China To Curb Illegal Underground Foreign Currency Trading With Increased Penalties

Illegal Forex Trading
United States one dollar bills on a light table at the Bureau of Engraving and Printing in Washington (Photo: Reuters)

In an attempt to prevent further capital flight and to maintain the stability of the Chinese Yuan, China's government has now upgraded the punishments for illegal foreign exchange trades. The country is particularly interested in cracking down on exchanges made through the black market and in underground banks.

According to the new legislation under the Supreme People's Court and the Supreme People's Procuratorate, illegal foreign exchange trading the country will now be considered a criminal offense. The new sanctions will go into effect starting February. This will apply to all illegal trades and to businesses participating in the illegal exchange of currencies.

Transactions that are over 5 million Yuan, or around US$730,000, will be considered severe offenses and will be subject to imprisonment of up to five years plus a fine of five times the profits made during the transaction. The same punishment will also be applied to transactions that have made illegal profits of 100,000 Yuan, or around US$15,000.

Extremely severe offenses include transactions that exceed 25 million Yuan, or around US$3.7 million. This also includes transactions that generate illegal profits above 500,000 Yuan, or around US$74,000. Those caught may be facing jail time of more than five years plus a fine of five times the profits. Properties and other assets may also be confiscated during these cases. Perpetrators who have had prior violations and those with previous administrative cases may receive more severe punishments.

Prior to the announcement, the State Administration of Foreign Exchange already had 15 separate cases of illegal foreign exchanges in December alone. Four of those that were caught made exchanges through underground banks. Individuals involved have been fined accordingly and are now closely monitored by authorities and the People's Bank of China.

The increased penalties were announced right before the start of the Lunar New Year holiday, where the demand for foreign currencies is at its peak. During the holidays, millions of Chinese tourist travel overseas. Under the law, each individual is only allowed to buy around US$50,000 worth of foreign currency each year.

The government also does not allow "irrational" foreign investments, which includes the purchase of large properties and luxury assets overseas. Large investments by businesses and individuals are generally permitted, but they do have to go through a stringent screening process before being allowed to proceed. This is to prevent illegal capital flow and the transfer of illegal funds, which may affect the stability of the country's currency.  

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