In Depth: China Arms Itself With Stronger Law to Fight Money Laundering

[para. 1][para. 2] China's financial institutions are preparing for significant changes with the upcoming enforcement of the revised Anti-Money Laundering (AML) Law, effective January 1. This law aims to strengthen the fight against financial crimes, including money laundering, gambling, and terrorist financing. The revisions are set against a backdrop of evolving financial crimes, the rising involvement of nonfinancial institutions like real estate and accounting firms, and the advancement of technologies such as cryptocurrencies which are increasingly used for money laundering. The potential threats these pose to China's financial and national security are also considered in the new law.

[para. 3] The AML Law's latest revision is the first major update since its introduction in 2007, coinciding with the Financial Action Task Force's (FATF) upcoming review of China's AML framework. The revisions address criticisms from the FATF's 2019 report, bringing China's regulations closer to international standards. [para. 4][para. 5] Professor Wang Xin from Peking University Law School emphasizes the need for legislative balance between international standards and local AML conditions. This includes ensuring compliance while protecting customer data. The revision process was unusually thorough, involving three rounds of public consultation before the final draft was passed on November 8.

[para. 6][para. 7][para. 8] The new law broadens the definition of money laundering, extends its scope to nonfinancial sectors like real estate and accounting, and emphasizes monitoring risks associated with emerging technologies. It acknowledges AML as a national security issue, applying to offenses outside China impacting national security. Institutions now have intensified due diligence obligations, requiring thorough customer verifications, ongoing monitoring, and maintaining transaction records for at least ten years.

[para. 9] Penalties for noncompliance will significantly increase, with fines up to 10 million yuan ($1.4 million) for severe breaches. Since the FATF report, financial watchdogs have intensified AML supervision, aligning regulations with global standards under the new law. [para. 10] The People’s Bank of China is revising existing regulations and possibly formulating new ones to align with the updated AML law.

[para. 11][para. 12][para. 13] Despite prior awareness among financial institutions of impending changes, compliance remains challenging due to the rigorous requirements. The revised law expands its reach to previously under-supervised sectors, including real estate and accounting, which typically lack AML regulation experience. Guidance from respective supervisory authorities is anticipated to aid implementation, especially concerning this widespread expansion.

[para. 14][para. 15][para. 16] A novel aspect of the amended law is its introduction of a risk-based approach to AML, directing resources based on assessed risks, as advocated by the FATF. Compliance is expected to be proactive, requiring institutions to evaluate their risks rather than simply follow prescriptive instructions. Larger organizations are predicted to be focal points of regulatory scrutiny due to their significant impact potential.

[para. 17][para. 18] The updated law includes provisions for reduced penalties for institutions that demonstrate due diligence and responsibility in their AML practices. This principle is critical for encouraging ongoing AML efforts within institutions. Yu Pei from FTI Consulting indicates that the law's allowance for reduced penalties under specific conditions will bolster confidence and engagement in AML activities.