Title: Unmasking Money Laundering Through Underground Banking: A Focus on China-Linked Transactions
Date: July 2023
In light of growing concerns over money laundering via underground banking schemes, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) has published an Operational Alert, emphasizing indicators associated with illicit transactions with ties to China, especially in Hong Kong.
Project Athena: Fighting Money Laundering
Initially driven by investigations into casino-related money transactions involving bank drafts, Project Athena—a collaborative effort between FINTRAC, the Combined Forces Special Enforcement Unit – British Columbia, and other partners—is now confronting a wider scope of money laundering techniques and sectors. This expansion includes real estate, securities, automotive, and the legal profession, spurred by shifts in money laundering methods due to pandemic-related casino closures.
Figure 1: Key steps involved in transferring funds through underground banking schemes.
Evolution of Project Athena
Project Athena’s genesis came from probing the use of bank drafts in casinos, paving the way for a more extensive examination of illicit activities within sectors beyond gambling.
In their analysis of nearly 48,000 transactions related to underground banking schemes, FINTRAC identified that a substantial proportion originated in China, predominantly Hong Kong, via wire transfers to Canada. The subsequent flow of funds entered sectors such as casinos, real estate, securities, automotive, and the legal profession. FINTRAC reported a noteworthy prevalence of layered funds and investment account usage for money laundering schemes.
Use of Money Mules and ‘Daigou’ Networks
Suspected money mules often presented high volumes of cash deposits or large wire transfers from anonymous sources in China. These intermediaries facilitated transactions by purchasing bank drafts addressed to individuals or entities linked to the sectors mentioned earlier.
Additionally, ‘daigou’ networks—where individuals in China bought high-demand goods from Canada on behalf of clients—were discovered to be potentially used for laundering ill-gotten funds.
Misuse of Various Sectors
Real Estate Sector
Properties were targeted with income originating in China used to buy bank drafts linked to specific addresses or groups of units within the same address from real estate developers.
Securities Sector
Investment firms, financial planners, and investors were susceptible to receiving large bank drafts from obscure sources in China. Funds were then invested in short-term investment vehicles like Guaranteed Investment Certificates (GICs), eventually being redeemed for penalties and moved to other client accounts to conceal the original source of the funds.
Automotive Industry
Transactions involving automotive sector entities revealed inconsistent usage of funds. High-end and second-hand car dealerships, automotive import/export entities, and related businesses and their owners were targeted. ‘Straw buyers’ were identified as using funds from China to procure vehicles from suspicious dealerships, which often did not match their stated occupation. Furthermore, circular flows of funds between different entities and import/export businesses, particularly those located in China, were unearthed.
Legal Profession
Legal professionals, including lawyers, law firms, and notaries, were found vulnerable due to client confidentiality concerns. Laundered proceeds were processed by misusing client accounts or managing trusts and corporations, in addition to providing legal services for questionable real estate transactions. FINTRAC observed circumstances where legal professionals emerged as the beneficiary of bank drafts from unknown sources in China; once the drafts were sent, no further transactions related to the property were observed in the sending client’s account.
Suspicious Transactions: More than a ‘Gut Feel’
Reporting entities must consider facts, context, and money laundering indicators when deciding to file a suspicious transaction report to FINTRAC. A comprehensive list of money laundering indicators associated with China-linked transactions and underground banking schemes can be found in the Operational Alert. Evaluating these indicators, along with client information and surrounding circumstances, can help determine reasonable suspicions that a transaction might stem from money laundering through underground banking schemes.