China Police Reveal Busted Illegal Banking Operation
November 20 2015 - 10:20AM
Dow Jones News
BEIJING—Chinese police announced a crackdown on an illegal
foreign-exchange network that it said handled up to $64 billion in
transactions.
According to a report by police in Jinhua, a city of five
million people in eastern Zhejiang province, the network involved
hundreds of people in eight separate "gangs" working out of more
than two dozen "criminal dens." The operation routed money through
hundreds of accounts held at financial institutions in China and
Hong Kong to evade restrictions on moving currency outside the
country, it said.
According to recent state media accounts and a detailed police
report released Friday, police launched its crackdown on the
network on Dec. 15, 2014, after months of investigation. It was
unclear why the clampdown was only being disclosed now.
The official People's Daily newspaper said 69 people had been
criminally charged and another 203 people had been given
administrative sanctions.
The amount of money involved, up to 410 billion yuan ($64.25
billion) in cross-border transactions, raised questions among some
analysts about China's supervision of money outflows. "The fact
that multiple real banks were involved raises questions about
oversight. They've just allowed $64 billion to leave the country
without knowing," said Fraser Howie, coauthor of "Red Capitalism:
The Fragile Financial Foundation of China's Extraordinary
Rise."
"It's very difficult for legitimate investors to get money in
and out, but it's obviously very easy for these guys to do it
illegally," he added.
In August, China's Ministry of Public Security said it was
stepping up a campaign against underground banks, contending that
"gray capital" spirited out of the country had worsened the
nation's stock-market tumult. Authorities said earlier this month
that they have investigated more than 170 cases involving over 800
billion yuan in underground bank activity. It wasn't clear whether
the 410 billion yuan in the Jinhua crackdown was included in that
tally.
Beijing has become increasingly concerned with capital outflows
in the face of slower economic growth, an aggressive anticorruption
campaign and expectations for an interest-rate increase by the U.S.
Federal Reserve in December—factors that have made it more
attractive to hold assets outside China for investors and others.
Standard Chartered estimates that China has seen $830 billion in
capital outflows, not counting outbound foreign direct investment,
over the past 17 months.
In October, in a sign that the government's bid to stem outflows
was bearing fruit, such outflows declined to $37.2 billion compared
with around $150 billion in both August and September, Standard
Chartered said. China's foreign-exchange reserves rose during the
month, after declining for five straight months, to $3.53 trillion
at the end of October.
Jinhua police said the antimoney-laundering department of
China's central bank noticed suspicious transactions in September
2014 and teamed up with local police and foreign-exchange
regulators in an investigation code-named the "9-16 project" after
its start date.
Under a mastermind whom police only identified by the surname
Zhao, the network allegedly set up dozens of shell companies in
Hong Kong, whose financial system is separate from the mainland's.
The group opened over 800 accounts in the former British colony and
at least seven Chinese provinces to evade foreign-exchange limits.
Zhao's identity couldn't be determined nor was it known whether the
person has retained a lawyer. Police, the central bank and the
currency regulator couldn't be reached or didn't immediately
respond to written questions.
According to Jinhua police, plainclothes police mapped out the
network, then worked with financial regulators in reviewing
millions of illegal transactions. The government said the bust was
the largest ever of an underground banking network in China.
Police and the People's Daily newspaper said the gangs used
nonresident accounts—those held in China by overseas
organizations—to evade scrutiny and foreign-currency purchase
limits. These allowed the money to leave the country on a "through
train" without going through normal regulatory review, they said,
for settlement abroad by the Hong Kong and Shanghai Banking Corp.
and other unnamed financial institutions. Banks have since
tightened their rules to close the loophole, the People's Daily
said.
An HSBC spokesman in Shanghai said the bank doesn't comment on
individual cases. "But HSBC has zero tolerance for money laundering
and makes every effort to protect the bank, our customers and the
financial system against criminals," the spokesman added.
The alleged scope of the operation points to weaknesses in
China's financial supervision, said Liu Qiao, a finance professor
with the Guanghua School of Management. The apparent delay in
reporting the crackdown points to resistance from within the
system, he added.
"A lot of local governments don't want to disclose scandals,"
Mr. Liu said. He said he believed the timing of the announcement
was related to a recent wave of investigations of irregularities in
China's financial sector in the wake of the summer's stock-market
crash. "They're now investigating financial institutions more
carefully." he added.
According to the People's Daily, the network's transfer
operations also involved creating phony export declarations,
defrauding local governments of millions of yuan in export
incentives and export-tax rebates.
Li Pei contributed to this article.
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(END) Dow Jones Newswires
November 20, 2015 10:05 ET (15:05 GMT)
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