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Chinese gem racket exposes issues in Lanka’s legal and regulatory frameworks
The discovery that Chinese nationals are entering Sri Lanka on tourist visas, securing residency on false pretexts, earning troves of cash by purportedly trading Madagascan and local gems without licensing while failing to prove the identity of their buyers has exposed multiple issues in the country’s legal and regulatory frameworks.
Su Dianzhang, Su Binghuang and Weibin Liu had been living at the expensive Crescat Apartments in Kollupitiya. Between them, they had nearly a billion rupees deposited in three bank accounts at a private bank in the same neighbourhood. As investigations later proved, this was less than what they claimed through invoices and receipts to have earned peddling gemstones.
The Central Bank of Sri Lanka (CBSL) is responsible for implementing the Financial Transactions Reporting Act of 2006. The law provides for the collection of data relating to suspicious financial transactions to facilitate the prevention, detection, investigation and prosecution of the offences of money laundering and financing of terrorism.
In March last year, the CBSL’s Financial Investigation Unit (FIU) complained to the police Financial Crimes Investigation Division (FCID) about suspicious deposits and withdrawals from the bank accounts of two of the men: Su Dianzhang and Weibin Liu.
The suspects had arrived in Sri Lanka as tourists but secured residence visas by claiming to the Department of Immigration and Emigration that two of them were translators while the third was a barber. Then, their accounts started receiving sums of money as much as Rs 100mn at a time. This caused their bank to flag this activity with the FIU.
Weibin Liu, when opening his savings account in September 2017, had said, he hoped to deposit between Rs 1-2mn a month. His monthly income, he claimed, was around Rs 1mn. But between September and December 2017, he placed sums ranging from Rs 10mn and Rs14mn to Rs 46mn, Rs 60mn and Rs 50mn. By February last year, his account contained Rs 201,664,274.25.
Su Dianzhang also started his savings account in September 2017. His anticipated monthly income was between Rs 100,000 and Rs 500,000 a month. By March last year, his account held a total of Rs 365,099,834.37.
Su Bianghuang–the “barber”– opened his account in October 2017 with an initial deposit of Rs 10mn. By March last year, it contained Rs 391,607,900.52. As the monies deposited by these men far exceeded the amounts they had said they would earn at the time of opening the accounts, the bank did a customer review. When a manager asked where they got such large sums from, they said they were selling gems to Chinese tourists.
It was here that the investigation kicked off. Su Bianghuang is abroad and has not been questioned. The other two claimed that they had obtained parcels of gems from Sri Lankan middlemen who brought them from Madagascar and China. They had these rough stones polished in local workshops and sold the finished gems to Chinese tourists they had made contact with via the internet.
A search of Weibin Liu’s home revealed Rs 5mn in Rs 5,000 notes. He said it was from a gem sale. He insisted that he was a gem merchant from the Chinese province of Quanzhouand had arrived in Sri Lanka on May 2017 to improve his business. He had no licence to trade in gems but claimed his partner had one. Eight other Chinese passports were found in his possession. Several mobile phones were confiscated.
Su Dianzhang also came to the country in May 2017 and lived at Crescat with his wife and child. Both men maintained that they did not bring anything of great value to Sri Lanka; only enough for daily expenses. Neither did they take expensive goods or large sums of money out of Sri Lanka. The passports of each suspect shows frequent travel with visits sometimes spaced just days apart.
Foreigners who are partners in joint ventures with Sri Lankans can trade in gems under licence issued to the company by the National Gem and Jewellery Authority. But it was only in March 2018 that the men started a company with a local partner called Luxor Gems (Pvt)–months after starting their “business”.
The gems that came from abroad were packed in “parcels” or “bags” and released by the Customs Department at Bandaranaike International Airport on the payment of the stipulated US$ 200 duty. This is not an illegal method of import. It is that easy to bring the stones in. One man, who conveyed such a consignment on behalf of a suspect, said it weighed around 750g. Another was around 500g.
Some Chinese tourists were buying gems wholesale, Weibin Liu and Su Dianzhang said. They provided receipts and invoices but these only contained names, not even passport numbers, of the buyers. It was not possible, therefore, to track them.
The monies these Chinese nationals made were earned within a short period of arriving in Sri Lanka. For having obtained residence visas on falsified information, they were handed out suspended sentences and fines. But investigations into other areas continue.
Questions have arisen over the audacity with which these businesses were conducted. The suspects only produced receipts and invoices after their bank froze their accounts. And they did not register a business till after they were in trouble.
As for bank accounts, resident workers are only permitted to deposit their salaries–not gem trading receipts. The amounts of cash the amassed were large. With more and more foreigners entering Sri Lanka, and with controls being so lax, financial authorities say a close eye must be kept on possible money laundering.
These suspects had not declared any monies either going out of Sri Lanka or coming into the country. There was no Customs documentation. But their receipts also didn’t match their deposits. Where was the difference? And how much was it?
More work needs to be done in Sri Lanka on money laundering and Customs offences, on cross-border currency transfers and on how many foreigners hold residence visas based on false declarations. Are there other foreigners with bank accounts to which such large sums are deposited and have all banks and financial services entities obtained and effectively validated Know Your Customer (KYC) declarations? How many of them submit Suspicious Transaction Report (STR)?
The Gem and Jewellery Authority’s oversight supervision and industry regulations must also be looked into, experts said, questioning, too, whether Customs clearance and examination processes are effective. Unlicensed gem trading could seriously damage Sri Lanka’s reputation.
Sri Lanka needs to do more in these areas. Only last month, the European Commission (EC) named it as “high-risk third country” with strategic deficiencies in anti-money laundering and countering financing of terrorism (AML/CFT) laws. It is the only other South Asian nation to be flagged apart from Afghanistan and Pakistan.
It is also among eleven nations identified by the intergovernmental Financial Action Task Force (FATF) as having AML/CFT regimes that are deficient, but who are cooperating with the organisation to cover these gaps.
“High risk and monitored jurisdictions” are countries that have taken insufficient measures to combat money laundering, terrorist financing and other threats to the international financial system. And any non-European Union (EU) country identified by FATF as representing a risk to the international financial system is presumed to represent a risk to the Union’s internal market.
This is not a reputation that Sri Lanka should aspire to.