## cr18191

## Source details

**Canonical URL:** [cr18191](https://www.imf.org/-/media/files/publications/cr/2018/cr18191.pdf)

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### INTRODUCTION
- This Technical Note (TN) provides a targeted review of China’s AML/CFT system in the context of the FSAP; it is not an assessment or evaluation of the Chinese AML/CFT system. A comprehensive assessment against the current FATF standard will be available during 2018–2019.
- Review focus:
  - Factual update of changes since the February 2012 FUR, including desk review of LEG questionnaire responses.
  - Anti-corruption efforts through the AML/CFT framework with emphasis on: CDD (including beneficial ownership and enhanced CDD for high-risk customers, in particular PEPs); STR regime; measures to identify/disrupt underground cross-border transfers and dealing in foreign exchange; analytical and dissemination functions of CAMLMAC; international efforts to pursue individuals suspected of corruption and recover proceeds laundered abroad.
  - AML/CFT supervisory framework for the financial sector with focus on banks, including the PBC’s AML/CFT supervisory program and measures related to the Shanghai Free Trade Zone (SHFTZ).
- Sources for staff analysis: materials provided by authorities, information submitted to FATF since 2007, pre-FSAP questionnaire answers, desk review of legislation, and information gathered during onsite visit in December 2016.

### PROGRESS SINCE THE LAST ASSESSMENT — COMPLIANCE WITH INTERNATIONAL STANDARDS
- Historical milestones:
  - China began focusing on AML/CFT issues in 2003; first AML law and subsequent onsite inspections expanded coverage to insurance and securities.
  - 2007 FATF mutual evaluation (FATF 2003 Recommendations): China was found partially compliant with sixteen Recommendations and noncompliant with nine.
  - Core and special recommendations of concern in 2007 included: Recommendation 1, 5, 13; SR II and SR IV; and other deficiencies such as 23, 35, SR I, SR III. FATF placed China on enhanced follow-up in June 2007.
- PEPs:
  - 2007 MER found no AML requirements for PEPs; by June 2007 regulations covered foreign PEPs.
  - PBC circular No. 391[2008] defined foreign PEPs (examples listed in source).
  - FIs are required to establish systems to determine if a customer or beneficial owner is a PEP, perform enhanced due diligence on foreign PEPs, and require senior management approval to establish a commercial relationship with a PEP.
  - Remaining 2012 FUR deficiency (in context of 2003 standard): lack of a requirement for FIs to understand source of the wealth of PEPs.
- By February 2012 FATF removed China from enhanced follow-up noting:
  - Substantial progress on 25 previously rated Recommendations, with 16 upgraded to largely compliant.
  - China largely criminalized ML consistent with international standards except for lack of criminalization of self-laundering.
  - CDD and STR rules advanced; securities and insurance brought into AML/CFT regime; DNFBPs not yet covered.
- Since 2012:
  - Criminal Law amended to include remaining terrorist financing offenses.
  - Criminal Procedure Law amended to include non-conviction-based asset forfeiture provisions.
  - Counterterrorism Law defines terrorism and requires FIs and DNFBPs to immediately freeze funds/assets of terrorist organizations.

### PROGRESS TOWARD ALIGNMENT WITH THE REVISED FATF STANDARD (2012)
- Key elements of revised standard requiring attention:
  - Requirement to identify, assess, and understand ML/TF risks and address them using a risk-based approach.
  - Increased focus on access to beneficial ownership information and transparency of legal persons/arrangements.
  - Inclusion of domestic PEPs within scope of enhanced CDD on a risk-sensitive basis.
  - Greater emphasis on demonstrating effectiveness of AML/CFT regimes.
- NRA developments:
  - JIMCAML (led by PBC) involving financial and DNFBP sector representatives contributed to NRA framework.
  - Authorities indicate the framework has been completed.
  - World Bank assistance arranged; NRA to be conducted using the WB NRA tool.
  - Authorities anticipated completion of the NRA process in 2017.

### KEY FINDINGS ON ANTI-CORRUPTION AND SELF-LAUNDERING
- Anti-corruption status:
  - Anti-corruption is a top government priority; China ratified UNCAC in 2006 and created internal control mechanisms.
  - AML/CFT regime not fully aligned with anti-corruption framework; alignment would enhance detection, deterrence, and confiscation of proceeds of corruption.
  - Preventive gap: domestic PEPs are not covered by mandated enhanced CDD.
- Self-laundering:
  - Article 312 of the "Criminal Law of China" does not exclude "self-laundering"; authorities view concealing proceeds of one’s own crime as an extension of the predicate offense.
  - Laundering is not sanctioned as an independent action but is considered during sentencing.
  - Absence of prosecutions for self-laundering may impair authorities’ perception of corruption as an ML threat and their understanding of national ML risk.

### ML/TF RISK ASSESSMENT INITIATIVES (OTHER THAN FORMAL NRA)
- AMLB conducted an annual National Threat Assessment for each of the last three years; assessments include case studies and other information sources.
- Authorities’ view on principal predicate offenses:
  - financial fraud;
  - undermining the order of financial management;
  - drug-related offenses;
  - telecommunications crime (fraud via telecommunications media).
- Corruption considered a major criminal activity generating significant proceeds of crime (POC).
- Principal types of TF activities:
  - financing of terrorist organizations and individual terrorists inside China;
  - financing cross-border terrorist activities.
- Geographic and sectoral risk perspectives:
  - Geographic: eastern China, particularly south-eastern coastal provinces/cities, are exposed to illicit drug trade related criminal activity.
  - SHFTZ exposes China to ML/TF risks associated with tax offenses and smuggling.
  - Financial sector: banking sector considered most at risk due to rapid growth and large transaction volumes.
  - DNFBP sector: real estate sub-sector and dealers in precious metals and stones (DPMS) have significant exposure.

### PEPs, BENEFICIAL OWNERSHIP, AND TRANSPARENCY MEASURES
- PEPs:
  - China enhanced preventive measures for foreign PEPs but has not mandated enhanced CDD for domestic PEPs; aligning with 2012 FATF standard requires mandating enhanced CDD for domestic PEPs on a risk-sensitive basis.
- Beneficial ownership (BO) transparency:
  - FIs mandated to obtain BO information from customers; SAIC established Enterprise Information Disclosure Regime (EIDR) on October 1, 2014.
  - EIDR includes data fields and a “legal representative” field which authorities indicate reports BO information but staff assessed this is not adequate for FATF BO requirements.
  - Some industry supervisors require regulated institutions to disclose information (CIRC measures cited); unclear that system contains BO information as set out in FATF Recommendations.
- Recommendation on BO:
  - Authorities need to ensure arrangements developed to record and maintain BO information are working effectively.

### DATA, STATISTICS, AND INFORMATION GAPS
- Robust and comprehensive data are essential for a risk-based approach.
- Areas for improvement in statistics and arrangements include:
  - ML investigations;
  - prosecutions;
  - convictions;
  - confiscations;
  - suspicious transaction reports (STRs).
- Recommendation on statistics:
  - Authorities should broaden the range and level of detail of AML/CFT statistics maintained, including ML investigations, prosecutions, convictions, confiscations, STRs, and sanctions imposed on FIs.

### MAIN RECOMMENDATIONS FOR AML/CFT (TIMING: “Near term” = within six months; “Medium term” = within six to 18 months)
- General
  - Prioritize completion of the NRA and share findings with all competent authorities and representatives of all categories of reporting persons covered by AML/CFT obligations, taking into account confidentiality considerations. — Near term
  - Focus on bringing the legal framework into full technical compliance with the FATF Recommendations as some deficiencies outstanding at the time of the 2012 FUR have still not been addressed. — Medium term
  - Strengthen cooperation across all competent authorities to enhance overall effectiveness of AML/CFT arrangements. — Medium term
  - Consider broadening the range and level of detail of AML/CFT statistics collected (ML investigations, prosecutions, confiscated property, convictions, STRs). — Medium term
- Anti-Corruption Efforts
  - Ensure that self-laundering can be independently investigated, prosecuted and convicted as a stand-alone offense. — Medium term
  - Remove Company Law provisions allowing transfer of bearer shares by mere delivery and not requiring companies to record holders’ names. — Medium term
  - Introduce a definition of domestic PEPs in line with international standards and impose enhanced due diligence obligations on FIs for these clients. — Near term
- AML/CFT Supervision of Financial Sector (Banks focus)
  - Strengthen cooperation between the PBC and sector supervisors regarding AML/CFT supervision. — Medium term
  - Strengthen PBC HQ focus on group-wide risks rather than institution-specific risk when developing supervisory priorities. — Medium term
  - Strengthen sanctions available to the PBC and sanctions actually imposed on FIs for failure to meet AMLL obligations to create a regime proportionate and dissuasive for the largest institutions, particularly banks. — Medium term
  - Expedite introduction of the “5C” or similar risk-scoring system to the banking sector across the PBC supervisory network. — Near term

### ANTI-CORRUPTION POLICY FRAMEWORK AND INSTITUTIONAL MEASURES
- Policy and institutional highlights:
  - Curbing corruption identified as a priority since the XVIII National Congress (November 2012).
  - China signed and ratified UNCAC in 2006 and participates in UNCAC asset recovery working group.
  - China held the presidency of the G20 anti-corruption group and hosted G20 2016 summit; outcomes include adoption of “G20 High-Level Principles on Cooperation on Persons Sought for Corruption and Asset Recovery” and “G20 Anti-Corruption Action Plan 2017-2018”, and establishment of G20 anti-corruption center in Beijing in September, 2016.
  - National Bureau of Corruption Prevention (NBCP) established and shares resources with Ministry of Supervision (MS); minister of MS concurrently director general of NBCP.
  - NBCP responsible for UNCAC-related work; China actively promoting mutual legal assistance (MLA) legislation though new legislation not yet enacted.
- Corruption as predicate offense:
  - Corruption included as predicate offense for ML in 2006; Article 191 contemplates corruption as a predicate offense.
  - Criminal Law reformed to include UNCAC-required offenses; bribery of foreign and international public officials in article 164.
  - Investigation/prosecution/conviction of ML does not require conviction for the predicate offense.

### INSTITUTIONAL ANTI-CORRUPTION ARRANGEMENTS AND ASSET DISCLOSURE/VERIFICATION
- Institutional roles:
  - Coordination among LEAs and discipline inspection and supervision agencies.
  - Two categories of anti-corruption initiatives: administrative investigations (ethics/probity/party membership) and jurisdictional criminal investigations.
  - CCDI coordinates international anti-corruption work with judicial departments and law enforcement; MS cooperates with CCDI.
  - MPS and SPP roles: MPS (police) lacks jurisdiction over corruption/bribery of government officials in law; SPP supervises and directs approval of arrests, prosecutions, and ML cases; GBAC within SPP handles anti-corruption investigative units.
- CCDI capacity:
  - CCDI has 47 discipline inspection teams embedded across ministries, agencies, and regulatory bodies.
- Asset disclosure:
  - Framework based on Regulations on Reporting Personal Matters by Leading Party Officials (May 2010); declarations required for officials at/above county and division level and equivalent public enterprise officials.
  - Verification: approximately 10 percent of disclosures subject to random verification and another 10 percent subject to verification with priority each year; verification lacks apparent risk-based approach.
  - Asset disclosure forms not public but available to HR departments within the Party, discipline inspection department, and procuratorial authorities.
- Anti-corruption outputs:
  - Since eighteenth CPC National Congress (November 2012), DIC at all levels received more than 9,500,000 tipping-off letters and visits, filed 1,000,000 or more cases, sanctioned more than 1,000,000 persons, and transferred 46,000 persons to judicial authorities.
  - CCDI transferred cases against 43,000 persons for criminal investigation where evidence suggested criminal wrongdoing.
  - Since 2014 MS coordinated extradition of over 100 persons who escaped the jurisdiction and repatriated proceeds of corruption.

### AML SUPPORT TO ANTI-CORRUPTION EFFORTS AND CASES
- Convictions and recoveries:
  - Between 2013 and 2015, 92,195 corruption investigations yielded 69,017 cases resulting in convictions (PBC statistics).
- Skynet operations (since 2014):
  - 2,566 individuals charged with corruption who had fled Chinese justice arrested in more than 70 countries and regions.
  - Over RMB 8.64 billion recovered.
  - 37 individuals who were the subject of Interpol red notices have been captured.
- Judicial assistance:
  - Since 2013, Ministry of Justice sought foreign criminal judicial assistance in 12 cases of corruption (some still in process).
- Foreign PEPs and reporting:
  - Definition for foreign PEPs provided (see source).
  - Once identified as foreign PEP, FIs and DNFBPs must adjust risk level, further understand source of assets, increase frequency of collecting/updating information, may limit transaction size/frequency, and are mandated to report suspicious transactions to CAMLMAC.
- FIU and CAMLMAC:
  - FIU housed within PBC comprises CAMLMAC, AMLB, and AML Divisions in PBC branches.
  - PBC and branches can conduct investigations on suspicious transactions and predicate activities; results on suspicion of corruption transferred to CCDI and anti-corruption department in procuratorial authorities.
  - FIU analyzes STRs and disseminates results on corruption cases to SPP; potential ML with corruption predicate disseminated to GBAC of SPP.
  - Anti-corruption cooperation between FIU and LEAs includes intelligence, financial analysis, and participation in campaigns (e.g., Skynet).
  - In 2015, PBC carried out AML investigations for more than 600 cases related to corruption.
- Note on STR analysis:
  - CAMLMAC’s analysis of STRs, as presented to the mission, does not reflect that corruption is often the predicate crime underlying these reports; FIs do not identify suspicious activity related to corruption consistently.

### IMPEDIMENTS TO EFFECTIVE ANTI-CORRUPTION FRAMEWORK
- Domestic PEPs:
  - No legal mandate for enhanced CDD for domestic PEPs; many FIs conduct enhanced due diligence de facto and subscribe to PEP databases, but lack of legal mandate makes supervisory enforcement unclear.
  - Insurance guideline (CIRC) reportedly requires same enhanced CDD measures on domestic PEPs as foreign PEPs.
  - Many FIs do not consider state-owned enterprises and entities closely intertwined with PEPs to be high-risk customers.
- Beneficial ownership and bearer shares:
  - Authorities state EIDR makes shareholder names available but registry limited to shareholder names; information on controllers not necessarily held.
  - Mixed FI feedback on ease of obtaining BO information.
  - Company Law provisions:
    - Article 139 (2014) requires transfer of registered stocks with endorsement and company must record transferee’s name and address.
    - Article 140 (2014) provides transfer of unregistered stock (bearer shares) is affected by mere delivery and companies are not required to maintain a record of holders of unregistered stock.
  - Authorities assert all stocks are electronically traded and real-name registration exists, but Company Law retains provisions allowing bearer share transfer by mere delivery without recording holders’ names.
- Threat assessment and STR identification:
  - Authorities’ threat assessments do not identify corruption as an ML threat despite judicial conviction statistics: since 2013, 73,029 people convicted of corruption with POC recovered of RMB 8.54 billion.
  - CAMLMAC analysis indicates FIs do not identify indicators of corruption in day-to-day transactions.

### SUPERVISION OF FINANCIAL INSTITUTIONS (PBC FOCUS) — COVERAGE, RISK-BASED APPROACH, AND SHFTZ
- Supervisory coverage:
  - PBC responsible for AML/CFT supervision for over 5,000 institutions, including:
    - deposit taking institutions (approximately 4,270, including 70 trusts companies),
    - securities and futures firms (approximately 380),
    - insurance entities (approximately 180),
    - payment institutions approximately 270).
  - Many deposit-taking institutions are small rural cooperatives.
  - PBC prioritizes supervisory resources on systemically important and higher-risk FIs, bringing prioritized entities to approximately 1,000.
  - Article 4 of AMLL (2007) assigns nationwide AML supervision to PBC; function undertaken by PBC’s AMLB. Sector supervisors include CBRC, CIRC, and CSRC.
- Market entry controls:
  - Fit and proper assessments of shareholders, directors, and senior managers (no criminal record, sound integrity).
  - Review of applicants’ internal systems and controls for ML/TF risk management (examples: CBRC Circular No. 657 (December 2014), CIRC Measures).
- Risk-based approach and tools:
  - 2012 PBC guidance introduced risk-based approach and risk indicators.
  - Guidelines for Assessment of ML/TF Risk and Categorized Management of Customers: four indicators for risk analysis — customer’s characteristics, locations, businesses, and industries; new customer risk level determined within ten working days; high-risk customers reviewed at half-yearly intervals.
  - FIs may develop own risk scoring if as robust; Board approval and senior manager oversight required.
  - 2015 pilot self-assessment exercise: 103 banks, one securities firm, and two insurance institutions participated; results identified deficiencies and led to annual risk assessment submission requirement.
  - PBC’s 5C system uses five indicators: circumstance, commodity (product lines), client, communication, and correction; outcomes feed supervisory priorities with institution size and systemic importance.
  - Implementation varies across PBC branches; methodology focuses on individual institutions and inadequately examines group-wide risks; concern over migration of products across related entities with weaker CDD practices.
- SHFTZ risks and measures:
  - SHFTZ risks: high international trade transactions, cross-border renminbi business, services to nonresident legal and natural persons; PBC concerned about TPPI risks and tax offenses/smuggling.
  - PBC responses include 2014 Notice on work against ML/TF in SHFTZ, Innovation Business Money Laundering Risk Assessment System, requirement for FIs to produce ML risk assessment reports for innovative products/services, and strengthened collaboration with SHFTZ management commission, customs, and tax administrations.

### PBC SANCTIONS FRAMEWORK, PRACTICE, AND STATISTICS
- Legal sanctioning powers (Article 32 AMLL):
  - Fines on FIs for failure to meet specified obligations: RMB 20,000 to 50,000.
  - Fines on a chairman, a senior manager, or other persons: RMB 10,000 to 50,000.
  - Where ML has taken place as result of specified breach:
    - Fines on FIs: RMB 50,000 to 5,000,000.
    - Fines on natural persons: RMB 50,000 to 500,000.
  - PBC can advise sector supervisors to order discipline of officers or revoke qualifications and prevent employment in financial sector.
- Approximate USD equivalents provided in source footnotes (preserve wording as in source):
  - RMB 20,000 to 50,000 — Approximately US$31,000–77,700.
  - RMB 10,000 to 50,000 — Approximately US$1,500–7,700.
  - RMB 50,000 to 5,000,000 — Approximately US$77,700–777,000.
  - RMB 50,000 to 500,000 — Approximately US$7,700–77,700.
- PBC sanctioning activity (2012–2015):
  - PBC imposed:
    - 385 sanctions on banks.
    - 17 sanctions on securities and futures institutions.
    - 130 sanctions on insurance institutions.
    - 12 sanctions on payment institutions.
  - Most common deficiencies leading to sanctions: CDD failures (failure to obtain identification documents and information on source of funds); in some cases failure to file STRs.
  - Average value of sanctions applied during 2013 to 2015: RMB 164,135.
  - Highest fine ever imposed by PBC: RMB 3,000,000 (for leaking confidential information).
  - PBC has not requested CBRC, CIRC, or CSRC to impose sanctions on staff of FIs under Article 32 to date; PBC indicates no discovered deficiencies meriting such sanctions.
  - Authorities did not provide statistics showing actual value of sanctions applied by institution type and violation nature.
- Observations on dissuasiveness:
  - Maximum pecuniary sanction for a single breach is RMB 5,000,000; this maximum appears relatively modest given the size of the largest institutions and seems unlikely to be dissuasive for the largest FIs.
- Tables (selected aggregate figures preserved from source):
  - Banks — Number of Inspections / Number of Sanctions (2012–2015):
    - 2012: 485 / 52
    - 2013: 529 / 105
    - 2014: 683 / 112
    - 2015: 783 / 116
    - Total: 2,480 / 385
  - Securities and Futures Institutions — Number of Inspections / Number of Sanctions (2012–2015):
    - 2012: 138 / 1
    - 2013: 123 / 0
    - 2014: 114 / 9
    - 2015: 150 / 7
    - Total: 525 / 17
  - Insurance Institutions — Number of Inspections / Number of Sanctions (2012–2015):
    - 2012: 544 / 30
    - 2013: 479 / 36
    - 2014: 449 / 35
    - 2015: 467 / 29
    - Total: 1,939 / 130
  - Payment Institutions — Number of Inspections / Number of Sanctions (2012–2015):
    - 2012: 6 / 0
    - 2013: 15 / 1
    - 2014: 16 / 6
    - 2015: 28 / 5
    - Total: 65 / 12
  - Insurance Value of Sanctions Imposed on Financial Institutions (2013–2015):
    - 2013 — Number of Inspections: 1,146; Number of Sanctions: 142; Amounts of Sanctions (Yuan): 21,542,000; Average Value of Sanctions: 151,704
    - 2014 — Number of Inspections: 1,262; Number of Sanctions: 162; Amounts of Sanctions (Yuan): 27,418,500; Average Value of Sanctions: 169,250
    - 2015 — Number of Inspections: 1,428; Number of Sanctions: 158; Amounts of Sanctions (Yuan): 26,870,000; Average Value of Sanctions: 170,063
    - Total — Number of Inspections: 3,836; Number of Sanctions: 462; Amounts of Sanctions (Yuan): 75,830,500; Average Value of Sanctions: 164,135

### PBC SHANGHAI BRANCH AND ROLLOUT OF 5C SCORING SYSTEM
- 5C scoring system rollout and strategy:
  - PBC Shanghai head office is introducing the 5C scoring system starting with trusts, expanding to TPPIs, and intends phased rollout to all licenses.
  - Branch documenting implementation experience; recommendation to expedite introduction to banking sector due to highest ML/TF risk assessment.
  - PBC HQ should monitor Shanghai branch’s rollout given nationwide implications.
- Supervisory planning:
  - PBC and branches meet twice a year to develop/review AML/CFT supervisory strategy; self-assessments of all FIs reviewed and used to develop supervisory activities.
- Supervisory cooperation and sector supervisors:
  - By law CBRC, CSRC, and CIRC should cooperate with PBC; involvement varies.
  - CBRC and CSRC have issued secondary legal instruments; neither CBRC nor CSRC undertakes dedicated AML/CFT on-site inspections.
  - CIRC is more actively involved with offsite and onsite programs and has inspected provincial branches; CIRC incorporated ML/TF risks into C-ROSS and developed entity prioritization methodology.
  - CIRC and PBC have not conducted joint inspections to date; plan to do so in future.

### CONCLUSIONS AND PRIORITY ACTIONS
- Overall progress:
  - Authorities have taken significant measures to enhance AML/CFT legislative and regulatory framework since 2007 MER and continued efforts after removal from FATF enhanced follow-up.
- Priority recommended actions:
  - Complete the NRA and share findings with all AML/CFT competent authorities and reporting person categories, considering confidentiality limits.
  - Bring legal framework into full compliance with FATF Recommendations; address outstanding deficiencies from 2012 FUR.
  - Mandate enhanced CDD for domestic PEPs on a risk-sensitive basis to align with revised FATF standard.
  - Ensure BO recording and maintenance arrangements are effective and that beneficial ownership information is fully and comprehensively available in line with FATF Recommendations.
  - Strengthen cooperation across all AML/CFT competent authorities to enhance overall effectiveness.
  - Broaden and deepen AML/CFT statistics maintained, including ML investigations, prosecutions, convictions, confiscations, STRs, and sanctions on FIs.
  - Ensure self-laundering can be independently investigated, prosecuted and convicted as a stand-alone offence.
  - Remove Company Law provisions allowing transfer of bearer shares by mere delivery without recording holders’ names.
  - PBC to develop outreach to FIs to reinforce awareness of links between proceeds of corruption and potential abuse of institutions for ML purposes.
  - PBC and sector supervisors to strengthen cooperation; PBC HQ to increase focus on group-wide risk; expedite 5C rollout to banking sector; consider strengthening sanctions available and imposed on FIs.

*People’s Republic of China — International Monetary Fund, Technical Note: EXECUTIVE SUMMARY; excerpted sections on AML/CFT supervisory arrangements, anti-corruption, and related statistics from cr18191.*

### EXECUTIVE SUMMARY __________________________________________________________________________ 4

### EXECUTIVE SUMMARY

### INTRODUCTION
- This Technical Note (TN) provides a targeted review of China’s AML/CFT system in the context of the FSAP. It is not an assessment or evaluation of the Chinese AML/CFT system. A comprehensive assessment against the current FATF standard will be available during 2018–2019.
- The review focused on:
  - Factual update of changes since the February 2012 FUR, including a desk review of responses to a LEG questionnaire.
  - Anti-corruption efforts through the AML/CFT framework, concentrating on:
    - CDD, including beneficial ownership and enhanced CDD for high-risk customers, in particular PEPs;
    - The STR regime;
    - Measures to identify and disrupt underground cross-border transfers and dealing in foreign exchange;
    - Analytical and dissemination functions of CAMLMAC;
    - International efforts to pursue individuals suspected of corruption and recover proceeds laundered abroad.
  - AML/CFT supervisory framework for the financial sector with a focus on banks, including the PBC’s AML/CFT supervisory program and measures related to the Shanghai Free Trade Zone (SHFTZ).
- Staff’s analysis was based on materials provided by the authorities, information submitted to the FATF since 2007, answers to a pre-FSAP questionnaire, and a desk review of legislation and information gathered during an onsite visit in December 2016. Main meetings are listed in Annex I.

### PROGRESS SINCE THE LAST ASSESSMENT — A. Compliance with International Standards
- China began focusing on AML/CFT issues in 2003 with initial regulations that did not include insurance and securities sectors; it subsequently began onsite inspections and enacted its first AML law.
- In the 2007 FATF mutual evaluation:
  - China was found partially compliant with sixteen FATF recommendations and noncompliant with nine (FATF 2003 Recommendations).
  - Noncompliant or partially compliant core recommendations included: 1 (criminalization of ML), 5 (CDD), 13 (reporting of suspicious transactions related to ML); special recommendations included SR II (criminalization of the financing of terrorism) and SR IV (reporting suspicious transactions related to the financing of terrorism).
  - Key recommendation deficiencies included 23 (regulation and supervision), 35 (international instruments), SR I (ratification and implementation of UN instruments) and SR III (freezing and confiscating terrorist assets).
  - In June 2007, the FATF adopted the mutual evaluation report and placed China on enhanced follow-up.
- PEPs:
  - The 2007 MER found no AML requirements in relation to PEPs (foreign or domestic).
  - By June 2007, regulations covered foreign PEPs; PBC circular No. 391[2008] defined foreign PEPs (current or former foreign personnel performing important public functions, e.g., heads of state, heads of government, senior politicians, senior government, judicial, or martial senior officers, senior management of state-owned enterprises, important persons of political party, or family members and other close associates).
  - FIs are required to establish risk management systems to determine if a customer or beneficial owner is a PEP, perform enhanced due diligence on foreign PEPs, and require senior management approval to establish a commercial relationship with a PEP.
  - From the 2012 FUR, the remaining deficiency (in the context of the 2003 standard) was the lack of a requirement for FIs to understand the source of the wealth of these persons.
- By February 2012, FATF considered China had made sufficient progress to be removed from enhanced follow-up:
  - Substantial progress on 25 recommendations that had been rated partially compliant or noncompliant, with sufficient progress to bring 16 of those recommendations to a level of largely compliant.
  - China largely criminalized ML to align with international standards, with the only remaining concern being lack of criminalization of self-laundering.
  - CDD and STR rules were advanced, securities and insurance sectors were brought into the AML/CFT regime, but DNFBPs are not yet covered.
- Since the 2012 FUR:
  - Criminal Law was amended to include the remainder terrorist financing offenses.
  - Criminal Procedure Law was amended to include non-conviction-based asset forfeiture provisions.
  - Other laws, such as the Counterterrorism Law, define “terrorism,” “terrorist activities,” “terrorist organizations,” and “terrorists,” ensure designating procedures, and require FIs and DNFBPs to immediately freeze funds or assets of terrorist organizations.

### PROGRESS SINCE THE LAST ASSESSMENT — B. Bringing the AML/CFT Framework in Line with the Revised Standard
- The IMF is expected to evaluate China in summer 2018 against the revised FATF standard (2012).
  - Key changes in the revised standard include: requirement to identify, assess, and understand ML/TF risks and address them using a risk-based approach; increased focus on access to beneficial ownership information and transparency of legal persons/arrangements; inclusion of domestic PEPs in the scope of enhanced CDD on a risk-sensitive basis; greater emphasis on demonstrating effectiveness of AML/CFT regimes.
- The authorities have initiated a process to develop a framework for a National Risk Assessment (NRA):
  - Members of the Joint Inter-Ministerial Conference on Anti-Money laundering (JIMCAML), led by the PBC, together with representatives of the financial and DNFBP sectors, are contributing.
  - Authorities indicate the framework has been completed.
  - Arrangements have been made for the World Bank (WB) to assist in conducting the NRA.
  - Data gathered will feed into an NRA to be conducted using the WB NRA tool.
  - Authorities anticipate the NRA process will be completed in 2017.

### KEY FINDINGS ON ANTI-CORRUPTION AND SELF-LAUNDERING
- Anti-corruption:
  - The Chinese government has given anti-corruption a prominent place on its agenda, reflected in steps to implement the United Nations Convention Against Corruption (UNCAC) and a clear internal control mechanism to ensure probity in the public sector.
  - The AML/CFT regime is not fully aligned with the anti-corruption framework; alignment would enhance detection, deterrence, and confiscation of proceeds of corruption.
  - On the preventive side, amending the legal framework to cover domestic PEPs and requiring FIs to adopt enhanced measures when dealing with these customers would increase the likelihood of reporting suspicious transactions where corruption is the underlying criminal activity.
- Self-laundering:
  - Article 312 of the "Criminal Law of China" does not exclude "self-laundering," but authorities indicate concealing proceeds of one’s own crime is viewed as an extension of the predicate offense and is investigated.
  - Laundering is not sanctioned as an independent action but is considered during sentencing.
  - The absence of prosecutions for self-laundering may affect authorities’ perception of corruption as an ML threat and their understanding of national ML risk.

### SUPERVISION — KEY POINTS ON PBC AND BANKING SECTOR SUPERVISION
- The People’s Bank of China (PBC) has taken measures to strengthen supervisory arrangements:
  - Initial implementation of a risk-based approach: requiring institutions to undertake self-assessments and developing an internal methodology for prioritizing institutions for supervisory oversight.
- Areas for further strengthening:
  - Increase focus on group-wide risk when developing supervisory priorities.
  - Strengthen cooperation between the PBC and sector supervisors to ensure effectiveness of supervisory activities.
  - Expedite rollout of internal risk assessment mechanisms to banks across the country.
  - Strengthen sanctions that can be imposed on FIs for breaches of the Anti-Money Laundering Law 2007 (AMLL) to make them more dissuasive, especially for large banking institutions.

### MAIN RECOMMENDATIONS FOR AML/CFT (Table 1)
- Timing definitions:
  - “Near term” is within six months; “medium term” is within six to 18 months.

- General
  - Prioritize completion of the NRA and share the findings with all competent authorities and representatives of all categories of reporting persons covered by the AML/CFT obligations, taking into account limitations imposed by confidentiality considerations. — Near term
  - Focus on bringing the legal framework into full technical compliance with the FATF Recommendations as some deficiencies that were outstanding at the time of the 2012 FUR have still not been addressed. — Medium term
  - Focus on generally strengthening the cooperation across all competent authorities to enhance the overall effectiveness of AML/CFT arrangements. — Medium term
  - Consider broadening the range and level of detail of AML/CFT statistics that are collected, including those on ML investigations, prosecutions, confiscated property, convictions, and Suspicious Transaction Reporting (STR). — Medium term

- Anti-Corruption Efforts
  - Ensure that self-laundering can be independently investigated, prosecuted and convicted as a stand-alone offense. — Medium term
  - Remove the provisions of the company law that allow the transfer of bearer shares to be affected by the mere delivery of such shares and do not require companies to record the names of the holders of such shares. — Medium term
  - Introduce a definition of domestic PEPs in line with the international standards and impose enhanced due diligence obligations on FIs when dealing with these clients. — Near term

- AML/CFT Supervision of the Financial Sector with Focus on Banks
  - Strengthen cooperation between the PBC and sector supervisors with respect to AML/CFT supervision. — Medium term
  - Strengthen PBC HQ’s focus on group-wide risks rather than on institution-specific risk, in the process of developing supervisory priorities. — Medium term
  - Strengthen the sanctions available to the PBC as well as the sanctions actually imposed on FIs for failure to meet their obligations under the AMLL in order to create a sanctions regime that is more likely to be proportionate and dissuasive for the largest institutions, particularly the banks. — Medium term
  - Expedite the introduction of the “5C” or similar risk-scoring system to the banking sector across the PBC supervisory network. — Near term

*People’s Republic of China — International Monetary Fund, Technical Note: EXECUTIVE SUMMARY.*

### 11.      Apart from the formal NRA process, the authorities have undertaken other initiatives

### 11. Apart from the formal NRA process, the authorities have undertaken other initiatives to improve their understanding of ML/TF risks in China

### ML/TF risk assessment initiatives
- The AMLB has conducted an annual National Threat Assessment for each of the last three years.
- Assessments have included a number of case studies and information from other sources informing risk conclusions.

### Principal predicate offenses and TF activities
- The authorities have concluded that the principal predicate offenses are:
  - financial fraud,
  - undermining the order of financial management,
  - drug-related offenses,
  - telecommunications crime (relating to various types of fraud perpetrated via the use of telecommunications media).
- Corruption is also considered to generate significant proceeds of crime (POC) and is viewed as a major criminal activity.
- Principal types of TF activities in China are:
  - financing of terrorist organizations and individual terrorists inside China,
  - financing cross-border terrorist activities.

### Geographic and sectoral ML risk perspectives
- Geographic:
  - The authorities consider the area in the east of China and in particular the south-eastern coastal provinces and cities are particularly exposed to criminal activity linked to the illicit drug trade.
  - Financial sector activity in the SHFTZ exposes China to ML/TF risks associated with tax offenses and smuggling.
- Financial sector:
  - The authorities consider that the banking sector is most at risk for ML due to rapid growth and large transaction volumes.
- DNFBP sector:
  - The authorities consider the real estate sub-sector and dealers in precious metals and stones (DPMS) to have significant exposure to ML risks.

### PEPs, beneficial ownership, and transparency measures
- PEPs:
  - The revised FATF standard requires arrangements for management of risks associated with domestic and international PEPs.
  - China has enhanced preventive measures for foreign PEPs since its 2007 ME, but the measures adopted do not extend to domestic PEPs.
  - To align with the new standard, China will need to mandate enhanced CDD for domestic PEPs on a risk sensitive basis.
- Beneficial ownership (BO) transparency:
  - China has taken initial steps by mandating FIs to obtain BO information from their customers.
  - On October 1, 2014, the State Administration for Industry and Commerce (SAIC) established an Enterprise Information Disclosure Regime (EIDR) with a database including business registration, property mortgages, equity pledges, administrative penalties, and annual reports.
  - The EIDR contains a data entry field for “legal representative,” which authorities indicate reports BO information, but staff assessed this is not an adequate means for obtaining BO information.
  - Some industry supervisors require regulated institutions to disclose necessary information. Examples:
    - CIRC Measures for the Administration of the Information Disclosure by Insurance Companies require insurance companies to release annual information disclosure reports on the company's website and in newspapers designated by the CIRC (including information of shareholders and actual controllers).
    - No.1 to 4 of the Notice of the CIRC on Issuing the Standards for the Disclosure of Capital Use Information by Insurance Companies require disclosure on affiliated transactions, persons responsible for the risks, shares of listed companies, and large unlisted equity and large real estate investment.
  - It is unclear that the system contains beneficial ownership information as set out in the FATF Recommendations.
- Recommendation related to BO:
  - The authorities need to ensure that the arrangements developed to record and maintain BO information are working effectively.

### Data, statistics, and information gaps
- Robust and comprehensive data are essential for an effective risk-based approach.
- There is room for improving arrangements for maintaining statistics across areas including:
  - ML investigations,
  - prosecutions,
  - convictions,
  - confiscations,
  - suspicious transaction reports (STRs).
- Recommendation related to statistics:
  - Authorities should broaden the range and level of detail of AML/CFT statistics they maintain, including those related to ML investigations, prosecutions, convictions, confiscations, STRs, and sanctions imposed on FIs.

### Conclusions and policy recommendations (from TN)
- Authorities have taken significant measures to enhance the AML/CFT legislative and regulatory framework since the 2007 MER and continued efforts after removal from FATF’s enhanced follow-up process.
- Priority actions recommended:
  - Complete the NRA and share its findings with all AML/CFT competent authorities and representatives of all categories of reporting persons covered by AML/CFT obligations, taking into account confidentiality limitations.
  - Focus on bringing the legal framework into full compliance with the FATF Recommendations as some deficiencies outstanding at the time of the 2012 FUR have not been addressed.
  - Mandate enhanced CDD for domestic PEPs on a risk sensitive basis to align preventive measures with the new FATF standard.
  - Ensure BO recording and maintenance arrangements are effective.
  - Strengthen cooperation across all AML/CFT competent authorities to enhance effectiveness.
  - Broaden and deepen AML/CFT statistics maintained (see Data gaps above).

### Anti-corruption efforts — policy framework and institutional measures
- Policy framework:
  - Curbing corruption identified as a priority, particularly since the XVIII National Congress of the CPC in November 2012.
  - China signed and ratified the UNCAC in 2006 and participates in the UNCAC asset recovery working group.
  - China held the presidency of the G20 anti-corruption group in the year of the report and hosted the G20 2016 summit in Hangzhou, leading to adoption of:
    - “G20 High-Level Principles on Cooperation on Persons Sought for Corruption and Asset Recovery,”
    - “G20 Anti-Corruption Action Plan 2017-2018,”
    - establishment of the G20 anti-corruption center in Beijing in September, 2016.
  - National Bureau of Corruption Prevention (NBCP) established and shares resources with the Ministry of Supervision (MS); the minister of MS holds a concurrent post as director general of the NBCP.
  - NBCP is responsible for work under the framework of the UNCAC.
  - China is actively promoting legislation on mutual legal assistance (MLA) though new legislation has not yet been enacted.

### Corruption as a predicate offense for ML
- Corruption included in the list of predicate offenses for ML in 2006.
- Article 191 of the Criminal Law contemplates corruption as a predicate offense.
- Investigation, prosecution and conviction of ML does not require a conviction for the predicate offense.
- Criminal Law reformed to include offenses required by UNCAC, with corruption and graft in Chapter VIII and bribery of foreign and international public officials in article 164.
- Self-laundering:
  - Article 312 of the "Criminal Law of China" does not exclude "self-laundering".
  - According to authorities, concealing proceeds of one’s own crime is viewed as an extension of the predicate offense; laundering is not sanctioned as an independent action and is considered during sentencing.
  - The mission was not presented with judicial decisions to support this observation.
  - This approach reduces the likelihood that an investigation into corruption will lead to opening an ML case, limiting use of the AML framework for corruption.
  - Undertaking prosecutions for self-laundering would reinforce the independence of the ML offense and improve tools for prosecution and asset recovery, even after the statute of limitations for the predicate offense may have run out.
- Conspiracy provisions:
  - Third parties who launder proceeds of corruption can be treated as co-perpetrators of the predicate offense in certain scenarios:
    - If a person agrees ex ante with a third party that he/she will commit the predicate offense and the third party agrees ex ante to launder the proceeds, the third party is considered a co-author of the predicate offense and could not be charged with an ML offense.
    - If the person commits the corruption offense and ex post facto agrees with the third party to launder the proceeds, ML charges can be brought against the third party.

### Institutional framework for anti-corruption
- Coordination among several authorities including law enforcement agencies (LEAs) and discipline inspection and supervision agencies.
- Two categories of anti-corruption initiatives:
  - administrative investigations into ethics and probity of public officials and party members,
  - jurisdictional investigations into criminal offenses related to corruption, bribery, and crimes of dereliction of duty.
- CCDI and international cooperation:
  - Central Commission for Discipline Inspection (CCDI) coordinates international anti-corruption work with judicial departments and law enforcement.
  - MS cooperates with CCDI to perform party discipline inspection and administrative supervision functions.
  - Administrative investigations led by MS/CCDI (subject to internal party decisions); criminal investigations led by the Supreme People’s Procuratorate (SPP) (subject to judicial decisions).
- CCDI functions and sanctions:
  - CCDI supervises, rectifies, and curbs corruption; coordinates international anti-corruption policy work.
  - CCDI elected for a five-year term and organizes and coordinates work against corruption.
  - Sanctions for Party discipline violations include warnings, serious warnings, removing of Party position, depriving of Party positions, placing on probation within the Party, and expulsion from the Party.
  - For criminal suspects, cases are transferred to judicial organs.
- CCDI inspection teams:
  - CCDI has 47 discipline inspection teams embedded in different ministries, agencies, and regulatory bodies.
  - These teams can launch investigations leading to party discipline or transfer to law enforcement (MPS or SPP) if criminal behavior is suspected.
- MPS and SPP roles:
  - MPS is China’s police body; AML division functions include research into ML trends, instructing and coordinating ML investigative work of local law enforcement, and coordinating international law enforcement ML work.
  - MPS has no jurisdiction in matters involving corruption and bribery related to government officials, although in practice SPP may send ML cases originating in corruption to MPS for further investigation.
  - SPP supervises and directs approval of arrests, prosecution, and supervision of ML cases; within SPP, the General Bureau of Anti-corruption (GBAC) has four units handling initial investigations, prevention guidance, and coordination of international MLA in corruption cases. GBAC has authority over investigating corruption cases with national impact.

### Asset disclosure regime and verification
- China’s asset disclosure regime:
  - Implemented through the Bureau of Cadre Supervision of the Organization Department of the Central Committee of CPC.
  - First set out in Regulations on Income Declaration by Party and Government Officials at or above County Levels in 1995; now based on Regulations on Reporting Personal Matters by Leading Party Officials from May 2010.
  - Supervision bureau of every organization's human resources department manages the regime.
  - All officials above the county and division level and officials in public enterprises and public institutions of the same level must declare property and affairs at the beginning of every year.
- Verification of asset declarations:
  - Two types of verification:
    - verification with priority (for officials in line for promotion and officials identified via tip-off),
    - random verification.
  - Each year approximately 10 percent of all asset disclosures are subject to random verification and another 10 percent are subject to verification with priority.
  - There does not appear to be a risk-based approach to verification.
  - Consequences for filing false information include criticism, warning and admonishment or adjusting the official’s posting.
  - Asset disclosure forms are not public but available to:
    - human resource departments within the Party,
    - the discipline inspection department,
    - the procuratorial authorities.

### Anti-corruption outputs and international cooperation
- Since the eighteenth National Congress of the CPC (November 2012), the DIC at all levels across China:
  - received more than 9,500,000 tipping-off letters and visits,
  - filed 1,000,000 or more cases,
  - sanctioned more than 1,000,000 persons,
  - transferred 46,000 persons to judicial authorities.
- CCDI actions:
  - Where evidence suggested criminal wrongdoing, CCDI transferred cases against 43,000 persons for criminal investigation.
- Extradition and repatriation:
  - Since 2014, the MS coordinated efforts to extradite over 100 persons who escaped the jurisdiction and repatriated their proceeds of corruption.

*Source: cr18191 - 11. Apart from the formal NRA process, the authorities have undertaken other initiatives*

### 32.      China has made significant efforts to convict corrupt criminals and recover proceeds of

### 32.      China has made significant efforts to convict corrupt criminals and recover proceeds of corruption, both domestically and overseas.

### AML Support to Anti-Corruption Efforts
- Between 2013 and 2015, 92,195 corruption investigations yielded 69,017 cases resulting in convictions (PBC statistics).
- Since 2014, “Skynet operations”:
  - 2,566 individuals charged with corruption who had fled Chinese justice arrested in more than 70 countries and regions.
  - Over RMB 8.64 billion recovered.
  - 37 individuals who were the subject of Interpol red notices have been captured.
- Since 2013, the Ministry of Justice has sought foreign criminal judicial assistance in 12 cases of corruption (some still in process).
- Definition and measures for foreign PEPs:
  - China defines foreign PEPs as “foreign incumbent or outgoing persons who perform important public functions, such as heads of state, heads of government, senior officials, important government, judicial or military officials, state-owned corporate executives, major party members, persons holding important positions in the international organizations, and members of their families or persons in close association with them.”
  - Once identified as an international or foreign PEP, FIs and DNFBPs must adjust risk level, take measures to further understand the source of the customer’s assets, and increase the frequency of collecting and updating information.
  - Reporting entities can investigate PEP transactions, inquire the purpose of the transaction, and implement restrictions such as limiting transaction size and frequency.
  - Reporting entities are mandated to report suspicious transactions to the CAMLMAC.
- FIU structure and functions:
  - China’s FIU is housed within the PBC and comprises the CAMLMAC, the AMLB and the AML Divisions in PBC branches.
  - The PBC and its branches can conduct investigations on suspicious transactions and predicate criminal activities; results on suspicion of corruption are transferred to the CCDI and anti-corruption department in procuratorial authorities.
  - PBC and its branches can conduct investigations at the requests of the CCDI and anti-corruption department in procuratorial authorities.
  - The FIU analyzes STRs and disseminates results on corruption cases to the SPP; results related to potential ML cases with a predicate offense of corruption are disseminated to the GBAC of the SPP.
  - Anti-corruption is a priority cooperation area between the FIU and LEAs; cooperation includes providing intelligence and financial analysis and participation in specialized campaigns (e.g., Skynet).
  - In 2015, the PBC carried out AML investigation for more than 600 cases related to corruption.
- Note on STR analysis:
  - CAMLMAC’s analysis of STRs, as presented to the mission, does not reflect that corruption is often the predicate crime underlying these reports.

### Potential Impediments to a Fully Effective Anti-corruption Framework
- Domestic PEPs:
  - China has yet to mandate enhanced CDD for domestic PEPs as defined by the 2012 FATF recommendations.
  - Many FIs appear to de facto conduct enhanced due diligence on domestic public officials and subscribe to databases (e.g., Dow Jones and Bankers Yearbook) to identify domestic PEPs.
  - AML/CFT risk management systems in some banks classify domestic PEPs as high-risk, requiring enhanced CDD under international standards; however, this is not legally mandated.
  - Lack of legal mandate makes it unclear how many FIs conduct enhanced due diligence on domestic PEPs and may hinder supervisory sanctions for non-compliance.
  - Many FIs do not generally consider state-owned enterprises, entities closely intertwined with PEPs, to be high-risk customers.
  - Authorities indicate CIRC’s Guidelines require insurance companies to conduct the same enhanced CDD measures on domestic PEPs as on foreign PEPs.
- Transparency of legal persons and beneficial ownership:
  - Authorities state EIDR makes shareholder names of all companies available to the public, but registry information is limited to names of shareholders; information on controllers is not necessarily held.
  - Mixed feedback from FIs on ease of obtaining beneficial ownership information: some report they can obtain it; others report it can be very difficult.
  - Use of unregistered stock (bearer shares) continues to be allowed:
    - Article 139 of the Company Law (2014) requires transfer of registered stocks to be done with endorsement and company must record transferee’s name and address in shareholder register.
    - Article 140 of the Company Law (2014) provides that transfer of unregistered stock (bearer shares) is affected by mere delivery of the stock to the transferee; companies are not required to maintain a record of holders of unregistered stock.
    - Authorities assert all stocks in China are electronically traded, holders of bearer shares must open securities accounts and trade through the Stock Exchanges, and real-name registration on securities accounts and registration of transfer in China Securities Depository and Clearing Company provide transparency. Notwithstanding, Company Law allows transfer of bearer shares by mere delivery and does not require recording names of holders.
- Threat assessment and STR identification:
  - Authorities’ responses and threat assessments do not identify corruption as a threat for ML, though authorities and FIs consider corruption a significant threat.
  - Judicial authorities’ records: since 2013, 73,029 people convicted of corruption with POC recovered of RMB 8.54 billion.
  - PBC has issued indicators on corruption to FIs and required focus on suspicious transactions related to corruption.
  - CAMLMAC’s analysis of STRs reveals FIs do not identify suspicious activity related to corruption, suggesting difficulty in identifying relevant indicators in day-to-day transactions.

### Conclusions and Recommendations
- Findings:
  - Anti-corruption has a prominent place in the Chinese government’s agenda, reflected in ratification and implementation of UNCAC, participation in international anti-corruption efforts (including G20 anti-corruption agenda), and internal control mechanisms to ensure probity in state agencies.
  - China’s AML framework is not fully aligned with anti-corruption initiatives: interpretation that concealing proceeds of one’s own crime is an extension of the predicate offense, and broad co-authorship rules impair LEAs’ ability to investigate and prosecute laundering of corruption proceeds.
  - The system lacks a mandate for FIs and DNFBPs to apply enhanced measures for domestic PEPs on a risk-sensitive basis and does not ensure transparency and availability of beneficial ownership information.
  - It would be useful for the PBC to develop outreach initiatives to FIs to reinforce awareness of links between proceeds of corruption and potential abuse of institutions for ML purposes.
- Recommended actions:
  - Ensure that self-laundering is effectively investigated, prosecuted and convicted as a stand-alone offence.
  - Remove provisions of the Company Law that allow transfer of bearer shares to be affected by mere delivery and that do not require companies to record names of holders of such shares.
  - Ensure full and comprehensive availability of information on the ownership and control of legal persons in line with the FATF Recommendations.
  - Mandate enhanced CDD for domestic PEPs as set out in the FATF Recommendations.

### Supervision of Financial Institutions with a Focus on the Banking Sector
- Supervisory arrangements:
  - The PBC is responsible for AML/CFT supervision for over 5,000 institutions, including:
    - deposit taking institutions (approximately 4,270, including 70 trusts companies),
    - securities and futures firms (approximately 380),
    - insurance entities (approximately 180),
    - payment institutions approximately 270).
  - Many deposit taking institutions are small, rural cooperatives.
  - PBC focuses supervisory resources on systemically important institutions and FIs facing higher ML/TF risks operating in urban centers, bringing the number of entities prioritized to approximately 1,000.
  - Article 4 of the AMLL (2007) gives the PBC responsibility for AML supervision nationwide; function undertaken by PBC’s AMLB.
  - Other state institutions responsible for AML supervision within their respective areas include CBRC, CIRC, and CSRC; PBC and sector regulators operate via headquarters and branches.
  - Market entry controls by CBRC, CSRC, and CIRC:
    - Fit and proper assessments of shareholders, directors, and senior managers (no criminal record, sound integrity).
    - Review of applicants’ internal systems and controls for ML/TF risk management.
    - Example: CBRC Circular No. 657 (December 2014) requires license applicants demonstrate systems to manage ML/TF risks.
    - CIRC Measures require application documents for insurance company or insurance asset management company to include statement on source of investment funds and declaration of legality.
    - Sector supervisors receive support from the PBC in these determinations.
- Risk-based approach:
  - 2012 PBC guidance to introduce risk-based approach; development of risk indicators to assess inherent ML/TF risk and quality of management measures.
  - Guidelines for Assessment of ML/TF Risk and Categorized Management of Customers of FIs:
    - Risk analysis system based on four main indicators: customer’s characteristics, locations, businesses (including financial products and financial services), and industries (including occupations) and types of financial products used.
    - FIs expected to weight factors and develop risk scores; determine new customer’s risk level within ten working days after establishment of business relationship.
    - Continuous monitoring and revision of customer risk scores required; high-risk customers reviewed at half-yearly intervals.
    - FIs may develop own risk scoring if as robust as Guidelines; policies and procedures must be approved by Board and a senior manager responsible for implementation.
  - 2015 pilot exercise:
    - Institutions requested to undertake self-assessments included 103 banks, one securities firm, and two insurance institutions.
    - Resulted in identification of risk management deficiencies and measures to strengthen systems; subsequently FIs required to submit risk assessments annually.
    - Implementation varies across PBC branches (e.g., Shanghai and Chengdu branches at various stages).
  - PBC’s 5C system for supervisory risk assessment uses five indicators: circumstance, commodity (product lines), client, communication (information sharing between FI and supervisors), and correction (risk mitigation); outcomes feed supervisory priorities along with institution size and systemic importance.
  - Variations exist across PBC branches; branches encouraged to develop additional supervisory tools (e.g., Chengdu branch software to understand business activity implications for ML/TF risk).
  - Current methodology focuses on individual institutions and inadequately examines risk across financial groups; no concerted effort to assess self-assessments collectively for group-wide risks.
  - Concern over migration of products across related entities in financial groups (e.g., movement of products from banks to related trust companies) where related entities may exhibit weaknesses in CDD practices.
- Shanghai Free Trade Zone (SHFTZ) risks and measures:
  - SHFTZ presents unique ML/TF risks: high level of international trade transactions, cross-border renminbi business, services to nonresident legal and natural persons.
  - PBC concerned about risks from third party payment institutions (TPPI); considers tax offenses and smuggling as main predicate criminal activities in the zone.
  - PBC responses:
    - 2014 Notice on Effectively Conducting Work against Money Laundering and Terrorist Financing in China (Shanghai) Pilot Free Trade Zone outlining enhanced CDD measures, customer identification, and ongoing monitoring.
    - Emphasis on Innovation Business Money Laundering Risk Assessment System to ensure ML departments participate in product/service development and ensure ML/TF risks considered in design.
    - FIs required to produce ML risk assessment report focusing on innovative products and services.
    - PBC strengthened collaboration with SHFTZ management commission, customs, tax administrations, and administration of industry and commerce.

*IMF mission report excerpt.*

### 51.      The PBC Shanghai head office is in the process of strengthening it risk-based approach

### 51.      The PBC Shanghai head office is in the process of strengthening it risk-based approach

### Strengthening the risk-based approach and 5C scoring system
- The PBC Shanghai head office is in the process of introducing the 5C scoring system.
- Implementation rollout:
  - Started with the assessment of trusts.
  - Expanded to TPPIs.
  - Intends to roll out the use of the scoring system to all licenses in a number of phases.
- The branch is documenting its experience in implementing the new system to make it a positive learning experience.
- Recommendation:
  - While a phased introduction is reasonable, the branch should expedite the introduction of the system to the banking sector as it considers this sector to have the highest ML/TF risks.
  - PBC HQ should monitor the Shanghai branch’s rollout given the nationwide implications for AML/CFT supervision.

### AML/CFT supervisory strategy and planning
- PBC and its branches meet twice a year to develop and review AML/CFT supervisory strategy.
- Annual cycle:
  - Beginning of each year: meeting at PBC HQ in Beijing to review previous year’s AML/CFT supervisory activities and plan the coming year.
  - During this meeting, self-assessments of all FIs are reviewed and are important criteria for developing supervisory activities.
  - Branches submit proposals for oversight of FIs under their direct supervisory responsibility.
  - After review and discussion, decisions on strategic priorities for the coming year are made.
  - After receiving the new supervisory strategy from HQ, branches determine how best to apply it to their supervisory plans.

### Supervisory cooperation
- Legal and institutional roles:
  - PBC is the overall AML/CFT supervisor of FIs in China.
  - By law, the CBRC, the CSRC and the CIRC should cooperate with the PBC and perform their AML supervision obligations within their respective sectors.
- Sector supervisors’ involvement:
  - Sector supervisors support the PBC’s role to varying degrees.
  - CBRC and CSRC have issued secondary legal instruments to guide licensees on AML/CFT obligations.
  - Neither the CBRC nor the CSRC undertakes dedicated AML/CFT on-site inspections.
  - CBRC appears to make some input to PBC onsite inspections.
  - CSRC has very little interaction with PBC regarding onsite inspections; there are occasions when CSRC is unaware the PBC is undertaking an on-site inspection of one of its licensees.
  - Measures for AML Work in the Securities and Futures Sector, Article 11 (i), indicates a securities or futures institution should inform the CSRC when it has been subject to an inspection or has been punished by the PBC.
- CIRC engagement:
  - CIRC is more actively involved in ongoing AML/CFT supervision with both offsite and onsite programs.
  - In 2011 CIRC established an AML/CFT information reporting system requiring licensees and CIRC branches to provide information on compliance with AML/CFT obligations.
  - Between 2014-2016 the CIRC organized 26 branch offices to inspect 98 provincial branches of insurance companies.
  - CIRC incorporated ML/TF risks into China Risk Oriented Solvency System (C-ROSS) used to determine capital adequacy of insurance companies.
  - CIRC developed a methodology to prioritize insurance entities for supervisory activities including onsite inspections.
  - Some cooperation exists between CIRC and PBC: CIRC would not inspect an entity recently inspected by the PBC.
  - CIRC and PBC do not use the same prioritization methodology; hence, no certainty that issues CIRC would cover were covered by PBC inspections.
  - To date the CIRC and the PBC have not conducted joint inspections; they plan to start undertaking joint inspections in the future.

### Sanctions framework and practice
- Legal sanctioning powers (Article 32 of the AML Law):
  - Fines on FIs for failure to meet specified obligations: ranging from RMB 20,000 to 50,000.
  - Fines on a chairman, a senior manager, or other persons: range from RMB 10,000 to 50,000.
  - Where ML has taken place as a result of the specified breach:
    - Fines on FIs: range from RMB 50,000 to 5,000,000.
    - Fines on natural persons: range from RMB 50,000 to 500,000.
  - The PBC can advise sector supervisors to:
    - (i) order the relevant FI to discipline the officer, or
    - (ii) revoke the person’s qualification to hold a post and prevent him/her from working in the financial sector.
- Approximate USD equivalents in source footnotes (preserve wording as in source):
  - RMB 20,000 to 50,000 — Approximately US$31,000–77,700.
  - RMB 10,000 to 50,000 — Approximately US$1,500–7,700.
  - RMB 50,000 to 5,000,000 — Approximately US$77,700–777,000.
  - RMB 50,000 to 500,000 — Approximately US$7,700–77,700.
- PBC sanctioning activity (historical 2012–2015):
  - Over the period 2012 to 2015, PBC imposed:
    - 385 sanctions on banks.
    - 17 sanctions on securities and futures institutions.
    - 130 sanctions on insurance institutions.
    - 12 sanctions on payment institutions.
  - Most common deficiencies leading to sanctions: CDD failures (e.g., failure to obtain identification documents and information on source of funds); in some cases, failure to file STRs.
  - Average value of sanctions applied during 2013 to 2015: RMB 164,135.
  - Highest fine ever imposed by the PBC: RMB 3,000,000 (imposed on an institution for leaking confidential information).
  - To date, PBC has not requested the CBRC, the CIRC, or the CSRC to impose sanctions on staff of FIs under Article 32 of the AMLL; PBC indicates no discovered deficiencies meriting such sanctions.
  - Authorities did not provide statistics showing actual value of sanctions applied by institution type and violation nature.
- Observations on dissuasiveness:
  - The maximum pecuniary sanction for a single breach of the preventive measure regime is RMB 5,000,000.
  - This maximum appears relatively modest given the size of the largest institutions in China, particularly in the banking sector, and seems unlikely to be dissuasive for the largest FIs.
- Tables provided in source (numbers preserved):
  - Table 2 — China: Banks, Securities, and Futures—Number of Sanctions Imposed by the PBC by Sector (2012–2015)
    - Banks — No. of Inspections / No. of Sanctions:
      - 2012: 485 / 52
      - 2013: 529 / 105
      - 2014: 683 / 112
      - 2015: 783 / 116
      - Total: 2,480 / 385
    - Securities and Futures Institutions — No. of Inspections / No. of Sanctions:
      - 2012: 138 / 1
      - 2013: 123 / 0
      - 2014: 114 / 9
      - 2015: 150 / 7
      - Total: 525 / 17
  - Table 3 — China: Insurance and Payments Institutions—Number of Sanctions Imposed by the PBC by Sector (2012–2015)
    - Insurance Institutions — No. of Inspections / No. of Sanctions:
      - 2012: 544 / 30
      - 2013: 479 / 36
      - 2014: 449 / 35
      - 2015: 467 / 29
      - Total: 1,939 / 130
    - Payment Institutions — No. of Inspections / No. of Sanctions:
      - 2012: 6 / 0
      - 2013: 15 / 1
      - 2014: 16 / 6
      - 2015: 28 / 5
      - Total: 65 / 12
  - Table 4 — China: Insurance Value of Sanctions Imposed of Financial Institutions (2013–2015)
    - 2013 — Number of Inspections: 1,146; Number of Sanctions: 142; Amounts of Sanctions (Yuan): 21,542,000; Average Value of Sanctions: 151,704
    - 2014 — Number of Inspections: 1,262; Number of Sanctions: 162; Amounts of Sanctions (Yuan): 27,418,500; Average Value of Sanctions: 169,250
    - 2015 — Number of Inspections: 1,428; Number of Sanctions: 158; Amounts of Sanctions (Yuan): 26,870,000; Average Value of Sanctions: 170,063
    - Total — Number of Inspections: 3,836; Number of Sanctions: 462; Amounts of Sanctions (Yuan): 75,830,500; Average Value of Sanctions: 164,135

### Conclusions and recommendations
- PBC progress and gaps:
  - The PBC has initiated measures to strengthen supervisory arrangements, including:
    - Requiring institutions to undertake self-assessments.
    - Developing internal methodology for prioritizing institutions for supervisory oversight.
  - Areas for further strengthening:
    - Increase focus on group-wide risk rather than institution-specific risk when developing supervisory priorities.
    - PBC and sector supervisors should strengthen cooperation to ensure effectiveness of overall AML/CFT supervisory activities.
    - Shanghai PBC branch should expedite introduction of the 5C risk scoring system to the banking sector because of its assessment that the banking sector has the highest ML/TF risks; PBC HQ should monitor this process.
    - Authorities should consider strengthening both the sanctions available to the PBC and the actual sanctions imposed on FIs for breaches of AML/CFT obligations.

*People’s Republic of China — International Monetary Fund*

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_Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18191.pdf_