The Financial Action Task Force (FATF) adopted the Fourth Mutual Evaluation Report on Anti-Money Laundering and Combating the Financing of Terrorism in China in February this year. To submit to the FATF’s fourth evaluation, China has, since 2016, issued a series of regulatory statutes, regulations and guidelines, and intensified the penalties available in anti-money laundering work. In addition to banks, such financial institutions as fund management companies, insurance companies and trust companies, as well as such specific non-finance entities as real estate developers, precious metal traders and company service providers established in China are all entities that bear anti-money laundering obligations in China. The overall intensity, depth and breadth of anti-money laundering in China will further increase in 2019.
Improvement of the financial institution anti-money laundering compliance system. On 29 January 2019, the China Banking and Insurance Regulatory Commission (CBIRC) issued the Administrative Measures for Anti-Money Laundering and Combating Terrorism Financing by Banking Financial Institutions, establishing the CBIRC’s basic framework for anti-money laundering work.
Compared with other financial institutions, anti-money laundering systems in the banking industry are sound, as their overseas branches have consistently been a key focus of anti-money laundering regulation. However, as seen from the penalties imposed in the 2018-2019 period, banks remain the major recipients of penalties.
Particularly since the new document specifies that senior management bear responsibility for the implementation of management, and the board of directors bear ultimate responsibility, and add to that the commencement during the past two years of “double punishment” of the entity involved in a matter and the persons directly responsible, it can be foreseen that the pursuit of the liability and the punishment of responsible persons, even senior management, will further strengthen in future.
Non-banking financial institutions such as insurance companies, fund management companies and securities companies are still at the early stages of establishing anti-money laundering systems, but as the regulatory force has gradually turned towards them in recent years, the reviews of their internal control systems and transaction documents face greater compliance risks.
From the information on penalties imposed, it can be seen that customer identification and identification of beneficial owners have been the focus of regulation during the past year. In June 2018, the central bank issued the Notice of the People’s Bank of China (PBOC) on Issues Relevant to Further Improving the Work of Identifying Beneficial Owners, requiring obligation-bearing institutions to perform the obligation of identifying beneficial owners.
Many penalized financial institutions violated the provisions of article 32 of the Anti-Money Laundering Law concerning the obligation to carry out identification of customers and/or the obligation to submit reports on large or suspicious transactions, and these two points will remain the focus of punishment of financial institutions in future. Furthermore, we would recommend that financial institutions pay particular attention to the following: customer due diligence; file keeping; taking of extra measures in respect of politically sensitive persons; compliance management of overseas branches; and co-operation with financial intelligence units.
Anti-money laundering risk warnings for specific non-finance organizations. The Notice of the PBOC General Office on Strengthening the Oversight of Anti-Money Laundering by Specific Non-Finance Organizations, and the Notice of the PBOC General Office on Further Strengthening the Work Associated with Anti-Money Laundering and Combating Terrorism Financing, set such specific non-finance organizations as real estate developers, real estate intermediary firms, precious metal traders, law firms, notary offices, etc., as entities that bear anti-money laundering obligations, and subject them to penalties with reference to the anti-money laundering regulations governing financial institutions.
Where no specific provisions exist, fines will be imposed, illegal income confiscated, and the directors, senior officers and directly responsible persons punished in accordance with article 46 of the Law on the PBOC. Where there is suspicion that a criminal offence has been committed, the criminal liability of the entity and the relevant responsible persons will be pursued. To date, no non-finance organization in China has been penalized for failure to perform its anti-money laundering obligations, but the establishment of a sound anti-money laundering risk control system is a requirement that enterprises will necessarily face in future.
Be aware of anti-money laundering criminal risk. In contrast to the third evaluation, the fourth evaluation by the FATF contained a new effectiveness evaluation of the matters recommended by the FATF, in addition to the compliance evaluation, and the criteria for the compliance evaluation of the criminalization of money laundering were also more stringent than those in the past. Articles 191 and 312 of the PRC Criminal Law criminalize money laundering. Items (1) to (4) of article 191 of the Criminal Law address money laundering done through financial markets, whereas item (5) is a catch-all clause, i.e., money laundering carried out “by other means”.
The Anti-Money Laundering Law specifies that money laundering is a crime lying downstream from seven crimes, including gang-type organized crime, financial fraud, etc., the purpose of which is to cover up or conceal criminal proceeds and benefits. In judicial practice, the majority of acts of money laundering have been placed within the scope of the crime of covering up or concealing criminal proceeds, or the crime of benefiting from criminal proceeds in article 312 of the Criminal Law.
When a financial institution engages in finance business or a specific non-finance organization expands into an innovative business such as blockchain technology, it can easily cross a criminal “red line” due to a lack of criminal compliance experience, and complex financial transactions such as securities transactions, cross-border payments, etc., which can be used to cover up the improper interposition of illegal funding acts, also give rise to major criminal risks.
Also, for fund-intensive crimes such as illegal fund raising, it is necessary to complete the redirection of funds through a financial institution and use various types of non-counter financial instruments and complex transactions to launder money. When the personnel of a financial institution are involved in such crimes, it is also necessary to have a third party investigate and handle the matter to avoid the institution and its senior officers being exposed to criminal risks. In such circumstances, internal investigations and precautionary criminal compliance become especially important.
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