China mounts massive crackdown on sprawling underground bank network

Police launch raids across the country as finance system comes under strong pressure from capital outflows

PUBLISHED : Wednesday, 17 August, 2016, 11:43pm
UPDATED : Monday, 12 June, 2017, 12:53pm

Hundreds of suspected operators of underground banks have been arrested this year in a nationwide crackdown on the multibillion-yuan illegal cross-border money trade, China’s Ministry of Public Security said on Wednesday.

In all, 450 suspects from 192 illegal banks had been rounded up in relation to 200 billion yuan (HK$234 billion) in illicit transactions, the ministry’s newspaper, China Police Daily, reported.

The crackdown comes as the mainland faces strong capital outflow pressures, partly due to expectations of a weakening yuan. The country’s foreign exchange reserves have fallen by about US$450 billion in the last year despite signs of stabilisation in ­recent months.

The capital account is largely closed to individuals except for a few channels, such as the Shanghai-Hong Kong stock link. Mainland residents can change up to US$50,000 worth of foreign currencies per year.

Demand for ways to skirt these limits has grown with the elite’s appetite for offshore property and the need for corrupt officials squeezed by President Xi Jinping’s anti-corruption campaign to move their illicit gains abroad.

Renmin University finance professor Zhao Xijun said the authorities had no choice but to “strike hard” because the situation could easily get out of control to disrupt the market. “Underground money shops are a scaled business now in China, and there are hundreds, if not thousands, of shell companies with the sole purpose of getting money out of China,” Zhao said.

Beijing trains gun on underground banks to check cash exodus

The authorities admitted in the report that the underground banking network had become “wider and deeper”, making it harder for law enforcement to root it out. Operations could be found across the country but they were particularly prevalent in Hebei, Liaoning, Jilin, Jiangsu, Zhejiang, Shanghai, Fujian, Shandong, Hunan, Guangdong, Sichuan and Gansu.

Underground banks have covered up crimes ... and some [suspects] have abetted criminals involved in terrorism and drug smuggling, severely threatening national security
Senior public security officer

In June, police in Guangdong arrested 17 people from a network that allegedly posed a “serious threat” to national security, Legal Daily reported. Officers from the Shenzhen Public Security Bureau’s economic crime department said that in the city alone the network laundered and moved more than 30 billion yuan across the border in the last five years.

The suspects allegedly used a fake electronic component company and its subsidiaries to disguise money transfers as normal business payments, the investigators were quoted as saying.

“Underground banks have covered up crimes ... and some [suspects] have abetted criminals involved in terrorism and drug smuggling, severely threatening national security,” Legal Daily quoted a senior officer with the ministry’s anti-money laundering task force as saying.

The Shenzhen police bureau, which led the investigation, said officers almost lost trace of the main suspects as they used a web of 360-plus bank accounts at 13 commercial banks. “Examining these accounts was like finding a needle at the bottom of the ocean. The data was a mess,” police officer Qian Shuo said.

Revealed: the underground bank that illegally transferred millions in cash out of China

To transfer money out of China, the suspects would ask the client to put the funds in a domestic account, then an agent overseas would be instructed to inject an equivalent amount of money into an overseas account specified by the client, depending on the international exchange rate.

The same method also applied to transfer offshore funds into China.

The middlemen charged clients fees of up to 5 per cent, with a million US dollars a day flowing across the border on average, according to one suspect.

Shenzhen was used as base for the network’s headquarters because of its proximity to Hong Kong, with subsidiaries in Jieyang and Shantou.

The damage is obvious
Luo Yonglong, SAFE

Luo Yonglong, deputy director of supervision with the State Administration of Foreign Exchange, said the widespread use of underground banks had created a huge monetary “black hole” undermining the financial markets and affecting government macroeconomic policy.

“The damage is obvious,” Luo said.

The central bank had opened a “green channel” for police, so law enforcers could get access to data to trace underground activities with unprecedented ease and speed, according to the report.