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)