Study in China identifies areas in China where most money launderers originate and finds that the number of suspicious activity reports filed does not improve regulatory effectiveness

By Christine Duhaime | May 31st, 2019

According to money laundering law empirical research from China, a person from Fujian (Triad land) is most likely to be a money launderer, and the study also found that the filing of voluminous numbers of suspicious activity reports (“SAR”), does not lead to improved anti-money laundering results across any sector or in the economy.

Filing SARs

Researchers looked at millions of reports and found, after comparing six years’ worth of data, that China submits 187 times more SARs than the UK and 32 times more than the US, but that when it came to money laundering prosecutions, the UK had 5 times more prosecutions from SARs than China, and ten times that of the US.  The reason for the lack of a correlation to the filing of SARs and prosecutorial results in China, as compared to the UK or the US, was based on the fact that China, unlike the US and UK, has a prescriptive or rules-based reporting regime.

A rules-based reporting regime requires reporting irrespective of identified risks. In contrast, risk-based reporting regimes require reporting based on a risk assessment. Canada has a semi-hybrid model where a risk assessment is required to assess risks of the incidents of the occurrence of a money laundering or terrorist financing risk occurring and steps to mitigate such risks, but a reporting regime unconnected to a risk assessment that like China, is 100% rules based.

An example of an AML law regime that is risk based would be, for example, laws that accommodate financial inclusion and require obtaining and verifying the identity of an account holder on the basis of the risk they pose consistent with the FATF Recommendations. In contrast, a rules based  regime in AML law requires treating every account holder exactly the same, irrespective of the risks they pose to the financial system.

Predicate offences most often committed in China 

The researchers then looked at 221 money laundering cases in China and made some conclusions about risks of financial transactions in China based on geography, and that exit out to other countries, including Canada. China has far fewer predicate offences under the federal Criminal Law of China, than Canada or the US, and thus with respect to underlying predicate offences to a money laundering offence, no comparisons could be determined.

The predicate offences most likely to occur in China were corruption involving government officials (42%), drugs (8%), smuggling (8%) and tax evasion (5.8%).

Geographical areas most high risk for money launderers in China

The researcher’s geographical risk assessment of China concluded that the risks for money laundering were higher in coastal provinces and were correlated to higher levels of economic development and foreign trade. In terms of pure domestic high risk areas, researchers found that the areas most at high risk for money laundering were Fujian, Zhejiang, Guangdong, Jiangsu, Shandong and Chongqing.

When it comes to provinces with international exposure in China, the high risk areas for money laundering activities were:

  • Guizhou
  • Gansu
  • Hainan
  • Tibet
  • Yunnan
  • Sichuan
  • Guangxi

The provinces with the lowest propensity for money laundering activities were:

  • Tianjin
  • Liaoning
  • Shanghai
  • Jiangsu
  • Guangdong

Fuzhou, home of the Triads and most money launderers

Fujian scored high as an area for money laundering likely because Fuzhou, its main city, is the birthplace and epi-centre of the Triads, one of the world’s oldest and most dangerous organized crime gangs. The Triads date back to the first of the seven dynasties. In China, the Triads are considered to be a black society, or a black group – in Mandarin, hei shehui. Black societies have a small group of administrative leaders insulated from political and police pressures by a large number of soldiers who have an extensive infiltration into all levels of police and political organs, which allows them to operate without risk of arrest and/or investigation. Immigrants to Canada that are accepted through the Quebec investor immigration program have been known to be from Fuzhou and Xiamen – two Triad cities in Fujian with high rankings for financial crime. Triads grew and grow their organizational power no matter where they are – Fujian, Hong Kong or Canada – from gambling, forced sexual trafficking of women, and extortion. Pictures of Triads here.

PEPs most at risk for being money launderers in China

With respect to risks arising from type of customer, the researchers found that politically exposed persons pose the greatest statistical risk of being money launderers in China. Second was persons in financial services (banks or securities brokers) because they have access and ability to defraud banks and crucially, to exit proceeds of corruption out of China. Researchers noted the fact that the Bank of China was defrauded by many of its politically exposed executives who exited RMB 3 billion and “escaped to Vancouver” with the proceeds of crime. The third most high risk occupation to be a money launderer in China was owners of private companies who transfer, using companies that are often fake, vast fortunes out of China to foreign countries.

Researchers looked at the use of underground banks to exit money illegally from China to other countries and found that more than 50% of those cases involved government officials who had proceeds of corruption they exited out without detection.

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