How is Some Money Moved from China? Often with Smurfs and Structuring.
I am often asked how Chinese foreign nationals who have immigrated to the US, China, or EU, or are attempting to, move millions of dollars in funds to other countries unimpeded when there are Chinese banking regulations (commonly called currency controls) that prohibit the removal of funds from China above a certain threshold.
The answer is that many of them use a scheme called “structuring”.
Structuring is a well-known technique in money laundering law used by persons to launder proceeds of crime. It involves breaking down large sums of money to get funds “placed” in the legitimate financial system to avoid anti-money laundering reporting requirements (usually in amounts just below $10,000). It is also called smurfing because often many people, that in the trade we call “smurfs”, work together to complete the placement stage, namely, they make small deposits to avoid detection that fall under the bank reporting threshold. Not all structuring involves proceeds of crime, but all structuring involves manipulating the movement of money through many different people to avoid detection and hide the true transactor behind the transaction. And all structuring triggers the requirement in the US, Canada and the EU to file a suspicious activity report.
Structuring is a Well-Known Money Laundering Method
Structuring by smurfs is such a well known method that all national laws in respect of money laundering take that into account by requiring that banks look at placements over a rolling 24-hour period specifically to capture smurfs smurfing the system with proceeds of crime. Other anti-money laundering legal provisions, including those dealing with third parties conducting transactions for others and the requirement to report suspicious activities such as structuring and use of third parties, are designed to identify and eliminate smurfing.
Criminals with proceeds of crime usually desire to move funds from one country to another, thus there is routinely an international wire transfer involved after placement (when all the smurfs have made their deposits) to quickly get the money exported and into the bank account the criminal has in another country. In China, politically exposed persons sometimes have proceeds of corruption that they want to remove quickly to a known safe haven. Vancouver is a well-known safe haven for Chinese foreign nationals, partly because it’s a city where many private and public sector entities chase wealthy immigrants and apply relaxed financial crime scrutiny to them. In anti-money laundering practice, politically exposed persons (“PEP“) and private banking clients are both supposed to be given greater, not lesser, scrutiny. If you have a PEP who is a private banking client, it’s a double-whammy for every bank in terms of scrutiny, and of course, the expense of such scrutiny goes through the roof, hence PEPs are usually de-risked out of the bank.
How Columbian Drug Lords use Structuring to Move Money
Let me give you a real example from a FBI case in the US that involved “microstructuring”. Microstructuring is structuring only with micro payments.
On March 15, 2006, in New York, Columbia drug lords ordered the microstructuring by smurfs of 112 deposits into several bank accounts. The drug traffickers in New York had to find a way to get the proceeds of drug trafficking to Columbia, so they decided to structure to avoid bank reporting requirements. The way it worked was that between 8:50am and 2:52pm, the drug trafficking smurfs in New York City made numerous cash deposits of US dollars in the range of $500 to $1,500 from drug trafficking revenues into banks all over Queens and Manhattan. In the space of a few hours, they deposited $110,000 in drug proceeds in various banks.
The Columbian drug cartel then used ATMs in Columbia to withdraw the funds in Pesos and the laundering cycle was complete. At the height of its activities, the cartel moved close to $2 million from New York to Columbia by microstructuring.
Structuring is Criminal
In 1986, structuring was criminalized in the US and in the year of this case, one office in New York alone indicted or convicted 25 people for the offence of microstructuring. The IMF estimates that between 2% and 5% of the world’s GDP — between $962 billion and $2.4 trillion is laundered worldwide every year. Authorities rely heavily on banks, which are required to report all cash transactions of $10,000 or more and to institute “know your customer” procedures to ferret out money laundering. Money laundering schemes are complex, employing layers of transactions, like structuring, to move money through multiple countries to obscure the trail of funds.
In China, structuring and the use of smurfs is as commonplace as in other jurisdictions only its most prevalent variety involves the evasion of Chinese banking laws that control the removal from China of more than $50,000 annually by Chinese citizens.
Chinese Structuring Scheme
Under this “Chinese Structuring Scheme”, a Chinese foreign national (who I’ll call the “Evader”) pays multiple smurfs (third parties) to use their bank accounts in China temporarily and file false bank remittance application forms.
The Evader transfers $50,000 into each smurf’s bank account in China. The smurf in China then completes a bank remittance application form to wire the $50,000 from China to Vancouver ostensibly for themselves as the declared “remitter” and “owner” of the funds, when it fact the funds are being remitted secretly for the Evader who is deliberately structuring multiple financial transactions using the global financial system to avoid detection and not only evade, but violate, Chinese banking laws.
The Evader locates and pays as many smurfs as are needed to each falsely act as the remitter of $50,000 to equal the amount she or he wants to export from China. Often at least 100 smurfs must be located with bank accounts in China for each Evader, who is willing to participate in the Chinese Structuring Scheme. The Evader has to pay each smurf a hefty fee for agreeing to participate in the scheme.
Chinese Structuring Scheme can be a Money Laundering Conspiracy
The Chinese Structuring Scheme is usually a well-planned and organized money laundering conspiracy (where it involves proceeds of crime), and is a form of banking and government fraud in China. The conspiracy is to break the law and to abuse the international financial system to effect the removal from China of funds that are prohibited from removal by the person as a matter of Chinese policy. Those policy are in place to, inter alia, protect the Chinese economy and stop the enormous outflows of proceeds of corruption from China.
There is nothing different with the Chinese Structuring Scheme using smurfs as a money laundering technique as compared to any other structuring technique that occurs elsewhere in the world. If it sounds like the same structuring method used by the Columbian drug lords in the example above, its because it is. It may be self-evident but structuring is structuring, no matter where it is occurring.
Structuring Hides Real Person Behind Financial Transactions
All structuring is designed to avoid detection of the real financial transaction that is occurring (the movement of a larger sum of money by one remitter, the Evader) by anti-money laundering compliance personnel and computer systems and to circumvent banking laws that protect our global financial system from financial crimes.
There is a litigation in Canada involving an employment matter which describes how a wealthy Chinese foreign national who immigrated to Vancouver structured many transactions through a Canadian bank. The judge in that case made a finding of fact that a Vancouver bank employee was aware of structuring from China by the client to avoid Chinese federal law, and facilitated the structuring activity. The employee was terminated, rightly in my view. There is no evidence that the funds transferred in this case was proceeds of crime.
The case is illustrative because it provides an example of a real case of structuring from China to Vancouver. In the case in question, the bank had a rich client who wanted to buy a luxury mansion in Vancouver for $5.7 million. In order to pay the deposit, the client needed to bring into Vancouver $500,000 from China.
Chinese Banking Regulations Control Remittances
As noted above, banking regulations in China prohibit the removal of more than $50,000 annually by a person to any country, subject to some exceptions that require approval of the government. Chinese foreign nationals in China do not exercise the exceptions because they do not want the Government of China to be aware that they have wealth and that they intend to remove it from China to Canada. The exceptions are, however, quite accommodating and they allow Chinese foreign nationals to export unlimited sums for things like payment of foreign legal bills, alimony payments, payments pursuant to a Court order and for commercial purposes, such as an investment.
In case you’re wondering why it is that Chinese foreign nationals simply do not seek permission to export more than $50,000 from China honestly with full disclosure pursuant to one of the permitted exceptions, anecdotally they have said it is because the money is suspect either because it is legitimately earned but not reported to avoid the payment of taxes (e.g., tax evasion) or because it is corruption payments. If the anecdotal evidence is true, in both cases it’s proceeds of crime. As a result, some Chinese foreign nationals go through the time-consuming and expensive process of finding and paying smurfs to help them lie to banks in China.
In the litigation case in question, the wealthy bank client did not want to obtain government approval to remove $500,000 so she left Vancouver and went to China and chased down smurfs to help her evade the law pursuant to the Chinese Structuring Scheme.
The bank employee, it appears, also required that she locate smurfs in Vancouver to receive each wire sent by each smurf – so she needed double the smurfs.
I have seen paperwork where Chinese foreign nationals use multiple smurfs in China to wire money into one bank account in Canada opened in the name of the Evader but I have never heard of cases where there are double smurfs, meaning a set in China who sends the funds and a corresponding different set of smurfs in Vancouver receiving the funds.
Pursuant to this type of structuring, the funds from each Vancouver smurf’s accounts are then all wired, as an internal transaction within the Canadian bank, into the Evader’s Vancouver account.
Abusing Law Firm Trust Accounts?
According to the litigation case in question, the bank employee who was terminated, merged the wires into the Evader’s account so that the funds could be sent to a law firm as one transaction so that the wealthy Chinese foreign national who immigrated to Vancouver could pay the deposit for her mansion through her law firm. No one informed the law firm that its trust account was being used to receive structured funds, or that Chinese banking laws had been violated as part of the structuring scheme.
Canadian law firms and lawyers generally know little about money laundering or the flow of funds from China. They know less about what constitutes a structured transaction.
In case you did not know, the Evader cannot send the funds to the law firm directly from smurfs in China because no law firm could accept wires from unknown multiple third party smurfs in China into their trust accounts that were sent in violation of Chinese banking laws, or that may be proceeds of crime. Pursuant to professional rules of conduct, lawyers and law firms are prohibited from assisting clients break the law. If they know a client is breaking the law, they are required to terminate the relationship. That’s because all lawyers are, first and foremost, officers of the Court and administrators of justice and have a higher duty, collectively, to uphold the rule of law. And so the Evader goes through a bank for the international money movement and the law firm accepts the funds because they are unaware of its dubious origin. All banks must report to FINTRAC, the structuring, smurfing and use of third parties that are not the true persons behind financial transactions but lawyers do not have reporting obligations to FINTRAC.
Bank Employee who Apparently Ignored AML Law
In the litigation case in question, the judge explained that the wealthy foreign national from China needed ten different smurfs in China to send $50,000 each to ten other smurfs in Canada but could only find eight smurfs in Canada willing to accept $50,000 for her. In the middle of the night, hours before the deposit was due for her luxury Vancouver mansion, she called a bank employee and asked the bank employee to act as a Vancouver smurf to receive the funds. The employee thought there was nothing wrong with participating in a structuring scheme or allowing the bank to be used for that purpose, so she agreed.
I’m also not suggesting the bank did anything wrong and there appears not to have been any reliable evidence on their role from the case. The employee’s role, however, was disturbing from an AML compliance standard. The employee in question was well-versed in AML requirements because she was a licensed investment advisor and accountant, in addition to being a bank employee and had, in that sense, triple the AML reporting obligations. Despite that, she did not tell the bank about the incident and it is probably safe to assume that the employee likely did not file a suspicious transaction report for the structuring activity (part of which involved her bank account when she acted as a Vancouver receiving smurf), the use of third parties, and the activity to evade Chinese banking laws. The bank employee likely also failed to report the 10 wires as one transaction of $500,000 by one client.
Imagine for a moment, how many smurfs would be required to subsequently buy the $5.7 million luxury mansion in Vancouver a month later. You can quit imagining – it’s 228 smurfs. In other words, 114 strangers in China and 114 strangers in Vancouver that are being paid to act as remitters for the Evader to obfuscate the real transactor behind the financial transaction. For all of the money moved to Vancouver annually from China, imagine the thousands and thousands of smurfs required. Make no mistake about it – smurfing and structuring funds from China is a lucrative business in China all on its own.
Most of the international banking community acknowledges that problems of money laundering require a coordinated approach to deny access to funds and financial services for nefarious activities.
In anti-money laundering law, a suspicious transaction that requires reporting includes a transaction conducted to conceal funds, inter alia, to evade any law or regulation, including a foreign one, or one that has no apparent lawful purpose.
No Lawful Purpose with Chinese Structuring Schemes
Chinese Structuring Schemes like the one in this case, are suspicious in the classic money laundering sense because they are designed for the sole purpose of evading banking laws and clearly have no lawful purpose – in fact everyone knows its purpose is unlawful because that is the whole point, namely to unlawfully remove more than $50,000 from China by structuring to hide the fact that it is one person remitting the funds to Vancouver.
So now you know the way some Chinese foreign nationals in China move money or proceeds of crime to Vancouver, New York, London and many other places — they employ good old-fashioned money laundering structuring methods that our anti-money laundering laws are expressly designed to detect but mysteriously don’t ever seem to. I don’t mean to suggest that all money flowing from China to Vancouver is proceeds of crime but with respect to personal transfers, a large volume of it is and when it is proceeds of crime, structuring is the preferred method for its removal to avoid detection.
Call me Un-Canadian but $1.00 Honestly Earned is Better than $1 Million in Proceeds of Crime
Call me un-Canadian but I’d rather Canada chase immigrants who want to immigrate to Vancouver who have earned their money honestly and have nothing to hide with the use of structuring schemes and smurfs who falsify government remittance forms, even if all they can bring to Canada is $1.00.
The fabric of the country and indeed, our banking system is stronger for that $1.00 honestly earned than all the millions of dollars we allow into this country as proceeds of crime, year after year.
Call me un-Canadian too for this but I’d love to see leadership when it comes to financial crime at a global bank. How nice would it be for one bank CEO, just one, to stand up and say: “No, our bank is not going to be used for financial crime.” And to mean it.
And how nice would it be for Canada to join in and say: “No, Canada is not going to be used for financial crime.” And to mean it.
The Association of Certified Anti-Money Laundering Specialists is hosting a free Town Hall to explore the issues of Vancouver’s Real Estate Market and the Flow of Funds From China from 7:30am – 9:30am on October 5, 2015, at the Vancouver Club. Details will be posted here soon.