China Gets Tough on Money Laundering

The new anti-money laundering provisions and the two procedures on currency transactions go much further in giving the banks an enforcement role. This is spelled out in three thematic areas, the first being "know your customer". It is now incumbent upon the banks to examine for authenticity and legality the documents presented by customers requiring bank services, regardless of whether they are individuals, corporations or other entities. These documents are to be photocopied and the copies kept in files. The second area is reporting of large or suspicious transactions, which relates to internal book transfers as well as to cash transactions. Suspicious transactions should be immediately reported to the Public Security Bureau (PSB). The third area is record keeping. The regulations stipulate requirements for maintaining records of customer accounts and transactions data.

The procedures on renminbi transactions require reporting of: 1) single transfers between legal persons, organizations, and privately-owned businesses (collectively termed "units") of Rmb1 million (US$121,000 equivalent) and above; and 2) each instance of i) cash deposits or withdrawals, ii) transfers between bank accounts of individuals, iii) transfers between settlement accounts of units and individuals of Rmb200,000 (US$24,000 equivalent) and above.

The regulations give 13 examples when defining "suspicious" payment transactions that should be reported immediately to the PSB. They are generally in relation to the amount, frequency, direction, purpose and character of the transactions. One example provided by the PBOC would be new accounts into which numerous small transfers flow, with the accumulated balance then transferred out, and vice versa. In newspaper interviews PBOC officials have said that the designation "suspicious" could usefully and more neutrally be construed to mean "abnormal". The responsibility of the bank is only to report the transactions; it is left to the PSB to determine if they involve any wrongdoing.

For the financial institutions involved, the regulations require establishment of discrete policies, procedures and job responsibilities and personnel relating to anti-money laundering. All these aspects will be subject to PBOC inspection and audit.

Several noteworthy aspects present themselves in these regulations. One is the limitation of the regulations to financial institutions under the responsibility of the PBOC: policy banks, commercial banks, credit cooperatives, postal savings, trust and investment companies, finance lease companies, and "foreign financial institutions".

Specifically left out are China's securities and funds management firms, which are under the supervision of the China Securities Regulatory Commission (CSRC), and insurance firms, which are under the China Insurance Regulatory Commission (CIRC). We would expect this deficiency to be remedied in the future. These companies, particularly securities firms, are well known reservoirs of the illicit funds that move through the Chinese financial system and the Chinese economy.

We note also that, so far at least, the minimum limit on reporting of cash transactions, at US$24,000 equivalent, is far above the US$10,000 equivalent in most banking centres, including Hong Kong. We can deduce that the relatively high limit reflects the fact that in China, where bank transfers often take days or weeks, cash is a very common means of settlement and business is often conducted through individual accounts. In this context a Rmb200,000 cash transaction is by no means particularly large or unusual.

For practitioners no less than for casual observers, the relentless flow of partial and contradictory regulations from Chinese government departments has tended to produce a degree of dismissal and scepticism. This unintended outcome stems from the fact that, as in the present case, new regulations can in effect dictate in considerable detail the requirements and steps toward achieving goals that have not been realized by previous, less specific regulations.

While it is correct to expect, in the short term, shortfalls and large gaps in compliance with the new regulations, it is a mistake to believe that the regulations are not very important or will not have a significant effect. Further, the effect will certainly increase over time. In explaining how it would handle the challenge of actually processing all the information that banks would be reporting, the head of the PBOC monitoring office in a recent public interview sketched the central bank's vision of a nationwide account transaction information management system. This system is to be constructed using account numbers for all individual corporate and other entity accounts, opened at all financial institutions. Such a systems capability may sound fanciful. But in effect the infrastructure already exists with the PBOC's central bank loan reporting system. The realization of PBOC's "vision"