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Money Laundering Regulations and Funds from China for a Property Purchase – Why can’t we use them?

Money Laundering Regulations are essential to every real-estate transaction and compliance with them is a part that solicitors and conveyancers will sometimes spend a lot of time on, as early as the very start of a purchase. For clients resident in the EU or UK, these checks can be straightforward, primarily consisting of the following:

  • Checking the client’s proof of identity (e.g. their passport or UK/EU photo driving license);
  • Checking the client’s proof of address (e.g. their bank statement or utility bill);
  • Evidence of the client’s funds for the purchase (e.g. bank statement showing where the money is held or a mortgage offer from a Lender);
  • Confirming the source of funds (e.g. regular income as an employee or employer, sale of another property or a pension).

However, the above is not good enough when it comes to clients that are Chinese nationals (holds a Chinese passport) and their source of funds is coming from within China. This is due to China’s regulations that were amended in November 2009 that stated that Chinese citizens are not permitted to transfer any sum of money that would exceed the equivalent of USD 50,000 out of the country in one calendar year. In 2017 this was expanded so that the maximum overseas withdrawals by a private individual using a Chinese bank card is only RMB 100,000 (around USD 14,000).

The most important part for us solicitors and conveyancers in real-estate, also noted by the National Crime Agency (NCA) in their report on “Chinese Underground Banking and ‘Daigou’” in October 2019, is that there is currently no legal means for Chinese citizens to transfer currency overseas for the purpose of buying property as an investment. China made it clear in their domestic notice titled “Notice of the State Administration of Foreign Exchange on Further Improving the Management of Personal Settlement and Sale of Foreign Exchange” (国家外汇管理局关于进一步完善个人结售汇业务管理的通知) that in order for a Chinese citizen to use their domestic funds from China to purchase property in the UK they would have to provide their bank in China with proof of the cancellation of their residence in China. This is because individual direct investment is not permitted by the Chinese authorities.

A common scenario that has derived from China’s policy (which I have also personally encountered on many occasions) is the client attempting to circumvent those controls by dividing a large sum into many smaller amounts through friends, family or colleagues, since the overseas transfer of USD 50,000 is an allowance given to each individual. This process is more commonly referred to as “splitting”. Until the NCA’s supporting document in 2019, it was largely thought to be acceptable provided the usual checks were carried out and the source of fund were legitimate. This is now clearly not the case as it is still against China’s regulations. In that scenario, the solicitor or conveyancer handling the matter would have to decline to act for the client and depending on how far the transaction has already progressed, it may need to be reported to the NCA for a verdict before any money can be returned to the client if money was already in the law firm’s client account.

A common misconception that some clients have when approaching the solicitor or conveyancer is that there is a limited enforcement period for the money laundering checks, i.e. if their funds may have successfully circumvented China’s foreign exchange restrictions through whatever means and have been in a UK bank account for over 6 months, then it is considered “legitimate”. This is not the case and we need to clarify to the client that there is no limitation period as to money laundering checks.

So, is there a scenario where Chinese citizens can buy Property in UK at all? As far as NCA are concerned, the only proper channel is via registration with a business approved by the Chinese Government’s “Qualified Domestic Institutional Investor” (QDII) programme, which have strict conditions that must all be met, some of which are:

  • The registered business must have personnel with experience of investment abroad (including 1 member with over 5 years and a further 3 members with over 3 years);
  • Value of assets and number of years in operation must be a certain amount depending on the business type;
    • RMB 200 million in net assets plus 2 years in business for asset management companies; or
    • RMB 800 million in net assets plus 1 year in business for securities firms.

The only other accepted scenario as referenced above is where the client has already provided their own bank with proof of the cancellation of their residence in China.

Perhaps in the future China will ease on these restrictions, should they see a bigger benefit to allowing individual direct investment abroad but until then, solicitors and conveyancers ought to be extra cautious when carrying out their money laundering checks so as to not get caught out.

Posted By Sam Yuen

11 February 2022

Sam Yuen
Solicitor - Real Estate