How China’s biggest bank became ensnared in a sprawling money laundering probe

ICBC, at the direction of the Chinese Communist Party, is a flagship in China’s quest to become a global banking giant. However, an investigation into money laundering has led to diplomatic complications

By Angus Berwick and David Lague  /  Reuters, MADRID

Sun, Aug 06, 2017 - Page 7

A few minutes before 8pm on Aug. 8, 2012, two Chinese living in Spain — a banker and her client — held a blunt telephone conversation.

Wang Jing was a senior officer at the Madrid branch of the state-controlled Industrial and Commercial Bank of China (ICBC). The client, Xu Kai, was an alleged top figure in an international money laundering group that was suspected of using the bank to transfer illegal income to China. The network was allegedly using multiple accounts in the name of Chinese residents of Spain, in some cases without their permission, to make the transfers, but there had been a hitch.

Earlier that day, Wang said a woman had come to the branch to complain that transfers were being made from her account without her knowledge.

Wang chided Xu, telling her to make sure that account holders used in the scheme were on board.

“You have to look out for yourself and make sure these people are obedient,” Wang said.

More complaints would lead to “problems” for the bank, Wang added.

The bank already had problems. Big problems. Spanish police were listening.

Wang’s warning to Xu is documented in confidential court filings that include wiretap transcripts from a series of police investigations starting in 2009 into Chinese organized crime in Spain.

The Spanish authorities have said publicly they suspect these groups siphoned up to 1.2 billion euros (US$1.4 billion at the current exchange rate) out of Spain to China between 2009 and the end of 2012.

The wiretaps and findings from police investigations ultimately led Spanish investigators to the front door of ICBC — the world’s biggest bank by assets. On the morning of Feb. 17 last year, dozens of police officers burst into the bank’s Madrid branch and arrested Wang and four other senior managers. Two more executives were arrested after the raid.

In a statement released in May last year, Spanish prosecutors said the giant Chinese state-run lender was a conduit for laundering tens of millions of euros in illegal funds from tax fraud and smuggling by “Chinese criminal organizations.”

The sums laundered were so large, the prosecutors said, that “the damage to the socio-economic order and the national economy is clear.”

However, beyond news of the arrests and a summary of allegations in the statement, little information has been revealed about the case.

Now, thousands of pages of confidential case submissions reviewed by reporters, and interviews with investigators and former ICBC employees, provide the first detailed account of the alleged racket and show that the probe reaches high into the state-run bank’s European operation.

The investigation has so alarmed Beijing that China’s top official in Madrid has publicly pressured Spanish officials to conclude the inquiry, warning that failure to do so would harm economic relations.

FORGED DOCUMENTS

At the core of the ICBC case is the relationship between the bank and a group of clients from Spain’s thriving Chinese business community.

These clients are alleged to have accumulated mountains of cash, much of it from avoiding duty and tax on the sale of consumer goods imported from China. They could not spend it or bank it in Spain without raising suspicion, so they opted to send it to bank accounts in their homeland.

The wiretap transcripts show how ICBC allegedly helped them do it: 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, police said in the court filings.

Law enforcement officials in Spain are preparing to expand their probe, reporters have been told.

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, two Spanish officials involved in the investigation said.

The Luxembourg unit of ICBC holds the lender’s EU bank license and is responsible for supervising the Madrid branch.

ICBC spokesman in Europe Sun Feng said the case file was sealed by the court so the bank could not comment on it.

ICBC, he added, was a “law-abiding company” and had cooperated with Spanish authorities.

“ICBC Spain Branch has been insisting on operating within the law and regulations and has continuously strengthened the internal control of anti-money laundering,” Sun said in a written response to questions for this article. “ICBC Spain Branch has always been actively cooperating with the judicial authority to conduct the investigation.”

Repoters spoke to five of the arrested ICBC employees by telephone and sent questions to all seven and their lawyers. All but Wang, who commented very briefly, declined to discuss the case.

“Inside the bank, I am the lowest-level employee,” Wang said, who declined to discuss the wiretap transcript of her telephone conversation with Xu.

Wang referred all questions to ICBC.

Xu, who was arrested and released on bail in late 2012, fled to China. She could not be reached for comment.

POLICE SURVEILLANCE

The court filings and wiretap transcripts reviewed by reporters indicate that within eight months of ICBC opening for business in Madrid in January 2011, its staff there were soliciting money transfer business from people under police surveillance.

Money transfers to China soon accounted for an estimated 95 percent of the Madrid branch’s business, a Spanish judicial official said.

The wiretap transcripts document ICBC managers in at least 30 conversations with six leaders of Chinese networks in Spain, who police believe were seeking new avenues to launder money. These included conversations in which ICBC staff discussed how to avoid detection when moving money to China. On occasion, the staff warned of transfers that might attract unwanted attention.

After listening in on the Aug. 8, 2012, telephone conversation where Wang warned Xu, the police concluded from a series of wiretap conversations that Wang, “from her privileged position as an ICBC employee, was not only aware of the activities carried out” by suspected money launderers, but also was “actively collaborating” with them.

The police pointed in their report to the advice she gives Xu on “how the transfers must be made and how she must control the people working for her.”

The wiretap transcripts also document conversations between suspected Chinese money launderers in Spain and ICBC employees in China.

Officials involved in the investigation spoke to reporters on condition of anonymity because the probe is ongoing and Spain’s High Court has imposed secrecy orders on the proceedings.

From 2011 to 2013 ICBC’s Madrid branch transferred about 225 million euros to China, most of it for suspected criminal networks, the officials said.

These networks also sent funds via money transfer firms in Spain and by smuggling large amounts of cash by road to other European countries from where it was transferred to China.

On the strength of the wiretaps, money transfer records and other evidence, police last year arrested the seven ICBC executives in Madrid, including branch manager Liu Wei (劉煒) and ICBC European division general manager Liu Gang (劉剛).

Authorities accused the bank of laundering money for several criminal networks in Spain and seeking to conceal this role.

The seven employees who are suspects in the money laundering case are out on bail. They have had their passports confiscated and are awaiting further legal proceedings in Spain, a High Court spokesman said.

BANKING LICENSE

For now, none of the suspects have been formally charged. Under Spanish law, a person is named as a suspect under investigation for a particular offense — and can be detained for up to four years — until an investigating judge decides whether to press charges.

If convicted for money laundering, the bankers could be jailed for up to six years. If the bank is found to be complicit, it could lead to a hefty fine. In the event of a trial, the bank would have to endure a public airing of its alleged links with suspected criminal networks in Spain and China.

However, the bigger danger for the state-run ICBC is that its European banking license could be withdrawn. ICBC is concerned the investigation could affect its European headquarters in Luxembourg, people with direct knowledge of the case said.

This includes the risk that Luxembourg’s financial supervisor could ask the European Central Bank to withdraw ICBC’s banking license if the supervisor believes there is sufficient evidence the bank failed to comply with mandatory anti-money laundering provisions, these people said.

ICBC is a flagship in China’s quest to become a global banking giant. At the direction of the Chinese Communist Party, it and other Chinese state-run banks have aggressively expanded into offshore markets.

For ICBC and the other giants, the money-laundering accusations could stymie their expansion plans. In Italy, state-controlled Bank of China was fined this year for involvement in a separate money-laundering case.

The bank said it had bolstered its internal checks and that the settling of the case did “not imply any admission of guilt.”

For European countries the investigations pose the risk of diplomatic conflict with Beijing that could affect business relations with the world’s second-biggest economy.

A Spanish Civil Guard serious crime unit spokesman said police were working with authorities “in many other countries,” without elaborating.

In the police raid last year on the ICBC branch, dubbed Operation Shadow, officers swarmed through the lemon-colored building on Paseo de Recoletos, a wide, tree-lined boulevard in central Madrid, filled with art galleries, museums and palaces. All staff were ordered not to touch their telephones or computers, former ICBC employees said.

In the summary of accusations against ICBC released in May, Spain’s anti-corruption and organized crime prosecutor’s office said the alleged criminals carried thousands of euros in cash at a time into the bank’s Madrid branch, stuffed in rucksacks and boxes.

ICBC divided the funds being transferred to China between multiple accounts to ensure they did not exceed the 50,000 euros limit above which it would have had to declare to authorities, the summary said.

The bank failed to report any suspicious transactions as required under Spanish law regarding 78 of its clients, it added.

Detention and bail rulings for some of these customers show that they were already under investigation for suspected involvement in a range of crimes, including money laundering, tax fraud, bribery, extortion, forgery and smuggling.

According to the confidential court filings, police allege members of these suspected criminal organizations used fake documents, such as falsified passports, to open accounts at ICBC’s Madrid branch.

ICBC employees are suspected of accepting falsified invoices to justify the origin of money transferred to China, police said in the filings.

If the suspects from the bank and the alleged smuggling networks go on trial, it is possible some might deny they participated in the bugged conversations. They might also dispute the conclusions authorities drew from the wiretaps.

DIPLOMATIC FALLOUT

The ICBC arrests ignited a behind-the-scenes diplomatic spat in the spring of last year, senior Spanish officials said.

China was particularly incensed by the high profile raid on the Madrid branch and reports in local media linking the arrests with the “Chinese mafia,” according to Javier Serra Guevara, who was Spain’s chief commercial attache in Beijing at the time of the raid.

“We tried to explain to the [Chinese] that Spain’s government does not control the media,” Serra Guevara said.

After the raid, the Chinese Ministry of Foreign Affairs announced it had asked Spain to protect the “rights and interests” of Chinese companies and citizens.

Chinese Ambassador to Spain Lu Fan (呂凡) was more pointed at an investment conference in March.

“More than a year has passed since the case arose,” Lu said in Madrid. “This has undermined the confidence of Chinese business people and investment here and also that of the Chinese government. A prompt solution would help this confidence to return and for the cooperation between both countries to return to normality.”

Former Spanish minister of foreign affairs Jose Manuel Garcia-Margallo denied there had been a diplomatic crisis with China over the case.

“There was no pressure and we would not have tolerated it,” he said.

“The media attention has moved on, end of story,” he added, abruptly ending the interview.

Spain has been home to a thriving Chinese community for decades. Established residents and an influx of new immigrants, many from Qingtian County in Zhejiang Province, found that the global financial crisis provided an ideal opportunity to expand. Their goods were cheap and Spanish businesses were floundering.

Chinese manufactured goods flooded Spain. Imports from China increased from 4.7 billion euros in 2000 to 18.9 billion in 2010, the Spanish Ministry of the Economy said.

SMUGGLING PARK

One sign of this expansion was the emergence of a sprawling industrial park called Cobo Calleja on the southern outskirts of Madrid.

The hub became one of the biggest trading centers for Chinese goods in Europe. The dense complex of warehouses and wholesale outlets sells a vast array of products in bulk — from lipstick to industrial compressors, ballet shoes, party hats, saucepans and national flags.

Many of the importers only declared a fraction of the value of each container, knowing that tax and customs people could not possibly inspect all the containers arriving in Europe, a senior Spanish tax official said.

However, once the importers sold the undeclared goods, they needed to hide the proceeds from the Spanish tax authorities.

So, the Spanish tax official alleges, the trader networks became crime gangs as they systematically engaged in tax evasion, smuggling and money laundering to hide their funds and get them out of the country to China.

The transcripts of bugged conversations are explicit about smuggling.

In one telephone call, Zhou Jianjun, a man police suspect to be a leader of a money-laundering network in Spain, discusses illicit merchandise-trading with an associate named in the court filings as a suspected crime boss in China.

“If Colombia is known for drugs, African countries for conflict, well, China is known for smuggling,” Zhou said.

Zhou was arrested in October 2012 and later released on bail. His lawyer said her client did not want to talk to reporters about the case.

Additional reporting by Giselda Vagnoni

This is part one of a two-part series. Part two will appear in tomorrow’s edition.