Resumen de Prensa

01/02/2007

Entra en vigor la nueva ley antiblanqueo en China (Moneylaundering.com)

Dirty banking executives laundering hundreds of millions of dollars obtained using fake invoices for nonexistent materials. Software executives enticing Chinese bankers to grant them exclusive business deals with luxurious golf getaways and costly shopping excursions.

Such revelations, made in Chinese government documents and a U.S. federal court in Florida, may become more common as Chinese financial institutions – and the U.S. and European banks entering the country’s market – scour account transactions in compliance with China’s first comprehensive anti-money laundering (AML) law.

The Law of the People's Republic of China on Anti-Money Laundering, which took effect Jan. 1, and its corresponding regulations go beyond the country’s previous patchwork regulations and require its financial institutions to develop money laundering controls with reporting and customer identification procedures in line with international standards. The new law allows the government to penalize institutions for non-compliance and launderers for a wider range of predicate crimes, including fraud, corruption and financial malfeasance.

China, which has opened its markets to foreign competition, is taking steps to curb corruption and financial crime to encourage U.S. and European investment in its economy, said Peter Gallo, whose Hong Kong-based company, Pacific Risk Ltd., consults businesses on money laundering and terrorist financing. China’s economy is expected to grow 10 percent this year, according to China’s National Bureau of Statistics. The success of the AML measures in the law also will determine whether China gains membership in the Financial Action Task Force (FATF), the global money laundering watchdog, Gallo said.

‘Conduit for reliable information’

The Chinese government estimates that the amount of money laundering through its financial system each year equals 3 percent to 5 percent of its gross domestic product (GDP). That means $90 billion was laundered there in 2005. The amount of money obtained through corruption reportedly equals nearly 15 percent of China’s annual GDP. The Chinese National Audit Office said that dishonest government officials alone embezzle or divert nearly $3 billion a month.

A 2006 World Bank Institute report concluded that China's control of corruption has eroded since 1996 and, in the same year, Transparency International ranked China, along with Russia and India, as the countries with the most bribery.

Corruption has led to “social unrest throughout the country in recent years,” said Gallo, a lawyer and former British military intelligence officer. “It’s probably the single greatest threat to the country’s stability. It’s endemic.”

The government has arrested thousands of banking executives and government officials for such crimes as accepting bribes and using retirement funds for their own gain. In fact, the government said it disciplined 47,036 senior government officials for bribery, embezzlement, misuse of public funds, money laundering and other financial crimes in 2005.

More than 4,000 of those officials fled to other countries with their dirty money, Gallo said.

In July 2006, Xinhua, China’s government-run news agency, identified countries where 40 Chinese officials fled while being investigated for corruption. Nine took $1.1 billion in dirty funds to the United States, according to Xinhua. Five went to Australia with $1.2 billion and three went to Canada with a reported $1.3 billion.

Gallo said the new law, passed Oct. 31, gives China more tools to prosecute corruption cases and creates a “conduit for reliable financial information independent of corrupt law enforcement agencies.”

‘Prime market’

Despite China’s struggles with corruption, non-Chinese banks and financial firms see new opportunities there since it opened its markets to foreign competition in December as part of its 2001 agreement to join the World Trade Organization.

China is “a prime market for financial service providers” because its middle class, which saves more than it spends, is growing wealthier, said Greg McBride, a senior financial analyst for Bankrate.com in Palm Beach, Fla.

Now, U.S. and European Banks including American Express, Bank of America, Credit Suisse, Goldman Sachs, HSBC, Merrill Lynch and Royal Bank of Scotland are paying billions of dollars to gain access to millions of such potential customers. The new law may reduce the perils of operating in China.

“There’s always a risk any time you are entering a new market, especially one that’s overseas and was as closed and protected for so long,” McBride said. “It increases the number of unknowns.”

With the new rules in place, China’s banks are trying to shed hundreds of billions of dollars in risky and non-performing loans. The Chinese government spent $400 billion in the last decade to cover the costs of problem loans that its state-run banks granted for political reasons, according to Jonathan Anderson, the chief Asian economist at UBS.

Non-performing loans at Chinese banks totaled $850 billion by 2005, according to Anderson, but that number could shrink to $200 billion by the end of the year because many institutions are writing them off.

‘Global fight’

China’s new anti-money laundering law and its corresponding regulations require several types of businesses – including depository institutions, securities firms, futures broker-dealers, insurance companies, leasing businesses and auto finance companies – to develop comprehensive AML programs with customer identification procedures, recordkeeping rules and suspicious and large transaction reporting requirements.

Those regulations meet international standards established by the FATF in its 40 Recommendations on Money Laundering. The Chinese government, however, does not regulate real estate agents, lawyers, casinos or precious metal dealers, as the FATF suggests in the recommendations.

Still, the initiative could help China, now an observer with the FATF, gain full membership in the organization.

“The new law will make a great contribution to the global fight against money laundering and terrorist financing and will have a major impact in the Asia-Pacific region,” FATF spokeswoman Helen Fisher said. “Criminals are attracted to countries that have weak anti-money laundering and counter-terrorist financing measures. China doesn’t want to be on that list.”

Hong Kong, for example, implemented AML legislation in 1989 and joined the FATF a year later.

Despite those rules, Gallo said, many of the funds in Chinese money laundering schemes move through Hong Kong.

For example, bank executives at a Bank of China branch in Kaiping defrauded the bank of more than $725 million during a 10-year period by granting sham loans to state-owned businesses involved in the scheme. Those businesses transferred the loan money to a small trading company in Hong Kong owned by Bank of China executives, then moved it abroad to the United States with fake invoices for nonexistent materials, according to Gallo’s report.

In January 2002, the U.S. Office of the Comptroller of the Currency (OCC) penalized the U.S. branches of the Bank of China $10 million for loan fraud filing fraudulent letters of credit, and other violations.

The OCC ordered the bank’s U.S. branches in New York and Los Angeles to develop safeguards against fraud, strengthen their risk management divisions, improve their know-your-customer policies and implement procedures to identify beneficial owners. Chinese regulators subsequently levied a $10 million penalty on the bank’s home operations.

In 2006, the U.S. Attorney’s Office in Nevada indicted two of the Bank of China managers who had defrauded the bank of $485 million for laundering $2 million of the stolen money through a Las Vegas casino, among other things.

U.S. companies that invest in Chinese banks with such corruption put themselves at risk, Gallo said.

Liu Liange, director of the People’s Bank of China’s money laundering bureau, said at a November seminar at Fudan University in Shanghai that Chinese banks will be relying a great deal on the counsel of U.S. companies.

She said, “Money laundering has been proved to be an emerging challenge for the whole world, while China lags behind Western countries in anti-money laundering experience and legislation.”

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