Four Banks Fined for Breaking Rules on Offshore Loan Guarantees

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 Co. Ltd. on the Chinese mainland, the mainland subsidiaries of Hong Kong-based OCBC Wing Hang Bank Ltd. 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.

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. Thus, banks are required by the forex regulator to tighten their scrutiny of debtors’ information and projects.

The four bank branches were fined between 1 million yuan ($151,000) and 8 million yuan. A Zhuhai branch of Xiamen International Bank in Guangdong Province was ordered to suspend the sale of foreign currencies to corporations for three months, while a Beijing branch of OCBC Wing Hang Bank was told to halt all forex sales for three months.

The earliest incident of misconduct among the banks was in August 2014, while the most recent was in December 2016, according to SAFE. The regulator did not disclose the identities of the borrowers involved.

Several banks, companies and individuals have been punished for violations of forex rules in recent years. Since late last year, Chinese regulators have enforced multiple measures to control capital outflows to prevent capital flight, as well as to respond to the weakening yuan.

Contact reporter Lin Jinbing (jinbinglin@caixin.com)