Is Your Organization Enabling Fraud by Chinese Citizens?
- Elizabeth A. McMorrow
- 2 days ago
- 3 min read
In July 2026, China (PRC) issued an announcement through its Ministry of Finance and State Taxation Administration that Chinese citizens must pay 20% personal income tax on their contribution of assets into an offshore trust and on income generated by the offshore trust. There have been a number of useful articles breaking down the details of this PRC announcement. I would like to remind trustees and other financial institutions (FIs) about the PRC’s currency controls and the potential fraud used to evade the PRC currency controls.
Currency Controls
The People’s Republic of China (PRC) allows its citizens to convert only US$50K worth of Chinese yuan per person each year. Penalties on the Chinese individual for violating the annual limit include large fines and imprisonment. A variety of methods to defy PRC’s currency control law are used including:
Hong Kong money changers
Carrying cash, jewelry, gold bars across border
Underground banks in China / hawala system
Pooling the $50K annual quota across family and friends (e.g., paying a fee to people who will not be using their annual quota)
Credit cards, e-money / crypto
False invoicing to pay foreign suppliers
Individual Income Tax Law
The PRC income tax law includes anti-avoidance language which allows the PRC to investigate those it suspects are engaging in tax avoidance schemes at home or abroad. Jurisdictions participating in the Common Reporting Standard (CRS) require their FIs to report information to their tax / financial authority who in turn share the financial account information with the tax authority(ies) where the Financial Account holder is a tax resident.
Currently, over 100 jurisdictions share CRS account information with the PRC including:
The U.S. does not participate in CRS. Presently, the PRC has not signed a FATCA Intergovernmental Agreement (IGA) with the U.S. The U.S. considers the PRC to have a Model 1 IGA “in substance.” The “in substance” label means that the U.S. is not treating the PRC as a non-IGA jurisdiction. The lack of information sharing by the U.S. makes the U.S. an attractive location for Chinese citizens to open certain financial accounts.
U.S. Bank Secrecy Act (BSA) / Suspicious Activity Report (SAR)
The BSA requires FIs to file a Suspicious Activity Report (SAR) with the U.S. Financial Crimes Enforcement Network (FinCEN) for transactions involving US$5,000.00 or more in funds and assets if the FI knows, suspects, or has reason to suspect that:
The transaction involves funds derived from illegal activities or is intended or conducted in order to hide or disguise funds or assets derived from illegal activities (including, without limitation, the ownership, nature, source, location, or control of such funds or assets) as part of a plan to violate or evade any federal law or regulation or to avoid any transaction reporting requirement under federal law or regulation;
The transaction is designed to evade the BSA or its implementing regulations; or
The transaction has no business or apparent lawful purpose or is not the type of transaction that the particular customer would normally be expected to engage in, and the company knows of no reasonable explanation for the transaction after examining the available facts, including the background and possible purpose of the transaction.
The basic questions related to funding an account and subsequent distributions out of the account are:
What is the client’s source of wealth?
What is the source of these particular funds?
Who are these funds being sent to?
A financial institution subject to BSA must file a SAR if a transaction involves funds derived from illegal activities; is intended or conducted to hide or disguise funds or assets derived from illegal activities; or is part of a plan to violate or evade any U.S. federal law or regulation or to avoid any transaction reporting requirement under U.S. federal law or regulation.
The following are links to FinCEN materials highlighting its concern with Chinese money laundering networks:
El mismo en espanol:
Additional Compliance Risk to FI
Foreign tax authorities can request U.S. assistance in the investigation of an individual who is tax resident in that foreign jurisdiction. The request may be that an FI share the client files. If the foreign tax authority identifies information which implicates the FI in foreign tax fraud or other illicit activity, the foreign tax authority will likely share that information with the U.S. government. If the FI is a multinational enterprise with offices in the foreign jurisdiction, further investigations could adversely impact the local foreign business.
Given the potential risk to U.S. FIs related to unwitting participation in a client’s fraudulent activity, it is important that the FI have an understanding of high-risk jurisdictions, written policies and procedures which outline documentation to obtain during enhanced due diligence, and a rapid response plan to government requests for records.
For assistance, please contact me via my contact page or at elizabeth@elizabethmcmorrowlaw.com.
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