Chinese banks warned on anti-money laundering compliance

A seasoned financial advisor has warned the Chinese financial institutions of serious consequences if they stay behind with international partners in compliance with anti-money laundering legislation (AML).

A study recently published by AlixPartners, a global consultancy firm for companies, has shown that a significant number of financial institutions do not have adequate schemes to combat money laundering and compliance with sanctions and the training of their boards.

In the survey, 32% of respondents said they considered the AML and sanction compliance budgets at their companies as "inadequate" or "seriously inadequate", while 20% of respondents said their board did not receive AML and sanction training and regular briefings despite the fact that many new compliance standards have recently been implemented around the world. AlixPartners regards this as a sign that a good understanding of AML and sanctions risks is not fully permeated by the upper reaches of many financial institutions.

"Both AML compliance and sanctions remain a major challenge, not just for Chinese banks, but all banks operating internationally," Sven Stumbauer, New York-based managing director of the practice of financial advisory services at AlixPartners, told China Business Law Journal. . "Given the investigations and enforcement actions that have taken place in recent years, it appears that Chinese banks are still lagging behind and need to increase their focus on AML and sanction compliance."

The survey was based on answers from financial services executives and the managements of 361 financial institutions around the world. Among the respondents, six financial institutions came from the Chinese mainland (responses from the head office) and eight financial institutions were from Hong Kong.

In a growing trend, US and European financial institutions are de-risking and leaving relationships with financial institutions that may risk a high level of AML and sanctions.

Stumbauer said that a number of Chinese banks on the mainland had built up new relationships with these financial institutions. "Both boards of directors and senior management must pay close attention to these types of risky relationships and determine whether current risk management practices are sufficient to not only comply with local AML rules and regulations, but also with global standards," he said. .

"I think it's safe to say that Chinese banks on the Chinese mainland do not want to be known to give more priority to profit than to comply with AML rules and regulations." The resulting reputational damage, combined with possible enforcement actions would certainly affect the growth mainland that Chinese banks have experienced over the past decade.

"It is important that Chinese banks focus holistically on compliance with AML / sanctioning and that they have active involvement of the board of directors of the head office It is also crucial that Chinese banks apply policies and procedures for AML / sanctions that do not just follow the letter of the law, but also the spirit of the law and leading industrial practices. "

Stumbauer emphasized the leading role of the board of directors. "Without significant board involvement, Chinese banks in the US and worldwide will continue to be exposed to possible regulatory measures," he said. "While this is a challenge for most financial institutions operating globally, it seems like a big challenge for Chinese financial institutions to develop and expand globally.

"Once the board has provided an overall compliance strategy, it is up to senior management to apply a global standard in all jurisdictions that can meet strict legal requirements and regulatory expectations in different jurisdictions."

Stumbauer suggested that when Chinese banks operate in a global environment, they should consider reviewing and possibly improving:
(1) AML / sanctions risk assessment of its products and customers; (2) AML / sanctions risk assessment of its counterparties, in particular correspondent banking relationships; (3) customer research; (4) automated transaction monitoring systems to detect potentially suspicious activity; (5) automated transaction monitoring systems to detect potential sanction occurrences; and (6) reporting suspicious activities to authorities.

Stumbauer said that Chinese banks on the Chinese mainland have expanded their AML / sanctioning teams, but that "the robustness of a bank's AML / sanctions compliance structure is not only a matter of resources and personnel, but also of quality and effectiveness.