In order to prevent and crack down on hot money and other kinds of cross-border fund inflows in violation of the regulations, to maintain the healthy and steady operation of the foreign exchange market, and to ensure the economic and financial security of the state, since the latter half of February 2010, the State Administration of Foreign Exchange (SAFE) has launched special campaigns to struggle against hot money and other kinds of fund inflows in violation of the regulations in some provinces (regions and cities) with massive inflows of foreign exchange funds. To date, 197 cases of foreign exchange transactions in violation of the regulations have been disclosed, involving a total amount of USD7.34 billion. At the beginning of October 2010, the SAFE launched a new round of special inspections to combat foreign exchange fund inflows in violation of the laws and regulations. In total, 3 head offices of commercial banks, 33 branches of Chinese-funded banks, and 9 branches of foreign-funded banks have been inspected, covering areas such as foreign exchange settlement and sales, short-term external debt, offshore financing, sources and utilization of foreign exchange funds, and so on.

The inspections show that with constant efforts to improve financial services, the majority of the banks have enhanced their awareness of business compliance, and as a result overall compliance has improved. However, it was also found that some banks had operated in violation of the relevant regulations. The major forms of violations include: the amount of the short-term debt exceeding the quota, illegal foreign exchange settlement of capital and settlement and sale of foreign exchange by individuals, fund collections and payments under the current account and the capital account in violation of the regulations on the administration of foreign exchange accounts, failure to conduct authenticity examinations when offering foreign exchange transaction services for clients, and so forth.

By complying with the relevant laws, the SAFE has dealt with the said cases in a centralized manner and has imposed severe punishments. Since October 2010, the SAFE has imposed penalties on banks conducting business in violation of the regulations in 20 regions, including Guangdong, Jiangsu, Beijing, Shanghai, and so forth. The entities involved include 79 branches of 16 incorporated banks, such as the Industrial and Commercial Bank of China (ICBC), the Agricultural Bank of China (ABC), the Bank of China (BOC), China Construction Bank (CCB), China CITIC Bank, Shanghai Pudong Development Bank (SPDB), Xiamen International Bank, and Yamaguchi Bank. Penalties have been imposed in the form of fines, suspensions of certain kinds of foreign exchange businesses, punishment of senior management,  and so forth.

In order to warn and educate the banks and their branches, to further enhance the banks awareness of business compliance, and to create social synergy to struggle against the hot money,the SAFE circulated information about the cases of non-compliance in various batches. The first batch of typical cases, involving banks that illegally conducted foreign exchange business and were penalized, was announced on October 28, 2010.  Now information about the second batch of cases is being circulated as follows according to the progress of the relevant inspections:

In January 2009, the sub-branch of the ICBC in Yanbu county of Foshan city failed to scrutinize the vouchers for foreign exchange settlement and handled a foreign exchange settlement deal involving capital totaling USD26.32 million for a real estate company in Foshan, which violated the regulations on the administration of foreign exchange settlement of capital. According to the Regulations of the Peoples Republic of China on Foreign Exchange Administration (hereinafter referred to as the Regulations), the SAFE imposed fines on the said sub-branch and suspended its capital settlement business for 3 months. Meanwhile, fines were imposed on two senior managers in the said sub-branch.

During the period from January to December 2009, the sub-branch of the ICBC in Hanjiang county of Yangzhou city failed to scrutinize the vouchers for the settlement of foreign exchange and concluded 22 deals of foreign exchange settlement of capital for three foreign-invested enterprises, including a textile company in Yangzhou, involving a total amount of USD19.174 million. Such behavior was deemed to be in breach of the relevant regulations on the administration of foreign exchange settlement of capital.  Therefore, the SAFE imposed fines on the said sub-branch and suspended its capital settlement business for 3 months pursuant to the regulations.

In November 2009, the Liuli sub-branch of the CCB in Shanghai failed to scrutinize the vouchers for the settlement of foreign exchange and completed one deal of foreign exchange settlement of capital totaling HKD63.1166 million for a shopping company. Furthermore, the inspection revealed that no vouchers were issued for HKD26.7212 million of the total amount. This violated the regulations on the administration of foreign exchange settlement of capital. In light of this, the SAFE imposed fines on the sub-branch and suspended its capital settlement business for 3 months pursuant to the regulations.

In September 2009, the Sanyuan sub-branch of the CCB Beijing branch failed to examine vouchers in the amount of USD1.73 million for foreign exchange settlement when handling foreign exchange settlement business for individuals in excess of the annual total limit. Such behavior was deemed to be in violation of the relevant regulations on the administration of foreign exchange settlement of capital.  The SAFE thereby imposed fines on the said sub-branch and suspended its foreign exchange settlement and sale business for 6 months pursuant to the regulations.

In April 2009, the Baoan sub-branch of the CCB Shenzhen branch settled USD2.3 million-worth of short-term loans in foreign exchange for an instrument company in Shenzhen. Such behavior was deemed to be in violation of the relevant regulations on the administration of foreign exchange settlement under the capital account. The SAFE thereby imposed fines on the sub-branch and suspended its foreign exchange settlement business for capital projects for 3 months according to the regulations.

During the period from March 2008 to May 2010, the Fuzhou branch of the Xiamen International Bank handled 33 foreign exchange settlement deals without using the information system for the administration of foreign exchange settlement and sale for individuals, involving a total amount of HKD 17.2842 million. This violated the relevant regulations on the administration of individual foreign exchange. The SAFE thereby imposed fines on the said branch and suspended its foreign exchange settlement business for individuals for 6 months according to the regulations.

During the period from February to October 2009, the Zhongxing sub-branch of the SPDB in Ningbo city handled 56 foreign exchange settlement deals for a person surnamed Dong and 55 other domestic individuals by splitting large sums of foreign exchange into smaller parts, involving a total amount of USD2.7659 million. In accordance with the regulations, the SAFE imposed fines on the said sub-branch.

In May, July, and August 2010, the business department of the Dalian branch of the China CITIC Bank had USD1.3779 million-worth of capital settled through 3 petty cash deals for a real estate company in Dalian. The department failed to scrutinize the vouchers for the foreign exchange settlement, resulting in a violation of the relevant regulations on the administration of capital settlement business. The SAFE thereby imposed fines on the department and suspended its capital settlement business for 3 months pursuant to the regulations.

In December 2009, the Jiangnan Sub-Branch of the ICBC in Yulin city completed 14 foreign exchange settlement deals in cash for individuals by splitting large sums of money into smaller parts, involving a total amount of USD67, 000. In May 2010, the business department of the ICBC Yulin branch concluded 5 deals of spot exchange settlement for individuals by splitting large sums of money into smaller parts, totaling HKD 2.3 million. Such behavior was deemed to be in violation of the relevant regulations on the administration of individual foreign exchange, and the SAFE thereby imposed fines on the said sub-branch and branch and suspended their foreign exchange settlement and sale business for 3 months pursuant to the regulations.

The designated foreign exchange banks, as the major channels for conducting foreign exchange business, should firmly embrace the philosophy of scientific development and fulfill their social responsibilities in an earnest manner and in strict compliance with the regulations on foreign exchange administration. The banks referred to in this circular should attach great importance to their violations, examine their business operations, and rectify any acts of non-compliance. Other banking institutions should draw lessons from the above-mentioned cases so as to strengthen their internal management and to operate their businesses according to the laws and regulations. The foreign exchange authorities will continue to improve financial services to facilitate the operation of market entities; meanwhile, they will intensify supervision of the foreign exchange business of banks, enhance the approaches for foreign exchange inspections, and crack down severely on hot money and other kinds of cross-border fund flows that do not comply with the law, thus promoting the healthy development of the foreign-related economy and finance.