In a rare move, China’s foreign exchange regulator named Friday four banks that have violated rules on providing guarantees for loans issued by offshore banks, amid broader efforts to crack down on illegal capital outflows. The State Administration of Foreign Exchange (SAFE) targeted branches of China Minsheng Bank and Xiamen International Bank on the Chinese mainland, the mainland subsidiaries of Hong Kong-based OCBC Wing Hang Bank and South Korea’s Industrial Bank of Korea. The banks were criticized for failing to conduct due diligence regarding transaction details, the use of funds and debtors’ qualifications and repayment abilities, Caixin reports.
An onshore company is permitted by Chinese law to pledge domestic collateral in exchange for a local bank’s guarantee letter for a loan issued by an overseas bank to the onshore company’s offshore subsidiaries. While this system helps Chinese companies engaged in trade or investment abroad get financing more easily and cheaply, it also creates opportunities for money laundering or the illegal transfer of assets.