Chinese burn

Solicitors regularly encounter funds originating from abroad, including from China. Ciara McQuillan examines the steps an Irish solicitor should take when such funds are used in an Irish transaction 

Solicitors practising in conveyancing and commercial property regularly encounter funds originating from abroad, including from the People’s Republic of China.

Those funds are often substantial and are frequently used for property purchases, business acquisitions, and other investments. AML legislation requires solicitors to obtain satisfactory information (and in some cases evidence) of a client’s source of funds and source of wealth.

Where money has passed through third-party settlement arrangements, underground banking networks, offshore structures, commingled accounts, or other mechanisms designed to bypass capital controls, obtaining reliable verification may prove exceptionally difficult or impossible.

Difficulty can arise in establishing the source of funds. The difficulty is not the client’s nationality but, in some cases, the inability to verify the lawful origin of the funds and how they left China. 

China operates a restrictive foreign-exchange regime. Large transfers may reach Irish solicitors’ client accounts through opaque routes, sometimes in breach of Chinese law.

This presents a compliance challenge with solicitors’ obligations under both the Criminal Justice (Money Laundering and Terrorist Financing) Act 2010 and the Solicitors (Money Laundering and Terrorist Financing) Regulations 2020 (as amended).

Solicitors providing AML-regulated legal services are designated persons under the 2010 act. Before establishing a business relationship, they must conduct customer due diligence, assess money-laundering and terrorist-financing risk, and apply a level of due diligence appropriate to the risk.

They must also identify and verify the source of funds (the origin and transfer route of the monies used) and the source of wealth (how the client acquired those monies) with reliable, independent evidence.

Funds from China will often require application of enhanced due diligence.

Chinese controls

China’s foreign exchange controls are administered by the State Administration of Foreign Exchange (SAFE). These controls apply to both individuals and corporate entities.

In the case of individuals, the central feature of the regime is the annual foreign exchange quota of US$50,000 or its equivalent in other currencies. Each Chinese citizen may, through the authorised banking system, purchase foreign currency up to that limit in a calendar year.

The quota is intended to meet ordinary personal needs, such as travel, overseas-education fees, and medical expenses. It is not, in the ordinary course, a lawful mechanism for overseas property investment.

Chinese banks are accordingly required to verify the stated purpose of the foreign exchange purchase. Where a client contends that funds were remitted lawfully through the Chinese foreign exchange system, SAFE-related filings, approvals, registrations, or bank confirmations may support that account.

Such material is, however, evidential rather than determinative, and must be assessed against the amount transferred, the identity of the remitter, and the wider source of funds and source of wealth evidence.

The practical implication for an Irish solicitor is that a remittance of €300,000 or €500,000 for the purchase of Irish property cannot ordinarily be explained solely by reference to one individual’s annual personal foreign-exchange quota.

The amount also does not correspond naturally with the ordinary personal purposes for which that quota is generally available.

Separate regulated channels may exist for particular forms of permitted outbound investment, but any reliance on such a channel should be supported by the relevant approvals, registrations, and bank records.

Accordingly, where a client or a family member has transferred a substantial sum from China to Ireland, the solicitor should obtain sufficient information and documentation to understand the source of the funds and the route by which they were transferred.

If the explanation is that the funds were remitted through the individual foreign-exchange quota, the solicitor should assess whether the amount, stated purpose, identity of each remitter, and supporting records are consistent with that explanation.

Any material inconsistency may indicate a possible breach of Chinese foreign-exchange controls and should prompt further enquiries.

Such a breach would not, without more information, establish that an offence has been committed in Ireland or that the funds represent the proceeds of criminal conduct.

The solicitor must instead assess whether the circumstances, as a whole, give rise to knowledge or suspicion, or reasonable grounds for suspicion, for the purposes of Irish anti-money-laundering legislation.

Circumventions

Practitioners should be alert to the principal methods by which value may be moved out of China in circumvention of capital controls. Each method carries distinct AML and evidential risks.

One method is splitting. Multiple individuals, often friends or relatives, each use their own annual quota to purchase foreign currency. The funds are then pooled in an overseas account and remitted onward to the solicitor’s client account.

The hallmark is a pattern of transfers below the individual threshold from persons who are not parties to the transaction and have no obvious connection to it. 

While this does not mean that the monies are the proceeds of crime, it does make establishing the source of funds difficult, because it would involve having to identify all parties splitting the funds.

Another route is underground banking. This requires particular attention, because it is difficult to detect from the receiving end of the transaction.

It operates on a principle of value matching. A client in China deposits renminbi/yuan with an underground banker. The banker then instructs an associate or controlled account overseas to pay the equivalent amount in foreign currency to the client’s nominated overseas account.

The renminbi deposited in China never crosses a border. The foreign currency paid out overseas was already outside China in a separate pool of funds available to the network.

From the solicitor’s perspective, the danger is that the funds received may appear legitimate on their face. The bank statement may show a transfer from a reputable overseas bank. A client may produce documentation showing a superficially plausible chain of transfers.

The difficulty emerges only when the solicitor probes the source of wealth and the mechanism by which the funds left China.

For solicitors, the critical point is that funds passing through an underground banking network may be impossible to verify satisfactorily as legitimate. The solicitor may be unable to confirm the source of wealth because the link between the client’s assets in China and the funds received in Ireland has been broken or obscured.

The solicitor may also be unable to confirm the source of funds because the immediate source is a pool of commingled money of uncertain provenance.

Trade-based manipulation is another route. It may involve over-invoicing, under-invoicing, misdescription, undervaluation, or other manipulation of import and export transactions so that value is retained offshore and later used as part of a capital transfer.

Cryptocurrency may also be used, resulting in conversion of renminbi into digital assets in China, transfer to an overseas wallet, conversion to a fiat currency, before deposit into a bank account.

Third-country routing creates a further difficulty. Funds may be sent to Hong Kong, Macau, or another intermediary jurisdiction before being transferred to Ireland. The intermediate jurisdiction creates a layer of apparent legitimacy, making the tracing of funds back to mainland China more difficult.

The concern is not merely that these routes are unusual, but they may obscure the true origin of the monies, making it materially harder to verify the source of funds and the transfer mechanism to a satisfactory standard.

Red flags

The following indicators, individually or combined, should alert the solicitor to the possibility that funds from China have been moved in circumvention of capital controls or through underground banking channels:

• Multiple transfers from different named individuals who are not parties to the transaction, with no obvious relationship to the client,
• Funds arriving from third-party personal or corporate accounts without satisfactory explanation,
• Funds routed through intermediate jurisdictions, particularly Hong Kong, Macau, or Southeast Asian countries,
• A client’s inability to provide a clear, consistent, and documented explanation of how the funds were accumulated and transferred out of China,
• Bank statements, tax returns, employment records, or other documents that cannot be independently verified or appear inconsistent,
• An amount grossly disproportionate to the client’s declared income, occupation, or business activities,
• Source of wealth involving cash-intensive businesses where income is difficult to verify,
• Reluctance or inability to provide original Chinese-language documents with certified English translations,
• Funds arriving from a corporate account where the client is not a director or shareholder,
• A structure that appears designed to avoid reporting thresholds or obscure the trail of funds.

No single red flag is determinative. However, the presence of several indicators should alert serious concern and require enhanced enquiry.

Practical risk mitigation

Solicitors and firms handling transactions involving funds from China should approach them with a structured risk assessment.

First, the firm’s (business) practice-wide risk assessment should specifically address the risks associated with funds originating from China and should reflect the features of the Chinese capital control regime and the methods of circumvention described above.

Second, the solicitor should consider at the outset whether the transaction presents a higher risk of money-laundering or terrorist-financing, and whether enhanced due diligence is required.

Third, the solicitor should require a detailed written explanation dealing separately with the source of wealth and source of funds. The explanation should state how the funds were accumulated, how they were transferred from China to Ireland, and what transfer mechanism was used.

Fourth, the solicitor should obtain and retain supporting documentation. Depending on the circumstances, this may include Chinese personal income-tax returns, employment contracts, business-registration documents, bank statements showing the domestic accumulation of funds, and evidence of the lawful conversion and remittance of foreign currency. 

If the transfer was said to have been made through the banking system, the client should be able to produce documentation evidencing the foreign-exchange purchase and remittance. If no such documentation can be produced, the solicitor must consider why.

Fifth, in cases involving significant sums, the solicitor should consider independent verification of Chinese documents, including certified translation and, where warranted, a legal opinion from a Chinese law firm on the legality of the outbound transfer.

Sixth, where the solicitor forms a suspicion, or has reasonable grounds to suspect, that the funds represent the proceeds of criminal conduct or that money-laundering is being attempted, a suspicious transaction report must be made to FIU Ireland and the Revenue Commissioners.

The obligation arises at the point of suspicion and does not depend on certainty. The solicitor must not inform the client that a report has been or will be made.

Finally, the solicitor should maintain contemporaneous file notes, recording the due diligence steps taken, the documents obtained, the risk assessment, and the reasons for any decision to proceed or decline the retainer.

Getting it wrong

The consequences of failing to discharge these obligations are severe. Under the 2010 act, a solicitor who fails to apply customer due diligence or enhanced due diligence, fails to report a suspicious transaction, or engages in or facilitates money-laundering may commit a criminal offence.

Beyond criminal liability, the solicitor may face regulatory consequences, including disciplinary proceedings, which may cause reputational damage to the solicitor and firm.

The essential point is that the solicitor’s obligation is to examine, apply due diligence proportionate to the risk, and report where suspicion arises.

Commercial pressure cannot displace that duty. It requires specific knowledge, specific questions, a willingness to decline retainers when necessary, and reporting suspicious transactions as necessary.

Gatekeeper

The flow of funds from China into client accounts is a present and growing reality. It is driven by legitimate demand, including investment in property, education, and business, but it takes place against a capital-control regime that makes lawful large-scale transfers by individuals exceptionally difficult.

The gap between demand to move funds and the lawful channels available has created an environment in which splitting, underground banking, trade-based manipulation, third-country routing, and cryptocurrency may be used to move value offshore.

The Irish solicitor stands at the gateway. The critical question is not whether the client appears credible or whether the immediate remittance appears regular on its face. It is whether the solicitor can verify, by reliable and independent evidence, source of wealth, source of funds, and the route by which the funds entered the transaction.

Where satisfactory verification is not forthcoming, the solicitor should not proceed on reassurance alone.

Firms should train fee-earners on these risks, update their risk assessments to reflect the Chinese capital-control environment, and seek specialist advice where the complexity of a transaction exceeds in-house expertise.

Ciara McQuillan is an AML executive and solicitor in the AML Section of the Law Society’s Regulation Department. She is grateful to the heads of AML and Regulatory Legal Services for their input on this article.