Money laundering investigation stymied by China, Italy says
In this Saturday, March 7, 2015 photo, a woman waits in front of the headquarters of the Bank of China as security guards patrol the building in Beijing. (AP Photo/Ng Han Guan)
Erika Kinetz, The Associated Press
Published Friday, June 5, 2015 1:46AM EDT
Last Updated Friday, June 5, 2015 6:56AM EDT
FLORENCE, Italy -- Police in Florence wondered where all the money was going. Italy's economy was heading off a cliff, but its Chinatowns were booming. Luxury cars snaked past Chinese betting parlours and garment factories that hummed into the night. Chinese immigrants were buying up Italian coffee bars and real estate. But their prosperity was not reflected in local tax records.
"What do they do with the money?" said Pietro Suchan, then deputy public prosecutor in Florence. "Do they eat it?"
The answer, after a four-year investigation by Italy's financial police, was no. They discovered that more than 4.5 billion euros ($4.9 billion) -- the proceeds of counterfeiting, prostitution, labour exploitation and tax evasion -- had been smuggled out of Italy to China in less than four years using a money-transfer service. Nearly half that money was funneled through one of China's largest state banks, the Bank of China, which earned more than 758,000 euros in commissions on the transfers, according to Italian investigative documents obtained by The Associated Press. Italian officials said that when they tried to appeal to Chinese authorities for help, they got nowhere.
Once the money left Italy, it vanished behind China's great legal firewall.
Italian police had no way to track the flow of dirty money in China and no way to get the cash back to Italy's depleted state coffers. The Bank of China, which is now under investigation in Italy for money laundering, denied wrongdoing, saying it has always complied with Italian regulations.
A great legal firewall separates China from the West, despite the deep economic ties -- both licit and illicit -- that bind them. A combination of inconsistent co-operation, incompatible legal systems and China's secrecy laws have allowed criminals to globalize more effectively than law enforcement -- and made it harder for Western companies and courts to put them out of business.
The legal firewall has also helped people who sell counterfeit goods use major, state-run Chinese banks as financial shelters on a significant scale, AP found in an article published in May. Counterfeiters have used the banks, including the Bank of China, to process credit card payments and move their money beyond the reach of U.S. law enforcement. But Western companies that have pursued Chinese counterfeiters in the U.S., where many counterfeit goods are sold, have been blocked by China's secrecy laws, which prohibit banks from freezing funds or releasing information on the order of a foreign court. The banks say they are caught in a jurisdictional dispute between the U.S. and China, which maintains that bank secrecy is a matter of national sovereignty.
"Chinese financial institutions can effectively operate behind a firewall that keeps them largely immune from the jurisdiction of U.S. courts and regulatory agencies, leaving U.S. partners, competitors, and investors vulnerable," said a May report from the U.S.-China Economic and Security Review Commission, which advises Congress.
The consequences of that legal firewall are becoming more palpable as Chinese businesses go global. Chinese companies have invested $46 billion in the U.S. since 2000, most of it in the last five years, according to the Rhodium Group, a New York research firm. Chinese banks have expanded their reach, opening overseas branches and buying stakes in foreign banks. Chinese firms have voraciously tapped U.S. financial markets, with the 2014 IPO of e-commerce giant Alibaba ranked the largest in history.
In the shadow of this rapid expansion, however, a quiet war is brewing over whose rules and regulations will apply. At issue is how much China will adhere to existing norms, forged largely by Western powers, and how much it will try to reshape them to conform to its own values and strategic priorities.
For now, the lack of co-operation can effectively shield Chinese firms from overseas litigation, giving Western companies and consumers little legal recourse when something goes wrong.
"It makes it quite uneven in terms of the playing field between the parties," said Otto Lee, a Silicon Valley lawyer who is working with a U.S.-based company that won a trade secret theft case against a Chinese company but can't collect the judgment. "It gives the Chinese entity an unfair advantage."
In Italy, the firewall has given rise to a sizeable black economy in the Chinese immigrant community and prevented police from understanding the global scope of the criminal networks operating on their turf.
While the Italians were shut out of China, The AP was able to track some of the missing money to a Chinese foreign trade company that has been accused of repeatedly shipping counterfeit goods.
The company, a large import-export firm called the Wenzhou Cereals Oils and Foodstuffs Foreign Trade Corporation, sent tens of thousands of fake Converse sneakers to the United States and Croatia, according to a separate lawsuit filed in the U.S., court documents show.
The company's ultimate owner, according to Chinese regulatory filings? An investment group controlled by the Wenzhou city government.
A one-sided investigation
Money2Money, the network of money transfer centres prosecutors say was responsible for funneling the 4.5 billion euros to China, was part-owned by a Chinese family that had immigrated to Italy.
Igor Angelini, head of Europol's financial intelligence group, said the money sent to China via Money2Money likely came from across Europe, especially France and Spain; both have large Chinese immigrant communities.
"We could track physical movements of money across borders in Western Europe," he said. "These agencies acted as a polar attraction for cash."
Police seized transaction records from the Money2Money centres and, with the help of two employees, said they untangled a web of fake names and family ties used to mask the identities of the people sending the money.
Many of the more than 1.5 million transfers, which were fractioned into small sums to avoid triggering scrutiny, were a way for the Chinese immigrants to avoid paying Italian taxes, prosecutors said. Police documented dozens of small business owners -- many of whom ran garment factories powered by under-paid immigrants working illegally -- making remittances of hundreds of thousands of euros, despite declared earnings in the tens of thousands, or less, according to hundreds of pages of Italian court documents reviewed by AP.
Others were caught with heaps of counterfeit purses, wallets, shoes and belts in their factories. Police also traced some of the money back to men caught running Chinese prostitution rings out of apartments around Italy.
Using evidence culled from seized Money2Money computers, police identified the names of individuals and companies in China that received the illicit funds.
That's where the investigative trail stopped.
Suchan, the prosecutor who oversaw the investigation, said he believes much of the money laundered through Money2Money was used to buy counterfeit goods in China, which were then smuggled back to Europe. But he can't prove it.
"We did not have the possibility, despite many attempts made, to have an official contact with the judicial authorities and police of China," he said. "We have discovered 50 per cent of the truth."
Those attempts included reaching out to the Chinese Embassy in Florence and a liaison police officer stationed in the Italian Embassy in Beijing, he said.
China's foreign ministry said in a faxed response to questions that the relevant authorities had no knowledge of the Italian case.
"China is always committed to deepening law enforcement co-operation with other countries, jointly cracking down on transnational crimes and punishing criminals," the ministry wrote. Suggestions to the contrary, they said, "are not objective and just."
Nevertheless, the investigation went nowhere. A spokesman for the Italian Embassy in Beijing said the Embassy does "not have information about the eventual outcome" of the money-laundering inquiry. Italy's foreign ministry declined to comment.
Give and take
Eventually, Italian prosecutors followed the trail of dirty money to four Bank of China employees and its Milan branch -- all of which are under investigation in Italy for money laundering. Prosecutors say the bank facilitated the secret transfer of 2.2 billion euros collected by Money2Money to people and companies in China, according to previously undisclosed Italian investigative documents obtained by AP.
The bank had an exclusive contract with Money2Money, stipulating that it would not deal with any other money transfer network in Italy, Suchan said.
The bank said in an email that it had "no clues of the alleged criminal activities underlying the transfers of money" and that the agreement with the Money2Money network was "totally in line with the policy of Bank of China." Lawyers for Money2Money said their clients have not had a fair chance to defend themselves and are not guilty.
The case is now stalled in Italian courts, as prosecutors try to notify nearly 300 hard-to-find defendants, most of them Chinese.
Franco Roberti, Italy's chief anti-mafia prosecutor, said the Bank of China -- knowingly or not -- played "an absolutely necessary role in the transfer of funds from Italy to China." But, he added, "It's difficult to have a rapport of international co-operation with China." He said he believed things would improve due to a memorandum of judicial co-operation that China and Italy signed in September.
Judicial co-operation has become a top priority for China's Communist Party, which is ramping up efforts to repatriate corrupt officials who have fled overseas. China said last year's effort to hunt absconders abroad, "Operation Fox Hunt," netted hundreds of people, more than a third of them from Southeast Asia. In April, China launched a new initiative, "Skynet," to trace fugitives and their overseas money, and released a list of its 100 most wanted economic criminals. Forty of them are thought to be in the United States, according to the party's Central Commission for Discipline Inspection.
"We may see some changes coming from China because of the internationalization of the Chinese economy," said Douglas Clark, an intellectual property lawyer in Hong Kong. "China now needs the assistance of foreign countries. To get that, they're going to have to offer assistance themselves."
The government connection
One of the companies in China that received illicit payments via Money2Money was an import-export agent called Wenzhou Cereals Oils and Foodstuffs Foreign Trade Corporation, according to Italian court documents obtained by AP.
Those documents place the company in Shanghai, but no company by that name exists there. Corporate records show a company by that name in Wenzhou, a city 465 kilometres (290 miles) south of Shanghai. Most Chinese migrants to Italy come from that area.
Wenzhou Foreign Trade was a state-run company until 2012, and is still owned by an investment group controlled by the city government according to Chinese regulatory filings.
Italy's financial police traced payments of 3 million euros to Wenzhou Foreign Trade via Money2Money in 2007. The cash was sent in small increments under 180 different names, but Italian tax authorities had no record of 178 of those people, according to court documents.
In April of that year, a Chinese man living in Rome was accused of selling counterfeit goods sent by the Wenzhou company. Four days after police raided his shop, he sent 12,499.99 euros to Wenzhou Foreign Trade -- three and a half times his reported annual income -- via Money2Money.
Last October, Converse Inc. sued Wenzhou Foreign Trade in a federal court in New York, saying it had shipped 8,160 pairs of sneakers to the U.S., including an unspecified number of fakes. Croatian customs also seized 24,720 pairs of fake Converse exported by the company in 2013, according to U.S. court documents. Converse declined to comment on details of the case.
Cut off from the rest of China by rugged mountains and the sea, Wenzhou is famous for its entrepreneurs. Its residents pioneered a model of low-cost, small-scale manufacturing that flourished as China embraced market reforms in the late 1970s. Wenzhou Foreign Trade, founded in 1979, helped those entrepreneurs reach global markets. By 2009, it had become the largest foreign trade company in Wenzhou city, according to its website.
The company's offices sit near the top of the Wenzhou International Trade Centre, a weather-beaten skyscraper on a busy road downtown. It deals in a dizzying array of products, including glasses, shoes, clothes, hardware and machinery, auto parts, food and medical equipment. The company says it has been cleared for expedited customs processing in China, received top credit rankings from the Bank of China and the Industrial and Commercial Bank of China, and is registered with the U.S. Food and Drug Administration.
The FDA declined to disclose whether Wenzhou Foreign Trade has a registered food facility, but said registration does not imply endorsement.
Cai Jiliu, Wenzhou Foreign Trade's general manager, declined to comment on the Italian case, saying he didn't work at the company at the time. He said the fake Converse exports were the result of "management negligence."
"I feel we have been used," he said in a telephone interview. "Our clients are smaller companies. They have a weaker awareness of intellectual property rights, and our staff did not totally obey our company's rules."
Six other defendants reached settlements with Converse. Wenzhou Foreign Trade did not. There is no evidence in court documents that the company even sent a lawyer to represent it in New York.
"China and America have different cultural backgrounds," Cai said. "Chinese prefer communication to lawsuits."
Associated Press photographer Mark Schiefelbein contributed to this report from Wenzhou. Associated Press writer Frances D'Emilio contributed from Rome.