2006 INCSR Volume II: Money Laundering and Financial Crimes

China, People’s Republic of

Money laundering remains a major concern as the People’s Republic of China (PRC) restructures its economy. A more sophisticated and globally connected financial system in one of the world’s fastest growing economies will offer significantly more opportunities for money laundering activity. Most money laundering cases now under investigation involve funds obtained from corruption and bribery. Narcotics trafficking, smuggling, alien smuggling, counterfeiting, fraud and other financial crimes remain major sources of laundered funds. Proceeds of tax evasion, recycled through offshore companies, often return to the PRC disguised as foreign investment, and as such, receive tax benefits. Continuing speculation following the July adjustment of the renminbi exchange rate system also fueled illicit capital flows into China throughout 2005. Hong Kong-registered companies figure prominently in schemes to transfer corruption proceeds and in tax evasion recycling schemes. The International Monetary Fund recently estimated that money laundering in China may total as much as $24 billion annually.

In 2005, China drafted a new Anti-Money Laundering Law, under the direction of a ministerial-level coordinating committee created in 2004. This new law is expected to broaden the scope of existing anti-money laundering regulations and to establish more firmly the Central Bank’s authority over national anti-money laundering efforts. The new law was submitted to the National People’s Congress Standing Committee at the end of 2005, but as of the end of December 2005, the NPC had not reviewed the draft legislation. The authorities expect the law to be passed in 2006.

China has taken steps to enhance its anti-money laundering regime. After conducting studies on how to strengthen the system, the People’s Bank of China (PBC) and the State Administration of Foreign Exchange (SAFE) promulgated a series of anti-money laundering regulatory measures for financial institutions. These include: Regulations on Real Name System for Individual Savings Accounts, Rules on Bank Account Management, Rules on Management of Foreign Exchange Accounts, Circular on Management of Large Cash Payments, and Rules on Registration and Recording of Large Cash Payments.

Measures came into effect in 2004 that further strengthened China’s anti-money laundering efforts, including a March 2004 PBC regulation entitled "Regulations on Anti-Money Laundering for Financial Institutions," which strengthens the regulatory framework under which Chinese banks and financial institutions must treat potentially illicit financial activity. The regulation effectively requires Chinese financial institutions to take responsibility for suspicious transactions, instructing them to create their own anti-money laundering mechanisms. Banks are required to report suspicious or large foreign exchange transactions of more than $10,000 per person in a single transaction or cumulatively per day in cash, or non-cash foreign exchange transactions of $100,000 per individual or $500,000 per entity either in a single transaction or cumulatively per day.

Banks are also required to report large renminbi transactions, including single credit transfers of over 1 million RMB (approximately $120,500), cash transactions above 200,000 RMB (approximately $24,000), and domestic fund transfers of over 200,000 RMB, and are expected to report suspicious RMB transactions and refuse services to suspicious clients. Under the regulation, banks are further required to submit monthly reports to the PBC outlining suspicious activity and to retain transaction records for five years. Banks which fail to report on time can be fined up to the equivalent of approximately $3,600.

These measures complement the PRC’s 1997 Criminal Code, which criminalized money laundering under Article 191 for three categories of predicate offenses, including narcotics trafficking, organized crime, and smuggling. In 2001, Article 191 was amended to add terrorism as a fourth predicate offense. Additionally, Article 312 criminalizes complicity in concealing the proceeds of criminal activity, and Article 174 criminalizes the establishment of an unauthorized financial institution. However, the class of existing predicate offenses needs to be expanded.

While official scrutiny of cross-border transactions is improving, the Chinese Government is also moving to loosen capital-account restrictions. For example, as of January 1, 2005, travelers can take up to 20,000 RMB (approximately $2,400) in or out of the country on each trip, up from 3,000 RMB (approximately $360) previously. New provisions allowing the use of RMB in Hong Kong have also created new loopholes for money laundering activity. Authorities are also allowing greater use of domestic, renminbi-denominated, credit cards overseas. Such cards can now be used in Hong Kong, Macau, Singapore, Thailand, and South Korea. To address online fraud, the PBOC tightened regulations governing electronic payments. In 2005, the Central Bank announced new rules that consumers could not make online purchases of more than RMB 1,000 (approximately $124) in any single transaction or more than 5,000 RMB (approximately $620) in a single day. Enterprises are limited to electronic payments of no more than 50,000 RMB (approximately $6,200) in a single day.

In 2003, the Chinese Government established a new banking regulator, the China Banking Regulatory Commission (CBRC), which assumed substantial authority over the regulation of the banking system. The CBRC has been authorized to supervise and regulate banks, asset management companies, trust and investment companies, and other deposit-taking institutions, with the aim of ensuring the soundness of the banking industry. One of its regulatory objectives is to combat financial crimes. However, primary authority for anti-money laundering efforts remains with the PBC, the country’s Central Bank, along with the Ministry of Public Security in terms of enforcement.

In 2004, the PBC established a central national Financial Intelligence Unit (FIU) -the China Anti-Money Laundering Monitoring and Analysis Center, whose function is to collect, analyze and disseminate suspicious transaction reports and currency transaction reports. This move was an important accomplishment of the Anti-Money Laundering Strategy Team tasked with developing the legal and regulatory framework for countering money laundering in the banking sector. The team is chaired by a Vice-Governor of the PBC and is composed of representatives of the PBC’s 15 functional departments

In September 2002, SAFE adopted a new system to supervise foreign exchange accounts more efficiently. The new system allowed for immediate electronic supervision of transactions, collection of statistical data, and reporting and analysis of transactions. A separate Anti-Money Laundering Bureau was established at the PBOC in late 2003 to coordinate all anti-money laundering efforts in the PBC and among other agencies, and to supervise the creation of the new FIU.

In spite of China’s efforts, institutional obstacles and rivalries between financial and law-enforcement authorities continue to hamper Chinese anti-money laundering work and other financial law enforcement. Continuing efforts by some Chinese officials to strengthen the relatively weak legal framework under which money laundering offenses are currently prosecuted in the Chinese criminal code have yet to bear fruit. Furthermore, the current Anti-Money Laundering Law does not allow certain investigative practices commonly used with success in the United States. Also, anti-money laundering efforts are hampered by the prevalence of counterfeit identity documents and cash transactions conducted by underground banks, which in some regions reportedly account for over one-third of lending activities. China has increased efforts in recent years to crack down on such underground lending institutions. According to Chinese media reports, authorities shut down 155 underground banks dealing in $1.5 billion worth of illegal foreign exchange transactions between April and December 2004. Overall in 2004, 50 money laundering cases were jointly investigated by the police, the PBC and SAFE, according to the Chinese press.

A continued structural impediment is the absence of a nationwide automated network to monitor banking transactions through the PBOC. Many inter-banking transactions from one region to another are conducted manually, which delays the PBC’s ability to prevent money laundering. As a result, weaknesses in the Chinese banking and criminal regulatory structure continue to be exploited by both domestic and foreign criminal enterprises.

To remedy these deficiencies, the PBOC launched a national credit-information system in early 2005. The system officially began operation in January 2006. Although still very limited, this system will allow banks to have access to information on individuals as well as on corporate entities. PBOC rules obligate financial institutions to perform customer identification and due diligence, and record keeping. However, there is currently no legislative instrument, only administrative rules, requiring customer due diligence and record keeping. SAFE implemented a new regulation on March 1, 2004 requiring non-residents, including those from Hong Kong, Macau, Taiwan, and Chinese passport holders residing outside mainland China, to verify their real names when opening bank accounts with more than $5,000.

The PRC supports international efforts to counter the financing of terrorism. Terrorist financing is now a criminal offense in the PRC, and the government has the authority to identify, freeze, and seize terrorist financial assets. Subsequent to the September 11, 2001, terrorist attacks in the United States, the PRC authorities began to actively participate in U.S. and international efforts to identify, track, and intercept terrorist finances, specifically through implementation of United Nations Security Council counterterrorist financing resolutions.

China’s concerns with terrorist financing are generally regional, focused mainly on the western province of Xinjiang. Chinese law enforcement authorities have noted that China’s cash-based economy, combined with its robust cross-border trade, has led to many difficult-to-track large cash transactions. There is concern that groups may be exploiting such cash transactions in an attempt to bypass China’s financial enforcement agencies. While China is proficient in tracing formal foreign currency transactions, the large size of the informal economy—estimated by the Chinese Government at about 10 percent of the formal economy, but quite possibly larger—makes monitoring of China’s cash-based economy very difficult.

The PRC signed the UN International Convention for the Suppression of the Financing of Terrorism on November 13, 2001, but has not ratified it. The PRC has signed mutual legal assistance treaties with 24 countries.

The United States and the PRC signed a mutual legal assistance agreement (MLAA) in June 2000, the first major bilateral law enforcement agreement between the countries. The MLAA entered into force in March 2001 and provides a basis for exchanging records in connection with narcotics and other criminal investigations and proceedings. The PRC is a party to the 1988 UN Drug Convention, and in 2003 ratified the UN Convention against Transnational Organized Crime. In January 2006, it ratified the UN Convention against Corruption.

The United States and the PRC cooperate and discuss money laundering and other enforcement issues under the auspices of the U.S.-PRC Joint Liaison Group’s (JLG) subgroup on law enforcement cooperation. The JLG meetings are held periodically in either Washington, D.C., or Beijing. In addition, the United States and the PRC have established a Working Group on Counter-Terrorism that meets on a regular basis. The PRC has established similar working groups with other countries as well.

In late 2004, China joined the newly-created Eurasian Group (EAG), a Financial Action Task Force (FATF)-style regional group which includes Russia and a number of Central Asian countries. In January 2005, China became an observer to the FATF and desires to become a full member of the FATF.

In 2005, China’s CBRC signed a memorandum of understanding with the Philippine Central Bank, Bangko Sentral ng Pilipinas, to share information on suspected money laundering activity. China’s financial intelligence unit, the China Anti-Money Laundering Monitoring and Analysis Center, also signed its first MOU with a foreign counterpart at the end of 2005, with South Korea’s FIU, allowing the two to exchange information related to money laundering, terrorism financing and other criminal financial activity.

The Government of the People’s Republic of China should continue to build upon the substantive actions taken in recent years to develop a viable anti-money laundering/terrorist financing regime consistent with international standards. Important steps include expanding its list of predicate crimes to include all serious crimes, and continuing to develop a regulatory and law enforcement environment designed to prevent and deter money laundering. China should ensure that the FIU is an independent, centralized body with adequate collection, analysis and disseminating authority, including the ability to share with foreign analogs and law enforcement, and that a system of STR reporting is adequately implemented. It will be important for China’s FIU to join the Egmont Group of Financial Intelligence Units as soon as possible to ensure it has access to vital financial information on possible illicit transactions occurring in other jurisdictions. China should provide for criminal penalties for non-compliance with requirements that financial institutions perform customer identification, due diligence, and record keeping, as well as incorporating the suspicious transaction-reporting requirement into law. China should also become a party to the UN International Convention for the Suppression of the Financing of Terrorism.