China expands anti-money laundering obligations
The Measures for the Supervision and Administration of Anti-Money Laundering and Counter-Terrorist Financing of Financial Institutions ("Measures") recently promulgated by the People's Bank of China (PBOC) came into effect on 1 August 2021. Among other things, the Measures expand the scope of applicable entities, provide specific details of internal control and risk management requirements and increase PBOC's supervision and administration powers. The new Measures are a significant development, demonstrating China's efforts to improve and enhance its anti-money laundering (AML) and counter-terrorist financing (CTF) regime.
- Organizations subject to the AML/CTF requirements under the new Measures have been widened to include loan companies, asset management subsidiaries of commercial banks, non-banking payment institutions, insurance agents and insurance brokers.
- Financial institutions subject to existing AML regulatory obligations will need to review and pay attention to the connection between the Measures and their existing obligations to ensure they are fully compliant with PBOC's requirements.
- The Measures adopt a risk-based approach and require that an organization's internal control mechanism correspond to its AML/CTF risks and business scale, and should include a risk assessment mechanism. Applicable institutions will need to review their existing controls to ensure compliance, noting that PBOC has been given greater powers for enhanced AML/CTF supervision.
- Organizations are reminded to undertake customer due diligence, including the need to keep customer identification data and transaction records, and report large-value transactions and suspicious transactions.
In more detail
After China's fourth round mutual evaluation conducted by the Financial Action Task Force on Money Laundering (FATF) from 2018 to 2019, multiple departments took steps to strengthen the AML/CTF regime as recommended by FATF. These efforts include an amendment to the money laundering offense in the Amendment XI to Criminal Law by the Standing Committee of the National People's Congress, PBOC's public consultation in December 2020, greater cooperation between the PBOC and the procuratorates, and an increased number of prosecutions for money laundering offenses in 2020 of 368.2% compared to 2019.1
Based on the structure set up by the Measures for the Supervision and Administration of Anti-Money Laundering of Financial Institutions (Trial) (Doc No. YF  344, "2014 Measures"), the PBOC began a public consultation on 30 December 2020 that resulted in the approval of the Measures on 25 April 2021. Our alert takes a look at the main features of the Measures, which took effect on 1 August 2021.
The new Measures have widened the scope of applicable institutions by adding developmental financial institutions, consumer finance companies, loan companies, non-banking payment institutions and many other types of financial service companies. The following table briefly compares the entities in the 2014 Measures with those added to the new Measures.
|2014 Measures||2021 Measures|
Policy banks, commercial banks, rural cooperative banks, rural credit cooperatives, and village banks
Developmental financial institutions, policy banks, commercial banks, rural cooperative banks, rural credit cooperatives, and village banks
Securities companies, futures companies, and fund management companies
Securities companies, futures companies, and securities investment fund management companies
Insurance companies and insurance asset management companies
Insurance companies and insurance asset management companies
Financial asset management companies, trust companies, enterprise group finance companies, financial leasing companies, auto finance companies and currency brokers
Trust companies, financial asset management companies, enterprise group finance companies, financial leasing companies, auto finance companies, consumer finance companies, currency brokers, loan companies, and wealth management subsidiaries of banks
Other financial institutions to perform AML/CTF obligations as determined by PBOC
Other financial institutions to perform AML/CTF obligations as determined and announced by PBOC
Payment institutions, bank card institutions, fund clearing centers, and institutions engaging in foreign exchange and fund sales businesses are governed by the Measures.
Non-banking payment institutions, bank card clearing institutions, fund clearing centers, network microfinance companies, and institutions engaging in foreign exchange, fund sales, professional insurance agency, and insurance brokerage businesses are governed by the Measures.
Many of the newly added entities have already been performing AML/CTF obligations as required by other regulations. For instance, developmental financial institutions and consumer finance companies are subject to the Administrative Measures on Anti-Money Laundering and Counter-Terrorist Financing of Banking Financial Institutions, while online microfinance companies are subject to the targets of the Administrative Measures on Anti-Money Laundering and Counter-Terrorist Financing of Internet Financial Institutions (Trial).
Meanwhile, non-bank payment institutions have been the focus of AML/CTF scrutiny for many years. In July 2021 alone, PBOC brought numerous administrative cases against non-bank payment institutions for AML noncompliance, with fines of millions of yuan in each case.2 It is worth mentioning that when PBOC was soliciting comments on the draft Measures, there was a proposal for private equity fund managers to be included in the Measures. PBOC ultimately rejected this suggestion and noted, "considering that the legal definition of private equity fund managers still needs to be further clarified, and from a practical point of view, China's private equity fund managers are of complex types, large numbers and have generally few staff, it is difficult to unify AML/CTF requirements for them; PBOC will further study the potential money laundering risks of private equity fund with relevant authorities."3 Therefore, at present, the AML obligations that private equity fund managers need to perform are limited to the requirements of the Administrative Measures on the Fundraising Behaviors of Private Equity Investment and other relevant regulations.
Internal control and risk management requirements
The Measures include a new chapter, 'Internal Control and Risk Management of AML/CTF of Financial Institutions,' that specifies the requirements on duties, staff and information submission to build a safer and sounder risk control system. Some of the key requirements are highlighted below.
- Establish a risk self-assessment mechanism at the head office level
- Establish a centralized AML/CTF mechanism at the head office level so that all affiliates within the group may implement the same AML/CTF mechanism
- Establish an appropriate risk management mechanism according to the AML/CTF risks identified, taking enhanced measures for identified high-risk situations, and adopting simplified measures for identified low-risk situations
- Establish a compatible IT system for AML/CTF matters and upgrade the system promptly
- Establish an audit mechanism (either by an internal audit team or an independent external auditor) for AML/CTF
- Perform customer due diligence, keep customer identification data and transaction record, report large-value transactions and suspicious transactions, and perform other obligations
b) Staff requirements
- Establish a new internal department or designate an existing internal department to be responsible for AML/CTF matters
- Clarify the respective responsibilities of board of directors, board of supervisors, senior managements and relevant departments on AML/CTF matters, and establish corresponding mechanisms of performance evaluation, rewards and punishment
- Appoint or designate a senior manager to take the lead in AML/CTF management
- Appoint sufficient AML/CTF personnel based on an organization's scale of operations, risk status and business development trends
c) Requirements for information submission and reporting
- Submit AML/CTF information in accordance with PBOC's requirements
- Report to PBOC in a timely manner the formulation or revision of the main AML/CTF internal control system, including any adjustment of the main personnel responsible for AML/CTF and material risk issues
- Annual report to PBOC by a financial institution's domestic headquarters confirming the condition that their overseas branches or subsidiaries (if any) will receive the AML/CTF supervision from the host countries
Supervision and administration measures
As a final note, the new Measures have upgraded PBOC's supervision powers by allowing PBOC to use a variety of measures to carry out AML/CTF supervision and administration. Some of these measures include:
- Evaluating the establishment and implementation of AML/CTF system based on information submitted
- Conducting on-site assessment of AML/CTF risks
- Meeting with directors, supervisors, senior managers or department heads
- Conducting supervisory visits
- Introduction of the AML Supervision Reminder Letter requiring a written response within 20 working days (compared with PBOC's previous right to make telephone or written inquiries requiring a response within five working days)
- Conducting on-site inspection — this includes the power to check/copy documents and materials, seal documents and materials and inspect information relating to a financial institution's digital business management and AML/CTF risk management system.