Answer: In recent years, facing the complicated and volatile economic and financial situations both at home and abroad, the State Administration of Foreign Exchange (SAFE), in accordance with the decisions and arrangements of the CPC Central Committee and the State Council, deeply implemented the scientific outlook on development, adhered to the principle of “expanding domestic demand, making structural adjustments, reducing the surplus, and promoting the balance of payments,” strengthened the monitoring and management of cross-border capital flows, increased efforts to carry out foreign exchange inspections on the basis of developments in the change of situation, improved foreign exchange inspection methods, rigorously cracked down on illegal and irregular flows of foreign exchange funds, and effectively guarded against the impact of cross-border capital flows. From 2007 to 2011, the foreign exchange authorities investigated a total of over 15,000 cases of activities in violation of the foreign exchange laws and regulations, and imposed a total of RMB 1.27 billion in administrative fines.

In 2007, the SAFE carried out a “Comprehensive Inspection of the Inflow and Settlement of Foreign Exchange Funds” in ten coastal areas, such as Guangdong, whose total amount of foreign exchange receipts and payments accounted for more than 50% of China’s total, basically determining the channels for the inflow of illegal and irregular foreign exchange funds, such as those in the guise of foreign direct investment and trade in goods.

In 2008, China ’s surplus of foreign exchange settlement and sales continued to expand, and the situation worsened in terms of the surplus of foreign exchange settlement and sales in trade in goods exceeding the surplus of customs imports and export trade. The SAFE carried out special inspections and investigations in five regions, such as Jiangsu, of the situation of importing without foreign exchange payments and making foreign exchange payments without foreign exchange purchases, and determined the reason for such a situation in terms of the trade in goods and its impact on the sharp increase in the surplus of foreign exchange settlement and sales.

In 2009, the SAFE carried out special inspections of foreign-invested enterprises in ten regions, such as Liaoning, and discovered violations of the regulations on foreign exchange administration, e.g., some foreign-invested enterprises handled the procedures for profit remittances by making use of false vouchers, and for the foreign exchange settlement of capital by making use of false materials, and willfully changed the use of funds after conversion.

In 2010, the SAFE organized and carried out special actions for dealing with and cracking down on hot money in 13 provinces (cities) with a large volume of foreign exchange business, carried out a comprehensive inspection of the foreign exchange inflows by such key channels as trade in goods and foreign direct investments, and rigorously cracked down on irregular cross-border capital flows.

In 2011, the SAFE promoted throughout the country special actions for dealing with and cracking down on hot money. During the year, the foreign exchange authorities investigated and handled a total of 3,488 cases involving activities in violation of the regulations on foreign exchange administration, collected RMB 503 million in penalties and confiscations, and made outstanding achievements in dealing with and cracking down on the inflows of hot money.

Question 2: What achievements have the foreign exchange authorities made in recent years in terms of cracking down on major activities in violation of the foreign exchange laws and regulations, such as illegal banks?

Answer: The SAFE pays much attention to investigation of major cases in violation of the foreign exchange laws and regulations involving large amounts, wide regions, and many participants. The major cases involved a huge volume of funds, caused great damage to domestic macro-controls and market stability, and had an adverse social impact. From 2007 to 2011, the SAFE overcame difficulties and gathered its forces together to deal a crushing blow to the illegal activities. During that period, the foreign exchange authorities investigated a total of 23 major cases, involving RMB 31.937 billion; cooperated with the public security bodies to ferret out 65 cases involving illegal banks, 26 cases involving online foreign exchange speculation, and 119 cases involving illegal sales and purchases of foreign exchange, with a total amount of over RMB 100 billion; apprehended more than 1,000 suspects, and imposed a total of RMB 160 million in administrative fines; and rigorously cracked down on the arrogance of the offenders and criminals violating the laws on foreign exchange administration and effectively safeguarded the economic and financial order of China.

While rigorously cracking down on the major activities in violation of the laws and regulations, such as the illegal banks, the SAFE implemented measures based on a combination of dredging and blocking principles, improved regulatory measures, further improved the convenience of services, satisfied the reasonable demands of the society for cross-border payments, and put pressure on the space for illegal foreign exchange trade.

Question 3: What are the key targets of inspection in the foreign exchange authorities’ crack down on the illegal and irregular cross-border flows of foreign exchange funds?

Answer: The SAFE firmly focused on the key link of cross-border capital flows, i.e., the financial institutions, such as the banks, in its inspections, and deeply carried out special inspections of financial institutions.

In 2007, the foreign exchange authorities carried out special inspections of the foreign exchange collection and settlement and the short-term external debt in 208 banks and branches in four regions, such Beijing . In 2008, the foreign exchange authorities carried out special inspections on implementation of the management policy for the foreign exchange settlement of capital by the designated foreign exchange banks in ten regions, including Guangdong and Fujian . In 2009, the foreign exchange authorities carried out comprehensive inspections of foreign exchange business compliance of the head offices and nine branches of two joint-stock banks.

In 2010, in consideration of such problems as the rapidly expanding scale of the inflows of foreign exchange funds through the banks, the foreign exchange authorities intensified their efforts to inspect the banks’ foreign exchange business. In 2011, the foreign exchange authorities further increased the frequency of inspections. While carrying out special inspections of the head offices of Chinese- and foreign-funded banks, the foreign exchange authorities carried out sample inspections in return visits to 26 banks that had been inspected in 2010 and effectively consolidated the achievements of these inspections.

Question 4: In recent years, the foreign exchange authorities’ achievements in the investigation of cases involving illegal and irregular capital such as hot money have significantly improved.  What is the main reason for this?

Answer: As the scale of foreign exchange receipts and payments continuously expands, the foreign exchange trade methods become more complicated, and the illegal and irregular flows of foreign exchange funds, such as hot money, become more complicated and secretive, consequently, the traditional foreign exchange inspection methods that rely on manpower and manual work can no longer meet the work requirements of the situation. In order to improve the inspection efficiency and precisely crack down on illegal and irregular funds such as the hot money, the SAFE energetically elevated and improved the off-site inspection methods. In 2010, the SAFE developed the Off-site Foreign Exchange Inspection System. The system has wide coverage and a strong search ability for information, can rapidly and accurately lock the subjects in violation of the laws and regulations and their violation activities, strengthened the ability of the foreign exchange authorities to deeply search for clues about illegal and irregular capital flows, changed the past working mode that was based upon extensive screening, and played an important role in improving the accuracy, initiative, and effectiveness of cracking down on illegal and irregular flows of foreign exchange funds, such as the hot money.

Question 5: The special actions dealing with and cracking down on hot money contribute to deterring flows in violation of the foreign exchange laws and regulations. In addition, what measures do the foreign exchange authorities have to enhance the law-abiding awareness of market players?

Answer: Based upon regulatory practices in recent years, most of the market players carried out lawful foreign exchange operations, most of the demand to use foreign exchange and transactions had authentic bases, and part of the activities in violation of the regulations on foreign exchange administration were due to a lack of knowledge of the policy adjustments and regulatory changes in foreign exchange administration. Therefore, in recent years, while rigorously cracking down on activities in violation of the foreign exchange laws and regulations, the SAFE placed high priority on foreign exchange policy propaganda and alertness education and actively took a variety of measures to promote lawful operations by foreign exchange business operators.

First, increasing efforts on positive propaganda, and reducing unintentional irregular activities. One the one hand, the foreign exchange authorities spread the foreign exchange administration policies through a variety of media, such as television, newspapers, and networks; on the other hand, the foreign exchange authorities introduced foreign exchange administration knowledge and business handling procedures through such means as on-site consultations and the distribution of brochures so as to actively help foreign-related enterprises and the public better  acknowledge and understand foreign exchange administration policies and regulations and the specific handling procedures, and to reduce unintentional irregular activities by foreign exchange transaction participants. Second, increasing efforts for the disclosure of information on illegal and irregular activities to deter activities in violation of the laws and regulations. From 2007 to 2011, the SAFE provided the public with services for searching and disclosing information on illegal and irregular activities in a total of 9,775 enterprises. In 2010 and 2011, the SAFE publicly exposed some major irregular activities, and disclosed, in 6 batches, typical cases of activities in violation of the foreign exchange laws and regulations involving 17 bank violators, 26 enterprise violators, and 13 individual violators.

Question 6: What arrangements do the foreign exchange authorities have this year to crack down on illegal and irregular cross-border capital flows?

Answer: In 2012, the SAFE will thoroughly implement the spirit of the Central Economic Working Conference and the National

Financial Working Conference, grasp well the general keynote of the work for “Steady Development,” continuously enhance the sensitivity and prospects of inspection work, and increase efforts to monitor and crack down on unusual cross-border capital flows, such as hot money; give full play to the advantages of the Off-site Foreign Exchange Inspection System, and carry out special inspections and investigations; strengthen resource integration and interdepartmental cooperation, and continue to increase efforts to crack down on illegal and criminal activities with respect to foreign exchange, such as illegal banks; actively improve the inspection methods, perfect the inspection means, and improve the relevant and effectiveness of foreign exchange inspection work; seriously punish activities in violation of the foreign exchange laws and regulations in accordance with the law, create a stable, harmonious, and sound market environment for foreign exchange reform and development, and effectively safeguard the economic and financial security of China.