In mid-August, the Financial Action Task Force on Anti-Money
Laundering (FATF) published an assessment of how the anti-money
laundering (AML) and counter financing of terrorist (CFT) standards
have been implemented in China.
Founded in 1989 by the G7, the FATF currently has 29 member
countries and territories, and 2 regional organizations.
China's compliance with the FATF’s 49
Recommendations
The report details China's compliance levels according to the 49
FATF Recommendations. It also describes and analyzes those
measures, and provides recommendations to improve the system.
“With the enactment of the AML Law and the 2006 Penal Code
amendment, China has rapidly made significant progress in
implementing and enhancing its AML/CFT system,” said Richard
Barrett, drafter of the report.
“In 2005, Chinese authorities cracked down on 47 underground
banks and arrested 165 money laundering suspects. In December 2006,
China broke up another 7 such banks and arrested 44 suspects
involved in schemes totaling 14 billion yuan (US$1.84 billion),”
the report reads.
The report details China's compliance ratings with the 49 FATF
Recommendations. Rating levels are: compliant, largely compliant,
partially compliant, and non-compliant.
Among these 49 recommendations, China has 8 items rated as
compliant, 16 as largely compliant, 16 as partially compliant and 9
as non-compliant.
Half of China’s total items are rated as compliant and largely
compliant. Compared to most FATF members, the country holds an
average rating.?
“China has implemented a combined declaration system with the
Customs Administration. All cross-border transportations of cash
exceeding 20,000 yuan (US$2,630) in local currency or US$5,000 in
foreign currency must be declared.” The report states. “Mechanisms
are in place to strengthen the ability to freeze suspicious
domestic accounts set up by foreign companies or individuals.”
China’s defects and shortcomings regarding the anti-money
laundering system have been frankly outlined. “China faces a great
shortage of anti-money laundering experts. Many current hires do
not know the relevant laws and regulations. Too many suspicious
transactions demand examination; the related department does not
have enough personnel.
The report also mentions that China should adopt tougher
measures toward countries that have failed to meet the FATF
anti-money laundering standards regarding multi-national support
systems. Due to these differences, China’s law enforcement agencies
and financial experts cannot freely provide assistance to foreign
counterparts. For example, Chinese authorities forbid foreigners to
establish a shell bank in the country. Significantly, China does
not prohibit domestic banks to conduct transactions with foreign
shell banks.
The FATF has also criticized China’s jewelry dealers and real
estate agencies. They have no procedures to validate clients’
identification. They keep fluid records, resulting in large sums of
money entering the Chinese real estate market and partly
contributing to soaring house prices. The report reveals that some
20 percent of high-end houses and villa transactions classify as
money laundering offences. “This is not a secret among insiders,”
it reads.
China suffers from money laundering crimes
On June 28 of this year, China became an official member of the
FATF. But for decades the country has suffered from crimes linked
to money laundering schemes.
According to statistics from the International Monetary Fund,
the total sum of money laundering crimes worldwide has now risen to
US$1.8 trillion and occupies five percent of the total global GDP.
Moreover, the sum is increasing at a speed of US$100 billon
annually.
“Money laundering criminals are shifting their venues toward
developing countries like China, Myanmar and Vietnam,” said Michael
McDonald, a US expert in the international anti-money laundering
field.
China is suffering an annual loss of some 200 billion yuan
(US$26 billion) that flows out through underground banks,
statistics from China’s Ministry of Commerce indicate.
“Before China joined the FATF, Chinese authorities had trouble
gaining credibility. They needed help from international agencies
when demanding the return of absconded funds taken by corrupt
officials who fled to other countries,” noted Yang Cheng, a Chinese
expert in transnational crimes. For decades, China has had massive
difficulties recovering funds illegally taken out of the
country.
“It is imperative for China to work together with countries
around the world battling anti-money laundering schemes,” said Yang
Cheng. “Only via the globally respected FATF membership can Chinese
banks truly gain the trust of foreign banks as well as advance
toward the international financial market.”
The FATF boasts global success combating money laundering. By
holding three plenary meetings and one symposium attended by the
entire member states each year, the FATF can survey each member
country’s anti-money laundering performance. Then they assist these
countries in establishing a more transparent and stable financial
system. This helps to ensure that all national financial indexes
conform to relevant international standards. The process also
promotes a way to lift sanctions imposed by other countries.
Because loopholes exist in the war against money laundering,
coupled with the factor that they were not full members of the
FATF, Turkey and member states of the Association of Caribbean
States (ACS) were placed on the FATF’s list of non-cooperative
countries and territories. Consequently, western countries imposed
sanctions regarding investment drawing and international
settlements. “Joining FAFT can improve China’s related mechanisms
to check embezzlement and other swindles,” commented David Mahon, a
general manager of an investment management company.
In January 2003, the People’s Bank of China (PBC) issued three
rules concerning anti-money laundering and the reporting of
large-sum and suspicious payment and foreign exchange transactions
by financial institutes. The Law on Anti-money Laundering was
enacted on October 2006 and took effect as of Jan. 1, 2007.
In 2004 Governor Zhou Xiaochuan of the PBC wrote two letters to
the President of the FATF, Frank Swedlove. He expressed China’s
fervent wish to become a member of the FATF. The governor said that
China would accept the FATF principles. This included Forty
Recommendations and Nine Special Recommendations on Terrorism
Financing. The governor pledged that China’s battle against
anti-money laundering and anti-terrorism financing would be carried
out based on the 49 FATF Recommendations.
An uneasy journey
On Nov. 12 of last year, a FATF delegation of seven people
arrived in China with the mission to evaluate whether China had met
the requirements to become a FATF member. These seven experts
drafted an assessment that rated China’s anti-money laundering
accomplishments.
Seven experts arrived from the US, France, Australia, etc. Their
professional fields covered finance, law, and administration.
During the 13-day mission, the evaluation group visited 35
units, including the PBC, the Ministry of Foreign Affairs, the
Ministry of Public Security, the Supreme People's Court, the
Supreme People's Procuratorate, and various banking, securities and
insurance regulatory commissions. Forty meetings were held between
the group and the respective units.
Additionally, they made on-the-spot surveys of the frontline
positions for anti-money laundering in banks. Three banks in
Beijing and Shanghai were sampled randomly. When visiting a bank,
they asked the managers and staff members questions, such as
whether they are required to check customer IDs during a
transaction, and whether they would report to the higher-ups and
save the transaction details when suspicious clues arose.
“To gain credibility regarding their answers, we sometimes asked
different banking staff of different banks the same question. If
the answers jived, we would investigate further,” an expert from
the group revealed.
The US and French experts were fluent in Chinese. Especially
selected by FATF, they wanted to get real information about China’s
anti-money laundering situation.
Related resources covered by the Chinese media were also
referenced when the evaluating group was drawing up their report.
Experts read Chinese newspapers, magazines, and professional
publications, and had access to the websites of governmental
institutions where they could download officially releases on
anti-money laundering and other related materials.
Another grounds for evaluation is a questionnaire the FATF gave
to the Chinese government. It contained over forty items, including
current laws and regulations combating money laundering as well as
relevant statistics.
On June 28, 2007, the Plenary Meeting of FATF agreed to accept
China as a full member of the FATF based upon broad consensus in
Paris. Mr. Swedlove, the president of the FATF, said in the
meeting, “Although a lot of work needs to be done regarding China’s
battle against anti-money laundering, we cannot close our
organization’s door on a country with a population of 1.3 billion
and ever increasing financial influence.”
(China.org.cn by Wang Zhiyong and Zhang Tingting August 17,
2007)
