Underground banks expose policy loopholes

(Ecns.cn)--Illegal foreign exchange deals of new Taiwan dollars (TWD) and Chinese yuan (RMB) via underground banks have been increasing, exposing loopholes in the finance and banking policies of both Taiwan and the mainland, the Oriental Outlook, a state-run magazine, revealed on Monday.

The underground banks are "efficient," the magazine reported, explaining that it only takes them about half an hour to complete a foreign exchange deal because of their extensive business networks and loyal customers.

On February 13, 2008, police in south China's Fujian Province cracked an illegal banking case, the most serious in recent years.

According to local authorities, the underground bank had been colluding with foreign money houses in illegal foreign exchange trade worth over 1 billion yuan (US$159 million).

Yang Xiuzhen, the principal offender, confessed that they had been working with private banks in Taiwan since 2007, and had made profits by raising exchange rates between TWD and RMB.

Zhang Jianping, former operator of the underground bank, added that they would first negotiate an exchange rate with buyers and then wire them the Taiwanese currency once the bank had received the advance payments.

The bank was doing a roaring trade in the exchange of TWD and RMB, noted Chen Zhuguan, another defendant, adding that each deal would involve capital ranging from hundreds of thousands to millions of yuan.

"To stay out of trouble, we usually opened bank accounts with other people's IDs," Chen said.

Altogether six people involved were punished by law, while Yang Xiuzhen, the principal criminal, was sentenced to six years in prison.

Statistics from the Public Security Bureau of Fuzhou, capital of Fujian, show that since 2007 local police have broken 21 cases concerning underground banks focused on the trading of currency. Tens of billions of RMB were reportedly involved in the crackdown, and 35 people were arrested.

Yet "these cases were just the tip of the iceberg," Liu Wennian, of the Fujian provincial public security bureau, told the Oriental Outlook.

Since the deals between underground banks are based on trust and verbal stipulations, it is hard for police to track down the criminals, Liu added.

Liu analyzed that trade between Taiwan and Fujian has been booming, creating a great demand for the exchange of the two currencies. However, current legal foreign exchange channels, compared to underground banks, are usually inconvenient due to lengthy procedures and insufficient quotas.

Reporters from the Oriental Outlook found out that the illegal banks had secret outlets in both the mainland and Taiwan, which made them able to complete a deal after only a couple of phone calls.

According to some industry insiders, the underground banks are mostly family businesses that are tightly structured with detailed divisions of labor.

Family members are the most trustworthy and will help each other in case of court trials. Moreover, they use code words when discussing business with their customers and seldom transmit sensitive information such as bank accounts through communication tools, the insiders said.

The underground banks do not trade in cash either. Instead, they mostly use bank transfers, added the insiders, who further warned that the illegal banks have become a major channel for money laundering.

Many criminal suspects try to avoid punishment by moving their black money out of China through underground banks, which increases financial risks, they said.

Ni Xiaoyu, a professor at Fujian Police College, pointed out that by processing deals worth hundreds of millions of yuan, underground banks have undermined the capability of financial authorities to monitor and manage the nation's foreign exchange affairs.

Deng Lijuan, deputy head of the Taiwan Research Center at Xiamen University, further analyzed that current cross-Straits trading uses U.S. dollars for quoting prices and settling accounts, which increases costs and risks for foreign exchange. It also provides opportunities for illegal banks since they can directly exchange different currencies for their customers.

Deng added that related government departments in both Taiwan and the mainland should strengthen cooperation and establish a cross-Straits currency settlement mechanism to get at the root of the problem.