GLOBAL BRAND: China UnionPay has become one of the largest bank card brands in the world with more cards in circulation than any other.
REUTERS/STRINGER
CHINA China’s card-carrying money smugglers
Chinese are evading currency restrictions when travelling abroad by conducting phony sales on their UnionPay bank cards to get mounds of cash.
BY JAMES POMFRET
SPECIAL REPORT 1 CHINA CARD-CARRYING MONEY SMUGGLERS
MACAU, MARCH 12, 2014 city’s revenues drawn from gambling, and a willingness to tolerate some capital flight rowing numbers of Chinese are - especially if it can be tracked through using the country’s state-backed names on bank cards. Moreover, the rapid Gbankcards to illegally spirit billions growth of UnionPay, including the spread of dollars abroad, a Reuters examination of its terminals at retail stores across the has found. world, is playing a key role in China’s strat- This underground money is flowing egy for making the yuan a global currency. across the border into the gambling hub No one knows for sure how much of Macau, a former Portuguese colony that Chinese money is being channelled ille- like Hong Kong is an autonomous region gally into Macau. Tam Chi Keong, an as- of China. And the conduit for the cash is sistant professor at the Macau University the Chinese government-supported pay- of Science and Technology, puts the total ment card network, China UnionPay. at HK$1.57 trillion ($202 billion) a year In a warren of gritty streets around through various channels.. Tam says his es- Macau’s ritzy casino resorts, hundreds of timate is based on his analysis of Macau’s neon-lit jewellery, watch and pawn shops finances and interviews with gambling in- are doing a brisk business giving main- dustry participants. land Chinese customers cash by allowing NUMBER ONE: Macau is now the world’s largest A senior UnionPay executive said the them to use UnionPay cards to make fake gambling hub with annual gaming revenues Shanghai-based company has long been purchases - a way of evading China’s strict seven times that of Las Vegas. aware of the payment card abuse in Macau currency-export controls. REUTERS/BOBBY YIP and elsewhere, but was limited in its ability On a recent day at the Choi Seng to act. That’s because the primary respon- Jewellery and Watches company, a mid- sibility lies with authorities in Macau or dle-aged woman strode to the counter any other country where the fraud is taking past dusty shelves of watches. She handed place, he said. the clerk her UnionPay card and received “The problem you are talking about has HK$300,000 ($50,000) in cash. She signed 3.53 existed for several years,” said the executive, a credit card receipt describing the transac- who spoke on condition of anonymity. “We tion as a “general sale”, stuffed the cash into billion have continuously taken measures.” her handbag and strolled over to the Ponte THE GOVERNMENT’S SON 16 casino next door. The number of UnionPay bank The withdrawal far exceeded the daily cards in circulation, the most in Though relatively unknown in the West, limit of 20,000 yuan, or $3,200, in cash that the world UnionPay has quietly grown to become individual Chinese can legally move out of one of the biggest card brands and pay- the mainland. “Don’t worry,” said a store Source: The Nilson Report ment networks in the world, accepted in clerk when asked about the legality of the 142 countries. There are more UnionPay transaction. “Everyone does this.” by corrupt officials and business people to cards in circulation now than any other Internal discussion documents prepared send money out of the country. brand - 3.53 billion, or nearly a quarter of by UnionPay and by financial authorities It’s unclear why the central bank, the the world’s total, according to the industry in Macau and China show these fake sale Peoples Bank of China (PBOC), hasn’t newsletter, the Nilson Report. Visa remains cash-backs are widespread in such retail cracked down harder on the practice, al- the world leader by transaction value with stores. The practice violates China’s anti- though the documents Reuters reviewed $4.6 trillion in card transactions in the first money-laundering regulations as well as show the bank was aware it had become a half of 2013; UnionPay was second with restrictions on currency exports, according growing problem. $2.5 trillion. to Chinese central bank documents re- Industry experts point to a weak enforce- If UnionPay poses a problem for viewed by Reuters. Chinese authorities also ment culture in China, a reluctance to hurt Chinese authorities, it is a problem of their fear the UnionPay conduit is being used Macau financially with 80 percent of the own making. The card brand is often seen
SPECIAL REPORT 2 CHINA CARD-CARRYING MONEY SMUGGLERS
as an arm of Chinese state policy. challenges for UnionPay. While the card Plastic cash UnionPay was established in 2002 system is helping monetary authorities UnionPay, the world’s largest card issuer by the PBOC and the State Council or open up the capital account, it is also en- and the second-largest commercial card Cabinet. Its founding shareholders were abling people to funnel their ill-gotten brand by transaction volume, raked in 85 Chinese banks, led by the five biggest gains out of China, said Yan. “It’s not the $2.5 trillion worth of card purchases in the state-owned banks. Former senior PBOC only tool” for money laundering, Yan says, first half of 2013. officials still fill the company’s top ranks, “but it’s a major tool.” CARD CIRCULATION GROWTH including UnionPay’s current chairman, Su Macau is a prime gateway for this ac- Percent change, 2012 vs. 2017 forecast Ning, and its former president, Xu Luode. tivity. It is the only place in China where They declined requests to be interviewed. casino gambling is legal, and so Chinese 60 51% UnionPay dominates the card market in gamblers bring vast sums of money here. China thanks to a central bank decree that Because Macau is administered separately 40 requires all card issuers, including foreign from the mainland, there are restrictions on ones, to process their yuan-based transac- how much currency mainland Chinese can tions through UnionPay’s electronic pay- take into the gambling haven. But gam- 20 ment network. All Chinese merchants and blers find ways of skirting currency controls automated teller machines are required to when they cross into Macau. And much process their yuan transactions through of the money these mainlanders ostensi- 0 UnionPay MasterCard Visa UnionPay. The World Trade Organization bly take to Macau for gambling, Chinese in July 2012 ruled that China was dis- authorities believe, is actually going abroad NUMBER OF CARDS IN CIRCULATION criminating against foreign card brands, into bank accounts. Billion cards, 2012 but it made no specific recommenda- Any steps to clamp down on UnionPay tions. Foreign card brands still have to use cashback transactions would likely rattle UnionPay for settlements in China. Macau, because the cash also feeds the ca- UnionPay 3.5 UnionPay’s increasing use overseas is sino sector on which the territory’s $43.6 part of Beijing’s multi-pronged strategy billion economy overwhelmingly depends. to eventually open up China’s capital ac- Macau is now the world’s biggest gambling Visa 2.5 count and internationalize the yuan, which hub, with revenues seven times those of Las is formally known as the renminbi. Beijing Vegas. Last year, gambling revenue rose 19 also eased restrictions on many kinds of percent to $45.2 billion. Nearly 40 percent MasterCard 1.2 capital transfers as it gradually loosens up of that went to the government in taxes. control over the currency, making it easier Beijing is particularly concerned about for money to leave China’s borders. The the role of this capital flight in the country’s TOTAL CARD PURCHASE VOLUME efforts have paid dividends. The renminbi endemic government corruption scandals. Trillion dollars, first half 2013 has already overtaken the euro to become An internal research report in 2008 by the Credit card Debit card* the second-most used currency in trade fi- PBOC identified UnionPay cards as one nance, according to data from global trans- of the main tools for corrupt individuals to action services organisation SWIFT. facilitate cross-border transfer of funds. The Visa $4.6 “(China) may be happy to see UnionPay central bank report said the practice was sweeping different markets across the growing rapidly. world in different countries and territories,” Many card users follow their money UnionPay $2.5 said Yan Lixin, head of Fudan University’s abroad. Since the mid-1990s, an estimated China Centre for Anti-Money Laundering 16,000 to 18,000 Communist party of- MasterCard $2.0 Studies in Shanghai. “It is backed up by ficials, businessmen, CEOs and other in- the government. It is the real son of the dividuals have “disappeared” from China, government.” according to a separate PBOC report pre- *Includes prepaid cards for Visa and MasterCard. At the same time, these changes pared in 2008 – taking with them some 800 MasterCard excludes Maestro and Cirrus data. have vastly complicated the compliance billion yuan ($133 billion). Source: The Nilson Report.
SPECIAL REPORT 3 CHINA CARD-CARRYING MONEY SMUGGLERS
FAKE SALES: Jewellery and pawn shops around Macau’s casinos do a brisk business giving customers piles of cash by ringing up phony sales on their bank cards. Many of the shops have signs saying they welcome UnionPay cards. REUTERS/TYRONE SIU
But the practice isn’t limited to corrupt It is backed up by the Taiwan authorities said in January, given officials. The ubiquitous UnionPay card, government. It is the real son of the abnormal UnionPay transactions they with its instant access to piles of cash, has the government. found, they would consider setting up a made the task of whisking money out of cross-straits mechanism to ensure timely China far easier for ordinary Chinese. Yan Lixin information exchange and prevent illegal Head of Fudan University’s Anti-Money money laundering, according to CNA, its CAPITAL FLIGHT Laundering Studies in Shanghai semi-official news agency. Taiwan’s cabinet Today, the outflow is gathering pace. is considering the proposal. In Macau, UnionPay card transactions Wan was cited as saying in the document. China isn’t standing still. A decade ago, reached 130 billion Macau patacas ($16.77 “If this continues, this could affect the ques- the government began trying to rein in billion) in just the first four months of tion of the further opening up of the yuan.” money laundering, and since then it has 2012, up from 88.1 billion patacas in all All the counter-parties involved benefit amended criminal laws and strengthened of 2011, according to a confidential report from these cashback transactions, an indus- commercial banking rules. by Macau’s banking regulator, the Macau try source said. The retail merchant makes UnionPay officials say they are trying Monetary Authority reviewed by Reuters. money on the exchange rate, the way a to stamp out the illicit transfers. One of Around 90 percent of those transactions currency trader would. The Macau banks the main steps the company took came in were “highly concentrated in jewellery, or- overseeing the merchant charge 1 percent June of 2012, when it required UnionPay nament and luxury watch sales”, the report to 2 percent on the transaction. And the card-issuing banks to put a 1 million yuan said. UnionPay card-issuing bank back in China ($166,000) daily limit on any transaction in If that rate persisted for the full year, will generally charge around 1 percent on Macau, down from 5 million to 10 million UnionPay sales in Macau for all of 2012 the transaction, the source said. yuan previously. That limit applies to actual would have reached nearly $50 billion - The cashback activity is spreading be- sale transactions. nearly $45 billion of it for jewellery-related yond Macau to other Chinese tourist desti- UnionPay’s rivals, meanwhile, don’t ap- sales, a figure exceeding even Macau’s total nations, including Taiwan, Japan and South pear to be playing the cashback game. gambling revenues that year. Korea, people in the credit-card industry Macau jewellery stores visited for this ar- “Are these actual transactions? Where say. ticle said Visa and Mastercard were not does this money come from?” the deputy UnionPay cashback transactions generally used for cashback transactions. head of the Monetary Authority, Wan Sin reached 9.78 billion yuan ($1.59 billion) A senior executive with a rival card Long, asked in the document. in 2012 in Taiwan, almost doubling from brand said his company had “zero toler- “Banks have not carried out good moni- the year before, according to a report by ance” for the kind of cashbacks allowed by toring, nor earnestly handled the situation,” Taiwan’s government investigation agency. UnionPay. “We don’t allow jewellery stores
SPECIAL REPORT 4 CHINA CARD-CARRYING MONEY SMUGGLERS
CASH PLEASE Zhang visits one of the jewellery shops clustered around Macau’s casinos to get HK$300,000 ($38,600) in cash using her debit card. That’s well over the $3,200* daily limit China allows for citizens travelling abroad. JACKPOT
4455 6677 8899 0022 VALID THRU 01/18 ZHANG HUA THE FORGET THE JEWELS FAKE SALE Zhang ignores the jewellery, OFF TO THE SLOTS and presents her UnionPay debit Zhang then makes her way to card to the store clerk who then a casino to spend the cash. SCAM performs a fake sale. A scenario of how mainland Chinese are smuggling money out of China using their UnionPay debit cards
Zhang Hua
COLD HARD CASH TRANSACTION APPROVED CLEARING SYSTEM About HK$320,000 worth of yuan is Once the transaction is approved, Aer entering her pin number in a deducted from her bank account in China; Zhang signs a store receipt describing UnionPay point-of-sale machine, the the amount includes commission the transaction as a generic “sale”. transaction goes through the UnionPay for the cashback service. The store then clearing system and Zhang’s bank to hands her HK$300,000 in cash. determine if she has suicient cash in her account to proceed.
*Limit imposed by China, capped at RMB20,000. RMB1 = HK$1.27 or US$0.16. Source: Reuters.
SPECIAL REPORT 5 CHINA CARD-CARRYING MONEY SMUGGLERS
to give any form of cash whatsoever,” this person said. “That’s completely illegal... Coming to a store near you: Both as a bank and a (card) network, we’re supposed to close it down immediately.” world’s biggest bankcard LOCAL AUTHORITIES RESPONSIBLE In UnionPay’s curved glass headquarters does not disclose financial results or details. In a written response to questions for this in Shanghai’s financial hub of Pudong, a The United States, home to UnionPay’s article, UnionPay said it “has always strictly plaque commemorates a visit by former biggest rivals, has complained long and prohibited the swiping of cards for cash Chinese President Hu Jintao in 2010. often about its privileged status in China. without any goods being purchased and has Emblazoned on it is a quote from Hu urging In 2012, following complaints by collaborated from many sides to boost the the company to “step up the effort to Washington, the World Trade Organization investigation of such risks.” internationalize and strive to build UnionPay ordered China to stop discriminating against According to UnionPay’s “Operating into a major global brand for bankcards”. foreign bank card rivals such as Visa and Regulations,” overseas banks participating China’s renminbi or yuan is not yet Mastercard, but did not make any specific in the UnionPay system are required to an international currency - it is not freely recommendations. close the accounts of merchants found to convertible. Yet China’s official bank card has “A more efficient payment card system be engaged in fraudulent transactions. achieved Hu’s dream of global dominance. in China would be more beneficial for both But local authorities such as the Macau China UnionPay has become the world’s merchants and consumers,” U.S. Trade Monetary Authority have the primary re- largest card brand with 3.53 billion cards Representative Ron Kirk said at the time. sponsibility for investigating suspicious in circulation, just over a decade after it China has yet to open the bank card market. cross-border transactions, the company says. was founded in 2002. Its $2.5 trillion in UnionPay regularly waives fees that its rivals The Macau Monetary Authority said in transactions in the first half of last year was charge and is known for having the lowest fees a written response that bank card-related second to Visa Inc’s
SPECIAL REPORT 6 CHINA CARD-CARRYING MONEY SMUGGLERS
could swipe UnionPay cards to buy gold bullion of up to 10 million yuan ($1.5 mil- lion) - then sell it straight back for hard cash. A Chow Tai Fook spokesman confirmed that. He said the store had “no specific lim- its on the amount that our customers can buy using any form of payment, as long as the payment is approved by the bank when we swipe the card.” At a jewellery store inside the Venetian Macau casino run by Las Vegas Sands, a manager said card cashbacks constituted most of the shop’s business. The shop was run by the owner of a VIP room or “jun- ket” operator, which brings in big gamblers GLOBAL EXPANSION: The UnionPay flag flies next to a Chinese national flag at the company’s from the mainland. Shanghai headquarters. UnionPay is playing a key role in China’s strategy for internationalising the “I would say there’s no upper limit for yuan. REUTERS/STRINGER UnionPay,” said the black-suited manager, who spoke on the condition he not be iden- tified. “The credit limits aren’t enforced at casinos, too. Macau’s merchants lately have Inside seven such stores, customers were all.” tried to better disguise the UnionPay trans- observed swiping UnionPay cards at glass An executive at Las Vegas Sands, speak- actions by routing transactions electroni- counters and receiving wads of cash with- ing on condition of anonymity, said ven- cally across the border to China to escape out actually buying anything. dors with UnionPay card-swiping ma- the scrutiny of Macau authorities, a banker “We can remit as much money as you like chines have been caught wandering around in Macau said. with your UnionPay card,” said a red-haired the casino. “They closed the Macau tap, but they’ve man surnamed Lai at one jewellery shop. A “People walk around with mobile union opened an even larger China tap,” said the yellow sign carried the slogan: “Welcome pay card machines on the gaming floor,” the Macau banker with direct knowledge of Renminbi. Welcome UnionPay cards.” executive said. “They are linked to China the practice. “The merchants are always “You don’t actually buy anything,” said (computer) servers, not (ones in) Macau. So cunning.” Lai, standing near a half-empty display case it is like they are getting cash out in China. A UnionPay memo to banks and coun- containing a messy spread of watches and When we see them on the floor we kick terparties in Macau, dated Oct. 29 and re- jewellery. “We just help people get money them out.” viewed by Reuters, said the company was out of China so they can gamble more.”” That practice also exists outside the aware of these practices and had initiated steps to stop it. It urged Macau banks and - Additional reporting by Farah Master and REUTERS TV UnionPay counterparties to crack down by Yimou Lee; Editing by Michael Williams and blacklisting such retailers and fining them. Bill Tarrant UnionPay said in the memo it hoped that all parties with UnionPay linked busi- FOR MORE INFORMATION ness would make a “concerted effort to James Pomfret, Senior Correspondent, rectify Macau’s UnionPay card transaction Politics and General News market discipline and sustain its stable lon- [email protected] ger term development.” Bill Tarrant, Enterprise Editor A visit to Macau since the memo was [email protected] See the video: Michael Williams, Global Enterprise Editor http://link.reuters.com/pax27v issued, however, found cashback services to be flourishing. [email protected]
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