Banking & Finance

Shanghai orders banks to strengthen checks on overseas direct investment to help stem illegal capital outflows

PUBLISHED : Tuesday, 28 June, 2016, 8:22pm
UPDATED : Tuesday, 28 June, 2016, 8:22pm

The foreign exchange authority in Shanghai has asked banks to strengthen due diligence checks of overseas direct investment by companies to stem illegal capital outflows, three banking sources said.

The local forex regulator stressed Tuesday that there is no change regarding an individual’s foreign exchange quota and rules, trying to play down the issue against the backdrop of rising foreign currency transactions triggered by the Brexit.

A source at one state-owned bank in Shanghai said they have issued a new notice that a due diligence report on anti-money laundering is required for any company set up in the form of a limited partnership after July 2015 for overseas direct investment and seeking currency swaps of US$5 million or above. The step is taken amid strengthened anti-money laundering management of limited partners’ direct overseas investment, the source said.

Another source at the same bank said they received instructions Tuesday morning that banks should make sure they know clearly about the source of the funds, as well as historical trade of the Chinese company, and information about the limited partners of the company.

A third source at another domestic bank said the lender is poised to issue a similar notice on strengthened background information checks for capital outflow from companies, after attending a meeting organised by forex authorities regarding overseas investment procedures last week in Shanghai.

They declined to be named as they are not authorised to speak to media.

The Shanghai branch of the State Administration of Foreign Exchange said yesterday that it hasn’t stopped foreign exchange business for individuals, denying media reports earlier that the authority had halted the services.

The forex regulator also said in response to an enquiry yesterday that it has asked banks in the city to check the authenticity of overseas direct investments to guard against false claims.

Banks are required to authenticate these investments, in an effort to close channels for individuals to illegally transfer their assets overseas or for illegally emigration.

Under existing regulations, individual could only convert yuan to a limit of US$50,000 per year. For corporates, the foreign exchange conversion is based on its own discretion.

Iris Pang, senior economist with Natixis in Hong Kong, said Tuesday that the tightened monitoring is in preparation for more capital outflows, but that the tightened monitoring does not mean tightened regulations.

“For sure, the tightened monitoring is a measure to prevent further capital outflows from China,” Pang said. “Due to Brexit, yuan depreciation will continue as the long term impact of Brexit may hurt GDP growth of UK and Europe, which may in turn hurt external trade flows between these economies and China.”