Laundering Luxury

“Surrogate Shopping”

In China, luxury goods are often subject to significant tariffs and can be expensive compared with the same item purchased overseas. Counterfeiting is also prevalent and may result in health risks or even death. In 2004, fake infant formula originated in Anhui province in China caused the deaths of 13 babies, followed in subsequent years by further infant deaths caused by contamination. The result is demand for authentic western products and/or luxury items at lower prices than official outlets (where taxes and duties have been paid) – with discounts of around 40% for some products.

With movement of capital out of China restricted to approximately $50,000 per person per year, daigou buyers in western countries face liquidity issues with financing their purchases, as well as moving the proceeds of sales outside China. They may therefore engage with CMLNs as financial service providers, or alternatively CMLNs may directly manage and operate diagou networks.

One methodology for daigou operations is:

1. Goods are advertised on marketplaces in China such as TaoBao (comparable with eBay) or on social media.
2. The daigou (buyer) receives funding from the CMLN to make their purchases. This may be cash, electronic funds transfers, peer-to-peer payments, or checks.
3. Daigou buyers use cash or credit cards to purchase items in the United States or other western countries. Often, these are high-value electronics or luxury goods, purchased according to instructions from CMLNs. Items may also include cosmetics or health products.
4. Where credit cards are used, the cash and/or bank funds are used to pay off the account balances. Credit card reward points may also be used for travel or exchanged for USD payments.
5. The buyer ships the items to China or to a daigou operator in the buyer country (e.g. the United States) who receives items from multiple daigou then coordinates the exports to China.
6. The items are sold for a profit by avoiding the applicable import taxes or duties. The daigou receives the proceeds in China.

Daigou may also use CMLNs to move value using mirror transfers, circumventing Chinese capital restrictions, for example:

• United Kingdom: Daigou in the United Kingdom receive funds into the UK bank account. These funds are provided by CMLNs and are derived from criminal activity. The funds may also be wire transfers from mule accounts into which criminal proceeds have been placed.
• China: Daigou pay the equivalent value to the CMLN in China from the proceeds of sales of luxury or other items.

Through these mirror transfers, the daigou moves their profits from China to the United Kingdom.

There are many variations on the daigou operations, with the above representing just some ways they can operate.

Red Flags – Individual Accounts

CMLNs often target Chinese diaspora to operate as money mules, buyers, or brokers. Chinese students are particularly vulnerable due to visa conditions which may limit lawful employment. Some students may be recruited by being told they are providing money transmission services for other students or unbanked Chinese workers, whereas other mules are aware their account will be used for illicit activity.

Red flags that may indicate an account is associated with daigou activity are:

🚩 The customer shows indications of irregularities in documents which may indicate they are fraudulent, for example a Chinese passport and visa contain the same photograph despite purportedly being issued years apart.

🚩 Activity that is not commensurate with the customer profile. For example, a student receives wire transfers described as “tuition” or “living expenses” that do not correspond with the timing of these costs during the academic year, or where the amounts do not correspondent with the expenses described.

🚩 Discrepancies between declared income/earnings and account activity.

🚩 A customer, especially a Chinese national, regularly uses a credit card to purchase large volumes of electronics or other luxury goods.

Assessments indicate that some students may hand control of their accounts to CMLNs when they return to China on completion of their studies. This means that ongoing monitoring of accounts is necessary to identify changes that may indicate daigou or illicit activity.

Red Flags – Corporate Accounts

Business bank accounts may also be used to facilitate daigou activity. Red flags include:

🚩 Individuals associated with a business account, such as directors or authorized signatories, show indications of irregularities (see above).

🚩 A business operating in the electronics or luxury goods sector shows revenues that are not proportionate to the business’ size or scale.

🚩 A business operating in the electronic or luxury goods sector makes payments for multiple credit cards for individuals unrelated to the business.

🚩 Companies registered in Hong Kong send funds to Chinese nationals residing in the United States, where the company has characteristics of a shell company.

Taking Action

Financial institutions identifying unusual activity which may indicate daigou or related CMLN activity should undertake an investigation in accordance with their internal process. This may include collecting and validating further information about the source of wealth or source of funds for the customer, and enhanced due diligence on the account holder, related individuals, and counterparties.

Where the investigation indicates that the activity is suspicious, institutions should file a Suspicious Activity Report (SAR) in accordance with regulatory requirements. For example, for reports to FinCEN the report should include the key reference “CMLN-2025-A003”.

Additional reports, such as Currency Transaction Reports, should also be filed where requirements are met.

Information sharing between financial institutions provides valuable opportunities to better identify, assess, and respond to potentially illicit activity. Sharing should be undertaken in accordance with applicable regulatory requirements.

Finally, staff should be provided with training to ensure they remain informed on emerging typologies and risk indicators, enabling them to respond effectively. In addition to regular (often annual) training, specialized and targeted training throughout the year may also be valuable.