Dirty money flow washes over China

2012-08-07

Mainland banks are ill-equipped to fight money laundering

China remains awash in dirty money, despite official attempts to bring its money laundering laws and enforcement systems up to international standards.

On October 30, the State Administration of Foreign Exchange (SAFE) issued its first report on the money-laundering of foreign exchange, which said that as of the end of June this year, it had investigated more than 100 cases involving US$57 million, and was working on a further 100 involving US$470 million.

In a speech on August 27 on the first meeting of a joint ministerial conference on money laundering, central bank governor Zhou Xiaochuan said that since March last year, his bank had received 3,061 reports of suspicious yuan payments and the SAFE had received 170,500 reports of suspicious foreign currency payments totalling US$9.72 billion.

According to official estimates presented at a conference on the issue in March, at least 200 billion yuan is leaving the country each year through illegal channels, a sum equivalent to 2 per cent of China's annual GDP.

Suspect funds may include the proceeds of bribery, corruption, drug trading, smuggling of people and goods, fraud, tax evasion, cheating on tax rebates and other crimes.

In a report, SAFE said the primary responsibility for tracking illicit money flows lay with the banks.

'Any financial institution that finds extremely large sums of money or suspect funds in the process of managing foreign exchange should report this to SAFE or its provincial-level branches. The doubtful cases will be given back to local branches for further examination,' it said.

The government is rushing to pass its first comprehensive money-laundering law. The National People's Congress (NPC) began drafting legislation in March, expected to reach the Standing Committee early next year.

As it stands, Chinese law is well behind the curve. The NPC revised the Criminal Law in 1997 to include money laundering as a crime, and last year the People's Bank of China issued new regulations for financial institutions that included a framework for reporting and monitoring.

The banks remain ill-equipped, however, to monitor China's massive capital flows to international standards. They lack the technology to build inter-bank data networks that would enable them to trace remittances. There is also a paucity of trained personnel capable of managing such a system.

In the US, nearly two-thirds of the funds financial institutions spend on money-laundering controls go to employee training.

Mr Zhou said in his August speech that police had solved 73 cases, closed 153 underground money centres and illegal banks, detained 240 suspects and seized 80 million yuan since 2002. The illicit transactions involved several billion yuan.

'Such crimes as smuggling, tax evasion, tax-rebate cheating, financial fraud, market manipulation and insider trading are on the rise. These are catalysts for corruption like embezzlement and bribe taking, severely damaging the health of the national economy and corroding social and public morality.

'Our current measures are still falling short of the requirements. Laws and regulations are far from perfect, leaving quite a gap from the perspective of international practices. The awareness of the importance of money laundering by financial institutions has yet to be sharpened and internal control systems and the reporting of suspicious fund transactions have yet to be strengthened and improved.

'The means of money laundering has become ever more sophisticated and specialised, including via the internet,' he said.

The US Bureau for International Narcotics and Law Enforcement Affairs was even more critical, in a report published in March.

'Institutional obstacles and rivalries between financial and law-enforcement authorities continue to hamper Chinese anti-money laundering work. These efforts are hampered by the prevalence of counterfeit identity documents and cash transactions conducted by underground banks.

'Another structural impediment is the absence of a nationwide automated network to monitor banking transactions through the People's Bank. Many inter-banking transactions from one region to another are conducted manually, which delays the PBOC's ability to prevent money laundering. As a result, weaknesses in the Chinese banking and criminal regulatory structure continue to be exploited by both domestic and foreign criminal enterprises,' it said.

It added that efforts by some Chinese officials to strengthen the relatively weak legal framework under which money-laundering offences were prosecuted in the Chinese criminal code had yet to bear fruit.

The bureau called on China to broaden its legal definition of money laundering and develop a regulatory and law enforcement environment that could stop it.

One of the most well-known failures concerns Gao Yan, 62, a delegate to the NPC and Communist Party committee chief of the now-defunct State Power Corp since August 1997, who disappeared in October 2002 and is believed to have fled abroad, possibly to Australia, with millions in yuan of stolen state assets.

In June this year, the Auditor-General said that between 1998 and 2002, individual managers - Gao was the highest ranking - had stolen from the State Power Corp 3.28 billion yuan. How could he have moved so much money through the banking system without this being reported? Was it because he was an associate of former prime minister Li Peng?

The system did catch one of his ex-subordinates, Lin Kongxing, former general manager of the Central China Power Group, who went on trial in October in Shuizhou city, Hubei province for the theft of 80 million yuan in public funds which he laundered through underground banks to accounts abroad.

During the trial, the prosecutor gave a typical example of how he moved money.

His company paid 4.98 million yuan into a bank account, ostensibly for engineering work which his company had contracted. Three days later, the account was closed and the money moved into another account in the same bank. It was then moved to the account of a bank in Hunan, controlled by a company owned by Lin's daughter and son-in-law. From there, it was 'laundered' abroad.

Source: http://www.scmp.com/article/480720/dirty-money-flow-washes-over-china