Are Chinese expats being targeted by the UK’s anti-money laundering regime?

13 Jul 2023, 28 mins ago

The UK operates a strict regime of both civil and criminal tools to combat money laundering under the Proceeds of Crime Act 2002 (POCA), which is implemented by various government bodies, including the National Crime Agency (NCA) and His Majesty’s Revenue and Customs (HMRC), as well as local police forces.

In recent years, statistics show that the sum of funds forfeited under POCA has risen exponentially. In 2019/2020, the sum forfeited was just over £50 million. In 2020/2021, the figure rose to £110 million, and in 2021/2022, the figure rose again to £191 million.

The UK government does not publish statistics on the nationalities of the owners of the funds seized; however, it is recorded that the Chinese diaspora forms approximately 0.7% of the UK’s population. In this blog we discuss the UK’s money laundering regime in the context of Chinese expats living in the UK.  

In 2019, the NCA began a spur of enforcement action in the form of account freezing orders against over 100 bank accounts. Through the years, we have continued to see Chinese nationals being targeted by the NCA, HMRC and other law enforcement agencies. Around the same time, the NCA published a paper on its position regarding the threats posed by the Informal Value Transfer System (IVTS) and the “Daigou” system, which we explore in further detail below.

R v Jiang

The case of R v Jiang [2022] EWCA Crim 1516 was recently decided in the Court of Appeal, in which a Chinese national operated a money remittance service which allowed him to provide RMB in China in exchange for Pounds Sterling in the UK. The respondent’s parents would provide him with money in China, and with the aid of Chinese expats he found online in the UK, he would transfer that money into Pounds Sterling. He would then buy designer goods in the UK using the Pounds Sterling and sell them back in China. In this case, the respondent was convicted on one count of operating an unregistered money service business, and the funds involved in his remittance business were subject to confiscation. The Court of Appeal ruled in this case that not only were the profits from the businesses criminal property, and therefore liable for forfeiture, but that the entire turnover of the business was also criminal property, and therefore liable for forfeiture.

Informal Value Transfer System and “Daigou”

The situation involved in the case of Jiang is what the NCA might describe as a mixture between the IVTS and a Daigou.

An Informal Value Transfer System (IVTS), more commonly referred to as Chinese Underground Banking, is the idea that the client trying to remit funds from China to the UK would first pay someone in China, and then the IVTS operator would pay them an equivalent sum in the UK (often in cash).

The “Daigou” system (i.e. buying expensive goods in the UK such as designer handbags, baby formula, etc. and selling them in China), is the idea is that Chinese expats would buy these goods in the UK and bring them back or ship them to China for sale (i.e. often not disclosing this to Chinese customs). Their product would then be cheaper than goods subject to import tariffs and be safe from the risk of counterfeit goods in China.  

IVTS and Daigou are concepts that many expats are familiar with and is not limited to the UK.

The NCA is of the view that IVTS schemes operated in the UK are vulnerable to money laundering, as UK criminals can mix in their cash with that of the IVTS, so as to create a cash pool that the IVTS operator can draw from. In addition, they are of the view that the IVTS is unlawful if it is unregistered, as it should be classified as a regulated money service business (i.e. a business that requires registration in the UK).

The NCA’s position on Daigou is similar, in the sense that Daigou requires a cash pool in the UK to purchase the luxury goods, which could be susceptible to criminals in the UK who can use it to launder cash. What’s more, it is unlawful in China to circumvent tariffs and income tax, and is potentially in violation of HMRC’s VAT retail export scheme.

In response to this, a common enforcement method used by the UK authorities (including the NCA) is to issue freezing orders against funds suspected to be involved in IVTS and Daigou cases, and thereafter, to issue forfeiture orders against the same funds. We discuss more about freezing orders and forfeiture orders in more detail in this blog.

Occasionally, it may be that an individual is lawfully living and working in the UK, but, due to various reasons, become clients of IVTS or Daigou schemes (for example, if they urgently wanted to move money into the UK). As a result, they may become unknowing participants of these schemes, and their funds may be subject to enforcement action by the UK authorities. The law can be very harsh in these circumstances. In the case of Director of ARA v Szepietowski and others [2007] EWCA Civ 766, Moore-Bick LJ states that “it is not difficult to think of circumstances in which the property might be recoverable from someone who is himself entirely innocent”. As such, even if one is an unknowing participant of these schemes and absent of wrongdoing, their funds are still at risk.

Possible defences

In such cases, should the UK authorities apply to forfeit the funds, some possible defences to be considered are:

1. Section 308 Defence

For a Section 308 defence to apply, the recoverable property must have been obtained in good faith, for value, and without notice as to its tainted origins. The onus is on the person raising this defence to prove. There are many circumstances in which the UK authorities can argue that it should have been known that the funds were tainted, even where there is no actual knowledge of this. 

2. Proportionality Defence

For forfeiture to occur, the court must be satisfied that it is proportionate to do so with the aim of reducing crime when weighed against the respondent’s human rights under the European Convention of Human Rights. Where funds are required for commercial reasons, it may be difficult to raise a human rights argument.

Expansive investigations

Our team of legal experts have seen other types of cases where the UK authorities may start by targeting a low-value pool of funds, but through the course of their investigation begin freezing other assets belonging to the respondent. There is no guarantee that the UK authorities will necessarily be satisfied with what they have initially frozen, and they will look to freeze and forfeit as much money as is legally possible and permissible.

Conclusion

In light of the above, it is difficult to say that Chinese expats are being specifically targeted by these measures, but it is very likely the case that the UK authorities will continue with such enforcement measures, which may disproportionately affect the Chinese diaspora.

If you find yourself subject to an account freezing order or forfeiture order, make sure you contact us for advice in the first instance. Gherson has seasoned expertise in this area including a Chinese-team who can assist.

More from Gherson on this topic

In an earlier blog on this subject titled An Account Freezing Order – What Are The Next Steps?, Gherson provided basic background to an Account Freezing Order and potential steps to take against one.

How can Gherson help?

Gherson has specialist knowledge and experience in successfully challenging account freezing orders and cash forfeiture proceedings.  If you require any advice on matters discussed in this blog, then Gherson would be more than happy to assist.

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The information in this blog is for general information purposes only and does not purport to be comprehensive or to provide legal advice. Whilst every effort is made to ensure the information and law is current as of the date of publication it should be stressed that, due to the passage of time, this does not necessarily reflect the present legal position. Gherson accepts no responsibility for loss which may arise from accessing or reliance on information contained in this blog. For formal advice on the current law please do not hesitate to contact Gherson. Legal advice is only provided pursuant to a written agreement, identified as such, and signed by the client and by or on behalf of Gherson.

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