According a Chinese proverb, “the best time to plant a tree is twenty years ago, the next best time is now,” and so it goes with preventing and detecting Money Laundering and Terrorism Finance. China has not wasted time, but still has more to do. With significant proceeds of crime generated, in keeping with its status as the world’s second largest economy, a robust response is required. According to an IMF Report, together with APG, adopted by FATF and published in April 2019 “China has a strong understanding of the money laundering and terrorist financing risks it faces, but it should focus more on the laundering of proceeds of crime and increase the range of sources used for its national risk assessment.“
Money Laundering and Terrorism Financing Risks
According to the Chinese National Risk Assessment (NRA) (as referred to in the Country Report adopted by FATF);
- The main proceeds-generating predicate crimes in China are illegal fundraising, fraud, trafficking in illicit drugs, bribery and corruption, tax crimes, counterfeiting of products, and illegal gambling. Also large amounts of illicit proceeds flow out of China annually. As noted in the NRA, between 2014 and 2016, illicit proceeds totalling RMB864 billion (US$126 billion) were repatriated to China from over 90 countries. China indicates that illicit proceeds also flow out of the country through underground banking operations; China faces a serious threat from terrorism. From 2011 to 2016, China registered 75 terrorist incidents that killed 545 people. The main conflict area and focus for the authorities is the northwest province of Xinjiang, from where the “Eastern Turkistan Islamic Movement” (ETIM) operates.
According to the Annual US Department of State Money Laundering assessment (INCSR) (2018) published in March 2019 , China is categorised by the US State Department as a “Major Money Laundering Country”, along with 80 other Countries including many other large advanced industrial countries. The primary sources of criminal proceeds according to the INCSR are:
- “corruption, drug and human trafficking, smuggling, economic crimes, intellectual property theft, counterfeit goods, property crimes, and tax evasion,” whilst also quoting Chinese authority sources that “identify illegal fundraising; cross-border telecommunications fraud; weapons of mass destruction, proliferation finance, and other illicit finance activity linked to North Korea; and corruption in the banking, securities, and transportation sectors as ongoing money laundering challenges.”
- “criminal proceeds often are laundered via bulk cash smuggling; TBML; shell companies; purchasing valuable assets, such as real estate and gold; investing illicit funds in lawful sectors; gaming; and exploiting formal and underground financial systems and third-party payment systems.”
- “corruption often involves state-owned companies, including those in the financial sector.”
According to other sources, China is vulnerable to financial crime and generates significant amounts, with as much as US$261 billion a year, coming only second behind the United States, and ahead of the next highest (in order) Mexico, the EU, Russia, India, Canada, and Japan. This is just over 2% of China’s GDP and so in line with estimates from the UN which suggests between 2-5% of GDP is a reasonable estimate. From these the top 5 crimes that generate more than 95% of the total amounts in criminal proceeds are: US$93 billion from illegal gambling, US$75billion from Human Trafficking, US$60 billion from Counterfeit and Piracy of goods, US$17 billion from Drug Trafficking & US$10 billion from Wildlife Trafficking.
According to TI, China has seen its score improve slightly from a score of 3.5/10 in 2010 to 39/100 in 2018. The Chinese government, led by President Xi Jinping, is in the midst of a sweeping anti-corruption campaign that has led to thousands of arrests, nonetheless, corruption continues to affect public and private environments. TI state that “Companies are likely to experience bribery, political interference or facilitation payments when acquiring public services and dealing with the judicial system. The common practice of guanxi is a custom for building connections and relationships based on gifts, banqueting, or small favours. Guanxi related gifts can be considered bribery by foreign companies and by national and international anti-corruption laws.”
Country Evaluation Report adopted by FATF - April 2019
The China Country report was published in April, 2019 which stated that overall, “China has a strong understanding of the money laundering and terrorist financing risks it faces, but it should focus more on the laundering of proceeds of crime and increase the range of sources used for its national risk assessment.” As far as scores were concerned (based on the simple scoring model used also in FCN1):
- Scores for technical compliance are 53% placing China 60th and 30% for effectiveness placing China 42nd equal in each case (out of 75).
- China compares unfavourably against other Countries & Territories in the Region with Macau reporting much better results (82%/45%), as well as such as Thailand (58%/36%), but China fares better against Cambodia (52%/15%), Mongolia (50%/6%) & Myanmar (48%/3%). Hong Kong is due to report later this year.
Additional highlights included:
- that, “FI’s and non-FI’s have an insufficient understanding of the risks they face, and while the People’s Bank of China has a good understanding of how its FI’s could be abused by criminals and terrorists, it has little to no understanding of the risks facing non-financial businesses and professions.”
- that “Hiding the persons who ultimately own or control a legal entity is facilitated by fundamental legal shortcomings and effectiveness issues. This deficiency also notably affects efforts to address corruption;” and
- that “targeted financial sanctions related to both terrorist financing and proliferation financing is poor, and China should fundamentally strengthen its legal framework and the implementation of these UN-mandated sanction regimes and work with FI’s and designated DNFBP’s to achieve implementation.”
China’s Action Plan:
China has agreed to a number of “Priority Actions” based on the findings in the Country Report, adopted by FATF. As Confucius said – “don’t curse the darkness, light a candle.” These are to:
- expand the information sources relied upon to formulate its NRA including from academic and international organisations’ as well as feedback from foreign jurisdictions.
- review the functioning of its FIU joining up the current standalone databases at central and provincial levels and to ensure the operational independence of the FIU,
- do more in relation to Policy and legal instruments to “follow the money” and create comprehensive legal frameworks for the implementation of TF and PF requirements,
- address shortcoming in the AML/CFT legal framework on coverage of online lenders, DNFBPs, domestic PEPs, Trust & Fiduciary Service Providers, and the criteria for reporting suspicious transactions.
- ensure FI risk assessments are useful and robust, and that as a result these reflect actual threats and corresponding vulnerabilities exposing FI’s to risk; the effectiveness of ongoing due diligence, notably the monitoring of transactions; and the consolidated supervision of financial groups, to ensure a robust management of ML/TF risks by these FI groups.
- review risk assessments and supervision of DNFBPs for compliance with AML/CFT obligations and introduce a new more effective approach.
- ensure that competent authorities can obtain adequate, accurate and current basic and beneficial ownership information (beyond legal owner information), in a timely manner, and
- improve its international co operation in ML/TF cases
This last action mirrors a criticism of China found in the US INCSR 2018 that states, “While China has taken steps to improve its AML regime, there are significant shortcomings in implementing laws and regulations effectively and transparently, especially in the context of international cooperation. China should cooperate with international law enforcement in investigations regarding indigenous Chinese underground financial systems, virtual currencies, shell companies, and trade-based value transfers that may be used for illicit funds transfers.”
