How To Smuggle Money Out Of China

Tyler Durden's picture

With Chinese authorities clamping down on the shadow-banking system, taking action of their bubble-bursting reforms, and now increasing the trading bands on the Yuan (to increase volatility and hopefully unwind, in a controlled manner, the biggest and most one-sided carry trade in the world's markets), we thought it perhaps surprising that growing numbers of Chinese are using UnionPay - a state-backed bank card - to illegally funnell billion of dollars out of the country. As Reuters reports, its unclear why the PBOC has not clamped down on this as documents show they are well aware of it... and as one clerk noted "don't worry... everyone's doing it."

 

 

Via Reuters,

Growing numbers of Chinese are using the country's state-backed bankcards to illegally spirit billions of dollars abroad, a Reuters examination has found.

 

This underground money is flowing across the border into the gambling hub of Macau, a former Portuguese colony that like Hong Kong is an autonomous region of China. And the conduit for the cash is the Chinese government-supported payment card network, China UnionPay.

How It Works:

In a warren of gritty streets around Macau's ritzy casino resorts, hundreds of neon-lit jewellery, watch and pawn shops are doing a brisk business giving mainland Chinese customers cash by allowing them to use UnionPay cards to make fake purchases - a way of evading China's strict currency-export controls.

 

On a recent day at the Choi Seng Jewellery and Watches company, a middle-aged woman strode to the counter past dusty shelves of watches. She handed the clerk her UnionPay card and received HK$300,000 ($50,000) in cash. She signed a credit card receipt describing the transaction as a "general sale", stuffed the cash into her handbag and strolled over to the Ponte 16 casino next door.

 

The withdrawal far exceeded the daily limit of 20,000 yuan, or $3,200, in cash that individual Chinese can legally move out of the mainland. "Don't worry," said a store clerk when asked about the legality of the transaction. "Everyone does this."

Why has The PBOC done nothing about it?

The practice violates China's anti-money-laundering regulations as well as restrictions on currency exports, according to Chinese central bank documents reviewed by Reuters. Chinese authorities also fear the UnionPay conduit is being used by corrupt officials and business people to send money out of the country.

 

It's unclear why the central bank, the Peoples Bank of China (PBOC), hasn't cracked down harder on the practice, although the documents Reuters reviewed show the bank was aware it had become a growing problem.

 

Industry experts point to a weak enforcement culture in China, a reluctance to hurt Macau financially with 80 percent of the city's revenues drawn from gambling, and a willingness to tolerate some capital flight - especially if it can be tracked through names on bank cards. Moreover, the rapid growth of UnionPay, including the spread of its terminals at retail stores across the world, is playing a key role in China's strategy for making the yuan a global currency.

 

...

 

Any steps to clamp down on UnionPay cashback transactions would likely rattle Macau, because the cash also feeds the casino sector on which the territory's $43.6 billion economy overwhelmingly depends. Macau is now the world's biggest gambling hub, with revenues seven times those of Las Vegas. Last year, gambling revenue rose 19 percent to $45.2 billion. Nearly 40 percent of that went to the government in taxes.

The people are following their money out of the country...

Many card users follow their money abroad. Since the mid-1990s, an estimated 16,000 to 18,000 Communist party officials, businessmen, CEOs and other individuals have "disappeared" from China, according to a separate PBOC report prepared in 2008 - taking with them some 800 billion yuan ($133 billion).

It won't stop soon...

Though relatively unknown in the West, UnionPay has quietly grown to become one of the biggest card brands and payment networks in the world, accepted in 142 countries. There are more UnionPay cards in circulation now than any other brand - 3.53 billion, or nearly a quarter of the world's total, according to the industry newsletter, the Nilson Report. Visa remains the world leader by transaction value with $4.6 trillion in card transactions in the first half of 2013; UnionPay was second with $2.5 trillion.

 

If UnionPay poses a problem for Chinese authorities, it is a problem of their own making. The card brand is often seen as an arm of Chinese state policy.

 

UnionPay was established in 2002 by the PBOC and the State Council or Cabinet.

 

...

 

UnionPay dominates the card market in China thanks to a central bank decree that requires all card issuers, including foreign ones, to process their yuan-based transactions through UnionPay's electronic payment network.

And is increasing as capital flight spreads...

Today, the outflow is gathering pace.

 

In Macau, UnionPay card transactions reached 130 billion Macau patacas ($16.77 billion) in just the first four months of 2012, up from 88.1 billion patacas in all of 2011, according to a confidential report by Macau's banking regulator, the Macau Monetary Authority reviewed by Reuters. Around 90 percent of those transactions were "highly concentrated in jewellery, ornament and luxury watch sales", the report said.

 

If that rate persisted for the full year, UnionPay sales in Macau for all of 2012 would have reached nearly $50 billion - nearly $45 billion of it for jewellery-related sales, a figure exceeding even Macau's total gambling revenues that year.

 

"Are these actual transactions? Where does this money come from?" the deputy head of the Monetary Authority, Wan Sin Long, asked in the document.

And there's no limit...

"I would say there's no upper limit for UnionPay," said the black-suited manager, who spoke on the condition he not be identified. "The credit limits aren't enforced at all."

 

An executive at Las Vegas Sands, speaking on condition of anonymity, said vendors with UnionPay card-swiping machines have been caught wandering around the casino.

 

"People walk around with mobile union pay card machines on the gaming floor," the executive said. "They are linked to China (computer) servers, not (ones in) Macau. So it is like they are getting cash out in China. When we see them on the floor we kick them out."

 

That practice also exists outside the casinos, too. Macau's merchants lately have tried to better disguise the UnionPay transactions by routing transactions electronically across the border to China to escape the scrutiny of Macau authorities, a banker in Macau said.

 

"They closed the Macau tap, but they've opened an even larger China tap," said the Macau banker with direct knowledge of the practice. "The merchants are always cunning."

Backdoor to Yuan internalization and the demise of the dollar?

UnionPay's increasing use overseas is part of Beijing's multi-pronged strategy to eventually open up China's capital account and internationalize the yuan, which is formally known as the renminbi or yuan. Beijing also eased restrictions on many kinds of capital transfers as it gradually loosens up control over the currency, making it easier for money to leave China's borders. The efforts have paid dividends. The renminbi has already overtaken the euro to become the second-most used currency in trade finance, according to data from global transaction services organization SWIFT.

 

"(China) may be happy to see UnionPay sweeping different markets across the world in different countries and territories," said Yan Lixin, head of Fudan University's China Centre for Anti-Money Laundering Studies in Shanghai. "It is backed up by the government. It is the real son of the government."

And no one seems to care:

"We can remit as much money as you like with your UnionPay card," said a red-haired man surnamed Lai at one jewellery shop. A yellow sign carried the slogan: "Welcome Renminbi. Welcome UnionPay cards."

 

"You don't actually buy anything," said Lai, standing near a half-empty display case containing a messy spread of watches and jewellery. "We just help people get money out of China so they can gamble more."

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