Black banks’ targeted in latest anti-graft crackdown
The central government is stepping up its anti-graft drive by cracking down on illegal lending and money-laundering operations in a bid to prevent outbound flows of stolen assets.
The Ministry of Public Security says “black banks” and illegal currency exchanges have facilitated the flights of a number of former government officials and senior managers of State-owned companies accused of corrupt activities. Most have absconded to popular destinations, such as the United States and Australia, where a lack of bilateral extradition treaties and differences in international law and legal process ensure they are safe from extradition.
At the end of August, the ministry began a three month operation targeting underground lenders, money launderers and offshore funds.
Meng Qingfeng, vice-minister of public security, said the ministry will work closely with the People’s Bank of China and the State Administration of Foreign Exchange to share information and establish a mechanism to coordinate and conduct rapid investigations into suspicious outbound flows of assets.
A special force will be established to combat underground banks and unearth evidence of economic crimes. The ministry will increase the flow of related information, and a series of educational events will be organised to show the public how to conduct overseas financial transactions through legal channels, Meng said.
Corrupt officials or business leaders secretly planning to leave the country have used a network of underground banks to send “millions of dollars” of illegally obtained assets overseas, according to officials.
The outflows pose a severe threat to national economic safety, so the government is determined to smash money-laundering operations and improve foreign exchange controls to maintain financial and political stability.
In April, the Public Security Ministry joined the PBOC and SAFE in a combined operation targeting underground money exchanges. So far, more than 230 suspects have been apprehended in many major cases, and more than 100 black banks have been closed down, ending operations thought to have netted about 670 billion yuan (S$146 billion), according to the statistics released by the ministry.
Tip of the iceberg
Officials cited the case of Qiao Jianjun, a former director of China Grain Reserves Corp, and his wife, Zhao Shilan, as an example of economic crime.
In March, a US federal grand jury indicted the couple on charges of providing false documents to gain EB-5 immigration visas－which provides permanent residence for qualified foreign investors who guarantee to create jobs－to enter the US. The Chinese authorities also accused them of laundering money in China, according to the ministry.
In 2011, Qiao was being investigated on allegations he’d embezzled more than 300 million yuan, stolen national assets and accepted large bribes. He allegedly transferred the entire 300 million yuan overseas via underground dealers and fled with Zhao to the US, where they purchased properties in suburban Seattle. Zhao is now in FBI custody, but Qiao is still at large and being sought by US law enforcement authorities, the ministry said.
Qiao’s case is one of many, according to officials, who said he is one of a large number of former high-ranking individuals who sent money abroad and then skipped the country. The ministry declined to say exactly how many officials have fled overseas, or estimate the value of misappropriated assets.
Last year, “Operation Fox Hunt”, a six-month campaign targeting fugitives and suspects overseas, resulted in the return of 680 Chinese nationals－4.5 times more than in 2013－from 69 countries and regions, including the US, Australia and Singapore. Stolen assets valued at as much as 3 billion yuan were recovered, and most of the returnees are now under further investigation or face trial.
In April, the ministry started a new round of “Fox Hunt”, and Interpol published a list of the 100 top absconders－77 men and 23 women－alleged to have been involved in corrupt practices.
To date, more than 150 people have been brought back to China from about 30 countries and regions to stand trial.
Ou Yangxiong, a senior official at SAFE, said black bank activity is so clandestine and the throughput of illegal assets so large that it’s difficult to accurately assess the scale of the problem.
“A large amount of untraced cross-border capital has been ‘freed’ from the State’s financial regulatory system. That has created a huge funding black hole that is seriously disrupting the nation’s financial management and endangering economic security,” he said.
Hidden channels
Underground financial activity is a serious and complex problem in China’s industrial heartlands, such as Guangdong province, and it is now spreading to other regions, according to Meng.
“These activities not only involve financial and securities crimes, but they inevitably become underground channels and money-laundering tools that enable corrupt officials and terrorist suspects to illegally send ill-gotten gains abroad,” he said.
Loopholes in the banking supervision mechanism are easily exploitable, according to Liu Ming, an officer at the Economic Investigation Department of the Public Security Bureau in Shenzhen, Guangdong, the pilot city for China’s reform and opening-up policy in the late 1970s.
“There is no requirement for the official banking sector to examine and approve cross-border financial transactions, and underground money dealers never conduct background checks into clients’ identities or the source of their funds,” Liu said.
According to the Foreign Exchange Management Regulation, national qualified enterprises are allowed to open bank accounts to conduct cross-border trade, but they are required to submit the relevant documents to the banking regulators and obtain official approval from SAFE to conduct cross-border transactions.
Profit and risk
In places where black banks are most active, such as Shenzhen, the exchanges are making huge profits. “They collude with their accomplices in China, including Hong Kong, and other places, such as the US, to form a complete, secret chain of interest,” said Shu Jianping, a senior official with the Economic Investigation Department’s anti-money-laundering unit.
According to Shu, when an underground bank receives funds from clients in China, the dealers immediately notify their accomplices overseas via instant-messaging platforms, such as WeChat and QQ, and stash the money in bank accounts they control to avoid supervision by the banking authorities. Later, their associates abroad transfer foreign currency, such as US or Hong Kong dollars, to the clients’ overseas bank accounts, based on the daily exchange rate.
Other transfers take place via offshore companies registered in small African countries or island states, such as the Seychelles and the Cayman Islands. Fake documents, including bogus business contracts and invoices, are used to simulate trading activity, and transactions are then conducted through offshore bank accounts, he said.
In July, police in Guangdong arrested two underground lenders, Ye An’cheng and Zheng Lisheng, and smashed eight money-laundering dens in the Bao’an district of Shenzhen, according to the Shenzhen Public Security Bureau.
The two men and their accomplices worked with contacts overseas to run underground banks specialising in illegal foreign currency deals and online cross-border transactions. Clients were charged 3 to 5 per cent for every 100 yuan processed. The sums involved are often in the millions, so the profits can be enormous, the PSB said.
Ye, Zheng and several accomplices are currently in the custody of the provincial prosecutors’ department and will face charges soon, according to PSB officials.
“I wasn’t worried about the consequences, but I now realise I was likely to be caught sooner or later if I committed these crimes. I apologise to the public,” Ye told a reporter from Xinhua News Agency, who spoke with him at the detention centre.
Ye said conducting cross-border transactions via underground banks is a risky undertaking because the dealers flee at the first sign of exposure, taking the money with them. “Also, if they discover that the client has obtained a large amount of money, some gangs will commit robbery, illegally detain or even kidnap the client to get their hands on it,” he said.
Currency management
Li Mingzhao, a senior official at the Economic Crimes Investigation Bureau, said underground banking operations can lead to a range of serious problems, including a rise in organised crime, drug trafficking, illegal immigration and online gambling, all of which have the potential to derail social stability.
Meng, the vice-minister, said the focus on underground financing is intended to help maintain economic stability. “Cracking down on underground banks is closely related to national economic safety, as well as overall economic and social development,” he said.
Dai Peng, head of the Criminal Investigation College at People’s Public Security University of China, said the authorities, especially those in the banking sector, should assist the police by strengthening checks on commercial trading and tightening supervision of bank officials to prevent them from becoming involved with corruption.
“China’s banks should conduct careful examinations of client identities and documentation and tighten supervision to monitor the suspicious flow of assets overseas,” he said.
The authorities need to “make improvements to the management of foreign currency exchange to encourage businesses to conduct legal transnational trading and meet the strong demand for cross-border capital transactions”, he said.
Vice-Minister Meng stressed that the government will actively pursue corrupt officials and other economic criminals, irrespective of their whereabouts. “We have redoubled our efforts to fight money laundering, and it doesn’t matter where suspects have escaped to, or how much money they have sent abroad illegally, we will find them and bring them back to stand trial,” he said.
A lucrative but highly risky undertaking
“After the number of police raids surged, we decided to turn to clients introduced by trustworthy friends and acquaintances, rather than solicit business publicly,” Lin Weidong said.
Lin (not his real name) has been running an underground bank in the Luohu district of Shenzhen, a manufacturing hub in Guangdong province, for seven years.
“The pursuit of material benefits, huge market demand and loopholes in the banking supervision mechanism have been catalysts for money-laundering crimes,” said the 37-year-old “black banker” from Chaozhou, Guangdong.
He and his accomplices used to approach potential customers on the streets of Shenzhen’s financial district, but now they only conduct clandestine transactions for clients introduced by trusted acquaintances, including a number of officials at high street banks.
To avoid attracting the attention of the police, many underground banks operate under the guises of registered commercial trading companies, investment brokers or consultancies, he said.
Every year, Lin conducts illegal transfers of money and assets for tens of clients, including high-ranked businesspeople, heads of State-owned companies and corrupt officials.
Client numbers may be small, but the sums being transferred often total millions of yuan, and customers pay high premiums, as much as 3 to 5 per cent per 100 yuan ($15.80), to send funds overseas. The money is usually transferred to the US, Australia and other countries that haven’t signed extradition treaties with China, he said.
In light of the greater risk now posed by the official crackdown on corruption, Lin said he is planning to sever his connections with the underground bank and become a legitimate businessman.
“Most clients think transferring illegal proceeds abroad via ‘hidden channels’ is safe and convenient because the process bypasses the banking sector’s examination and approval procedures, such as ID checks, submission of trading documents and full disclosure of the sources of funds or assets,” he said.
“In fact, there are many potential risks in the underground banking system, including financial and personal safety, and if the police uncover the transactions, the brokers and clients are equally accountable in the eyes of the law,” he added.
