Enforcement key if Chinese banks want to avoid being investigated

By Caixin – Global Times Source:Global Times Published: 2017/2/26 20:28:39

Lax on money laundering


More and more overseas branches of Chinese banks are getting investigated on money laundering charges, including Bank of China, Agricultural Bank of China and China Construction Bank. Experts said the investigations are largely the result of a strengthened supervision, the banks' own lack of vigilance and imperfect internal controls to catch money laundering. Although China has established laws and regulations to combat money laundering, they have not been very successful because the penalties are not severe enough to be a deterrent. Authorities need to enforce the regulations better to show China's consistent stance in the fight against money laundering.

Photo: CFP



Recently, Bank of China (BOC) agreed to pay a 600,000 euro ($633,540) fine to settle a 4.5-billion-euro money laundering case involving its Milan branch in Italy, Reuters reported on February 17.

The Florence court in Italy ordered BOC to pay back 980,000 euros it earned through the illegal transactions, and four staff members at the branch were sentenced to a suspended two-year prison term for failing to report illegal money transfers, the report said.

Early in June 2015, Florence prosecutors alleged that nearly 300 people including some BOC employees smuggled more than 4.5 billion euros to China from the country between 2006 and 2010.

BOC's Milan branch is not the only Chinese financial institution fined by overseas anti-money laundering departments. Agricultural Bank of China (ABC)'s New York branch was fined even more for alleged instances of money laundering.

The New York State Department of Financial Services (DFS) announced in November 2016 that ABC would pay a $215 million penalty and install an independent monitor because of violating New York's anti-money laundering laws.

The DFS accused ABC officials of obfuscating dollar transactions conducted through the New York branch that might reveal violations of sanctions or anti-money laundering laws, according to a statement on the department's website. It also alleged that ABC management had silenced and severely curtailed the independence of the chief compliance officer at the branch, who tried to alert branch management and conduct internal investigations of suspicious activity.

The regulatory actions are credit negative because they point to internal systems and controls failures and are a reputational hit for ABC, Moody's Investors Service said in a note sent to the Global Times.

"We expect the regulatory action to dent the growth of ABC's dollar clearing and trade finance businesses as it prompts the bank to examine and improve its transaction monitoring and risk assessment policies," Moody's said.

Some other Chinese banks were also involved in money laundering cases in the past two years. In July 2015, the Federal Reserve Bank of New York found problems that left China Construction Bank's New York branch vulnerable to money laundering, according to a report in the magazine Caixin Weekly. The Fed asked the bank to correct the problems. In Spain, police investigated Industrial and Commercial Bank of China's branch in Madrid on suspicions of money laundering in February 2016.

Adapting abroad

Many countries and regions have strengthened supervision on financial institutions in recent years, so it's not as if financial regulators in developed countries are specifically targeting China, Caixin Weekly reported on Monday, citing Yu Wenqian, fraud investigation & dispute services partner at consulting firm EY.

Yu said the penalties show that regulators have become a lot more serious about compliance and have been punishing violations with harsher penalties, said the report.

Chinese banks with branches overseas have neither the willingness nor the courage to fund terrorist organizations or carry out transactions related to sanctioned countries. But they may find themselves involved in money laundering cases due to their lack of vigilance when developing their business among local Chinese communities, Caixin reported.

Chinese banks that open branches abroad are owned or controlled by the State, Caixin reported, citing industry insiders. They need to adapt to increasingly strict international regulations to fight money laundering.

However, some of the banks have adopted an air of carelessness about the rules, the report said. When they end up under investigation, they make excuses. Some have even asked Chinese regulatory agencies to retaliate against the country or region that investigates them.

The report said such retaliation would not stop foreign financial regulators from punishing Chinese banks for money laundering.

Chinese banks' overseas branches are coming under growing pressure to comply with regulation, people close to ABC told Caixin Weekly. In March 2016, US regulators lowered the rating of Chinese banks' New York branches to third from second, and pointed out 26 problems that need to be fixed, including regulatory compliance management and internal auditing, the report said.

Enforce the rules

Since 2003, China has established regulations in line with international standards to prevent money laundering.

In 2007, the country joined the Financial Action Task Force, an inter-government body promoting policies to combat money laundering and terrorist financing, Caixin reported. Five years later, it became the first developing country whose anti-money laundering and anti-terrorist financing work were up in line with international standards.

Facing a complex global and domestic economic environment and under pressure from a depreciating yuan, China further strengthened oversight of money laundering in 2016.

In December, the People's Bank of China, the country's central bank, lowered the reporting threshold for yuan-denominated cash transactions to 50,000 yuan ($7,283.96). Prior to the change, banks only had to report transactions more than 200,000 yuan. It also required banks to report cross-border transfers exceeding 200,000 yuan by individuals.

In January 2017, the China Banking Regulatory Commission issued guidelines requiring domestic banks to improve supervision at the oversees branches by verifying client information and strengthening regulatory compliance management to prevent money laundering and terrorist financing.

"For years, regulators have been touting measures to fight money laundering, but they're never effective," a domestic bank executive was quoted as saying in Caixin's report.

Experts argued that domestic rules to prevent money laundering have had trouble in implementation because the penalties are not severe enough be a deterrent, according to Caixin. Authorities in Europe and the US can fine banks hundreds of millions of dollars, but in China, fines are capped at to several millions yuan.

In addition, China's central banks lack the power to investigate money laundering. Often authorities cannot freeze illegal bank accounts before the money is transferred abroad. Under Chinese law, the central bank's president is only one who can authorize a freeze, which can last no longer than 48 hours. Consequently, the central bank almost never freezes bank accounts.

Domestic supervision institutions need to put these regulations into practice and investigate financial institutions that come under investigation abroad to show China's consistent stance in the fight against money laundering, Caixin noted.

 

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