Trade based money laundering - bill of exchange scams in China

Fraudulent scams and transactions involving the use of bills of exchange (B/E) in China recently reported highlights the risks to counterparties and banks that do not maintain adequate anti-Trade Based Money Laundering (TBML) procedures and monitoring. 

One of the reported scams involved employees at the Beijing branch of Agricultural Bank of China allegedly perpetrating fraud and embezzling more than RMB 3.92 billion (US$596 million) by the use of a B/E, while the other involved a branch of Citic Bank in the northwestern city of Lanzhou leading to approximately RMB 969 million (US$147 million) loss.

How does a Bill of Exchange work?

A B/E is an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to or to the order of a specified person or to bearer.

B/Es are short-term debt instruments commonly used in financing international trade and can be sold to another financial institution at a discount before it matures. A typical cross-border trade utilising B/E to facilitate payment is as follows:


1a. Under a Contract of Sale, the Seller agrees to ship goods and send documents via Documentary Collections method.

1b. Seller initiates shipping goods to the Buyer and hands over goods to Shipper or Carrier.

2. Seller sends documents via Documentary Collections to Seller’s bank together with payment instructions and a B/E.  A B/E is payable (i) on sight or (ii) at the maturity date stated.

3. Seller’s bank checks the Seller’s instructions and that they conform with the documents.  Then those documents are sent to Buyer’s bank otherwise known as the Collecting Bank.

4a. The Buyer is advised about collection by his bank.  After satisfactory inspection, the Buyer will Accept the enclosed B/E (an Accepted Draft) and receives the documents attached to the B/E.  These are commonly the Shipping Documents, including the title documents relating to the goods.

4b. The Buyer can then present the Shipping Documents to the Carrier and collect the goods.

5. The B/E (the Accepted Draft) is given to Seller’s bank and the Accepted Draft is kept at Seller’s bank until the maturity date.

6. On the maturity, the Accepted Draft is presented for payment to Collecting Bank as a ‘Clean Collection’ (that is without other shipping documents) and the Buyer’s bank makes payment to Seller’s bank as per Seller’s payment instructions

How does the scam work?

In the Agricultural Bank of China incident, it was reported that the B/E was allegedly illegally sold by its employees to a third party agency in Chongqing and was then sold to another bank. The employees had allegedly used the proceeds from the sale to invest in the Chinese stock market last year. As the Chinese equities slumped, the employees suffered loss and were unable to pay the money back. The case is now under police investigation and has been reported to the State Council by the Ministry of Public Security and China Banking Regulatory Commission (CBRC).

Similar bill fraud involving Citic Bank was revealed in respect of perpetration by a bill financing agent which has long worked with Citic Bank. The agent, instead of obtaining bills on behalf of client companies, was reported as allegedly cashing the bills and investing the proceeds in the stock market. The fraud was again uncovered after the Chinese market plunged.

Trade based money laundering

Both incidents draw attention to the inadequate internal controls at some Chinese banks, which echoes the list of “imprudent behavior” in trade finance identified in the notice issued by CBRC on 31 December 2015 following their investigation at the banks earlier the year. Apart from fraudulent cashing of B/Es, CBRC also highlighted other common tactics used including conspiracy with agents and the use of financing to inflate balance sheets.

TBML is attracting increasing attention from financial regulators around the world. The Financial Conduct Authority in the United Kingdom reported the results of its investigations in its Thematic Review; The Monetary Authority of Singapore’s Information Paper published in October 2015 and the Hong Kong Monetary Authority’s guidance on TBML all highlights the need for banks to implement robust procedures and protect against specific TBML structures, scams and techniques.

Fraudulent use of B/E is only one of the many methods of TBML in the arena of cross-border trade financing. Simmons & Simmons have been offering trainings on TBML and has published a reference guide and glossary on techniques and products in Trade Finance, including a new chapter on TBML.

If you would like to arrange a training session or a copy of the book, click here or contact Jolyon Ellwood-Russell at +852 2583 8298 or jolyon.ellwood-russell@simmons-simmons.com.

Click here to download the Chapter on "Trade based money laundering" from the "Structures & Solutions in Trade Finance" book.