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China: Anti-money laundering changes for banks

On 15th September 2014, South China Morning Post published an article in which it is reported that the People’s Bank of China has begun to assign more responsibility to banks in flagging suspicious transactions. To that end, the journal’s article confirms that: 

…In January last year, the anti-money-laundering division of the PBOC issued a new set of rules meant to gradually move away from the current system.

The new system will ask banks to assess the level of money-laundering or terrorism-funding risk of each customer on a scale of one to 100. The regulator has given some guidance on how to score customers using this scale, but the bulk of the rating will be left to the banks themselves.

By moving towards a system where banks take responsibility for assessing their clients, instead of checking off a list of possible infractions, the mainland is moving more in line with international standards for anti-money laundering, as told by Michael Thomas, North Asia director at Wolters Kluwer Financial Services.

The PBOC is also looking to bring information from banks, taxation authorities and customs officials into the fight against money laundering.

Trade finance is by far the most common means to keep large, illicit financial transactions out of the view of officials, Thomas said. At present, goods can be imported, repackaged and exported without ever leaving a ship, making it possible for criminals to claim those products as new exports and receive payments for them – even possible tax exemptions if they are moved in and out of a free-trade zone.

Such shady transactions will become more apparent to the regulator after bank, tax and customs data can be parsed together.

“If someone imports two tonnes of tomatoes, a financial institution isn’t going to go inspect them,” Thomas said. “It’s customs. So the question is whether the regulator can tie all this data together.”

As Shanghai continues to open up its pilot free-trade zone, these procedures will only get more difficult – and more attractive to criminals.

Currently, many services and intellectual property products, such as software, have not been included in the pilot. However, once companies can export non-physical services and software, regulators will have an increasingly difficult time matching those products with the financial transactions used to pay for them, Thomas said.

These factors are likely to slow down the opening of the zone at a time when the central government is trying to crack down on corruption.

President Xi Jinping’s anti-corruption drive is also aimed at stopping officials from moving large amounts of money – along with their families – abroad.

Mainland media have dubbed these cadres “naked officials” and regional governments have come down particularly hard this year on those caught with major assets abroad. In July, the provincial government of Guangdong said it identified more than 2,000 “naked officials” and removed more than 800 of them.

Foreign banks are not completely prepared for the changes that the mainland is pushing through on the anti-money-laundering front, Thomas said.

Banks were required by the end of 2013 to submit their plans for enacting the new customer assessments and those systems should be in place by the end of this year. Yet, as the end of 2014 approaches, not all foreign banks have submitted their plans to the PBOC, putting them nearly a year behind schedule, Thomas said.

Most foreign banks are monitoring the development of the new rules but some will likely be surprised when they are finally enacted, he said.

The institutions likely to be caught most off guard are the mainland’s smaller banks, which are currently gearing up to go global.

Several city banks in mainland China have already listed in Hong Kong and others have expressed their intention to do so. However, these banks have little knowledge of anti-money laundering rules abroad, Thomas said: “They’re running a big risk if they don’t understand the regulations in other countries.”

Source: South China Morning Post


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