U.S. Relations With the People's Republic of China (2009)

United States Department of State
Bureau of International Narcotics and Law Enforcement Affairs

2009 International Narcotics Control Strategy Report (INCSR)

February 27, 2009

Volume II: Money Laundering and Financial Crimes

March 2009

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Country Reports

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China, People's Republic of

Over the past five years, the Government of the People's Republic of China has made significant progress in developing anti-money laundering (AML) and counterterrorist financing (CTF) measures including legislative reform, strengthening enforcement mechanisms, and implementing international cooperation initiatives. However, money laundering remains a serious concern as China restructures its economy and develops its financial system. Narcotics trafficking, smuggling, trafficking in persons, counterfeiting of trade goods, fraud, tax evasion, corruption, and other financial crimes are major sources of laundered funds. Most money laundering cases currently under investigation involve funds obtained from corruption and bribery. Proceeds of tax evasion, recycled through offshore companies, often return to China disguised as foreign investment and, as such, receive tax benefits. Chinese officials have noted that most acts of corruption in China are closely related to economic activities that accompany illegal money transfers. Observers register increasing concern regarding underground banking and trade-based money laundering.

The People's Bank of China (PBOC), China's central bank, maintains primary authority for AML/CTF coordination. The PBOC shares some AML responsibilities with other financial regulatory agencies, including: the China Banking Regulatory Commission (CBRC), which supervises and regulates banks, asset management companies, trust and investment companies, and other deposit-taking institutions; the China Insurance Regulatory Commission (CIRC), which supervises the insurance sector; and the China Securities Regulatory Commission (CSRC), which supervises the securities sector. The Ministry of Public Security (MPS) has both an Anti-Money Laundering (AML) Division and an Anti-Terrorism Bureau, which lead anti-money laundering and counterterrorist finance-related law enforcement efforts.

China has criminalized money laundering under three separate articles of the Penal Code. China introduced Article 349 of the Penal Code in December 1990 to criminalize the laundering of proceeds generated from drug-related offenses, and amended Articles 191 and 312 of the Penal Code in June 2006. Article 191 expands the criminalization of money laundering to additional categories of predicate offences: narcotics trafficking, smuggling, organized crime, terrorism, embezzlement and bribery, financial fraud and disrupting the financial management order. The Article 191 amendments to seven predicate offenses, including fraud, bribery, and embezzlement, narcotics trafficking, organized crime, smuggling, and terrorism. Article 312 criminalizes money laundering on the basis of an all-crimes approach, and criminalizes complicity in concealing the proceeds of criminal activity. The Financial Action Task Force (FATF) 2007 mutual evaluation report (MER) identified several deficiencies in China's criminalization of money laundering. These included the failure to fully cover the sole and knowing acquisition and use; criminalize self-laundering; provide for corporate criminal liability for article 312 and 349 offences; and adequately criminalize terrorist financing as a money laundering predicate offense.

Chinese authorities are in the process of addressing several of these deficiencies. China has interpreted its Penal Code to extend the all-crimes offence set out in article 312 to the sole and knowing acquisition and use of proceeds--a judicial interpretations which is poised to become law after undergoing a third reading by the Legal Affairs Committee of the National People's Congress (LAC/NPC). Chinese authorities are amending the Penal Code to provide for corporate criminal liability. A draft Penal Code amendment (Amendment 7) extending corporate criminal liability to article 312 (the all-crimes money laundering offence) passed its first reading at the end of August 2008 but must still undergo second and third readings.

A new anti-money laundering (AML) law, which covers AML/CTF preventative measures for the entire financial system, took effect January 1, 2007. The law extends AML/CTF obligations to the securities and insurance sectors, requires financial institutions to maintain thorough account and transaction records and reports of large and suspicious transactions, and explicitly prohibits financial institutions from opening or maintaining anonymous accounts or accounts in fictitious names. The PBOC remains the primary regulator for AML/CTF purposes for all financial institutions, including insurance and securities, although other regulators (CBRC, CSRC and CIRC) have a role in formulating the requirements, primarily in relation to systems and controls. To implement the new AML Law, PBOC issued "Rules for Anti-Money Laundering by Financial Institutions" (AML Rules) (effective January 1, 2007); "Administrative Rules for Reporting of Large-Value and Suspicious Transactions by Financial Institutions" (LVT/STR Rules) (effective March 1, 2007); and "Administrative Rules for Financial Institutions on Customer Identification and Record Keeping of Customer Identity and Transaction Information (CDD Rules) (effective August 1, 2007). The AML Rules obligate financial institutions to perform customer due diligence, regardless of the type of customer (business or individual), type of transaction, or level of risk. . Under the new regulatory framework, all financial institutions--securities, insurance, trust companies and futures dealers--must manage their own AML mechanisms and report large and suspicious transactions. The LVT/STR Rules were amended on June 21, 2007, to require financial institutions to report suspicious transactions related to terrorist financing.

Under the AML and LVT/STR Rules, banks must report any cash deposit or withdrawal of over renminbi RMB 200,000 (approximately $27,000) or foreign-currency withdrawal of over $10,000 in one business day to the PBOC's financial intelligence unit (FIU). Banks must report either electronically within five days or in writing within 10 days. They must also report money transfers exceeding RMB 2 million (approximately $274,000) between companies in one day or between an individual and a company greater than RMB 500,000 (approximately $68,500). All financial institutions must submit monthly reports describing suspicious activities and retain transaction records for five years. Financial institutions that fail to meet reporting requirements in a timely manner are subject to a range of administrative penalties and sanctions including revocation of their licenses or forced suspension of business operations.

The new CDD Rules require all financial institutions to identify and verify their customers, including the beneficial owner, (although this requirement may be limited to the natural person who ultimately controls--as opposed to owns--a customer), and extend requirements relating to the identification of legal persons to all financial institutions. Banks must identify and verify customers when carrying out occasional transactions over 10,000 RMB or 1,000 U.S. $ equivalent, or when providing cash deposit or case withdrawal services over 50,000 RMB or 10,000 U.S. $ equivalent. Similar provisions cover a range of cash and other transactions for the insurance sector. All securities transactions must be funded through a custodian bank account subject to CDD. The CDD Rules call for risk-based CDD and monitoring, and introduce specific requirements for financial institutions in relation to foreign Politically Exposed Persons (PEPs), including the requirement to obtain approval from senior management before opening an account and determine the source of funds.

According to Article 16 of China's AML Law, when establishing business relationships, financial institutions must require prospective customers to show a valid identification card or other identification document issued by a reliable independent source. For example, when opening an account, customers who are residents of China must produce an official or temporary identification card, or in the case of military unit servicemen or armed police, an army or police identification card. The financial institution must verify the customer's identity documents by examining their authenticity and keep records of the information contained therein. Financial institutions may also verify the customer's identity through the State Administration of Industry and Commerce (SAIC) or through public security departments. To remedy deficiencies in regulators' ability to obtain information, the PBOC launched a national credit-information system in January 2006. Although still very limited, this system allows banks to have access to information on individuals as well as on corporate entities.

Because of the country's size, the Chinese authorities have evolved a decentralized system of AML/CTF supervision, with general oversight being exercised from PBOC head office in Beijing. The supervisory program includes both onsite and offsite monitoring (based on submission by financial institutions of periodic reports). The frequency of onsite inspections for particular institutions is risk-based. The overall adequacy and effectiveness of China's AML supervisory system is improving, but problems remain, particularly with respect to the usefulness of the offsite process. According to the PBOC 2007 China Anti-Money Laundering Report, examiners executed on-site inspections of 4,533 financial institutions to determine compliance with the AML rules. Of the inspected institutions, 350 received financial sanctions for violating the regulations. The fines totaled RMB 26.52 million (approximately $3.9 million). Of the 350 institutions incurring penalties, 341 were banking financial institutions, 4 were in the securities and futures sector, and the other 5 were in the insurance sector. Of the 350, 347 institutions failed to verify customer identification or report large-value or suspicious transactions, and 3 failed to set up an AML internal control system. Fifty-five percent of the sanctioned institutions were State-owned and joint-stock commercial banks, and 98 percent were Chinese-funded. More recent data is not available.

The AML Law provides for the PBOC's AML authorities, roles and functions, including its FIU. China's FIU is divided into two units within the single overarching authority of the PBOC: China Anti-money Laundering Monitoring & Analysis Center (CAMLMAC) and the Anti-Money Laundering Bureau (AMLB). The heads of CAMLMAC and the AMLB both report to a single deputy governor.

CAMLMAC, established in April 2004, specializes in data collection, processing and analysis, as well as international cooperation. It receives and analyzes STRs and LVTs, and is the central point of contact for foreign FIUs. Established in October 2003, the AMLB organizes and coordinates China's anti-money laundering affairs, and executes administrative investigation, dissemination and policy oversight. Although CAMLMAC and the AMLB work together to conduct follow-up analysis on LVTs and STRs, the AMLB conducts the majority of the additional analysis and dissemination functions.

According to the PBOC, authorities in 2007 discovered 89 cases of money laundering involving RMB 28.8 billion (approximately $4.17 billion). In the first half of 2008, the PBOC sanctioned 12 financial institutions involved in money laundering, with fines totaling RMB 2.25 million (approximately $329,000), The PBOC has also helped police solve 42 money laundering cases involving about RMB 84.4 billion (approximately $12.4 billion).

The Ministry of Public Security (MPS), China's main law enforcement body, follows up on STRs and guides and coordinates public security authorities across China in money laundering investigations. The AML Division of the MPS Economic Crime Investigation Department (ECID) handles the majority of responsibilities related to the seizing, freezing and confiscation of criminal proceeds. The Anti-Terrorism Bureau of the MPS investigates general crimes relating to terrorist financing. Crimes against state security (including terrorism and related crimes) are the responsibility of the Ministry of State Security (MSS). The Supreme People's Procurator (SPP) supervises and directs the approval of arrests, prosecution, and supervision of cases involving money laundering crimes. The Supreme People's Court (SPC) supervises and directs the trial of money laundering crimes. Both the SPP and the SPC can issue judicial interpretations. Law enforcement agencies have authority to use a wide range of powers, including special investigative techniques, when conducting investigations of money laundering, terrorist financing and predicate offences. These powers include seizing articles relevant to the crime, including all records held by financial institutions. Reportedly, however, law enforcement and prosecutorial authorities focus on pursuing predicate offences, to the exclusion of AML/CTF.

China has implemented a cross-border currency disclosure system using risk-based targeting operated by the General Customs Administration (GCA). All travelers must declare cross-border transportation of cash exceeding RMB 20,000 for local currency (approximately $2,930) or of foreign currency. There is no requirement for bearer negotiable instruments. However, a FATF follow up report states: " China has finished drafting new Administrative Rules on Management of AML Information of Cross-Border Transportation of Cash and Bearer Negotiable Instruments (informal name). The draft is now being circulated among relevant competent authorities for comment. The main issues that are still being debated relate to: (1) reconciling the FATF definition of bearer negotiable instruments with related definitions in existing Chinese legislation; (2) ensuring that the new Rules do not conflict with existing currency-control legislation; and (3) setting the declaration threshold." China prohibits cross-border transportation of RMB through the mail system. The GCA is authorized to conduct checks of persons entering or leaving the country, seize undeclared cash, and question, detain and sanction anyone who violates any requirement. Those who carry out physical cross border transportation related to money laundering or terrorist financing are also subject to criminal sentences. New provisions allowing the use of RMB in Hong Kong have created loopholes for money laundering activity. Authorities do not appear to effectively use captured data for money laundering or terrorist financing investigations.

Only banks have the authority to provide money or value transfer services in China, and may not have agents that offer such services. Article 174 of the Penal Code states that it is a criminal offense to operate an illegal financial institution or provide financial services illegally in China. Although China has had some success at combating illegal underground banking, the country's cash-based economy, combined with robust cross-border trade, contributes to a high volume of difficult-to-track large cash transactions. While China is adept at tracing formal financial transactions, the large size of the informal economy--estimated by the Chinese Government at approximately ten percent of the formal economy, but quite possibly much larger--means that tracing informal financial transactions presents a major obstacle to law enforcement. The prevalence of counterfeit identity documents and underground banks, which in some regions reportedly account for over one-third of lending activities, further hamper AML efforts. Authorities have expressed concern that criminal or terrorist groups could exploit underground banking mechanisms to bypass law enforcement.

The extent of the linkages between underground banking and the large expatriate Chinese community remains unknown. Traditionally, money changers, gold shops, and trading companies operate "flying money" or fei-chien networks. The international Chinese underground banking system depends on close associations and family ties resistant to most law enforcement countermeasures. Value transfer via trade goods, including barter exchange, is a common component in Chinese underground finance. Many Chinese underground trading networks in Africa, Asia, the Middle East, and the Americas participate in the trade of Chinese-manufactured counterfeit goods, in violation of intellectual property rights. Reportedly, the proceeds of narcotics produced in Latin America are laundered via trade by purchasing Chinese manufactured goods (both licit and counterfeit) in an Asian version of the Black Market Peso Exchange.

To address online fraud, the PBOC has tightened regulations governing electronic payments. PBOC rules prohibit consumers from making online purchases of more than RMB 1,000 (approximately $137) in any single transaction or more than RMB 5,000 (approximately $688) in a single day. Enterprises are limited to electronic payments of no more than RMB 50,000 (approximately $6,900) in a single day. In March 2007, Chinese regulators announced additional online restrictions regarding the use of "virtual money" (online credits sold by websites to customers to pay for games and other web-based services) amidst rumors that criminals were using the credits to launder money.

Terrorist financing is criminalized in Article 120bis of the Penal Code. The MER found that China did not adequately criminalize the sole collection of funds in a terrorist financing context. Through a judicial interpretation of the Penal Code, China has clarified that the terrorist financing offence covers the sole and knowing collection of terrorist funds and has defined "funds" to conform to the definition set forth in the Vienna Convention. These judicial interpretations will likely become law after undergoing a third reading by the Legal Affairs Committee of the National People's Congress (LAC/NPC).

China's primary domestic concerns with terrorist financing focus on the western Xinjiang Uighur Autonomous Region. Subsequent to the September 11, 2001, terrorist attacks in the United States, Chinese authorities began to actively participate in U.S. and international efforts to identify, track, and intercept terrorist finances. However, according to the MER, China has not implemented UNSCR 1267 and UNSCR 1373 in a manner that meets the specific requirements of FATF Special Recommendation III.

China is a party to the 1988 UN Drug Convention, the UN Convention against Transnational Organized Crime, the UN Convention for the Suppression of the Financing of Terrorism, and the UN Convention against Corruption. China has signed mutual legal assistance treaties with over 24 countries and has entered into some 70 MOUs and cooperation agreements with over 40 countries. The United States and China signed a mutual legal assistance agreement (MLAA) in June 2000, the first major bilateral law enforcement agreement between the countries. The MLAA entered into force in March 2001 and provides a basis for exchanging records in connection with narcotics and other criminal investigations and proceedings. The United States and China cooperate and discuss money laundering and enforcement issues under the auspices of the U.S./China Joint Liaison Group's (JLG) subgroup on law enforcement cooperation. In addition, the United States and China have established a Working Group on Counterterrorism that meets on a regular basis. China has established similar working groups with other countries as well. China has signed extradition agreements with 30 countries to make it more difficult for economic criminals to seek shelter abroad. According to China's Ministry of Public Security, approximately 800 Chinese economic crime suspects have reportedly fled abroad with more than 70 billion RMB (approximately $9.1 billion) involved. In late 2004, China joined the Eurasian Group on combating money laundering and financing of terrorism (EAG)--a FATF-style regional body. China became a member of the FATF in June 2007.

The Government of China has significantly strengthened its anti-money laundering regime through legislative and regulatory reforms, law enforcement mechanisms, and membership in international organizations, in particular the FATF. The Chinese Government should continue to take steps to develop a viable AML/CTF regime consistent with international standards. China should continue to develop a regulatory and law enforcement environment designed to prevent and deter money laundering, and it should raise awareness within the judiciary of money laundering as a criminal offense. China should ensure that law enforcement and prosecutorial authorities specifically pursue money laundering and terrorist financing offenses, and not simply treat them as a subsequent byproduct of investigations into predicate offenses. China's Anti-Money Laundering Law and related regulations should also apply to a broader range of nonfinancial businesses and professions. Authorities should assess the application of sanctions for noncompliance with identification, due diligence and record-keeping requirements to ensure that they have a genuinely dissuasive effect. China should ensure that its judicial interpretations that clarify and strengthen its AML/CTF regime become codified in law. In addition to strengthening its counterterrorism finance regime, Chinese law should ensure that it defines the term "terrorist activities" consistently with international standards. The Penal Code should also specify the definition of "funds" and criminalize the act of collecting funds for terrorist purposes. In addition, China should take steps to effectively implement the UNSCRs and strengthen its mechanisms for freezing terrorist assets. Chinese law enforcement authorities should examine domestic and home-grown ties to the international network of Chinese expatriate brokers and traders that often link to underground finance, trade fraud, and trade-based money laundering activities.

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