On December 30, 2020, the People’s Bank of China (PBOC) promulgated the draft Administrative Measures on the Anti-Money Laundering and Counter Terrorism Financing by Financial Institutions (the Draft Measures, in Chinese: 《金融机构反洗钱和反恐怖融资监督管理办法（修订草案征求意见稿）》) for public comment. The Draft Measures are intended to supersede the Measures for the Anti-Money Laundering Supervision and Administration of Financial Institutions (for Trial Implementation) issued by PBOC in 2014 (2014 Trial Measures, in Chinese: 《金融机构反洗钱监督管理办法（试行）》) and also extend its coverage to counter terrorism financing (CTF) obligations of financial institutions.
We set out below the major highlights of the Draft Measures for your information:
Obligors subject to anti-money laundering (AML) and CTF obligations expanded
PBOC’s existing AML regime already applies to a wide scope of financial institutions (such as policy banks, commercial banks, securities firms and insurers) and designated non-financial institutions (such as non-banking payment institutions, bank card organizations, and clearing institutions). The Draft Measures now expand the scope of entities which are subject to the AML and CTF obligations (the AML/CTF Obligors) as follows:
- Financial institutions - to also include: (i) development financing institutions , (ii) wealth management subsidiaries of commercial banks, (iii) loan companies, (iv) consumer financing companies, and (v) specialized insurance agents and insurance brokers; and
- Non-financial institutions - to also include: (i) all non-banking payment institutions, (ii) foreign exchange institutions, and (iii) internet micro-loan companies.
In fact, some AML/CTF Obligors newly included in the Draft Measures (compared to the 2014 Trial Measures) have already been subject to AML obligations under regulations issued by other financial regulators (such as the China Banking and Insurance Regulatory Commission, CBIRC) either independently or jointly with PBOC; examples of this include development financing institutions, consumer financing companies, non-banking payment institutions and internet micro-loan companies. The Draft Measures have consolidated the AML and CTF requirements applicable to financial institutions generally, which are scattered in different regulations, whilst the legislation specially applicable to certain industry sectors (such as the Administrative Measures for Combating Money Laundering and Terrorism Financing by Banking Financial Institutions (in Chinese: 银行业金融机构反洗钱和反恐怖融资管理办法) issued by CBIRC in 2019) remain in effect.
Enhanced internal control and risk management requirements
Pursuant to the Draft Measures, an AML/CTF Obligor is now required to establish a more stringent and enhanced internal control and risk management mechanism, which must be compatible to its AML / CTF risk status and business scale, including, e.g.:
- Establishing a risk self-assessment mechanism at the head office level, which is to identify, evaluate and understand money laundering and terrorism financing risks, and submitting the self-assessment report to PBOC (or its local counterpart) within 10 working days of its board approval;
- Subject to senior management approval, establishing an appropriate risk management mechanism according to the money laundering and terrorism financing risks identified;
- Establishing a new internal department or designating an existing internal department (led by senior management personnel) to be responsible for internal AML and CTF matters;
- Establishing a compatible IT system, as required, for managing AML and CTF matters and upgrading/optimising the system promptly when needed;
- Establishing an audit mechanism (either by an internal audit team or an independent external auditor) for AML- and CTF-related work, and submitting the audit report to the board of directors or its designated committee; and
- Establishing a centralised AML/CTF mechanism at the group level of the AML/CTF Obligor, so that all affiliates within the group may implement the same AML/CTF mechanism.
In addition to the above, as with the existing AML regime, the Draft Measures also require AML/CTF Obligors to fulfill reporting obligations with respect to AML/CTF work (e.g. any amendments to internal control policies on AML/CTF matters or any change of personnel in charge of AML/CTF matters) and AML/CTF risks identified pursuant to the Draft Measures.
PBOC’s supervisory mechanism regarding AML/CTF
Compared to the 2014 Trial Measures, the Draft Measures elaborate in more detail the different circumstances in which different supervisory actions may be taken by PBOC (including its competent local counterparts), such as the following:
- Conducting AML/CTF law enforcement inspections;
- Conducting a risk assessment/monitoring of AML/CTF Obligors in order to understand their risk status promptly and accurately;
- Conducting a specific risk assessment at the premises of an AML/CTF Obligor on its overall AML/CTF risks or risks in certain business lines in order to detect loopholes or weakness in the AML/CTF Obligor’s risk management;
- Issuing an AML regulatory risk alert letter to an AML/CTF Obligor if PBOC notices AML/CTF risks or obvious loopholes in its AML/CTF work which must be rectified;
- Having a risk-warning conversation with directors, supervisors, senior management officers or department heads of an AML/CTF Obligor if the AML/CTF function has not been performed adequately or if any material risk incident has occurred; and
- Conducting onsite visits to an AML/CTF Obligor as necessary and exercising ongoing monitoring of its implementation of the rectification measures which are expected to be taken by the AML/CTF Obligor to address the AML/CTF risks/issues.
The Draft Measures articulate the different types of documents that may be used by PBOC, and the relevant procedures that should be followed (e.g. prior notification to the AML/CTF Obligor before an onsite visit unless in exceptional circumstances), in PBOC’s exercise of the supervisory powers.
Administrative penalties for non-compliance
The Draft Measures do not impose any new or additional administrative penalties for non-compliance, hence the penalty provisions as set out in the existing laws and regulations remain applicable. They include:
- Ordering rectification of non-compliance;
- Imposing disciplinary penalties on directly-responsible personnel of the AML/CTF Obligor which is in breach;
- A fine of up to RMB5 million on the non-compliant AML/CTF Obligor;
- A fine of up to RMB500,000 on directly-responsible personnel of the non-compliant AML/CTF Obligor;
- Ordering a suspension of the business of the non-compliant AML/CTF Obligor pending rectification; or
- Revocation of the non-compliant AML/CTF Obligor’s operational licence.
In a nutshell, the Draft Measures represent the efforts of Chinese regulator in response to the requirements and comments raised by the Financial Action Task Force 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.