Today we are going to learn about the different ways Chinese people move money from one place to another. In particular, we're going to examine traditional Chinese financial practices in the long period prior to the advent of modem electronic banking, as well as mutations produced when traditional practice is subjected to foreign influence. We're going to examine the component methodologies of what some in law enforcement are calling Chinese underground banking. We want to consider whether or not a cohesive, Chinese dominated underground banking system exists in Southeast Asia and if so, how it is managed and where it is liable to penetration by the skilled investigator.
By 1983 we begin to see a number of DEA-originated documents postulating the existence of an "underground banking system" dominated by Chinese in Southeast Asia. These lead to an estimate, ostensibly with broad intelligence community concurrence, that "...the lion's share of heroin money probably is handled within Asia by the Chinese underground banking system."
In 1984, the President's Comrnission on Organized Crime tasks the Department of the Treasury to analyze, for the first time, all available cash flow data concerning Hong Kong. A consistent increase in small denomination U.S. currency repatriated from Hong Kong to the United States is noted, exceeding the total volume of all currency transactions with any European country. This increase parallels the increase in Southeast Asian heroin marketed in the United States from 1981 to 1983. On the basis of this observation and other data, analysts are led to conclude that the massive U.S. currency surplus in Hong Kong emanates from Southeast Asian drug trafficking.
Suddenly the concept of a Chinese underground banking system becomes important to an overall grasp of Asian currency flow, and this leads in tum to a view of traditional financial practices that I believe is liable to gross misinterpretation. I want to take a moment and carefully examine the current United States federal law enforcement view, as expressed in the literature. Following this we will launch a detailed historical survey and then contrast the current view with historical realities, noting differences and similarities.
According to federal sources: "Apart from a historical distrust for banks among the Chinese, the [underground banking] system grew out of political turmoil, Communist takeovers in many countries where the Chinese reside, and constant harassment of expatriate Chinese in nearly all the countries where they are present in significant numbers. Operated by money changers, gold shops, and trading companies, the underground banking system is linked by kinship ties to the Chinese-dominated heroin production business and to an intricate web of other Chinese commercial interests....
"The recordkeeping procedures of the underground banking system are nearly nonexistent, with coded messages, "chits," and simple telephone calls used to transfer money from one country to another. One Hong Kong police official stated that he once seized a piece of paper with the picture of an elephant on it that represented the collection receipt for $3 million at a Hong Kong gold shop. The system nonetheless has the ability to transfer funds from one country to another in a matter of hours, provide complete anonymity for the customer, provide total security, convert gold or other items into currency, and convert one currency into another of the customer's choice."
In February 1988, the Department of Justice reports: "Large amounts of money...move internationally in an underground banking system that operates on tradition and trust. Chinese sometimes carry and exchange encoded 'CHITS' that substitute for monetary instruments. For example, a CHIT encoded in New York can be exchanged for an agreed upon amount of cash, gold, heroin or other commodity in Hong Kong. Shops that specialize in gold and precious stones, money exchangers and import/export businesses fomm a network that moves cash and commodities with little or no documentation. This system originated hundreds of years ago as a means of avoiding robberies and repressive tax measures by the Ching dynasty. Today, the CHIT system offers an invisible means of moving hard currency intemationally."
This summarizes what we think we know about what we choose to call Chinese underground banking. Before we leave this recap of the current view I want to note parenthetically that I was also studying Asian currency flow in the early l980s, albeit from a Vietnamese perspective, and I encountered some variance of emphasis from the intelligence community.
In the summer of 1984 I interview a former provincial advisor on the topic of the Chinese money changers in Viet-Nam. My informant recalls that while stationed in Saigon during the war he becomes late with the mortgage for his home in the United States. He reports making arrangements with a gold shop in Cholon and having his house payment credited in Virginia the very next day.
About the same time I task the Defense Intelligence Agency for their view of currency flow in the region. I go to DIA because I knew they had or should have a rich archive on the subject. The Director of DIA replies: "Our analysts have concluded...that the current mechanism utilized to transfer funds does not involve actual movement of negotiable instruments between the United States and Vietnam. It is instead a barter system. The type of system currently in use has been noted by our analysts as existing for at least the last several decades. The mechanism involves a payment of funds by the sender to a broker in the United States. The broker in tum notifies a party in Vietnam to make payment of a specific amount to the intended recipient. The party in Vietnam disbursing the funds is thereby able to accumulate a dollar account in the United States with the broker which may then be drawn on when needed by the party in Vietnam.
"Some [sources] have stated their suspicions that this system is being used by criminal elements in Vietnam as a way of transferring funds generated in Vietnam through black market activities to a safe haven outside Vietnam for unspecified future use. In the opinion of our DIA analysts such a system may also be utilized by or directly associated with SRV intelligence and security agencies, possibly in association with criminal elements. This system would result in the availability of operational funds for the use of SRV personnel or others, both in the United States and elsewhere.
"Such a barter system is not unique to Vietnam. It is quite probable [you have] noted the barter system in use in other countries around the world which have strict prohibitions regarding foreign currency transactions."
Today, when we think about moving individual quantities of money from one place to another, we usually think about electronics and high tech communications systems such as those employed by the Clearing House Interbank Payments System (CHIPS), or the low tech medium of the telegraphic wire faith, or related organizations such as Society for Worldwide Interbank Financial Telecommunications (SWIFT). Such systems demand developed infrastructure, skilled personnel and reliable communications links. But how did money move before these systems were invented? How did money move when it took the form of gold, silver, copper, silk, tea, rice or salt? And how did money move among common people in remote areas or developing nations?
In order to answer these questions we need to remember money's functions. Money in fact has four functions: as a medium of exchange, as a means of payment, as a standard of value and as a store of value. The form money takes and the manner in which it moves is conditioned by each function. Let me give you a few examples. You have a quantity of raw opium. I wish to purchase the opium so I give you a quantity of silver. The silver becomes a medium of exchange with which I obtain a commodity. You owe me a debt from an unsatisfied transaction, so I accept the opium from you in lieu of silver. The opium becomes a means of payment, and hence a form of money.
I accept the opium from you at the rate of one kilo for each one hundred taels of silver you owe me.12 The silver therefore becomes a standard by which the opium is valued. I stockpile silver in anticipation of future purchases, and you do the same with your opium. Our holdings thus become a store of value. We will take the silver for opium scenario a step further. Suppose that I wish to purchase 500 kilos of opium from you. You live in Burma, I live in China. I do not want to transport 50,000 taels of silver, so I tell my cousin in Burma to pay you and I promise to settle with him later. You deliver 250 kilos but you receive 50,000 taels of silver. I now have a 50,000 tael liability on my cousin's books, a 25,000 tael asset on your books and a commodity worth 25,000 taels on my books.
I sell my opium for double its unit cost and have 50,000 taels of silver in my possession. My cousin tells me to pay a 50,000 tael debt he owes in China and thus settle my debt with him in Burma. I have caused the transportation of 250 kilos of opium from Burma to China without moving my silver and have 25,000 taels in Burma which the Chinese authorities will never see. During the course of this transaction my "money" has taken the form of raw opium, silver taels, notes between my cousin, myself, and third parties, and has been altemately a medium of exchange, a means of payment, a standard of value and a store of value. Note also that my transactions have been both domestic and intemational in character. If you fully understand these examples then you already understand the fundamentals of Chinese underground banking, and you may consider that which follows as nothing more than diverting variations on a theme.
Money in ancient China took many forms: jade and pearls, tortise shells and cowries, dogs and horses, leather, hemp and silk cloth, grain and metal. These we understand as types of commodity money, the chief characteristic of which is handiness to local barter transactions and unsuitability for distant trade.
In the latter half of the T'ang dynasty a growing tea commerce between the south and the imperial capital began to underscore the necessity for convenience of exchange. In response, a medium of transfer poetically named "flying money" (fei-ch'ien) evolved. Provincial governors maintained "memorial offering courts" at the capital. Southem merchants paid the money they made from the sale of goods at the capital to these courts, which then used it to pay the tax quotas due from the Southem provinces to the central govemment. In retum, the courts issued the merchants with a certificate. When the merchant retumed home, he presented this certificate to the provincial govemment and was paid an equivalent sum of money. Thus did both the merchant and the local government avoid the risk and inconvenience of carrying quantities of copper or silk.
Traditional credit institutions also play a role in early money moving custom, so let us take a few moments and examine the most prevalent types.
The oldest credit institution in China is the pawnshop. These originate in Buddhist monasteries which would lend out donated wealth, usually at about three percent or less, at terms of redemption ranging from six months to three years. As time progressed they evolved into more secular institutions, generally divided according to capital into four main classes, and a subsidiary class of village agencies representing the larger firms. Because pawnshops were an important source of tax revenue for the government, and therefore closely monitored, we fortunately have rather detailed records of the pawnbroking profession in China. We leam that the profession grew dramatically between the seventeenth and nineteenth centuries; from 7,685 pawnshops in 1685 A.D. to 23,139 pawnshops by 1812 A.D..16 We also leam that as they evolved, they came to resemble commercial banks, making loans on commodities, and engendered early commodity futures speculation. The pawnshops could also move money. A village agency corresponding with its urban parent could arrange credit transfers from shop to shop. The use of pawnshops for moving funds was never central to pawnshop trade custom and fell into decline with the growth of the banking profession.
The most enduring traditional credit institution in Chinese custom is the mutual financing association or ho hui, dating back to the T'ang dynasty and still encountered in one form or another over most of Asia to the present day. The financing association also owes its origin to the Buddhist monasteries, which organized clubs to finance charitable activities, promote thrift and provide mutual assistance in the case of noteworthy events such as weddings or funerals. An argument could be made that they functioned as a kind of mutual social insurance institution. Although the mutual financing association exists in several forms or variations, the basic concept remains the same. A group of individuals each pledge the same sum of money. The aggregate total is utilized by each individual who, after an interval, pays back the total, less his share. Interest may or may not be involved. The scheme closes when all participants have made use of the total and all sums have been repaid.
By way of example, I need to raise $90,000., so I collect nine friends who each pledge $10,000. Together we determine there will be ten quarterly payments, settlement to be made at ten meetings of our society. At the first meeting, I take $90,000., and pay back $10,000. at the next and each successive meeting, when someone else takes $100,000. The scheme closes after two and a half years, when all members have shared the fund. The three principal forms encountered are the "rotating society," in which order of participation is determined beforehand, the "dice shaking society," in which order of participation is decided by the shaking of dice, and the "auction society" in which interest is charged and the funds go to the person willing to pay the highest interest. This last form is most prevalent in the United States today, typically encountered in the Chinese, Vietnamese, Korean and Thai communities.
Lesser variations are occasionally observed, frequently with colorful names. Thus we have the "dragon-headed club", so-called because first payments are larger than subsequent payments, as the dragon's head is larger than its tail. We also have the "snake shedding its skin club," so named because the money is paid back in gradual installments, as a snake sheds its skin.
Although there is nothing illegal in the scheme per se, the hui is frequently encountered by law enforcement. The encounter typically follows a scheme organizer absconding with funds or a member becoming late in his payments. Participants sometimes feel Westem police will not understand the underlying concepts so they attempt justice among themselves, often with unfortunate results. I have also observed the scheme being used by a husband to conceal assets from his estranged wife during a divorce proceeding, and among the criminal fringe as a means of concealing ill-gotten wealth. The key to locating records, if any, in such matters is to leam the identity of the organizer. Traditionally, the organizer may have an assistant who must also be identified, as the latter often keeps the records. One next examines financial pattems and couples these with association matrices. These investigations seem more complicated than they really are.
In the Ch'ing dynasty businessmen in Shansi province began the practice of forming courier companies to safeguard money in transportation. They soon found it expedient to set up branches in other cities with which they frequently did business, and thereafter began issuing drafts for convenience in moving funds from branch to branch. Thus were the Chinese remittance banks born.
The Shansi banks were organized as family businesses and often engaged in commercial investment in commodities. They also enjoyed substantial government trade and operated as fiscal agents for government treasuries. But their main business was money transfers by means of drafts, which they sold for a fee, much in the fashion of travellers' checks. The system succeeded because the Shansi bankers developed an extensive, nationwide network.
Following the Shansi banks we find a large variety of local retail banks, money exchanges, clearinghouses, customs banks and silver shops. These issued promissory notes and in some cases currency, and in this manner competed in small measure for the Shansi money transfer business. These variations comprise what one scholar calls the "old-style banks." The study of such variations is entertaining but as our time today is limited I will leave their story untold.
The foreign banks operated entirely free from Chinese laws and regulations and, while in China, were substantially free from their own national laws and regulations. They quickly dominated foreign exchange and foreign remittances. I want to note parenthetically that parallel developments were taking place in VietNam. In 1862 the French occupied Saigon, in 1863 Cambodia, in 1873 Central Viet-Nam, in 1884 North VietNam and in 1893, Laos. Opium pemlits were issued to Chinese merchants in VietNam and opium refineries were established with colonial government assistance. The enterprise flourished to the extent that by 1899, the French Banque de l'Indochine was able to establish its first Chinese office, chiefly on the basis of the opium trade. When, in 1915, the British ceased importing opium into China, the French continued to traffick and began cultivating their own sources of supply in northwestern VietNam and eastem Laos. French advisors made contact with the Meo and Yao hill tribes, teaching them to grow, harvest and market opium and thus was the Golden Triangle born.
The basis for all of this was of course silver. During 1837, for example, the British sent 2.4 million kilograms of opium to China. Each kilo of opium was worth five taels of silver thus, approximately 10 million taels of silver were transmitted abroad in a single year.
We shall now briefly acknowledge family remittances and the chit system, as these seem to attract a good deal of attention among federal investigators.
As Chinese labor began to spread throughout the world, and in particular Southeast Asia, the emigration process began to have considerable effect on the social institutions of the Chinese. In particular, the dual or joint family system came into being. Whereas in China a man of substance would keep his several wives in or around the same compound, under the dual family system, the laborer abroad would have two families: one in China and one in the immigrant nation. In the words of Victor Purcell:
"Such arrangements obviously call for careful financing. The emigrant abroad, after deducting what he needs to meet his expenses, usually retnits his savings periodically to his home in China for the support of the family there and to meet extraordinary expenses.... At the same time the family home in China is a kind of insurance for the emigrant, for he can always return there if he is unemployed."
A number of more or less conventional means evolved to meet these special necessities. As the question of remittances home was usually a politically delicate one in the immigrant nation, Chinese residing outside China had frequent recourse to traditional methods such as those outlined above. Where, for example, there was a Chinese gold shop in Thailand owned by a chap with a dual family, use was made of the gold shop on the theory that host nation officials would be incapable of tracking the transactions. Thus did certain dual families come to dominate the remittance trade in certain areas of the world. We should also remember that when these matters first arise, there is an absence of corresponding banks, and the Chinese are often subject to repressive taxation in the host nations.
Contrary to popular belief the chit system does not originate with overseas Chinese remittances nor with so-called native banks. Chits are a colonial invention.
The word "chit" is itself the diminutive of "chitty," a word of Anglo Indian origin borrowed from the Hindi chitthi, meaning a mark. From about the late seventeenth century the word crept into English usage as meaning a note, pass or certificate given to a servant.
The chitty came to China in the nineteenth century by way of British custom. Foreign residents in the treaty ports found handling strings of Chinese cash or silver ingots a major inconvenience. In order to eliminate this inconvenience a system was devised whereby:
"The salary of foreign employees was paid by check drawn on the Chinese compradore, who then held the funds against which the employee wrote 'chits'... memoranda acknowledging debts for retail transactions. These were accepted by the shopkeeper and passed for collection to the firm's compradore."
You might wish to contrast this with the "official" view of the chit system, cited earlier. Certainly, representative paper, i.e. chits, are being employed to move money in Asia, but the point here is that you are dealing with a colonial custom rather than something indigenously Chinese.
Now that we have passed through our brief historical survey I think it is useful to next examine specialized subjects of possible significance to investigations in the region.
Chinese accounting practice forms a worthy study for the Asian crime specialist, particularly as such practice relates to settlement dates. I am certain I do not need to remind anyone in this audience that the last day of the lunar year is of supreme importance to Chinese fiscal matters for it is upon this day, by longstanding tradition, that all accounts are squared. It is in fact considered a great disgrace if one is not able to pay off all debts by this day. Some of you may be surprised to leam that certain trades have different settlement dates. Merchants and grocerymen, for example, traditionally present their bills from the eleventh to fifteenth days of the eighth lunar month. Wholesalers are traditionally paid on the second and sixteenth of any given month. Local custom also accounts for variation.
In concept, Chinese books of account are very much like our own, while in practice they offer a different appearance. A cash book will be ruled horizontally, receipts being entered above and payments below the line. "Above the line" is called heaven, and "below the line," earth. These are compared at intervals. The difference between the two is expressed as an asset or a liability. These are not carried forward, but on the occasion of the next comparison the new items will be totalled and added to the original asset or liability.
Balance sheets are almost identical to our own form, with one or two significant exceptions. Contributed capital, known as lo pun, or "old root," is carried as entitled to a specified rate of interest (usually 8% to 10%) and the sum required to pay this is shown as a liability. Profits, also known as hung li, or "red gain" means the surplus after interest is deducted, indicative of an interesting cultural assumption that everything over and above the fixed rate of return is "red" or good fortune, something quite different from our own concept of "in the red." Balance sheets will also portray "deposits" and "loans," referring to the practice of firms providing banking facilities for participants.
The ability to recognize what is or is not a normal book of account is of paramount importance. I want to give you just a brief example from my own experience. During my employment with the U.S. Customs Service I was considered an expert in Vietnamese matters but I was also occasionally asked to comment on other Asian cases. At the time there was a substantial case involving an alleged Triad office-holder from Hong Kong. He was detained and his documents were copied. Among these was a small book with elaborate notations, such as: "Auntie's Bird Nest Soup, 20,000 " Several people looked at this and finally some headquarters boffin pronounced it as a wagering record. The suspect was keen on horses so this seemed plausible.
My opinion was asked and I examined the document carefully. I was ready to agree it was a betting book until I remembered the characteristic line between heaven and earth in Chinese books of account. Upon careful scrutiny it was found that this was a record of the suspect's personal cash loan
"Chops" (to cheung) as employed in financial records also form an interesting study. Most banks and counting houses employ them in great profusion, even to the present day. A chop is of course a seal, traditionally of stone but also encountered in wood, ivory and various other materials, which is dipped into vermillion ink-paste and impressed by way of a verification stamp. Types of chops include the general purpose chop (shu kan to cheung) for acknowledging letters or indicating ownership; the goods delivery chop (fat for to cheung), usually a square seal sent on invoices accompanying goods; the cash delivery chop (kau ngan to cheung), used on a blank receipt delivered with cash; the goods acknowledgement chop (ying him fo to cheung), stamped by the receiver on the invoice when goods are delivered; the acknowledgement chop (shau ngan to cheung), stamped on the cash receipt when cash is taken in, and the indebtedness chop (kit hong to cheung), stamped in acknowledgement of a loan.
I have frequently encountered chops used on currency, either to indicate ownership of money moving in packets, or to identify "off the books" currency destined for certain accounts. You will also see chop-marks used to shroff currency, or verify it as genuine.
A circumstance parallel to marking "off the books" currency, is the practice of the parasitic account. A case of this type was recently encountered in California, wherein a branch Chinese retail bank serving Taiwanese customers was observed to have two different accounting systems. One was the normal account, while the other was a so-called parasitic account, tracked on a desktop computer system separate and apart from the bank's main computer system, and believed to relate to the customer's principal account at the main office back in Taiwan.
Another specialist's study we occasionally hear about has to do with the so-called "money stations," or clandestine radio broadcasters operating in Southeast Asia. Common sense ought to tell you that Southeast Asia is one of the most politically volatile regions of the globe; the nations therein have eminently capable security, intelligence and military services, and as the clandestine broadcast is the very soul of subversion, such things will be monitored with incredible care. Indeed it is so. State of the art signal triangulation is in the fifth of a second range, so any notion you may have of a World War II type 1 watt attic station going on and off the air should be discarded. If clandestines are operating in Southeast Asia everybody and his brother knows about them and can tell you just exactly where they are.
Our brief study of Chinese financial practices is now concluded. If you have been listening carefully you might be tempted to remark, "Well, this is all nice to know, but how does it help me investigate crime?" That is a valid question indeed and I have an answer.
If you investigate sophisticated criminal conspiracies involving Asian suspects, sooner or later you will be confronted with the task of tracing financial transactions. Often, these transactions take place within the context of culturally specific trade customs or commercial practices entirely foreign to your own experience. Serious error is thus invited if you attempt to assess what you see through your own, ethnocentric models.
I want to suggest that the proper way to conduct such investigations is to first gain a solid understanding of traditional financial practices peculiar to each nation in which you have interest. The next step is to apply what you know of the internal dynamics of the criminal enterprise under examination, after which you may progress to testing your resulting hypotheses by conventional methods.
If you omit the first step you will find considerable frustration attendant on your endeavors. You may begin to suspect criminal purpose or intent where none in fact exists and lead yourself into a warren of your own imagination.
The cases which will be made against traditional Chinese financial mechanisms that have been subverted to criminal purpose will be Title 31 cases and possibly 18 U.S.C. Sec. 1956 or Sec. 1957 cases. 31 U.S.C. Sec. 5312 is particularly onerous in that it specifically defines as a "financial institution," a private banker, a currency exchange, a dealer in precious metals, stones or jewels, and a pawnbroker, among others, all of which strike at the heart of traditional Chinese practice. This, in concert with 31 U.S.C. Sec. 5324, the prohibition against structuring transactions to evade reporting requirements, certainly provides the tools to do the job.
The challenge becomes one of critically separating the criminal transaction from the technical violation; of separating the relatively innocuous, culturally specific transaction from the overt act in the continuing criminal conspiracy.
Certainly there are gold shops and foreign currency dealers in Bangkok or Hong Kong or Los Angeles that facilitate money transfers in support of the narcotics trade. The mechanisms they employ, while sometimes technically violable are not inherently illegal; rather they are the vestiges of a banking system of a farflung people that antedates modem electronic banking. Whether or not they employ these mechanisms wittingly to criminal purpose is a matter for individual investigation. From the vantage point of a decade's worth of experience tracking hot money in Asia I do not personally believe such investigations are all that difficult. I think they are well within the reach of any Asian organized crime specialist willing to apply common sense and elbow grease, and a generous measure of faimess in dealing with the traditions and customs of foreign people.
Now you all see that I really know very little about Chinese underground banking, yet you have courteously permitted me to learn more about the topic by speaking before you. When you speak about a thing it helps to organize your thinking, and suggests ways you can improve. If my thinking aloud has helped you I will be pleasantly surprised. I owe you great thanks for helping me today.
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Originally presented before the 12th Annual International Asian Organized Crime Conference, Ft. Lauderdale, Florida, June 26, 1990