Supervision Regulators raise concerns about Overseas Chinese Banks AML Standards

Regulators worldwide are scrutinising the efficacy of anti-money laundering (AML) compliance at Chinese banks following a series of recent cases involving the operations of subsidiaries and branches of Chinese banks operating abroad. The scrutiny comes as China cements its position as the world's second-largest economy. 

Evidence is growing that the country's state-owned financial institutions are involved in large-scale money laundering for the expatriate Chinese community round Europe and in the United States (see case studies below). 

The issue has triggered alarm in the United States and Europe where local law enforcement agencies and regulators have been involved. Reuters reported, via the CAIXIN news agency, that the UK Financial Conduct Authority has plans to strengthen inspections of the largest branches of subsidiaries of Industrial and Commercial Bank of China (ICBC) and on China Construction Bank Corp (CCB). Spokesmen for the banks named in this article either could not be reached or declined to comment.

The cases involving Chinese subsidiaries abroad listed below have a number of common features. Each involves one of the largest five state-owned Chinese banks, the suspected transfer of funds from an overseas subsidiary back to China, and participation by an overseas subsidiary working with an extensive local Chinese community. A number also involve the bank working with allegedly illegal activities, including counterfeiting and prostitution, in the overseas market.

Chinese local banks pay lip service to regulation but their implementation is deficient, said Henry Rui, partner at EY in Shanghai.

"They will claim that their paperwork, their procedures follow the local country's policy but the implementation is questionable," he said. 

"Their standard may be lower than the EU standard. When they do the funds transfer, they don't check the source of funds, which is very important in KYC. They don't check; they just do the transaction." 

Bypassing compliance

The local Chinese banks will bypass compliance to win business, Rui said. "When they have a bigger customer or piece of business to win, there will be a question mark over their implementation standards." 

Rui has undertaken projects for a number of foreign banks operating in China and they apply the highest international standards, he said.

The history of AML in China is relatively recent and banks are taking time to close the gap between local and international standards, Rui said. 

The first AML rules were introduced in 1997 with a criminal law that included the banning of money laundering. Administrative rules for the submission of suspicious activity reports were introduced in 2003, and the Chinese financial intelligence unit, called the Chinese Anti-Money Laundering Monitoring Analysis Centre (CAMLMAC), was set up in 2004. The country joined the Financial Action Task Force, the global standard setter, in 2007.

Ineffective regulators

China's legal code applies international standards to know your customer (KYC) due diligence and disclosure of beneficial ownership but regulators fail to apply it, said Steve Tsang, professor of Contemporary Chinese Studies and director of the China Policy Institute at the University of Nottingham in the UK. He said local regulators were not as effective as the Chinese government would like them to be. 

"That is why they still have the problem," Tsang said.

Banks' role in facilitating capital flight from China was a significant government concern, he said. 

"You cannot have capital flight on this kind of scale without proper respected and respectable financial institutions being used as vehicles. Whether their senior executives turn a blind eye or not, I don't know. You are not talking about £1 million here or there that can be smuggled out in a suitcase. You are talking about a huge amount of money being involved. That money will have to be sent through normal channels, so some of the major financial institutions will have been involved," Tsang said.

Most Chinese banks have tight regulations in terms of the amounts going out without going through an authorisation process. "Technically, you can't take a lot of money out of China but everybody gets their money out of China. How do people manage to buy expensive properties in central London?"

A low level of fines has impeded Chinese regulation, according to a report by Temenos, a banking consultancy operating in China.

The report said regulators can impose fines amounting to no more than $70,000 on an institution for misconduct. 

Directors, senior managers and other persons directly responsible for the misconduct can also receive a fine of between $1,500 and $7,300. If non-compliance leads to money laundering, the fines are about ten times higher. 

Rui said the fines may be large in the context of salaries for state bank officials. "If you gave the bank or the management a serious fine or penalty, no one would want to work in the bank. Salaries are not high."

The Temenos report referred to the People's Bank of China (PBoC)'s "light-handed" stance on the enforcement of AML violations.

"In order to create a genuine incentive for banks to reduce money laundering, the regulator must be willing to legislate and execute serious punishment to improve credibility. Otherwise banks will not make the effort to sustainably reduce money laundering," the report said.

Overseas subsidiaries 

Overseas subsidiaries and branches of Chinese state banks need to hire local AML experts to introduce and monitor compliance, Rui said. A number have followed this advice, only to find that foreigners clash with the bank's culture and quit. 

"Local experts don't like to work in a Chinese bank because the culture is different. The Chinese subsidiary needs to change its mindset in line with the local country's way of doing business, which says you need to comply with every regulation, every policy of the European country. They need to implement the local policy and regulations of the local country," Rui said.

Drawing hope that officialdom is putting greater emphasis on the importance of the implementation of AML rules in Chinese banks, Rui said the Chinese government has just formed a committee to assist banks with introducing financial technology. 

"The introduction of AML compliance as a membership qualification is very important. You need to pass the AML evaluation," he said. 

The committee is operating under the auspices of government bodies including the China Banking Regulatory Commission, the Chinese Securities Regulatory Commission and the Chinese Insurance Regulatory Commission. 



Five directors of Industrial and Commercial Bank of China (ICBC) in Madrid were arrested and charged with money laundering and tax evasion in February 2016. The Guardia Civil, in "Operation Shadow", said ICBC had been used to transfer money made in the import scheme from Spain to China. Some 40 million euros of undeclared money had been found. In addition to the five directors' arrests, another 47 were charged with money laundering, tax fraud, contraband and other criminal activities.

The criminal group allegedly helped businesses to launder money, charging commissions in the process. Illegal workshops were found where contraband goods were made by Chinese nationals, a number of whose identities could not be verified. Spain has a Chinese population of some 180,000. 

One former law enforcement official, who wished to remain anonymous, said lapses found at ICBC in Spain are shared across the board with other Chinese banks. 

"ICBC's [AML] lapses were not unique to it. The same could be said of the other four Chinese banks as they have created presences for themselves, first in Hong Kong, and then in Europe and the United States. It appears that the bank was using the latest systems, but they still had lapses in their KYC. That's why there needs to be more hands on, personalised scrutiny for people and monies from certain countries. Risk-based screening needs to be ratcheted up," the official said.

Spanish regulators need to share some of the responsibility for poor compliance by local Chinese banks, said a private sector investigator, speaking on condition of anonymity.

"Spain and Portugal are among the worst countries in Europe from the standpoint of criminal activity such as money laundering, smuggling and sanctions violations. This is as much a failing of ICBC as it is of regulators in Spain. Having said that, when you're an enterprise as large as ICBC, one of the largest banks on earth, there are bound to be violations," the investigator said. "The question is, do they learn from them and is there a feedback loop that makes their compliance evolve and improve?"

Bank of China

Italian police investigated the suspected smuggling of more than 4.5 billion euros out of Italy to China, through a money transfer service part-owned by Chinese immigrants. The funds went through Bank of China's Milan branch, which handled more than half of the 5 billion euros. It earned more than 758,000 euros in commissions on the transactions. 

Investigations into these cases are undermined by the absence of effective legal and judicial cooperation between China and the West. BoC has global assets of about $2.5 trillion and is on the Financial Stability Board's list of systemically important institutions. 

China Construction Bank

Questions have been raised about the quality of AML compliance at China Construction Bank (CCB) following the announcement last year that the U.S. Office of the Comptroller of the Currency (OCC) had brought enforcement action against the bank. 

The details of the infringements have not been disclosed but an OCC spokesman has said that the lender's U.S. division had agreed to rectify policies and systems for finding and reporting suspicious behaviour among its customers, keep better track of currency transactions and limit its vulnerability to financial crimes. 

CCB has also faced an enforcement action from the Federal Reserve similar to Bank of China's OCC action. The Federal Reserve ordered the lender to tighten the money laundering controls in its New York branch.

(Additional reporting by Ajay Shamdasani of Thomson Reuters Regulatory Intelligence in Hong Kong)
  • Nick Kochan is a contributing editor to Thomson Reuters Regulatory Intelligence. He is the author of 'The Washing Machine', a book about money laundering and 'Corruption: The New Corporate Challenge'. Kochan writes widely about compliance and economic crime.