Beijing is training its anti-corruption sights on the country’s vast “underground” banking system, with police busting one record-breaking network in Zhejiang, state media reported on Friday. People’s Daily reported that the Zhejiang network was the biggest of its kind, carrying out 410 billion yuan (US$64 billion) in illegal foreign exchangetransactions. Since April, police had uncovered 170 cases of illegal money transfers involving a total of 800 billion yuan of transactions, the Communist Party’s flagship newspaper added. But Guangdong Academy of Social Sciences professor Li Youhuan, who researches fund flows, said the amount was just a “tip of the iceberg” and warned that it would be difficult to quickly close regulatory loopholes in the system. Money laundering appears to be rampant as corrupt officials and unethical stock traders race to transfer their dirty money abroad Professor Li Youhuan “China has to deal a heavy-handed blow to underground banks to maintain financial stability,” Li said. “Money laundering appears to be rampant as corrupt officials and unethical stock traders race to transfer their dirty money abroad.” Li estimated that several hundred billion US dollars had poured across the border through underground banks. Public security vice-minister Meng Qingfeng has said underground banks posed a huge threat to the country’s financial stability, with criminals using them for fraud, gambling, corruption and “irregular” stock trades. Read more: Crackdown on Chinese stock market meltdown trades exposes faults in the system In the Zhejiang case, police said Zhao Mouyi, a suspect based in Jinhua, set up more than 10 companies in Hong Kong to transfer money through “non-resident accounts” – loosely regulated accounts used by offshore companies on the mainland. Zhao had a vast network across the country that serviced about 14,000 clients. His underground banks created fake export and import deals to sidestep oversight while directing money in and out of the mainland, the report said. Beijing took a major step towards controlling illegal money outflows after the summer stock market turmoil that wiped out trillions of US dollars in market capitalisation. Blaming unethical traders for the turmoil and suspecting many of trying to shift their gains offshore, police began investigations into “malicious short-sellers” in July. Since then, dozens of powerful regulators, corporate executives and asset managers, including Yao Gang, former vice-chairman of the China Securities Regulatory Commission, have come under the spotlight . Read more: Running out of puff: China can’t inflate yet more speculative bubbles to disguise the structural problems in its economy Early this month, the Ministry of Public Security announced that it had uncovered its first two alleged malicious short-sellers: Gao Yan, general manager of Hong Kong-owned fund Yishidun, and Liang Zezhong, one of the fund’s senior executives. The two men allegedly bought and sold index futures at prices that deviated from market standards, pocketing more than 2 billion yuan in illegal gains in the process. State media said Yishidun used “grey channels” to transfer 200 million yuan of the illegal income outside the mainland. People’s Daily said one senior official of a state-owned company also tried to send 18 million yuan to an overseas account through an underground bank in Fujian that had a network extending from Hong Kong to Taiwan, Australia and Saudi Arabia. In tandem with a slowing Chinese economy, businesses and individuals are now increasingly seeking to diversify their portfolios, hoping to hold more offshore assets amid an expected depreciation of the yuan. A Hong Kong police source said the local force’s role in the latest crackdown was limited to passing intelligence to its mainland counterpart, providing intelligence such as bank transaction records specifically requested by mainland police. “It was not a joint operation,” the police source said.