China’s Capital Controls and Its Unintended Consequences

China’s strict capital controls, designed to stabilize the yuan, curb capital flight, and safeguard financial security. To prevent capital flight, Beijing limits the amount that a citizen can take out of the country to $50,000 in foreign currency each year.

But did the Chinese government really expect these rules to be followed? People, unsurprisingly, like to move their money freely. Instead of stopping capital flight, these restrictions have given rise to an unlicensed money exchange industry with far flung tentacles into countries with a large Chinese diaspora.

 

These unlicensed operators often use mirror transactions—money is deposited in China, and an equivalent sum is paid out abroad (in the US, Hong Kong, or Singapore) - without any cross-border transfer. They rely on cryptocurrencies, shell companies, or even an extensive network of couriers stationed worldwide.

 

This underground financial web isn’t new. The Indian diaspora has long used Hawala, an informal money transfer system. But where Hawala traditionally handled small sums, Chinese money brokers now move vast amounts to bypass the $50,000 cap, attracting a darker, criminal element.

 

With larger sums come bigger risks. It’s not uncommon to hear stories of individuals losing six or seven-figure sums to unscrupulous brokers. This money has then been used to extract even more money from the unsuspecting victims of scam centers scattered in special economic zones in border towns of countries in Southeast Asia – far away from the policy makers sitting in Beijing. The massive growth in the number and size of these scam centres is in step with the increase in tightening of capital controls in 2016.

 

Chinese money brokers, known as 'fei ch’ien,' have also become critical players in global money laundering schemes. Their deep cash reserves make them perfect conduits for laundering illicit proceeds from fentanyl sales in the US, funneling dirty money across borders undetected.

 

Beijing’s capital controls were meant to protect the economy, but in many ways, they’ve done the opposite—fueling a parallel financial world beyond the state’s reach. The more the government tightens its grip, the more inventive and expansive these underground networks become.

 

China’s policymakers now face a paradox: How do you control capital without driving it further into the shadows? The answer remains elusive, but one thing is clear - where there’s a will, there’s always a way for money to move.

Why Did The Fujian Gang Members Use Multiple Passports?

 

The faces of the suspected money launderers that stared back from the landing pages of Singapore's online media outlets in August 2023 were, at best, unimpressive. They looked more like illegal cigarette vendors on some of Singapore's seedier streets than multi-millionaires. The 10 that were caught (out of an undisclosed number) by a 400 strong police island wide operation had between them close to 3 billion Singapore dollars in cash, cars and condominiums funnelled from unlicensed money lending in China, online scams in Cambodia and remote online gambling operations in the Philippines. 

 

One common denominator among the suspects was they were all Chinese nationals with foreign passports. St Kitts and Nevis, Cambodia, Cyprus and Vanuatu passports were popular choices. (It is interesting to note China does not allow dual citizenship. Had they been caught in China they would have received far harsher sentences not only for their crimes but for breaking the dual citizenship law.)  

 

Fortunately, for them, they were convicted in Singapore and received relatively light prison sentences ranging from 13 – 17 months. After serving their prison sentences they were given a CHOICE of where to be deported. Not surprisingly, many of them chose Cambodia, where they hold passports and operate numerous illegal businesses. 

 

Let us go through the various steps on how a foreign passport would have come in handy when transferring profit derived from illegal activities in one country to purchasing assets in another country :-

 

Step 1: The criminal obtains passports from several countries, one from a country where laws are very lax to run their illegal business and another from a country which doesn’t tax earnings such as Vanuatu.  

 

Step 2 : The criminal then sets up the business in Cambodian border towns like Poipet on the Thai border and Bavet on the Vietnam border, both well known for its ‘special economic zones’ filled with casinos, online gambling centres and scam operators.  Mo

 

Step 3: The criminal will then set up a company in Singapore through a corporate service provider and apply for an employment pass sponsored by that company in Singapore. This is fairly easy to obtain and would entitle the convict to conduct business. The company would mostly be involved in trading in goods and the business would be legitimate for the first year or so to avoid raising any red flags with the authorities.

 

Step 4: Once things are going smoothly the criminal will through a corporate service provider in Singapore incorporate multiple companies in Vanuatu. The fact that he or she is a citizen of Vanuatu makes the setting up of such companies a mere formality and many service providers in Singapore offer this very legitimate service. 

 

Step 5: One of the companies in Vanuatu most likely an anonymous shell company  drafts a fake loan agreement stating that it has provided a loan to the Cambodia-based illegal business. 

 

Step 6:  The Cambodian illegal business "repays" the loan by transferring illicit funds into the company's bank account in Vanuatu. This allows dirty money to enter the international financial system under the pretense of debt settlement.

 

Step 7: The Vanuatu company moves the money often broken down in multiple smaller transactions through different accounts (often across multiple banks in different countries) to further obscure its origins. 

 

Step 8: The Singapore company, which the criminal is an employees of, will then start issuing invoices to the company in Vanuatu; some will be for real goods and services but most will be fake. 

 

Step 9 : The Vanuatu company will start remitting money from its multiple accounts in multiple banks in different countries to the suspect’s company account in Singapore. 

 

Step 10: The money remitted to the criminal’s company’s bank account in Singapore can then be used to purchase assets such as real estate, cars, and jewellery in the name of the criminal who can now claim the money is legitimate.

Dual Citizenship – Can the Chinese Government Find Out?

 

A friend’a grandmother after becoming a US citizen in the 60s, retained her Chinese ID (Shenfenzheng ID) and continued to visit relatives in China regularly using her US passport and kept her Shenfenzheng ID up to date. - https://www.reddit.com/r/Chinavisa/comments/1dmc7sq/dual_citizenship_how_can_chinese_government_find/

 

Given China's strict stance against dual citizenship, it came as a big surprise that the Chinese government hasn’t plugged this loophole with some simple database management tools and some collaboration between the departments issuing the ID and the departments issuing the passport and immigration counters around the country. 

 

China's Policy on Dual Citizenship

 

China does not recognize dual citizenship. According to the Nationality Law of the People's Republic of China, Chinese citizens who acquire foreign nationality automatically lose their Chinese citizenship. This means that upon naturalization in another country, individuals are expected to relinquish their Chinese citizenship and associated documents, such as the Chinese National ID.

 

Potential Risks of Retaining Chinese ID Post-Naturalization

 

Retaining a Chinese National ID after acquiring foreign citizenship can lead to several complications:

 

1. Legal Implications: Using a Chinese ID as a foreign national is illegal. If discovered, individuals may face legal consequences for utilizing an invalid ID to access benefits or services reserved for Chinese citizens.
2. Asset Vulnerability: Assets such as property, bank accounts, and retirement funds in China could be at risk. If authorities determine that an individual is no longer a Chinese citizen but has been accessing these assets using a Chinese ID, they may freeze or confiscate these holdings.
3. Detection Advancements: With the advancement of technology and data integration, the likelihood of authorities detecting discrepancies in citizenship status has increased. This means that individuals who previously navigated the system without issue may now be more susceptible to discovery.

 

In conclusion, while retaining a Chinese National ID after acquiring foreign citizenship might offer short-term conveniences, the long-term risks associated with such actions, especially in light of China's non-recognition of dual citizenship, are significant. Individuals are advised to approach this matter with caution and seek professional guidance to navigate the complexities involved.

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