Hong Kong – Imagine entrusting your life savings to a group of strangers you only know through WhatsApp. Some wealthy people in China are willing to take such gambles to move some of their wealth out of the mainland.
Take the case of 32-year-old Phoebe, who recently moved nearly 1 million yuan (approximately S$190,000). To do so, she first had to transfer money to her local intermediary's account. Then Phoebe, who asked to be identified only by her first name due to privacy and legal concerns, had to sit still.
After a tense few hours, transactions started trickling into another account she has in Hong Kong. Once you have cash, you can go anywhere.
The funds that appeared in Phoebe's account came from a total of 10 people, one of whom deposited the equivalent of US$1,300 (S$1,800) in banknotes via an ATM. The transaction took place through an informal and unregulated system known around the world as hawala. On one side of the administrative border between the mainland and Hong Kong, Phoebe handed over her money to members of her caretaker network. Meanwhile, the transaction was mirrored by other users in the network and the money was deposited into her account.
The whole operation depended on faith. But Phoebe's wait wasn't as nerve-wracking as you might expect. Through mutual connections, Phoebe was introduced to a reputable asset management company that introduced her to a money transfer agency that is illegal in China.
Wealthy advisers have reported a surge in demand for overseas backup options since borders reopened after the pandemic. A crackdown on ideologically unfavorable industries, uncertainty over geopolitical tensions, and President Xi Jinping's push for “common prosperity” are scaring not only the wealthy but even the middle class. Furthermore, the domestic economy is in an increasingly dire situation. Many wealthy families find it essential to have money abroad, either to diversify their assets or to pave the way for future immigration.
While traditional havens such as Vancouver condos and US stock investments remain attractive, Singapore has emerged as an increasingly popular destination over the past two years.
However, opportunities to legally move cash out of China are very limited, with individuals typically only able to send US$50,000 a year overseas. They also have a one-time opportunity to move money when they emigrate. Underground networks come into play to fill this gap.
“These institutions were created to meet a surge in demand,” said Joel Gallo, an adjunct professor at New York University in Shanghai. “They operate as quasi-banking companies, operate without oversight, and engage in regulatory arbitrage in a gray area.”
Although there are no reliable estimates of the size of this industry, findings disclosed by the authorities suggest it is huge. In 2021, state media reported, citing China's State Administration of Foreign Exchange, that an investigation in China's western Gansu province uncovered an operation involving assets worth 75.6 billion yuan. The funds were distributed among his network of five organizations using his more than 8,000 bank accounts across more than 20 states.
The scope of this network is truly global, operating not just in Hong Kong but wherever there is a significant Chinese diaspora. According to a 2019 intelligence study by the UK's National Crime Agency (NCA), it is “highly likely” that underground banks would set up pools of funds in key locations and allow recipients to quickly receive cash in local currency. ”.
However, partnering with such a financial shop is not a decision to be taken lightly. People caught using illegal currency exchange services in mainland China typically face fines of at least 30 percent of the amount they try to transfer. If the amount is large, the party providing the service could face significant prison terms. The maximum penalty, life imprisonment, is usually handed down only in cases of complex crimes such as bribery, but there are also reports of penalties ranging from one to five years.
If you reside in places such as Hong Kong, the UK or Singapore, China's capital laws do not apply to you, but you do run the risk that legitimate banks will be suspicious of the source of your funds.
A spokesperson for the Monetary Authority of Singapore said that while Singapore does not have capital controls in place like other jurisdictions, the regulator does encourage financial institutions, including money transfer agencies, to spot and report suspicious transactions and activities. He said he was looking for it. Institutions are also required to mitigate reputational, legal and operational risks from activities that are affected by the laws of other jurisdictions.
There's reason for Singapore banks to be particularly cautious. In August, authorities arrested and charged 10 people of Chinese descent with various crimes, including money laundering. More than S$2.8 billion in cash and other assets were frozen or confiscated. The allegations involve attempts to transfer proceeds from illegal activities such as fraud and illegal gambling, rather than remittances.
