Courting China: the financial crime risks

Chinese president Xi Jinping’s recent visit to the UK has been hailed as a “golden era” in Sino-British relations by Prime Minister David Cameron’s government, with high hopes of promoting increased Chinese investment into Britain.

While China’s share of global GDP has risen to 12.2% in 2015 from 1.7% in 1993, in 2013 Chinese investments accounted for a mere 0.1% of total FDI into Britain.1 At the same time, Chinese investors are increasingly looking abroad as the domestic market cools down, with expectations that outbound FDI will eclipse inbound FDI within the next two years.2 This provides an incentive for the UK government to attract more Chinese outwards investments as the country’s economy continues to grow and diversify.

Whilst officials have promoted the opportunities for increased trade and investment, there has also been growing concern about the risks involved, particularly the UK’s susceptibility to the flow of illicit funds from China. In recent years, a significant level of Chinese investment has been made in the UK real estate sector or has flowed into the UK through government-sponsored investor visa programmes. Increasingly, commentators are raising questions around what is known about the origin of funds and the quality of due diligence undertaken in the UK.

The need for due diligence on Chinese investors is illustrated by a case in the UK commercial real estate sector. An aborted GBP 175 million trade centre investment project in 2013 involved the Peel Group and Stella Shiu, a Chinese businesswoman who had a string of failed companies under her name and no traceable assets in China. The Peel Group, a UK developer proposing a GBP 10 billion development project along the Mersey River, had signed an agreement with Sam Wa Resources Holding in 2012, whose main principal was Ms Stella Shiu. According to reporting by the Financial Times, corporate filings in Hong Kong showed that Ms Shiu had changed her Chinese name after a 2008 ruling by a Hong Kong court that declared her bankrupt for failure to pay a loan. She had a string of failed investments under her former Chinese name, and visits to the registered addresses of Sam Wa Resources in Shanghai revealed no sign of the company.

3 In June 2015, the Peel Group announced that it was pulling out of its joint venture with Sam Wa for the development of the project.4 The case involving Ms Shiu and Sam Wa Resources illustrates the challenges of opacity of information surrounding Chinese investors.

Commentators have also highlighted systemic concerns in relation to money laundering and the Chinese financial system. A report by Global Financial Integrity has found that illicit funds worth USD 1.3 trillion originating from China have been laundered in the West between 2003 and 2012.5 There are indications that some of China’s largest financial institutions are implicated in global illicit cash flows.6 The majority of funds are channelled through fake trade invoicing, and are often subsequently invested in high value markets such as real estate; some believe through shell companies registered in offshore centres, such as Jersey or the British Virgin Islands.

While foreign banks and regulatory agencies have complained that Chinese authorities are often uncooperative in helping with transnational investigations into money laundering networks originating from within its borders, there is also evidence of official recognition that money laundering undertaken through some of the country’s premier institutions needs to be dealt with. China has recently launched efforts to curtail the movement of capital out of the country. According to the People’s Bank of China, over GBP 82 billion of suspect corrupt wealth has been placed under investigation by Chinese authorities since April 2015.

In September 2015, in connection to President Xi’s state visit to the U.S., it was announced that the two countries would step up their cooperation in fighting corruption, money laundering and terrorist financing.7 Political developments in China have also curtailed money laundering activities to some extent. The ongoing national campaign to crack down on corruption has had a significant impact on corrupt behaviour. It has resulted in a sharp fall in profits for casinos in Macau, the gambling haven that was previously implicated in channelling large amounts of illicit funds away from mainland China. Authorities have taken direct measures, such as the arrest of 17 people involved in a Macau money laundering ring in August 2015.8 Furthermore, the crackdown on money laundering has even received recognition by state media. In June 2014, the Bank of China, the country’s largest foreign-exchange lender, was criticised by China Central Television (CCTV) for complicity in money laundering activities, referring to several investigations under way in Italy and Canada.

9 Despite these efforts, some analysts have warned that the flight of illicit funds from China may increase as a result of the 2015 Shanghai stock market crash and the wider slowdown of the Chinese economy.10 Closer trade relations between China and the UK have caused a huge increase in the level of high net worth individuals applying for Tier 1 investor visas in the UK. Out of 3,048 “golden visas” awarded since 2008 in exchange for GBP 2 million in quality investments, 1,126 (37%) have been awarded to Russian and Chinese individuals. In 2014, over half of all golden visas were awarded to Chinese individuals, for a total of GBP 1.15 billion in investments.

A recent report by Transparency International, a non-governmental organisation that monitors international corruption,11 shows that the UK’s Tier 1 Investor scheme is vulnerable to money laundering activities due to a lack of effective checks on visa applicants by the UK authorities.

According to the government’s own assessment, the UK’s anti-money laundering (AML) system suffers from low supervisory and reporting standards. At the same time, the level of compliance across relevant private sectors, such as real estate, is also lacking. Even the industry organisation, the National Association of Estate Agents, is clear that AML standards are too low in the sector, and that offshore company ownership prevents adequate checks from being carried out.

China represents a significant opportunity for UK trade and investment but, at the same time, low levels of transparency in China, in conjunction with well-documented financial crime risks, reinforce the need to undertake effective due diligence, whether investing in China, or receiving investment from Chinese companies or individuals.

11 The report is available here: