By Anthony Diosdi
Chinese investors have a huge appetite for U.S. real property. However, many Chinese investors cannot buy U.S. real estate because local currency restrictions prevent them from transferring funds to the U.S. China controls inbound and outbound foreign exchange flows. If a Chinese citizen or business entity needs to make an overseas payment it is required to purchase the foreign funds with RMB (the Renminbi ‘RMB’ is the official currency of the People’s Republic of China) from a bank qualified to do foreign exchange business. Most banks in China are qualified to do foreign exchange business.
When converting RMB to a foreign currency, the bank is required to review whether the outbound capital is for investment or for regular payment. Outbound capital investment refers to overseas equity investment and is strictly restricted. Outbound capital refers to overseas equity investment and is strictly restricted. Chinese citizens and companies can convert and remit freely up to $50,000 (U.S. Dollar) equivalent per year. Conversions exceeding the $50,000 quota are still possible, but the citizen or company cannot complete it at a bank counter freely; he or she or it must apply to the local State Administration of Foreign Exchange for written approval. Chinese banks will not let the extra conversion go without receiving an approval letter. To secure approval to exceed the $50,000 limitation in yearly payments, the Chinese citizen or business entity must submit documents verifying the underlying transaction. The application documents mainly include: 1) the contract signed between the Chinese party and the foreign company; 2) notarization and legalization of the engagement letter/ contract; 3) tax return certificates of the payee; and 4) request for payment.
China’s $50,000 yearly fund transfer limits pushed some Chinese real estate investors to consider using cryptocurrency trading agreements to transfer funds from China to the United States to purchase U.S. real estate. In the next section of this article, we will discuss how cryptocurrency trading agreements work.
Cryptocurrency Trading Agreements
A number of U.S. businesses offer cryptocurrency trading agreements as a way to get around China’s $50,000 transfer limit. The way it works is the facilitator of the transaction will purchase cryptocurrency on behalf of a Chinese investor for a price (which may be denominated in a fiat currency or another cryptocurrency) at which it is willing to sell or purchase a specific quality of such cryptocurrency. The cryptocurrency is then transferred to a designated wallet. For example, assume that Tom, a Chinese citizen, would like to purchase a home for his son Joe, a U.S. citizen in San Francisco, California for $3 million. Tom has all his money in China and is aware of China’s $50,000 annual transfer limit. Consequently, Tom and his son Joe enter into a cryptocurrency trading agreement in which Tom transfers cryptocurrency worth approximately $3 million to a designated wallet. The cryptocurrency facilitator immediately makes the cryptocurrency transferred to the designated wallet available to Joe who exchanges the digital currency for dollars. As of a result of this cryptocurrency trading agreement, Joe is able to purchase a home in San Francisco for $3 million. Although cryptocurrency trading agreements are becoming a popular way to avoid China’s $50,000 yearly funds transfer limit, for the reasons discussed below, these agreements may expose participants to both Chinese and U.S. criminal liability.
Chinese Currency Law
On September 24, 2021, ten Chinese government authorities, including the People’s Bank of China, jointly issued a Notice to clarify that cryptocurrency is not a legal tender. The Notice further stated that all cryptocurrency transactions in China are considered illegal, including offshore exchanges to provide services to Chinese citizens. The authorities stated that China-based employees of offshore crypto exchanges or any companies providing services to them will be investigated and prosecuted. However, while vChina has banned cryptocurrency transactions, it has not banned individuals from holding cryptocurrency.
While the Chinese government’s efforts to ban cryptocurrency transactions appear to be focused on banning platforms, exchanges, financial institutions and the infrastructure that supports cryptocurrency transactions, the Notice appears to render all cryptocurrency transactions illegal and does not specifically exempt individuals who transact in cryptocurrency with other individuals. Moreover, in previous announcements by the Chinese government prohibiting certain crypto-financing, the prohibitions have been directed at both institutions and individuals. Since cryptocurrency trading agreements involve the purchase and sale of cryptocurrency (involving a Chinese resident or citizen), these types of transactions likely violate Chinese law.
United States Laws and International Money Laundering Enforcement
In the United States, the statutory definition of most criminal offenses is entirely self-contained. That is, the law creating the offense defines every element of that crime. In some cases, however, a criminal law may refer to other statutes to fill out one or more elements of an offense. One example is the Racketeer Influenced and Corrupt Organization Act (“RICO”). RICO makes it a federal offense for an “enterprise,” which can consist of one person or a group of offenders, to commit a “pattern of racketeering activity” through two or more “predicate offenses,” which can include numerous crimes defined by other provisions in the United States Code. See 18 U.S.C. 1961(A) & (B).
In a few instances, however, the government makes it a crime to violate a foreign law. One example is the new Anti-Money Laundering Act. On January 1, 2021, the new Anti-Money Laundering Act took effect. Under this law, anyone transferring funds from, to, or through the U.S. intending to promote any form of unlawful activity specified in the federal money laundering statute commits a federal offense, no matter how clean the funds were that are transferred. Funds that merely flow-even if only electronically- through a corresponding bank or an intermediary in the U.S. on their way to an individual can be a basis for a money laundering charge.
The Second Circuit Court of Appeals, for example, recently affirmed a money laundering conviction of a foreign national who bribed a Ugandan foreign minister to secure a business opportunity for a Chinese company in Uganda. The funds went electronically from a Hong Kong bank to a Ugandan bank but touched at least briefly into the accounts of two U.S. correspondent banks. That was enough to violate the federal money laundering statute.
The unlawful activity does not need to be separate and distinct from the money transfer. Courts have held that transferring funds to complete an illegal sale, or as part of a fraudulent scheme, satisfies the statutory requirement of promoting the “carrying on of specified unlawful activity.” That means that knowing funds come from a clean source and that the recipient will subsequently use the funds for a legitimate purpose is not enough to shield an international transfer from potential money laundering exposure.
One way or another, financial transactions do need some connection to criminal activity to constitute international money laundering- they have to either involve the proceeds of “specified unlawful activity” or promote “specified unlawful activity.” This means that the “unlawful activity” that forms the basis for an international money laundering charge need not be unlawful in the United States. Indeed, federal courts have repeatedly rejected efforts by defendants to graft onto foreign law offenses various nuanced requirements of federal law. See International Money Laundering Enforcement Will Rise- What GCs Need to Know, Bloomberg Law, by Chris Pace (Feb 16, 2021).
The very basis of cryptocurrency trading agreements is to ensure that Chinese residents have a platform to purchase and sell cryptocurrency. According to the Notice discussed above, cryptocurrency transactions are illegal in China. The cryptocurrency trading agreements also provide an avenue for Chinese residents to bypass China’s $50,000 yearly funds transfer limit. Since cryptocurrency trading agreements likely violate one or more Chinese laws, participants of such agreements may satisfy the “unlawful activity” element or elements of the new international money laundering statute. (Even if the cryptocurrency trading agreement does not likely violate any U.S. law). Consequently, any individual participants and/or facilitators of such transactions have potential criminal money laundering exposure. Anyone considering using or has used a cryptocurrency trading agreement to transfer funds into the U.S. to avoid China’s $50,000 transfer limit should consult an attorney who is familiar with these agreements.
Anthony Diosdi is one of several tax attorneys and international tax attorneys at Diosdi Ching & Liu, LLP. Anthony Diosdi focuses a part of his practice on criminal tax enforcement, broad-based civil tax compliance and white collar matters generally. He also advises clients on the IRS voluntary disclosure program, with particular focus on disclosure related to offshore banking accounts.
Anthony Diosdi is a frequent speaker at international tax seminars. Anthony Diosdi is admitted to the California and Florida bars.
Diosdi Ching & Liu, LLP has offices in San Francisco, California, Pleasanton, California and Fort Lauderdale, Florida. Anthony Diosdi advises throughout the United States. Anthony Diosdi may be reached at (415) 318-3990 or by email: firstname.lastname@example.org.
This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.