Bank of China Money Laundering Accusation Crisis – Is This the Start of Cooling off for EB-5 Investment from China?

Bank of China Money Laundering Accusation Crisis – Is This the Start of Cooling off for EB-5 Investment from China?

By Yi Song, Esq.

July 11, 2014

China’s state television accused Bank of China, one of the biggest state-owned commercial banks in China violates the currency exchange rules and involves in shadow banking and money laundering on a large scale. This news is rather alarming to the EB-5 community as China provides more than 85% of the EB-5 investment.

Bank of China Program Ease Currency Restriction

The EB-5 program offers foreign investors a pathway to US permanent residence. The investors invest $1 million, or $500,000 as most investors do, in a targeted employment area or rural area and create ten jobs, the investors will be granted a green card in the matter of approximately five years.

According to Chinese currency exchange laws and regulations, a Chinese national can send only $50,000 a year out of mainland China. In late 2011, the Bank of China launched “Youhuitong” (translation: preferential remittances) service eliminating the $50,000 restriction and exchange RMB into USD internally from the bank’s offshore accounts in London or Paris. Many China commentators and observers believed it is a positive sign of China opening up its highly controlled capital market and it is part of China’s grand plan toward Chinese currency RMB internationalization.

The program is experimental yet legal. It is rather peculiar that China central television attacked Bank of China’s “Youhuitong” as “illegal” and “secretly operating”. Since launched in 2011, the Bank of China program has been used to send about 20 billion RMB, or $3.2 billion US dollars out of the country. Bank of China is not the only state-owned commercial bank that offers said services, though the only one being attacked by the central television.

Government Aims to “Cool” EB-5 Investments

From completing due diligence for this article, the author spoke to several practicing Chinese banking lawyers that who are of the opinion that it is a sign that the Chinese government cooling down the EB-5 market and overseas property investments. Since Bank of China launched the program, the users of the program are primarily EB-5 investors and investors who exchanged currency to acquire overseas properties.

In the first quarter of 2014, China’s outbound real estate investment increased by 25% and reached $2.1 billion[1]. Chinese real estate developers have aggressively made overseas investment since late last year. Chinese developer Wanda Group just announced their plan to invest $900 million to build a new skyscraper in Chicago. Earlier this year, Wanda Group acquired the Spanish landmark building in Madrid for $358 million.[2] Greenland acquired 70% equity ownership of Brooklyn Atlantic Yard[3] in New York City, a controversial EB-5 project, which raised nearly $250 million from 498 Chinese investors by April 2014 for its phrase II development.

In recent years, there has been rapid growth in the cross-border RMB business in response to global market developments and the internationalization of the Chinese currency RMB. Bank of China issued a statement on July 9, 2014 stating that the “Reports of ‘underground banking’ and ‘money laundering’ have no basis in fact”. The statement was amended shortly after publication to remove the name of the TV broadcaster and other related details.

The incident is also believed to be President Xi Jinping’s efforts to crack down on the corruption. China’s recent Anti-Corruption Campaign has sweeping effects and the author believes it will change the demographics of the EB-5 investors. The offspring of “naked officials” accounts for a significant number in the EB-5 investors. “Naked officials” are those who send their families abroad to live and study while they stay behind in China to continue their posts in the government. Yet officials’ source of wealth and the manner of transfer the wealth is questionable.

EB-5 investors traditionally use currency exchange facilitators to exchange the currency at $50,000/per person. The said method has not been prohibited by the State Administration of Foreign Exchange. Another way to exchange currency is through underground banking in Hong Kong. Both methods have not been questioned either by the Chinese authorities or by the USCIS.

Bank of China temporarily suspended their cross-border RMB business. The author learned that a significant amount of EB-5 investors’ funds are stuck in the process and are currently frozen at the Bank of China’s London offshore account. It is unclear when the suspension will be removed.

Courtesy to Didi Kirsten Tatlow of New York Times’ article China’s Central Bank Investigates Report of Money Laundering

About the Author:

Yi Song, Esq. is an attorney at Mona Shah & Associates in New York City. Yi is a dual licensed attorney in the US (New York State) and in People’s Republic of China. Before joining Mona Shah & Associates, she worked at a securities litigation firm in Manhattan. She clerked at China’s highest court – the Supreme Court of People’s Republic of China. At Mona Shah & Associates, Yi practices EB-5 law and securities law and works on many successful EB-5 capital raising projects. She received her LL.B. degree from Beijing Foreign Studies University and she is a graduate from Georgetown University Law Center in Washington, DC. Her articles on EB-5 and securities law are published by LexisNexis, AILA, eb5info.com, eb5investors.com and ILW. Yi serves on the advisory board of eb5investors.com Magazine Chinese Edition and is a speaker on American Immigration Lawyers Association (AILA) EB-5 Conference. She writes a column for the Chinese newspaper Legal Weekly on American law and society. Yi is a native speaker of mandarin Chinese. She speaks fluent English and basic French.

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