China Joins the FATF | September 2007
By Cedric Lam and Liu Yang

The People’s Republic of China (China) became a full member of the Financial Action Task Force (FATF) on 28 June 2007, having first joined the FATF as an observer in January 2005. The FATF is an inter-governmental body formed in 1989 by the then G7 nations. It sets international standards and develops and promotes policies to combat money laundering and terrorist financing activities. It also provides a platform among national regulators to work together and share best practices in those areas.

Attaining full FATF membership is a significant event for both the government and private sectors in China. Chinese businesses and financial services providers will benefit as many regulators in the developed markets, including the US Federal Reserve, consider such membership as recognition of a country's anti-money-laundering efforts. It is also frequently seen as an indirect indicator of whether a financial institution from that country is operating to an internationally accepted standard. This may help, for instance, to pave the way for local Chinese banks to secure licenses to operate overseas. The new FATF member obligations could also serve as catalysts for the central government to clamp down on local corruption, a growing problem that provokes much concern in recent years among Party leaders in Beijing. The international pressure that comes with the FATF membership should also provide momentum to the Chinese government to escalate its effort in fighting related problems such as smuggling, drug trafficking and terrorism and safeguarding the economic and social order in China.

Full membership status means China must now implement approximately 40 FATF recommendations within a reasonable time frame and undergo a mutual evaluation process to assess its level of compliance with those recommendations. In practical terms, the things China must put in place include:

• laws that effectively criminalize money laundering and terrorist financing activities,
• laws that make it mandatory for Chinese financial institutions to identify their customers,
• requirements to keep customer records and report suspicious transactions, and
• an effective financial intelligence unit to collect, analyze, monitor and investigate possible money laundering activities in the country.

To prepare for its admission to the FATF, China had already passed a number of new national laws to target possible money laundering and terrorist financing activities in the country. The PRC Anti-Money Laundering Law and the Financial Institutions' Anti-money Laundering Regulations that came into force on 1 January 2007 are two good examples. Chinese regulators also put in place various new requirements for sensitive sectors such as banking, securities, real estate and insurance. These included the Measures on Administration of Financial Institutions' Reporting of Large and Suspicious Transactions, effective as of 1 March 2007. The efforts on the part of the Chinese authorities to strengthen the legal and regulatory framework have continued since China joined FATF, as evident from the Measures on Administration of Financial Institutions’ Authenticating the Identities of Customers and Preserving Customer Identity Information and Transaction Records that came into effect on 1 August 2007.

To fully live up to its obligations as a member of the FATF, much work remains to be done by the Chinese government. As with all new laws in China, the effectiveness of the various anti-money laundering and counter-terrorist financing initiatives will depend on their successful implementation in practice. That could be enhanced by ensuring support from lower-level government officials and fostering inter-provincial cooperation. Awareness, as well as determination, to apply and enforce the various new laws, regulations and measures by local prosecutorial and judicial authorities, as well as financial houses outside of the country’s major financial centers, will also be critical.

From a substantive standpoint, China, as an FATF member, will be expected to broaden the scope of application of its anti-money laundering and counter-terrorist financing regime to a wider range of non-financial businesses (e.g., jewelry companies) and professionals (e.g., law firms and accounting firms). Further efforts to curb the increasing misuse of legal persons and arrangements (such as the use of shelf companies in offshore tax havens like the British Virgin Islands) to hide or disguise the assets and/or particulars of transactions, and more proactive measures aimed at stamping out unlicensed remittance systems (a major channel for terrorist financing in China) will also be welcomed.

Joining the FATF is a very positive step that signals China’s determination to seriously tackle money laundering and terrorist financing activities, which some estimate now involves more than US$20 billion every year. As China continues to open up its economy under the World Trade Organization agreements, the opportunities for the illicit flow of capital will increase. FATF membership will help generate the necessary political will to bring about more legislative and regulatory reforms in coming years. Given the increasing economic significance of China, its role in global trade and therefore its strategic position in the world market, China’s membership in the FATF should also help in coordinating the anti-money laundering and counter-terrorist financing efforts of other countries.

Cedric Lam is a partner in the Advocacy practice group of Dorsey & Whitney's Hong Kong and Shanghai offices. His practice focuses on dispute resolution and intellectual property matters in Greater China. He counsels multinational corporations in a broad range of industries on various matters including anti-money laundering and the prevention of fraud and corruption Contact Details: Tel: + 852 2105 0289 Email: lam.cedric@dorsey.com

Liu Yang is a legal consultant in the Corporate practice of Dorsey & Whitney’s Shanghai office. She practices in the areas of foreign direct investment and general corporate matters in China, including without limitation, establishment of foreign-invested business entities, mergers and acquisitions, corporate financing, real estate, intellectual property and dispute resolution. Contact details: Tel: + 86 21 6135 6177 Email: yang.liu@dorsey.com