China’s continued focus on anti-money laundering: What it means for regulated Chinese entities and Australian reporting entities

China’s AML/CTF Regulatory Environment

The People’s Bank of China (PBOC) and the Ministry of Public Security are leading the AML Campaign, which involves 9 other government agencies, namely the:

• National Supervisory Commission;
• Supreme People’s Court;
• Supreme People’s Procuratorate;
• Ministry of State Security;
• General Administration of Customs;
• State Taxation Administration;
• China Banking and Insurance Regulatory Commission (CBIRC);
• China Securities Regulatory Commission (CSRC); and
• State Administration of Foreign Exchange.

The AML Campaign

The AML Campaign requires the above agencies to coordinate. It will focus on reinforcing risk prevention and implementing control mechanisms to counter money laundering by:

1. Strengthening political standing and organisational leadership;
2. Enhancing awareness and training with respect to anti-money laundering;
3. Implementing a work mechanism based on the principle of ‘dual investigations’, through amendments to the anti-money laundering law and revisiting relevant judicial interpretations;
4. Bolstering analytic capabilities of money laundering scenarios and intensifying investigative efforts;
5. Strengthening the capabilities of ‘obligated entities’ (i.e. reporting entities) to prevent and manage/control money laundering; and
6. Imposing more severe penalties against relevant contraventions of the law.

These heightened measures evidence China’s continued focus on stepping up money laundering oversight by strengthening its AML regime.

Customer Due Diligence (CDD) and Record Keeping

In addition to the AML Campaign announcement, a joint release was made by the PBOC, CBIRC and CSRC titled the ‘Administrative Measures for Financial Institutions on Customer Due Diligence and Keeping of Customer Identification and Transaction Records’ (Order No.1 [2022] of the PBOC, CBIRC and CSRC) (Measures). The Measures are considered to be a significant step in guarding against financial risks by imposing improved systems and mechanisms of AML supervision and practices in China.

These new requirements commenced on 1 March 2022 and include the following:

1. How financial institutions are to conduct CDD by adopting a risk-based approach, providing for enhanced due diligence in high risk settings while allowing a simplified process where transactions or customers have been assessed as low risk;
2. Updated requirements for the identification of beneficial owners; and
3. Requirements on keeping of customer identification and transaction records.

In addition to financial institutions, the Measures will also apply to the following entities with regard to their obligations to conduct CDD and keep records of customer identification and transaction information:

• non-bank payment companies;
• bank card clearing institutions;
• funds clearing centres; and
• institutions conducting the business of currency exchange, funds sale, professional insurance agency or insurance brokerage.

China AML Framework Trends

Along with the amendments to China’s AML framework, in recent years the PBOC has also considerably scaled-up its enforcement efforts, as demonstrated by the material annual increase in the value of penalties imposed on both corporations and individuals. The volume of suspicious transaction reports has also grown by almost 58% between 2019 and 2020, according to the China Anti-Money Laundering Report 2020 issued by the PBOC.

Regulation and restrictions on digital currencies and digital assets remain a key focus for Chinese regulators. For example, on 18 February 2022, the CBIRC issued a statement highlighting the risks relating to the Metaverse and associated criminal activities, such as illegal investments and fraud. Specifically, the CBIRC has urged the public to be mindful of the risks relating to various unlawful activities, including those set out below, and report suspected criminal activities to the authorities:

• Investment opportunities branded as ‘Metaverse investment projects’ that seek to lure investors on the basis of high returns;
• Opportunities in the virtual real estate market whereby scammers create an illusion of panic buying to drive trading activities; and
• The issue of digital currencies represented as the future ‘Metaverse currency’.

In response to the AML Campaign and Measures, regulated entities in China should consider:

• Implementing or reviewing existing customer and transaction monitoring systems, following the Measures made by the PBOC, CBIRC and CSRC;
• Reviewing existing risk assessments to ensure alignment with expectations of the regulator concerning new or emerging money laundering risks. For example, assessing risk exposure to restrictions on transactions connected to cryptocurrencies;
• Whether enhancement projects are required for information technology monitoring software and capabilities to combat financial crime. For example, investments in machine learning and artificial intelligence-based tools to improve these monitoring efforts; and
• Reviewing all relevant rules and requirements holistically and reassessing the effectiveness of their internal AML policies to ensure ongoing compliance, given the severe penalties for non-compliance.

Relevance for Australian reporting entities

Australian entities should remain alert to the direct and indirect effect these changes can have on their operations.

Australia’s anti-money laundering and counter-terrorism financing (AML/CTF) laws and regulations require reporting entities to adopt a risk-based approach and to devise a program specific to the money laundering and terrorism financing risks their business faces.

Relevant considerations include whether the entity has customers, operations or shareholders in a foreign jurisdiction, and if so, the legal and regulatory framework of the foreign jurisdiction in which the entity has a business interest.

As new payment methods emerge, which can be subject to varying jurisdictional restrictions and prohibitions, such as crypto assets and digital fiat currencies (notably in the context of China where e-CNY has been launched in pilot cities nationwide), Australian entities with customers, operations or shareholders in China should consider:

• The existing and emerging trends relating to AML regulation in China, as well as any conflict of laws issues that can arise with Australian AML/CTF laws and regulations;
• The customers, products and service offerings Australian reporting entities provide and the requirements to comply with Chinese AML laws and regulations;
• Assessing whether existing CDD, transaction monitoring and AML/CTF risk assessments require uplift to account for recent changes and emergent trends; and
• Issues relating to ongoing compliance with other Australian and Chinese laws and regulations (in areas such as cybersecurity, privacy and data protection).

Should the above raise any questions regarding the operation of your business, our financial crime compliance specialists in our risk advisory team are able to assist, together with our legal expertise based in both Australia and in China.