Staggering amounts of money exchanges hands and gets moved around China and out of China every day. How is it done? The “Wall Street Journal China” posted an article on its “China Real Time Report” yesterday, March 19, entitled, The Mechanics of Moving Money out of China”. (
http://blogs.wsj.com/chinarealtime/2012/10/19/how-hong-kongs-legal-system-enables-china-cash-flight/
) written by Alex Frangos. Mr. Frangos gives his readers some very good insight into how money gets out of China. He reports:
“The case of Yan Suiling and how $2 million worth of Chinese money ended up in Hong Kong offers a look at how the former British colony serves as a legal safe haven for getting wealth out of mainland China.
Ms. Yan, who was convicted in Hong Kong in 2009 of money laundering and spent time in a Hong Kong prison, was exonerated earlier this year based on her argument that her actions – while illegal under Chinese law – are legal in Hong Kong.
She was moving money across the border using an underground money transfer agency, a type of institution that is illegal on the mainland. But Hong Kong’s highest courts view these operators — sometimes known as remittance agents — as a legal part of the free-market fabric of the former British colony, where capital movements are almost completely unfettered.
Chinese individuals have been sending money abroad on a grand scale lately, $225 billion over the past year, according to
Wall Street Journal calculations
of government trade, foreign exchange and investment statistics. Capital control regulations on the mainland, however, forbid individuals from moving more than $50,000 out per year. It’s a rule that’s often evaded
Hong Kong, with a legal and financial system separate from the mainland, is a key place to get around that limit, according to Simon Young director at the Centre for Comparative and Public Law at Hong Kong University. Ms. Yan’s case shows how. Ms. Yan declined to comment through her lawyers. The details from the case were gleaned through Hong Kong court documents (including the original
2009 lower court ruling
.)
Ms. Yan, trained as an accountant, made a small fortune in southern China selling insurance, Amway products and owning three restaurants with her mother in Guangzhou, according to a summary of facts presented by the judges who decided the appeal, based on evidence provided at trial by prosecutors and defense lawyers. She wanted to get some of her money abroad, specifically to invest in the Hong Kong stock market, according to evidence presented by her attorneys.
That makes her like many Chinese seeking higher returns for their money. Interest rates are low in China, the stock market continues to underperform and there’s little choice in what to invest in.
She inquired at her local mainland bank, Shenzhen City Commercial Bank, how to get the money out, according to evidence her lawyers presented at trial. Her banker, Ting Chi Ming, helped her with a number of transfers. He then referred her to his wife, Chu Kwan Kwan, identified in the Hong Kong court documents as “Madam Chu.”
Neither Mr. Ting nor Ms. Chu could be reached for comment. Representatives for Ping An Insurance (Group) Co. of China, which acquired Shenzhen Commercial Bank in 2007, didn’t respond to requests for comment. None of the three appeared or testified at trial, and none were charged with wrongdoing in the Hong Kong court.
Ms. Chu ran an underground bank, according to defense evidence cited by the Hong Kong judges, an operation that they said would match people who wanted to bring money into China illegally with those who wanted to get it out illegally. These strangers would deposit money in each other’s accounts — one inside China, the other in Hong Kong. Money doesn’t actually cross the border, making it difficult for regulators to track.
In one of Ms. Yan’s transactions, Ms. Chu directed her to deposit 3 million yuan (roughly $480,000) into a mainland bank account in the name of a stranger, also a client of Ms. Chu’s, the court said.
The same day, another stranger deposited checks worth the same amount that Ms. Yan had deposited on the mainland, converted into Hong Kong dollars, into an account Ms. Yan owned at an HSBC branch in Hong Kong. HSBC, which hasn’t been accused of wrongdoing, declined to comment.
Funds don’t actually cross the border, but the clients essentially moved money from one jurisdiction to the other, evading the $50,000 limit.
From 2007 through 2009, Ms. Yan sent more than US$2 million to Hong Kong to invest in the stock market through this method, according to the court documents.
Ms. Yan got caught up in a criminal morass when one of the checks deposited into her Hong Kong HSBC account turned out to be the proceeds from a mortgage fraud. Using false identification, an unidentified “rogue,” according to court documents, took out a US$1 million mortgage for an apartment at the luxury Bel Air complex in Hong Kong that was actually owned by someone else. Some of that money ended up in Ms. Yan’s account.
Hong Kong law enforcement arrested Ms. Yan in Hong Kong. Under Hong Kong law, prosecutors didn’t have to prove that Ms. Yan knew about the mortgage fraud directly, only that a reasonable person should have figured the money was from a tainted source. In fact, prosecutors didn’t present evidence that she knew about the mortgage fraud. She claimed she wasn’t involved and the transactions were legitimate.
She was convicted and served 18 months in a Hong Kong prison.
Her lawyers appealed and eventually won. Their argument: She shouldn’t have known it was ill-gotten gains from the mortgage fraud because she thought it was from the underground banking transaction she arranged. And she had the bank records to prove it.
Hong Kong’s Court of Final Appeal, its highest court, agreed with the argument, saying it was “not surprising” that she would “find it necessary” to use an underground bank in order to invest in Hong Kong’s stock market.
Though using the underground bank is illegal on the mainland, it is legal in Hong Kong. Under Hong Kong law, money laundering can be prosecuted only if the underlying crime that generated the money is a crime in Hong Kong, such as drug dealing or human trafficking. Because operating an underground money transfer operation isn’t illegal in Hong Kong, there was no underlying crime to prosecute Ms. Yan.
“It shows the inadequacies of our money laundering criminal offense and raises policy issues of what we do with underground banking,” says Mr. Young, of Hong Kong University.
He adds: “When you have such a developed financial system, it’s inevitable that money flows, and it’s very difficult to tell what is tainted money and what is not.”
Hawkeye in China
– Lex Smith