HONG KONG: The city is conducting a multi-pronged customs, shipping and financial sector crackdown against so-called fake trade invoicing that allows billions of dollars of capital to leave China illegally.
Hong Kong’s central bank told Reuters it has beefed-up its scrutiny of banks’ trade financing operations, while customs officials are doing more random checks on shipments crossing border posts and conducting raids on warehouses to ensure the authenticity of goods, said senior officials working in shipping, logistics and banking. The head of a logistics company said surprise customs inspections at Hong Kong border posts had doubled.
The sources declined to be identified, given the sensitivity of the issues.
They said the increased efforts began this year and reflected concerns about billions of dollars in illicit cash, which authorities suspect are being channelled through Hong Kong following a stock-market crash in China last year.
“Examinations and investigations reflect one of the strongest trends we are seeing now in the financial sector,” said Ms Urszula McCormack, a partner at law firm King & Wood Mallesons, which helped co-author a report published by The Hong Kong Association of Banks in February that highlighted shipping as a sector where fake invoicing can thrive.
“(Hong Kong) regulators are now in enforcement mode,” she said.
China has become increasingly concerned about capital outflows since the middle of last year, when Chinese rushed to get money offshore for safekeeping or to invest following the stock-market slump and unexpected yuan devaluation. Hong Kong is the most popular route, said analysts, because of its proximity to China.
Chinese authorities have tried to stem the outflows by tightening cross-border investment quotas, stepping up enforcement action of existing rules and restricting residents from buying financial products, such as insurance policies, offered in Hong Kong. But the trade channel had largely been left untouched, given the complexity and magnitude of transactions involved.
A record net US$674 billion (S$916 billion) left China last year, estimates the International Institute of Finance. An extra US$175 billion left China in the first quarter. China had been a long-term net importer of dollars.
While capital flows reflect legitimate business, analysts said the gap between trade figures reported by China and by Hong Kong for the same goods shows how imports and exports are being used to spirit cash offshore.
In December, for example, the gap between Chinese imports from Hong Kong and Hong Kong’s exports to China — a rough indicator of capital flowing through trade — surged to a record US$1.9 billion, which many economists attributed to falsifying trade invoices.
The December figures show that one dollar in every 10 of exports from Hong Kong to China may have been falsified to skirt China’s capital controls, according to Thomson Reuters’ calculations.
By March, the gap was still a relatively large US$1.4 billion.
The Hong Kong Customs and Excise Department said it was looking into the disparity between the trade figures in coordination with local and Chinese authorities. It said it would “continue to maintain vigilance over the latest trends of money laundering”.
The most popular way to fake invoices involves overstating the value of imports into China or under-stating the value of exports. A Chinese company could export goods to its Hong Kong subsidiary worth US$100 each, but invoice the export at US$80 each. The Hong Kong subsidiary sells them for US$100 each and parks the profit in an offshore bank account.
The goods involved often lack an obvious value, such as jewellery and electronic components, making it difficult for customs officials or banks to spot a fake transaction.
