Legal tender

Poker chips, fake invoices and art: How China’s elite illicitly move money out of the country

October 25, 2012
October 25, 2012

China’s coming political transition is making business people nervous. They rely on having “guanxi” (connections) with the right officials to get things done and the Beijing government can part an entrepreneur from his assets if it wants.

So money is fleeing China. According to a Wall Street Journal report on capital flight published earlier this month, some $225 billion was sneaked out in the 12 months to September.  Yet the government strictly controls the renminbi and the Chinese currency is not freely tradeable internationally. Chinese law says citizens are only allowed to take the equivalent of $50,000 a year out of the country. Still, there are a number of ways to sequester funds offshore. Quartz spoke to some half-dozen “experts,” many of whom must remain anonymous due to the sensitive (and illicit) nature of the strategy:

Visit Macau casinos

The best-known way to turn renminbi into foreign currency is to visit Macau, a separately governed, former Portuguese enclave on the Chinese mainland  which boasts a gaming market far bigger than that of Las Vegas. Crucially, it is possible to exchange gambling chips for foreign currency in Macau casinos.

Chinese nationals cannot turn up in Macau with suitcases full of money. But there is a loophole in the China-Macau regulations that is wide enough for busloads of money launderers to drive through each day.

A US State Department report said in March that Macau is “popular among gamblers seeking inscrutability and alternatives to China’s currency movement restrictions.”

Here are some basic steps Chinese nationals sometimes follow in Macau to change their renminbi into foreign currency before sending it abroad.

1) Sign up with travel companies known as “junket operators.” These high end tour agents make a living transporting Chinese gamblers to Macau and arranging their accommodation and, crucially, their casino credit.

2) Borrow money from the junket operator to fund the gambling.

3) Head to casino and pick up gambling chips from the junket.

4) The chips the junkets provide are called “dead” chips because they can’t be traded for cash and have to be played. But when a player wins a bet, he is paid in cashable chips, which he can exchange for Hong Kong or US dollars inside the casino.

“At the end of the day if the gambler has come out ahead that money can be cashed. It is at that point that the money is no longer traceable by the Chinese authorities,” says Martin Williams, the Asia Pacific editor of gaming trade publication Gambling Compliance.

Other schemes have been reported. For example, a 2008 cable from the US Consulate in Hong Kong among the trove released by Wikileaks stated: “provincial officials in the mainland [of China] increasingly provide “sweetheart” deals to junket operators (e.g. land sales, business licenses, government contracts), in exchange for bank deposits or cash sums paid to the officials upon arrival in Macau.”

And a 2009 cable from the US Consulate in Hong Kong suggested strong links between junket operators and Chinese money launderers. It said:

Junket operators work directly with Macau casinos to buy gaming chips at discounted rates, allowing players to avoid  identification. Know-your-customer (KYC) and record-keeping requirements are significantly looser than in other international gaming venues.

The Chinese government often restricts its citizens from visiting Macau by tightening visa rules. That, the US Consulate said in the 2009 cable, “may reflect Chinese government concern about corrupt officials laundering money in Macau.”

Go shopping in Macau 

Macau shopkeepers can be as helpful as casinos when it comes to turning Chinese renminbi into something more freely tradable.

What he has observed, Williams says, is Chinese visitors to Macau using debit cards to buy expensive goods in shops before the retailer—for a fee—refunds the money in another currency.

“Find a friendly Macau shopkeeper, use the debit card to buy a Rolex, sell the Rolex back to the shop, get foreign currency and pay the shopkeeper a fee,” he says.

Take advantage of a scheme allowing Chinese business people to pay foreign suppliers in Renminbi. 

Since 2009, Chinese businesses have been  allowed to use the renminbi to buy goods from suppliers offshore. So, for example, a hospital that wishes to buy an X-ray machine from Germany can now go to their bank, present the German company’s invoice, and get the bank to exchange some Chinese renminbi for euros that will be wired to the German supplier’s account.

This scheme is often abused.

“It is fairly easy to get renminbi out the country by pretending you are paying a foreign supplier,” a senior corporate lawyer working in Hong Kong says. “Just cook up a deal where a friend in Hong Kong sends you an invoice for something you usually buy from abroad. Go to the bank, get the foreign currency sent to the friend in Hong Kong, and he will then deposit the funds in a Hong Kong bank account for you.”

“This is the most common way of getting renminbi turned into something else and sent abroad,” says a tax accountant at a big four accounting firm in Hong Kong. “It is virtually un-detectable.”

Cross-border trade settlement, as the economists call “using renminbi to pay someone abroad for something,” is soaring. Amounts spent increased steadily throughout 2011 and the first six months of 2012, even as the Chinese economy slowed down, as the chart on page 2 of this report (pdf) illustrates.

It is impossible to tell whether trade settlements are real or fake, and that is why this works so well as a means for getting money out of China illicitly.

“This laundering method causes all kinds of problems for my clients who are legitimate,” says Steve Dickinson, a China- based attorney who works for Seattle firm Harris Moure.  “This trick is pretty old and so the authorities know about it and there is so much paperwork proving invoices from foreign suppliers to Chinese companies are real and not fake.”

Or just buy some art. 

Very rich people in China love to buy art, antiques and fine wines.  They are, of course, allowed to sell their investments to buyers abroad.
And mainland Chinese art dealers have started to hold auctions across the border in Hong Kong. There is nothing wrong with such companies expanding internationally. Their mainland Chinese art sellers are meant to bring home any profit they make on foreign sales and pay tax on it.

Sometimes they do not.

A private equity fund manager based in Shanghai explains: ” people can buy art in China and sell it in Hong Kong. The key is to arrange for a Hong Kong buyer to place the funds for whatever you are selling them into a Hong Kong bank account, in US dollars, for example. Just offer them a big discount and make sure you trust them, and this is easy.”

“Or you can buy European art at a super inflated price and then sell it back to a dealer offshore for a bit less” says Dickinson.

Chinese nationals need approval from the foreign-exchange regulator, the State Administration of Foreign Exchange, to buy items abroad such as art that take them over their $50,000 limit. It is hard for the SAFE officials to value art, Dickinson explains. What is the value of a piece of art, right, or a bottle of valuable wine?”

But it is getting harder to move money offshore. 

The Beijing authorities are scrutinizing foreign investments made by Chinese companies much more carefully. And they have been shining a spotlight to the art world.

The Hong Kong-based corporate lawyer says the Beijing authorities are now deeply aware of the problem of capital flight so the wealthy are less likely to take risks right now.

“While people really want to get their money abroad, they are starting to fear reprisals. They feel bank staff are less likely to ignore suspicious transactions. So Chinese people with money feel that they probably should stop sending money out the country for now.”

Dickinson concurs. “Actually all these routes are getting clamped down on. There are a bunch of foreign bankers, brokers, art dealers and the like who for years have run around China charging commission for moving money abroad. Their life is getting harder so their fees are getting a lot higher.”

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