25 June 2021
Sharp Growth in Chinese Underground Banking
The National Crime Agency (NCA) has reported an exponential growth of Chinese Underground Banking in the UK and around the world. Chinese Underground Banking is a system where value is transferred between countries, without funds actually being moved. It has become commonplace in the Chinese community and is now being misused by criminals for money laundering. Read our latest article below to find out what has been happening...
Why has this been happening?
The NCA suggests that the most likely reason for the growth is the Chinese government's regulation and policy regarding removing capital from China. It is exceptionally difficult to move money out of China and there are many restrictions imposed on what the money which does leave the country can be spent on.
Citizens are not able to obtain more than $50,000 of foreign currency each year and the maximum amount which can be withdrawn with a Chinese bank card overseas is around $14,000. The Chinese Underground Banking system is attractive to criminals looking to get their criminal proceeds out of the UK. The system is used to launder the money because funds are not transferred between countries.
How does it work?
Collectors receive cash from those who want to move it out of China, for whatever reason and use it in a form of retail commerce. The practice is known as Daigou and involves purchasing goods in the UK which are in demand in China, on behalf of Chinese citizens and then exporting these goods to be sold in China.
In some cases, customs officials are bribed to evade the controls. Typically, this involves the use of mule accounts which are opened by Chinese students in the UK as a way of earning extra cash. Recent cases include accounts with Santander who reported suspicious deposits totalling £57m to authorities and Barclays Bank reporting more than 14,000 accounts which it believed to be compromised.
The seriousness of these crimes and the repercussions are obvious, so accountants providing services to Chinese clients should be aware of the rise of Chinese Underground Banking. There is a risk that accountants with clients who have moved money out of China may be handling or facilitating the handling of criminal proceeds. It is vital that accountants can identify the source of funds as part of due diligence procedures, which is also a requirement of money laundering regulations.
Tell-tale signs of accounts being used for money laundering, according to the NCA, are where the account receives cash deposits only, or where transfers come into the account from multiple other accounts. The latter would be mule accounts feeding a destination account. Also, payments into the account may be broken down into smaller amounts which would be deposited at branches in dispersed locations. In some cases, also, recipients may have opened several accounts with different banks in order to receive deposits.
There has also been a rise in VAT reclaims, which could be a reflection of the growing problem with Daigou. One example was the exploitation of the HMRC VAT 407 retail export scheme, where VAT could be reclaimed on goods purchased in UK retail stores that were intended to be exported.
Additionally, some stores assisted customers in reclaiming VAT under this scheme as well as shipping goods on their customers' behalf. Post-Brexit regulation which was brought in on 1st January 2021 put an end to the scheme, however, claims could continue to be lodged under the scheme until 31st March 2021.
As criminals 'up their game' and find new and different ways to launder criminal monies into the UK and the rest of the world, the accounting sector is working to maintain its awareness of the methods used to extract money from China. Any discoveries or suspicions of money laundering should be immediately reported to the National Crime Agency.
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