China will impose tougher punishments on underground bankers moving money in and out of the country to curb capital flight.
Underground bankers trading in large amounts of foreign currencies can now be charged with the crime of operating an illegal business and risk facing more than five years in jail, according to a judicial notice that took effect from February. Before this, offenders were only fined.
"The major business for most underground banks is now contra payments, leading to huge capital outflows and great damage to society. It's the major target of our crackdown," according to a recent notice issued by China's Supreme People's Procuratorate and reported in South China Morning Post.
The last thing the government wants to see is capital stampeding out of China"
The Supreme People's Court and the Supreme People's Procuratorate specified that the new rule would apply to underground transactions that involved at least 5m yuan ($74,000) or led to a profit of 100,000 yuan. In particular, authorities were expanding their scope from the underground channelling of money offshore to include illegal «contra trading» of foreign currencies.In contra trading, the money changer holds accounts inside and outside the country and tries to match the demand of buyers and sellers of different currencies, without the need for the funds to cross the border.
Clients of underground banks in China send an agreed amount to the banker's account in China, and the banker then remits the equivalent in foreign currency to the customers' overseas accounts. The banker carries out a similar transaction with overseas clients, getting them to put money in the banker's overseas account before remitting the money to the overseas customers' accounts in China.
The procuratorate said illegal payments and foreign currency trading through underground banks had been on the rise in recent years.
Dealers used to profit from buying low and selling high on local foreign currency black markets. Now they had shifted to illegal contra cross-border money transfers, substantial capital outflows that were not monitored, the procuratorate said.
China has been moving to rein in currency outflows via the handful of overseas investment channels available to mainland investors. That action has included a ban on domestic cryptocurrency exchanges, stricter disclosure requirements for individuals buying foreign currencies, and tighter limits on corporate investments abroad.
"The last thing the government wants to see is capital stampeding out of China," Tang Xiangbin, a foreign exchange analyst at China Minsheng Banking Corp told Reuters.