AML rules tighten up

The new rules will also impact non-financial organisations such as non-banking payment institutions, foreign exchange providers, internet micro-loan companies, bank card providers and clearing institutions.

Some of these organisations – such as consumer financing or internet micro-loan companies – already had to deal with existing AML requirements from other financial regulators including the China Banking and Insurance Regulatory Commission (CBIRC).

Consolidating approach

‘The new rules consolidate the AML and CTF requirements applicable to financial institutions generally, which were scattered in different regulations before,’ says Sun Hong, who heads up the Shanghai office at the law firm Norton Rose Fulbright.

Some pieces of legislation that apply to specific sectors, such as the CBIRC’s Administrative Measures for Combating Money Laundering and Terrorism Financing by Banking Financial Institutions, remain in place.

Another significant change is that institutions will need to tighten their internal controls and risk management as well as establish dedicated AML and CFT audit mechanisms, either internal or external, that will submit audit reports directly to the board of directors or a designated committee.

The rules clearly outline what action the PBOC might take and how it will exercise its supervisory powers.

‘Know-your-customer procedures will certainly become more complicated, and investors will need to vet potential investees more carefully,’ says Patrick Ip, director at the Hong Kong Private Equity Finance Association.

At a practical level, banks are now not allowed to disburse any funds that they cannot clear in an exit situation, he adds. In effect, companies will need to account for every penny when preparing to exit an investment.

Long-term benefit

In the long run, and despite the increased regulatory scrutiny, institutions could benefit from the new rules.

‘The regulations give institutions a clearer idea of how they will be regulated. The rulebook is more transparent, which is a good thing,’ says Chris Cheung, a partner at Deloitte Forensic in mainland China and Hong Kong SAR who specialises in financial crime compliance, AML and risk analytics.

‘They also take a risk-based approach that allows institutions to both address high-risk areas and prioritise control measures that matter.’

Catalyst for change

A key catalyst leading to the updated rules was a Financial Action Task Force (FAFT) evaluation, published in April 2019, that summarised mainland China’s AML and CTF efforts. The FAFT noted that ‘China’s AML/CFT supervisory system is almost exclusively focused on the financial sector.’

The international body went on to add that mainland China had virtually no ‘effective preventive or supervisory measures’ for other sectors although its approach to systemic risk was considered ‘adequate’.

The FAFT suggested that mainland China broaden the sources of information it used to formulate its national risk assessment to include publications from academic or international organisations and feedback from foreign jurisdictions in order to better understand the threats, vulnerabilities and risks it faces. All these considerations were taken into account in the drafting of the new rules.

‘The regulations represent the efforts of the Chinese regulator in response to the requirements and comments raised by the FATF during its review and assessment of China’s overall AML work in 2019 and are intended to enhance China’s AML and CTF regime to bring it in line with the international standards,’ says Ai Tong, a lawyer at Norton Rose Fulbright.

Clearer and more transparent rules should, says Cheung, create a more effective regulatory regime.

‘My suggestion is for institutions to embrace the regulator, and actively seek their guidance to better understand its expectations. Institutions should also take advantage of the training and information sessions on offer and talk to their peers,’ he says.

For its part, the PBOC has pledged to continue implementation of the regulations and urges financial institutions to keep improving their AML practices.

‘As the regulator promulgates more laws and regulation in the future, transparency will be further increased and will allow China to further rectify the identified weaknesses in the system,’ Cheung adds.

PBOC also issued a draft version of the AML law in June 2021, with significant changes including an expanded definition of money laundering activities, enhanced regulations for non-financial entities, and significantly stiffer penalties for offenders. A timetable for the law coming into effect has not yet been made public.