China

Sanctions

EU embargo on arms

The US State Department has imposed sanctions under Caatsa against third parties in China for dealing with blacklisted Russians.

FATF AML Deficient List

No

Higher Risk

US Dept of State Money Laundering Assessment 
Not on EU White list equivalent jurisdictions
Corruption Index (Transparency International & W.G.I.)
World Governance Indicators (Average Score)
Failed States Index (Political Issues)(Average Score)

Medium Risk

Weakness in Government Legislation to combat Money Laundering

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ANTI-MONEY LAUNDERING

 

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 Mutual Evaluation Report relating to the implementation of anti-money laundering and counter-terrorist financing standards in China was undertaken in 2019. According to that Evaluation, China was deemed Compliant for 7 and Largely Compliant for 15 of the FATF 40 Recommendations. It was deemed 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

 

Chinese authorities 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.  

 

In 2018, China continued its anti-corruption campaign and increased regulatory scrutiny of the financial sector.  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.

 

 

 

SANCTIONS

There is currently an EU embargo on arms.

In September 2018, the US State Department imposed sanctions under Caatsa against third parties in China for dealing with blacklisted Russians. Officials said that they decided to act against the Chinese military procurement organisation, the Equipment Development Department, after it purchased military equipment from Moscow in November 2017.

 

BRIBERY & CORRUPTION

Rating                                                                           (100-Good / 0-Bad)

Transparency International Corruption Index                           39

World Governance Indicator – Control of Corruption             47

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

 

ECONOMY

Since the late 1970s, China has moved from a closed, centrally planned system to a more market-oriented one that plays a major global role; in 2010, China became the world's largest exporter. Reforms began with the phaseout of collectivized agriculture, and expanded to include the gradual liberalization of prices, fiscal decentralization, increased autonomy for state enterprises, growth of the private sector, development of stock markets and a modern banking system, and opening to foreign trade and investment. China has implemented reforms in a gradualist fashion. In recent years, China has renewed its support for state-owned enterprises in sectors considered important to "economic security," explicitly looking to foster globally competitive industries. The restructuring of the economy and resulting efficiency gains have contributed to a more than tenfold increase in GDP since 1978. Measured on a purchasing power parity (PPP) basis that adjusts for price differences, China in 2015 stood as the largest economy in the world, surpassing the US in 2014 for the first time in modern history. Still, China's per capita income is below the world average.

After keeping its currency tightly linked to the US dollar for years, China in July 2005 moved to an exchange rate system that references a basket of currencies. From mid-2005 to late 2008, cumulative appreciation of the renminbi against the US dollar was more than 20%, but the exchange rate remained virtually pegged to the dollar from the onset of the global financial crisis until June 2010, when Beijing allowed resumption of a gradual appreciation. In 2015, the People’s Bank of China announced it would continue to carefully push for full convertibility of the renminbi after the currency was accepted as part of the IMF’s special drawing rights basket.

The Chinese Government faces numerous economic challenges including: (a) reducing its high domestic savings rate and correspondingly low domestic consumption; (b) facilitating higher-wage job opportunities for the aspiring middle class, including rural migrants and increasing numbers of college graduates; (c) reducing corruption and other economic crimes; and (d) containing environmental damage and social strife related to the economy's rapid transformation. Economic development has progressed further in coastal provinces than in the interior, and by 2014 more than 274 million migrant workers and their dependents had relocated to urban areas to find work. One consequence of population control policy is that China is now one of the most rapidly aging countries in the world. Deterioration in the environment - notably air pollution, soil erosion, and the steady fall of the water table, especially in the North - is another long-term problem. China continues to lose arable land because of erosion and economic development. The Chinese government is seeking to add energy production capacity from sources other than coal and oil, focusing on nuclear and alternative energy development.

Several factors are converging to slow China's growth, including debt overhang from its credit-fueled stimulus program, industrial overcapacity, inefficient allocation of capital by state-owned banks, and the slow recovery of China's trading partners. The government's 13th Five-Year Plan, unveiled in November 2015, emphasizes continued economic reforms and the need to increase innovation and domestic consumption in order to make the economy less dependent in the future on fixed investments, exports, and heavy industry. However, China has made only marginal progress toward these rebalancing goals. The new government of President XI Jinping has signaled a greater willingness to undertake reforms that focus on China's long-term economic health, including giving the market a more decisive role in allocating resources. In 2014, China agreed to begin limiting carbon dioxide emissions by 2030.

Agriculture - products:

world leader in gross value of agricultural output; rice, wheat, potatoes, corn, peanuts, tea, millet, barley, apples, cotton, oilseed; pork; fish

Industries:

world leader in gross value of industrial output; mining and ore processing, iron, steel, aluminum, and other metals, coal; machine building; armaments; textiles and apparel; petroleum; cement; chemicals; fertilizers; consumer products (including footwear).

Exports - commodities:

electrical and other machinery, including data processing equipment, apparel, furniture, textiles, integrated circuits

Exports - partners:

US 18%, Hong Kong 14.6%, Japan 6%, South Korea 4.5% (2015)

Imports - commodities:

electrical and other machinery, oil and mineral fuels; nuclear reactor, boiler, and machinery components; optical and medical equipment, metal ores, motor vehicles; soybeans

Imports - partners:

South Korea 10.9%, US 9%, Japan 8.9%, Germany 5.5%, Australia 4.1% (2015)

Investment Climate  -  US State Department

China employs a more restrictive foreign investment regime than its major trading partners, including the United States. While China was the world’s top destination for foreign direct investment (FDI) in 2015, broad sectors of the economy remain closed to foreign investors. China relies on a Foreign Investment Catalogue to encourage foreign investment in some sectors of the economy, while restricting or prohibiting investment in many others. China’s investment approval regime shields inefficient and monopolistic Chinese enterprises from competition – especially those companies China attempts to cultivate as national champions.

U.S. companies surveyed in 2015 by the American Chamber of Commerce in China (AmCham) cited inconsistent regulatory interpretation and unclear laws as their top challenge doing business in China. Other difficulties listed were, in descending order, labor costs, obtaining required licenses, the shortage of qualified employees, industrial overcapacity, the shortage of qualified management, increasing Chinese protectionism, corruption, taxes, and intellectual property rights infringement.

Around 77 percent of the businesses consulted felt foreign firms were increasingly less welcome in China.

In 2015, the Chinese central government announced a series of reforms and pledges that could lead to gradual improvements in the investment climate if they were implemented, both from market access and regulatory standpoints. Major developments of 2015:

During a state visit in September 2015, President Obama and President Xi agreed to “intensify” negotiations for a high-standard Bilateral Investment Treaty (BIT) that would level the playing field for U.S. investors in China and expand market access to previously restricted sectors of the Chinese economy. China in 2015 also continued its investment agreement negotiations with the European Union.

China announced it would introduce two national “negative lists” – one covering both domestic and foreign investors and another list with additional limits on foreign investment. The negative lists delineate sectors of the economy where certain Chinese agencies would continue to require investors to secure approval from those agencies for investment projects. Investments in unlisted sectors would no longer require approval by those agencies; however, China would maintain separate approval, licensing, and screening processes conducted by other agencies. China is now piloting the foreign investment negative list in the Shanghai, Tianjin, Guangdong, and Fujian Free Trade Zones (FTZs).

To date, China has not described how it would implement the national negative list. The national negative list’s impact on China’s many industry-specific licensing and approval processes is unknown. There are also issues regarding compatibility with China’s Foreign Investment Catalogue (the most-recent version dates to March 2015), as well as with separate Chinese reviews of investment projects for their impact on China’s security, environment, land-use, and other considerations. Given the limited transparency of China’s current investment approval processes, in addition to private sector concerns that rules are inconsistently applied, the impact of a national negative list on market access is uncertain.

Other legislative concerns revolve around the National Security Law, enacted in July 2015, which expanded the scope of economic activities that can be screened on national security grounds to include an investment’s impact on cultural security, information security, industrial security, military security, technological security, and territorial security, among others. The pending Foreign Investment Law, in its current draft, would also create a broad national security review mechanism for foreign investment.

 

Although the Chinese Communist Party (CCP) says it expects to fulfill by 2020 the market-oriented economic reform agenda it announced at the CCP’s third plenum in 2013, it has yet to provide a detailed reform roadmap and timetable. At present, foreign investors worry about discriminatory industrial policies, opaque and selectively enforced investment approval procedures, licensing barriers that favor domestic firms (especially state-owned enterprises and private Chinese firms that enjoy government support), and the lack of an independent judiciary to settle disputes. Poor enforcement of intellectual property rights (IPR), the forced transfer of technology, and systemic lack of rule of law are also challenges.

The United States government has raised concerns about China’s investment restrictions and discriminatory policies at high levels, in bilateral fora such as the U.S.-China Joint Commission on Commerce and Trade (JCCT), the U.S.-China Strategic and Economic Dialogue (S&ED), and the U.S.-China BIT negotiations. The United States government emphasizes the benefits to China of opening new sectors to foreign investment, increasing transparency, and improving the enforcement of existing laws to protect investors’ rights.

 

FURTHER REPORTS

9 January 2018  - IMF Report  -  People's Republic of China Financial Sector Assessment Program Detailed Assessment of Observance of Basel Core Principles for Effective Banking Supervision  -  Extract

 

With respect to AML/CFT, the People’s Bank of China (“PBC”) leads the formulation of policies on AML analysis and risk alerts, and implements risk-based AML approaches. To establish more effective AML initiatives, the PBC has launched pilot programs for large-sum and suspicious transaction reporting by financial institutions, guiding such institutions to establish their own monitoring and analysis indicators, update the reporting procedure, and improve internal AML control regimes. The PBC explained that the pilot program has helped produce a fewer number of reports with higher quality, and a higher number of cases in identifying investigation clues from such reports. At the time of the assessment, the PBC was revising the Administrative Rules on the Reporting of Large-sum and Suspicious Transactions of Financial Institutions based on the results from the pilot program so as to improve the usability of suspicious transaction reports.

   

General standards: To guard against malpractices and frauds, among other criminal activities, the China Banking Regulatory Commission (“CBRC”) issued the Guidelines on Internal Control of Commercial Banks and the Guidelines on Operational Risk Management of Commercial Banks, requiring banks to clearly define internal control responsibilities, improve internal control programs, provide more support and have ongoing assessment and oversight. Banks are required to strengthen the three lines of defense, i.e. business management, risk and compliance, as well as audit and oversight, to properly monitor, report and examine abnormal suspicious transactions, and update the accountability and follow-up policies and procedures.  Specific standards: Regarding high-risk areas, the CBRC has issued targeted internal control and operational guidelines, including the Notice of the CBRC General Office on Strengthening the Internal Control Management of Banking Financial Institutions and Effectively Preventing Operational Risks of Counter Business, requiring banks to follow the “Know-Your-Customer” (KYC) principle, strengthen the review in account opening and authenticity verification, formulate policies for identifying unusual and suspicious transactions to strengthen the monitoring of bank accounts, the control over authorization and conducts of staff who have access to customer information, and the management of audio and video recording, business outlets and staff conduct.   

The Administrative Rules on the Reporting of Large-sum and Suspicious Transactions of Financial Institutions provides that financial institutions shall immediately report, in writing, to the China Anti-Money Laundering Monitoring and Analysis Center (CAMLMAC) or the PBC or the PBC local offices any suspected criminal activities they identify or reasonably suspect when performing AML duties. The rules also provide that financial institutions shall report large-sum and suspicious transactions to CAMLMAC.   

The CBRC has also formulated policies for handling cases of suspicious transactions and criminal activities and urged banks to put in place policies and procedures to prevent, identify, report and handle criminal activities. The Notice on Revising the Definition and Classification of Cases Involving Banking Financial Institutions classifies criminal cases that may involve banks into three categories: crimes committed independently by bank staff, crimes that bank staff participate in and crimes committed by external parties.   

Pursuant to the Procedures for Handling Cases involving Banking Financial Institutions, the Rules on Reporting and Registering Information of Cases (Risks) involving Banking Financial Institutions, the Coordinated Committee for the Prevention and Control of Cases involving Banking Financial Institutions and the Major Emergency Reporting Policy, the CBRC requires banks to have in place policies and procedures for case handling, and standardized practices on reporting, registration, investigation, review and conclusion of cases, accountability and supervisory returns. Banks are required to submit information on cases that have been filed with judicial authorities and on risk events that have been identified but not yet determined to be cases. 

 

The PBC, in its Notice on Effectively Conducting Examinations for Anti-Money Laundering Enforcement in 2016, required its local offices to strengthen the supervision over systemically important financial institutions with higher terrorist financing risks, and further required financial institutions to enhance CFT controls and improve risk management against terrorist financing. From 2011 to 2015, the PBC carried out over 4,000 on-site examinations on banking financial institutions and imposed over 500 administrative penalties as required by law.   

As the banking supervisor, the CBRC requires banks to comply with the AML Law, regulations and applicable requirements. Banks are expected to continuously optimize suspicious transactions monitoring system to better monitor movements of large-sum and suspicious funds, routinely reconcile large-sum accounts and timely report irregularities. The CBRC conducts supervisory interviews requires banks to improve their comprehensive risk management capabilities and AML “blacklist” controls. 

In the context of CBRC’s supervision of bank’s cross border activities, the supervisor encourages banks to strengthen the management of their overseas branches, subsidiaries and affiliates, strictly comply with AML laws and regulations in host countries, improve information sharing and management coordination within banking groups, and ensure ongoing tracking and timely monitoring of cross-border transactions/customer fund flows. 

 

For banks that apply for establishment, the CBRC and its local offices review the source/legitimacy of paid-in capital and prohibit capital from unknown sources. Consistent with the policy applying to domestic banks, foreign banks that apply for establishing institutions in China must submit the AML policies of their parent banks. If the AML policies are not deemed effective, establishment of branches or subsidiaries will be denied.   

The CBRC undertakes targeted examinations on effectiveness of internal controls and case prevention on an ongoing basis. In respect of telecom frauds that have been a frequent occurrence in recent years, the CBRC has required banks to freeze and blacklist bank accounts involved, prohibiting such accounts from remitting, transferring or withdrawing within or outside China. 

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