Market Insight: China, daigou, and underground banking

The focus on China as a source of money laundering is a relatively recent development. In October 2019, the National Crime Agency (NCA) published a report titled "Chinese Underground Banking and 'Daigou'", which highlighted the threat and specifically the role of daigou shopping in money transfers across borders. This was the focus of a recent investigation by the National Crime Agency in August 2022, which resulted in the arrest of a 33-year-old Chinese national on suspicion of money laundering.

Although the basics of AML regulations should be familiar to most compliance professionals, applying them to novel cases such as this can be difficult, especially when dealing with individuals or companies from foreign countries with unfamiliar cultural and business practices.

In this blog, we will explore the complexities of identifying and managing potential money laundering risks associated with daigou shopping and other potentially unfamiliar international business practices. As compliance professionals, it’s important to stay informed and make informed judgement calls to keep your firm safe from any potential penalties.

What is daigou? Understanding the underground banking system

Daigou, or "buying on behalf of someone," has become a popular way for Chinese citizens to move their newly acquired wealth abroad. This can involve the purchase of either luxury goods (that are then couriered or posted back to China) or property. The practice originated in part due to the tough foreign exchange controls in China that aimed to stem capital flight and keep money in the country. While the practice of daigou itself is not illegal in the UK, the process of transferring large sums of money and commodities informally provides opportunities for underground bankers to engage in money laundering.

These underground money shops offer a fast, efficient, and reliable international transfer service. They use a variety of techniques to shift value from one jurisdiction to another, attracting a wide range of clientele, including small traders, individuals buying foreign properties, parents paying overseas university fees, and members of organized crime groups and corrupt politicians moving their money offshore and out of the reach of the Chinese government and its law enforcement agencies.

Daigou and real estate

In terms of real estate, daigou can also refer to Chinese buyers purchasing properties abroad, particularly in the United States, Canada, Australia, and New Zealand. These buyers may be looking for a place to live, investment opportunities or as a way to diversify their assets. These purchases can be made through daigou agents, who help to facilitate the transaction and handle the logistics of shipping and customs clearance. These agents can also provide assistance with property management and rental services.

So what does this mean for real estate agents and firms?

The increasing popularity of daigou and the use of underground banking networks present a number of risks for real estate agents and firms. First and foremost, real estate agents and firms must be vigilant in identifying potential money laundering activity and conducting due diligence on international buyers. This may involve conducting additional due diligence on Source of Funds and Source of Wealth, reviewing documentation, and monitoring transactions for any suspicious activity.

Furthermore, real estate agents and firms must be aware of the different cultural and business practices of international buyers and be prepared to adapt their procedures accordingly. For example, daigou agents may be involved in the transaction, and real estate agents and firms should be aware of the role they play and the potential risks they pose. 

Real estate agents and firms must be aware of the increasing scrutiny of international property transactions by regulators and law enforcement agencies and be prepared to provide documentation and information as necessary. This may include providing records of transactions, buyer information and other documentation to regulatory authorities. 

Red flags for real estate agents

The Law Society has also provided a list of potential red flags for Chinese underground banking. These include:

• transfers of money from multiple origin accounts in China
• transfers of money in sums just below the reportable limit (currently US$50,000)
• money received via multiple UK accounts
• payments from third parties
• use of an intermediary, agent or corporate structure not directly connected to the client
• money transferred from unusual locations not directly connected to your client, or those such as Fuqing or Wenzhou in Fujian Province which have a long connection to Chinese underground banking (as well as Guangdong, Liaoning, Zhejiang, and Jiangsu).

Additional challenges with due diligence on Chinese clients and companies

When underground banking may be in play, it becomes even more critical to carry out rigorous KYC and identity verification. However, identifying and verifying the identity of Chinese clients can also be challenging due to the limited use of Chinese names in identifying individuals. 

Over half of mainland Chinese people share only 100 family names and names are recorded officially in Chinese characters, which can be written identically in English script. Even with a date of birth added, it can be difficult to distinguish one individual from another.

When it comes to conducting identification and verification checks, passports can be particularly useful for AML compliance teams, as they are individually issued and generally reliable forms of identification that show the individual’s name in Chinese characters as well as Western script. The Chinese identity card, which contains the individual’s official ID number, is also a useful tool for identification. The ID number is central to numerous official Chinese processes and is generally memorized by individuals at an early age. It conveys personal and easily extracted information about the client, including their date and place of birth and their gender.

When it comes to Chinese corporations, any legitimate company with an international footprint should be registered online and should be able to produce copies of their formal business registration documents showing company information such as their name and principal place of business and the name of the individual authorized to act on their behalf. This information can be used to comply with AML regulations and to ensure that the financial institution is not doing business with illicit actors.

Conclusion

In conclusion, daigou/underground banking is a complex issue that presents challenges for those who need to comply with the Money Laundering Regulations in the UK. It is important for UK businesses and government to strike a balance between identifying, managing, and mitigating the risks associated with underground banking, while also continuing to engage positively with emerging markets.