China’s market regulator announced a sweeping investigation on Friday against three major brokers running cross-border trading, as it launched a two-year crackdown on investment leaving the country.

China does not allow private individuals to directly invest in overseas markets, requiring them to trade assets only through approved third-party channels.

However, regulations differ in the semi-autonomous city Hong Kong, and some brokers have been able to legally operate there, attracting investors from mainland China to open trading accounts in the Chinese finance hub.

Authorities have sought to regulate the loophole in recent years, and in 2022 barred private Chinese investors from opening accounts with such brokers.

The China Securities Regulatory Commission (CSRC) said on Friday it will probe and impose penalties on Hong Kong-registered brokers Futu and Longbridge, as well as New Zealand-registered Tiger Brokers.

Regulators said the brokers had conducted securities-related business in China “without obtaining the necessary approvals or licenses”, violating China’s securities law.

The CSRC said in a separate statement Friday it will join forces with seven other bodies, including the Ministry of Public Security and the People’s Bank of China, to carry out a two-year campaign targeting illegal cross-border securities activities.

The campaign aims to “completely eradicate the illegal cross-border operations of overseas securities, futures and fund management institutions”, it said.

Futu said in a filing that Chinese authorities have proposed a fine of about 1.85 billion yuan (US$271 million).

Futu “has already ceased opening accounts for applicants with mainland Chinese identities… has consistently engaged in active dialogue with regulatory authorities and complied with their rectification requirements”, it said in a statement.

Chinese investors accounted for about 13 percent of the firm’s total client base of 29.2 million users registered globally, it added.

UP Fintech, a US-listed brokerage firm who owns Tiger Brokers, said CSRC fined the company 308.1 million yuan and confiscated 103.1 million yuan of illegal income.

The firm “accepts the penalty with sincerity,” it added.

The two brokers’ CEOs were also fined.

Chinese authorities’ aim “is to gain full control of capital outflows, and to block any loopholes of these illegal activities”, Kelvin Lam, a China-focused economist at Pantheon Macroeconomics, told AFP.

“What China is trying to do at the moment is to make sure no overseas branches of these companies… take funds out of Chinese investors and help them to invest overseas,” Lam said.

Hong Kong cross-border brokers have operated in a regulatory grey zone until now, he said, but authorities are seeking to fully stem the flow of Chinese investment out of the country.

“Rather than worrying the fact of capital leaving China illegally, the aim of Chinese authorities is to seek full control of the situation rather than anything else,” Lam said.

Shares in Nasdaq-listed Futu tumbled more than 25 percent in Friday’s trading, with UP Fintech dropping about 20 percent.

A US jury convicted a man on Wednesday for his role in running a clandestine Chinese “police station” in New York as part of a campaign to monitor US-based dissidents.

“Harry” Lu Jianwang, 64, faces up to 30 years in prison for acting as an illegal agent of the Chinese government in setting up and running the “overseas police station” in Manhattan’s Chinatown, the Justice Department said in a statement.

Lu and another man, Chen Jinping, were arrested in April 2023 and accused of operating the secret police station, which operated from an office building, on behalf of China’s Ministry of Public Security.

Canada and several European governments have cracked down on similar “police stations,” whose existence was first revealed by Spain-based rights group Safeguard Defenders.

They often operate with little or no indication they are there, though US officials said the Manhattan office had been visited by officials from the Chinese consulate in New York.

According to Safeguard Defenders, the stations have been involved in pressuring nationals to return home to face criminal charges.

“Lu Jianwang used a police station in New York City to target PRC (People’s Republic of China) dissidents in furtherance of the Chinese government’s political agenda,” said FBI Assistant Director in Charge James C. Barnacle Jr.

FBI agents first searched the outpost in October 2022 and found a blue banner reading “Fuzhou Police Overseas Service Station, New York, USA,” referring to a city in southeastern China.

“The New York police station was part of a global initiative by the MPS (Ministry of Public Security) to establish overseas police service stations all over the world,” the Justice Department said.

“Lu was tasked by his MPS handler with collecting information on behalf of the Chinese government, such as locating a pro-democracy advocate who had fled from China and moved to the US,” it added.

Beijing said in December last year that there was no “so-called police station.”

“China is a country governed by the rule of law and has always strictly abided by international law and respected all countries’ judicial sovereignty,” said foreign ministry spokesman Lin Jian when asked about the case at a regular news conference.

Lu’s co-defendant Chen Jinping is awaiting sentencing.