New Guidance on on Chinese Underground Banking and Funds from China

The Legal Sector Affinity Group (LSAG)  has recently issued an Advisory Notice on Chinese underground banking and funds from China. The following is  summary of its main features. 

Individuals and businesses in China are only allowed to take funds out of the country for certain limited purposes, with a $50,000 limit per person per year.

Some clients may attempt to bypass these restrictions by making false declarations to the government about the purpose of currency transfers, splitting up transactions into smaller amounts, or using informal value transfer systems that don't use the normal banking system.

In order to comply with legal/regulatory obligations under the Money Laundering Regulations firms must take care to ensure that they understand the source of their client's funds, establish whether the client has misrepresented the reason for the transfer, and obtain evidence of the client's source of funds.

Red flags that could indicate suspicious activities include multiple payments made to high value goods retailers/brands, which may suggest that the person is participating in illegal surrogate shopping ("daigou"), or information given in support of transfers that appears false or contradictory.

Misleading the Chinese authorities about the reasons for a currency transfer is not a crime in the UK, but it is something to consider carefully. The key issue is the need to establish that the funds come from a legitimate source. 

The UK Financial Intelligence Unit (UKFIU ) does not advise for or against submitting SARs (Suspicious Activity Reports) or Defence Against Money Laundering (DAML) SARs when overseas currency laws have been broken. This means that it is the responsibility of each case to be considered individually and it is up to the user to decide whether to report any suspicion based on all available information.

UKFIU would not necessarily expect firms to make SARs solely where the purpose of the transaction was misrepresented, however proper source of funds and/or wealth checks should be made before deciding against submitting a SAR. Splitting funds through family members requires however a more detailed source of funds checks to track the paths of these monies.  

In the event that Customer Due Diligence (CDD) cannot be completed, you must assess whether the inability gives rise to an increased suspicion of money laundering and thus greater reporting obligations. If CDD is not able to be completed, it is important to consider whether any information gathered or derived from other sources brings the transaction within your AML or KYC requirements.