FATF Releases Fourth Round Mutual Evaluation Report of China

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.

The month ahead in financial services regulatory developments…

In this blog post, we round-up forthcoming developments in the UK and at EU and International levels in financial services regulation for June 2019.

3 Jun
5 Jun
8-9 Jun
  • G20 ministerial meetings:
    • finance ministers and central bank governors (Fukuoka, Japan)
    • trade and digital economy (Tsubuka, Japan)
10 Jun
11 Jun
12 Jun
13-14 Jun
14 Jun
15-16 Jun
19-20 Jun
20-21 Jun
21 Jun
26 Jun
27 Jun
28-29 Jun
29 Jun
  • Deadline for responses to the European Securities and Markets Authority (ESMA) CP on ELTIF RTS
By 30 Jun
End Jun
Jun
Jun/Jul
Jun-Aug

Updated DOJ Guidance Steers Effective Compliance and Remediation Programmes

Authors: Kyle Wombolt, Jeremy Birch and Charlotte Benton

The US Department of Justice Criminal Division (DOJ) has issued updated guidance on the Evaluation of Corporate Compliance Programs (guidance). Under the guidance, DOJ prosecutors evaluate the effectiveness of a company’s compliance programme when conducting an investigation, determining whether to bring charges or negotiating plea or other arrangements.

“Whether in the US, Asia Pacific or elsewhere, the guidance sets out useful prompts for a best practice compliance framework” observes Hong Kong corporate crime and investigations partner, Jeremy Birch. “Given the propensity of regulators to borrow from each other’s procedures and practices, it will also be of interest to companies subject to regulatory scrutiny, investigation or enforcement outside the US, as a benchmark for appropriate remediation and resolution.”

The guidance covers many of the same areas as the previous version, providing additional context to the multifactor analysis of a compliance programme.

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OFAC Emphasizes Importance of Risk-Based Sanctions Compliance Programs for US and International Companies

Authors: John O’Donnell, Jonathan Cross, Geng Li, Christopher Milazzo, Susannah Cogman and Daniel Hudson

Further emphasizing its expectation that all companies whose business touches on the United States should maintain a robust, risk-based US economic sanctions compliance program (“SCP”), the US Treasury’s Office of Foreign Assets Control (“OFAC”) has published a detailed “Framework for OFAC Compliance Commitments” (the “Framework”) setting forth the key components of an adequate SCP. OFAC’s release of the Framework heightens the need for US and international companies to review their existing policies, procedures and controls relating to sanctions compliance, and to make appropriate changes to update relevant policies in line with OFAC’s guidance. As the number and scale of US sanctions enforcement actions increase, maintaining an effective SCP is an essential tool for managing sanctions risk; conversely, the Framework makes clear that the absence of an adequate SCP will be viewed negatively by OFAC pursuant to its Economic Sanctions Enforcement Guidelines.

The Framework includes a discussion of the typical “root causes” of sanctions violations leading to OFAC enforcement action; in most cases, SCP deficiencies are key elements in these examples. Thus, all companies whose business directly or indirectly involves the US or US persons should review their SCP carefully in consideration of these identified root causes.

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No More “Significant Reduction Waivers” – The Trump Administration Further Strengthens Sanctions against Iran

On April 22, 2019, the White House announced that the Trump administration will not issue further “significant reduction waivers” exempting specified countries from the threat of secondary sanctions based on their purchases of Iranian crude oil. The move signals the Trump Administration’s intention to utilize economic sanctions to bring Iran’s level of oil exports to zero. The announcement follows the recent determination to designate the Islamic Revolutionary Guard Corps as a foreign terrorist group, both forming part of the Administration’s “maximum pressure” campaign with respect to Iran. The campaign aims to push Iran to take action in response to the Trump Administration’s “twelve demands,” which relate both to nuclear issues and to other aspects of Iran’s behaviour, such as its involvement in conflicts in Syria and Yemen and tensions with US allies in the region.

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New podcast on conducting internal investigations in Asia

Robert Hunt, a partner in the firm’s corporate crime and investigations practice, has recorded a podcast for the Corporate Compliance and Ethics Blog on trends in internal investigations in Asia.

Whilst investigations used to be largely corruption-related, Rob is seeing an increasing number of investigations into sales and revenue fraud, money laundering and sanctions. Robert discusses these as well as the rise of data privacy and privilege issues and the role played by language and culture in investigations.

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AML/CFT compliance in Hong Kong: Recent record fine and reminder of latest guidance

Authors: William Hallatt, Hannah Cassidy, Natalie Curtis, Valerie Tao and Jennifer Fong.

The Hong Kong Securities and Futures Commission (SFC) has recently reprimanded and fined Guosen Securities (HK) Brokerage Company (Guosen) HK$15.2 million for failures in complying with anti-money laundering and counter-terrorist financing (AML/CFT) regulatory requirements when handling third party fund deposits.

This is the largest fine imposed under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) to date.

In this e-bulletin, we provide an overview of the Guosen case and other recent cases, the regulators’ approach to AML/CFT enforcement, as well as a reminder of the recent AML/CFT regulatory guidance.

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Parliamentary Reports Back Improvements to the Supervision and Prosecution of Economic Crime

In this article we summarise some of the key points arising from two important reports regarding economic crime in the UK which have been published in recent weeks.

On 8 March 2019, the House of Commons’ Treasury Committee published its “Economic Crime – Anti-money laundering supervision and sanctions implementation” report (the “Treasury Committee Report”), which suggests improvements to be made in order to tackle economic crime and develop anti-money laundering (“AML”) supervision.

On 14 March 2019, the House of Lords’ Select Committee on the Bribery Act 2010 (“UKBA”) published a report titled “The Bribery Act 2010: post-legislative scrutiny” (the “UKBA Report”) which considered whether the Act is achieving its intended purposes.

We outline some of the key conclusions and recommendations of the reports, including in relation to:

  • Proposed Legislative Reform – including potential changes to corporate criminal liability and the Bribery Act Guidance in relation to the “adequate procedures” defence and corporate hospitality;
  • Deferred Prosecution Agreements (“DPAs”) – suggested improvements including in relation to the court’s discretion, discounts, the prosecution of individuals and their application to smaller companies;
  • AML Supervision – the risks of the current approach to AML supervision by multiple bodies and suggested improvements;
  • Financials Sanctions – the effectiveness of sanctions for economic crime, including the possibility of introducing a discretion to block UK listings on the grounds of national security and the influence of e.g. Russian money in the UK;
  • Derisking – recommend strategic action to combat derisking;
  • Suspicious Activity Reports (“SARs”) – consideration of the SARs reform programme and suggested improvements;
  • Information Flows – potential information flows at bank level and the National Economic Crime Centre’s (the “NECC”) role as a co-ordinator of law enforcement, regulators and the private sector; and
  • Resources and Delays – the impact of delays and a lack of resources on combatting economic crime.

Please click here to read our full briefing.

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COURT OF APPEAL UPHOLDS DISCLOSURE ORDER DESPITE RISK OF PROSECUTION IN IRAN

The Court of Appeal has upheld a first instance decision requiring the claimant Iranian bank to produce customer documents in unredacted form, subject to measures to protect their confidentiality, despite the fact that compliance would put the claimant in breach of Iranian law: Bank Mellat v HM Treasury [2019] EWCA Civ 449.

This case gives a helpful illustration of the court’s approach where a party asserts that the production of documents under its disclosure obligations will contravene foreign criminal law. The court will balance the actual risk of prosecution in the foreign jurisdiction against the importance of the documents to the fair disposal of the trial. While the risk of prosecution will be a factor to weigh in the balance, it will not be determinative.

It is interesting to compare the High Court’s similar decision, albeit in a contrasting context, in the recent case of ACL Netherlands BV v Lynch (considered here). In that case the court declined to grant a party permission to use documents received on disclosure in the English litigation in order to comply with a US grand jury subpoena. Both decisions deal with a scenario where documents are required for proceedings in one jurisdiction but production will put the party in breach of its obligations under the (civil or criminal) law of another jurisdiction. Both decisions highlight the difficulties that may be faced by a party that finds itself caught between conflicting obligations in this way.

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