‘Underground banks’ and other illegal financial schemes are rampant in China. Now, policymakers may clamp down.
Qiao Xiaohui and Song Yanhua, Caijing 26 December 2008
For the second time this year, Beijing policymakers are reviewing a proposed criminal law amendment that emphasizes a crackdown on so-called “rat trading,” “underground banks,” and illegal private fund-raising rampant across China.
Under the proposal, financial professionals as well as government regulators who cross the line could face tough penalties.
The draft proposal sets the maximum penalty for “rat trading” – through which a stock trader manipulates the market by opening multiple positions to dupe other traders – at 10 years in prison and fines equal to as much as five times unlawful earnings.
Professionals at financial institutions including stock exchanges, brokerage firms, fund managers, banks and insurance companies would come under increased scrutiny.
The proposed amendment also would set strict penalties for private fund-raising activities as well as underground banks, which operate across the country.
Underground banks are usually linked to foreign currency exchange deals that bypass the State Administration for Foreign Exchange. These organizations often accept deposits and lend at high interest rates.
The amendments were drafted based on a field study in Hunan and Zhejiang provinces conducted by the Standing Committee of the National People’s Congress.
The study found that prosecutors in those provinces filed more than 60 cases involving more than 1 billion yuan tied to private, illegal transactions and financial fraud in the first six months of 2008.
In Hunan, southern China, underground banks unlawfully raise funds, guarantee financing and issue high-rate loans while disguising as ordinary businesses such as pawn shops and third-party loan guarantee firms.
In Zhejiang, underground banks function as “clubs” in which facilitators invite relatives and friends to join. Gradually, a fund’s size may grow until it can finance business operations. But some clubs later evolve into vehicles for financial fraud.
This is the second time that the rat trading amendment has been reviewed by the National People’s Congress Standing Committee. Four months ago, the committee rejected the same measure.
The latest version of the amendment was expanded to include illegal fund-raising and underground banks.
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Officials Eye Crackdown on Financial Fraud
‘Underground banks’ and other illegal financial schemes are rampant in China. Now, policymakers may clamp down.
Qiao Xiaohui and Song Yanhua, Caijing
26 December 2008
For the second time this year, Beijing policymakers are reviewing a proposed criminal law amendment that emphasizes a crackdown on so-called “rat trading,” “underground banks,” and illegal private fund-raising rampant across China.
Under the proposal, financial professionals as well as government regulators who cross the line could face tough penalties.
The draft proposal sets the maximum penalty for “rat trading” – through which a stock trader manipulates the market by opening multiple positions to dupe other traders – at 10 years in prison and fines equal to as much as five times unlawful earnings.
Professionals at financial institutions including stock exchanges, brokerage firms, fund managers, banks and insurance companies would come under increased scrutiny.
The proposed amendment also would set strict penalties for private fund-raising activities as well as underground banks, which operate across the country.
Underground banks are usually linked to foreign currency exchange deals that bypass the State Administration for Foreign Exchange. These organizations often accept deposits and lend at high interest rates.
The amendments were drafted based on a field study in Hunan and Zhejiang provinces conducted by the Standing Committee of the National People’s Congress.
The study found that prosecutors in those provinces filed more than 60 cases involving more than 1 billion yuan tied to private, illegal transactions and financial fraud in the first six months of 2008.
In Hunan, southern China, underground banks unlawfully raise funds, guarantee financing and issue high-rate loans while disguising as ordinary businesses such as pawn shops and third-party loan guarantee firms.
In Zhejiang, underground banks function as “clubs” in which facilitators invite relatives and friends to join. Gradually, a fund’s size may grow until it can finance business operations. But some clubs later evolve into vehicles for financial fraud.
This is the second time that the rat trading amendment has been reviewed by the National People’s Congress Standing Committee. Four months ago, the committee rejected the same measure.
The latest version of the amendment was expanded to include illegal fund-raising and underground banks.
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