HONG KONG – Imagine entrusting your life savings to a group of strangers you know only via WhatsApp. Some affluent Chinese people are willing to make that gamble to get part of their wealth out of the mainland.

Take 32-year-old Phoebe, who recently moved almost one million yuan (S$190,000). To do it, she first had to transfer her money into the account of a local facilitator. Then, Phoebe, who requested to be identified by only her first name because of privacy and legal concerns, had to sit tight.

A few tense hours later, transactions began to pop piecemeal into a separate account she holds in Hong Kong. Once the cash is there, it can go anywhere.

The funds that appeared in Phoebe’s account came from 10 people in total – one of whom deposited the equivalent of US$1,300 (S$1,800) in notes via an ATM. The transaction moved through an informal, unregulated system known around the world as hawala. On one side of the administrative border between the mainland and Hong Kong, Phoebe handed over her money to members of her facilitator’s network; on the other side, the transaction was mirrored by others in the network who dropped money into her account.

The entire operation was dependent on faith. But Phoebe’s wait was not quite as nerve-jangling as you might expect: She had been referred to the remittance agency – which is illegal in China – by her established, well-­regarded wealth manager introduced via mutual connections.

Since international borders reopened post-pandemic, advisers to the rich report a surge in demand for overseas backup options. Crackdowns on ideologically out-of-favour industries, uncertainty over geopolitical tensions and President Xi Jinping’s push for “common prosperity” have spooked the rich and even the middle class. In addition, the domestic economy looks increasingly dire. Many wealthy families feel it is essential to have money outside the country, whether to diversify assets or to pave the way for potential future immigration.

Traditional havens still hold their allure – think a condo in Vancouver or United States equity investments – but over the past two years, Singapore has increasingly emerged as a favoured ­destination.

Yet opportunities to move cash legitimately from China are severely limited, with individuals normally allowed to wire only US$50,000 a year overseas. They also have a one-time opportunity to move their money when they emigrate. Plugging the gap is where the underground networks come into play.

“These agencies have sprouted to meet soaring demand,” said adjunct finance professor Joel Gallo at New York University Shanghai. “They act as quasi-banking firms, yet operate without the scrutiny of one and adroitly engage in regulatory arbitrage by standing in a grey zone.”

There is no reliable estimate on how big the industry is, but probes disclosed by the authorities suggest an enormous scale. One investigation in China’s western Gansu province uncovered an operation with 75.6 billion yuan in assets, state media reported in 2021, citing China’s State Administration of Foreign Exchange. The money was spread among a network of five organisations that used more than 8,000 bank accounts across more than 20 provinces.

The networks are truly global in scope, operating not only in Hong Kong but wherever there are significant numbers of the Chinese diaspora. It is “highly likely” that underground banks will have pools of funds ready in key locations, so recipients can receive their cash quickly, and in the local currency, according to a 2019 intelligence assessment by Britain’s National Crime Agency (NCA).

Linking up with one of these money shops, though, is not a decision to be taken lightly. People caught using illegal currency ­exchange services in mainland China are usually fined 30 per cent or more of the amount of money they attempted to transfer. If the sum is significant, those providing the service face significant jail time. Although the maximum penalty of a life sentence is typically handed down only when there are compounding offences such as bribery, reports of sentences ranging from one to five years are common.

Although China’s capital laws do not apply if you are in the likes of Hong Kong, Britain or Singapore, there is a risk of legitimate banks getting suspicious about the source of funds.

A spokesperson for the Monetary Authority of Singapore said that while Singapore does not implement the capital controls of other jurisdictions, the regulator requires financial institutions, including remittance agents, to detect and report suspicious transactions and behaviour. Institutions are also required to mitigate reputational, legal and operational risk from activities affected by other jurisdictions’ laws.

Singapore’s banks have reason to be on especially high alert: In August, the authorities arrested and charged 10 people with Chinese origins with a range of crimes including money laundering. More than S$2.8 billion of cash and other assets were frozen or confiscated. The allegations involve attempts to move proceeds from illicit activities such as scams and illegal gambling, not remittances.

But there is a dark side to remittance operations. To ultimately settle exchanges via hawala, Chinese underground banks regularly use cash generated by criminal groups through activities such as drug trafficking, cigarette smuggling, organised illegal immigration and human trafficking, according to the NCA. For example, a gang with operations in both China and Britain might front the money to pay a hawala recipient in London and then get paid a corresponding amount by the underground bankers in Shanghai.

The British law enforcers found that Chinese student accounts were sometimes used as a back door to get money into the legitimate banking system. The NCA identified more than 100 people who had made cash deposits into more than 14,000 personal bank accounts held or set up predominantly by Chinese students. The amount of cash put into these accounts in a 12-month period totalled in excess of £100 million (S$167 million), with some of the people parking more than £2.5 million each.

Right now, there are increasing signs that more money is looking to leave. Real estate consultancy Juwai IQI said in August that it expects more than 700,000 Chinese to exit the country in the next two years. Top destinations for buying property – based on searches on its site – include Australia, Canada and Britain. Singapore ­introduced a 60 per cent property tax for foreign purchasers in April, which has crimped mid-market demand.

If more cash flows out of China than into it, that means not all remittance requests can be satisfied by mirrored transactions, and agencies need to find ways to actually get money across the border. Clamping down on these routes has been a long-running game of cat and mouse. The Chinese authorities have swatted simple options such as cash being moved in suitcases or car boots or sailed to Hong Kong in junks. Increased scrutiny of overseas acquisitions has reduced the opportunities to get money out by paying an inflated price for companies outside China. The crackdown on crypto has also made it much harder to use digital currency as a workaround.

Yet there are still ways. One popular technique is known as “smurfing”. It involves recruiting people on the mainland who have not used their legitimate remittance quotas of US$50,000. By using many people, the agencies can then use their bank accounts and small individual allowances to funnel large amounts of money outside the country. Case investigations disclosed by the government show that this can sometimes reach epic scale. One man, surnamed Li, recruited 102 individuals to help send C$6.8 million (S$6.8 million) in 2020, state media reported.

Even if moving money out of China becomes more difficult, experts do not foresee any let-up in overall attempts. Based on unexplained discrepancies in tourist data – which suggest Chinese tourists are leaving cash abroad when they travel – as much as US$150 billion is expected to exit in 2023, according to an estimate from senior economist Gary Ng at French investment bank Natixis. BLOOMBERG