The war against money laundering, though hardly lost, has been for many years a global conflict, with many fronts whose exact contours are in constant flux. One of the more enduring sectors along those fronts is China. China not only is among the top 20 countries on the Basel Institute on Governance’s AML Risk Index, but has the world’s second-largest economy and largest population, and is the third-largest country in geographic size. Its vast financial system comprises not only banking and financial markets, but a “shadow banking” system consisting of informal financial intermediaries, internal financing and trade credits, and coalitions among firms, investors, and local governments.
Unfortunately, the vastness of the Chinese economy and financial system has played an important role in China becoming what one recent report “the global hub for money laundering, not just for the Chinese but for criminals around the world.”
One example of Chinese connections to global money laundering came to light this week, as Italian authorities announced that they had successfully taken down “a complex money laundering operation and an illegal metal recycling business that had enabled criminals to transfer huge amounts of illicit cash between Italy and China.” The police operation was the culmination of a three-year investigation that the anti-mafia prosecutor in Trieste coordinated.
The investigation revealed “a network of firms that between 2013 and 2021 sold around 150,000 tonnes of scrap metal, including copper, brass and aluminium, that came from various sources, circumventing environmental norms and evading taxes on deals estimated to be worth some €300 million (US$363 million).” Companies in the Czech Republic and Slovenia reportedly produced falsified documents, showing that the material had been acquired in China, in order to make the metals look legitimate for end-users, and sent approximately €150 million (US$181 million) in deposits to Chinese banks as apparent payment to enhance the authenticity of the false documentation.
As part of their investigation, the Italian financial police used wiretapping, surveillance, and particularly micro-cameras. Police surveillance operations showed, for example, that when the money was transmitted to China, certain Italian businessmen connected with the operation “received huge bundles of cash back in Italy. On one occasion, €200,000 in cash was handed over in a plastic shopping bag.”
To date, Italian police have placed 53 people under official investigation, made five arrests, and seized €66 million (US$80 million), but are continuing investigations, especially into the Chinese operations.
China certainly appears to be taking its domestic money laundering problem seriously. Just this month, the Central Bank of China released a revised draft anti-money laundering (AML) law that would increase fines for certain offenses and expand the scope of the AML law’s coverage, and Chinese authorities reportedly arrested more than 1,100 people suspected of involvement in laundering proceeds of fraudulent schemes.
Nonetheless, the recent Italian police operation points up the need for expanded AML cooperation between Chinese and foreign law enforcement and regulatory agencies, and between leading Chinese and foreign financial institutions. It also underscores the importance of financial firms’ AML compliance departments maintaining vigilance in identifying China-related international transactions that pose an elevated risk of money laundering.