China Drafts Regulation to Crackdown Money Laundering

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Last updated at: (Beijing Time) Tuesday, January 14, 2003

China Drafts Regulation to Crackdown Money Laundering

China has unveiled its first anti-money laundering regulation in an escalation on its war against the flow of "dirty'' money, which threatens the prospect of its fast growing economy.

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China has unveiled its first anti-money laundering regulation in an escalation on its war against the flow of "dirty'' money, which threatens the prospect of its fast growing economy.

The regulation, announced Monday by the central People's Bank of China (PBOC), details its regulatory responsibilities and the obligations of local and foreign financial institutions. The regulation will come into effect on March 1.

"It's very necessary because there are various irregular economic activities as the system undergoes a transition (from a planned economy to a market-oriented one),'' said Qin Chijiang, deputy secretary general of the China Society of Finance.

"If we don't tackle money laundering, there might be big trouble and capital drainage.''

Chinese officials and analysts widely acknowledge that money laundering has been on the rise in the country over recent years, largely tracking an uptrend in activities like embezzlement, drug trafficking and smuggling.

Such illegal conduct, which analysts say is relatively concentrated in China's better developed coastal areas, not only results in the legalization of crime proceeds and drainage of State assets, but threatens China's financial security.

A government official, who declined to be named, said: "They (money launderers) don't care about costs (in transferring money from one place to another) and it's mostly moving rapidly. It's very likely to disturb financial stability.''

Insiders estimate the illegal outflow of foreign exchange from China, a major form of money laundering that is better known as capital flight, has totalled about US$150 billion since 1987 and averaged US$20 billion annually in recent years.

The PBOC launched its anti-money laundering campaign in June by establishing two departments to monitor suspicious transactions and co-ordinate inter-ministry co-operation.

The campaign escalated Monday as the new regulation was substantially broadened to also include illicit gains from terrorist acts and "others,'' alongside smuggling, drug trafficking and operations by criminal gangs.

Under the new regulation, financial institutions are required to create their own anti-money laundering mechanisms and report suspicious and certain large transactions, as well as decline services to clients with suspicious identities.

Sources said the State Administration of Foreign Exchange (SAFE), which was specified in the regulation as the supervisor to oversee large and suspicious foreign exchange transactions, has already submitted related draft rules to the central bank.

"As far as I know, the headquarters have hammered out a report and submitted it to the PBOC,'' said an unnamed official with SAFE's provincial office in Central China's Hunan Province.

According to experiences from nations with freely convertible currencies, like France, the official said a threshold equivalent to US$5,000 could be a reasonable limit to require forex (foreign exchange) transactions to be reported.

The SAFE report contains a "fairly complicated'' system for identifying suspicious dealings that governs the source, use and scope of the money concerned, the SAFE official said, "but generally speaking, it's operable.''

But Qin said Monday's regulation was probably not enough to corner money launderers, as the prevalent use of cash in China may easily help them escape the attention of regulators and banks.

"It's a step forward concerning big-sum transfers (made through the financial system), but some (illegal cash) transactions just cannot be tracked,'' Qin said.

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