China Imposes Stricter Anti-Money Laundering Rules

China’s top banking regulator is stepping up an anti-money laundering campaign by imposing new restrictions on financial institutions’ market entry, internal controls and management structures. Regulators aim to rein in risky transactions.

The China Banking and Insurance Regulatory Commission (CBIRC) issued its first policy document this year Thursday targeting banks’ anti-money laundering and counter-terrorist financing practices. The document outlines requirements for banks to track capital sources and verify the background of shareholders and executives, as well as designate specific individuals to lead anti-money laundering and anti-terrorist financing efforts.

The commission’s move came on the heels of a crackdown on financial risks and a slew of measures to enhance institutions’ anti-money laundering compliance, following suit with global counterparts.

The Financial Action Task Force (FATF), a global standards-setter on anti-money laundering and other economic crimes, is conducting a fourth round of mutual evaluations to determine whether China’s legal and institutional framework is effective in combating money laundering and financing of terrorism. The results will be published most likely in the spring, Caixin has learned.

China has completed three rounds of evaluation by the FATF. The biggest challenge in the fourth round is whether China’s anti-money laundering system established in accordance with global standards is as effective as expected, a regulator told Caixin earlier.

The latest rules are aimed at ensuring the effectiveness of banks’ anti-money laundering policies, a banking sector source said. The rules require banks to assign a specific executive to take charge of anti-money laundering and counter-terrorist financing measures and to grant the executive adequate independence and resources to carry out the duties.

Banks should put information about their anti-money laundering and counter-terrorist financing efforts and progress on their internal information systems to enable risk monitoring, analysis and information sharing, according to the rules.

The rules also require banks to conduct background checks on shareholders and executives and track any investment capital to the origin. Banks should set up internal mechanisms to identify customers and control suspicious transactions. Bank staffs should be equipped through training with anti-money laundering and anti-terrorist financing knowledge, according to the rules.

Sources close to the commission said lax oversight of bank shareholders has been blamed for murky transactions in the Chengdu Rural Commercial Bank, which is accused of helping its major shareholder Anbang Insurance Group to facilitate risky borrowings and violate anti-money laundering rules.

China’s financial regulators have stepped up an anti-money laundering crackdown since 2017 when the State Council issued guidelines to highlight such efforts as part of a national strategy.

In July 2018, the central bank fined five financial institutions for violating anti-money laundering law, including Bank of Communications, Ping An Bank, Shanghai Pudong Development Bank, Galaxy Securities and China Life Insurance. It was the first time for the Beijing head office of the monetary authority to impose such fines.

The penalties ranged from 700,000 yuan to 1.7 million yuan ($102,000 to $250,000) for violations including failing to verify client identities, failing to properly store customer identity documents and transaction records, and failing to report large, suspicious dealings.

In October, the central bank along with the CBIRC and the China Securities Regulatory Commission issued joint guidelines to expand anti-money laundering and counter-terrorism financing oversight to the burgeoning internet financial sector. The extension covers online payment providers, online lenders, online financing information intermediaries, equity crowdfunding platforms, online fund sellers, insurance and trust platforms and internet consumer finance companies.

Chinese financial institutions are facing closer anti-money laundering scrutiny as they expand globally. Last year, the Industrial and Commercial Bank of China (ICBC) was fined $6.16 million by U.S. regulators for insufficient anti-money-laundering measures. Previously, Bank of China, Agricultural Bank of China and China Construction Bank also received warnings or penalties for lapses in anti-money-laundering practices from foreign regulators.

Chen Hao, an analyst at Industrial Securities, said in a research note that tighter anti-money laundering regulation and tougher penalties on violators will put more pressure on banks’ capital. Some overseas banks have increased their provisions to cushion possible risks of penalties, Chen said.

Contact reporter Han Wei (weihan@caixin.com)