NPC member: Underground banks are a huge threat

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The spike in recent years in underground banking activities should serve as a wake-up call for banks whose load of paperwork and lack of efficient transfer mechanisms have forced legitimate capital transfer needs to resort to shadier practices, says Professor Chen Jingying, vice president of the East China University of Political Science and Law and a member of the National People's Congress (NPC).

China's illegitimate underground banking system is a growing problem. These are illegal organizations that help people move large sums of money in and out of China beyond the official annual quota of 50,000 US dollars. The practice has become a problem that is big enough to pose a threat to China’s economy.

"It has been used as a channel to launder money by corrupt officials and businessmen,” said Professor Chen.

The illicit cross-border fund transfers elegantly help their client’s skirt currency controls with bank accounts on each side of the border, and squaring opposite transactions on each side. Money is “moved” to an account outside the mainland when a money changer remits dollars to a clients’ overseas account after receiving payment in yuan on this side of the border.

Some underground banks are using shell companies to operate./‍ CFP Photo

Vast cash reserves in both accounts are a staple of the business. In a campaign in 2017, the authority exposed underground banks that collectively hold some 300 billion yuan, and the criminals were charged with 200 million yuan just in fines alone.

The bigger problem right now is that many underground banks have evolved. They used to be family-owned remittance agencies or currency changers, but now are setting up shell trading companies and move money through electronic corporate wire transfers. "It is very difficult for banks to examine the huge amount of electronic transfers and single out which ones are illegal,” said Professor Chen.

Individuals are not the only ones relying on these underground means of funneling money outside China, either for legitimate commercial purposes, or as a way to get around the capital control currencies put in place to prevent capital flight and a major selloff that could put the yuan’s stability at risk.

According to Professor Chen, some state-owned and foreign firms are using it too. You might ask, "Why would companies use illegal ways to move their legitimate money?”

“It's because the legal ways require too much paperwork and time. Therefore, this situation should serve as a warning bell for Chinese banks that need to improve their efficiency,” said Professor Chen.

Chen proposed to the NPC an upgrade in China's criminal law and the anti-money laundering legislation. Harsher punishments and fewer loopholes are expected to help China deal with this looming threat to the country's financial stability.