The Financial Action Task Force (FATF), in February 2005, welcomed China as an observer. The FATF's invitation to China follows the commitment made by the Chinese authorities to implement the FATF 40 + 9 Recommendations, to undergo a mutual evaluation and to play an active role in the fight against money laundering and the financing of terrorism both regionally and worldwide. According to a 2007 U.S. Department of State report, on October 31, 2006, the National People's Congress passed a new Anti-Money Laundering Law, which came into effect on January 1, 2007. This new law broadens the scope of existing anti-money laundering regulations to include any institution involved in money laundering. It mandates that financial and some non-financial institutions maintain records on accounts and transactions, and that they report large and suspicious transactions. The law more firmly establishes the Central Bank's (the People's Bank of China) authority over national anti-money laundering efforts, and also increases the number of predicate offenses for money laundering to include terrorism, fraud, bribery, and embezzlement. Additional regulations were also announced in 2006 aimed at further strengthening China's anti-money laundering efforts. China will be eligible for FATF membership after the completion of a successful mutual evaluation of its anti-money laundering and counter-terrorist financing system.

General Overview

The Financial Action Task Force (FATF), in February 2005, welcomed China as an observer. The FATF's invitation to China follows the commitment made by the Chinese authorities to implement the FATF 40 + 9 Recommendations, to undergo a mutual evaluation and to play an active role in the fight against money laundering and the financing of terrorism both regionally and worldwide. China will be eligible for FATF membership after the completion of a successful mutual evaluation of its anti-money laundering and counter-terrorist financing system. (FATF 2005, p. 1)

According to a 2005 Oxford Analytica (OA) report, in May 2004, the authorities indicated the start of a three-year period for coming into compliance with the anti-money laundering (AML) requirements of the FATF. (OA 2005, p. 57)

On October 31, 2006, the National People's Congress passed a new Anti-Money Laundering (AML) Law, which came into effect January 1, 2007. This new law broadens the scope of existing anti-money laundering regulations to include any institution involved in money laundering. Additional regulations were announced in 2006 aimed at further strengthening China's anti-money laundering efforts. (U.S. DoS 2007)

According to a 2006 report by the law office of Heller Ehrman LLP., the new AML law provides a definition of anti-money laundering with which all relevant entities must comply. The AML refers to the prevention of the use of various methods of the disguising and hiding of the source and nature of illicit income and the subsequent proceeds that have come from drug crimes, organized crimes of a criminal syndicate nature, terrorist crimes, smuggling crimes, crimes of corruption, crimes of disrupting the order of financial administration, financial fraud crimes and other crimes. With the inclusion of the phrase "other crimes" the legislation fulfills the requirements imposed by the United Nations (UN) Convention on Corruption and other international conventions to enlarge the scope of predicate crimes. (Heller Ehrman LLP 2007, p.1)

However based on a 2007 report by the U.S. Department of State (DoS), money laundering remains a major concern as China restructures its economy. A more sophisticated and globally connected financial system in China - one of the world's fastest growing economies - will offer significantly more opportunities for money laundering activity. Most money laundering cases under investigation in 2006 involved funds obtained from corruption and bribery. Narcotics trafficking, smuggling, alien smuggling, counterfeiting, fraud and other financial crimes remain major sources of laundered funds. Proceeds of tax evasion, recycled through offshore companies, often return to China disguised as foreign investment, and as such, receive tax benefits. Continuing speculation following the July 2005 adjustment of the renminbi (RMB) exchange rate system also fueled illicit capital flows into China throughout 2006. Hong Kong-registered companies figure prominently in schemes to transfer corruption proceeds and in tax evasion recycling schemes. The International Monetary Fund (IMF) estimated that money laundering in China may total as much as $24 billion annually. (U.S. DoS 2007)

According to the 2007 U.S. DoS report, in spite of China's efforts, institutional obstacles and rivalries between financial and law-enforcement authorities continue to hamper Chinese anti-money laundering work and other financial law enforcement. Continuing efforts by some Chinese officials to strengthen the relatively weak legal framework under which money laundering offenses are currently prosecuted in the Chinese criminal code have yet to bear fruit. Anti-money laundering efforts are hampered by the prevalence of counterfeit identity documents and cash transactions conducted by underground banks, which in some regions reportedly account for over one-third of lending activities. China has increased efforts in recent years to crack down on such underground lending institutions. In December, 2006, authorities in Shanghai announced they were investigating the country's largest-ever money laundering case, totaling about five billion Yuan ($633 million). (U.S. DoS 2007)

The Principles

1. Legal Systems and Related Institutional Measures

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The Financial Action Task Force (FATF), in February 2005, welcomed China as an observer. The FATF's invitation to China follows the commitment made by the Chinese authorities to implement the FATF 40 + 9 Recommendations, to undergo a mutual evaluation and to play an active role in the fight against money laundering and terrorism financing both regionally and worldwide. (FATF 2005, p. 1) However, there is no information publicly available as to China's compliance with the FATF recommendations relating to this Principle.

On October 31, 2006, the National People's Congress passed a new Anti-Money Laundering (AML) Law, which came into effect January 1, 2007. This new law broadens the scope of existing anti-money laundering regulations to include any institution involved in money laundering. It mandates that financial and some non-financial institutions maintain records on accounts and transactions, and that they report large and suspicious transactions. The law more firmly establishes the Central Bank's authority over national anti-money laundering efforts.. The law also increases the number of predicate offenses for money laundering, to include fraud, bribery, and embezzlement. (U.S. DoS 2007)

According to a 2007 U.S. Department of State (DoS) report, China has taken steps to enhance its anti-money laundering regime. After conducting studies on how to strengthen the system, the People's Bank of China (PBC) and the State Administration of Foreign Exchange (SAFE) promulgated a series of anti-money laundering regulatory measures for financial institutions. These include: (1) Regulations on Real Name System for Individual Savings Accounts; (2) Rules on Bank Account Management; (3) Rules on Management of Foreign Exchange Accounts; (4) Circular on Management of Large Cash Payments; and (5) Rules on Registration and Recording of Large Cash Payments. (U.S. DoS 2007)

The 2006 AML law provides a definition of anti-money laundering with which all relevant entities must comply. It provides that AML refers to the prevention of the use of various methods of disguising and hiding of the source and nature of illicit income and the subsequent proceeds that have come from drug crimes, organized crimes of a criminal syndicate nature, terrorist crimes, smuggling crimes, crimes of corruption, crimes of disrupting the order of financial administration, financial fraud crimes and other crimes. With the inclusion of the phrase "other crimes" the legislation fulfills the requirements imposed by the United Nations (UN) Convention on Corruption and other international conventions to enlarge the scope of predicate crimes. (Heller Ehrman LLP 2007, p.1)

The 2006 Anti-Money Laundering Law builds on China's 1997 Criminal Code. The 2006 law amended Article 191 of the Criminal Code to criminalize money laundering for seven predicate offenses, expanded from the original three predicate offenses, which were narcotics trafficking, organized crime, and smuggling. In 2001, Article 191 was amended to add terrorism as a fourth predicate offense. Article 191, however, still does not encompass all of the twenty designated categories of offenses identified by the Financial Action Task Force (FATF), even after passage of the 2006 law. Additionally, the 2006 law amended Article 312 to make it an offense to launder the proceeds of any crime through a variety of means. Article 312 criminalizes complicity in concealing the proceeds of criminal activity. Article 174 criminalizes the establishment of an unauthorized financial institution. (U.S. DoS 2007)

China supports international efforts to counter the financing of terrorism. Terrorist financing is a criminal offense in China, and the government has the authority to identify, freeze, and seize terrorist financial assets. 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, specifically through implementation of United Nations Security Council counterterrorist financing resolutions. (U.S. DoS 2007)

The 2006 AML law makes "the administrative department of the State Council" the money laundering authority in charge of coordinating and supervising China's anti-money laundering efforts but does not identify a specific administrative authority. However, the People's Bank of China (PBC) Law provides that the PBC is the authority in charge of anti-money laundering issues in the financial industry. The 2007 AML Law empowers the Money Laundering Authority and its branches to engage in investigation of money laundering. Additionally, temporary freezing of money transfers are permitted if the customer in question is requesting the remittance abroad of funds under investigation. The 2007 AML law sets forth penalties for money laundering offences which range from administrative sanctions to criminal punishment. In particular, it expands the scope of and imposes more serious administrative penalties on financial institutions, their directors, senior managers, and staff responsible for a variety of money-laundering offenses. Those offences include systemic offenses, such as failing to institute anti-money laundering internal controls, as well as specific acts, such as failing to report large value or suspicious transactions. (Heller Ehrman LLP 2007, p.1)

China is a party to the 1988 UN Drug Convention, and the UN Convention against Transnational Organized Crime. China is also a party to the UN Convention against Corruption and to the UN International Convention for the Suppression of the Financing of Terrorism in 2006. (U.S. DoS 2007)

Additional regulations were announced in 2006 aimed at further strengthening China's anti-money laundering efforts. In December, 2006, China's central bank issued two new regulations, "Rules for Anti-Money Laundering by Financial Institutions," which came into effect January 1, 2007, and "Administrative Rules for Reporting of Large-Value and Suspicious Transactions by Financial Institutions," which came into effect March 1, 2007. Together, these regulations revise earlier PBC regulations implemented in March, 2004. The new regulations will require all financial institutions-including securities, trust companies and futures dealers-to report large and suspicious transactions. Any cash deposit or withdrawal of over RMB 200,000 or foreign-currency withdrawal of $10,000 in one business day must be reported within five days if electronically or within 10 days in writing to the PBC. Money transfers between companies exceeding RMB 2 million or US$200,000 in one day or between an individual and a company greater than RMB 500,000 or US$100,000 must also be reported. The regulations are slated for implementation between January and March of 2007. (U.S. DoS 2007)

In 2003, the Chinese Government established a new banking regulator, the China Banking Regulatory Commission (CBRC), which assumed substantial authority over the regulation of the banking system. The CBRC has been authorized to supervise and regulate banks, asset management companies, trust and investment companies, and other deposit-taking institutions, with the aim of ensuring the soundness of the banking industry. One of its regulatory objectives is to combat financial crimes. However, primary authority for anti-money laundering efforts remains with the PBC, the country's Central Bank, while enforcement is handled by the Ministry of Public Security. (U.S. DoS 2007)

In 2004, the PBC established a central national Financial Intelligence Unit (FIU), the China Anti-Money Laundering Monitoring and Analysis Center, whose function is to collect, analyze and disseminate suspicious transaction reports and currency transaction reports. According to the China Anti-Money Laundering Monitoring and Analysis Center, 683 suspicious money laundering cases had been reported to the police by the end of 2005. They involved 137.8 billion Yuan ($17.2 billion) and over one billion U.S. dollars. (U.S. DoS 2007)

In spite of China's efforts, institutional obstacles and rivalries between financial and law-enforcement authorities continue to hamper Chinese anti-money laundering work and other financial law enforcement. Continuing efforts by some Chinese officials to strengthen the relatively weak legal framework under which money laundering offenses are currently prosecuted in the Chinese criminal code have yet to bear fruit. Anti-money laundering efforts are hampered by the prevalence of counterfeit identity documents and cash transactions conducted by underground banks, which in some regions reportedly account for over one-third of lending activities. China has increased efforts in recent years to crack down on such underground lending institutions. In December, 2006, authorities in Shanghai announced they were investigating the country's largest-ever money laundering case, totaling about five billion Yuan ($633 million). The case involves underground banks, according to Chinese media reports. (U.S. DoS 2007)

While official scrutiny of cross-border transactions is improving, the Chinese Government is also moving to loosen capital-account restrictions. For example, as of January 1, 2005, travelers can take up to 20,000 RMB (approximately $2,500) or, in foreign currency, up to $5,000, into or out of the country on each trip, up from 3,000 RMB (approximately $360) previously. New provisions allowing the use of RMB in Hong Kong have also created new loopholes for money laundering activity. Authorities are also allowing greater use of domestic, RMB-denominated, credit cards overseas. Such cards can now be used in Hong Kong, Macau, Singapore, Thailand, and South Korea. To address online fraud, the PBC tightened regulations governing electronic payments. In 2005, the PBC announced new rules that consumers could not make online purchases of more than RMB 1,000 (approximately $124) in any single transaction or more than 5,000 RMB (approximately $620) in a single day. Enterprises are limited to electronic payments of no more than 50,000 RMB (approximately $6,200) in a single day. (U.S. DoS 2007)

Chinese law enforcement authorities have noted that China's cash-based economy, combined with its robust cross-border trade, has led to many difficult-to-track large cash transactions. There is concern that groups may be exploiting such cash transactions in an attempt to bypass China's financial enforcement agencies. While China is proficient in tracing formal foreign currency transactions, the large size of the informal economy, estimated by the Chinese Government at about 10 percent of the formal economy, makes monitoring of China's cash-based economy very difficult. (U.S. DoS 2007)

2. Preventive Measures - Financial Institutions

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The Financial Action Task Force (FATF), in February 2005, welcomed China as an observer. The FATF's invitation to China follows the commitment made by the Chinese authorities to implement the FATF 40 + 9 Recommendations, to undergo a mutual evaluation and to play an active role in the fight against money laundering and terrorism financing both regionally and worldwide. (FATF 2005, p. 1) However, there is no information publicly available as to China's compliance with the FATF recommendations relating to this Principle.

On October 31, 2006, the National People's Congress passed a new Anti-Money Laundering (AML) Law, which came into effect January 1, 2007. This new law broadens the scope of existing anti-money laundering regulations to include any institution involved in money laundering. It mandates that financial and some nonfinancial institutions maintain records on accounts and transactions, and that they report large and suspicious transactions. The law more firmly establishes the Central Bank's authority over national anti-money laundering efforts. The law also increases the number of predicate offenses for money laundering, to include fraud, bribery, and embezzlement. China has taken steps to enhance its anti-money laundering regime. After conducting studies on how to strengthen the system, the People's Bank of China (PBC) and the State Administration of Foreign Exchange (SAFE) promulgated a series of anti-money laundering regulatory measures for financial institutions. These include: (1) Regulations on Real Name System for Individual Savings Accounts; (2) Rules on Bank Account Management; (3) Rules on Management of Foreign Exchange Accounts; (4) Circular on Management of Large Cash Payments; and (5) Rules on Registration and Recording of Large Cash Payments. (U.S. DoS 2007)

The 2006 AML law requires financial institutions established in China to engage in anti-money laundering measures, such as a "comprehensive know your customer" system, "customer identification materials," "transaction recording system", "large value transaction and suspicious transaction" reporting systems. "Financial institutions" refers to policy banks, commercial banks, credit cooperative societies, postal savings institutions, trust companies, securities companies, futures brokerages, insurance companies and other entities that the regulatory authority in charge of anti-money laundering has designated. (Heller Ehrman LLP 2007, pp.1-2)

In 2006, China's central bank issued two new regulations, "Rules for Anti-Money Laundering by Financial Institutions," which came into effect January 1, 2007, and "Administrative Rules for Reporting of Large-Value and Suspicious Transactions by Financial Institutions," which came into effect March 1, 2007. Together, these regulations revise earlier PBC regulations implemented in March, 2004. The new regulations will require all financial institutions - including securities, trust companies and futures dealers - to report large and suspicious transactions. Any cash deposit or withdrawal of over RMB 200,000 or foreign-currency withdrawal of $10,000 in one business day must be reported within five days if electronically or within 10 days in writing to the PBC. Money transfers between companies exceeding RMB 2 million or US$200,000 in one day or between an individual and a company greater than RMB 500,000 or US$100,000 must also be reported. The regulations are slated for implementation between January and March of 2007. (U.S. DoS 2007)

These regulations enhance a prior March 2004 PBC regulation entitled "Regulations on Anti-Money Laundering for Financial Institutions," which strengthens the regulatory framework under which Chinese banks and financial institutions must treat potentially illicit financial activity. The regulation effectively requires Chinese financial institutions to take responsibility for suspicious transactions, instructing them to create their own anti-money laundering mechanisms. Banks in particular were required to report suspicious foreign exchange transactions - but not all transactions, as in the new regulations - of more than $10,000 per person in a single transaction or cumulatively per day in cash, or noncash foreign exchange transactions of $100,000 per individual or $500,000 per entity either in a single transaction or cumulatively per day. Under the regulation, banks were further required to submit monthly reports to the PBC outlining suspicious activity and to retain transaction records for five years. Banks which failed to report on time can be fined up to the equivalent of approximately $3,600. Under the December 2006 regulations, financial institutions that fail to meet reporting requirements in a timely manner can have their licenses or business operations suspended. (U.S. DoS 2007)

On April 12, 2006, the PBC proposed a series of measures aimed at curbing money laundering in the insurance, banking and securities sectors. The proposed regulations, which were circulated for comment until May 8 2006, would require institutions to report all "block transactions" - defined as transactions worth more than 50,000 RMB (approximately $6,241) or $10,000 per day - to the PBC's anti-money laundering center for review. The proposal would also define the following as "block transactions": noncash transactions of more than 200,000 RMB or $100,000 per day, and transactions between institutional accounts amounting to more than 1 million RMB or $500,000 per day. However, as of early 2007, the status of these proposed regulations is unclear. (U.S. DoS 2007)

In 2003, the Chinese Government established a new banking regulator, the China Banking Regulatory Commission (CBRC), which assumed substantial authority over the regulation of the banking system. The CBRC has been authorized to supervise and regulate banks, asset management companies, trust and investment companies, and other deposit-taking institutions, with the aim of ensuring the soundness of the banking industry. One of its regulatory objectives is to combat financial crimes. However, primary authority for anti-money laundering efforts remains with the PBC, the country's Central Bank, while enforcement is handled by the Ministry of Public Security. (U.S. DoS 2007)

In 2004, the PBC established a central national Financial Intelligence Unit (FIU), the China Anti-Money Laundering Monitoring and Analysis Center, whose function is to collect, analyze and disseminate suspicious transaction reports and currency transaction reports. According to the China Anti-Money Laundering Monitoring and Analysis Center, 683 suspicious money laundering cases had been reported to the police by the end of 2005. They involved 137.8 billion Yuan ($17.2 billion) and over one billion U.S. dollars. (U.S. DoS 2007)

In September 2002, SAFE adopted a new system to supervise foreign exchange accounts more efficiently. The new system allowed for immediate electronic supervision of transactions, collection of statistical data, and reporting and analysis of transactions. A separate Anti-Money Laundering Bureau was established at the PBC in late 2003 to coordinate all anti-money laundering efforts in the PBC and among other agencies, and to supervise the creation of the new FIU. (U.S. DoS 2007)

The PBC launched a national credit-information system in early 2005. The system officially began operation in January 2006. Although still very limited, this system will allow banks to have access to information on individuals as well as on corporate entities. PBC rules obligate financial institutions to perform customer identification, due diligence and record keeping. SAFE implemented a new regulation on March 1, 2004 requiring nonresidents, including those from Hong Kong, Macau, Taiwan, and Chinese passport holders residing outside mainland China, to verify their real names when opening bank accounts with more than $5,000. (U.S. DoS 2007)

3. Preventive Measures - Designated non-Financial Business and Professions

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The Financial Action Task Force (FATF), in February 2005, welcomed China as an observer. The FATF's invitation to China follows the commitment made by the Chinese authorities to implement the FATF 40 + 9 Recommendations, to undergo a mutual evaluation and to play an active role in the fight against money laundering and terrorism financing both regionally and worldwide. (FATF 2005, p. 1) However, there is no information publicly available as to China's compliance with the FATF recommendations relating to this Principle.

On October 31, 2006, the National People's Congress passed a new Anti-Money Laundering (AML) Law, which came into effect January 1, 2007. This new law broadens the scope of existing anti-money laundering regulations to include any institution involved in money laundering. It mandates that financial and some nonfinancial institutions maintain records on accounts and transactions, and that they report large and suspicious transactions. The law, however, does not clearly define "nonfinancial institutions" for AML purposes. The law also increases the number of predicate offenses for money laundering, to include fraud, bribery, and embezzlement. China has taken steps to enhance its anti-money laundering regime. (U.S. DoS 2007)

The 2006 AML law requires certain specified non-financial institutions to engage in anti-money laundering measures, such as a "comprehensive know your customer" system, "customer identification materials," "transaction recording system", "large value transaction and suspicious transaction" reporting systems. (Heller Ehrman LLP 2007, pp.1-2)

4. Legal Person and Arrangements & Non-Profit Organizations

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The Financial Action Task Force (FATF), in February 2005, welcomed China as an observer. The FATF's invitation to China follows the commitment made by the Chinese authorities to implement the FATF 40 + 9 Recommendations, to undergo a mutual evaluation and to play an active role in the fight against money laundering and terrorism financing both regionally and worldwide. (FATF 2005, p. 1) However, there is no information publicly available as to China's compliance with the FATF recommendations relating to this Principle.

5. National and International Co-operation

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The Financial Action Task Force (FATF), in February 2005, welcomed China as an observer. The FATF's invitation to China follows the commitment made by the Chinese authorities to implement the FATF 40 + 9 Recommendations, to undergo a mutual evaluation and to play an active role in the fight against money laundering and terrorism financing both regionally and worldwide. China will be eligible for membership with the Financial Action Task Force (FATF) after the completion of a successful mutual evaluation of its anti-money laundering and counter-terrorist financing system. (FATF 2005, p. 1) However, there is no information publicly available as to China's compliance with the FATF recommendations relating to this Principle.

China supports international efforts to counter the financing of terrorism. Terrorist financing is a criminal offense in China, and the government has the authority to identify, freeze, and seize terrorist financial assets. 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, specifically through implementation of United Nations Security Council counterterrorist financing resolutions. (U.S. DoS 2007)

China is a party to the 1988 United Nations (UN) Drug Convention, and the UN Convention against Transnational Organized Crime. China is also a party to the UN Convention against Corruption and to the UN International Convention for the Suppression of the Financing of Terrorism in 2006. (U.S. DoS 2007)

China has signed mutual legal assistance treaties with 24 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. In late 2004, China joined the Eurasian Group (EAG), a Financial Action Task Force (FATF)-style regional group which includes Russia, Belarus, China, Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan. In January 2005, China became an observer to the FATF and seeks to become a full member of the FATF. The FATF conducted a mutual evaluation of China in November, 2006. (U.S. DoS 2007)

In 2005, China's China Banking Regulatory Commission (CBRC) signed a memorandum of understanding with the Philippine Central Bank, to share information on suspected money laundering activity. China's financial intelligence unit, the China Anti-Money Laundering Monitoring and Analysis Center, also signed its first MOU with a foreign counterpart at the end of 2005, with South Korea's FIU, allowing the two to exchange information related to money laundering, terrorist financing and other criminal financial activity. (U.S. DoS 2007)