Chinese Banks Warned On Anti-Money Laundering Compliance

A seasoned financial adviser has warned Chinese financial institutions of serious consequences if they continue to lag behind international partners in anti-money laundering (AML) compliance.

A survey recently published by AlixPartners, a global business advisory firm, showed that a significant number of financial institutions lack both adequate anti-money laundering and sanctions compliance budgets and training for their boards.

In the survey, 32% of respondents said they considered the AML and sanctions-compliance budgets at their companies to be “inadequate” or “severely inadequate”, while 20% of respondents said their board was not receiving AML and sanctions training and regular briefings, despite many new compliance standards having recently been implemented around the world. AlixPartners regards this as a sign that an understanding of AML and sanctions risks has not fully permeated the upper reaches of many financial institutions.

“Both AML and sanctions compliance will continue to pose a significant challenge not only for Chinese banks, but all banks operating internationally,” Sven Stumbauer, the New York-based managing director of the financial advisory services practice at AlixPartners, told China Business Law Journal. “However, given the investigations and enforcement actions that have occurred over the past few years, it would appear that Chinese banks are still playing catch up and need to increase their focus on AML and sanctions compliance.”

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

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

Stumbauer said some mainland Chinese banks had established new relationships with these financial institutions. “Both boards of directors and senior management need to pay close attention to these types of high-risk relationships and make a determination as to whether the current risk management practices are adequate to not only comply with local AML rules and regulations, but global standards as well,” he said.

“I think it’s safe to say that mainland Chinese banks do not want to be known for placing a greater priority on profits over compliance with AML rules and regulations. The resulting reputational damage, coupled with potential enforcement actions, would certainly impact the growth mainland Chinese banks have experienced in the past decade.

“It’s important that Chinese banks focus on AML/sanctions compliance holistically, and that they have active involvement from the head office’s board of directors. Also, it is critical that Chinese banks adopt AML/sanctions policies and procedures that not only follow the letter of the law, but the spirit of the law and leading industry practices.”

Stumbauer stressed the leading role of the board of directors. “Without significant board involvement, Chinese banks will continue to face exposure to potential regulatory action in the US and globally,” he said. “Though this is a challenge for most financial institutions that operate globally, it seems to be a significant challenge for Chinese financial institutions as they mature and expand globally.

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

Stumbauer suggested that when operating in a global environment, Chinese banks should consider revisiting and potentially enhancing the following:
(1) AML/sanctions risk assessment of its products and customers; (2) AML/sanctions risk assessment of its counterparties, especially its correspondent banking relationships; (3) customer due diligence; (4) automated transaction monitoring systems to detect potentially suspicious activity; (5) automated transaction monitoring systems to detect potential sanctions violations; and (6) reporting of suspicious activities to authorities.

Stumbauer said mainland Chinese banks had been expanding their AML/sanctions compliance teams, however “the robustness of a bank’s AML/sanctions compliance structure is not only a matter of resources and headcount, but also a matter of the quality and effectiveness of the controls being implemented and a full understanding of the AML/sanctions risks posed by certain counterparties”.