China Said to Probe Alleged Bank of China Money Laundering

Jul 10, 2014 5:13 am ET

(Updates with comment from analyst in 13th paragraph.)

July 10 (Bloomberg) -- China’s central bank and currency regulator are investigating a state media report that alleged Bank of China Ltd. broke rules on transferring money overseas, two government officials familiar with the matter said.

The probe focuses on whether Bank of China violated regulations in its operations or aided money laundering, the people said, asking not to be named as they aren’t authorized to speak publicly on the matter. Starting an investigation doesn’t mean the Beijing-based bank has done anything wrong, they said.

Bank of China, the nation’s largest foreign-exchange lender, yesterday denied a report by China Central Television claiming that it circumvented the rules by helping customers transfer unlimited amounts of yuan overseas and convert it into other currencies through a product called “Youhuitong.” The bank said it introduced a cross-border yuan transfer service in 2011 with the knowledge of authorities.

Chinese foreign-exchange rules cap the maximum amount of yuan that individuals are allowed to convert into other currencies at $50,000 each year and ban them from transferring yuan abroad directly. Policy makers have taken steps in recent years including allowing freer movements of capital in and out of China as they seek to boost the global stature of the yuan.

Not Compatible

“China’s foreign-exchange restriction is no longer compatible with the growing economy and the drive to make the yuan a global currency,” Chen Xingyu, a Shanghai-based analyst at Phillip Securities Research, said by phone today. “Loopholes and irregularities may occur during the deregulation process, but that doesn’t mean the direction is wrong.”

A press officer for Bank of China didn’t immediately respond to a request today for comment on the probe. The State Administration of Foreign Exchange didn’t immediately reply to a fax seeking comment.

People’s Bank of China Governor Zhou Xiaochuan said it’s too early to comment on the state television report. “First of all, we need to know what’s really going on,” he said at a briefing in Beijing during the U.S.-China Strategic and Economic Dialogue today.

Shares of Bank of China in Hong Kong fell 0.9 percent to close at HK$3.46, while the benchmark Hang Seng Index added 0.3 percent. The stock slid 2.8 percent yesterday, the most on the Hang Seng Finance Index, following the CCTV report.

‘Underground Bank’

Media reports referring to “an ‘underground bank’ and ‘money laundering’ are inconsistent with the facts,” Bank of China said in a statement on its website yesterday. The cross- border yuan transfer service only allows money to be moved for emigration and overseas property investment, it said.

Youhuitong targets customers who wish to invest in or migrate to North America, Australia and some European countries, CCTV reported, referring to documents shown by unidentified Bank of China employees.

Bank of China’s service complies with regulatory principles and was started after notifying relevant authorities, the lender said in yesterday’s statement. Many commercial banks in the southern province of Guangdong offered similar services under a trial program, it said.

The currency regulator’s Guangdong branch in 2012 picked Bank of China, China Citic Bank Corp. and a foreign lender to let individuals transfer yuan abroad as part of efforts to promote global use of the currency, Time Weekly reported in April 2013. Banks were told not to promote the trial, which took place at a few branches in Guangdong, the report showed.

Potential Misunderstanding

“The secrecy might have led to the potential misunderstanding,” Ming Tan, a Hong Kong-based analyst for Jefferies LLC, wrote in a note today. “We do not believe BOC, as a big state-owned bank, will conduct a business illicitly for such a small earnings benefit, notwithstanding potential misconduct by some staff.”

Tan estimated that the earnings contribution from Youhuitong is likely to be less than 1 percent.

“The relevant branches of the bank have put in place robust business operation procedures in compliance with the relevant regulatory and anti-money laundering requirements,” Bank of China said yesterday. With more Chinese companies and people going global, use of the yuan across borders is an “irreversible trend,” it said.

Founded in 1912, Bank of China held a monopoly on the nation’s foreign-exchange dealings and overseas banking from 1949 to 1994. That legacy left it with the biggest overseas business, which accounted for about 26 percent of its assets at the end of last year, data compiled by Bloomberg show. Bank of China is the clearing bank for the yuan in Hong Kong, Macau, Taipei, Malaysia, Luxembourg and Frankfurt.

--With assistance from Aipeng Soo and Xin Zhou in Beijing.