Understanding the risk associated with China Trade

Objective of this article is to create awareness about the risks associated with the China Trade. American President announced the trade war against China due to the excessive duties charged by the Chinese Government on USA manufactured cars. But trade war is not the only issue related to the China Trade, it has got many other dimensions. In China TBML is catching up very fast. Recently, China was in news due to the nexus between 1MDB and China Petroleum Pipeline Bureau. In China TBML is very chronic. One of the major risks for the bankers working with the Chinese businesses is the sanctions imposed on China.

Sanctions on China

Sanctions is one of the major aspects of the trade based money laundering. The EU arms embargo on China was imposed by the EU on China in response to its suppression of the Tiananmen Square protests of 1989. The troops with automatic rifles and tanks killed at least several hundred demonstrators trying to block the military’s advance towards Tiananmen Square. China has vastly developed its trade sector. So has unfortunately developed many trade based laundering techniques. As a response, European Union and United States stopped selling the Arms to China.

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

Violation of China TBML Sanctions

The definition was interpreted by different countries in a different manner. France was supporting the revocation of the Bans on China. In-spite of ban, wikileaks data revealed that European Union countries in 2003 sold China €400 million of “defence exports” and, later on, approved other sales of military grade submarine and radar technology.

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.

Under Invoicing Technique

Though sanctions were imposed on China by the European Union, China have been the strongest trade partner of European Union. Chinese companies adopted under invoicing mechanism to flood the European markets with the Chinese Goods.

Globally, Chinese companies have dumped their goods by adopting the under-invoicing technique popularly used in Trade Based Money Laundering. When the exports are under-invoiced, it helps the companies to earn profit outside China and park the money in the countries which are comparatively stable and safer than China.

In China, artwork is often used to evade currency controls. The country is one of the fastest growing art markets in the world, and legal sales generated US$11.8bn in 2015. However, with legislation allowing citizens to send just US$50,000 overseas each year, misinvoicing is often used as a way around this.

Challenge before Compliance Professionals

Tackling the Trade related risks and complying with Trade Based Money Laundering provisions is one of the biggest challenges faced by the compliance professionals in the financial institutions. There are certification programs which offer the exclusive training on the Trade Based Money Laundering.

Originally published at giccp.com on July 17, 2018.