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

A 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.

Sing Tao Daily

Here (and below) is the latest story on the money laundering concerns of Chinese immigrants buying luxurious homes, in Sing Tao Daily.

We are quoted in the story discussing the issue in Canada.

圖文：本報記者孫銘雪

專家指稱 現金交易 當局不知情

潛逃美國的中國貪官喬建軍與前妻趙世蘭，涉嫌在大溫地區購置房產洗黑錢，已遭美方起訴，但喬建軍目前仍在逃。有反洗黑錢專家指出，大溫房市確定成為部分中國黑錢的洗錢天堂，但她認為這些貪官不要心存僥倖，嚴打行動可能讓他們大吃一驚。
防洗黑錢專家、溫市律師杜希米（Christine Duhaime）周二接受《星島日報》訪問時表示：「大溫房市確實成為部分中國貪官或不法所得的洗錢天堂，她經常聽聞地產經紀描述有買家，帶著裝滿現金的行李箱來購買房產。此行為雖不犯法，但構成可疑洗錢行為，必須依法通知加拿大金融交易及報告分析中心(Financial Transactions and Reports Analysis Centre of Canada，簡稱FINTRAC)。

杜希米指出，許多地產經紀處理大筆的現金交易時，沒有向FINTRAC報告，因此，比起其他產業，房市更容易涉及洗黑錢活動。 促嚴格執行反洗黑錢法 她說，加國接納新移民時，應對他們的海外財產來源進行查證，追查是否涉及犯罪所得。加國銀行接受新客戶開戶時，如發現資金來源有問題，必須依法拒絕開戶，但目前並無嚴格執行，她認為《反洗黑錢及恐怖主義融資法》（Proceed of Crime Money Laundering & Terrorist Financing Act）必須更嚴格執行。 警告中國貪官勿心存僥倖
杜希米強調，潛逃在北美的中國貪官不要有心存僥倖心態，因中國政府展現追捕貪官的決心，於G20峰會簽署反腐敗協議。美國政府已積極追緝黑錢下落，加國政府也緊跟在後，涉及洗黑錢的中國通緝犯如在北美被捕，遣送回中國的程序會比其他罪犯更為容易。
根據加拿大商業地產服務公司高力國際（Colliers International）研究報告，估計去年從中國進入世界各國房地產的資金達到183億元。
喬建軍妻大溫購房疑洗黑錢
中國儲備糧管理有限公司周口直屬庫前主任喬建軍，被指在2011年攜3億多元人民幣公款潛逃美國，美國當局指喬建軍及趙世蘭，透過在中國、加拿大和美國開設銀行戶口，然後調動金錢，藉著在美加兩國購買房屋，洗黑錢及隱藏金錢乃貪污和侵吞所得。而趙世蘭更以大溫列市及白石購置的房產，向銀行申請110萬元按揭，疑為洗錢之用。