OREANDA-NEWS. January 26, 2012. Since the beginning of 2011, the State Administration of Foreign Exchange has actively implemented the decisions and arrangements of the CPC Central Committee and the State Council, has maintained tough measures against hot money, and has continuously improved the accuracy of cracking down on activities in violation of the foreign exchange laws and regulations, such as hot money, in particular by further improving the inspection methods and actively using the Off-site Foreign Exchange Inspection System. Recently, the Deputy Administrator of the State Administration of Foreign Exchange, Deng Xianhong, accepted an interview with journalists on issues concerning dealing with and cracking down on illegal and irregular capital flows such as hot money, reported the press-centre of SAFE. 

Question 1: What are the results of the foreign exchange authorities cracking down on illegal and irregular capital flows such as the hot money since the beginning of this year?

Answer: Since the beginning of this year, in order to effectively prevent financial risks, the foreign exchange authorities have maintained tough measures against hot money in accordance with the decisions and arrangements of the CPC Central Committee and the State Council, and have achieved notable results. In the first half of 2011, the foreign exchange authorities investigated 1,865 cases of activities in violation of foreign exchange laws and regulations, involving an amount in excess of USD16 billion, an increase of 26.2% and 26.9% respectively over the same period of the last year; the total amount of administrative penalties and confiscations imposed by the foreign exchange authorities was RMB260 million, whereas the total amount for all of 2010 was RMB243 million. In the first half of 2011, the foreign exchange authorities cooperated closely with the public security bodies to carry out a series of special actions to crack down on irregular cross-border capital flows, exposed 10 cases involving illegal banks and on-line foreign exchange speculation in an amount exceeding RMB10 billion, destroyed 16 illegal trade markets, and, consequently, effectively curbed and deterred illegal and crime activities related to foreign exchange and effectively curbed the increasingly active momentum in illegal and irregular capital flows such as hot money.

Question 2: Since the beginning of this year, there was a breakthrough increase in the number of cases involving illegal and irregular capital such as hot money investigated by the foreign exchange authorities.  What is the mean reason for this?

Answer: In recent years, as the foreign economy of China has continuously developed, illegal and irregular capital flows such as hot money have become more complicated and secretive. The foreign exchange authorities have always rigorously cracked down on irregular cross-border capital flows, carrying out special actions to deal with and crack down on illegal and irregular capital inflows such as hot money, specifically investigating illegal and irregular funds of key participants and channels and rigorously cracking down on illegal and irregular transactions such as illegal banks. In particular, the foreign exchange authorities searched extensively for clues about illegal and irregular capital flows such as hot money through multiple channels, connected and coordinated with the on-site inspections in a timely manner, and consequently improved the accuracy and effectiveness of the crackdown on hot money.

Generally, the key channels for the foreign exchange authorities to obtain clues on irregular flows of foreign exchange include: first, the handling of business and the on-site inspections by the foreign exchange authorities; second, the receipt of reports; third, the receipt of clues handed over by the public security bodies, audit offices, customs, tax authorities, and other departments. In particular, a maximum amount of RMB 100,000 on the basis of his or her contributions will be rewarded to those who proactively report on clues about activities in violation of the foreign exchange laws and regulations.  The reward may also be increased for those who make special contributions.

In order to strengthen the monitoring and early warning on illegal and irregular capital flows such as hot money, the foreign exchange authorities have energetically elevated and improved the off-site inspection methods. In 2010, the foreign exchange authorities developed and promoted nationwide the Off-site Foreign Exchange Inspection System. The operation of the system enhances the capability of the foreign exchange authorities to carry out extensive searches for clues about illegal and irregular capital flows, and plays an important role in improving the accuracy, initiative, and effectiveness of cracking down on activities in violation of the foreign exchange laws and regulations.

Question 3: Could you briefly introduce the Off-site Foreign Exchange Inspection System?

Answer: The Off-site Foreign Exchange Inspection System is mainly used to find clues about illegal and irregular capital flows such as hot money. In recent years, the means and methods of illegal and irregular cross-border capital flows have become more complicated, posing a great challenge to the inspections by the foreign exchange administration. It is difficult to adapt to the needs of situation if the foreign exchange authorities only rely on daily supervision or on-site inspections to discover clues about illegal and irregular activities. In order for the foreign exchange inspections to cover the foreign exchange collection and payment activities of various market players, after years of investigation, the foreign exchange authorities designed and developed the Off-site Foreign Exchange Inspection System.

The characteristics of the system are as follows: First, wide coverage. The system covers various foreign exchange-related subjects, such as banks, non-bank financial institutions, enterprises, and individuals, and monitors almost all the information on foreign exchange transactions under the current account and the capital account. Second, strong capability to search for information. It may screen suspicious and irregular transactions from a vast amount of foreign exchange transaction data, sketch the entire track of capital operations by participants in suspicious and irregular transactions, and consequently promptly and accurately investigate the subjects in violation of the laws and regulations and their specific activities in violation of laws and regulations. Therefore, it basically realizes all-dimensional foreign exchange supervision, investigation of all illegal and irregular activities and precise guidance for case investigations.

Question 4: What are  the actual effects of the Off-site Foreign Exchange Inspection System?

Answer: The Off-site Foreign Exchange Inspection System has obvious advantages in terms of finding and investigating clues about activities in violation of the foreign exchange laws and regulations, and is becoming a powerful weapon of the foreign exchange authorities to crack down precisely on irregular cross-border capital flows. In the first half of this year, the number of cases filed and closed and the amount of penalties and confiscations far exceeded those in the corresponding period of the last year, and the Off-site Foreign Exchange Inspection System has played an important role therein.

Currently, the Off-site Foreign Exchange Inspection System comprehensively covers the key transaction methods and channels of illegal and irregular cross-border capital flows such as hot money by establishing 19 supervisory and analytical indicators in six categories. In particular, in the first half of this year, through the Off-site Foreign Exchange Inspection System, the foreign exchange authorities carried out nationwide screening and investigation of clues related to cross-border inflows and foreign exchange settlements of illegal and irregular funds over the past two years, and found 821 clues about suspected irregular cross-border capital flows and 16,945 transactions involving USD16.703 billion suspected to be in violation of the regulations on foreign exchange administration.  In particular, the verification rates of clues in the Jiangsu branch, Shanghai branch, and Zhejiang branch were 62.5%, 70%, and 76.7% respectively.

Question 5: Could you introduce several cases involving activities in violation of the regulations on foreign exchange administration found through the Off-site Foreign Exchange Inspection System¬

Answer: The Off-site Foreign Exchange Inspection System can flexibly set screening conditions and search methods based upon the inspection experience and targets, and can discover clues about illegal and irregular capital flows in a timely manner.

For example, in general, payments of goods in normal transactions do not appear in integer form. In consideration of this behavioral characteristic, certain sub-branches of the foreign exchange authorities regularly monitored foreign exchange transactions in which RMB funds from the foreign exchange settlement were used toward payment of goods and appeared in integer form, and successfully found one case in which the enterprise completed the foreign exchange settlement procedures for external debt through false trade contracts and applied the funds from the settlement toward repayment of a domestic RMB loan. An investigation determined that the enterprise changed the purpose of the funds from foreign exchange settlement of external debt and it was punished by the local foreign exchange authority in accordance with the relevant regulations.

As another example, a certain branch of the foreign exchange authorities set special indicators in the Off-site Foreign Exchange Inspection System to screen large amounts and rapid foreign exchange settlements in the name of payments of land prices by newly established foreign-invested enterprises and followed the flows of RMB funds from the foreign exchange settlement. The branch screened 15 suspicious enterprises and carried out on-site inspection thereof. The inspections found that 9 enterprises had applied the RMB funds from the foreign exchange settlement for purposes other than the payment of the land prices as previously declared. Presently, the 9 enterprises have been punished by the local foreign exchange authorities.

Question 6: How do the foreign exchange authorities verify violations after finding clues about illegal and irregular cross-border capital flows such as hot money? What kinds of administrative penalties do violators face?

Answer: The foreign exchange authorities will specifically carry out on-site inspections, investigations, and collections of evidence on relevant suspected violators after finding and investigating suspected violators and related transactions through the Off-site Foreign Exchange Inspection System. According to Article 33 of the newly amended in 2008 Regulations on the Foreign Exchange Administration of the People s Republic of China, the foreign exchange authorities may enter the facilities of foreign exchange operations and places of suspected foreign exchange violations to conduct on-site inspections and investigations and to collect evidence; the foreign exchange authorities have the right to require an explanation of the matters under investigation from the relevant institutions and individuals, and have the right to inquire about the accounts of the entities and individuals directly relevant to cases of foreign exchange violations; where necessary, the foreign exchange authorities may apply to a people s court to freeze or seal the illegal funds or other involved property.

After an on-site inspection, investigation, or collection of evidence, where the activities in violation of the laws and regulations on foreign exchange are verified, the foreign exchange authorities will impose administrative penalties in accordance with the law.  When it is suspected that a crime has been committed, the case will be handed over to the judicial authorities and criminal liability will be pursued in accordance with the law. In particular, with respect to institutions and individuals involved in illegal and irregular cross-border capital flows such as hot money, the foreign exchange authorities will order that corrections be made, will confiscate the illegal gains, and will impose a fine of no more than 30 percent of the amount involved; where the circumstances are serious, a fine of no less than 30 percent of the amount involved but no more than the amount involved may be imposed. Where the activities of the financial institutions in violation of the laws and regulations on foreign exchange are verified, the foreign exchange authorities may order termination of the relevant business operations of such financial institutions and also issue a warning and impose an administrative fine on the person in charge or any other person with relevant accountability.

In the first half of this year, the foreign exchange authorities imposed penalties and confiscated a total amount of RMB202 million with respect to three kinds of irregular activities closely related to the flow of hot money, such as the illegal use of foreign exchange, the remittance of foreign exchange into the territory of the People Republic of China in violation of the provisions or illegal foreign exchange settlements, and violations of the regulations on external debt administration, for which the penalty in a number of major cases exceeded RMB10 million. This reveals the strength and determination of the foreign exchange authorities to crack down on illegal and irregular cross-border capital flows such as hot money.

Question 7: What about future prospects for dealing with and cracking down on hot money?

Answer: Facing the complicated economic situations both at home and abroad, the foreign exchange authorities will continue to rigorously crack down on irregular cross-border capital flows, with a special focus on seriously combating the inflows of hot money, further improving the inspection methods, and intensifying the investigation and punishment of major cases. We will continuously improve the Off-site Foreign Exchange Inspection System, expand the data sources, optimize the indicators for monitoring and analysis, and adjust the monitoring indicators in a timely manner in accordance with changes in the foreign exchange receipts and payments situation. We will further strengthen off-site inspections of unusual capital outflows and effectively prevent and resolve the financial risks of unusual capital inflows and outflows while also strengthening the off-site monitoring of unusual capital inflows of enterprises, banks, and individuals.

In summary, the foreign exchange authorities have the capability, means, and confidence to firmly crack down on illegal and irregular capital flows such as hot money, and any activities that disrupt the order in the foreign exchange market and violate the regulations on foreign exchange administration will be punished in accordance with the law.