HMRC v Cheng Xing & Anor

Mr Justice Sweeting: Introduction

1. This an application by Barry Roger Woollard (“Mr Woollard” or “the Applicant”), an Officer of the Commissioners for HM Revenue and Customs (“HMRC”), in relation to Cheng Xing and Yan Zhang (“the Respondents”). The Applicant seeks a Property Freezing Order (“PFO”) under section 245 A of the Proceeds of Crime Act 2002 (“ POCA 2002 ”). The order is sought in respect of three properties and the balance of a savings bank account owned by the Respondents, with an approximate combined value of £1,425,890.00.

2. The application is supported by Mr Woollard’s detailed second witness statement of some 80 pages, with an exhibit bundle comprising 3084 pages. The investigation into the four assets is currently in a covert phase, and the application is made without notice due, it is argued, to the risk of dissipation if the Respondents were to be given notice. It is anticipated that the fact of the investigation might, absent an order, be discovered by the Respondents by 26 August 2025, as HMRC is required to issue a VAT assessment by that date, which will rely on banking information obtained during the investigation. Background to the Case

3. The Respondents, Cheng Xing and Yan Zhang, are Chinese nationals. They are married and have two young children. Both are currently 42 years of age. They own and reside at 26 The Holdings (“Asset 1”). They also own a leasehold flat at 27 Meadow Croft (“Asset 2”) and a freehold property at 6 Goldings Crescent (“Asset 3”). Mr Xing opened an HBOS savings account in March 2024 (“Asset 4”), which currently holds approximately £132,890.00. Assets 3 and 4 were identified following the grant of a Disclosure Order.

4. The Applicant submits that there is a good arguable case that the three properties and the bank account balance constitute recoverable property. This submission is advanced on the basis that the property was, it can be inferred on the evidence, purchased with the proceeds of money laundering offences, contrary to sections 327 , 328, and 329 of POCA 2002 , or alternatively, offences committed by acting as an unregistered Money Services Business (“MSB”) in contravention of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017), or the Money Laundering Regulations 2007 prior to 26 June 2017. It is submitted that the assets were acquired through cash and monetary transfers that cannot be traced to legitimate earnings. The Respondents are alleged to be involved in Chinese Underground Banking and “Daigou” transfers to launder funds, the source of which is unknown, but where the manner of movement of funds implies unlawful conduct.

5. A civil recovery investigation, initiated by the Applicant, led to a Disclosure Order under section 357 of POCA, granted by Mrs Justice Lang on 17 July 2024. This order facilitated the discovery of Assets 3 and 4, as well as financial records from 2018 onwards. This additional information, it is submitted, strengthens a good arguable case that the properties and bank account are recoverable property. Declared Income of the Respondents

6. In relation to declared income, the financial history of the Respondents appears limited. Ms Zhang was the sole Director and Shareholder of Eternity Intertrade Limited from January 2013, holding one share worth £50,000. This company did not submit any accounts or annual returns and was dissolved in June 2014. Mr Xing was the company secretary of, and held a 30% shareholding in, UK S&S Food Limited from July 2014, a licensed restaurant business that traded at a permanent loss from 2016 to 2018 and was dissolved in December 2019.

7. Ms Zhang has been the sole director and shareholder of UKFRESHASIANFOOD Limited since October 2018, also a licensed restaurant. Both Respondents have been declared to be employees of this company on PAYE since December 2018. The company’s accounts include ‘Loans from Directors’ of increasing amounts, reaching £194,149 by 31 October 2023.

8. Mr Xing has never been registered with HMRC for Self-Assessment. Ms Zhang has been registered since 2018, but her self-assessments show total income exceeding £10,000 only once in six years (£10,052.00), incurring no tax liability. The combined PAYE income of the Respondents for the ten-year period 2013/14 to 2022/23 was £151,884.04. Their joint declared income for the 11-year period 2013/14 to 2023/24 was £188,435.04, averaging £17,130.46 per year after tax. This declared income raises questions as to their ability to support their companies through directors’ loans and shareholders’ funds, especially given the £194,149 ‘loaned’ to UKFRESHASIANFOOD Limited. Financial Analysis: 2010 to 2018

9. A civil tax compliance investigation began in September 2018, covering April 2010 onwards. Banking material for 14 accounts held by the Respondents was obtained via a without notice application to the tax tribunal, covering April 2010 to December 2018. Analysis of these accounts by Mr Woollard revealed: i) Credits totalling £266,690.02 in 2013/2014 and £678,186.10 in 2014/2015 across personal accounts, with the provenance of the payments often unclear due to insufficient detail. ii) Of the 2014/2015 credits, £542,609.66 concerned transfers from third parties. iii) Expenditure exceeding £1 million on ‘high-end’ prestige designers and retailers between 2010/2011 and 2017/2018. iv) Refund payments in relation to Tax-Free Shopping totalling £26,173.19 (2010/2011 to 2017/2018). v) Numerous cash deposits were made across different UK locations, with multiple deposits often occurring on the same day in different towns and cities. During this period, 512 cash deposits totalling £544,451.00 were credited to their personal accounts. vi) Some 367 cash withdrawals totalling £158,073.00 were debited, sometimes with multiple withdrawals being made on the same day.

10. The high-end transactions, postage fees totalling £32,438.99, and PayPal activity (credits of £33,987.21, debits of £79,004.16) for 2010-2018, constitute unexplained wealth and are consistent with Daigou schemes. The amount spent on high-end goods and postage substantially exceeds the Respondents declared income. Neither Respondent declared business income in relation to the buying, selling, or likely exporting of high-end goods to China. The activity of the Respondents between 2010 and 2018 is consistent with Chinese Underground Banking and the operation of an unregistered MSB to launder criminal funds using a ‘Daigou’ mechanism as an informal value transfer scheme (“IVTS”). Financial Analysis: 2018 to 2024

11. The analysis of banking information for the tax years 2018/2019 to 2023/2024, obtained via the Disclosure Order, shows a significant decrease in cash deposits but a substantial increase in transfers from and to third parties, indicating the continuation of suspected money laundering or the operation of an unregistered MSB. This shift appears linked to measures taken by the regulated UK banking sector in 2018 to combat money laundering, which included a reduction in the ability of individuals to bank cash into third-party accounts.

12. Anomalies identified in this later period include: i) £233,618.36 identified as likely banked cash. ii) £124,506.35 net expenditure in relation to their children, including private school fees. iii) £23,237.03 net expenditure in relation to Healthcare & Hospital. iv) £55,215.96 net expenditure in relation to ‘High End’ prestige designers and retailers. v) £596,923.17 received across personal bank accounts in relation to ‘Third Party Transfers’. vi) £164,679.15 paid out across personal bank accounts in relation to ‘Third Party Transfers’. vii) £274,027.47 received across personal accounts appearing to concern transfers from the Respondents’ personal bank accounts in China. viii) Monetary transfers totalling £1,163,138.41 received from third parties, including PayPal receipts, possible restaurant income, and overseas transfers, against modest PAYE income.

13. The Respondent’s personal finances, as with their company finances, are, on the available evidence, inconsistent with their declared income. There have also been payments to conveyancing solicitors coinciding with the acquisition of the three properties without the need for a mortgage or secured loan, despite the minimal PAYE income declared. The evidence in relation to the four assets which are the object of the order is as follows. 26 The Holdings (“Asset 1”)

14. Asset 1 was purchased for £476,000 on 5th September 2014 without a mortgage. The Respondents made 16 payments totalling £491,632.48 to the conveyancing solicitors, Horizon Law, between June and September 2014. In the months prior to purchase, 21 large payments from various third parties totalling £498,583.03 were received into their accounts. A large part of these funds was then transferred between their accounts before being paid to the solicitors. These payments included references to 14 individuals other than the Respondents, with Mr Xing’s mother being one identified individual. Additionally, between May and July 2014, 34 cash deposits totalling £42,009.90 were made at various branches across the UK. The funds for Asset 1 are likely a combination of transfers in and cash deposits, not commensurate with declared income, and appear to have been deliberately structured to avoid detection. 27 Meadow Croft (“Asset 2”)

15. Asset 2 was purchased for £185,000 on 9th October 2018 without a mortgage or secured loan. Payments totalling £193,460.72 were made to K and K Solicitors Limited, located at the same address as Horizon Law, between August and September 2018. The analysis of these payments indicates their origin in cash deposits and transfers from various accounts, many appearing to originate in China. The funds for Asset 2 are suspected to be from a combination of transfers in and cash deposits of unknown, but suspected unlawful, provenance, and are, again, not commensurate with the Respondent’s declared earnings. 6 Goldings Crescent (“Asset 3”)

16. Asset 3 was purchased for £250,000 on 1 March 2024, again without a mortgage. Four payments totalling £260,103.95 were made to K and K Solicitors Ltd between November 2023 and February 2024. The source of a £25,000 payment from Ms Zhang’s account and further transfers of £20,000 and £7,500 into her account were effectively enabled by transfers from an overseas account held by a ‘Yan Zhang’ in Beijing, China. A payment of £234,208.96 from Ms Zhang’s Lloyds account was derived from cash deposits, transfers from another of her accounts, and five transfers of monies from China, likely from accounts held by Ms Zhang, her mother, and her father. These payments are, similarly, not consistent with declared earnings and are suspected to be the proceeds of the Respondent’s activities as an unregistered MSB, related Daigou activity, and money laundering. HBOS Savings Account ending 969 (“Asset 4”)

17. Asset 4 received two deposits totalling £130,000.00 from Mr Xing’s long-held HBOS account ending 664. This account (ending 664) had accrued £698,742.26 from suspected unlawful activity, in addition to those used for Assets 1 to 3. Excluding overseas transfers, Mr Xing’s HBOS account ending 664 received £549,669.15 between September 2018 and March 2024, which is 7.65 times greater than his declared gross income of £71,803.44 for the same period. The number, stated sources, and amounts of money transferred into Mr Xing’s HBOS account appear specifically arranged to avoid detection in relation to Chinese monetary restrictions. Three of the overseas transfers into this account appear to be in Mr Xing’s name, despite him being a UK resident since 2002. Two additional overseas transfers in relation to Asset 4 came from Mr Xing’s mother and a ‘Qu Xuan’. The transfer of monies from family and friends is, I was told, noted to be another tactic used in Chinese Underground Banking to avoid detection in relation to Chinese monetary restrictions.

18. Overall, Mr Woollard’s financial analysis identifies 103 ‘Transfers In’ totalling £1,867,046.22 into the Respondents’ personal UK bank accounts between 6 April 2010 and 30 April 2024. Many of these were from accounts in China, which on their face may contravene Chinese money movement restrictions. The money movements are suspected to originate from Daigou and money laundering activity, facilitated by the laundering of criminal cash through the Respondents’ personal bank accounts. This suspicion arises from the volume and value of transfers from China, the frequency and spread of cash deposits (2010-2018), and third-party monetary transfers (2018-2024). The analysis carried out supports the suspicion that the Respondents have committed money laundering offences and further offences under the MLR 2017 by acting as unregistered MSBs using a suspected IVTS to move suspected criminal funds via Chinese underground banking. Relevant Law

19. Civil Recovery proceedings are in rem High Court proceedings under Chapter 2 of Part 5 of the POCA 2002 , brought by government agencies against defendants alleged to hold property obtained through unlawful conduct. Unlawful Conduct

20. Section 241 of POCA 2002 defines unlawful conduct as conduct occurring in the United Kingdom (“UK”) that is unlawful under its criminal law. It also extends to conduct occurring outside the UK if it is unlawful under the criminal law applying there and would be unlawful under UK criminal law if it occurred here. For the purposes of civil recovery, the court must decide on a balance of probabilities whether matters alleged to constitute unlawful conduct have occurred. Recoverable Property

21. This is defined under section 304(1) of POCA as “Property obtained through unlawful conduct”. Such property can be followed into the hands of a person obtaining it on a disposal. Property Freezing Order (PFO)

22. A PFO is an interim remedy available under section 245 A of POCA 2002 , serving as the statutory equivalent of a freezing injunction in private law civil proceedings. Its purpose is to preserve property for civil recovery proceedings. Section 245 A(2) states that a PFO specifies the property to which it applies and prohibits any person to whose property the order applies from dealing with it.

23. An application for a PFO may be made without notice if giving notice would prejudice the enforcement authority’s right to obtain a recovery order. The court may make a PFO if it is satisfied that two conditions are met. The first condition is that there is “a good arguable case” that the property is or includes recoverable property. The second condition, if applicable, in relation to associated property, is that the enforcement authority has taken all reasonable steps to establish the identity of the holder if not already identified. HMRC is an “enforcement authority” for these purposes. “A good arguable case”

24. This expression is commonly used in applications for freezing orders and similar interim relief. In The Niedersachesen [1984] All ER 398, at 404d, it was held to be: “One which is more than barely capable of serious argument, but not necessarily one which the judge considers would have a better than 50 percent chance of success”.

25. Moore-Bick LJ in Director of the Asset Recovery Agency v Szepietowski & others [2007] EWCA Civ 766 , at paragraph 111, stated that this: “flexible test... requires something more than a case capable of being taken seriously, but not necessarily much more and does not mean a case which, on the evidence before the court, is more likely to succeed than to fail.”

26. He further observed that in cases alleging fraud or serious impropriety, it is: “sufficient...for the applicant to show that there is a good prospect of succeeding at trial. A case which is merely speculative, however, will obviously not do”. Proving Unlawful Conduct by Inference

27. In civil recovery proceedings, it is necessary to identify the kind of unlawful conduct. Where the type of unlawful conduct is money laundering, it can be proved by inference. Langley J in ARA v Olupitan [2007] EWHC 162 (QB) , at paragraph 65, stated that: “A substantive offence of money laundering can be proved by inference from the way in which cash is dealt with and it is not necessary to prove the underlying offence which generated the cash”. Risk of Dissipation

28. Although not a statutory requirement for a PFO, the need to demonstrate a real risk of dissipation is crucial, as is the fundamental reason for seeking such an order. This principle, set out in Jennings v CPS (Practice Note) [2006] 1 W.LR 182 in relation to restraint orders, is applicable to PFOs. Longmore LJ in Jennings stated, at paragraph 61, that: “Fear of dissipation of assets is the reason for seeking a restraint order. Such fear must, in fact, exist before an order should be applied for. But in a case where dishonesty is charged, there will usually be reason to fear that assets will be dissipated. I do not therefore consider it necessary for the prosecutor to state in terms that he fears assets will be dissipated merely because he or she thinks there is a good arguable case of dishonesty. As my Lord has said, the risk of dissipation will generally speak for itself. Nevertheless, prosecutors must be alive to the possibility that there may be no risk in fact”.

29. This principle was reiterated in NCA v Younis [2023] EWHC 2477 (Admin) at paragraph 8. Issues for Determination

30. The central issues for my determination are therefore: i) Whether the Applicant has established a good arguable case that the four identified assets are or include recoverable property. ii) Whether there is a real risk of dissipation that justifies the grant of a PFO. iii) Whether the application should proceed on a without notice basis. iv) Whether the Applicant has fulfilled the duty of full and frank disclosure. Analysis Good Arguable Case

31. I conclude that the Applicant has presented a good arguable case that the four assets are recoverable property. The evidence adduced, primarily through Mr Woollard’s detailed financial analysis, clearly demonstrates a substantial discrepancy between the Respondents’ declared income and their actual financial activity and asset acquisition. Their combined average annual income after tax was approximately £17,130.46, yet their expenditure on ‘high-end’ prestige goods alone exceeded £1 million between 2010 and 2018. Furthermore, they have apparently ‘loaned’ £194,149 to their company, UKFRESHASIANFOOD Limited, by October 2023. This lifestyle and level of financial support for their business are simply not commensurate with their declared earnings.

32. The acquisition of three properties outright, without mortgages, despite their minimal declared PAYE income, further supports the Applicant’s case. The funding for these properties, as detailed by the Applicant, is strongly linked to significant monetary transfers and cash deposits from various third parties, often from China, that are not explained, on the material available, as deriving from any legitimate sources.

33. The pattern of numerous, often geographically dispersed, cash deposits (over £544,000 between 2010-2018), and a later shift to significant third-party monetary transfers (over £1.1 million between 2018-2024), points towards a deliberate strategy to move large sums of money in a manner designed to avoid scrutiny. The Applicant has submitted that the characteristics of these movements, are indicative of Daigou schemes, Chinese underground banking, and the operation of an unregistered MSB.

34. I am satisfied that, on the present material, the money laundering offences can be inferred from the way the funds have been dealt with. The scale, nature, and provenance of the monies coming into the Respondents’ accounts, coupled with their minimal declared income, strongly suggest that these funds are the proceeds of unlawful conduct. The Applicant’s submission that there is a “good prospect of the application for Civil Recovery succeeding” at trial, as articulated in Szepietowski , is well-founded. Without Notice Hearing and Risk of Dissipation

35. This application is properly made under section 245 A(3) of POCA 2002 . The Applicant’s submission that notice may have prejudiced their ability to obtain a recovery order is plainly correct in the circumstances. The investigation is currently covert, but the Respondents will become aware of it in August 2025 when a VAT assessment is served.

36. The Respondents’ clear and longstanding links to China, as evidenced by regular large transfers from that country since at least 2010, are a significant factor. Their historical activity demonstrates a sophisticated ability to move large amounts of money quickly across various jurisdictions and through different mechanisms. This expertise, gained over the past 15 years, raises a real and immediate concern that they could liquidate or transfer their assets rapidly if they had been made aware of the freezing application.

37. As established in Jennings and reaffirmed in Younis , in cases involving allegations of dishonesty or, as here, money laundering, there is generally an inherent risk of asset dissipation given the very nature of such activities. The potential for assets to be moved to China, given the extensive financial ties to that country, underscores the urgency and necessity of a without notice order to preserve the assets for potential civil recovery. I am satisfied that there is a real risk of dissipation in all the circumstances. Full and Frank Disclosure

38. I am satisfied that the Applicant has complied with his duty of full and frank disclosure. He has acknowledged that the money transferred to the Respondents could potentially be legitimate income from China, although he submits that this is unlikely given the transfer methods and Chinese money transfer restrictions. The Applicant does not have access to the Respondents’ financial records outside of the jurisdiction, particularly in China. I have considered the potential counterarguments, but they do not, at this stage, diminish the strength of the Applicant’s good arguable case given the highly suspicious nature of the transactions relied on. Conclusion

39. Having considered the detailed background, the relevant statutory provisions, and the applicable caselaw, I conclude that the Applicant has established a good arguable case that the three properties and the balance of the HBOS savings account are recoverable property, obtained through unlawful conduct. The overwhelming financial evidence showing large sums of money being available to the Respondents, which starkly contrasts with the Respondents’ declared income, together with measures designed to evade detection, strongly supports the inference of money laundering and unregistered MSB activities.

40. Furthermore, I am satisfied that there is a real risk of dissipation of these assets if the Respondents were to be given notice of this application, given their history of substantial, unexplained money movements and their international links.

41. It is proportionate and necessary for a Property Freezing Order to be granted at this stage to ensure that the assets are maintained while the civil recovery investigation proceeds. I have set a short return date which will give the Respondents the opportunity to be heard. The Applicant will, of course, continue to monitor the situation and will seek the discharge of the PFO if a good arguable case can no longer be made out.

42. Accordingly, the Property Freezing Order is hereby granted. END