A Guide to Anti-Money Laundering for Crypto Firms
The global legislative landscape is constantly changing but keeping up with the most recent anti-money laundering regulations is a mandatory requirement for every financial institution in the world. The rapid pace of legislative reform in certain jurisdictions deepens the AML compliance challenge even as firms boost their performance by integrating cutting edge technologies and automated solutions. As one of the largest, fastest growing, and most influential markets in Asia and the world, China has increased its AML focus in recent years. In 2019, the Financial Action Task Force (FATF) Mutual Evaluation Report (MER) on the People’s Republic of China detailed the initiatives that the Chinese government had taken to strengthen its anti-money laundering and counter-financing of terrorism (CFT) policies. While commending China’s anti-money laundering progress, FATF highlighted a number of important gaps that were limiting the effectiveness of its regulatory efforts: the report prioritized China’s fragmented approach to financial intelligence as a starting point for legislative reform.
China’s renewed regulatory focus is motivated by a desire to update its scattered and ineffective compliance landscape and reflects efforts to reform AML and sanctions regimes in countries across APAC and the world. More specifically, escalating tensions between China and certain Western export markets, including the United States and Australia, have led China to reconsider its approach to regulatory compliance and to develop a unified approach to trade and security policy in order to exert pressure on its major trading partners.
One of the most significant motivating factors behind China’s regulatory reforms is the US-China trade war, which has prompted China to introduce legal provisions for retaliatory sanctions and to strengthen rules concerning the export of controlled items. China’s legislative actions are essentially a response to those of the US government which already regulates the export of materials and technologies considered to have a direct impact on national security.
China’s deteriorating trading relationship with Australia also played a part in its regulatory reforms, which culminated in the introduction of measures to obstruct certain Australian imports including red meat, timber, lobsters, wine, and barley. However, since the Chinese measures against Australia did not affect the key iron ore sector, their impact was not considered significant and, since there was a lack of legislative grounds for the introduction of barley tariffs, Australia consequently referred China to the World Trade Organization for the first time.
With an increasing number of Chinese companies contravening foreign export control laws in an increasingly challenging international regulatory landscape, Chinese authorities have recognized the need for a unified, comprehensive legislative framework that sets out the new AML compliance responsibilities clearly.
As part of that unification effort, China has introduced the following regulatory measures to tighten its foreign export controls:
Unreliable Entities List
The Unreliable Entity List was introduced on 19th September 2020 and essentially established China’s international sanctions regime. According to the Ministry of Commerce (MOFCOM), the list is intended to safeguard China’s ‘national sovereignty, security and development interests’ and to protect its businesses by ensuring ‘fair and free’ international trade.
While there are similarities with the US Department of Commerce BIS Entity List, the Unreliable Entities List regime, allows for a broader range of sanctions actions against designated entities. Article 10 of the Unreliable Entities List sets out a range of punitive measures for businesses that violate Chinese sanctions, including fines, trading restrictions, and prohibitions on other trade, investment, work, entry, and residence activities in China.
The Export Control Law of the People’s Republic of China
The Export Control Law of the People’s Republic of China was adopted on 17th October 2020 and came into effect in China on 1st December 2020. The law is the first unified and comprehensive approach to export control regulation that extends beyond the national and territorial jurisdiction applied by the Chinese authorities. The text of the law concerns the export of nuclear and military products, dual-use products (that could fulfil both civilian and military purposes), and any items are considered paramount to the protection of China’s national security. Firms in China that seek to export controlled products designated under the law must seek an export license from MOFCOM.
Developed by China’s State Council and Central Military Commission, Article 18 of the Export Control Law establishes a control list of designated importers and end users. In order to comply with the law, Chinese firms must screen their customers against the control list and apply the relevant prohibitions, restrictions, or suspensions to transactions involving controlled items. Violations of the Export Control Law may result in severe administrative and criminal consequences (per Articles 33-41 and Article 43).
Implementation regulations and guidance for both the Export Control Law and the Unreliable Entities list are part of an ongoing process. Accordingly, at the end of 2020, MOFCOM published updated versions of its Catalogues of Goods Subject to Export and Import License Administration, the Dual-Use Items and Technology Import and Export License Management Catalogue, and the Catalogues of Prohibited Import and Export Goods.
China has not yet issued a Blacklist of entities and individuals prohibited from the trade activities designated under the new regime: ComplyAdvantage’s research team is monitoring releases from the relevant Chinese authorities in order to deliver effective analysis as soon as information is available.
MOFCOM implemented the Measures for Blocking the Improper Extraterritorial Application of Foreign Laws and Measures – also known as the ‘Blocking Rules’ – on 9th January 2021 as a response to an increase in US trade restrictions against Chinese companies. The Blocking Rules prevent Chinese firms from complying with foreign sanctions that are deemed by MOFCOM to have been applied unjustly against a third state – such as US secondary sanctions against North Korea or Iran. The Blocking Rules mirror the EU’s Blocking Statute which was reactivated in 2018 to prohibit EU firms from complying with extraterritorial US sanctions imposed on Iran.
The rules impose reporting obligations on Chinese entities along with penalties for persons that comply with foreign trade sanctions. Meanwhile, penalties for noncompliance with the Blocking Rules include warnings, fines, and other coercive measures. Chinese firms may apply to the State Council for exemptions to the Blocking Rules and file lawsuits for compensation if they believe they have been affected adversely by the foreign restrictions.
China’s anti-money laundering and counter-financing of terrorism supervisory system is primarily focused on the financial sector while AML/CFT measures for designated non-financial businesses and professions (DNFBP) are sparse. In its 2019 MER on China, FATF identified the lack of DNFBP regulation as a “significant vulnerability”, pointing out that the reporting of suspicious transactions by DNFBPs was “virtually non-existent”. FATF also highlighted China’s regulation of politically exposed persons (PEP) as a significant AML vulnerability – an issue compounded by the prevalence of corruption as a predicate offence in a country with a high amount of state-owned enterprises.
The financial regulatory bodies responsible for enforcing AML/CFT compliance in China are the People’s Bank of China, the Securities Regulatory Commission, and the Banking and Insurance Regulatory Commission.
China’s key AML/CFT rules, regulations, and important compliance considerations are set out in a number of official lists, documentation and guidance, including:
- The China Central Bank Administrative Penalties
- The China Banking and Insurance Regulatory Commission Administrative Penalties (to be published)
- The China Banking and Insurance Regulatory Commission Administrative Supervision Measures (to be published)
- The China Securities Regulatory Commission Administrative Enforcement Decisions
- The China Securities Regulatory Commission Warnings
- The China Securities Regulatory Commission Market Ban Decisions
The lack of focus on DNFBPs does not mean that Chinese entities should ignore DNFBP lists when implementing AML/CFT solutions. Instead, firms should seek to build flexibility into their compliance solution and monitor constantly for the introduction of DNFB requirements. The Chinese AML landscape is constantly evolving, and firms should be ready to tweak their compliance response to keep up with the latest regulatory requirements.
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At ComplyAdvantage we monitor regulatory developments continually to ensure our AML/CFT database is updated with the latest AML/CFT risks.
Disclaimer: This is for general information only. The information presented does not constitute legal advice. ComplyAdvantage accepts no responsibility for any information contained herein and disclaims and excludes any liability in respect of the contents or for action taken based on this information.
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