Improving Foreign Exchange Inspections in a New Regulatory Era
China Forex: What achievements were made in foreign exchange inspections in terms of combating illegal activity，curbing improper outflows of funds and maintaining order in the foreign exchange market in 2017?
Xu Weigang: In 2017，the national foreign exchange inspection system closely followed changes in the overall situation，expanding the scope of its inspections and toughening its punishments in an effort to crack down on illegal activities. In so doing it sent clear signals to the outside world of its intent to strengthen regulations and get tough with violators to bring order to areas where we had a chaotic market. A total of 3,160 cases of foreign exchange violations were investigated and fines of 760 million yuan were imposed during the year. That was an increase of 58% and 76%，respectively，over the previous year. Authorities punished financial institutions that failed to comply with regulations，and some 240 million yuan in fines imposed，up 2.7 times from the previous year.
Banks，as the main channel of capital flows，were subjected to much heavier punishments. The total of fines and confiscations showed an increase of 3.6 times the figure for the previous year. There were 825 cases involving companies and they were fined some 250 million yuan，representing increases of 29.3% and 2.6%，respectively. Some 1,840 individuals were found to be caught up in regulatory violations and they received fines totaling 270 million yuan，an increase of 1.5 times and 1.2 times，respectively，compared with the same period of the previous year. This was an effective deterrence to illegal capital outflows and a key part of our effort to maintain a stable foreign exchange market.
Our actions over the course of the year included the following: First，we cracked down on illegal fund outflows. In 2017，we conducted special operations to halt foreign exchange fraud，regulatory evasion and illegal arbitrage activities. We carried out on-site inspections of 307 banking institutions，407 enterprises and 194 individuals，dealing with cases of foreign exchange fraud and evasion of foreign exchange rules，illegal arbitrage and the failure of financial institutions to conduct proper audits and inspections related to their transactions. We had another 211 cases of illegal foreign exchange-related activities and these resulted in penalties and confiscations totaling 190 million yuan. We carried out special inspections of foreign exchange business and found that more than 300 bank institutions and 5,000 individuals were involved in breaking down larger transactions into many smaller ones in order to circumvent regulations. The total amount involved in this category of regulatory violations was US$230 million. We conducted special inspections on the foreign exchange business of third-party payment agencies，punishing those responsible for illegal transfers of funds or assisting in foreign exchange fraud or evasion of regulations. In some cases we temporarily suspended the authority of some financial institutions to process cross-border foreign exchange transactions.
Second，we made efforts to combat fake and fraudulent transactions，making special inspections of foreign loans to domestic institutions using a domestic guarantee. We investigated and dealt with 35 banking institutions which failed to perform proper verifications when conducting such transactions. These cases involved a total of US$2.6 billion. We imposed fines of 150 million yuan and suspended eight banks from carrying out foreign exchange business for periods of three to six months. We severely punished qualified domestic institutional investors (QDII) for excess remittances of foreign exchange funds or illegal arbitrage (purchasing foreign exchange domestically while selling foreign exchange abroad) and other cases of regulatory non-compliance. In these cases we imposed fines of 43.98 million yuan. We also carried out special inspections of the re-export trade，cracking down on fraudulent transactions that included falsified warehouse receipts to take advantage of domestic and foreign interest rate differentials.
Third，we strengthened our efforts to educate the public. Together with China Central Television，we produced a series of programs warning against the operations of illegal underground private banks. We worked with the media to publish reports that highlighted the investment risks associated with illegal online speculation in foreign exchange. We also documented 63 cases of foreign exchange violations on the website of the State Administration of Foreign Exchange (SAFE) and held meetings and seminars with members of the financial sector where we highlighted 12 cases of non-compliance by banks in order to keep market players abreast of our stricter management rules.
China Forex: What can you tell us about your plans for regulatory inspections in 2018? What new measures can we expect?
Xu Weigang: We have entered a new era in building socialism with Chinese characteristics，and foreign exchange inspections now face new challenges and new requirements. First，as a result of developments in the global and domestic economic and financial situation，the scale of cross-border capital flows has gradually expanded and become more complex. We need to strengthen our analytical capabilities related to foreign exchange inspections and ensure more balanced cross-border foreign exchange flows. There is a need for identifying key areas of illegal behavior and setting uniform punishment standards. We also need to improve our inspections to ensure they have greater relevance and timeliness.
Second，against the background of simplifying administrative procedures and decentralizing administrative authority，we need to be able to adapt our inspections to a changing situation. We therefore need more inspection tools.
Third，with the constant improvement of the socialist legal system and the growing familiarity of market players with their legal protections，the demands on foreign exchange inspectors have increased. Inspection needs to be further implemented in accordance with the requirements of the rule of law and the checking of discretionary power. This will help create openness and transparency as well as standardized procedures and punishments that are fair and just.
In 2018，foreign exchange inspections will be carried out under the spirit of the Communist Party's 19th National Congress，the Fifth National Financial Work Conference and the Central Economic Work Conference. We will hold high the great banner of socialism with Chinese characteristics in a new era，firmly establish what we call the "four awarenesses," and maintain steady progress in our inspection efforts. In accordance with the arrangements of the Peoples’ Bank of China and the work conference on foreign exchange management，we will focus on the efforts of the foreign exchange control centers，give more attention to the prevention of risk from short-term cross-border capital flows，and seek to balance outflows and inflows. As such we will maintain the pace and intensity of work，standardize corporate governance and lay a good foundation for further reform. We will crack down on irregularities such as underground private banks，illegal foreign exchange trading platforms and individuals who break up large transactions into many smaller ones to avoid detection. We will punish those who carry out illegal activities in the foreign exchange market and resolutely hold the line against systemic financial risks.
We will investigate and deal with false or deceptive transactions and illegal arbitrage activities such as the movement of funds out of the real economy and into speculative activities. The aim here will be to ensure high-quality development of the real economy，strengthen the capabilities of off-site monitoring and analysis，and strengthen the monitoring and inspection of institutions which have a greater impact on foreign exchange payments. We will also broaden our range of inspection tools and other supervision techniques and measures. We will standardize administrative penalties and discretionary powers，and enhance the quality of legal documentation. We will also strengthen the role of the Communist Party and internal controls， cultivate a greater sense of responsibility among officials and raise the quality of inspections.
China Forex: In 2017， SAFE investigated and dealt with a number of cases of the failure of financial institutions to comply with foreign exchange regulations. SAFE handled these cases in a stricter manner than before. At present，what kinds of foreign exchange violations are most prevalent as far as financial institutions are concerned? How will SAFE deal with these irregularities in the future?
Xu Weigang: In 2017，SAFE organized special inspections of foreign loans to domestic institutions with domestic bank guarantees，bank re-export trade，individual foreign exchange business conducted by banks and foreign exchange payment agencies. In so doing，SAFE strengthened the investigations into foreign exchange violations by financial institutions. A total of 492 such cases were investigated. Fines were imposed，13 banks were temporarily suspended from making foreign exchange settlements and 19 bank executives were held accountable. Fines of 240 million yuan were imposed，an increase of 2.7 times over the same period in the previous year. In particular，banks were the subject of much heavier fines. Bank fines increased by 3.6 times.
Inspections uncovered irregularities generally in legal compliance issues related to foreign exchange transactions and the failure to conduct due diligence in regards to transaction documents and cross-border capital arbitrage activities. In some cases，bank employees assisted in or participated in illegal arbitrage activities，setting a particularly bad example.
In 2018，SAFE will continue to investigate suspected illegal activities committed by financial institutions，focusing on