Exclusive Insight | China's Underground Money Houses: How Do They Work?
Evaluating the 'Ant Moving' Strategy and the Ease of International Fund Transfers
(The author of this article is Xie Yimin, an investor and an analysis expert for The China Brief.)
Bloomberg's recent publication on October 9th addressed the utilization of underground money houses by Chinese individuals for moving funds abroad. Here are my thoughts on this matter.
Assessing the Remaining Operational Space for Underground Money Houses
Is there a desire among Chinese people for financial security? Certainly. Do they wish to transfer excess funds abroad? Of course. Do some Chinese individuals use underground money houses or unauthorized means to facilitate such transfers? Undoubtedly. However, it is essential to inquire about the precise extent of this practice and its proportion within the total assets of Chinese individuals. Presently, precise statistics on this matter are lacking. Nevertheless, it is foreseeable that under increasing scrutiny, this practice is likely to diminish. While it may never be completely eradicated, its impact is expected to become negligible.
My guess is journalists may not be fully versed in the various restrictions placed on fund transactions by Chinese financial institutions in the current era. Allow us to provide a concise overview to help Western journalists avoid misconceptions. According to the "Measures for the Administration of Large-Value Transactions and Suspicious Transactions Reports by Financial Institutions" (People's Bank of China Order [2016] No. 3):
Cash withdrawals and deposits by domestic individuals in RMB or USD equivalent to RMB 50,000 or USD 10,000 are categorized as large-value transactions and are subject to monitoring.
Inter-account transactions by domestic individuals in RMB amounting to RMB 500,000 (or USD equivalent of RMB 100,000) or more are also classified as large-value transactions and are subject to monitoring.
Cross-border transactions by both domestic and foreign individuals in RMB exceeding RMB 200,000 (or USD equivalent of RMB 10,000) are categorized as large-value transactions and monitored.
Transactions conducted by domestic non-individual accounts exceeding RMB 2,000,000 are classified as large-value transactions and subjected to monitoring.
As per the "Regulations on Customer Due Diligence of Financial Institutions and the Management of Customer Identity Information and Transaction Records" (People's Bank of China, China Banking and Insurance Regulatory Commission, and China Securities Regulatory Commission Order [2022] No. 1), individuals making cash withdrawals or deposits in RMB amounting to RMB 50,000 or USD equivalent of RMB 10,000 are required to be registered by the bank.
Based on these regulatory measures, various fund transfer channels within China undergo close monitoring. If a fund holder intends to transfer RMB 2,000,000 to a domestic account controlled by an underground money house, multiple transfers totaling RMB 2,000,000 would be necessary. Each transfer would be closely monitored and could trigger an alert. Even in the personal experiences of residents, a bank transfer of RMB 200,000 would raise inquiries from the bank. Residents attempting to withdraw USD 2,000 in cash from their own foreign exchange account face delays of several days, showcasing the stringent supervision. With the increasing integration of big data and artificial intelligence in financial institutions, the system promptly identifies abnormal transfers and accounts associated with underground money houses. Consequently, the regulatory risk for underground money houses, both domestically and internationally, is significantly increasing. As mentioned earlier, multiple anomalous transfers from an overseas account can easily trigger scrutiny by overseas banks, leading to the freezing or even closure of the account. As a result, the operational feasibility of underground money houses is increasingly disproportionate to the risks they pose both domestically and internationally, and their survival space is naturally diminishing.
Is the "Ant Moving" Strategy Still Viable?
Readers should already be familiar with so-called "Ant Moving" strategy, where domestic residents use their relatives' USD 50,000 legal exchange quota to collectively exchange significant amounts of currency for legitimate exchange purposes. However, it is worth noting that this method was already restricted by the Chinese government in 2017 (due to uncontrolled overseas investments in previous years, resulting in a nearly trillion RMB decrease in China's foreign exchange reserves). This led to the tightening of overseas acquisitions and currency exchange by China, halting the buying spree of Chinese companies abroad and initiating the liquidity crunch and asset sales of real estate companies like Wanda and Evergrande.
In 2018, SAFE (State Administration of Foreign Exchange) reissued the "Implementation Rules of the Regulations on Foreign Exchange Administration for Individuals" (2007 version) and instructed all branches to strictly enforce it. Subsequently, in the "Guidelines on Foreign Exchange Business for Current Account" (2020 version) released in 2020, additional warnings and control measures for fund splitting (i.e., "Ant Moving") were included.
According to the implementation methods outlined in these rules, transferring funds to the same overseas account by five domestic residents on the same day or the next triggers controls. The rules also contain other detailed restrictions. Therefore, in practice, the "Ant Moving" strategy has become challenging since 2018. According to the latest information, the threshold triggering the red line for these five individuals has been further tightened to three individuals. In other words, to avoid triggering the control red line, a fund holder or an underground money house operator needs to collect the identity information of at least 100 individuals in the country to access their USD 50,000 exchange quotas. Previously, one or two overseas accounts were sufficient to execute "Ant Moving" without triggering controls. But today, to avoid triggering the control red line, at least 30 accounts need to be established overseas. Considering the increasing difficulty of opening bank accounts worldwide, a challenge known to anyone with overseas banking experience, especially for non-residents, the operational difficulty for even underground money houses has significantly increased, shrinking their survival space.
Moreover, as mentioned in the previous two articles, even if one successfully establishes numerous overseas accounts and executes "Ant Moving" for small amounts for a low-profile exit, multiple small transfers can quickly trigger alerts, resulting in the freezing of all involved bank accounts and even attracting legal investigations.
Is it Really Easy to Carry Funds Abroad?
The article also mentioned cases of domestic residents carrying large amounts of cash in their car trunks when exiting the country. While the efforts of foreign journalists should be acknowledged, due to their lack of understanding of China's complex situation, they tend to turn isolated incidents into widespread events.
Let us set aside the technological advancement in China's border control. Let's assume that carrying cash is feasible. How much cash can one carry? China has countless land border crossings, but upon slight consideration, it becomes apparent that only Shenzhen and Zhuhai, adjacent to the Pearl River Delta and Hong Kong and Macau, are the optimal ports for cash exiting. Other land border crossings are neighboring developing countries, either implementing foreign exchange controls or incapable of cash transactions. Even if successful in carrying funds abroad, it is impossible to facilitate deposits or transfers abroad. The prerequisite, often overlooked by journalists, is that in land border crossings in Shenzhen and Zhuhai, all passengers in vehicles must disembark and carry their luggage, while the driver passes through the border in an empty vehicle. Sedans and SUVs open their windows, and commercial vehicles open their middle doors. All vehicles must open their trunks and pass through the domestic border under the surveillance of numerous cameras. In simple terms, vehicles are almost "stripped" during the crossing; no luggage can be placed in the trunk; otherwise, it will be seized. Therefore, to carry funds through the border, they must be hidden where cameras and checkpoint personnel cannot see. Hence, the packages containing cash must be small and certainly cannot be the large suitcases imagined by readers based on the report. Even a normal briefcase must be carried by passengers. Therefore, the maximum size would be a small waist bag or a similar package concealed inconspicuously inside the vehicle. Moreover, the vehicle must hope not to trigger random checks, which, if triggered, would 100% result in the detection of the carried funds. Given the stringent measures mentioned earlier, the opportunity to accumulate a significant amount of foreign currency cash within China is almost impossible. Thus, carrying funds would involve Chinese yuan only. How much Chinese yuan cash can be accommodated in such small packages? It cannot exceed RMB 300,000, and the consequences of detection could range from fines and additional penalties to personal violations (and relevant penalties), blacklisting the carrying vehicle, and frequent random checks during future crossings. For larger amounts, criminal prosecution might be involved. The severity of the consequences and the extremely low probability of success raise a question of how many Chinese individuals are willing to take such risks. Ironically, even after a successful exit, the individual still faces strict cash entry controls at the Hong Kong and Macau border, with similar measures and consequences. Hence, the concept of carrying funds in the trunk is long outdated and has rarely occurred in recent years.
China is an ever-evolving nation, particularly in terms of its regulatory measures and methods. Opportunities that were exploitable before are being rapidly diminished. Additionally, with China's proactive application of high-tech methods, its ability to detect violations and respond promptly is increasing, and so is the speed at which loopholes are being closed. Therefore, Western journalists often only understand the situation afterward and, due to the constant updates, immediately turn it into old news.
Furthermore, while China is tightening its control over foreign exchange, it has not completely restricted all demands. It takes into account the actual foreign exchange needs of Chinese citizens in a globalized environment, such as outbound tourism, dividends from overseas listings involving mergers and acquisitions, options, and buyouts. In the rules introduced and revised in recent years, detailed provisions have been made for these activities. Even for overseas purchases of insurance, which the Chinese government does not encourage, regulations have been put in place. The primary consideration of the Chinese government in foreign exchange management is regulation and order, within the framework of protecting the domestic financial environment. The priority does not lie in whether the relevant quotas are sufficient, but rather in the financial capacity, financial order, and financial security of the nation. The demands of its citizens are highly subjective, and this is not the government's top priority.
Financial regulation is not exclusive to the Chinese government. Against the backdrop of global anti-money laundering efforts, countries around the world are strengthening monitoring of financial transactions and preventing financial crimes. Even in developed countries, which were traditionally perceived by the Chinese to have freedom in fund movements, the regulation of fund flow is becoming increasingly strict, with monitoring efforts no less than those in China. Therefore, the need of Chinese citizens to move funds (outside of regulation) is, in fact, facing a decreasing operational space, rather than being as extensive as depicted in the report. It is not just difficult to exit, but even more challenging to land funds overseas.
Today, the crackdown on underground money houses is becoming more comprehensive. Previously, the primary focus of underground money houses was on fund exiting, after which they had almost unrestricted operations, hardly worrying about legal risks. However, today, countries worldwide are enhancing cooperation in information sharing and law enforcement assistance. Underground money houses not only find it increasingly difficult to move funds abroad but also face stringent monitoring when legally landing funds overseas.
Around August 8th, Chinese authorities announced the arrest of an executive of a prominent immigration agency in Shanghai, touted as the largest immigration agency in China. Many rumors claimed that China's move was to obtain a list of names of Chinese people immigrating abroad. This reflects a lack of understanding of China's national conditions. Chinese regulatory authorities have real-time access to information about immigrants, without the need for any coercive measures. Furthermore, it is unnecessary to mobilize such an extensive operation. Subsequently, the police announced the individual's crimes, one of which was "illegal exchange of foreign currency." This shows that the clear objective of the Chinese police is to combat the behavior of underground money houses and fund outflows. In less than a week after this incident, the Singaporean police announced the bust of the largest money laundering syndicate in its domestic history, involving approximately USD 750 million, with the majority of individuals involved being Chinese citizens. Although the Singaporean government denied that this action was at the request of the Chinese government, it is clear to discerning eyes that these two cases were quasi-joint law enforcement actions facilitated by extensive communication between China and Singapore. The Shanghai immigration agency acted as the solicitor of fund outflow demands, while the Singaporean syndicate facilitated fund outflows (i.e., the underground money house). In fact, the Shanghai intermediary was an accomplice involved in suspected underground money house activities. Singapore has become the most popular destination for Chinese immigrants and fund outflows in recent years. This case is an accounting of the situation over the past three years since the pandemic, involving an amount of less than USD 1 billion. The amount of money laundering over three years is only around USD 1 billion (this amount might increase as the case continues to be investigated), indicating the significant shrinkage in the operational space of underground money houses in recent years. It is reasonable to believe that such cross-border law enforcement actions will become more prevalent, and the crackdown on underground money houses will become more global.
Regarding the 750 billion RMB money laundering case in Gansu in 2021 mentioned in the report, it actually occurred in 2019 and earlier. As mentioned above, in the years before 2017, the central government encouraged overseas mergers and acquisitions, resulting in rampant fund outflows for various purposes. Those years were the heyday of the underground money house business. Therefore, it is not difficult to imagine that 750 billion RMB is the accumulated amount over many years, rather than the amount for each year. In those days of lax control, such a scale was not uncommon. However, this outdated news report instantly misled readers, who lack an understanding of China, into thinking that the reported scale and prevalence are still ongoing, causing a misperception.
As mentioned multiple times, the exit of funds for Chinese residents today (outside of regulation) is not about whether they want to or not, but whether they can or cannot. The report introduces many reasons why Chinese people increasingly "want" to immigrate and move their funds out. However, as stated in the numerous regulatory limitations above, the reality is that they increasingly "cannot."