Diaz Reus held a half-day workshop at the Lexis-Nexis 2008 Anti-Money Laundering (AML) Summit in Shanghai, People’s Republic of China. The workshop’s first half consisted of presentations on Patriot Act – Section 311, China’s AML Challenges, and AML in Chile and Latin America. The latter half consisted of a panel discussion. The panel was comprised of representatives from a China bank, a U.S. bank, an information services provider, and a Professor who works at a China AML research center.
Patriot Act, Section 311 allows the Secretary of Treasury to designate a foreign country, institution, type of transaction, or an account to be a “Primary Money Laundering Concern” (PMLC). Once a designation is made, U.S. Financial Institutions and Agencies can then be ordered to take “Special Measures” in relation to the PMLC. Special Measures range from additional recordkeeping to prohibition on transacting with the PMLC.
Financial institutions in China are facing significant challenges in combating money laundering. There is a wide spectrum of potential suspects and novel means of criminal methods. They also face issues in client identification, record keeping, and large-sum and suspicious activity reporting.
With regard to AML in Chile and Latin America, measures have been taken not only by the Bank of Chile, but by foreign banks as well. Chile’s position is more pro-active rather than reactive and this strategy was suggested for China.
During the panel discussion, questions and comments were delivered by both the panel members and the audience resulting in a lively dialogue from all participants. Here is a sample of what was said:
What factors should financial institutions consider in their customer risk assessment methodology?
China AML regulations focus on preventing potential high-risk customers to start business relationship with banks. One problem is that the current AML system focuses more on financial institutions, especially banks. But in other countries, like USA, the AML system will cover non-bank financial institution and insurance companies as well.
With regard to identifying customers, the AML regulation simply states, “commercial banks need to check the identities of customers.” Checking identification using the available methods is difficult. There are many different systems available, such as systems from People’s Bank of China, from Public Security Bureau and so on. However, you cannot rely on those systems alone. So the question is about balance. How to balance the face-to-face identification and the using of system to identify?
[Our bank] separates customers’ risk based on their industry, location and country. We have three categories, which is high risk, medium risk and low risk. The important thing is where we can get that basic information about customers? We gather this information through public ways.
One of the most difficult questions I get is what the best approach is. To effectively comply with the risk is very hard to grasp. We do not have time to treat everyone in the same way; you need to concentrate on the significant high risk things, not only the customers, but also the areas, countries and industries. The best approach is the client screening process.
Current challenges China faces in AML prevention:
1. the objectives of financial institution supervision is different from that of Government supervision;
2. each type of financial institution has a different attitude or evaluation toward the current AML system
3. the financial institutions will report when they are not sure whether customer’s activity is a violation of AML law. Under those circumstances, the People’s Bank of China receives too much information and has a hard time to figure out which information is important.
How can financial institutions identify high-risk customers in their existing customer base?
[Our bank] receives the “black list” from OECD, then we will screen our current customer database to figure out whether it is a real match or a preliminary match. We have another system and if we find there is a suspicion regarding the transactions or the other party whom our customers are dealing with, we will make a professional and independent analysis. When doing such analysis, if we cannot legalize the transaction based on our information, then our customer manager will try to find out the real purpose of such transaction. If he fails, he will transfer the case to the compliance department to investigate the customer. We will check the account information within 6 months and review the public information to see whether there is suspicious anti-money laundry activity. If there is suspicion, then we will adjust the risk of that customer.
[Our bank] follows the guidelines from the People’s Bank of China. Recently, we double checked the information of 1,500,000 individual customers and some company customers. We use the online system from PBC to check the individual customers. Regarding the companies, we not only check the company’s profile; we also make sure the information of the legal representative of that company is accurate. We developed our own system to report important suspicious activities.
Customers’ risk level can change, so you need to have a sanction list that changes on a daily basis. Screen the customer list every night to make sure your customers are good. Make sure you have the system to get this information.
There are many risks that we need to take into consideration, such as product risk, area risk, service risk, customer risk and system risk. We all know about compliance officers’ training, setting up similar compliance department and strength the monitors from supervision bureau, but are they the right methods to prevent risk and are those methods enough? Right now, we are discussing how to analysis the suspicious activities that have already happened. I think it is better to focus on the prevention of such suspicious activities or risks.
On Quality of China credit reports:
The credit system in China is not complete. The online identification checking system from Public Security Bureau or systems from PBC or social security department is not complete. Some of the information is lacking, such as customers’ photos and financial information. However, we will confirm the identity of customers through other ways, like phone calls.
On customers changing trading categories:
We developed our own system to monitor such trade categories. The system has four parts: cash and instruments, quick cash flow, abnormal transactions, abnormal customer relationship. We can track the bank account transactions and the amount of transaction. But we cannot track the detailed goods.
On examples of suspicious activity:
One person of moderate means recently opened a bank account. The security exchange company transferred a big amount of money into his bank account. He used that money to trade on the stock market, earned a lot of money and deposited in the account again. Few days later, he cashed several million from his bank account. When checking his transaction history, such amount of money only stayed in this account temporary. And his action of cashing is also very suspicious.
One typical suspicious activity is when we cannot contact the key person in that company. The company is closed and customer does not answer our phones. Other suspicious activities include money goes in and goes out very quickly in the bank account; customer cannot explain the source or purpose of the money; we cannot find out the source of the fund and so on.