Attorney Shao Shiwei | Unveiling the Chaos of Mainland Residents Purchasing Insurance in Hong Kong: Gray Interest Chains, Illegal Currency Exchange, and Criminal Boundaries (Part I)

According to data published by the Insurance Authority of Hong Kong, the total gross premiums of newly issued policies in Hong Kong reached HKD 169.6 billion in the first three quarters of 2024. Among these, new policy premiums from mainland residents amounted to HKD 46.6 billion, accounting for nearly 30% and representing a year-on-year increase of 21%. This means that one out of every three clients purchasing Hong Kong insurance is from the mainland.

So, what are the reasons behind mainland residents' strong preference for Hong Kong insurance? Attorney Shao categorizes the motivations of mainland residents for purchasing Hong Kong insurance into two main types: one comprises "legitimate motivations" based on protection and asset allocation, while the other involves "sensitive motivations" that tread along gray boundaries.

Legitimate motivations mainly include the following:

Asset Diversification: Many clients seek to diversify the currency denomination of their assets by purchasing insurance policies denominated in US dollars or Hong Kong dollars, thereby hedging against the uncertainties arising from fluctuations in the RMB exchange rate.

Advantages in Coverage Scope: Critical illness insurance policies in Hong Kong offer broader coverage and provide partial benefits for early-stage conditions, with premiums generally lower than those in mainland China.

Wealth Succession and Education Funding: Clients use products such as whole life insurance and savings insurance to preserve capital for the next generation and to plan for their children’s future overseas education.

Expectations of Long-Term Returns: Some clients view insurance policies as an alternative “wealth management” vehicle, seeking relatively stable medium- to long-term returns.

Another category of “sensitive motives” involves issues at the boundaries of compliance:

Cross-Border Arbitrage for Financial Gain: Currently, the one-year fixed deposit interest rates for US dollars at many banks in mainland China generally range from 2.1% to 2.8%, whereas Hong Kong banks maintain rates between 3.7% and 4.5%. For instance, the demonstrated interest rates for whole life insurance and savings insurance products in Hong Kong can exceed 6%, encouraging clients to allocate assets across borders.

Illicit Cross-Border Transfer of Funds: Some individuals purchase Hong Kong insurance policies as a means to indirectly transfer funds offshore and evade foreign exchange controls, such as converting onshore assets into offshore US dollar assets through large-premium policies.

Evasion of Regulatory Oversight: Examples include transferring marital assets, evading debts, or concealing income, thereby using insurance products to create “channels for asset concealment” outside the scope of legal and regulatory supervision.

Money Laundering Channels: Certain individuals attempt to obscure the source or destination of funds by leveraging transactions associated with insurance policies, such as premium payments, withdrawals, or surrenders.

In summary, mainland residents, driven by various motives, actively seek information and channels to purchase Hong Kong insurance, which has contributed to the sustained high demand for Hong Kong insurance in the mainland market.

However, in practice, mainland residents face numerous restrictions when purchasing insurance in Hong Kong.

Although Hong Kong insurance products are quite popular in the mainland China market, in practice, mainland residents purchasing insurance in Hong Kong are subject to multiple restrictions arising from dual regulation by both mainland China and Hong Kong authorities.

1. The policyholder must personally travel to Hong Kong to sign the policy

Under the regulations of Hong Kong’s insurance regulatory authorities, customers must personally complete the insurance application process in Hong Kong. Policies signed remotely from mainland China are commonly referred to as “underground policies.” In the event of a dispute, such policies are neither protected under mainland Chinese law nor recognized by Hong Kong regulatory authorities.

2. Foreign exchange policies strictly restrict payment channels

Mainland residents are each entitled to an annual individual foreign exchange purchase quota equivalent to USD 50,000. Paying Hong Kong insurance premiums through illegal currency exchange, underground banks, fabricated trade transactions, or mirror-card swiping constitutes unlawful conduct. In certain circumstances, individuals engaging in such foreign exchange purchases may also face criminal liability.

3. Permissible types of insurance are restricted by foreign exchange management regulations

According to relevant policies of the State Administration of Foreign Exchange, this facilitated quota may not be used to purchase overseas financial products with investment attributes, such as Hong Kong savings insurance, participating policies, and universal life insurance.

Despite these numerous restrictions, mainland residents’ enthusiasm for purchasing insurance in Hong Kong has not waned. Fundamentally, this stems from the two core motivations outlined above: asset security and return expectations. Such demand persists and becomes more pronounced during certain policy windows or periods of market turbulence.

At the same time, for some practitioners in Hong Kong’s insurance industry, this represents a vast potential market. Driven by high commission structures, intermediaries, consultants, and agents have gradually formed a gray-market industrial chain characterized by stable structures, covert operations, and clear profit interests.

This industrial chain is not new. What has truly changed is that, in recent years, the state has continuously intensified its crackdown on illegal foreign exchange trading, with more proactive enforcement and clearer determinations of illegality.

Many practitioners previously believed that:

• They did not personally engage in currency exchange but merely “introduced a channel,” which they considered not to constitute unlawful conduct;

• Having no involvement in the handling of funds, or even "receiving no money," one might assume that the matter is unrelated to oneself;

• Clients engage in concealed offsetting transactions via card swiping; given the covert nature of these operations, the inability to detect them is often regarded as irrelevant to oneself;

•  

However, the outcome is frequently that, entirely unprepared, individuals inadvertently become entangled in a vortex of legal risks.

Notwithstanding multiple restrictions imposed by laws and policies, a gray industry chain surrounding the purchase of insurance policies in Hong Kong by mainland residents has quietly taken shape under the drive of substantial market demand and high commissions, and has continued to operate for many years.

The key roles involved in this industry chain primarily include:

Hong Kong Insurance Companies: Insurance institutions authorized by the Hong Kong Insurance Authority to lawfully conduct insurance business in Hong Kong.

Hong Kong Insurance Brokerage Firms: As insurance intermediaries, they are responsible for facilitating the execution of insurance policies between clients and insurance companies.

Licensed Insurance Intermediaries: Individuals holding valid Hong Kong intermediary licenses who directly participate in the insurance application process and complete policy execution formalities with clients.

Hong Kong insurance companies and insurance brokerage firms constitute the upstream segment of this industry chain. They conduct insurance business through cooperation with licensed insurance intermediaries.

Referrers: These individuals have direct contact with mainland clients. They typically do not hold Hong Kong insurance intermediary licenses, yet they solicit clients in the mainland under the guise of "consulting companies" and other such entities, obtaining potential client information through channels such as the internet, social media, and bank employees.

In order to expand their business, certain insurance brokerage firms and licensed insurance intermediaries cooperate with unlicensed mainland "referrers." Through these "referrers," they solicit clients in the mainland, induce the "referrers" to engage in unlicensed sales to mainland clients, and pay substantial referral fees, in some cases allocating more than 90% of their commissions to the "referrers," so as to complete the execution of insurance policies.

The customer-acquisition channels used by these “unlicensed referrers” primarily include mainland China-based “family offices,” “consulting firms,” third-party wealth management companies, and personnel from certain banks and insurance institutions. At the same time, they also covertly acquire customers through internet platforms such as Xiaohongshu (Little Red Book), Douyin (TikTok), and Baidu information-flow advertisements, attracting mainland visitors to purchase Hong Kong insurance policies by offering kickbacks or providing complimentary flights and hotel accommodations. Moreover, to attract clients, some “referrers” promise rebates or kickbacks, and may even channel funds back into clients’ accounts through fabricated transactions.

As noted in the typical case cited at the beginning of this article, in order to help clients pay overseas insurance premiums, some insurance practitioners may introduce underground banking operations or assist clients in conducting illegal foreign-exchange conversions through fabricated transactions, mirror trades, or other means.

However, when these practitioners arrange Hong Kong insurance coverage for mainland users and assist them in completing illegal currency exchanges, are they truly motivated solely by earning a commission or a referral fee for facilitating the exchange?

In fact, based on Attorney Shao’s experience in handling related cases, a significant number of practitioners do not knowingly violate the law. They may have only a superficial understanding of the relevant regulations and harbor a mindset of taking chances; some may not even realize that their conduct has already violated criminal law.

In other words, many individuals harbor serious misconceptions about the legal risks inherent in such activities.

If practitioners wish to ensure genuine compliance in their business development activities and avoid the situation of “earning meager profits while bearing disproportionate legal risk,” they must clarify the following:

Whether the activities they engage in are permissible at all, and where the boundaries lie;

Which actions constitute regulatory violations that may lead to industry disciplinary measures;

And which actions have crossed into the realm of criminal liability, potentially exposing them to charges of illegal business operations for “facilitating currency exchanges.”

What are the common types of conduct by insurance practitioners that give rise to legal risks?

Attorney Shao will provide a detailed analysis of these issues in Part II of this article. For practitioners, only by clearly understanding the rules and delineating the boundaries can they truly uphold the baseline of risk management before inadvertently becoming “embroiled in criminal cases.”