Black marketeers are seriously damaging China's foreign exchange market and encouraging smuggling and tax frauds according to officials who have recently mounted a crackdown on fraudulent currency exchanges.

Officials representing the State Administration of Foreign Exchange (SAFE) will be keeping a close eye on locations where they believe illegal forex deals are concluded and they will be monitoring offices where legitimate transactions take place.

Letters of credit (L/Cs) have been singled out as instruments SAFE believes have been routinely used to perpetrate forex frauds over several years. The L/Cs are used to fraudulently acquire foreign exchange.

Rigorous checks called for

According to a report published by SAFE, foreign currency management bureaus should rigorously check acquisitions of forex using documentary credits. A SAFE official has said that people found to be in breach of regulations should be seriously punished.

SAFE has also asked the relevant authorities to cancel any trading licenses they grant to import-export companies if that firm is found to be fraudulently acquiring foreign exchange.

Banks could be stripped of forex rights

Banks must be vigilant. The right to engage in foreign currency transactions will be stripped from a bank is proven to have caused a large currency outflow - even if it has done so unwittingly, or through carelessness, or if it is just one of several parties to a fraudulent transaction.

Company accounts will be scrutinised. SAFE officials say they will check the legality of investments, foreign debts and interest payments. Where accounts show large volumes of currency flow, a company's receipts will be checked.

No immunity for foreign firms

Foreign firms will also be targeted in the crackdown. Officials have suggested that checks will be run on companies that have repeatedly used receipts to acquire foreign currency to pay for imported equipment. SAFE will also seek to verify whether the capital invested in a foreign enterprise came from overseas and whether the enterprise is complying with legislation on repatriation of profits.

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