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Opinion

Meng Wanzhou Incident Highlights Risks Facing Chinese High-net-worth Individuals

By Wade Weems, Chang Liu, and Nan Wang; Kobre & Kim LLP

Just like the many Chinese businesses caught up in the U.S.-China trade war, high-net-worth individuals in the PRC also can be targets in U.S. criminal cases or face U.S. civil and regulatory penalties based on alleged involvement in economic crimes. Chinese high-net-worth individuals facing the risk of extradition and prosecution by the U.S. should seriously consider not only how they can mitigate this risk, but also assemble a plan in the event they are detained in a foreign country at the behest of U.S. authorities.

This exposure is illustrated by the plight of Meng Wanzhou, the Chief Financial Officer of Huawei. Ms. Meng was arrested in Vancouver in December 2018 at the request of the U.S. pursuant to an indictment claiming she lied to HSBC about Huawei’s relationship with Skycom, allegedly Huawei’s Iran-based subsidiary. Based on her representations, HSBC retained Huawei’s business and cleared more than $100 million worth of transactions through the U.S. related to Skycom, putting the bank at risk of violating sanctions.

On May 2020, the Supreme Court of British Columbia dismissed Ms. Meng’s objections that her alleged violation of U.S. sanctions did not also violate Canadian law, an essential (and near-universal) element in extradition analysis. The ruling turned on this concept of “double criminality,” the prevailing standard relating to extradition in common law jurisdictions. The court defined the alleged misconduct not as the violation of sanctions, but as Ms. Meng’s intentionally false statements to secure financial services from HSBC that exposed the bank to the risk of civil and criminal penalties, even if those penalties are within the context of U.S. sanctions laws.

The ruling expands the scope of dual criminality in Canada (and may serve as precedent elsewhere). This heightens risks for individuals travelling abroad who might be facing potential U.S. enforcement actions. U.S. prosecutors have generally attempted to side-step dual criminality issues by charging offenses in U.S. proceedings to conform to crimes that are also offenses in the requested countries, and the same time as they increasingly rely on U.S.-friendly jurisdictions to target Chinese nationals, including Jianjun Qiao, Gongda Zue, Yanjun Xu, Sihai Cheng and Su Bin. 

Violations of U.S. laws exposes individuals to risks outside of U.S. soil, and international travel to countries with which the U.S. has extradition treaties poses the greatest risk.  Individuals facing the prospect, however remote, of a U.S. extradition and prosecution should proactively assess potential risk exposure and prepare an emergency plan in the event of detention or arrest in a foreign country at the behest of U.S. authorities. Often the true level of risk is difficult to ascertain because U.S. indictments and arrest warrants are often sealed. Safe passage letters from certain jurisdictions provide a tool individuals potentially can use to minimize travel risks. Certain countries will grant, on a case-by-case basis, letters expressly stating that they will not respond to a direct extradition request for the individuals concerned.  However, these letters are often difficult to obtain even for the most connected and well-resourced individuals. 

If an individual is found in the position of arrest and potential extradition to the U.S., there may be other options to resolve the underlying charges in the U.S. by cooperating with authorities through non-prosecution or deferred prosecution agreements. If that option is unavailable, other defenses are available in addition to the dual criminality requirement.  For example, challenges on procedural grounds concerning the arrest or subsequent handling of the case or related evidence can be viable in many jurisdictions.  Defendants can also raise concerns about the overall fairness of the charges levied against them.  

These defenses are exemplified in Ms. Meng’s case. In June 2020, Ms. Meng’s lawyers filed a motion exposing a redacted two-page report on the involvement of the Canadian Security Intelligence Service (CSIS) in her arrest, arguing Ms. Meng’s constitutional rights had been violated.  The allegation builds on her claims that the seizure of her electronic devices and passcodes by the Canada Border Services Agency officers was illegal. The allegedly ongoing involvement of CSIS after Ms. Meng’s arrest bolsters her case that she is a victim of the abuse of power and improper process by Canadian prosecutors.  As the judge notes in the Supreme Court’s opinion, the Canadian Minister of Justice is required to refuse a surrender order for extradition, even in the final phase of the extradition process, if such an order would be unjust or oppressive given all the relevant circumstances.  As the rounds of legal challenges unravel, the final outcome of Ms. Meng’s case will not unfold until April 2021, when the court will hear final arguments in the extradition proceedings.  Nevertheless, in the face of rising U.S. enforcement actions, it is clear that Chinese entities need to carefully evaluate the changing environment and be prepared to address these risks.

About the Authors

Wade Weems

Wade Weems is a Shanghai-based lawyer at global disputes and investigations firm Kobre & Kim LLP. A former U.S. Department of Justice (DOJ) prosecutor, Mr. Weems counsels corporations and individuals with Asia ties in cross-border criminal cases and internal investigations stemming from U.S. government enforcement actions, particularly those alleging bribery or Foreign Corrupt Practices Act violations, theft, fraud and money laundering. Mr. Weems also advocates for clients affected by export control restrictions and sanctions issued by the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC) and the U.S. Department of Commerce.

Chang Liu

Chang Liu is a Shanghai-based lawyer at global disputes and investigations firm Kobre & Kim LLP. He is an experienced litigator who represents institutional and individual clients in complex cross-border matters, including commercial litigation, white-collar defense, regulatory compliance and internal investigations. Mr. Liu has particular experience representing companies and individuals in investigations connected to China and involving allegations of bribery and violations of the Foreign Corrupt Practices Act.

Nan Wang

Nan Wang is a Shanghai-based lawyer at Kobre & Kim LLP. Ms. Wang represents clients in cross-border disputes, especially in matters involving multinational companies and state-owned enterprises (SOE) operating in the People’s Republic of China. Ms. Wang also counsels companies in internal investigations stemming from Foreign Corrupt Practices Act (FCPA) allegations and regulatory violations.

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China’s Central Bank Digital Currency Won’t Be Blockchain-based or Rival to Alipay: Rich Turrin

Shanghai-based fintech veteran Rich Turrin says that despite the widespread association between distributed ledger technology and cryptocurrencies, China’s hotly awaited digital renminbi will not be based on blockchain technology.

In an interview with China Banking News Turrin said China’s central bank digital currency (CBDC) will instead mark an evolution from pre-existing payments systems created by tech giants such as Alipay and WeChat, as practical challenges mean that the blockchain is not the best technology to use for its underlying foundation. 

“Here’s the amazing thing, for a country that is a leader in blockchain adoption, China’s central bank digital currency does not mean blockchain,” said Turrin. 

“Many believe that central bank digital currency equals blockchain, but it really does not. In fact China’s PBOC has been very clear that blockchain does not have the performance requirements for the front-end retail-facing interface and the transmission of cash across their network.

“To give you an example, Alipay’s network on Single’s Day reached up to 500,000 transactions per second, which is well beyond anything that blockchain could ever possibly handle. 

“Blockchain networks simply cannot go anywhere near that, so PBOC is very clear that this is not a blockchain solution on the front end.”

Turrin believes that PBOC’s CBDC instead marks an evolution of pre-existing digital payments systems that were developed by tech giants AliPay and WeChat Pay last decade, and had a transformative impact on the Chinese economy.

“In my coming book China’s Digital Currency Revolution I talk about digital currency 1.0 and 2.0

“You really have to think that currency is already digital, with things like cheques and credits cards. Money doesn’t sit in a bank or a box, it’s already a digital ledger item at a bank.

“The first generation for China’s digital currency was really Alipay and WeChat Pay, they really started this whole revolution.

“It was so successful that the Chinese government looked at it and said – okay then – people want digital payment and 85% of all payments in the country are already digital.

“So why not take the next leap to make a true central bank currency. And that’s version 2.0 of digital currency in China.”

While the CBDC will not be blockchain-based, Turrin nonetheless expects distributed ledger technology to play an important ancillary role in China’s CBDC at a lower level of the system.

“There are different layers of the central bank digital currency and it is probable that one of those lower levels will have blockchain,” he said.

“This is a two-tier central bank digital currency. Central banks gives the digital currency to bank or financial institution, and the financial institution delivers it to consumers.

“They’re still working out exactly how the central bank will record and notify the financial institutions of their allocations of central bank digital currency. This is the layer where they’re thinking about using blockchain.”

Given that the Chinese CBDC marks an evolution of pre-existing digital payments developed by the tech giants, observers have speculated that its deployment could render its predecessor systems obsolete. 

Turrin does not consider this to be likely given that the infrastructure created by the likes of Alibaba and Tencent still plays a vital role in ensuring the security of holdings and the facilitation of transactions. 

“The CBDC gives people a very interesting new capability – direct digital payments from me to you without an intermediary, 

“This means no bank as an intermediary, no Alipay is an intermediary and no WeChat Pay is an intermediary.

“I can take my phone and put it near yours to transfer money by means of near-field communications – you can directly transfer money. 

“That’s wonderful, but the reality is that if you have large amounts of digital currency on your phone it also means that if you lose your phone you lose your digital currency/ 

“You will still want to keep your digital currency in a wallet provided by either a bank or an Ant Financial or a Tencent, because you certainly don’t want to keep a large amount of digital currency on your wallet on your phone”

Turrin further points out that the platforms that Alibaba and Tencent have created play a major role in the economic lives of Chinese citizens, and possess the requisite “stickiness” to retain customers. 

“What Alibaba and WeChat have both done is build these tremendously efficient platforms that are what we call in the platform business sticky – people use them and they want to use them.

“I have my household bills paid partially on WeChat Pay and another part on AliPay, and I use them every month all the time.

“Even if you give me a digital currency my billing is still going to go through those entities. It’s already set up, so why would I bother changing them.

“Going to central bank digital currency makes it so that you can pass digital currency around without the need for a third party.

“But these parties firstly provide some sort of security, and secondly they provide platforms which allow you to connect and more easily interact with whoever it is that needs payment. They’re not going away by any stretch of the imagination.”

Rich Tur­rin is the au­thor of the best-sell­ing “In­no­va­tion Lab Ex­cel­lence” and soon to be pub­lished “Chi­na’s Dig­i­tal Cur­rency Rev­o­lu­tion.” He pre­vi­ously headed IB­M’s Fin­tech In­no­va­tion Lab in Sin­ga­pore and IB­M’s bank­ing risk tech­nol­ogy team in China af­ter a 20 year ca­reer in bank­ing.

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