US Treasury Under New Mandate to Probe Chinese Money Laundering

WASHINGTON — The U.S. Treasury Department will inves­ti­gate the risks posed by China’s mon­ey laun­der­ing and devel­op a strat­e­gy to defend against them, accord­ing to lan­guage in the National Defense Authorization Act of 2021 requir­ing spe­cif­ic inquiry into what experts have long called a seri­ous threat.

Targeting China under­scores U.S. con­gres­sion­al law­mak­ers’ con­cerns over the lack of trans­paren­cy in China’s finan­cial reg­u­la­to­ry sys­tem and “who real­ly con­trols shell com­pa­nies being used to move bil­lions of dol­lars through and with­in its bor­ders,” wrote Nate Sibley, a research fel­low at the Hudson Institute,in an arti­cle on the think tank’s website.

A ded­i­cat­ed study and a ded­i­cat­ed strat­e­gy for [com­bat­ing] Chinese mon­ey laun­der­ing is a major devel­op­ment and indi­cates that the U.S. gov­ern­ment is final­ly tak­ing this threat seri­ous­ly,” Sibley told VOA Mandarin. “To date, we have relied on inves­tiga­tive report­ing and occa­sion­al details in indict­ments to under­stand this prob­lem. The con­trast with, for exam­ple, Russian mon­ey laun­der­ing, which gets a lot more atten­tion, is remark­able giv­en that [China] rep­re­sents the fore­most illic­it finance risk juris­dic­tion worldwide.” 

According to the U.N. Office on Drugs and Crime, mon­ey laun­der­ing accounts for $2 tril­lion a year, or about 5% of the world’s GDP.

The ille­gal activ­i­ty is designed to make large amounts of mon­ey gen­er­at­ed by a crim­i­nal activ­i­ty, such as drug traf­fick­ing, appear to have come from a legit­i­mate source, accord­ing to Investopedia. The mon­ey from the crim­i­nal activ­i­ty is con­sid­ered “dirty.” The process to “clean” it can be as time-test­ed as using cash to pur­chase assets such as real estate or as cur­rent as manip­u­lat­ing cryptocurrencies.

Money laun­der­ing encour­ages crim­i­nal behav­ior because it allows crim­i­nal mon­ey to be used in dai­ly life,” said a report from the Anti-Money Laundering Center of the Netherlands. “The invest­ments made by crim­i­nals may even give them a degree of influ­ence over peo­ple, busi­ness­es and legal sec­tors. This is why mon­ey laun­der­ing is such a seri­ous threat to the econ­o­my and why it also affects the integri­ty of the finan­cial sector.”

FILE — A man is sil­hou­et­ted in front of a Bank of China’s logo at its branch office in Beijing July 14, 2014.

Graham Barrow, a bank­ing expert in London, told VOA Mandarin that, in the past, inter­na­tion­al anti-mon­ey-laun­der­ing efforts focused on Central and Eastern Europe as well as the for­mer Soviet republics.

Barrow said, “I think what we’re see­ing is a very sig­nif­i­cant under­ground bank­ing sys­tem and oth­er process­es that are designed to move” some of the prof­its gen­er­at­ed by “what has become quite a cap­i­tal­ist soci­ety still oper­at­ing with­in the com­mu­nist regime. And they are shel­ter­ing their funds out­side of China, and I think that’s become a big issue.”

According to the U.S. State Department’s 2020 International Narcotics Control Strategy Report, “Chinese author­i­ties con­tin­ue to iden­ti­fy new mon­ey-laun­der­ing meth­ods, includ­ing ille­gal fundrais­ing activ­i­ty; cross-bor­der telecom­mu­ni­ca­tions fraud; weapons of mass destruc­tion, pro­lif­er­a­tion and oth­er illic­it finan­cial activ­i­ty linked to North Korea; and cor­rup­tion in the bank­ing, secu­ri­ties and trans­porta­tion sectors.”

The report con­tin­ues, “Criminal pro­ceeds are gen­er­al­ly laun­dered via bulk cash smug­gling, TBML, shell com­pa­nies, invoice manip­u­la­tion, high-val­ue asset pur­chas­es, invest­ing illic­it funds in law­ful sec­tors, gam­ing, and exploit­ing for­mal and under­ground finan­cial sys­tems and third-par­ty pay­ment sys­tems.” TBML refers to trade-based mon­ey laun­der­ing, which includes mis­rep­re­sent­ing the price, quan­ti­ty or type of goods in trade transactions.

Gao Guangjun, a New York lawyer famil­iar with the oper­a­tion of China’s Ministry of Public Security, told VOA that mon­ey laun­der­ing in China some­times involves brib­ing Chinese gov­ern­ment officials.

These peo­ple move funds in the name of nation­al secu­ri­ty, which can’t be detect­ed by the bank­ing sys­tem,” he said. “In China, peo­ple who run under­ground banks could be gang­sters or gov­ern­ment offi­cials. If you give them Chinese cur­ren­cy in China, you can receive your cash imme­di­ate­ly in the United States, or elsewhere.”

Businessman Cheung Chi-tai, cen­ter, accom­pa­nied by his body guard, leaves Wanchai District Court after a hear­ing for his upcom­ing mon­ey laun­der­ing tri­al, in Hong Kong, Oct. 14, 2016.

Another way to laun­der mon­ey is using expen­sive lux­u­ry goods. In coun­tries such as China, where brib­ing gov­ern­ment offi­cials to secure gov­ern­ment con­tracts or licens­es is not uncom­mon, lux­u­ry goods are often used instead of direct mon­e­tary pay­ments. It is more dif­fi­cult to trace the gift­ing of a hand­bag or watch than it is to track a finan­cial transaction. 

Illegal funds are shipped over­seas from China in the form of lux­u­ry goods, which are then sold for cash that flows into the legit­i­mate econ­o­my. Underground banks in China are often involved in this kind of washing. 

Another method favored by some Chinese indi­vid­u­als is to cre­ate com­pa­nies in the United Kingdom and in America that are effec­tive­ly dop­pel­gangers, accord­ing to Barrow. He said about 30,000 com­pa­nies in the U.K. have been iden­ti­fied as incor­po­rat­ed on behalf of Chinese indi­vid­u­als. These dor­mant com­pa­nies each have the same name as Chinese com­pa­nies, which can con­fuse finan­cial institutions. 

If I open a com­pa­ny in the U.K., the com­pa­ny has exact­ly the same name as my Chinese com­pa­ny. When I open an account in Hong Kong, I use the name of the British com­pa­ny. But for banks, it is dif­fi­cult for them to dis­tin­guish the funds they have entered. Is it from my Chinese com­pa­ny or a British com­pa­ny?” he said. “And once the funds arrive in Hong Kong, it is eas­i­er to trans­fer funds, because this is an impor­tant finan­cial center.”

The laun­der­ing occurs when one of these shell com­pa­nies appears to make a prof­it, which is the dirty mon­ey, and those funds are paid out as salary, busi­ness expens­es or invest­ment in a legit­i­mate endeavor.

Openly hiding

The Chinese Communist Party (CCP), which pre­sides over the world’s sec­ond-largest econ­o­my, “rou­tine­ly hides behind shell com­pa­nies to exploit the glob­al finan­cial sys­tem in pur­suit of geopo­lit­i­cal objec­tives,” accord­ing to Sibley’s arti­cle. These shell com­pa­nies fuel the CCP’s “mis­rule and facil­i­tate a broad range of threats to U.S. secu­ri­ty, pros­per­i­ty and values.”

All 50 U.S. states require more per­son­al infor­ma­tion from some­one try­ing to obtain a library card than they do from any­one set­ting up a com­pa­ny, accord­ing to a recent study by Global Financial Integrity, which tracks ille­gal finan­cial flows. 

The Defense Authorization Act’s required inves­ti­ga­tion and report would look into the extent and effect of illic­it finance risk relat­ed to the Chinese gov­ern­ment and Chinese com­pa­nies, includ­ing finan­cial insti­tu­tions; illic­it finance risks ema­nat­ing from China; and whether such risks have been enabled direct­ly or indi­rect­ly by the Chinese gov­ern­ment through weak reg­u­la­to­ry oversight.

A pro-democ­ra­cy pro­test­er takes part in a ral­ly to sup­port Spark Alliance, a fundrais­ing plat­form that has been accused of mon­ey laun­der­ing and had its funds frozen by author­i­ties, in Hong Kong on Dec. 23, 2019.
Stricter oversight

China itself is crack­ing down on mon­ey laun­der­ing with­in its bor­ders. In the first six months of 2020, the People’s Bank of China issued fines of more than $53.9 mil­lion to Chinese finan­cial insti­tu­tions that vio­lat­ed mon­ey-laun­der­ing laws, more than the total issued in 2019.

The sharp increase in pun­ish­ment reflects the Chinese gov­ern­men­t’s get-tough atti­tude. Previously, finan­cial insti­tu­tions would be pun­ished only once, no mat­ter how many rules they violated. 

For exam­ple, in 2018, there were only 47 mon­ey-laun­der­ing cas­es in China, involv­ing 52 peo­ple. Barrow said that num­ber failed to reflect the scope of the problem.

A year lat­er, a report by the Financial Action Task Force, the world’s lead­ing inter­gov­ern­men­tal orga­ni­za­tion to bat­tle mon­ey laun­der­ing, said China imposed too few penal­ties on mon­ey laundering.

There’s prob­a­bly a recog­ni­tion if China wants to take a place with­in the glob­al finan­cial com­mu­ni­ty, it absolute­ly has to do some­thing like that,” Barrow said, “because those FATF reviews affect lots of its abil­i­ty to walk the cor­ri­dors of pow­er effectively.”

Gao said the cur­rent tough reg­u­la­tions focus on ordi­nary peo­ple rather than senior gov­ern­ment offi­cials who con­tin­ue to get away with mon­ey laundering.

Adrianna Zhang con­tributed to this report from the VOA Mandarin Service.

Lin Yang, VOANews.Com