Trade Based Money Laundering is laundering of money with help of trade of goods and commodities. Trade Based Money Laundering is global challenge now-a-days. Emerging economies like India are battling this global phenomenon. One such emerging and second largest economy is China. Money Laundering in China is very chronic. Different techniques are frequently used to launder the funds. Some of the most common are cross border telecommunication frauds, Illicit fund raising, smuggling etc.
Trade Based Money Laundering Techniques
China has vastly developed its trade sector. So has unfortunately developed many trade based laundering techniques.
Illegal Trading of Bill of Exchanges
Bill of exchange is a written order to a person requiring them to make a specified payment to the signatory or to a named payee; a promissory note. Then such bill is presented by payee in the bank of remitter and cashed. As soon as it is cashed, the amount of payment is credited in payee’s account. In first half of 2018, many banks in China were penalized for illegal trade of bill of exchanges. These banks illegally traded value around 7.9 billion yuan i.e USD 1.25 Billion. Many such frauds took place in China in past. In one such case employees of bank sold Bill of exchanges illegally to third party agency. This agency then sold such bill of exchanges to another bank. The proceeds of sale were used by employees to invest in stock market. In another bank case, some Bill financing agent encashed these bills and diverted these funds in stock market.
Fake Invoicing/False Invoicing
Fake invoicing or false invoicing is submitted the invoice which either contain fake/false details or is inflated or duplicated. Such type of fraud can be committed to defraud the contracting personnel. Even there can be collusion with contracting personnel. In China this technique was particularly used to export illegal Chinese goods in European market. Fake invoices were provided to European custom departments. These fake invoices were of the goods like women clothes and shoes. Criminal gangs flooded European black market with such illegal goods. A huge amount of custom duty was lost by the hands of UK. In one example given by the anti-fraud team, women’s trousers imported from China were declared in the UK at an average price of €0.91 a kg, although market prices for cotton were €1.44kg. Generally Fake invoicing is use to manipulate and inflate import export data. According to some reports, in 2013 the value manipulated by fake invoicing was US$75 billion. This report also suggested that many import export statistics were created excluding the data from port of Shenzhen. This port is where much of the fraud was suspected to have taken place. Many reports suggest that China’s Import and Export data is manipulated by companies faking invoices to secure financing. This is conducted mainly in Hong Kong as borrowing rates there are cheaper.
Many trading companies take loans by keeping their commodities as collateral in banks. It is regular practice in China. But in 2014 many cases were lodged as fake receipts of commodities were provided. Some companies mortgaged same commodity multiple times by providing fake receipt on each loan request. The exposure amount of banks increased substantially due to such malpractice.
EU Sanction on China
Sanction is a policy imposed by United States Security Council, the European Union and certain individual countries on countries or target entities who are connected to imposing country through terrorism or any other threat to security or integrity of imposing Country. Basically it is a restriction on exports to maintain international peace. European Union has imposed one such sanction on China. That sanction is Arms Embargo Sanction. Arms Embargo is a prohibition of Export of weapons or Dual used Goods i.e. use for civil as well as military purposes. In 1989 Chinese Government violently suppressed the protests of Tiananmen Square of Beijing. Following this violent suppression, European Union imposed this Arms Embargo Sanction. This arms embargo on China has been imposed by EU laws, and implemented in the UK by statutory instruments. Generally all Military Items are included in the list as to restrict all type of exporters but the scope of this Arms Embargo defined by United Kingdom is-
- lethal weapons, such as machine guns, large caliber weapons, bombs, torpedoes, rockets and missiles
- specially designed components of the above and ammunition
- military aircraft and helicopters, vessels of war, armored fighting vehicles and other such weapons platforms
- any equipment which might be used for internal repression
Following list prepared by UK Military. But there is no such common list of items covered under Arms Embargo. So each country including UK, interpret this embargo as per its own laws and regulations.
Trade Ban on a Chinese Company
In April 2018, US Department of Commerce imposed ban on Chinese telecommunications-gear maker ZTE. US Government alleged that ZTE violated trade sanction settlement against Iran. ZTE was previously fined for supplying telecommunication equipment to Iran and North Korea. ZTE also appreciated employees involved in illegal conduct. But this ban was soon lifted as ZTE said to have deposited $400 million in a U.S. bank escrow account as part of a settlement.
So overall China has brought many Anti Trade Based Money Laundering measures but still effective measures and accurate AML policies must be brought.