Authors: Kyle Wombolt, Jeremy Birch, Karen Ip and Mark Chu
On 17 April 2019, the Financial Action Task Force (FATF) released its fourth round mutual evaluation report (Report) on the effectiveness of China’s measures on anti-money laundering (AML) and combating terrorist financing (CTF). The FATF is an intergovernmental organization which, in addition to developing AML and CTF policies, conducts periodic evaluations of member countries in order to evaluate the effectiveness of their AML and CTF policies.
What changes can institutions anticipate based upon the FATF’s recommendations?
Based on the FATF’s recommendations and recent developments within China, financial institutions and others falling within the AML Law’s ambit are likely to see increased regulatory scrutiny of their compliance with AML and CTF obligations. From a practical perspective, this is likely to result in an increased frequency of regulatory inspections, higher levels of enforcement activity and elevated penalties being sought.
What are the FATF’s findings in the Report?
Some key findings include the following:
- The effectiveness of China’s financial intelligence unit (FIU) is hampered by the incomplete sharing of information, inconsistent reporting practices for suspicious transaction reports (STR), and a lack of information regarding beneficial ownership (BO).
- The effectiveness of China’s Financial Institutions’ (FIs) preventative measures is limited by the market’s current level of understanding of ML/TF risks, a lack of implementation of requirements related to BO and ongoing due diligence, and gaps relating to the reporting of STRs.
- Designated Non-Financial Businesses and Professions’ (DNFBPs) (such as lawyers, real estate agents, and dealers in precious metals) implementation of preventative measures to address ML and TF is very limited.
What are the FATF’s recommendations in the Report?
The FATF has made several recommendations in the Report, including the following:
First, the FATF recommends that the People’s Bank of China (PBOC) increase onsite inspections in the banking sector, ensure adequate supervision of the DNFBP sectors, and extend the Anti-Money Laundering Law (AML Law) to the online lending sector. With regards to supervision of the DNFBP sectors, the PBOC issued a notice in July 2018 (link in Chinese) that would apply the AML Law’s AML and CTF obligations to DNFBPs. In October 2018, China’s top financial regulators – the PBOC, the China Banking and Insurance Regulatory Commission and the China Securities Regulatory Commission – also issued joint guidelines (link in Chinese) to expand AML and CTF oversight to internet financial service providers, including those conducting online payment and lending services.
Second, the FATF recommends that China should review the effectiveness of its financial sanctions for AML and consider substantially increasing the size of penalties for violations of the AML Law. There are already indications that China is moving in this direction. In particular, supporters of a motion to amend to the AML Law (link in Chinese) have proposed expanding the scope of the crime of money laundering beyond the current seven categories of predicate crimes. The supporters of the motion have also proposed ensuring that obligations under the AML law reach DNFBPs such as real estate agents, precious metals exchanges and law firms. Finally, they have proposed increasing the monetary penalties available under the AML Law which are currently capped at 5 million yuan (or approximately US$742,170).
Third, the FATF recommends that guidance and training should be provided to FIs and DNFBPs to enhance their understanding of the concept of beneficial ownership. The Report highlighted that institutions sometimes had varying, incomplete understandings of the concept of beneficial ownership. The FATF also states that whilst China’s National Enterprise Credit Information Publicity System can serve as a starting point to obtain BO information, it does not indicate whether the registered legal owner or the shareholders is the BO.