Bank of China

Fears of tough action by Beijing following allegation BOC launders money

Money laundering allegation could intensify rift between bankers and regulators on mainland

PUBLISHED : Friday, 11 July, 2014, 11:34pm
UPDATED : Saturday, 12 July, 2014, 4:36am

The Bank of China cash-transfer service at the centre of money laundering allegations could escalate the sabre-rattling between the mainland's liberal-minded bankers and conservative regulators. That would add to fears of a heavy hand on the financial system as Beijing tries to stem massive capital outflows.

On Wednesday, state broadcaster China Central Television accused BOC of offering illegal money laundering services to rich clients via the Youhuitong platform. BOC denied the allegation, insisting the service was part of a pilot programme aimed at internationalising the yuan.

"It is a wake-up call to all commercial banks, prompting them to plug the loopholes in their innovative products," Guo Tianyong , a professor at the Central University of Finance and Economics, said.

Technically, Youhuitong enables mainlanders to transfer unlimited amounts overseas, despite the annual cap equivalent to US$50,000 set by the central bank.

Rich mainlanders have increasingly been seeking to migrate, baulking at the deteriorating business climate and worsening pollution problem at home. According to the Hurun Report's survey of China's richest people, the percentage of super-rich individuals wanting to emigrate, or who had already done so, hit 64 per cent this year, up from 60 per cent last year.

Under existing laws and regulations, mainlanders cannot transfer the required amount abroad to qualify for business migration schemes unless they pass through the foreign exchange regulator's applications procedures and pay the relevant taxes.

Li Youhuan, a researcher at the Guangdong Academy of Social Sciences who is the mainland's best known economist focusing on fund flows, said the BOC service posed a serious threat to the mainland's foreign exchange policies, since it could help rich people direct huge capital outflows in a legal manner.

Currently, thousands of wealthy mainlanders relied on the illegal underground banking system to transfer money abroad, he said.

"The scandal again shows that the financial system is not willing to comply with the regulations," Li said. "The enforcement of the laws and regulations should be strengthened."

According to sources, BOC and other big commercial banks will be forced to suspend Youhuitong and similar money-transfer services amid a fresh round of regulatory tightening in the banking system.

Analysts said the BOC incident raised the prospect of a fissure in Beijing's efforts to reform the sector. It could trigger a new round of debate on whether to tighten regulations on lenders or allow a more decisive role for market forces in the banking system.

Premier Li Keqiang's cabinet is a strong advocate of drastic financial and economic reform, hoping that governments at all levels will relinquish their roles in business activities.

For Beijing, freer cross-border capital flow is desirable as China is determined to make the yuan an international currency, but rampant capital outflows could wreak havoc in the domestic economy and potentially spark social unrest.

Reform-minded bankers and analysts contend that if the authorities step up policing of commercial lenders, barring them from offering the money-transfer services, the underground banks helping move money overseas could grow faster.

In the Shanghai free-trade zone launched last year, Beijing promised to make the yuan fully convertible to facilitate cross-border capital flows, but it has yet to implement this. The BOC scandal was likely to deter officials from doing so, a Shanghai-based banking regulator said.

"Banking regulators are now battered by worries that the money would not only flow between the zone and markets abroad, but flow into the domestic economy," Guo said. "It will take some time before detailed rules are set."

An official with the China Banking Regulatory Commission's Shanghai branch said: "Now the worries about money outflow are mounting, the regulations would overrule the calls for liberalisation. Frankly, we're confused about the policymaking too. You never know when the promised capital account liberalisation will take effect."