BEIJING—Chinese police announced a crackdown on an illegal foreign-exchange network that it said handled up to $64 billion in transactions.

According to a report by police in Jinhua, a city of five million people in eastern Zhejiang province, the network involved hundreds of people in eight separate "gangs" working out of more than two dozen "criminal dens." The operation routed money through hundreds of accounts held at financial institutions in China and Hong Kong to evade restrictions on moving currency outside the country, it said.

According to recent state media accounts and a detailed police report released Friday, police launched its crackdown on the network on Dec. 15, 2014, after months of investigation. It was unclear why the clampdown was only being disclosed now.

The official People's Daily newspaper said 69 people had been criminally charged and another 203 people had been given administrative sanctions.

The amount of money involved, up to 410 billion yuan ($64.25 billion) in cross-border transactions, raised questions among some analysts about China's supervision of money outflows. "The fact that multiple real banks were involved raises questions about oversight. They've just allowed $64 billion to leave the country without knowing," said Fraser Howie, coauthor of "Red Capitalism: The Fragile Financial Foundation of China's Extraordinary Rise."

"It's very difficult for legitimate investors to get money in and out, but it's obviously very easy for these guys to do it illegally," he added.

In August, China's Ministry of Public Security said it was stepping up a campaign against underground banks, contending that "gray capital" spirited out of the country had worsened the nation's stock-market tumult. Authorities said earlier this month that they have investigated more than 170 cases involving over 800 billion yuan in underground bank activity. It wasn't clear whether the 410 billion yuan in the Jinhua crackdown was included in that tally.

Beijing has become increasingly concerned with capital outflows in the face of slower economic growth, an aggressive anticorruption campaign and expectations for an interest-rate increase by the U.S. Federal Reserve in December—factors that have made it more attractive to hold assets outside China for investors and others. Standard Chartered estimates that China has seen $830 billion in capital outflows, not counting outbound foreign direct investment, over the past 17 months.

In October, in a sign that the government's bid to stem outflows was bearing fruit, such outflows declined to $37.2 billion compared with around $150 billion in both August and September, Standard Chartered said. China's foreign-exchange reserves rose during the month, after declining for five straight months, to $3.53 trillion at the end of October.

Jinhua police said the antimoney-laundering department of China's central bank noticed suspicious transactions in September 2014 and teamed up with local police and foreign-exchange regulators in an investigation code-named the "9-16 project" after its start date.

Under a mastermind whom police only identified by the surname Zhao, the network allegedly set up dozens of shell companies in Hong Kong, whose financial system is separate from the mainland's. The group opened over 800 accounts in the former British colony and at least seven Chinese provinces to evade foreign-exchange limits. Zhao's identity couldn't be determined nor was it known whether the person has retained a lawyer. Police, the central bank and the currency regulator couldn't be reached or didn't immediately respond to written questions.

According to Jinhua police, plainclothes police mapped out the network, then worked with financial regulators in reviewing millions of illegal transactions. The government said the bust was the largest ever of an underground banking network in China.

Police and the People's Daily newspaper said the gangs used nonresident accounts—those held in China by overseas organizations—to evade scrutiny and foreign-currency purchase limits. These allowed the money to leave the country on a "through train" without going through normal regulatory review, they said, for settlement abroad by the Hong Kong and Shanghai Banking Corp. and other unnamed financial institutions. Banks have since tightened their rules to close the loophole, the People's Daily said.

An HSBC spokesman in Shanghai said the bank doesn't comment on individual cases. "But HSBC has zero tolerance for money laundering and makes every effort to protect the bank, our customers and the financial system against criminals," the spokesman added.

The alleged scope of the operation points to weaknesses in China's financial supervision, said Liu Qiao, a finance professor with the Guanghua School of Management. The apparent delay in reporting the crackdown points to resistance from within the system, he added.

"A lot of local governments don't want to disclose scandals," Mr. Liu said. He said he believed the timing of the announcement was related to a recent wave of investigations of irregularities in China's financial sector in the wake of the summer's stock-market crash. "They're now investigating financial institutions more carefully." he added.

According to the People's Daily, the network's transfer operations also involved creating phony export declarations, defrauding local governments of millions of yuan in export incentives and export-tax rebates.

Li Pei contributed to this article.

 

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(END) Dow Jones Newswires

November 20, 2015 10:05 ET (15:05 GMT)

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