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A UnionPay signage is pictured at its platinum VIP lounge at a mall in Singapore (EDGAR SU,REUTERS / March 12, 2014)
James PomfretReuters7:31 p.m. CDT, March 11, 2014
MACAU (Reuters) - Growing numbers of Chinese are usingthe country's state-backed bankcards to illegally spiritbillions of dollars abroad, a Reuters examination hasfound.
This underground money is flowing across the border intothe gambling hub of Macau, a former Portuguese colonythat like Hong Kong is an autonomous region of China.And the conduit for the cash is the Chinese government-supported payment card network, China UnionPay.
In a warren of gritty streets around Macau's ritzy casinoresorts, hundreds of neon-lit jewellery, watch and pawnshops are doing a brisk business giving mainland Chinesecustomers cash by allowing them to use UnionPay cards tomake fake purchases - a way of evading China's strictcurrency-export controls.
On a recent day at the Choi Seng Jewellery and Watchescompany, a middle-aged woman strode to the counter pastdusty shelves of watches. She handed the clerk her UnionPay card and received HK$300,000($50,000) in cash. She signed a credit card receipt describing the transaction as a "generalsale", stuffed the cash into her handbag and strolled over to the Ponte 16 casino next door.
The withdrawal far exceeded the daily limit of 20,000 yuan, or $3,200, in cash that individualChinese can legally move out of the mainland. "Don't worry," said a store clerk when askedabout the legality of the transaction. "Everyone does this."
Internal discussion documents prepared by UnionPay and by financial authorities in Macauand China show these fake sale cash-backs are widespread in such retail stores. The practiceviolates China's anti-money-laundering regulations as well as restrictions on currency exports,according to Chinese central bank documents reviewed by Reuters. Chinese authorities alsofear the UnionPay conduit is being used by corrupt officials and business people to sendmoney out of the country.
It's unclear why the central bank, the Peoples Bank of China (PBOC), hasn't cracked downharder on the practice, although the documents Reuters reviewed show the bank was aware ithad become a growing problem.
Workers clean windows next tothe logo of China Unionpay at thecompany's headquarters inShanghai
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Industry experts point to a weak enforcement culture in China, a reluctance to hurt Macaufinancially with 80 percent of the city's revenues drawn from gambling, and a willingness totolerate some capital flight - especially if it can be tracked through names on bank cards.Moreover, the rapid growth of UnionPay, including the spread of its terminals at retail storesacross the world, is playing a key role in China's strategy for making the yuan a globalcurrency.
No one knows for sure how much Chinese money is being channeled illegally into Macau. TamChi Keong, an assistant professor at the Macau University of Science and Technology, puts thetotal at HK$1.57 trillion ($202 billion) a year through various channels.. Tam says hisestimate is based on his analysis of Macau's finances and interviews with gambling industryparticipants.
A senior UnionPay executive said the Shanghai-based company has long been aware of thepayment card abuse in Macau and elsewhere, but was limited in its ability to act. That'sbecause the primary responsibility lies with authorities in Macau or any other country wherethe fraud is taking place, he said.
"The problem you are talking about has existed for several years," said the executive, whospoke on condition of anonymity. "We have continuously taken measures."
THE GOVERNMENT'S SON
Though relatively unknown in the West, UnionPay has quietly grown to become one of thebiggest card brands and payment networks in the world, accepted in 142 countries. There aremore UnionPay cards in circulation now than any other brand - 3.53 billion, or nearly aquarter of the world's total, according to the industry newsletter, the Nilson Report. Visaremains the world leader by transaction value with $4.6 trillion in card transactions in thefirst half of 2013; UnionPay was second with $2.5 trillion.
If UnionPay poses a problem for Chinese authorities, it is a problem of their own making. Thecard brand is often seen as an arm of Chinese state policy.
UnionPay was established in 2002 by the PBOC and the State Council or Cabinet. Its foundingshareholders were 85 Chinese banks, led by the five biggest state-owned banks. Former seniorPBOC officials still fill the company's top ranks, including UnionPay's current chairman, SuNing, and its former president, Xu Luode. They declined requests to be interviewed.
UnionPay dominates the card market in China thanks to a central bank decree that requiresall card issuers, including foreign ones, to process their yuan-based transactions throughUnionPay's electronic payment network. All Chinese merchants and automated tellermachines are required to process their yuan transactions through UnionPay. The World TradeOrganization in July 2012 ruled that China was discriminating against foreign card brands,but it made no specific recommendations. Foreign card brands still have to use UnionPay forsettlements in China.
UnionPay's increasing use overseas is part of Beijing's multi-pronged strategy to eventuallyopen up China's capital account and internationalize the yuan, which is formally known as therenminbi or yuan. Beijing also eased restrictions on many kinds of capital transfers as itgradually loosens up control over the currency, making it easier for money to leave China'sborders. The efforts have paid dividends. The renminbi has already overtaken the euro tobecome the second-most used currency in trade finance, according to data from globaltransaction services organization SWIFT.
"(China) may be happy to see UnionPay sweeping different markets across the world indifferent countries and territories," said Yan Lixin, head of Fudan University's China Centre
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for Anti-Money Laundering Studies in Shanghai. "It is backed up by the government. It is thereal son of the government."
At the same time, these changes have vastly complicated the compliance challenges forUnionPay. While the card system is helping monetary authorities open up the capital account,it is also enabling people to funnel their ill-gotten gains out of China, said Yan. "It's not theonly tool" for money laundering, Yan says, "but it's a major tool."
Copyright © 2014, Reuters
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