Canadian banks help Chinese flout their laws to get piece of ‘smurfing’ billions

Paul Panckhurst, Bloomberg News | November 6, 2015 

Getty ImagesA Chinese man counts his money in Beijing. In China, moving money in small increments out of the country to avoid reporting requirements is called 'smurfing,' a growing practice that raises ethical questions for the banks around the world who help them.

When Chinese nationals move money overseas, they often do it the way drug traffickers or terrorists do: They break down cash into small amounts below what would trigger official scrutiny.

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Moving money in small increments to avoid reporting requirements is called “smurfing,” after the little blue cartoon characters who as small individuals constitute a larger whole. A record US$194 billion exited China in September, according to a Bloomberg gauge estimating capital flows. The Chinese use numerous tactics to transfer money abroad, and smurfing is routine, with some of the cash flowing into overheated property markets in Vancouver, Hong Kong, New York and Sydney.

Now, as Chinese citizens bypass the country’s limit of converting US$50,000 a person per year by enlisting friends, relatives and even employees to send out cash on their behalf, banks and regulators around the world are being forced to decide: Is it okay to knowingly allow Chinese citizens to evade their government’s controls if it doesn’t break your own country’s laws?

In Vancouver, a Supreme Court case showed that one lender, Canadian Imperial Bank of Commerce, had assisted such transactions. The case arose when a CIBC financial adviser allowed a wealthy Chinese client to route two deposits of US$50,000 through her private accounts to buy a home, leading to the dismissal of the banker for “commingling” her own funds with her client’s.

Risks, Rewards

“With the corruption crackdown and the recent financial markets meltdown, more Chinese than ever are looking to move their wealth — some legitimately earned and some not — to safe havens outside of China,” said Bill Majcher, a Hong Kong-based former financial crimes investigator for the Royal Canadian Mounted Police. “Chinese capital is simply too large to ignore, so the banks will do all they can to capture this growing business, regardless of the risk it brings.”

China’s rules are being ‘made a mockery’ of. I wouldn’t do it if I ran the banks

Chinese buyers for the first time ranked as the biggest foreign purchasers of U.S. homes in the year through March, laying out US$28.6 billion. In Sydney, Chinese buy almost a quarter of the supply of new homes, and are forecast to double their purchases to A$60 billion (US$43 billion) by 2020. In Vancouver, home prices have doubled since 2005, and owning a home can cost as much as 91 per cent of household income.

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The Canadian court judgment last year in the fired banker’s wrongful dismissal case described the practice of bypassing China’s controls as challenging, complicated — and something that CIBC “supported.”

Separate Accounts

“If, for example, a CIBC client wanted to send US$150,000 from China to Canada, the money had to come from three accounts belonging to three different account holders in China and be transferred to three separate accounts belonging to three separate account holders in Canada,” the ruling said. “As long as all the appropriate accounts were set up, the money could be moved.”

In April this year, British Columbia’s Court of Appeal overturned the lower court’s ruling in the banker’s favor and ordered a new trial.

Asked about such transfers, CIBC said that it makes money-laundering checks, flags suspicious dealings to regulators and ensures that these “very infrequent” transactions comply with Canadian law. CIBC isn’t legally responsible for ensuring that money transfers comply with Chinese law, a duty that falls on institutions in China, spokesman Kevin Dove said by e-mail.

Money Laundering

Global banks have run afoul of regulators in recent years for failing to do enough to counter money laundering, one of the risks that arises from smurfing. As part of a US$1.9 billion settlement in 2012, HSBC admitted to failing to maintain effective anti-money-laundering programs in both the U.S. and Mexico, and in June of this year the bank said it had agreed to a fine to close an investigation into allegations of money laundering at its Swiss private-banking unit.
“We expect our customers to be in full compliance with all relevant laws and regulations including those related to Chinese currency controls,” Sharon Wilks, a spokeswoman for HSBC’s Canada business, said by e-mail.

Capping Withdrawals

China has been tightening up on channels for outflows, capping withdrawals at overseas automated teller machines and telling banks to watch out for “ants moving their house,” the term used in Chinese. In September, the State Administration of Foreign Exchange said lenders can refuse to process frequent withdrawals or transfers in which five or more people send money to the same overseas account.

In Hong Kong, banks have stepped up efforts to report suspicious transactions and cut the risk of financial crime, the Hong Kong Monetary Authority said in response to questions. Banks accounted for 83 per cent of such reports to the Joint Financial Intelligence Unit last year, the police-customs agency that helps investigate money laundering, the HKMA said.

Asked whether financial institutions are allowed to knowingly help Chinese citizens evade their home country’s capital controls, government agencies in Canada and Australia cited requirements including verifying customers’ identities and reporting suspicious transactions. A spokesman for the Financial Crimes Enforcement Network, an agency of the U.S. Treasury Department, said that banks are required to “conduct enhanced due diligence on foreign correspondent accounts.”

Beijing Investigation

Last year, smurfing surfaced again when Beijing police busted underground banks for US$23 billion of alleged transactions, including illegal transfers of money abroad. In one case, a man had moved more than US$5 million overseas in a year by breaking up the amount and using different bank accounts that had been borrowed, rented or purchased, according to the police statement.

Penalties for violating the US$50,000 annual cap are tiny: 30,000 yuan (US$4,700) for banks and 1,000 yuan for individuals, according to a SAFE rule issued in 2007. SAFE didn’t respond to a faxed request for comment on the rules and their enforcement.

The pooling of US$50,000 quotas is routine. Jenny Cai, a Shanghai resident, said she used her family members to help her buy a A$1.2 million apartment in downtown Sydney by grouping her own allocation along with those of her husband and daughter. Her property agent told her the arrangement is commonly used, she said, although her family members needed to falsely state that the cash was to be used for tuition fees.

Elsewhere in China, examples include a company that ordered employees to use their accounts to wire money to Canada for private property purchases, according to Christine Duhaime, a Canadian lawyer specializing in financial crime.

China’s rules are being “made a mockery of,” she said. “I wouldn’t do it if I ran the banks.”