Government Considering New Anti-Money Laundering Regulations to Address Corruption, Improve Commercial Environment

The People's Bank of China (PBOC) issued a series of draft regulations for public comment on April 12 aimed at "beefing up efforts to rein in money laundering across its banking, securities, and insurance sectors," according to an April 13 Xinhua article. Chinese officials and China's state run media report that the regulations are needed to improve China's commercial environment and combat widespread embezzlement, bribery, and financial fraud. The Asian Development Bank estimates that more than 200 billion yuan (approximately US $25 billion), or 2 percent of China's gross domestic product, is laundered on the mainland each year.

Xinhua reported that, under the draft regulations, companies would be required to monitor customers' identities, and to report large or suspicious transactions. The regulations included:

• Anti-Money Laundering Regulations for Banking and Financial Organizations
• Anti-Money Laundering Regulations for Securities and Commodities Financial Organizations
• Anti-Money Laundering Regulations for Insurance Financial Organizations

On April 25, Xinhua also reported that a draft Anti-Money Laundering Law had been submitted the same day to the National People's Congress Standing Committee (NPCSC) for deliberation. An April 26 Beijing News article (in Chinese) reported that the work on the law began in March 2004, and a draft was completed for comment in August 2005.

Xinhua cited Feng Shuping, Deputy Director of the Budgetary Work Commission of the NPCSC, as saying that the draft law would cover financial transactions, not only in the banking sector but also in other sectors, including insurance and securities firms, law firms, and accounting agents, and businesses such as real estate, jewelry sales, and auctions. An April 27 China Daily article said the draft law would also expand the categories of criminal activity that can be the basis of laundering prosecutions (called "predicate offenses") to include offenses involving corruption, such as embezzlement, bribery, and financial fraud. An April 26 People's Daily article (in Chinese) reported that the draft includes the following four systems:

• Customer identity tracking system;
• Record retention system;
• Large and suspicious transaction reporting system; and
• Internal monitoring system.

According to an April 24 China Daily article, Feng said the draft law focuses on monitoring and preventing money laundering, and that the penalties will continue to be set forth in the Criminal Law. Article 191 of the Criminal Law already criminalizes money laundering for four predicate offenses: narcotics trafficking, organized crime, smuggling, and terrorism. In addition, Article 312 criminalizes complicity in concealing the proceeds of criminal activity, and Article 174 criminalizes the establishment of an unauthorized financial institution.

In addition to the anti-money laundering provisions in the Criminal Law, the PBOC enacted three regulations in March 2003 that were specifically intended to address money laundering:

• Rules on Anti-Money Laundering for Financial Institutions
• Measures on the Administration of Reporting of Large and Suspicious Foreign Currency Cash Transactions
• Measures on the Administration of Reporting of Large and Suspicious Renminbi Transactions

These regulations require banks to report suspicious Chinese yuan and foreign exchange transactions. Banks are also required to report foreign exchange transactions of more than US $10,000 in cash, or non-cash transactions of US $100,000 per individual or US $500,000 per entity, as well as large renminbi transactions, including single credit transfers of over 1 million yuan (approximately US $120,500) per entity, and cash transactions and domestic fund transfers above 200,000 yuan (approximately US $24,000) per person or entity.

After the domestic news media announced that the draft law had been submitted to the NPCSC, several government officials expressed concern about how the proposed legislation handles the government freezing of suspected money laundering accounts. An April 27 Xinhua article quoted Ying Songnian, a member of the NPC's Internal and Judicial Affairs Committee, as saying, "Although the draft law provides for penalties if the [anti-money laundering] bureau's power were abused, it fails to address the issue of compensation." It also quoted Guo Shuyan, an NPC deputy, as saying: "The draft should specify under what conditions the bureau can freeze account[s] to prevent abuse of power." Finally, the article cited NPC delegate Lin Guangzhao as warning that if the government makes mistakes in freezing companies' accounts "it will seriously hurt the company's operation and raise business disputes."

Money laundering and the proposed corruption-related predicate offenses are major problems in China, according to both Chinese officials and the U.S. State Department. An April 25 Xinhua article quoted Feng as saying "Money laundering has grown into a prominent problem in China," and that "The current legal framework to monitor anti-money laundering is not well-founded." That article also said that by the end of 2005, the China Anti-Money Laundering Monitoring and Analysis Center, set up in 2004 under the PBOC, had forwarded 683 suspicious money laundering reports to the police involving 137.8 billion yuan (approximately US $17.2 billion). According to the State Department's 2006 International Narcotics Control Strategy Report, the International Monetary Fund has estimated that money laundering in China may total as much as US $24 billion annually, while a September 23 South China Morning Post article (subscription required) reported that the Asian Development Bank estimates that more than 200 billion yuan (approximately US $25 billion), or 2 percent of China's gross domestic product, is laundered on the mainland each year. Transparency International, an anti-corruption NGO based in Germany, ranked China 78 out of 158 in its 2005 Corruption Perceptions Index, and reports in Chinese state-run news media indicate that government corruption in China is widespread:

• At a December 2005 meeting of Asian and European prosecutors in Shenzhen, Deputy Procurator General Wang Zhenchuan said that procuratorates nationwide prosecuted and punished 50,000 corrupt officials from 2003 to 2005, according to a December 11 Xinhua report.
• In 2005, Chinese news media reported on what the China Daily labeled "China's biggest political scandal," in which more than 260 government officials were alleged to have connections with Ma De, a senior official in Heilongjiang province convicted in July 2005 for taking bribes.

The Chinese government has sought since 2003 to bring domestic law into compliance with international obligations. The Chinese government signed the United Nations Anti-Corruption Convention on December 10, 2003, and the National People's Congress ratified it on October 27, 2005, according to a report on the same day. In January 2005, China became an observer to the Financial Action Task Force, an inter-governmental body established by the G-7 nations in 1989 to develop and promote national and international policies to combat money laundering and terrorist financing.