Money laundering - Chinese style | China Accounting Blog | Paul Gillis

Money laundering - Chinese style

The SEC filed charges on December 10, 2012 against Huakang “David” Zhou, who had brought 22 Chinese reverse mergers to market. One of them, China HGS Real Estate (Nasdaq; HGSH), made it to Nasdaq though a scheme developed by Zhou. HGSH recently was relisted on Nasdaq after suspension because of its stock falling below $1, yet it has risen spectacularly, going from 42 cents on October 31 to a high of $4.35 on November 29, before falling back to $3.74 yesterday. Zhou was charged with numerous violations, including failing to disclose questionable wire transfers and stealing money from investors. The SEC press release and complaint make good reading for anyone interested in the reverse merger story. 

The issue of questionable wire transfers piqued my interest, since the reports on the Bo Xilai case explained how wealthy individuals circumvent China’s currency laws. It appears Zhou used a similar technique to move IPO proceeds back to China. 

Zhou controlled all the offering proceeds. He also hired all the accountants and lawyers for the companies. He was well positioned to do what he wished with the proceeds. 

On one transaction, the SEC alleges that Zhou wired $500,000 to his brother-in-law's U.S. brokerage account. His brother-in-law then wired an equivalent amount in Yuan from his China bank account to the target company in China. Other transactions followed a similar path. The SEC alleges that this method of transferring money was done to avoid China’s currency controls. The SEC case against Zhou does not appear to allege that the transaction broke any U.S. laws, but rather that he failed to disclose to investors the risky nature of the transaction.

The SEC is probably right. That is the technique that has been used by many wealthy Chinese to get money out of the country. Suppose I, a foreigner, wants to bring in $100,000 to buy a car (that will get me an E-series Mercedes). There is a legitimate way to do it, but I could probably get a better exchange rate if I find Mrs Zhang who wants to get money out of the country. If she will deposit 650,000 Yuan in my account in Beijing, I will deposit $100,000 in her daughter’s account in Berkeley. That is clearly a violation of China’s currency controls, yet I expect that it is not an uncommon practice. By the way, I bought my car with Yuan earned in China. These transactions require a lot of trust between the co-conspirators and seem to me to be easily detected by officials. 

Now that the SEC has so clearly documented the case against Mr Zhou and his brother-in-law, I wonder if the Chinese regulators might find some benefit in closer cooperation with U.S. regulators. 

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