A New Chapter in Crossborder Anti-money Laundering Supervision
The promulgation of the Guideline has further regulated and strengthened the supervision on money laundering and terrorist financing in cross-border transactions by financial institutions and provided strong support for cross-border anti-money laundering supervision.
On January 20，2021，the People’s Bank of China and the State Administration of Foreign Exchange (SAFE) jointly issued the Guideline for Combating Money Laundering and Terrorist Financing in Cross-border Transactions of Banks (Trial) (hereinafter referred to as the Guideline). The Guideline has further incorporated the instructions of the 2018 Anti-Money Laundering Work Conference for the Financial System and the 10th session of 2019 Inter-ministerial Joint Conference on Money Laundering，aiming to regulate banks’ management on cross-border transactions to further consolidate and strengthen the “first line of defense” against money laundering and effectively prevent the risks of money laundering，terrorist financing and illegal cross-border capital flows.
Background
The first is to prevent cross-border money laundering risks and safeguard national economic and financial security. In recent years，emerging financial businesses，tools and platforms have greatly increased the scale and frequency of cross-border capital flows，and made risks gather more easily. With cross-border trade and investment being facilitated and the financial market opening in two ways，the task of preventing risk of money laundering in cross-border transactions is getting harder. In response，the SAFE has been taking measures to crack down on illegal cross-border financial activities，especially illegal private banks and cross-border gambling，and block the channels for flight of capital from upstream criminal activities in a timely manner. So far，it has uncovered several illegal private bank and cross-border gambling cases jointly with the public security authority，providing solid support for anti-money laundering of cross-border businesses in China. However，with China further opening up to the outside world，cross-border money laundering and terrorist financing activities have become more concealed and complicated. To ensure national economic and financial security，it is imperative to improve banks’ ability of anti-money laundering and anti-terrorist financing in cross-border transactions. In this regard，despite the gradually maturing anti-money laundering and anti-terrorist financing supervision system in China in recent years，there is still a lack of comprehensive and systematic regulatory measures for the prevention and control of money laundering and terrorist financing risks in cross-border transactions of financial institutions. The Guideline has filled this gap and provided strong support for cross-border anti-money laundering supervision.
The second is to integrate with international regulatory standards and implement the rectification requirements for mutual evaluation on anti-money laundering. Strengthening the supervision on money laundering and terrorist financing is the general trend for international financial supervision ，and has also become an important means for China to participate in global governance and expand the two-way opening-up of the financial market. At present，the international community has established a complete set of anti-money laundering standards and implementation mechanisms，which has put forward higher requirements for the anti-money laundering work in China. In February，May and August 2019，China’s mutual evaluation report on anti-money laundering and anti-terrorist financing was reviewed by the Financial Action Task Force (FATF)，the Eurasian Group on Combating Money Laundering and Financing of Terrorism (EAG)，and the Asia/Pacific Group on Money Laundering (APG) and entered the “enhanced follow-up” stage. In order to ensure the follow-up rectification requirements raised in the mutual evaluation will be met，the People’s Bank of China analyzed the problems pointed out in the mutual evaluation report，drafted a rectification plan and defined the roles and responsibilities for the rectification. In December 2019，the 10th session of the inter-ministerial joint conference on money laundering was held to further promote the follow-up rectification of mutual evaluation. The promulgation of the Guideline is exactly a manifestation of China actively improving cross-border anti-money laundering supervision and advancing the follow-up rectification of mutual evaluation. Through timely revision and improvement of the anti-money laundering and counter-terrorist financing rules and regulations for cross-border transactions，the cross-border anti-money laundering requirements are incorporated in the daily supervision of financial institutions，so that financial institutions will assume the main responsibilities for anti-money laundering supervision in cross-border transactions.
The third is to push financial institutions to continuously improve their anti-money laundering compliance and risk management levels. The further two-way opening-up of the financial market enables market players to utilize both domestic and foreign markets and resources to optimize their capital allocation efficiency，but at the same time，it also facilitates cross-border money laundering activities. In practice，some financial institutions have not paid enough attention to cross-border anti-money laundering ，with obvious deficiencies in cross-border customer identification，risk assessment and due diligence，which is not conducive to the effective prevention and control of money laundering and terrorist financing risks in cross-border transactions and also increases the risk exposure of these financial institutions in the process of “going abroad”. Therefore，it is imperative for banks to strengthen their awareness of cross-border money laundering and anti-terrorist financing risks，improve their own cross-border money laundering risk management and control mechanisms，and monitor，identify，and prevent cross-border money laundering and terrorist financing risks in a timely manner.
Main Features
The Guideline consists of six chapters and thirty-five articles，providing anti-money laundering and anti-terrorist financing working standards for banks and other financial institutions in entity identification，risk identification and due diligence，reporting system and data retention，and internal control. It has organically integrated anti-money laundering management requirements with transaction authenticity and compliance management principles and mainly have the following features.
First，the Guideline is consistent with international practices. Judging from the experience of international anti-money laundering supervision，regulatory agencies generally regard financial institutions as the forefront and main pillar of anti-money laundering supervision. Among them，banks are at the center of the national payment system and the financial assets collection and transfer process，and provide financial services directly to customers. They are the best and most suitable agencies for identifying and discovering various illegal transactions. However，for a long time，due to the lack of accurate and in-depth understanding of money laundering risks，banks have not been playing an effective role in monitoring and assisting in cracking down on unusual and suspicious cross-border transactions. Therefore，based on international practices，the Guideline provides the due diligence requirements for banks in cross-border transactions according to the operation characteristics and business processes of banks to make sure banks’ fulfilling their responsibilities. At the same time，it requires non-bank financial institutions，non-bank payment institutions，clearing institutions，franchised institutions for domestic and foreign currency exchange for individuals and other institutions engaged in cross-border businesses to also follow the standards，and urges them to actively fulfill the responsibilities of identifying，evaluating，monitoring and controlling money laundering and terrorist financing risks in cross-border transactions.
Second，the Guideline is issue-oriented. In recent years，with the SAFE continuing to streamline administration and delegate power to the lower levels，the authority for scrutiny of related transactions has been delegated to banks. Whether banks can conduct effective scrutiny of the authenticity and compliance of relevant transactions during the business processing will directly affect the effectiveness of the risk prevention and control of cross-border money laundering. According to the results of the special inspection by the SAFE on foreign exchange transactions，one of the main reasons for the frequent occurrence of cross-border money laundering violations in banks lies in the immature internal control and compliance systems and their lack of abilities in risk identification，evaluation，and monitoring of relevant transactions. What is more serious is that some individuals inside the banks are involved in illegal and criminal activities. In this regard，the Guideline requires banks to be risk-based，and truly perform their duties of “know your customer，know your business，and due diligence” and effectively identify，evaluate，monitor and control money laundering and terrorist financing risks in cross-border transactions.
Third，the Guideline has refined the regulatory requirements. The Guideline focuses on cross-border supervision responsibilities. Under the current anti-money laundering legal framework，and according to the features of cross-border transactions and the foreign exchange management practices，the Guideline has put forward detailed requirements for banks’ anti-money laundering with respect to cross-border transactions，and emphasized that the identification，assessment，monitoring and control of money laundering and terrorist financing risks should be carried out through the entire cross-border transaction process，including background investigation，business review，continuous monitoring and information retention. It has also specified the key items that banks should pay attention to in customer due diligence and cross-border transaction scrutiny，and requires banks to conduct risk assessment and classification for different types of customers and cross-border services and products，so as to apply differentiated anti-money laundering and anti-terrorist financing risk management measures. In short，the Guideline has provided the direction and reference for banks in fulfilling their anti-money laundering and anti-terrorist financing responsibilities.
Fourth，the scope of management covers cross-border transactions in both domestic and foreign currencies. With the renminbi internationalization and the advancement of capital account convertibility，the scale and proportion of renminbi cross-border transactions are constantly increasing，and thus it has become imperative to accelerate the integrated supervision on cross-border transactions in both renminbi and foreign currencies. In practice，some market players commit cross-border money laundering activities by utilizing the different policies and regulatory requirements for cross-border transactions in yuan and foreign currencies，which further complicates the cross-border money laundering risks. To this end，the Guideline adheres to the integrated management framework for both domestic and foreign currency transactions，with definition，specific rules and regulatory requirements currency-insensitive ，in order to fully cover cross-border transactions and further curb cross-border money laundering activities.
Requirements for Bank Operations
First，banks need to shift from “compliance-based” to “risk-based”. In the past，banks tended to implement uniform and consistent compliance requirements for different entities，products and businesses in foreign exchange transactions. Now，in accordance with the requirements of the Guideline，banks need to take various factors into account in the prevention and control of money laundering and terrorist financing risks in cross-border transactions. While ensuring foreign exchange compliance，banks need to further strengthen risk identification，assessment and prevention according to the requirements of the Guideline and carry out due diligence commensurate with the risks of customers and businesses to improve the quality and efficiency of risk prevention and control.
Second，banks need to shift from process-oriented to result-oriented. Unlike the previous requirements that focus on the process of foreign exchange operations and the measures and procedures of materials review，the Guideline emphasizes that the objective of supervision is to regulate the management on cross-border transactions by banks and prevent the risks of money laundering，terrorist financing and illegal cross-border capital flows. In terms of specific due diligence measures，the Guideline insists that due diligence should be result-oriented. It allows banks to determine effective risk management methods based on their own operations. For low-risk customers or businesses，scrutiny measures can be simplified accordingly; for high-risk customers or businesses，banks should take enhanced scrutiny measures，ask customers to provide or actively collect more direct proof materials and carry out third-party or online verification to gain in-depth understanding of customer identification and transaction background and enhance the effectiveness and accuracy of supervision.
Third，the supervision should shift from case-by-case scrutiny to full-cycle monitoring. In accordance with the requirements of the Guideline，the identification，assessment，monitoring and control of money laundering and terrorist financing risks in cross-border transactions need to be carried out by banks through the entire cross-border business process. At the front end，banks should extend the transaction authenticity scrutiny to customer identification and permission，and establish the concepts of customer risk identification，account opening permission and classified management; at the mid end，the scrutiny should shift from the pro forma compliance of transaction documents to the substantive compliance involving commercial rationality and logical rationality; at the back end，the supervision should expand from the prior review of each transaction to the continuous monitoring of customer identities and capital transaction behaviors.
Finally，the banks should strengthen the construction of the internal control and compliance systems. At present，some banks are still not paying enough attention to money laundering and terrorist financing，and lack of accurate understanding of anti-money laundering and anti-terrorist financing costs. In order to implement the requirements，banks should，in the future，continue to explore and strengthen the construction of internal control and compliance systems according to the cross-border business processes and management requirements，establish management systems and separation of duties for the identification，evaluation，monitoring and control of money laundering and terrorist financing risks，carry out regular audits and evaluations，correct and rectify problems in a timely manner，thus continuously improving their abilities of combating cross-border money laundering and terrorist financing.