FATF Status

China is not on the FATF List of Countries that have been identified as having strategic AML deficiencies

Compliance with FATF Recommendations

The last follow-up Mutual Evaluation Report relating to the implementation of anti-money laundering and counter-terrorist financing standards in China was undertaken in 2022. According to that Evaluation, China was deemed Compliant for 9 and Largely Compliant for 22 of the FATF 40 Recommendations. It remains Highly Effective for 0 and Substantially Effective for 3 of the Effectiveness & Technical Compliance ratings.

US Department of State Money Laundering assessment (INCSR)

China is categorised by the US State Department as a Country/Jurisdiction of Primary Concern in respect of Money Laundering and Financial Crimes.

Overview

Money laundering in the People’s Republic of China (PRC) is of great concern.  The U.S. government estimates $154 billion in illicit proceeds move through China annually.  The National Defense Authorization Act, enacted on January 1, 2021, calls for the U.S. Department of the Treasury to conduct a study on the extent and effect of illicit finance risk relating to the PRC and Chinese firms. 

In 2021, the PRC made improvements to its anti-money laundering/combating the financing of terrorism (AML/CFT) framework, and the People’s Bank of China (PBOC) published draft amendments to the Anti-Money Laundering Law (AMLL).  Yet serious shortcomings persist in effective implementation and transparency, particularly in the context of international cooperation.  PRC authorities rarely share information on money laundering trends or take sufficient action to interdict or counter new laundering methods.    

The PRC is piloting a PBOC-backed digital currency known as the e-CNY Digital Currency Electronic Payment (e-CNY).  In September 2021, China banned virtual currency transactions and prohibited any new mining projects within the country.  It does intend to continue developing the e-CNY, calling it a digital version of the yuan, rather than a virtual currency. 

The PRC should broaden its investigation and prosecution of money launderers and cooperate with international law enforcement investigations regarding domestic Chinese underground financial systems, virtual currencies, shell companies, and trade-based money laundering (TBML).

Rating                                                                           (100-Good / 0-Bad)

Transparency International Corruption Index                           42

World Governance Indicator – Control of Corruption             55

Corruption in China presents business operating or planning to invest in the country with high risks. 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 negatively influence the business environment. 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 favors. Guanxi-related gifts can be considered bribery by foreign companies and by national and international anti-corruption laws. Companies are advised to carefully consider the type and value of gifts, the occasion, and the nature of the business relation. China offers a comprehensive legal framework in both the public and private sectors to criminalize several corrupt practices such as facilitation payments, money laundering, active and passive bribery, and gifts in the public and the private sector with the Anti-Unfair Competition Law focusing on commercial bribery. Anti-corruption laws are inconsistently and selectively enforced. For further information - GAN Integrity Business Anti-Corruption Portal

Although inbound FDI slowed in 2022, the People’s Republic of China (PRC) remained the number two Foreign Direct Investment (FDI) destination in the world, behind the United States. China’s initially swift economic recovery following COVID-19 reassured investors and contributed to high FDI and portfolio investments in 2021, but the continuation of the PRC’s Zero COVID policy until the end of 2022 and concerns about a lack of policy predictability lowered investor confidence, as demonstrated by FDI growth falling from 20.2 percent in 2021 to 8 percent in 2022, reaching $189 billion. On the equity side, comprehensive 2022 statistics are not yet available, but the first three quarters of 2022 witnessed net foreign portfolio divestment from China’s equity markets. The PRC’s stance on Russia’s invasion of Ukraine also contributed to third country investor concerns, especially against the backdrop of growing consideration of Environmental, Social and Governance (ESG) related impacts by investors worldwide. China has continued to develop its close economic relationship with Russia since Moscow launched its war of aggression against Ukraine. Russian energy sales to the PRC have increased in both dollar and volume terms. Some PRC companies have been subjected to additional export controls upon the basis of their ties to military programs of concern in the PRC itself as well as in Russia, Iran, and the DPRK. Certain PRC companies have been subject to listings for their nexus to government sponsored human rights violations and UN sanctions evasion. U.S. sanctions connected to espionage activities, illegal, unreported and unregulated (IUU) fishing also affected some PRC companies.

China remains a relatively restrictive environment for foreign investors due, in part, to prohibitions on investment in key sectors and unpredictable regulatory enforcement. Obstacles include ownership caps and requirements to form joint venture (JV) partnerships with local firms, industrial policies to develop indigenous capacity or technological self-sufficiency, licensing tied to localization requirements, and pressures to transfer technology as a prerequisite to gaining market access.

During the Chinese Communist Party’s (CCP) 20th Party Congress held in October 2022, Xi Jinping emphasized economic security through prioritization of self-reliance, especially in critical technologies, high tech manufacturing, and resilient supply chains. In addition to unprecedented personnel changes that rewarded loyalists over technocrats, the Party announced large-scale government and Party restructuring plans that would continue a trend of consolidating Xi’s leadership and expansion of the role of the Party in all facets of Chinese life: cultural, social, military, and economic. An increasingly assertive CCP has raised concerns among the business community about the ability of both domestic and foreign investors to make decisions based on commercial and profit considerations, rather than ideological dictates from the Party.

The PRC did make headway in opening access to the financial services sector by approving three wholly foreign owned enterprises (WFOEs) to sell mutual funds in China. These included Neuberger Berman Group (November 2022), Manulife Financial Corp (November 2022), and Fidelity International (December 2022). Data and financial rules announced in 2021 continued to create significant uncertainty surrounding the financial regulatory environment. After three years of strict zero COVID policies that shut China off from the world, restrictions on inbound travel were lifted in January 8, 2023 (after the period that this report covers). The PRC’s pandemic-related visa and travel restrictions throughout 2022 significantly affected foreign businesses operations, increasing labor and input costs and hampering the ability of companies and investors to conduct standard due diligence. Also, a slump in the property sector – which fell 5.1 percent in 2022 – played a sizable role in slowing economic growth. An assertive CCP, emphasis on national companies, and prioritization of self-reliance has heightened foreign investors’ concerns about the pace of economic reforms.Key developments in 2022 included:

On January 1, the National Reform and Development Commission (NDRC) and the Ministry of Commerce’s (MOFCOM) updated foreign FDI investment “negative lists” went into effect.

The PRC applied tax rates on selected goods originating in 29 countries and regions for 2022 in accordance with  China’s free trade agreements  (FTA), including the  Regional Comprehensive Economic Partnership (RCEP)  and the China-Cambodia FTA, both of which went into effect on January 1.

On February 15, the amended  Cybersecurity Review Measures (CSR Measures) went into effect, requiring a cybersecurity review before network platform operators with personal information of more than one million users can launch an overseas IPO.

On March 25 the National Development and Reform Commission (NDRC) issued the 2022 version of the Market Access Negative List, reducing the list of restricted or prohibitive industries from 123 to 117.

Shanghai – China’s financial center – underwent over two months of COVID lockdowns, from early April to June 1. Companies reported a variety of severe logistical and operational barriers during this period.

From mid-July through the late summer, heatwaves and droughts impacted hydropower dams as electricity usage spiked, causing authorities to limit power usage in some key economic and manufacturing hubs.

On June 21 the Uyghur Forced Labor Prevention Act took effect. The law prohibits importing goods into the United States that are mined, produced, or manufactured wholly or in part with forced labor in the PRC, including Xinjiang.

The PRC property market experienced a prolonged downturn, as new home and land sales plunged due to sagging demand exacerbated by zero-Covid restrictions and a series of policies designed to reduce leverage among property developers.  The PRC’s top 100 property developers reported a 41.3 percent decline in sales year-on-year.

On July 7, the Cyberspace Administration of China (CAC) issued the Measures for Security Assessment of Data Exports that laid out the regulatory requirements for allowing for cross-border data transfers, which went into effect on September 1.

The Joint Prevention and Control Mechanism of the PRC State Council announced 20 measures on November 11 to promote economic activity and minimize COVID-related disruptions.  In particular, the new policy ended the PRC’s “circuit breaker” policy, which penalized airlines for carrying passengers who tested positive on arrival, bringing Beijing closer to honoring its bilateral air transport agreements.

On December 14, the Central Committee of the Communist Party and the State Council Strategic Plan issued a “Strategic Plan for Expanding Domestic Demand,” which outlined plans to “raise the scale of consumption and investment to a new level by 2035.

Country Links

People's Bank of China

China Banking Regulatory Commission