1.          For what purposeshave the PBC and SAFE formulated the three above-mentioned Rules?

 

The crime of moneylaundering has attracted the attention of the international community.Countries are adopting laws and regulations, creating anti-money launderinginstitutions and mechanism to crack down on money laundering.  From the experience in other countrieswe have learned that financial institutions are most prone to abuse by moneylaundering criminals.  Thereforefinancial institutions have become the focus of anti-money laundering work in variouspart of the world and legislations have been passed to define the obligationsand functions of financial institutions in order to effectively prevent themfrom being abused.

 

As the centralbank, the PBC is charged with regulating and supervising financial institutionsand their operation and safeguarding the legitimate and sound performance offinancial industry. Over the years, the PBC has been working to improve thecorporate governance of financial institutions and issued a series of rules andregulations, which have, to some extent, prevented the financial institutionsfrom being abused for money laundering. For example, the PBC issued the Notice on Management over Large-Value CashPayment on 15 August 1997, establishing a reporting system for large-valuecash transactions and an appointment mechanism for withdrawal of large-valuecash.  The banking sector hasadopted the practice of real name for individual deposit account and accountmanagement.  Though these rules andpractice have to some extent contained money laundering activity, financial institutionshave yet to create competent anti-money laundering department, or establishstandards for identifying suspicious transactions.  A mechanism for data collection and analysis is also lacking.  Therefore, anti-money laundering rulesfor financial institutions are needed to provide a solution to these issues.

 

2.          What is moneylaundering?

 

According to the Criminal Law which was amended in 2001,the crime of money laundering is the conduct of institute or individual to,while acknowledging the proceeds and yields are generated from drug-relatedcrime, organized crime of an underworld nature, terrorist crime or traffickingcrime, conceal and disguise the nature and origin through providing account,converting the assets into cash or financial papers, transferring the fund toanother account or through other settlement means, or transmitting the fundabroad.

 

Dirty moneylaundered through financial institutions also include illegitimate proceed andits yield from embezzlement, fraud, tax evasion, acquiring state asset through illegitimatemeans and other crimes.  Thereforeit is clearly stipulated in the Rules forAnti-money Laundering by Financial Institutions that money launderingrefers to any action that legalize the ill-gotten income and yields generatedfrom criminal activities like drug trafficking, gang violence, terrorist act,smuggling or other crimes through various means in which the source and origin ofsuch income and yields are disguised.

 

3.          What is themajor content of the three Rules?

 

The Rules aremainly about two aspects.

 

First, on theprinciples and practice of anti-money laundering.

 

First of all, TheRules have established three principles. Principle One is legality andprudence, meaning financial institutions shall identify suspicious transactionsaccording to law and in a prudent manner and must not engage in unfaircompetition that prejudices the function of anti-money laundering.  Principle Two is confidentiality.  Financial institutions and their staffmust not disclose information on anti-money laundering to customer or otherpeople.  Principle Three is fullcooperation with judicial department and administrative enforcementdepartment.  Financial institutionsshall cooperate with and assist judicial department and administrativeenforcement department in their action to crack down on money laundering, provideassistance to judicial department, customs office and tax authorities in theirinvestigation and freeze deposit when required in accordance with relevant lawand regulations.

 

Secondly, financialinstitutions are required to have an anti-money laundering internal controlsystem and create relevant department for anti-money laundering and fourmechanisms have been established for financial institutions. The first is toknow your customer.  Financialinstitutions should verify the IDs and keep in record of the identification ofthe customer.  The second islarge-value transaction reporting system, requiring the financial institutionto report any transaction beyond a specified value to the PBC or SAFE, be it suspiciousor not.  The third is suspicious transactionreporting system, requiring financial institutions to promptly report, inaccordance with the indices specified by the PBC, any fund from the customerthat is suspected as proceeds from criminal activities to the PBC or SAFE.  The fourth is the record keepingpractice requiring financial institutions to keep record of account andtransaction information for a specified period of time.

 

Second,responsibilities and functions of the PBC and SAFE are clearly defined.  The PBC provides leadership to andsupervises the banking industry in their anti-money laundering efforts and theSAFE formulates standards for large-value and suspicious foreign exchange fundtransactions and supervises the reporting of such transactions.

 

4.          What is "knowing your customer"?

 

Knowing yourcustomer means that a financial institution should verify the valid IDs of thecustomer and keep record of the customer's identification when a customerrelationship is established and when processing a transaction for acustomer.  Knowing your customer isthe basis of anti-money laundering without which identifying and reportinglarge-value and suspicious transactions and anti-money laundering isimpossible.  Knowing your customerpractice places special importance on identifying the customer on the firsttransaction.

 

At the moment,knowing your customer practice has been established in the banking industry inChina.  Both individual andcorporate customers are required to produce valid IDs in order to open anaccount.  Furthermore, Rules on Real Name for Individual DepositAccount has required individual depositors to produce valid IDs to showtheir real identification. The three Rules have consolidated the existingprovisions and provided a more comprehensive framework of knowing your customer. Rules for Anti-money Laundering byFinancial Institutions require financial institutions to establish acustomers' identity registry system to verify the identities of customers when processingfinancial business including deposits and settlement and prohibit financialinstitutions from providing deposit and settlement services to customers whoseidentity is yet to be clarified or opening anonymous account or account with a fictitiousname.

 

5.          What islarge-value transaction reporting system?

 

It means that anytransaction above a specified amount, suspicious or not, shall be reported tothe PBC or SAFE.  Before the threeRules are issued, we have already put in place large-value cash withdrawalreporting system and large-value payment registry system.  According to Rules for Anti-money Laundering by Financial Institutions, any financialtransactions above a specified amount, including deposit, withdrawal andsettlement, shall be reported to PBC and SAFE.  Large-value transaction reporting system will not prejudicecustomer's rights as PBC and SAFE will keep in confidentiality informationabout legitimate transactions according to relevant rules and regulations.  But reporting can deter potentialcriminals.

 

6.          What issuspicious transaction reporting system?

 

When a financialinstitution identifies from a customer a fund that may be generated fromcriminal activities either on the basis of indicators prescribed by the PBC oron a discretionary basis, the institution shall report promptly to the PBC orSAFE.  It must be pointed out thatthe reporting system does not affect or obstruct the financial institution'sexamination over the suspicious transaction and when criminal activities aresuspected, the institution is obliged to report promptly to the local publicsecurity authorities.

 

The core and basisof anti-money laundering is the collection, analysis and reporting ofinformation of suspicious financial transactions. Therefore, the financialinstitution should create an effective monitoring system to discover moneylaundering and report promptly to PBC or SAFE when dirty money makes its firstattempt to enter the financial system. When the PBC and SAFE concludes, after analysis and examination, thatthe reported suspicious transaction may be a money laundering case, it shall betransferred to judicial department in accordance with relevant regulations. Asfor the formulating of standard for suspicious transaction reporting, bankingassociation or other sector association in some countries formulate guidancefor the financial institutions to follow. But in light of the anti-money laundering situation in China, the PBChas formulated Administrative Rules forthe Reporting of Large-Value and Suspicious RMB Payment Transactions andlisted 13 categories of suspicious transactions while the SAFE has formulated Administrative Rules for the Reporting ofLarge Value and Suspicious Foreign Exchange Payment Transactions and listed31 categories of suspicious transactions, 11 categories of which are aboutforeign exchange cash transactions, and 20 about foreign exchange non-cashtransactions.  In light of thecomplexities of anti-money laundering in the banking sector in China, the PBCand SAFE are not able to exhaust the possible conduct of suspicious transactions.  Therefore it is provided for in theabove Rules that the PBC and SAFE may make adjustment to the reporting standardof RMB and foreign exchange suspicious transactions and other transaction behaviors.

 

7.          For whatpurpose are the account information and transaction record kept?

 

On the one hand,collection, analysis and reporting of large-value and suspicious transactionsis not a one-off practice and suspicious transactions need to be monitored on acontinuous basis given the growing sophistication of money laundering.  On the other hand, judicial departmentsneed record of financial transactions in the investigation of money launderingand may need such record as evidence. That is why financial institutions are required to keep the accountinformation and transaction record for a certain period of time.

 

As a matter offact, before the three Rules are issued, record of financial transactions isalso required by corporate financial rules to be preserved for a certain periodof time.  The three Rules have containedprovisions on minimum period for financial transactions and account record tobe preserved.  But rules andprocedures issued by government departments must not run counter to laws and regulationspromulgated by the State Council. Thus financial institutions should follow the provisions in Accounting Law and regulationspromulgated by the State Council when the Lawand these regulations require account information and transaction record to bekept for a longer period of time.

 

8.          Willanti-money laundering by financial institution stand in conflict with theirconfidentiality obligation and prejudice customers' right especially that ofindividual customers?

 

Not in theleast.  I have several reasons tosay so.

 

First of all, the Constitution, Commercial Banking Law of the People's Republic of China, Regulationson Management of Deposit and Regulation on Using Real Name in Opening Individual Deposit Account containprovisions for the protection of owners' right of legitimate deposit andrequire financial institutions to keep in confidentiality account information.When fulfilling the obligation of anti-money laundering, staff and thefinancial institutions should not violate the above provisions on theprotection of customers' right, or the institution shall be penalized.

 

Secondly, knowingyour customer by financial institutions will not breach customers' right.  In China, to know your customer hasbecome a basic practice of the banking industry.  Regulations on UsingReal Name in Opening Individual Deposit Account requires the financialinstitutions to verify and keep in record the IDs of customers when providingservices to individual customers. The three Rules only further regulate the existing practice.  This will further enhance protection ofcustomers' rights.

 

Thirdly, customers'rights will not be breached in the reporting of large-value and suspicioustransaction and in the record keeping practice.  There are three reasons. First of all, customers' rightshave not been violated in the existing practice of large-value cash withdrawalreporting and large-value payment transaction reporting when institutionsfollow the practice properly. Secondly, the PBC and SAFE shall keep in strict confidentiality reportedtransactions in accordance with the relevant laws and regulations.  Financial institutions will not discloseany record to the public or those who should not be informed of.  It must be pointed out that the abovepractice is essential for anti-money laundering by financial institutions andcan effectively deter potential criminals.  And the record-keeping practice can provide original recordto judicial departments in their investigation.

 

9.          What are thesupervising and administrative responsibilities of the PBC and SAFE inanti-money laundering by financial institutions?

 

As the centralbank, the PBC is charged with supervising financial institutions and theiroperation and preserving the legitimate and sound performance of financialindustry.  The PBC set up the LeadingGroup for Anti-Money Laundering by Financial Institutions in September2001.  In July 2002, the PBCcreated Anti-Money Laundering Division and Payment Transaction MonitoringDivision in the Bureau of Security and Payment and Settlement Officerespectively. The three Rules contain explicit provisions on the responsibilityof PBC in supervising and coordinating anti-money laundering by financialinstitutions, establishing an anti-money laundering mechanism and large-valueand suspicious RMB transactions, creating a payment and settlement monitoringsystem for the collection and analysis of large-value and suspicious RMBtransactions.

 

The SAFE is responsiblefor formulating large-value and suspicious foreign exchange transactionreporting system and supervising the reporting of such transactions.

 

When the PBC or SAFEconcludes, after analysis, that a reported transaction may be a criminal case,the case shall be transferred to judicial department in accordance with Regulations on Transferring SuspectedCriminal Case to Judicial Department by Administrative Agencies andadministrative penalty shall also be imposed in accordance with laws andregulations.

 

10.      To whom dothe three Rules apply?

 

The three Rulesshall come into effect as of 1 March 2003.  Financial institutions that are regulated by the Rulesshould make necessary preparation for the implementation and the PBC shallcheck on the implementation by financial institutions.  The three Rules apply to the followinginstitutions:

 

1)       Rules for Anti-money Laundering by FinancialInstitutions applies toall financial institutions licensed by the People's Bank of China whichinclude:

 

A.           banks, suchas policy banks, wholly state owned commercial banks, joint stock banks, citycommercial banks and rural commercial banks;

B.            creditcooperatives, such as urban credit cooperatives and their unions and ruralcredit cooperatives and their unions;

C.           postalsavings institutions;

D.           non-bankfinancial institutions, including enterprise group finance companies, trust andinvestment companies and financial leasing companies;

E.            foreigncapital financial institutions, such as wholly foreign funded banks,sino-foreign joint equity banks, branches of foreign banks, wholly foreignfunded finance companies and sino-foreign joint equity finance companies andother kinds of foreign funded non-bank financial institutions.

 

2)       Administrative Rules for the Reporting of Large-Valueand Suspicious RMB Payment Transactions applies to financial institutions licensed by the PBCand established in the territory of China, which include policy banks,commercial banks, credit cooperatives and their unions and postal savingsinstitutions. Commercial banks refer to wholly state owned commercial banks,joint stock commercial banks, city commercial banks, rural commercial banks andwholly foreign funded commercial banks, sino-foreign joint equity bank andbranches of foreign banks that have been approved for local currency business.

 

3)       Administrative Rules for the Reporting of Large-Valueand Suspicious Foreign Exchange Payment Transactions applies to financial institutionsestablished in the territory of China that provide foreign exchange services.These include:

 

A.           banks, suchas policy banks, wholly state owned commercial banks, joint stock commercialbanks, city commercial banks and foreign capital banks;

B.           non-bankfinancial institutions, such as securities companies, insurance companies,financial leasing companies, finance companies, trust and investment companies,fund management companies, all including foreign capital ones;

C.           postalsavings institutions.