Hong Kong Cracks Down on Illegal Money Flows from China Trade

A teller counts US dollars and Chinese 100-yuan notes at a bank in Hefei, east China's Anhui province on January 16, 2011

A record net $674 billion left China last year, the International Institute of Finance estimates. A further $175 billion left China in the first quarter. 

Saint Chatterjee reports: Hong Kong is conducting a multi-pronged customs, shipping and financial sector crackdown against so-called fake trade invoicing that allows billions of dollars of capital to leave China illegally.

Hong Kong’s central bank told Reuters it has beefed up its scrutiny of banks’ trade financing operations, while customs officials are doing more random checks on shipments crossing border posts and conducting raids on warehouses to ensure the authenticity of goods, senior officials working in shipping, logistics and banking said. The head of a logistics company said surprise customs inspections at Hong Kong border posts had doubled.

A Hong Kong policeman stands guard at Hong Kong's border with Shenzhen, China April 29, 2016. REUTERS/Bobby Yip

A Hong Kong policeman stands guard at Hong Kong’s border with Shenzhen, China April 29, 2016. REUTERS/Bobby Yip

The sources declined to be identified given the sensitivity of the issues.

They said the increased efforts began this year and reflected concerns about billions of dollars in illicit cash authorities suspect are being channeled through Hong Kong following a stock market crash in China last year.

“Examinations and investigations reflect one of the strongest trends we are seeing now in the financial sector,” said Urszula McCormack, a partner at law firm King & Wood Mallesons, which helped co-author a report published by The Hong Kong Association of Banks in February that highlighted shipping as a sector where fake invoicing can thrive.

Rising property prices in the city mean few bookshops can afford ground-floor premises - except those backed by China’s official Liaison Office. Photograph: Jonas Gratzer/LightRocket via Getty Images

China has become increasingly concerned about capital outflows since the middle of last year when Chinese rushed to get money offshore for safekeeping or to invest following the stock market slump and unexpected yuan devaluation.

Hong Kong is the most popular route, analysts say, because of its proximity to China.

Chinese authorities have tried to staunch the outflows by tightening cross-border investment quotas, stepping up enforcement action of existing rules and restricting residents from buying financial products, such as insurance policies, offered in Hong Kong. But the trade channel had largely been left untouched given the complexity and magnitude of transactions involved.

A record net $674 billion left China last year, the International Institute of Finance estimates. A further $175 billion left China in the first quarter. China had been a long-term net importer of dollars.

While capital flows reflect legitimate business, analysts say the gap between trade figures reported by China and by Hong Kong for the same goods shows how imports and exports are being used to spirit cash offshore.

In December, for example, the gap between Chinese imports from Hong Kong and Hong Kong’s exports to China – a rough indicator of capital flowing through trade – surged to a record $1.9 billion, which many economists attributed to falsifying trade invoices.

The December figures show that one dollar in every 10 of exports from Hong Kong to China may have been falsified to skirt China’s capital controls, Thomson Reuters calculations show.

By March, the gap was still a relatively large $1.4 billion….(read more)

Source: Reuters

(Additional reporting by Michelle Chen, Stella Tsang, James Pomfret and Clare Baldwin; Editing by Neil Fullick)



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