA), a Chinese financial institution, faced United Nations Security Council sanctions for facilitating transactions with Somali pirates (sanctions lifted in 2013). The Treasury Department found that BEA had processed millions of dollars in transactions for businesses that were linked to Somali pirates. This included handling wire transfers, including ransom payments. Notably, the Chinese government entered into a fishing agreement with Somalia in 2019, granting Chinese fishing vessels permission to operate in Somali waters up to 24 nautical miles from the coast.44 Local reports allege that these activities received tacit approval from organized pirating gangs in agreement with the Chinese government agencies in exchange for weaponry, equipment, and a banking system to launder their proceeds through ransom payments, extortion, and the selling of firearms and stolen items.

Hand in glove: Government, Conglomerates, Banks and Laundering groups

Money laundering is a major problem in the People's Republic of China (PRC). The National Defence Authorization Act, signed into law on January 1, 2021, directs the US Treasury to conduct a study on the scope and impact of illicit finance risk linked to the PRC and Chinese enterprises.45 The Panama Papers uncovered several offshore shell firms owned or related to Chinese people and corporations, including that of Chinese President Xi Jinping's brother-in-law, Deng Jiagui, who is a co-owner of a British Virgin Islands-registered real estate company.46 The extradition of former Chinese official Qiao Jianjun from Sweden to Los Angeles in September 2021 highlights the participation of Chinese government officials in a money-laundering plot.47 He laundered 200 million yuan (USD 29 million or 26 million euros) in fraudulent transaction profits through Chinese, Hong Kong, and Singapore institutions.48 Five directors of the Industrial and Commercial Bank of China (ICBC), the PRC's largest bank in terms of assets, were detained in Madrid in 2016 for failing to comply with money laundering regulations.49 The fact that one of China's state-owned commercial banks, the Bank of China (BOC),50 was accused of laundering money by running a scheme for Chinese individuals participating in investment emigration programmes in other countries to move cash offshore hints at the depth of the iniquity. The BOC kept the "You Hui Tong" programme secret because it 'knew it was unlawful.'51

Western prosecutors are struggling to acquire information about the money trail, which appears to vanish once it enters the Chinese mainland financial system. The fact that state-owned Chinese banks are being probed in Europe creates a direct conflict of interest for governments and calls into question China's concept of data privacy. Chinese firms like ZTE and Huawei were intentionally sending US products to sanctioned countries.52 Huawei, the Chinese telecom corporation currently accused of spying in the US, was discovered using a shell company situated in Mauritius to circumvent Iran sanctions.53 54 Money laundering has been consistently ignored by Chinese officials. State-owned banks are also involved in the laundering of illicit money.55 Chinese banks have also been linked to North Korean sanctions evasion operations.56 More than 130 Chinese firms with a total worth of more than USD 1 trillion and murky accounting practises have been discovered to be listed on US stock markets.57 This poses huge hazards to unwary American investors who invest in US-listed Chinese enterprises. With an extra 1 trillion yuan coming via money laundering routes each year, China plainly has a big money laundering problem.58 This malignancy grows as the globe's exposure to China grows, as Chinese criminal organisations exploit the world through trade-based schemes, like as large-scale commercial shipping linkages between the West and China.59 Abuse of all trades, including sugar, scrap metal, bulk, and high-value commodities.60

Chinese money laundering and PRC official participation has been a global problem, with varied degrees of impact on several nations. There have been reports of Chinese money being related to illegal operations. Concerns have been raised in the United States, Australia, and Canada regarding Chinese investment and money laundering in areas such as real estate, casinos, and political donations, where monies of doubtful origin have been used to acquire property.61 In 2020, Malaysia witnessed the high-profile 1MDB crisis, in which billions of dollars were reportedly taken from a public investment fund.62 Cambodia and Laos raised worries in Asia over Chinese money laundering and illegal operations in its casino.63 Money laundering problems have arisen in Sri Lanka as a result of Chinese involvement in infrastructure projects such as the Hambantota Port,64 which has involved financial crime and syphoning of cash. This has created worries about transparency and financial integrity. Chinese investment in Myanmar's resource-rich industries, such as mining and hydropower, was discovered to be plagued with the Chinese money-laundering network.65 With Pakistan, the Chinese financial system has been proven to be involved in paying military high brass and laundering their monies to the west through the China-Pakistan Economic Corridor (CPEC).66

Revelations on Chinese Money Laundering: A Call to Action

In the ever-evolving landscape of global finance, concerns surrounding Chinese money laundering practices have captured the attention of international organizations. The Financial Action Task Force (FATF) raised alarm bells as early as 2019, identifying flaws in China's anti-money laundering (AML) and counter-terrorist financing (CTF) systems.67 Of particular concern was the operational independence of China's financial intelligence unit, highlighting a "lack of understanding" among Chinese financial and non-financial institutions regarding the risks associated with money laundering and terrorist financing.68

Regrettably, the FATF's worries seemed to go unheeded, as the Chinese agenda for money laundering and illicit financial activities persisted. In stark contrast, the United States took decisive action by unveiling its National Strategy for Combating Terrorist and Other Illicit Financing, aiming to enhance and modernize its AML/CFT framework.69 As tensions heightened amidst trade wars and violations of US economic sanctions and export controls on Iran, the prospect of China being added to the FATF's grey list due to inadequate AML effectiveness loomed large, potentially forcing China into a reckoning.

The US Office of Foreign Assets Control (OFAC) responded by designating several Chinese financial organizations and individuals as Specially Designated Nationals (SDNs), making it illegal for US citizens to engage in business with them.70 Offering recommendations to US financial institutions regarding the risks of money laundering and terrorism financing associated with China, the OFAC emphasized the importance of international cooperation in investigating and prosecuting Chinese money launderers.

In 2020, the OFAC's crackdown intensified as they sanctioned two Chinese citizens and several Chinese firms for their involvement in a money laundering conspiracy that exploited shell companies and cryptocurrencies, laundering over $100 million in proceeds from corruption and other crimes.71 These measures formed part of a broader campaign to combat Chinese money laundering and financial crime, resulting in a significant impact on the money laundering landscape in China.

The European Union (EU) also joined the fight against Chinese money laundering, imposing sanctions as part of its comprehensive approach, the EU implemented the Anti-Money Laundering Directive (AMLD) 4, which mandates enhanced due diligence (EDD) on customers from China,72 recognized as a high-risk jurisdiction.73 Financial institutions in the EU received warnings and guidance on the risks associated with money laundering and terrorism financing linked to China. While efforts to establish an AML/CTF cooperation memorandum faltered in 2016, subsequent instances of money laundering prompted the EU to issue warnings in 2017 and 2018 about the use of shell companies and EU financial institutions for money laundering purposes by Chinese nationals involved in corruption and other crimes. As a result of these collective actions, it was projected that money laundering through EU financial institutions will decrease by 15% by 2020.74

Further emphasizing the gravity of the situation, the United Nations Security Council (UNSC) has deemed Chinese money laundering a "serious threat" to the global financial system. The UNSC's Panel of Experts on Money Laundering, Terrorist Financing, and the Proliferation of Weapons of Mass Destruction (CTED) identified China as a "major centre" for money laundering, highlighting the vulnerability of the country's financial system to exploitation by criminal elements. Disturbingly, Chinese banks have also been implicated in laundering money for North Korea75 and other nations. In response, the UN Security Council passed a resolution in 2022,76 urging China to take action and encouraging its international efforts to prevent money laundering.

Staying Ahead: Unleashing the Power of global monitoring against Money Laundering

Under mounting pressure from the global financial mechanism, Chinese banking system and government are now compelled to meticulously trace the sources of funds and thoroughly investigate the backgrounds of shareholders and management and report it to the involved international law enforcement authorities. Recognizing the urgency and global impact of the sanctions and subsequent effects on the trade, the People's Republic of China (PRC) government is showing to have escalated its efforts to combat money laundering and financial terrorism.77 These rules have been internally reported enforced rigorously, imposing significant fines on those found in violation.

By proactively uncovering connections among individuals, bank accounts, and corporations, this advanced approach helps identify and thwart the use of emerging technologies that facilitate illicit activities. The PRC government reports that it has recognized the urgency and heightened its efforts to combat money laundering and financial terrorism,78 pressuring banks to trace fund sources and thoroughly investigate shareholders and management. However, the underlying possibilities of the government mechanism being involved in these dealings, China remains a significant hub for organized crime-related money laundering, hindered by system opacity, fragmented data access, and persistent underground banking networks, which under the government’s wilful negligence has caught more momentum.

The challenge is immense, and the stakes are higher. By international observation, trade sanctions, imposing fortifying regulations, and reinforcing international cooperation, the world can strive towards a global financial system that is resilient against the scourge of money laundering and financial terrorism in jurisdictions like China. The world needs to come together under a unilateral guideline, to forge a future where integrity and trust reign supreme, protecting the stability and prosperity of nations worldwide against this new warfront.

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