The State Administration of Foreign Exchange (SAFE) recently promulgated the Notice of the State Administration of Foreign Exchange on Issues regarding Improving Foreign Exchange Administration for Trade Financing by Banks (Huifa No.44 [2013], hereinafter referred to as “the Notice”). The Notice was issued to facilitate business operations of law-abiding and compliant enterprises, to bring into better play the role of financial services in serving the real economy, to check against false trade financing activities without authentic transactional backgrounds, and to prevent cross-border flows of abnormal foreign exchange funds.

The Notice includes the following three points. The first is to urge banks to improve verifications of the authenticity and compliance of trade financing. Banks should follow the principle of “understanding your client,” strengthen verifications of the authenticity and compliance of trade financing, especially long-term trade financing, actively support the authentic trade financing demands of the real economy, and prevent the defrauding of bank loans with false transactional backgrounds. Banks should enhance internal control and supervision, timely report suspicious transactions, and prevent non-compliance in implementation of the relevant rules or provision of assistance to evade the foreign exchange administration regulations. The SAFE should intensify verifications of the authenticity and compliance of bank trade financing, evaluate the due diligence of bank transactions, and implement on-site verifications or inspections when needed. The second is to strengthen the classified management of enterprises and to create an impartial and orderly market environment. Foreign exchange receipts and payments for trading activities by enterprises should provide authentic and legitimate transactional backgrounds. The SAFE should intensify the monitoring and verification of enterprises with abnormal trade balances, especially enterprises with abnormal growth of long-term trade financing and typical arbitrage characteristics, undertake classified administration of the relevant enterprises by complying with the relevant rules of foreign exchange administration for trade in goods, provide the strongest support to law-abiding and compliant enterprises, and pay special attention to enterprises that are categorized as Class-B or Class-C. The third is to impose tougher penalties on the non-compliant activities of banks and enterprises. Banks that fail to fully perform their verification duties shall be punished by the SAFE in compliance with the risk reminders and relevant regulations. With respect to enterprises that operate in violation of the regulations, the SAFE shall impose penalties on the enterprises concerned in accordance with the relevant regulations. The penalties shall be based on the various circumstances of the violations, i.e., illegal inflows of foreign exchange, illegal settlements of foreign exchange, illegal purchases of foreign exchange, or evasion of foreign exchange. If the relevant acts by the banks or enterprises constitute criminal offenses, the criminal responsibilities shall be investigated in accordance with the law.

This Notice shall take effect as of the date of promulgation.