Chinese banks must rate their clients' risk of criminal conduct on a scale of 1-5 as part of the central bank's moves to curb money laundering and fraudulent transactions estimated at hundreds of billions of dollars a year.
The new rules come as some experts cite China as the world's biggest source of 'dirty' funds and as it faces growing foreign pressure to scrutinise its financial links with North Korea and block cash transfers tied to Pyongyang's nuclear ambitions.
Global Financial Integrity, a Washington-based financial watchdog, estimated in December that China accounted for almost half of the $858.8 billion of illicit funds flowing into tax havens and western banks in 2010 - more than eight times the amounts for runners-up Malaysia and Mexico.
Over an 11-year period from 2000, China was home to $3.8 trillion worth of illicit financial flows originating from corruption, crime or tax evasion, the watchdog said. The numbers cannot be verified as there are few estimates in the market. The People's Bank of China (PBOC), the central bank, issued its new anti-money laundering rules to financial institutions in December, requiring them to rate clients' risks based on their location and the nature of their businesses, including their levels of transparency, five accountants and bankers with knowledge of the rules said. The rules were not publicly announced, and banks and insurance firms have to implement them by December 2015, the accountants and bankers said.
A person at the central bank, which oversees China's fight against money laundering, said the changes are intended to finesse regulations and improve monitoring efficiency. "One of the main goals is to change the method of regulation. Initial regulations were very cumbersome," he said, declining to be named due to the sensitivity of the subject. Financial institutions must now identify their riskiest clients and exercise discretion when reporting suspect deals. In the past, clients were rated against a checklist of money laundering traits without differentiating risk levels. That led financial institutions to inundate authorities with information and false leads that impeded checks, experts said.
The Financial Action Task Force (FATF), an international money-laundering watchdog, said in 2012 after a review of China that the central bank received 8 million reports in two years from financial institutions flagging possible criminal conduct. About 87 percent of those reports were filed because they fitted a type of transaction defined in the checklist and lacked any "subjective element of suspicion", the FATF said. "In the industry, there is a term for this. It's called vengeful reporting of data: since I don't want to be held responsible, I'll report everything to you," the central bank source said. While the FATF's review praised China's "good progress" in tightening money-laundering controls in more than a dozen areas, it raised concerns about inadequate efforts to freeze what it called terrorist-related assets and comply with international agreements on terrorism financing.
The number of money-laundering convictions in China, which the FATF had previously said was too low, was shown to have improved in the review, but with qualifications. Total convictions rose to 32,510 in 2008-10, up from just 150 in 2002-06, the FATF said, noting, the increase was driven by convictions for "receiving stolen goods", not money laundering.