Canadian Treasurer

July 25, 2014

Chinese banks react to money laundering allegations

Beijing, China – Three Chinese banks have temporarily suspended a yuan remittance service over suspicion of money laundering, says a   Wall Street Journal  report.

Last week, China Central Television (CCTV) accused Bank of China (BOC), China’s fourth largest lender, of allowing wealthy Chinese citizens to circumvent the country’s controls on cross-border transfers by exploiting an obscure remittance programme called You Hui Tong.  

Launched on a trial basis two years ago by the People’s Bank of China (PBOC), the programme allowed a few approved banks, including BOC, Industrial, and Commercial Bank of China (ICBC) and China CITIC, to begin offering cross-border CNY remittance services for individuals through their branches in the southern province of Guangdong. The PBOC deliberately kept the trial quiet, people familiar with the matter told the WSJ.  

Under current rules, Chinese individuals are not allowed to move more than US$50,000 out of the country annually. But according to CCTV, BOC was allowing wealthy clients to transfer unlimited amounts of CNY overseas and convert it to other currencies. CCTV said that in some cases, the bank even worked with immigration agents to help customers disguise the origins of the funds. The bank has denied all allegations.

The PBOC is now investigating the case. Meanwhile, BOC, ICBC and China CITIC have all halted the service.

“The programme itself is neither illegal nor improper as it’s been approved by the central bank, but the question is if any particular bank has gone too far by offering clients services they are not supposed to,” says a senior executive at a Beijing state-owned bank. “We all had to put a brake on it before the central bank draws a conclusion from its investigation.”

A BOC employee who asked for anonymity, confirmed to   Reuters  news agency that the bank had halted the remittance service. “The bank understands that there are management and risk control issues with the program, especially in relation to the junior employees involved,” the source says.

Impact on Trade with China?

The PBOC is not expected to withdraw the trial programme altogether, as it is part of Beijing’s initiative to promote the use of the yuan/renminbi (RMB) overseas. However, some analysts believe that halting the programme could at least momentarily stifle the Chinese government’s reform efforts.  

“This action highlights the tension between the benefits of easing restrictions on capital flows and the risks of allowing freer movement of capital in the absence of effective regulation of financial institutions,” says Eswar Prasad, a China scholar at Cornell University .

However, Alfred Nader, vice-president, Latin America and the Caribbean for Western Union Business Solutions, believes that this latest investigation could actually serve as a positive for RMB trade.  

“While this ‘secret experimental’ programme looks to be shut down for now, I believe this could serve as the impetus for the Chinese government to loosen the reins on the RMB,” he says. “In China, where there is a will, there is a way, and it’s time for these restrictions to be done away with and allow more freedom in the movement of money across borders.  

“Commercially, the RMB is being adopted in all corners of the globe as an easier alternative to the US dollar (USD). Now, it’s simply time for the Chinese to say, ‘OK, it’s time,’ and set the RMB free.”

He adds that Chinese citizens have been purchasing property in the US, Canada, Australia, and Hong Kong for the past decade – property that was often in the millions of dollars when the Chinese law was very clear about the US$50,000 limit.  

“It made me pleased to see CCTV report on something that I felt was a direct skirting of this law,” he says.




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