A response to the alleged China money laundering scam using the SIV Scheme

Twice this week China spectator have reported on widespread money laundering from China to Australia through the SIV Scheme.

They reported

“China’s state broadcaster CCTV launched a blistering attack on one of the country’s most powerful government-owned financial institutions, the Bank of China, accusing it of money laundering and not complying with the country’s foreign exchange law.

The 21 minutes of TV footage has sent shockwaves throughout the Chinese financial system and Bank of China shed 1.2 per cent off its share price in Hong Kong and 0.4 per cent in Shanghai. Industrial & Commercial Bank of China, the country’s largest lender, lost 1.4 per cent. Bank of China, the fourth largest lender in the country, issued a swift denial of CCTV’s allegations.

CCTV’s serious allegations about the Bank of China — that it was helping its clients to ‘launder money’ — has sparked heated debate in the country about massive capital outflows from China, including illicit money that belongs to corrupt officials and businesspeople. Research and advocacy group Global Financial Integrity estimates that between 2000 and 2011, China lost $US3.8 trillion in illicit capital outflows.

On the other hand, defenders of Bank of China argue that the country’s out-of-date foreign exchange control system is out of step with Beijing’s cherished goal to internationalise its currency and to modernise its financial system, namely allowing free flow of capital. For the bank’s defenders, it is only helping people to re-locate their assets.

Chinese regulators, including the People’s Bank of China, the country’s central bank, are facing a terrible dilemma. Chinese financial technocrats want to push ahead with reforms such as interest and exchange rates liberalisation, as well as relaxing capital controls to encourage more outbound investment.

However, China is in the middle of an unprecedented crackdown on corruption, and both official and social media spaces are filled with stories of so-called ‘naked officials’ (whose spouses and children live outside of China) fleeing the country. These people are looking for ways to launder money, and CCTV’s report alleges that some Bank of China employees are quite happy to do that for them, including forging documents.

It is clear that the Chinese regulator needs to strike a delicate balance between the need to reform the financial system and preventing money laundering on a massive scale. The CCTV report has focused the public attention on this explosive issue. Given that trillions of dollars have left China illicitly, the story could very well be a signal from Beijing that it is ready to clamp down on the illegal outflow of money.

China has a relatively weak anti-money laundering system in place. The official anti-money laundering watchdog was not set up until late 2003. Hong Kong’s securities regulator just reprimanded and fined a large Chinese securities firm, Ping An, for lax anti-money laundering standards. The CCTV report also contains incriminating footage of bank employees’ willingness to launder money for clients.

This incident should also be a wake-up call for Australia. We are witnessing a huge influx of Chinese money into Australia, including in the country’s property sector. Much of the money is from the hard-earned cash of Chinese businesspeople and newly prosperous middle class, but there is no doubt that Australia is a destination for ‘dirty money’.

There was also the story about a prominent Chinese businessman who ferried bagfuls of cash in his own private jet and deposited them at a local Bank of China branch, according to court documents. One of China’s leading investigative magazines, Caijing, also published a cover story about corrupted officials who had fled overseas including Australia. A former provincial governor reportedly fled to Australia with 40m yuan.

These stories should be of concern to Australia as this country faces a greater influx of Chinese money. Australia welcomes foreign capital, but this country should not become a safe haven for corrupt officials and their dirty money.”

I take issue with these stories.That is not to say that it may not exist, but I think that the context is incorrect.

The OECD, under the auspices of the Financial Action Task Force are very active and have recommendations on the enforcement of international standards on combating money laundering and the financing of terrorism & proliferation.
The Financial Action Task Force (FATF) is an inter-governmental body established in 1989 by the Ministers of its Member jurisdictions. The mandate of the FATF is to set standards and to promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and the financing of proliferation, and other related threats to the integrity of the international financial system. In collaboration with other international stakeholders, the FATF also works to identify national-level vulnerabilities with the aim of protecting the international financial system from misuse.
The FATF Recommendations set out a comprehensive and consistent framework of measures which countries should implement in order to combat money laundering.
Financial institutions are prohibited from keeping anonymous accounts or accounts in obviously fictitious names.
Financial institutions are required to undertake customer due diligence (CDD)
measures when:
(i) establishing business relations;
(ii) carrying out occasional transactions: (i) above the applicable designated threshold (USD/EUR 15,000 – in Australia its AUD10,000); or (ii) CERTAIN wire transfers in the circumstances covered by the Interpretive Notes;
(iii) there is a suspicion of money laundering or terrorist financing; or
(iv) the financial institution has doubts about the veracity or adequacy of previously obtained customer identification data.
The principle that financial institutions should conduct CDD should be set out in law. Each country may determine how it imposes specific CDD obligations, either through law or enforceable means.
The CDD measures to be taken are as follows:
(a) Identifying the customer and verifying that customer’s identity using reliable, independent source documents, data or information.
(b) Identifying the beneficial owner, and taking reasonable measures to verify the identity of the beneficial owner, such that the financial institution is satisfied that it knows who the beneficial owner is. For legal persons and arrangements this should include financial institutions understanding the ownership and control structure of the customer.
We know this better as the Know Your Customer regime.
In financial regulation, “politically exposed person” (PEP) is a term describing someone who has been entrusted with a prominent public function, or an individual who is closely related to such a person. A PEP generally presents a higher risk for potential involvement in bribery and corruption by virtue of their position and the influence that they may hold. The terms politically exposed person and Senior Foreign Political Figure are often used interchangeably.
There is no global definition of a PEP. Most countries have based their definition on the Financial Action Task Force on Money Laundering (FATF) definition.
a)current or former senior official in the executive, legislative, administrative, military, or judicial branch of a foreign government (elected or not)
b)a senior official of a major foreign political party
c)a senior executive of a foreign government-owned commercial enterprise, being a corporation, business or other entity formed by or for the benefit of any such individual
d)an immediate family member of such individual; meaning spouse, parents, siblings, children, and spouse’s parents or siblings
e)any individual publicly known (or actually known by the relevant financial institution) to be a close personal or professional associate.
The FATF definition is not intended to include middle-ranking or more junior individuals.
As of February 2012, the FATF definition of a PEP was revised to include domestic PEPs, bringing the number of PEP types to three – a foreign PEP, a domestic PEP and a person who is a senior member of an international organisation.Most FATF member countries treat domestic and foreign PEPs with heightened scrutiny. The distinction between a foreign and domestic PEP is problematic, because a person can be a foreign PEP everywhere in the world except in their own country. For example, China’s President and General Secretary of the Communist Party, is a PEP everywhere except in China. The same is true for Canada’s Prime Minister. In order to address this artificial distinction, the FATF Guidance says that if a person is a foreign PEP, that de facto makes them a domestic PEP in their own country. Logically, this makes sense for crime prevention purposes because in order to export proceeds of crime, the PEP must first use their own domestic financial system and thus, more importance should be placed on domestic, and non-foreign PEPs.
Most financial institutions view a PEP as a potential compliance risk and perform enhanced monitoring of accounts that fall within this category. Screening for PEPs is usually performed at the beginning of account opening, this initial due diligence being Know Your Customer. Screening of accounts periodically is performed as part of ongoing due diligence. The process of due diligence to uncover PEPs can be time consuming and requires screening against a reputable database of known PEPs, usually close to 1 million profiles, against the names, dates of birth, national identification numbers and photos of clients.
Here in Hong Kong I can attest that HSBC  can take 3 months to undergo this diligence for a PEP.
To suggest that this is a wake up call for Australia does not seem based on fact. Australia ( and the big 4 banks named in the article on this subject earlier this week) are entrenched in this KYC , anti AML and CMF and PEP regime.This is surely the check and balance for any shortcomings (or any widespread money laundering as reported by this article). If not , wouldn’t the bigger scandal be at home ?



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