The dirty money of China's filthy rich

Explosive allegations about money laundering at the Bank of China should be a wake-up call for Australia, which is fast becoming a destination for illicit capital outflows from corrupt officials and businesspeople.

Earlier this week, China’s state broadcaster CCTV launched a blistering attack on one of the country’s most powerful government-owned financial institutions, the Bank of China, accusing it of money laundering and not complying with the country’s foreign exchange law.

The 21 minutes of TV footage has sent shockwaves throughout the Chinese financial system and Bank of China shed 1.2 per cent off its share price in Hong Kong and 0.4 per cent in Shanghai. Industrial & Commercial Bank of China, the country’s largest lender, lost 1.4 per cent. Bank of China, the fourth largest lender in the country, issued a swift denial of CCTV’s allegations.

CCTV’s serious allegations about the Bank of China -- that it was helping its clients to ‘launder money’ -- has sparked heated debate in the country about massive capital outflows from China, including illicit money that belongs to corrupt officials and businesspeople. Research and advocacy group Global Financial Integrity estimates that between 2000 and 2011, China lost $US3.8 trillion in illicit capital outflows.

On the other hand, defenders of Bank of China argue that the country’s out-of-date foreign exchange control system is out of step with Beijing’s cherished goal to internationalise its currency and to modernise its financial system, namely allowing free flow of capital. For the bank’s defenders, it is only helping people to re-locate their assets.

Chinese regulators, including the People’s Bank of China, the country’s central bank, are facing a terrible dilemma. Chinese financial technocrats want to push ahead with reforms such as interest and exchange rates liberalisation, as well as relaxing capital controls to encourage more outbound investment.

However, China is in the middle of an unprecedented crackdown on corruption, and both official and social media spaces are filled with stories of so-called ‘naked officials’ (whose spouses and children live outside of China) fleeing the country. These people are looking for ways to launder money, and CCTV’s report alleges that some Bank of China employees are quite happy to do that for them, including forging documents.

It is clear that the Chinese regulator needs to strike a delicate balance between the need to reform the financial system and preventing money laundering on a massive scale. The CCTV report has focused the public attention on this explosive issue. Given that trillions of dollars have left China illicitly, the story could very well be a signal from Beijing that it is ready to clamp down on the illegal outflow of money.

China has a relatively weak anti-money laundering system in place. The official anti-money laundering watchdog was not set up until late 2003. Hong Kong’s securities regulator just reprimanded and fined a large Chinese securities firm, Ping An, for lax anti-money laundering standards. The CCTV report also contains incriminating footage of bank employees’ willingness to launder money for clients.

This incident should also be a wake-up call for Australia. We are witnessing a huge influx of Chinese money into Australia, including in the country’s property sector. Much of the money is from the hard-earned cash of Chinese businesspeople and newly prosperous middle class, but there is no doubt that Australia is a destination for ‘dirty money’.

There was also the story about a prominent Chinese businessman who ferried bagfuls of cash in his own private jet and deposited them at a local Bank of China branch, according to court documents. One of China’s leading investigative magazines, Caijing, also published a cover story about corrupted officials who had fled overseas including Australia. A former provincial governor reportedly fled to Australia with 40m yuan.

These stories should be of concern to Australia as this country faces a greater influx of Chinese money. Australia welcomes foreign capital, but this country should not become a safe haven for corrupt officials and their dirty money. 

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