As China steps up its efforts to intercept the outbound flow of cash, a close look at the rules for exchanging and sending money overseas reveals a sophisticated and shady industry
Whether it is luxury condos in New York, Los Angeles or Miami, or a US$500,000 Lamborghini for their teenage kid attending school in Manhattan, there are countless stories these days about the creative ways wealthy Chinese move huge sums of cash into the United States. After the Renminbi fell last August, a mad scramble ensued among many looking to keep their money stable by sending it overseas, triggering the Chinese government to unveil various initiatives to stem the outward flow of cash and stop people and banks from skirting the rules. But are there legitimate and safe ways for both Chinese or expats in China to get their money into the United States? Is it possible to send more than US$50,000 a day – or even US$1 million – into a savings account in Boston without drawing scrutiny from regulators?
As they say, it is complicated and in recent months, it has become even more so. Nevertheless, if you are determined, there are ways to get it done – some more legal than others.
A report released by the U.S. National Association of Realtors last year said Chinese buyers are the biggest foreign purchasers of real estate in the U.S., according to a news report. Another study from MacDonald Realty, a Canadian real estate brokerage firm, pointed out that in some areas of Vancouver, 70 percent of homes that sold for more than US$2.1 million (CAD3 million) went to mainland Chinese buyers. Similar trends were seen in Australia, Singapore and Hong Kong.
So how were the funds used to pay for these homes moved out of China?
Overseas investment has been a growing driver of RMB conversion and capital outflow in recent years as the personal wealth of Chinese citizens has grown dramatically. Recent events have only exacerbated that movement. On August 11, 2015, in a single day, the Central Bank of China, or PBOC, moved to depreciate the RMB by two percent. In the subsequent two days the RMB depreciated another three percent. The reasons for such actions have been debated and documented, but the effect has been clear – the uncertainty created by such aggressive unilateral moves has spooked investor and consumer confidence in China and accelerated money outflows. Whether it is individuals looking to preserve wealth or corporations looking for better investment opportunities, the pressure on the RMB is undeniable.
Since the August devaluation, the PBOC has been working to stabilize the exchange rate by creating new currency controls, strictly enforcing previously established ones and using capital reserves to offset the selling pressure on the RMB. By the end of February 2016, the national foreign currency reserve had shrunk by approximately 20 percent compared to before the depreciation in August.
Despite the PBOC’s efforts, large amounts of money continue to flow out from China. What are some of the methods to transfer money overseas within the current currency control environment? The rules are different for Chinese citizens and foreign expatriates.
Currently, each Chinese citizen is allowed to exchange US$50,000 per year using only their identification card and a declaration of usage (e.g. tourism). It is possible to exchange the money without visiting the bank in person as many banks offer Internet and telephone banking for many transactions including foreign currency transactions. Contrary to what many believe, the amount one can exchange or transfer in a year is not the same. Each Chinese citizen is allowed to transfer US$50,000 per day using only their identification card. Someone can transfer multiple times in a year as long as they have sufficient foreign currency in the bank account (which could be accumulated from prior years’ exchanges).
Let’s get more specific. Despite such convenience, it is extremely difficult for Chinese citizens to exchange anything above the US$50,000 limit. In addition to the limits above, various banks said they are only able to help customers process tuition fees and living costs for students studying abroad; any other type of fund exchange needed to be cleared by the State Administration of Foreign Exchange (SAFE).
After we checked with the SAFE helpline, we were given a list of documents required to exchange funds for approved uses, and they include personal hospitalization, membership fees to international academic societies, or medical bills for close relatives who fall ill overseas. SAFE also made it clear that currently there is no other legitimate way for local Chinese individuals to invest abroad including real estate or financial products (i.e. stocks and bonds).
In principle, there are currently no limits for foreign expatriates to exchange and transfer foreign currencies overseas as long as the funds were earned in China and the appropriate individual income tax (IIT) has been paid.
For example, exchanging and transferring income is possible if the expatriate is able to provide their labor contract and proof of tax payment. Some banks require additional documents such as a work permit or a statement of salary breakdown issued by the employer with a company stamp. Nevertheless, if you are legally employed by a company in China, the process should be easy. Expatriates are also permitted to exchange and withdraw US$500 daily. This does not require any document other than a personal identification and there are no annual limits on such incidental exchanges.
Investment gains and income from mainland China investment products, such as from stocks on the Chinese exchanges, cannot be transferred out of the country, according to the banks.
For those who wish to send money they obtained from a rental property or sale of a property, the banks were much less clear about the process. A limited number of banks seemed to understand the process and told us the principle is the same as salary income: i.e. a rent or sales contract to prove the legitimacy of transaction, registration of property as evidence of ownership, and a tax document substantiating the fulfillment of tax liability. If the property is owned by more than one individual, each individual owner is only entitled to exchange and transfer his/her own share of the rental income or sales proceeds.
Withdrawing cash abroad using UnionPay (the Chinese system that links banks, accounts and ATM cards) debit cards used to be one of the legitimate and convenient methods of exchanging and transferring money from mainland China to overseas. This worked for both expatriates working in China and Chinese citizens. For Chinese, these withdrawals were not counted towards the US$50,000 exchange limit per person per year.
Tightening of regulations
Signs point towards the Chinese government implementing stricter controls over currency exchanges and looking to stem money outflows from the mainland. In September 2015, SAFE stipulated that UnionPay tighten the usage of UnionPay RMB cards used overseas. On top of the existing daily withdrawal limit of equivalent RMB10,000 (US$1,500) per UnionPay card, an annual cumulative cap of RMB100,000 (US$15,000) per UnionPay card was introduced effective January 1, 2016.
Before the annual limit, a person could theoretically “move” as much as RMB10,000 per day, or RMB3.65 million (US$560,000) a year per UnionPay card and this could be multiplied by the number of UnionPay debit cards possessed.
As with any rules, there are loopholes and we cannot talk about sending money overseas without getting into the many ways being used to avoid the rules. Many of the methods described below are considered illegal and while we do not endorse them, it is important to discuss them in order to provide a broad picture of the situation. This is more important today as the Chinese authorities are implementing a series of crackdowns against illegal transfers of money, so readers should thoroughly consider all options and potential consequences before taking action.
“A smurf is a colloquial term for a money launderer. Also refers to one who seeks to evade scrutiny from government agencies by breaking up a transaction involving a large amount of money into smaller transactions that are below the reporting threshold. The term is derived from the cartoon characters known as The Smurfs.”- Investopedia
The easiest and most straight-forward way to exchange and transfer funds abroad is to smurf it by “borrowing” the exchange quota from Chinese citizens. This involves dividing the amount of money you wish to exchange by US$50,000 (the per person annual limit for local Chinese) and have each wire the money under their own name.
We spoke to one person who purchased a home in Sydney for AUD1.7 million. She found more than 20 people – family members, friends, friends of family members, to transfer the money for her.
Given the proliferation of this method, the Chinese government has taken steps to monitor for smurfing activities. In September, SAFE asked all commercial banks to be vigilant of possible splitting transactions, for example:
Five or more different individuals separately purchase foreign exchange on a same day, every other day or on two or more consecutive days and then remit the foreign exchange to the same overseas individual or institution.
Five or more linear relatives of the same individual separately purchase foreign exchange within the annual quota and then transfer the foreign exchange to the foreign exchange savings account of the individual.
What happens if you draw the attention of SAFE? You are placed on a “Watch List of Individual Splitting Foreign Exchange Settlement and Sales” for the remainder of the calendar year plus two additional years where every foreign currency transaction will be subject to greater scrutiny, including the requirement of additional documents or possible cancellation of the transaction. From January 2016, a nationwide monitoring system has officially come online. This system interlinks SAFE, the banks and UnionPay, allowing for easier observation of suspicious activity. These changes and upgrades have made smurfing an impractical and riskier method of fund transfer.
Suitcases of cash
Many people attempt to carry cash across the border in the hopes of not being caught by border control and customs. A popular destination for these funds is Hong Kong where RMB bank accounts are plentiful and converting RMB into HKD or USD is easy. If caught, customs authorities can seize any cash carried by individuals in excess of the legal limits. The penalty could go as high as 100 percent confiscation if the conduct is deemed as smuggling.
Current currency regulations allow individuals to carry cash overseas without special approval in the amount of RMB20,000 and US$5,000 (or equivalent) in foreign currencies per trip. For foreign currencies, multiple visits within the same day (e.g. travel between Shenzhen and Hong Kong) and multiple trips within a 15-day period are subject to US$500 and US$1,000 limits respectively from the second trip onwards.
Money changers and under-ground banks work like this: You approach an underground bank in China, (usually as a referral by an existing customer). Sometimes the bank is a registered company and has an office as a front; others may be completely underground, i.e. do not even exist on paper in mainland China.
You deposit your money into one or multiple bank accounts designated by the underground bank and the bank quotes the converted amount in the currency you desire using the spot exchange rate obtained from a commercial bank. This underground bank will also include its fees for the transaction, ranging from 0.1 percent to as high as 1.5 percent during crackdown periods where scrutiny is higher. The underground bank then instructs its counterpart overseas to transfer the money, in foreign currency, into your overseas bank account.
The two transactions are independent from each other and do not involve any real currency conversion or cross-border movement, thus it is difficult for SAFE and commercial banks to spot this kind of arrangement. The best situation for underground banks is that the transactions from each direction balance out, but this is often not the case. The differences are usually a net cash outflow from China, meaning underground banks have to then settle imbalances by, for example, using fictitious commercial transactions such as creating artificial procurement contracts to pay large sums of money from their China shell company to an overseas “supplier.”
In many shops across Hong Kong, Macau and Southeast Asia, individuals can use their UnionPay debit or credit cards at merchants. “Special” merchants will then process the transactions as if the card user is purchasing goods or services, but instead the merchant simply provides cash, in local currencies or USD, after taking a cut for processing fees as “profit.” It is extremely difficult for UnionPay and the card issuers (banks) to spot abnormalities from their systems unless the merchant’s transaction volume stands out. Needless to say, this method is illegal and all transactions are done under the counter.
There is another much easier way to convert your domestic wealth into overseas investments if you have an excellent credit rating. Chinese billionaire Liu Yiqian won a bid for Amedeo Modigliani’s “Reclining Nude” at a Christie’s auction in November. The winning offer was US$170.4 million. Liu put the purchase on his American Express Centurion Card (also known as the black card) issued in China. By repaying his credit card bill in China with RMB, Liu effectively was able to offshore his RMB.
Theoretically Liu can turn around and sell the painting overseas in foreign currency. As far as we know, he did not do this, but it is certainly a way to move huge sums overseas. Unlike the various means described above, this appears to be legal under the current SAFE regulations for many (but not all) types of goods and services purchased abroad.
The concept of a fully convertible RMB remains distant. Until then, questionable financial transactions, suspicious cross-border trips and shady cash and credit flows will continue as individuals seek to manage their RMB exposure. Stay informed about any changes that may impact the ability to convert RMB or move funds in and out of China as they tend to change regularly.
Eddie Lam is a Managing Director and Head of the Forensic Accounting and Advisory Services China practice at FTI Consulting. Tao Shen is a Director in FTI Consulting’s Forensic Accounting and Advisory Services practice. Both are based in Shanghai.