Enforcement key if Chinese banks want to avoid being investigated

Updated 2017-02-27 10:34:30 Global Times

Lax on money laundering

More and more overseas branches of Chinese banks are getting investigated on money laundering charges, including Bank of China, Agricultural Bank of China and China Construction Bank. Experts said the investigations are largely the result of a strengthened supervision, the banks' own lack of vigilance and imperfect internal controls to catch money laundering. Although China has established laws and regulations to combat money laundering, they have not been very successful because the penalties are not severe enough to be a deterrent. Authorities need to enforce the regulations better to show China's consistent stance in the fight against money laundering.

Recently, Bank of China (BOC) agreed to pay a 600,000 euro (3,540) fine to settle a 4.5-billion-euro money laundering case involving its Milan branch in Italy, Reuters reported on February 17.

The Florence court in Italy ordered BOC to pay back 980,000 euros it earned through the illegal transactions, and four staff members at the branch were sentenced to a suspended two-year prison term for failing to report illegal money transfers, the report said.

Early in June 2015, Florence prosecutors alleged that nearly 300 people including some BOC employees smuggled more than 4.5 billion euros to China from the country between 2006 and 2010.

BOC's Milan branch is not the only Chinese financial institution fined by overseas anti-money laundering departments. Agricultural Bank of China (ABC)'s New York branch was fined even more for alleged instances of money laundering.

The New York State Department of Financial Services (DFS) announced in November 2016 that ABC would pay a 5 million penalty and install an independent monitor because of violating New York's anti-money laundering laws.

The DFS accused ABC officials of obfuscating dollar transactions conducted through the New York branch that might reveal violations of sanctions or anti-money laundering laws, according to a statement on the department's website. It also alleged that ABC management had silenced and severely curtailed the independence of the chief compliance officer at the branch, who tried to alert branch management and conduct internal investigations of suspicious activity.

The regulatory actions are credit negative because they point to internal systems and controls failures and are a reputational hit for ABC, Moody's Investors Service said in a note sent to the Global Times.

"We expect the regulatory action to dent the growth of ABC's dollar clearing and trade finance businesses as it prompts the bank to examine and improve its transaction monitoring and risk assessment policies," Moody's said.

Some other Chinese banks were also involved in money laundering cases in the past two years. In July 2015, the Federal Reserve Bank of New York found problems that left China Construction Bank's New York branch vulnerable to money laundering, according to a report in the magazine Caixin Weekly. The Fed asked the bank to correct the problems. In Spain, police investigated Industrial and Commercial Bank of China's branch in Madrid on suspicions of money laundering in February 2016.

Adapting abroad

Many countries and regions have strengthened supervision on financial institutions in recent years, so it's not as if financial regulators in developed countries are specifically targeting China, Caixin Weekly reported on Monday, citing Yu Wenqian, fraud investigation & dispute services partner at consulting firm EY.

Yu said the penalties show that regulators have become a lot more serious about compliance and have been punishing violations with harsher penalties, said the report.

Chinese banks with branches overseas have neither the willingness nor the courage to fund terrorist organizations or carry out transactions related to sanctioned countries. But they may find themselves involved in money laundering cases due to their lack of vigilance when developing their business among local Chinese communities, Caixin reported.

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