Increasing Your Due Diligence as Belt & Road Infrastructure Provides New Regional Opportunities for Fraud

As China’s Belt & Road Initiative expands across the globe – some 147 countries and territories have now signed up to the BRI – increasing opportunities for fraud creep in. This is especially true of developing areas where new infrastructure builds can provide access to perhaps not yet fully secured assets, or foreign investors unfamiliar with the terrain may be exploited by local rogues and even mafia.

Accordingly, the Global Initiative Against Transnational Organized Crime has published a report entitled “China’s New Silk Road: Navigating the organized crime risk” which examines the convergence of planned infrastructure and trade route development projects as envisioned within China’s Belt and Road Initiative and established trafficking routes for criminal activities such as drugs, illicit environmental commodities, and people.

The report argues that the economic benefits across Asia and Africa, for example increased trade, employment opportunities and economic growth are likely to be exploited by criminals and suggests that risks of this nature should also receive appropriate levels of consideration.

This should apply not just to the governments and authorities that are seeking to capitalize on BRI but also to the companies that attempt to benefit from the emergence of new markets and trading opportunities.

This is an important issue as many of the proposed development initiatives are situated in less mature regulatory environments and are already exploited by criminal elements. Illegal activity is likely to be made easier by the increase in connectivity that new transport links and free trade zones will create.

Companies that are seeking to take advantage of the opportunities generated by the BRI should assess the criminal risks to help avoid being unwittingly involved in activities that breach legal and regulatory requirements.

Here we list three risk areas.

1. Bribery and corruption increased volume of interactions with port and other transport hub authorities, inspection officers and import/export officials can create an environment in which bribery and corruption can thrive. The BRI will result in many more opportunities for trade and transport focused corruption and companies should factor this into their risk assessments. Professional advise should be taken concerning knowledge of the correct duties and fees, together with an understanding of the reporting environment, whether this provides adequate protection, and if not, how to manage these eventualities.
2. Trade based money laundering (TBML) – already described by the Financial Action Task Force (FATF) as one of the top three methods used by criminals to launder the proceeds of their crimes, TBML should be considered by all companies involved in international trade and transportation. A good starting point is the recent guidance discussing TBML Risk Indicators, published recently by FATF and the Egmont Group of Financial Intelligence Units. This should be conducted hand in hand with checks concerning issued sanctions and whether they are potential risks of breaching these – punishments can be severe.
3. Understanding who you are doing business with. The BRI is increasing the size of the China plus market and creating new opportunities. It is important to conduct due diligence on both Government officials, corporate and other key individuals, and involved companies, to evade illegal activities including evasion of economic sanctions, money laundering, fraud, corruption, wildlife trafficking, abuse of worker’s rights, human trafficking, slavery and illegal mining, logging, fishing, or other environmental crimes. It is extremely important that businesses investing in BRI projects and countries operate a robust due diligence process to identify high risk trade participants and take mitigating action.

The benefits of the BRI are clear. Creating new trading routes and developing the supporting infrastructure will help generate prosperity and economic growth. Companies that aim to take advantage of BRI opportunities will also need to consider the criminal risks and how they may impact their own business objectives.

Failing to acknowledge that development and trade create vulnerabilities in contexts where governance and regulatory capacity is weak, crime levels are high and illicit markets are well established, also creates the risk of systematic criminal exploitation of the BRI, either through boosting existing illicit routes or facilitating the emergence of new ones.

While it is true that emerging technologies such as certain Fintech and banking applications will reduce risk in some areas, in others these will not, and especially in an increasingly sanctioned operating environment.

Dezan Shira & Associates are familiar with the due diligence pressure points in China, ASEAN, India, and Russia, and are also members of an extensive global network of firms that can be called upon to conduct the relevant research about who you are dealing with. Contact us at silkroad@dezshira.com. The following due diligence materials also refer:

• China
• India 
• Russia

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