Chinese officials and oligarchs – the next wave of illicit money-flows

Chris Hamblin

Clearview Publishing

27 January 2014

Money-laundering reporting officers and compliance officers in Hong Kong, the British Virgin Islands and other international financial centres might find it prudent to double-check accounts associated with close relatives of mainland Chinese politicians.

One of the reasons for the need for renewed vigilance is a new Chinese law, passed quietly last year and now in force, which requires mainland high-net-worth individuals to declare details of any offshore accounts they may hold. Offshore banks that do not ask for evidence that their Chinese HNW customers have signed on the dotted line might find themselves on the receiving end of a FATCA-style enquiry from the Chinese government at some point in the future. FATCA, the US Foreign Account Tax Compliance Act, comes into force in July, although there is talk of yet another extension. Everybody else – including China – is queuing up to copy it as we move towards a world where everything that is not compulsory is banned and everything that is not banned is compulsory.

The Vistra website lists three main amendments to China's tax disclosure law, which dates from 1995 and has the catchy title of 'measure for the reporting of statistics on international receipts and payments'. These are found in circular 642 and are as follows.

Everyone who is resident in China is now required to report his or her foreign financial assets and liabilities, a completely undefined phrase that has bemused the experts, to the government along with all cross-border transactions. Nobody knows when the Chinese government is going to clarify its definition; some residents are doubtless hoping that they will have to wait until their own trials for all to be revealed, especially as the penalty for high corruption is death and only the very well-connected seem to have their sentences commuted.
The new rules have forced the reporting requirements on a wider community of people. These now include: individuals who reside in China for a calendar year or more; Chinese passport-holders who have been absent from China for less than a calendar year; businesses that are incorporated in China; people not resident in China who nonetheless 'perform economic transactions within the People's Republic of China', which might or might not include people doing deals on emails that go through China; and the representative offices or branches of foreign institutions such as banks.
The amendments state that people who work in all departments of the Chinese government are now obliged to respect the confidentiality of the information that the draw from these sources. This is likely to be of no worth whatever, as (a) Chinese officials do not have a good law-abiding track-record, as witnessed by the blizzards of senior officials who launder their money in the US and go to live there themselves, and (b) Western governments have an execrable record of protecting sensitive data, with Her Majesty's Revenue & Customs probably coming top of the list of data-losers, data-abusers and issuers of spurious data-related propaganda. The data confidentiality rules also apply to bank staff who come across the data – a more hopeful proposition except in the case of indigenous banks.

The sheer opacity of the one-party state system obscures the reasons for China's new laws at the best of times. Commentators are assuming that these new rules are aimed at stemming the tidal wave of money stolen from the Chinese government offshore. Much of this money is accompanied by the very 'politically exposed persons' who have sequestered it. Officials from the state banks and other government departments have a long history of moving to the US and surrounding themselves with unexplained wealth. In 2011 a 67-page report from China’s central bank – one among many on the subject – looked at where corrupt officials were going and how they moved their money out of the country. One favourite route was to squirrel cash away with the help of loved ones emigrating abroad through the use of fake documents.

Another explanation for the new law might, however, be more prosaic; China's top-level leadership has long been on the warpath against corrupt PEPs and is now reeling from the sheer aggressiveness of FATCA. The government might merely be plumping for a means of retaliation against FATCA that makes reference to one of its favourite projects. At any event, compliance officers and MLROs ought to become more vigilant for these schemes while noting that the focus of Chinese PEP money seems to have floated south from the opaque incorporations of Delaware, Wyoming and Nebraska towards the banks and international business companies (IBCs) of the BVI.