It was a line easy to miss in Premier Wen Jiabao's 13,744-word speech to the National People's Congress earlier this month.

But there, buried in the text, was this sentence: "We will severely crack down on ... economic crimes such as smuggling, tax evasion and fraud, and money-laundering.''

Behind that brief but telling comment is the Chinese authorities' growing concern over an underground banking system that annually washes hundreds of billions of yuan through Hong Kong, Macau and other outlets, investigators say.

The motives for cleaning up the cash are mixed - some of it comes from crime, bribery, corruption and tax avoidance; some of the rest is prompted by a desire to get money into a more secure, law-abiding locale.

Concerned with tracking this river of cash, the mainland government is for the first time seeking to join international anti-money-laundering organizations and tighten its own laws.

The amounts involved are staggering. As much as 570 billion yuan (HK$537.4 billion) passes through this shadow economy every year, amounting to 2 to 5 percent of China's gross domestic product.

``Whenever the central government in Beijing is embarrassed by a scandal involving tax evasion, smuggling or corruption on a significant scale, the money trail invariably leads straight down to Hong Kong,'' says Peter Gallo, a Hong Kong-based lawyer and former British military intelligence officer whose company Pacific Risk advises businesses and non-government organizations on corporate fraud risk.

An example of this is the marathon trial now before the Hong Kong courts involving allegations of up to HK$95 billion being laundered out of the mainland into Hong Kong to avoid tax.

Prosecutors call it the world's biggest money-laundering case.

The Court of First Instance has heard the prosecution - in a retrial following a jury stalemate last year - describe how the system allegedly worked.

Despite assumptions that money now moves instantly and electronically, the court heard how funds were allegedly smuggled out by low-tech couriers, on their bodies, over a five-year period in the mid 1990s.

The cash was then allegedly washed through a Hong Kong money changer and the former Po Sang Bank, now part of the Bank of China.

Two defendants in the case have pleaded not guilty.

It is almost impossible to know how many such schemes are operating.

Friedrich Schneider, who advises governments and is author of The Shadow Economy: An International Survey, calculates that China's tax-evading shadow economy is running at around 15 percent of declared GDP - a staggering HK$1.78 trillion.

``I define the shadow economy as the production of legal goods and services where tax payments are avoided and where labor market laws are violated,'' says Schneider, a professor and chair of public finance at the Johannes Kepler University in Austria.

Illicit underground banks have become a major mainland growth industry to move capital out of the country. The official communist party newspaper China Daily reported just last month that 115 such banks were busted by the authorities in 2004, and 12.5 billion yuan was seized.

``Judging by the detected cases, underground banking is on a considerable scale,'' says Renmin University of China law professor Lu Jianping. ``In particular, underground banks are closely connected with money- laundering.''

At the root of much of the problem is corruption of, by and for officials at every level. Although Wen told the People's Congress that the leadership is conscientiously tackling corruption, a recent report by the Ministry of Commerce acknowledges that at least US$50 billion (HK$390 billion) has been taken out of the country by about 4,000 fleeing officials and managers of state-owned enterprises (see story below).

That might be the tip of a very large iceberg. The enormous scale of capital flight is responsible for Beijing's tightening of anti-money-laundering laws and application for membership in the inter-governmental Financial Action Task Force (FATF), to which Hong Kong already belongs.

FATF admitted the mainland as an observer to its meetings for the first time last month. Beijing hopes to become a full member by the middle of this year and Shanghai will host a regional meeting of FATF next month.

A People's Congress deputy and senior mainland bank official, Zhao Peng, acknowledged last week that bank surveillance techniques to spot and stop capital flight and money-laundering are poor. ``The inspection covers a narrow area and proves not that effective,'' Zhao, director of the Gansu provincial branch of the Industrial and Commercial Bank, told reporters. ``There are some loopholes in insurance and securities in terms of anti-money-laundering work.''

With so much money at stake, corruption remains endemic in China despite the deadly risks.

Property tycoon Chen Kai was one of the unlucky ones. He was caught, convicted and sentenced to death in January for paying out US$1 million in bribes in Fuzhou's worst corruption scandal. Chen, 42, operated an illegal casino, brothels and legitimate businesses while also serving on the Fuzhou town council.

The same fate seems likely to await at least some of the 35 alleged members of a rackets syndicate awaiting trial in Guangzhou. Among their crimes, say authorities, was bribing officials to turn a blind eye to money-laundering.

Large sums of capital earned from legitimate business activity are avoiding mainland taxation via export sales invoice manipulation and transfer pricing - both processes that enable a mainland company to appear unprofitable.

Some of the tax-avoiding money fleeing China is really just making a round trip, say Gallo and other specialists, in a process which cheats Beijing's tax laws not once but twice.

After being converted into legal capital, often via a Hong Kong trading company working with a mainland business, the money journeys on to an offshore tax haven and the cover of an easily acquired off-the-shelf company.

One popular stopover is the British Virgin Islands (BVI) (see panel), a rash of green specks in the Caribbean with a population of only 22,000 but at least 400,000 registered companies.

Once capital has settled legally in the BVI or another haven, it can return to China in the form of foreign direct investment - qualifying its mainland tax-evading owners for financial incentives and tax concessions.

Of course, most companies registered in the BVI and other offshore tax havens are legitimate. But a British tax official, who asked not to be identified, said in an interview the BVI, along with two other British-controlled Caribbean tax havens, the Caymans and the Turks and Caicos, are ``three of the worst offenders for facilitating money-laundering and the UK does little to stop it.''

The influential US-based geopolitical and business forecasting service, Stratfor, says it's difficult to pin down the volume of capital leakage out of China but believes between 2 and 5 percent is ``about right''. Stratfor's director of geopolitical analysis, Rodger Baker said round-tripping capital ``not only gives misleading figures for Chinese FDI, it is contributing to economic bubbles - real estate for example - and straining the country's ability to maintain its yuan peg.

``Now Beijing is encouraging Chinese to take more money abroad, both to relax pressure on the yuan and, in the case of larger Chinese businesses, to diversify their assets in order to better weather whatever economic strains will come upon China as a result of the implementation of more WTO requirements.''

Steve Vickers, chief executive of Hong Kong-based International Risk, a business intelligence and investigation service company, prefers to use the term ``leakage'' to describe much of the capital washing out of China. In his view, much of the loot is not the classic ill-gotten wealth associated with drugs, gambling or prostitution but rather out-and-out fraud.

``There have been, and continue to be, very large bad [bank] frauds on the mainland, money which is coming through Hong Kong,'' Vickers says. ``That's out-and-out criminality. Those frauds are much larger than people know about and there is a unit looking at all of this in China at the moment.''

He says Macau is currently in Beijing's sights for action against money-laundering. Tough new laws will be introduced there soon to curb criminal cash washing through the city's mushrooming casino business.

``The Chinese government is cracking down aggressively on Macau,'' Vickers says.

As part of Hong Kong's efforts to comply with FATF and International Monetary Fund rules, the city is preparing tougher anti-money-laundering rules in a bill for presentation to the Legislative Council later this year. The rules will require lawyers, accountants, real-estate agents and other professionals to more closely scrutinize clients' financial activities - supposedly turning them into Hong Kong's ``gatekeepers.''

However, Gallo says this won't prevent invoice manipulation by Hong Kong companies working on behalf of mainland businesses involved in round-tripping practices.

``At present, anti-money-laundering compliance is treated as a regulatory issue, and something of a nuisance at that,'' Gallo says. ``What is needed is a zero-tolerance corporate culture, but that will not come about without direction from the very top of an organization, and that will not happen unless and until senior management are brought round to see the problem from the State Council's perspective.

``But it is further exacerbated by the use of corporate vehicles in offshore financial centers whose primary attraction is their secrecy and, in many cases, by the complicity of financial advisers and others, in breach of their legal obligations under money-laundering legislation.''

United States regulators have handed out heavy penalties to companies that failed to comply with anti-money-laundering rules; AmSouth Bank was fined US$50 million last year and was forced to introduce a rigorous upgrading of its suspicious account activity surveillance. In Japan, Citibank was severely reprimanded by the financial regulatory authorities.

But, adds Gallo, ``the Hong Kong Monetary Authority has not shown any enthusiasm for such strict enforcement.''

``Hong Kong is China's greatest money-laundering problem and the sooner we all wake up to that uncomfortable fact, the sooner we can start dealing with it,'' Gallo says.

``If we don't deal with it, Beijing will have to.''