The State Administration of Foreign Exchange (SAFE) issued a series of circulars earlier this year to tighten the control of foreign exchange involved in the trade of goods. In addition to the three circulars consecutively issued in July, the SAFE implemented the Circular on Penalizing Acts that Violate the Foreign Exchange Control in the Trade of Goods,  Circular 34) on July 14, 2008 to specify penalties for the violation of these circulars. The SAFE issued these regulations with the intention of filtering out the inflow of hot money in China by ensuring the authenticity of export transactions and their compliance with China’s foreign exchange rules.

Circular 34 specifies certain penalty provisions for banks or enterprises that fail to comply with the Measures for the Online Verification of Foreign Exchange Collection and Settlement of Export Proceeds,  Circular 29), the Circular on Issues Regarding the Implementation of the Measures for the Online Verification of Foreign Exchange Collection and Settlement of Export Proceeds, Circular 31) and the Circular on Issues Regarding the Management of the Registration of Foreign Debts Under Enterprises’ Trade of Goods, Circular 30). Circular 29 repealed several previous circulars when it took effect on July 14, 2008. As of October 1, 2008, Circular 30, which went into effect on July 14, 2008, overrides any inconsistencies in previously issued regulations.

Under Circular 34, if a bank that is involved in foreign exchange transactions involving the trade of goods fails to utilize the online verification system to examine export proceeds in accordance with Circular 29 and with Circular 31, it will be subject to a redress order, a warning, and a penalty. The penalty shall not exceed RMB 300,000 for an institution and shall not exceed RMB 50,000 for an individual. Similarly, if a bank transfers an enterprise’s foreign exchange export proceeds to an account other than the one designated for inspection, it will be subject to a redress order, confiscation of illegal earnings and a penalty ranging from RMB 200,000 to RMB 1 million. The bank may be required to discontinue all relevant business activities if its violation is deemed material or if it fails to redress such violation within the designated time limit. In addition, if a bank fails to carry out the collection and settlement of foreign exchange for prepayments or the purchase and payment of foreign exchange for deferred payments involving trade of goods in accordance with Circulars 29 and 30, it will be penalized in accordance with Item 4 of Article 44 of Foreign Exchange Administration Rules and other relevant provisions concerning the administration of foreign debts.

If an enterprise engaged in the international trade of goods fails to verify and implement write-off procedures with respect to certain foreign exchange export proceeds within 180 days after the collection and settlement of the foreign exchange, or if the aggregate amount of the foreign exchange proceeds not verified and written-off without a justifiable reason is equal to or more than US$5 million, it will be subject to a redress order, a warning and a penalty, which is up to RMB 300,000 for an institution and up to RMB 50,000 for an individual for each collection and settlement. In addition, if an enterprise fails to register the collection and settlement of foreign exchange for prepayments or the purchase and payment of foreign exchange for deferred payments involving the trade of goods in accordance with Circulars 29 and 30, it will be penalized under Item 4 of Article 44 of Foreign Exchange Administration Rules and other relevant regulations on foreign debts.