High-Profile Spanish Money Laundering Investigation of Chinese Bank Raises Questions About Future of Similar U.S. Enforcement

by Ballard Spahr LLP
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As widely reported, the Spanish police raided last year the Madrid offices of the Chinese state-run Industrial and Commercial Bank of China (“ICBC”), the world’s biggest bank by assets. In the nearly 18 months following that raid and the numerous arrests made at that time, very little information about this money laundering investigation became known publically. That is, until Reuters recently published a lengthy article resulting from its review of “thousands of pages of confidential case submissions” and its “interviews with investigators and former ICBC employees.” The article raises numerous questions regarding the enforcement of European money laundering laws against Chinese banks operating abroad, as well as certain unique political and diplomatic considerations that may exist in those enforcement efforts. Below, we will compare these efforts with similar U.S. enforcement efforts, which are potentially gaining steam.

The Allegations Against ICBC

In great detail, the Reuters article addresses allegations that (1) the bank was a conduit for vast sums of euros illegally laundered from Spain to China; (2) bank employees made incriminating statements intercepted by wiretap; and (3) the bank used customers’ accounts to make transfers to China without their permission. Spanish officials allege that between 2011 and 2013, ICBC’s Madrid branch transferred approximately 225 million euros to China, with “most of it for suspected criminal networks.”  Spanish prosecutors have said that the sums are so immense, “the damage to the socio-economic order and the national economy is clear.” They claim that wiretap transcripts show ICBC bankers “accepted forged documents to conceal the source of the funds, failed to report suspicious transactions and even tipped off the smuggling groups ahead of inspections at the bank.”  ICBC staff also allegedly “discussed how to avoid detection when moving money to China” and “warned of transfers that might attract unwanted attention.”

What’s Next in the ICBC Investigation

Although numerous arrests occurred in the Spanish investigation, to date, no suspects have been formally charged. However, actions affecting ICBC’s ability to continue operating its business in Spain may be imminent.  The Reuters article cites unnamed Spanish law enforcement officials as stating that prosecutors “plan to ask the judge in charge of the case to summon ICBC’s Luxembourg-based European administrative board for questioning for the first time.”  ICBC’s Luxembourg unit holds the bank’s European Union bank license.  The article then cites unnamed sources who assert that ICBC is concerned that Luxembourg’s financial supervisor could ask the European Central Bank to withdraw ICBC’s banking license.

Diplomatic Considerations in European Money Laundering Investigations of Chinese Banks

Perhaps most interestingly, the Reuters article notes the risk that investigations into major Chinese banks like ICBC “pose the risk of diplomatic conflict with Beijing that could affect business relations with the world’s second-biggest economy.” Indeed, according to “senior Spanish officials,” the ICBC arrests last year “ignited a behind-the scenes diplomatic spat,” and China was “particularly incensed by the high profile raid.”  More recently, China’s ambassador to Spain stated that the lack of resolution more than one year after the raid “has undermined the confidence of Chinese business people and investment here and also that of the Chinese government.”  He then stated “a prompt solution” would help “both countries to return to normality.”

Elsewhere in Europe, a once high-profile Italian money laundering investigation into another Chinese bank, Bank of China (“BOC”), ended earlier this year with relatively little publicity. What began with allegations of more than 4.5 billion euros having been smuggled from Italy to China, with roughly half of that money sent to China through BOC, concluded last February with settlements in which BOC did not admit guilt or wrongdoing, but paid a 600,000 euro fine in the criminal case and paid 20,000,000 euros to settle a related tax dispute. It remains to be seen whether the Spanish investigation will track the Italian investigation by entering as a lion and leaving as a lamb – or whether it will represent an existential threat which forces one of the world’s biggest banks to fight for its ability to even do business in the European Union.

It remains to be seen whether the Spanish investigation will track the Italian investigation by entering as a lion and leaving as a lamb – or whether it will represent an existential threat which forces one of the world’s biggest banks to fight for its ability to even do business in the European Union.

Although political and diplomatic considerations sometimes may weigh against potentially harsher enforcement actions against Chinese financial institutions, recent events in the United States indicate that this country may take an increasingly aggressive path.

Noteworthy U.S. Enforcement Actions

On June 29, 2017, in a U.S. Department of the Treasury press release, FinCEN has alleged that the China-based Bank of Dandong “acts as a conduit for illicit North Korean financial activity” and is a “foreign bank of primary money laundering concern.” FinCEN therefore has proposed to “prohibit U.S. financial institutions from maintaining correspondent accounts for, or on behalf of Bank of Dandong” pursuant to Section 311 of the USA PATRIOT Act. Under this proposed rule, which is subject to notice and comment once published in the Federal Register, covered financial institutions “would also be required to apply special due diligence to their foreign correspondent accounts that is reasonably designed to guard against their use to process transactions involving Bank of Dandong.” Former senior Treasury and White House official Juan Zarate believed this move was “the opening salvo of a broader campaign to pressure North Korea through the Chinese financial system.”  As we previously have blogged, full sanctions under Section 311 can represent a “death sentence” for financial institutions because they typically must have access to the U.S. financial system in order to do business.

Similarly, the Bank of Dandong was referenced in a significant civil forfeiture action filed by the U.S. Department of Justice (“DOJ”) in September 2016 in the District of New Jersey, which sought the forfeiture of funds held at the Bank of Dandong and other Chinese banks. Again emphasizing certain connections between China and North Korea, the funds at issue allegedly represented the proceeds of a conspiracy to evade U.S. economic sanctions using a Dandong, China-based trading company and several front companies, facilitate monetary transactions in U.S. dollars through the U.S. on behalf of sanctioned entities in North Korea, and then launder those proceeds, including in and through U.S. financial institutions. As we also have blogged, the DOJ recently took the unusual step of obtaining so-called anticipatory “damming” seizure warrants to try to obtain substantial funds held in U.S. bank accounts belonging to five Chinese companies which allegedly were used to hide transactions with North Korea using U.S. currency in violation of U.S. sanctions and money laundering laws.

It has not just been the federal government targeting certain Chinese financial institutions. Last year, the New York Department of Financial Services (“NYDFS”) fined the Agricultural Bank of China (“ABC”) $215 million for allegedly violating New York’s Anti-Money Laundering (“AML”) laws.  According to the NYDFS press release, the ABC allegedly: failed to heed a warning by NYDFS about improving its compliance functions before increasing the volume of its U.S. dollar clearing through foreign correspondent accounts; used codes when using the SWIFT wire message system to mask the true parties to transactions and thwart regulators; conducted suspicious U.S. dollar transactions involving Chinese, Russian, Yemen, Afghan and Iranian entities; silenced would-be whistleblowers within the bank as to these deficiencies; and generally failed to maintain sufficient AML and anti-terrorism programs.

Given the recent money laundering-based actions against the Bank of Dandong and other Chinese banks, we may see even more aggressive AML enforcement against Chinese financial institutions operating in the U.S. in the near future. Previously, when federal regulators had identified alleged deficiencies in the AML compliance programs of Chinese banks, those regulators – specifically the Office of the Comptroller of the Currency and the Federal Reserve Bank of New York – had entered into settlement agreements in which the banks agreed to tighter controls, but did not face fines or other sanctions. Given recent events, regulators and the DOJ may, if facing similar circumstances today, take a more aggressive approach.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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