Business Insider has an interesting story here on “Operation Skynet”, the operation by the Chinese government to track down money laundering foreign nationals from China who exported funds and other assets illegally from China as part of the immigration process. Most of those people moved assets and money to Vancouver and New York and parked the funds in real estate.
Denial of Safe Haven
Operation Skynet is part of the larger global initiative of “denial of safe haven” in which the G20 countries agreed in 2013, not to allow the immigration system to be used to provide a safe haven for people who remove assets illegally from a country. The denial of safe haven permits the easier removal of a person to their home country to face money laundering charges in cases where there is evidence of such activities.
Tax Havens & Financial Firms Targeted
The Government of China said they are going after people who have facilitated or assisted Chinese foreign nationals to remove funds from the country illegally, such as immigration consultants and financial firms. Operation Skynet is also going to target tax havens.
In China, a person or company can only export $50,000 per year from China unless they obtain permission in advance to remove more than that amount. Often Chinese foreign nationals immigrating to places like Canada or the US do not want to seek permission in advance to remove more than $50,000 because they do not want to alert the Chinese government with respect to the amount of funds they have accumulated; and (b) how those funds were obtained. With respect to the latter, that is because often the funds were obtained from bribery or other forms of corruption and are proceeds of crime. If a person uses proceeds of crime, they are a money launderer. Every tax evader from China is, by definition, a money launderer. If a person from China removed funds illegally to Canada and China determines that the removal of funds is criminal, that person is likewise a money launderer.
Ways Chinese Nationals Illegally Move Funds
Foreign nationals from China remove money illegally in several ways when they immigrate to places like Canada and the US, as follows:
- They have several friends and family, or they force employees, to wire funds for them each at the maximum $50,000 amount to circumvent currency export restriction rules in China. I have seen files with up to 200 different employees of a Chinese company who were forced to wire $50,000 each so that the business owner could buy a $7 million mansion in Vancouver and have some spending money left over.
- They use junket operators who are sometimes connected to the Triads to move money for them to Macau where they gamble for relative minimal play and then have the funds wired from Macau to Canada or the US, sometimes using passé tax havens such as the BVI, Cayman Islands, Cook Islands or the like, or back through Hong Kong.
- They engage in trade-based money laundering where they create false invoicing to justify the wiring of vast sums of money on the basis of fictional trades to companies in places like Canada or the US.
- They pay money mules a 20% commission to physically transport funds from China to Canada or the US, who fail to report the importation of funds when they enter the country.
- Anecdotally, they buy Bitcoin in the amount they want removed, and cash it out in Canada or the US. If the price fluctuates in the interim period, it still cost them less than using a money mule and is more secure (and just as anonymous).
Last year, China apparently seized over 500 former foreign nationals who they allege illegally removed assets from China for prosecution. The adoption of FATCA by China and Canada signalled the death knell for funds removed from China illegally that were not declared.
Will China Seek to Recover from Banks for PEP Failures?
Private banks and asset managers who facilitated, or turned a blind eye to the removal of assets and funds from clients in China may have compliance issues of their own on this issue. That’s because most of the Chinese foreign nationals who removed, and continue to remove, funds from China are politically exposed persons in the US and Canada under anti-money laundering and counter-terrorist financing laws and very few bankers comply with politically exposed persons (“PEP“) laws in the way they were meant to be complied with. Often, banks provide a questionnaire to the client from China and ask the client to self-declare whether they are a PEP. It is not incumbent upon a person to self-declare whether they are a PEP or not and moreover, that determination is a legal one that most PEP are unqualified to determine. Asking a PEP to self-declare and purporting to rely on that self-disclosure does not constitute compliance with anti-money laundering law. The Government of China may be tempted, as a next step in Operation Skynet, to seek recovery from financial institutions who failed to meet the standard of care pursuant to PEP laws if that failure caused losses to the Government of China by allowing state assets to be moved from China.
Typologies of Money Laundering from China
Money launderers from all countries follow identical typologies (spending patters) the world over that help to identify them. The typologies below do not mean that anyone who displays these behavior patterns is a money launderer. Those typologies are:
1. They buy luxury homes.
2. They buy high end racing cars.
3. They buy high end jewellery (mostly watches).
4. They immediately register children in the most expensive private schools or most elite universities in Canada or the US.
5. They carry large amounts of cash.
6. They like to flaunt wealth in public.
7. They use private banking where the anti-money laundering and counter-terrorist financing practices are the most lax.
8. They use certain tax havens such as BVI or the Cayman Islands, that are no longer used by the financial elite who have moved on to other havens that are less obvious.
9. Their bank accounts are funded with hundreds of wire transfers from different sources.