Tightening Bank Supervision And Halting Illegal Forex Purchases

I n the nation's ongoing effort to crack down on foreign exchange irregularities, the State Administration of Foreign Exchange's Hainan arm spotted what appeared to be a case of splitting up larger transactions into many smaller foreign exchange purchases to circumvent quota restrictions. Key personnel at the bank in question were participants in this improper behavior, collaborating with other bank staff members to shift funds offshore in violation of foreign exchange regulations.

During a regular on-site inspection of individual foreign exchange business in January of 2016, regulators from SAFE's Hainan office discovered that 12 individuals on the Chinese mainland made 13 payments totaling US$560,000 to an individual surnamed Liang who was residing overseas. All of these payments were made through one domestic bank between May 2014 and January 2016. And in March 2015, five individuals made payments totaling US$250,000 through the same bank to an individual surnamed Liu, who also resided overseas. These suspicious payments eventually triggered a formal investigation of the bank.

The investigation determined that the foreign currency purchases of the 17 individuals could be traced back to the senior executive of the bank. Moreover, 16 individuals involved in these transactions were employees of the bank. Between May 2014 and January 2016, the bank's senior executive transferred his own renminbi funds to the renminbi accounts of the 16 staff members as well as another individual. The offshore payments were all made in the name of travel, lodging or tuition fees.

Further investigation determined that within half an hour on July 29, 2016, the senior executive entrusted bank staff members to handle five purchases of foreign exchange at the bank's counters in the amount of US$45,000. By permitting these smaller transactions to circumvent foreign exchange quotas, the bank clearly violated foreign exchange quota management rules. In addition, the bank failed to require the individuals involved in these transactions to submit any support documents. This was obviously in violation of foreign exchange auditing requirements.
 
Punishment
The bank's failure to conduct proper verification of the individual transactions violated the provisions of Article 12 of the Regulations of the People’s Republic of China on the Administration of Foreign Exchange (State Council document No. 532). This document clearly states that foreign exchange payments and receipts under the current account must be for legitimate transactions, and financial institutions conducting foreign exchange settlements and sales must make a reasonable effort to review the authenticity of the transaction documents to ensure their consistency with actual foreign exchange payments and receipts.

Article 5 of the Measures on Managing Individual Foreign Exchange (People’s Bank of China document No. 3, 2006) states that banks engaging in individual foreign exchange collection and payment, foreign exchange settlement and sales and the opening of foreign exchange accounts must conduct reasonable reviews of the  documents submitted by individuals as well as the relevant support materials. Article 7 of the same notice clearly states that banks and individuals must comply with the relevant provisions of these measures when handling foreign exchange business and should not evade quota regulations by splitting larger transacti