17 February 2019
China’s determined efforts to pursue ill-gotten funds increase risks for foreign companies that help Chinese clients to invest abroad. Photo: China Daily
China’s determined efforts to pursue ill-gotten funds increase risks for foreign companies that help Chinese clients to invest abroad. Photo: China Daily

Why background checks on Chinese investors are crucial

Since launching a nationwide anti-graft campaign in 2012, China has been tracking down corrupt officials who have fled the country and the assets they brought along. The most notable effort has been the establishment of the Fugitive Repatriation and Asset Recovery Office, also known as The Office, in 2014.

This year, the government launched a new round of anti-corruption operations, dubbed Skynet 2017, which placed asset recovery as a pivotal leverage in repatriating overseas fugitives. Foreign companies doing business with Chinese investors should be aware of this trend and step up their due diligence efforts.

The Office is a powerful, multi-agency organ, made up of senior officials from the Central Commission for Discipline Inspection, the judiciary, the procuratorate, the police, the Ministry of Foreign Affairs and the People’s Bank of China. It is headed by Li Shulei, a senior anti-corruption official who is viewed as a close aide of President Xi Jinping.

The Office has since secured the return of over 2,800 overseas fugitives, including government officials and individuals with public roles, and some 9 billion yuan (US$1.35 billion) in ill-gotten funds.

It recovers illegal overseas assets through various means including mutual legal assistance agreements or extradition treaties with foreign governments, filing lawsuits in foreign courts, and sending operatives abroad to passively force fugitives to surrender themselves and their funds.

Chinese funds and associated risks

Chinese investors are increasingly engaging foreign companies to buy assets abroad, particularly real estate. Australia, for example, has seen a general rise in property prices in recent years, which could be attributed partly to Chinese investors.

The surge in demand has attracted foreign companies to provide tailor-made services to Chinese investors. For example, McGrath Ltd., an ASX-listed realtor, runs a China desk to assist Chinese buyers of Australian properties. WooBuyers, another Australian realtor, promotes its solutions and local connections on its website targeting Chinese property investors.

However, the property buying spree in Australia comes with reports of suspicious transactions. Last year the Australian Transaction Reports and Analysis Centre, a money-laundering watchdog, reported that it has investigated over A$3 billion (US$2.37 billion) of suspicious transfers by Chinese investors, of which A$1 billion involved property transactions.

Although suspicious transfers are not by themselves proofs that crime is committed, the statistics point to the money-laundering risks associated with these investments.

In most cases, corrupt officials fleeing China do not just grab a bag, stuff it with cash and head out on an overnight flight to popular hiding destinations such as the UK, Australia and Canada; the transfer of funds is indeed a gradual money-laundering process.

They have many ways to send money overseas: through offshore shell companies, credit card transactions, underground banks, cash smuggling, and overseas contacts or family members abroad.

Once abroad, illegal proceeds are converted into legitimate forms of assets such as real estate, securities and bank deposits. The officials themselves are usually the last in the family to flee the country.

Due diligence efforts

China’s eagerness to pursue ill-gotten funds increase risks for foreign companies that help Chinese clients to invest abroad. Once targeted by the authorities, the asset recovery process could inflict legal costs and reputational damage to these companies.

In some instances, they could even find themselves at odds with local anti-money laundering laws. To these companies, client on-boarding due diligence and continuous transactions monitoring are effective risk mitigation measures.

Due diligence efforts should focus on the clients’ sources of wealth, particularly their political connections. The Financial Action Task Force (FATF), a Paris-based intergovernmental organization that designs anti-money-laundering policies, defines politically exposed persons (PEP) as individuals “who are or have been entrusted with prominent public functions in a foreign country”.

Regulators deem a PEP as presenting a higher risk of involvement in bribery and thus expect companies to adopt stricter risk management measures when on-boarding a client. Unsurprisingly, the FATF also recommends the same enhanced risk management measures to be extended to a PEP’s family members and close associates.

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The writer is a partner of Wallbrook, a global intelligence and compliance risk consultancy. He specialises in Asia with a focus on political and economic developments in the region.

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