In $64 Billion Bust, China Nabs "Underground Bank" Kingpin

Submitted by Tyler Durden on 11/20/2015 12:30 -0500
http://www.zerohedge.com/news/2015-11-20/64-billion-bust-china-nabs-underground-bank-kingpin
Late last month, we introduced you to “Mr. Chen”, a catch-all for the operators of tiny storefronts and kiosks in China who can either get you some tea and a Snickers bar, or smuggle millions out of the country, whichever you prefer.
“Mr. Chen” is part and parcel of China’s vast underground bank network which Chinese use to circumvent Beijing’s capital controls.
Officially, you’re only allowed to move $50,000 per year out of China, but there are any number of ways to get around that limit. One popular method - until Xi began to crack down that is - was the UnionPay end-around, which entails making what amounts to a fake purchase for something like, say, an expensive watch, and receiving cash from the merchant instead of merchandise. The underground bank method is more complex than that, but not by much. As WSJ explained in October, “large sums are divided into legally allowed amounts and then channeled out of the mainland via hundreds of bank accounts controlled by the underground banker.” Alternatively, “underground banks can match yuan deposited with them on the mainland with equivalent amounts in foreign currency paid into a client’s bank account elsewhere: Give the underground bank a sum, and a matching sum appears in Hong Kong, minus a cut of anywhere between 0.3% and 3%. No money physically or electronically crosses the border; the match is built on networks on both sides controlled by the underground bank.”
As we mentioned earlier this month when, courtesy of Bloomberg, we presented “5+1 Ways To Smuggle Billions Out Of China,” this is an underground business and so things don’t always go as planned, something a “Mr. Chan” (with an "a") discovered when he attempted to move CNY63 million out of the country via “Mr. Chen” (with an "e") only to find that once the transaction was complete, he only had CNY8 million left. That’s a pretty hefty fee even in the world of money laundering and so, Chan reported “Chen” to the authorities. The subsequent investigation led to the arrest of some 31 people and netted 1,087 accounts holding some CNY12 billion.
Those arrested were never heard from again.
Well, we're not sure if some other "Chan" got robbed and subsequently ratted on "Chen", but whatever the case, Chinese authorities have broken up another underground bank - more specifically, the largest such operation in the country which allegedly handled some $64 billion in illicit FX transactions. 
As Bloomberg reports, “more than 370 people have been arrested or face lawsuits or other punishment in the case centered in eastern Zhejiang province.” According to the details from Xinhua, it took police more than a year to sort the whole thing out, but by the time it was all said and done, 1.3 million transactions were scrutinized and 3,000 accounts were frozen. According to Jinhua City Public Security Bureau of Economic Investigation Detachment Vice Captain Zhang Hui, it took 35,000 sheets of paper to print out all of the evidence.
The group’s “Mr. Chen” is a guy called Zhao Mouyi, and as Bloomberg goes on to detail, he “set up more than 10 companies in Hong Kong from 2013 and transferring more than 100 billion yuan through so-called non-resident accounts, which are used by offshore companies in China when they are transferring money abroad.”
Amusingly, HSBC - the global bastion of money laundering - assissted Zhao in exchanging yuan for foreign currency. Here's the account from The People's Daily (Google translated):

Hui said that unlike traditional underground banks by domestic and foreign "knock" level account transfer of funds approach, this is the first case of the use of the case to commit the crime of domestic accounts NRA found that the use of NRA accounts management loopholes and no foreign exchange purchase limit features, bypassing the foreign exchange regulation, the RMB cross-border transfer accounts directly through the NRA, hit the accounts provided by the "customer" in the settlement after HSBC and other banks.

Well, if you're going to launder money (because that's basically what this is... you're taking an illicit sum and via a series of transactions rendering it free and clear) we suppose you might as well go with the guys who have the most experience.
HSBC didn't comment.
We suppose the only question now is whether anyone will ever hear from "Zhao" or any of his accomplices again.
You can expect this crackdown to continue unabated. The market believes (rightly) that Beijing is targeting a much larger deval going forward as the economy continues to falter. That means the pressure on the yuan isn't likely to dissipate in a meaningful way. Indeed, as Goldman noted a few days ago, based on the sum of outright spot transactions and freshly entered (but unsettled) forward contracts, FX outflow was about US$26bn in China during October, composed of US$24bn in net outright spot transactions and US$2bn via net forward transactions. In other words: capital is still flowing out of China.
As long as the pressure on the yuan is there, "Mr. Chen" will be around, white-haired, peering out from behind the candy and trinkets - and Xi will keep trying to stop him.

P.S. If you need to get money out of China and Chen isn't your style, there's always bitcoin...