Hawala Networks: Chinese Money Laundering By James Reed
This item I found interesting as a communist China observer and critic. It seems that wealthy individuals in China are getting concerned about the state of the Chinese economy and are seeking ways of getting their money out of the country, usually to Hong Kong. Hawala networks, so called, have been set up using people in Hong Kong to have money deposited in their accounts then transferred to other accounts anywhere in the world, as China is still allowing Hong Kong to operate with relative fanatical freedom, even though it is politically under tight communist control. Singapore, a low-tax jurisdiction, is also an option for the Chinese rich.
However, there is a darker side to hawala exchanges, as it is often used by crime gangs for money laundering. In August 2023, 10 Chinese were charged with money laundering offences with more than S$2.8 billion ($3.2 billion) of cash and other assets being involved.
Chinese underground banks are also using cash from criminal groups through activities such as drug trafficking, organised illegal immigration and human trafficking. Chinese student accounts were sometimes used as a back door to get money into the banking system, often to the tune of tens of millions of dollars.
It would be interesting to know the extent to which the present intake of hundreds of thousands of overseas students in Australia is facilitating this process as well. It is all being a “part of Asia,” a bad part.
“Imagine trusting your life savings to a group of strangers you know only via WhatsApp. Some affluent Chinese people are willing to make that gamble to get part of their wealth out of the mainland. Take 32-year-old Phoebe, who recently moved almost a million yuan ($210,000). To do it, she first had to transfer her money into the account of a local facilitator. Then, Phoebe, who requested to be identified by only her first name because of privacy and legal concerns, had to sit tight.
A few tense hours later, transactions began to pop piecemeal into a separate account she holds in Hong Kong. While the city has been stripped of many of the political freedoms it used to enjoy, it still occupies a unique place in China’s financial ecosystem as the only area with unfettered access to global capital markets. Once cash is there, it can go anywhere.
The funds that appeared in Phoebe’s account came from 10 people in total—one of whom deposited the equivalent of $2000 in notes via an ATM. The transaction moved through an informal, unregulated system known around the world as hawala. On one side of the administrative border between the mainland and Hong Kong, Phoebe handed over her money to members of her facilitator’s network; on the other side, the transaction was mirrored by others in the network who dropped money into her account. The entire operation was dependent on faith. But Phoebe’s wait wasn’t quite as nerve-jangling as you might expect: She’d been referred to the remittance agency—which is illegal in China—by her established, well-regarded wealth manager introduced via mutual connections.
Since international borders reopened post-pandemic, advisers to the rich report a surge in demand for overseas backup options. Crackdowns on ideologically out-of-favour industries, uncertainty over geopolitical tensions and Xi Jinping’s push for “common prosperity” have spooked the rich and even the middle class. In addition, the domestic economy looks increasingly dire. Exports are struggling, house prices are falling, and more than one in five young people are out of work. Many wealthy families feel it’s essential to have money outside the country, whether to diversify assets or to pave the way for potential future immigration.
Moving money
Traditional havens still hold their allure—think a condo in Vancouver or US equity investments—but over the past two years Singapore has increasingly emerged as a favoured destination. In the stable, low-tax city-state where Mandarin is one of the official languages, signs of the influx of Chinese cash are everywhere. Nightclub tables fetch as much as $US70,000 ($110,000) an evening during the Formula One Singapore Grand Prix, trendy wine bars for Chinese billionaires abound, and there’s been an explosion in the number of family offices managing the assets of the rich.
Yet opportunities to move cash legitimately from China are severely limited, with individuals normally allowed to wire only $US50,000 a year overseas. They also have a one-time opportunity to move their money when they emigrate. Plugging the gap is where the underground networks come into play.
“These agencies have sprouted to meet soaring demand,” says Joel Gallo, an adjunct professor of finance at New York University Shanghai.
“They act as quasi-banking firms, yet operate without the scrutiny of one and adroitly engage in regulatory arbitrage by standing in a gray zone.”
There’s no reliable estimate on how big the industry is, but probes disclosed by authorities suggest an enormous scale. One investigation in China’s western Gansu province uncovered an operation with 75.6 billion yuan in assets, state media reported in 2021, citing China’s State Administration of Foreign Exchange. The money was spread among a network of five organisations that used more than 8000 bank accounts across more than 20 provinces.
The networks are truly global in scope, operating not only in Hong Kong but wherever there are significant numbers of the Chinese diaspora. It’s “highly likely” that underground banks will have pools of funds ready in key locations, so recipients can receive their cash quickly, and in the local currency, according to a 2019 intelligence assessment by the UK’s National Crime Agency (NCA).
Linking up with one of these money shops, though, isn’t a decision to be taken lightly. People caught using illegal currency-exchange services in mainland China usually are fined 30 per cent or more of the amount of money they attempted to transfer. If the sum is significant, those providing the service face significant jail time. Although the maximum penalty of a life sentence is typically handed down only when there are compounding offences such as bribery, reports of sentences ranging from one to five years are common.
Although China’s capital laws don’t apply if you’re in the likes of Hong Kong, the UK or Singapore, there’s a risk of legitimate banks getting suspicious about the source of funds. A spokesperson for the Monetary Authority of Singapore says that while the city-state doesn’t implement the capital controls of other jurisdictions, the regulator requires financial institutions, including remittance agents, to detect and report suspicious transactions and behaviour. Institutions are also required to mitigate reputational, legal and operational risk from activities affected by other jurisdictions’ laws.
Singapore’s banks have reason to be on especially high alert: In August authorities arrested and charged 10 people with Chinese origins with a range of crimes including money laundering. More than S$2.8 billion ($3.2 billion) of cash and other assets were frozen or confiscated. The allegations involve attempts to move proceeds from illicit activities such as scams and illegal gambling, not remittances.
Walking a tightrope
But there is a dark side to remittance operations. To ultimately settle exchanges via hawala, Chinese underground banks regularly use cash generated by criminal groups through activities such as drug trafficking, cigarette smuggling, organised illegal immigration and human trafficking, according to the NCA. For example, a gang with operations in both China and the UK might front the money to pay a hawala recipient in London and then get paid a corresponding amount by the underground bankers in Shanghai.
The British law enforcers found that Chinese student accounts were sometimes used as a back door to get money into the legitimate banking system. The NCA identified more than 100 people who’d made cash deposits into over 14,000 personal bank accounts held or set up predominantly by Chinese students. The amount of cash put into these accounts in a 12-month period totalled in excess of £100 million ($190 million), with some of the people parking more than £2.5 million each.
The high stakes of navigating this murky world are one reason why trusted financial professionals have emerged as go-betweens. While it could cost them their careers if caught by company compliance, private bankers under pressure from clients can step into a gray zone. Bloomberg News spoke to four financiers who discussed how the lines can be blurred. All requested anonymity to speak freely. One former private banker, who currently works at a multifamily office, describes how he’s personally been involved in moving money for wealthy clients. Another financier says he’s helped introduce clients to such services, while his firm helps rich Chinese set up variable capital companies—a structure used by some investment funds in Singapore that can shield the ultimate beneficiaries’ identity from the public, though regulators can see.”
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