Italy: China stymied money laundering probe; Chinese bank's commissions under investigation

FLORENCE, Italy – As Italy’s economy was heading off a cliff, police couldn’t help but notice that the country’s Chinese communities were booming. Luxury cars rolled past Chinese betting parlours and garment factories. Chinese immigrants were buying up Italian coffee bars and real estate. Their prosperity, however, 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.

Beijing, which is seeking Western help in hunting its own economic fugitives, did not co-operate with the investigation, Italian officials said.

Once the money left Italy, it vanished behind China’s great legal firewall.

Despite the deep economic ties between China and the West, 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.

“We did not have the possibility, despite many attempts made, to have an official contact with the judicial authorities and police of China,” said Suchan, who oversaw the investigation. “We have discovered 50 per cent of the truth.”

China’s foreign ministry said in a faxed statement that Chinese authorities knew nothing 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.

The AP has traced some of Italy’s missing money to an import-export company owned by the Chinese government. The company, Wenzhou Cereals Oils and Foodstuffs Foreign Trade Corporation, has been accused of repeatedly shipping counterfeit goods, some to the United States. But it has also taken shelter behind the firewall, refusing to respond to a U.S. lawsuit brought by Converse Inc., which says the Wenzhou company sent tens of thousands of fake sneakers to the U.S. and Croatia.

That firewall has also helped counterfeiters use major, state-run Chinese banks as financial shelters on a significant scale, AP found in an article published last month. The banks, including the Bank of China, have processed credit card payments for online sales of fake goods and held accounts for counterfeiters.

Western companies that have pursued Chinese counterfeiters in the U.S., where many fakes are sold, have been blocked by China’s secrecy laws. 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.

The perils of non-co-operation are becoming clearer as Chinese businesses go global. Chinese companies have invested $46 billion in the U.S. since 2000, mostly 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, a quiet war is brewing over whose rules 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 on its own terms.

“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,” according to a report last month from the U.S.-China Economic and Security Review Commission, which advises Congress.

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. 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 U.S, according to the party’s Central Commission for Discipline Inspection.

The Italian case remains stalled, however, as prosecutors try to locate 300 defendants, most of them Chinese. The Bank of China said it had “no clues of the alleged criminal activities underlying the transfers of money.” Lawyers for Money2Money, the financial transfer service, said their clients are not guilty.

Many of the transfers, fractioned into small sums to avoid scrutiny, were a way for Chinese immigrants to avoid paying taxes, according to hundreds of pages of court documents reviewed by The Associated Press. Other migrants were caught with heaps of counterfeit purses and shoes. Police also traced money to men running Chinese prostitution rings.

Using evidence from seized Money2Money computers, prosecutors say they identified Chinese individuals and companies that received the illicit funds.

Wenzhou Foreign Trade was one. Prosecutors said it received 3 million euros via Money2Money in 2007, in exchange for shipping counterfeits to Italy. Last October, Converse sued Wenzhou Foreign Trade in a New York federal court, saying it had shipped over 24,000 pairs of fake sneakers to the U.S. and Croatia.

Cai Jiliu, Wenzhou Foreign Trade’s general manager, declined to comment on the Italian case, saying he didn’t work at the company then. He said the fake Converse exports were the result of “management negligence.”

Six other defendants reached settlements with Converse. Wenzhou Foreign Trade did not.

“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.

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