About once a month, someone will call one of our China lawyers wanting to discuss “working with you to help your clients get money out of China. These are nearly always phone calls (not emails) and we typically do not take the calls. Our feeling is that we’ve been doing this long enough (and discussing this long enough with ultra-high level finance and banking people and with really good China attorneys from other law firms), such that these callers are not going to tell us anything new.
But a few weeks ago a “we can work together to help your clients get money out of China” caller got through. I my defense I was on my treadmill and expecting another call and this caller somehow managed to get my firm’s receptionist to patch his call through to my cell phone and I picked it up. So while on mile four, I listened to this person explain his “foolproof and completely legal method” on how both his company and my law firm could “make a lot of money working together, while all the while I am telling him we were not interested and how it would not work.
He then followed this call up with an email reiterating that “we are on the same team” and setting forth the following method in writing:
- Client transfers RMB to one of our RMB accounts in China (we have both private and corporate accounts)
- Client sends RMB payment slip
- We confirm receipt of funds and match off with an existing client
- The following business day we will transfer the equivalent in GBP (British Pounds) from our UK regulated company to the client’s GBP bank account
- We provide the relevant document to support the audit trail of funds for the client
- Transfers in 1-2 working days
- Unlimited transfer amounts
- Working with an FCA regulated company based in London
- Full audit trail for transfer
- Guaranteed funds. Safe and secure route for RMB transfers
We looked at the plan and sent the following response and never heard back.
What you are proposing is a standard procedure for illegally getting money out of China that has been used for years. Two sets of linked accounts: one bank account in China and then a linked bank account in some other country. There are some Chinese banks that refer their customers to this kind of broker as a service to their customers. The idea is that even though the practice is illegal, a broker introduced by the bank is more likely to be trustworthy. This is particularly true when the initial deposit is made in the bank that made the introduction. The risk skyrockets when the work is done by a broker with no connection with a major bank. In other words, this sort of service is already available to any Chinese person who wants to make use of it and who is willing to pay the broker’s fee and skirt Chinese laws. So there is no need for a foreigner from England to provide the service in China.
Why is the practice illegal?
1. The obvious goal is to evade China’s laws on outbound fund transfers. Any contract set up with that purpose is void and that means it is unenforceable. That means that if something goes wrong, there is no way to enforce it on the Chinese side. Is there a way to enforce it in England? I would think not, under the same principal; the courts of England will not normally allow themselves to be used to assist in enforcing an illegal contract, in the same way courts generally will not enforce an illegal gambling contract.
2. The China side of this operation is not described. But it is clear these Chinese bank accounts are not being operated legally. There will be substantial sums coming into a bank account in China. Whose account? For what legitimate business purpose? Evading Chinese foreign exchange rules is not a legitimate purpose. Acting as an unregistered bank is not a legitimate purpose. How would taxes be paid? What happens to the funds? The funds are by definition stuck in China. For whose benefit? Used to do what?
3. I assume similar questions would be asked on the England side. The Chinese party is acting on trust. They expect the corresponding deposit to be made. But what happens if the deposit is not made? The Chinese party is stuck in China. What can they do?
4. Into what account in England is the money deposited? Part of Chinese foreign exchange control is that Chinese individuals and companies are not permitted to open foreign bank accounts without first securing Chinese government approval to do so and this approval requires a legitimate business purpose. Note that China has a worldwide taxation system, so the money that “just shows up” in these accounts must be reported to the Chinese tax authorities. But such a report would reveal that an illegal transfer had been made. So no report is made. This then is a currency transfer/tax evasion scheme, illegal in China and I would assume illegal in England as well.
So like I told you on the phone, if you are going to do this, you better not ever go to China or to any country that has an extradition treaty with China.
Beyond that, best of luck.
For more on getting money out of China, check out the following six part series we wrote last year:
- Getting Money Out of China: It’s Complicated. How incredibly frequently Western companies have been needing legal help in an (often desperate) effort to get money out of China so they can get funds due to them on all sorts of deals.
- Part 2. How most of the interest in getting money out of China involves purchasing single family homes in the United States or in Europe and how those deals are just not going to happen legally if they require money from the PRC. In this post, we also discussed how the Chinese government seems to apply a three part test in determining whether to allow funds to leave China to go to a Western company. Based on the many deals on which our China attorneys have worked, and the reports we get from our clients and their bankers and financiers, and from China consultants and bankers and financiers with whom we regularly share information, we see legitimacy and benefit to China and deal structure as the three key elements.
- Part 3. This post focused on the “benefit to China” element of China’s three part test.
- Part 4. This post focused on what is/was happening in China that is slowly down payments from China.
- Part 5. This post focused on increasing your odds of getting paid.
- Part 6. This post focused on what you can do to increase your odds of money leaving China legally.