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April 13, 2015

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Home » Opinion » Chinese Views

Closing laundering loopholes in tech era

By Ni Tao | April 13, 2015, Monday | Print Edition

A NATIONAL pastime of late has been sending and receiving gift cash through electronic payments enabled by WeChat, the popular mobile messaging service.

Businesses have joined the frenzy in issuing bonuses through WeChat, which has triggered an outcry over tax evasions. In addition to concerns about unpaid tax, experts say, the so-called WeChat wallet also carries a lesser-known risk: It can be exploited as a tool for money laundering.

Recalling a recent conversation with a banker, Michael Thomas, regional director North Asia at Wolters Kluwer Financial Services, said that “any money going to WeChat wallets, you don’t know the source of it.

“It’s spent somewhere else and possibly moves back into the banking system. That’s happening and it could easily be laundered money,” said the director of the company that provides risk management, compliance and auditing solutions for the financial services industry.

In his opinion, the sheer amount of financial innovation has complicated the anti-money laundering (AML) fight, as banks are unable to readily identify the source of cash flows via WeChat. “So it does open the floodgate (to higher risks),” Thomas told Shanghai Daily.

Although the China Banking Regulatory Commission has set up a new department to tackle issues with Internet banking, regulations aimed at containing new risks are still in development.

“Regulators are running behind the curve, trying to catch up with the pace of change,” Thomas said. The rapidly mutating forms of money laundering are just one of the many problems Chinese financial institutions face at a time of globalizing their operations.

The global crackdown on money laundering is put to serious test by the fast pace of growth in emerging markets, exerting considerable strain on the financial sector. “Financial firms in these markets are taking on tens of thousands of new customers every day, often without them attending a branch. This makes performance of Know Your Customer validations extremely difficult to complete without undue inconvenience to the customer,” said Corinne Saunders, CEO of the emerging and developing markets section at Wolters Kluwer.

According to Thomas, Chinese financial institutions have gained deeper understanding of money laundering and are starting to “go out looking for solutions.” Nonetheless, the regulatory oversight and their own self-monitoring are not yet fully effective.

A decade after the enactment of China’s first AML law in 2003, regulators issued guidelines to financial firms, urging them to establish risk control systems. The focus was to have their customers reassessed for risks in a dynamic way that reflects changes.

“The guidance said the institutions had to submit plans as to how they are going to implement these controls, and that was meant to have been completed by the end of last year,” said Thomas. “Many have missed the deadlines.”

“I think the guidelines are very good, but what I haven’t seen is a great deal of pressure from the regulator to make sure they are being imposed,” Thomas remarked.

He explained that although AML efforts have become a priority for regulators, the lack of incentives on the part of financial firms to implement self-monitoring has increased the difficulty of the job. But it would be in the interests of financial firms themselves to “enhance their AML controls to ensure that cross-validations, name checks and transaction histories can all form a part of their automated regular checks,” said Saunders.

Transparency

Transparency, however, may be a problem. “Most countries have extensive lists of people with criminal histories. But China doesn’t publish lists of that type,” said Thomas.

He added that the lack of lists is made up for, to a certain extent, with information published by Chinese courts on individuals convicted of financial frauds. His employer has compiled lists based on court sentences to appraise clients of high-risk individuals or locations.

And the necessity of background checks is not confined to customers, as the personal credit of financial firms’ employees is increasingly found to be a risk, said Jay Wang, managing director of the North Asia Pacific region for First Advantage, a company that provides employment background screening services.

“Banks lack background screening or recruitment standards, or just in terms of the day-to-day management of employee behavior,” said Wang.

Pointing to the fact that rapid expansion of foreign banks in the Chinese market has led to less rigor in vetting job candidates, he called for building employee risk profiles into the overall risk rating and control program of financial firms.

Thomas concurred. “Statistics in the US, in terms of money laundering where they caught people, show that more than 70 percent of the cases involve someone from within the financial institution.”

Tasked with cracking down on money laundering, China’s financial authorities raised the stakes with announcements early this year that interest rate liberalization reforms are “highly likely” this year, setting the stage for potentially more financial irregularities, including the risk of money laundering.

Thomas is optimistic that China will tighten its AML regulations prior to the FATF (Financial Action Task Force) compliance evaluation next year, when the country, a member of the intergovernmental body set up to combat money laundering, is due to be the next presiding inspector.

Chinese Views


 

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