China financial services regulation: Increased supervision of large-sum and suspicious transactions

On December 28, 2016, the People’s Bank of China (PBOC) issued the amended Administrative Measures on Reporting of Large-Sum Transactions and Suspicious Transactions by Financial Institutions (the Amended Measures), which will take effect on July 1, 2017 to supersede the current  administrative measures having been in effect since March 1, 2007 (the Current Measures).

General comments

The Amended Measures revise the Current Measures substantially and impose greater obligations on financial institutions in the reporting of large-sum and suspicious transactions (Reporting Obligations). Under the Amended Measures, financial institutions will not only need to comply with requirements explicitly set out therein, but also formulate their own transaction monitoring standards for suspicious transactions and ensure the effectiveness of such standards in preventing money laundering. This is in line with the overall trend of regulatory reform of China in recent years which gives regulated entities more autonomy in conducting businesses while increasing the risks of noncompliance.    

We summarize these major changes introduce by the Amended Measures as follows:

A wider scope of application

The Reporting Obligations under the Current Measures apply to major financial institutions regulated by financial regulators in China and institutions conducting specific businesses, such as payment or clearing business.

The Amended Measures expressly identify a few additional financial institutions and make them subject to the requirements of the Amended Measure, including insurance professional agents, insurance brokerage companies, consumer finance companies and loan companies. A “catch-all” provision of the Amended Measures is amended to capture all other institutions (be they financial institutions or otherwise) which engage in financial business and which are determined by PBOC to be performing anti-money laundering obligations. This indicates that it may be more common in the future for non-financial institutions to be required by PBOC to undertake the Reporting Obligations merely because they conduct some type of financial business.

More stringent obligations on the reporting of large-sum transactions

The Amended Measures significantly reduce the reporting threshold of cash transactions (e.g. cash deposit, withdrawal or remittance) denominated in Renminbi (RMB) from RMB200,000 (for a single transaction or all transactions within the same day) under the Current Measures to RMB50,000. This threshold applies regardless whether the underlying transactions are purely domestic or cross-border and whether the parties thereto are individuals or corporates.

The Amended Measures also add a new reporting threshold in respect of cross-border account transfer in RMB by individuals, which is RMB200,000 for a single transaction or all such transactions within the same day. The Current Measures only provide for a foreign currency threshold of USD10,000. This change is intended to address the phenomenon of Chinese individuals more actively participating in cross-border transactions denominated in RMB whilst the regulatory regime is gradually relaxed.

Under the Amended Measures, Reporting Obligations should be fulfilled by the obliged institutions within 5 business days of the occurrence of any large-sum transaction.

For easy reference, we summarize in the table below the various reporting thresholds, calculated on a daily basis for a single transaction or all transactions of the same nature entered into by an individual client or a corporate client:

More challenging requirements on the reporting of suspicious transactions

Through the Amended Measures, PBOC will change its approach in supervising suspicious transactions by imposing more onerous obligations on obligated reporting institutions, as explained as follows.

In addition to a general provision which requires financial institutions to report transactions which they consider suspicious of money laundering, the Current Measures provide a comprehensive list of activities and transactions that should be reported as suspicious transactions.

The Amended Measures delete the list of such specific activities and transactions as a whole and introduce a very broad provision requiring a financial institution to file a report if it finds out or reasonably suspects that any of its clients, clients’ funds or assets, or any clients’ current or potential transactions are related to criminal activities such as money laundering or terrorism financing, regardless of the amount of the assets or funds concerned.

More significantly perhaps, the Amended Measures require financial institutions to formulate their own transaction monitoring standards with regard to suspicious transactions and be responsible for the effectiveness of these standards. A financial institution is required to consider the following factors in preparing its transaction monitoring standards:

• Regulations, guidelines, risk alerts, reports on the types of money laundering activities and risk assessment reports, released by PBOC and its local branches;
• Criminal status quo analyses, risk alerts, reports on the types of crimes and working reports, issued by the public security authority and judicial authorities;
• The assets scale, geographical coverage, business nature, customers base, transaction specifics and conclusions of risk assessment on money laundering and terrorism financing, of the financial institution itself;
• Regulatory opinions on anti-money laundering issued by PBOC and its local branches; and
• Other factors that PBOC requires financial institutions to pay particular attention to.

Financial institutions are expected to conduct regular assessment of their transaction monitoring standards and make improvements in light of the outcome of such assessment. Meanwhile, financial institutions are required to undertake a manual analysis of suspicious transactions selected via the monitoring standards and record the process of such analysis. For those transactions which are not regarded as suspicious transactions after the manual analysis, the reasons should be kept on record, and for those which are determined to be reported, the report shall contain a complete record of the analyzing process concerning the specifics of the customer’s identification, the transactions or the activities concerned.

Suspicious transactions should be reported by financial institutions within 5 business days (which is 10 business days under the Current Measures) of transactions coming to be regarded as suspicious. 　　

Without any doubt, most financial institutions will now have to put more human and financial resources into their anti-money laundering function if they are to comply with the requirements outlined above.

Terrorism reporting obligations

The obligations on terrorism reporting are not addressed in the Current Measures but scattered throughout various notices and circulars of PBOC.

Under the Amended Measures, financial institutions must proactively conduct a real time monitoring of the lists of organizations and individuals that may be involved in terrorism activities, and must conduct required reporting if they reasonably suspect that any of their clients (or their transaction counterparties), any funds or other assets, are or may be associated with any of the following lists:

• List of organizations and individuals involved in terrorism activities released or requested to be implemented by the Chinese government;
• List of organizations and individuals involved in terrorism activities set out in the resolutions of the United Nations Security Council; and
• List of organizations and individuals which are suspected to be involved in terrorism activities and requested by PBOC to be watched out closely.

It is worth noting that, if any of the above mentioned lists are amended, financial institutions will be expected to carry out retrospective investigations and make reports in light of the requirements of the Amended Measures. The Amended Measure are however silent on the length of period that such retrospective investigations are to cover.