As China tightened its controls on money exiting the country, president Xi Jinping inadvertently gave rise to organised crime in Britain.
In the wake of its stock market tumbling in 2015-16, Beijing enforced stricter capital controls to avert downward pressure on the renminbi – and bolster the control of the Community Party.
Chinese citizens are barred from transferring more than $50,000 (£41,159) out of the country in a single year and only allowed funds less than this to be transferred for specific purposes. Those who breach capital controls face a fine of up to 30pc of the foreign exchange involved and, in the most serious cases, criminal charges.
It has pushed many citizens on the mainland, as well as students studying abroad, into the hands of organised crime networks which are taking advantage of the strict rules to launder dirty money and generate fees.
Now, legal professionals in the UK are braced for regulatory action as authorities start to crack down on the payments.
The Solicitors Regulation Authority (SRA) is set to issue fresh warnings about how to comply with regulations within weeks, while Britain’s National Crime Agency (NCA) is poised to release more information on how Chinese criminal networks are operating in the UK.
As it steps up enforcement action, the NCA last week arrested a 33-year-old Chinese national in Teesside as part of a major investigation into a suspected money laundering network.
The renewed focus on such organised crime comes as part of a broader push against illicit money in the wake of the Ukraine invasion.
Sue Hawley, director of campaign group Spotlight on Corruption, says: “There’s suddenly a major increased political focus that then increases pressure on regulators and law enforcement to show results.
“We know that the political mood music shapes and swings where law enforcement puts its resources. There does need to be some really serious thought put into the big picture on the level of Chinese money laundering in Britain.”
The NCA first warned City professionals about the growing problem in a report in 2019, warning that the Chinese underground banking sector could be worth billions of pounds.
The agency describes it as “a form of informal value transfer system”, adding: “It is likely that its prevalence is driven at least in part by the Chinese government’s policy and regulations regarding personal foreign exchange transactions and the removal of capital from China.”
According to the NCA, these criminal organisations often pose as a legitimate money transfer service to lure customers. The gangs accept clean money from Chinese families and offer to move it to Britain and other countries for a fee, before depositing the funds – often proceeds of crime – into a British bank account.
Graham Mackenzie, an anti-money laundering expert at the Law Society of Scotland, says the schemes are a “significant and growing threat” and solicitors need to remain “vigilant”.
He says: “We continue to review transactions where funds received from China, or from sources with a nexus or other links to China, follow unusual or questionable transactional patterns or have not otherwise been reasonably accounted for.
“In the last couple of years, several of our inspections have uncovered activity which has been highly suspect with hallmarks of money laundering activity.”
The UK’s banking sector has alerted the authorities to a number of cases of individuals recruited as mules to deposit funds.
In 2019, the NCA said Barclays warned authorities about more than 14,000 compromised accounts, while Santander flagged suspicious cash deposits of up to £57m in more than 600 student accounts.
In July, it emerged Barclays was embroiled in a case involving ten Chinese nationals, who were sentenced in relation to a £20m money laundering enterprise. The defendants, who were caught on the bank’s CCTV cameras, used a branch in Belfast to make a number of large cash deposits.
A spokesman for Santander said: “Combating financial crime is a priority for Santander. We have sophisticated processes in place to identify suspicious activity and are pleased that we were able to identify those involved in this case.”
Criminal organisations running the schemes – also known as “Underground Money Shops” – are easily able to find mule accounts in Britain to deposit the funds, according to the NCA, often using social media to recruit Chinese students studying in the UK who already have accounts.
“It is likely that some students set up multiple bank accounts with different banks, and allow the use of, or hand control of these accounts to the money laundering group, for a financial reward,” the agency warned.
“Alternatively, they may hand control of their accounts to the money laundering group when they return to China on the completion of their studies.”
It adds that much of the funds are sourced from drug trafficking, cigarette smuggling, organised immigration crime and human trafficking. Investigators found criminals were making total cash deposits of up to £500,000 and often used banknotes from Scotland and Northern Ireland, which the NCA said was “an indicator that the cash is likely to be derived from some form of criminal activity”.
Mackenzie says: “It can be normal Chinese citizens just looking to get their funds out of China because of the strict political regime, or it could be criminal gangs using alternative transfer systems to launder cash.
“Much of this then comes to the UK and the amount that is paid out can be the proceeds of crime.”
For Chinese corporations and financial investors, funds can be transferred overseas via official programmes, which they must qualify for.
In light of the renewed pushback from the SRA and the NCA, legal professionals say they are now bracing for regulatory action.
“There’s lots of educational work and support work going on with the industry to raise awareness of these issues,” says Mackenzie.
“We are seeing more cases of this and we are actively investigating them and where appropriate taking disciplinary action.”
Experts warn the Chinese government is unlikely to change direction on capital controls any time soon.
Xi’s strict zero-Covid policy has hampered international travel and factory output, triggering a 2.6pc decline in China’s GDP in the second quarter.
Jonathan Ashworth, an expert on the Chinese economy at Fathom Consulting, says: “The authorities are keeping a very close eye on the capital account at the present time and they are worried about outflows.”
He says Beijing cracked down on cryptocurrency transactions last September to stop citizens evading capital controls, after it emerged some were using bitcoin to bypass them.
“It’s a bit like whack-a-mole,” adds Ashworth. “The authorities are always trying to catch onto one scheme and once they’ve cracked down on something, people move onto other types of schemes to get money out.
“There are always new holes being exploited.”