An enormous financial crime failure & why Chinese media are fascinated with hot money flowing into real estate in Canada, the US and EU by Chinese immigrants

An enormous financial crime failure & why Chinese media are fascinated with hot money flowing into real estate in Canada, the US and EU by Chinese immigrants

By Christine Duhaime | April 9th, 2015

Fascination with hot money leaving China

The Chinese media continue to be fascinated with the story of Chinese immigrants to Vancouver, Toronto, New York, LA and Paris who are buying up luxurious mansions, countless condos, and wineries worth tens of millions of dollars, often with cash, and the greater emerging story – that China is coming after them for a variety of financial crimes.

I get the fascination.

Every non-wealthy person I’ve met in China greatly resents that countries like Canada and the US accept wealthy Chinese immigrants with dirty money. They don’t understand how it is possible that countries that they admire for being corrupt-free, accept their citizens with proceeds of crime, and reward them with permanent residence. Its at odds with what they believe our values are. Imagine the difficulty in being an anti-money laundering lawyer from Canada in China at the receiving end of that conversation.

The story is a fascinating one from a financial crime perspective because it evidences a problem we don’t want to acknowledge –  that anti-money laundering laws that are supposed to prevent the illicit removal of billions of dollars in state assets or proceeds of corruption from China to places like Canada, the US and France, are being ignored.

Ukraine as an example

We saw the same problem with the Ukraine where $70 billion in state assets was removed in 3 years to offshore tax havens and to Switzerland by government officials.

In that case, Ukraine’s former President, Viktor Yanukovych, went from earning $2,000 per month before entering politics in 2009 to amassing a personal fortune of $12 billion by 2013 which he parked overseas. Yanukovych was a politically exposed person (“PEP“). Despite the impossibility of earning that amount legitimately on his President’s salary, not one global financial institution appears to have done what anti-money laundering law requires in that case, which is to de-risk the account, close it, and report his financial transactions to the relevant FIUs. A year after Yanukovych fled from the Ukraine, not one of those financial institutions appears to have been prosecuted or sued for the recovery of state assets. Meanwhile, the Ukraine’s economy is on the brink of disaster and it could use its $70 billion back from the banks that wired it out to tax havens to feed people and rebuilt its infrastructure.

China clearly does not want to follow in the Ukraine’s footsteps and it is going after state assets.

My guess is that China at first will be friendly, to secure the return of its foreign nationals, then I suspect it will be less friendly, by suing financial institutions in conduit countries (Hong Kong and offshore tax havens) and in destination countries (US, Canada, France) to recover state assets that have been spent. The extent to which banks are liable for breaches of anti-money laundering law that causes economic losses to a foreign country will be an interesting legal issue. It would be a tort claim where importantly, the focus will be on the standard of care exercised by senior bank executives.

If China is successful in such a litigation, it may open the floodgates to hundreds of similar lawsuits. Would China win? It’s hard to say but banks systematically do a poor job on PEP legal compliance and, despite the Ukrainian example of a global PEP failure, don’t appear to be improving in this area. Banks have two achilles heels at the moment – PEP legal compliance and counter-terrorist financing legal compliance.

Chinese foreign nationals are PEPs

With respect to wealthy Chinese immigrants, they enter the immigration stream without 3rd party independent verification of the source of their wealth and most, if not all, are politically exposed persons.

PEPs are at a higher risk for financial crimes, such as laundering proceeds of crime, yet few financial institutions treat wealthy Chinese foreign nationals immigrating as PEP clients and verify source of funds.

When wealthy Chinese foreign nationals buy real estate in Canada or France, many real estate agents and developers who sometimes accept cash for the purchase of million dollar homes by foreign nationals from China do not report the transactions to FINTRAC or TracFIN, as required.

Pursuant to the G20 denial of safe haven arrangement, China has put pressure on Canada, the US and the EU to cooperate in tracking down funds moved to Toronto, New York, LA, Toronto, Paris and Dubai by Chinese foreign nationals for repatriation.

Money laundering concerns

There are three money laundering concerns that arise with wealthy Chinese foreign nationals immigrating, as follows:

1. The Chinese PEP usually removes funds from China in violation of the foreign currency export restrictions and to the extent that is a criminal offence in China, the proceeds of that transaction are proceeds of crime, and every bank accepting those funds has accepted proceeds of crime. The key legal issue is whether the circumstances in which the removal of funds is criminal – in China, it depends.  Assuming the criminal offence is triggered with that particular currency export, when such a PEP enters a foreign country with funds or wires it to another country, they have laundered money through the bank.
2. The Chinese PEP often has a high level government job with a salary that does not match their wealth, and their wealth may be derived from bribery payments. PEPs also often have businesses with revenues that do not match sales, indicating that payments in bribery are likely the source of wealth. When such a PEP  wires funds derived from bribery to a foreign country, the PEP has laundered proceeds of crime through the bank.
3. The Chinese PEP often brings large sums of cash into Canada, the US or the EU in suitcases and fails to file a currency report with immigration officials when they enter the foreign country. This is an offence under the proceeds of crime legislation.

I think the days are coming to an end when wealthy immigrants from China can immigrate without:

1. Proving that the source of funds is legitimate and is not proceeds of corruption. I have probably seen most of the schemes many prospective immigrants create to attempt to prove source of funds – they are easy to detect on Chinese banking and corporate records;
2. Immigration agencies demanding that there be independent verification and certification of source of funds by financial crime experts to protect the integrity of the financial system from being used for the importation of proceeds of corruption;
3. Banks and wealth managers proactively undertaking PEP due diligence and treating the accounts of PEPs with heightened scrutiny, as required; and
4. Financial Intelligence Units, such as FINTRAC, cracking down on real estate agents and developers who process large cash transactions and do not file the requisite reports.