Money laundering and the financial activities of terrorists pose a serious threat to the national security and the social stability of our globally connected financial environment. In response to these challenges, China has embarked on a significant overhaul of its Anti-Money Laundering (AML) legal framework to strengthen financial supervision and increase the effectiveness of AML and anti-terrorist financing through legal means. In June 2021, The People’s Bank of China (PBoC) published the amended Anti-Money Laundering Law (AMLL) for public comments. In 2023, this was included in the legislative work plan of the State Council. On April 23, 2024, the Draft Amendment to the Anti-Money Laundering Law (the “Amended AMLL”) was submitted to the 14th Standing Committee of the National People’s Congress for initial legislative deliberation1, representing a substantial step forward in the legislative process. On April 26, 2024, the Amended AMLL was released for public consultation2 for 30 days.
In this briefing, we highlight the key amendments proposed in the Amended AMLL and examine the implications for financial institutions, specific non-financial institutions, general entities and individuals.
1. Background and Significance
China’s existing AMLL is insufficient to meet the current regulatory needs in the rapidly evolving financial environment. The Amended AMLL is an important supplement and improvement to the existing legal regime, and reflects the determination of the Chinese government to stamp out money laundering. It is also a positive move in aligning China’s AML regulations with international standards.
2. Key Amendments
2.1 Emphasis on National Security. In Article 1, the Amended AMLL clearly states that AML work should serve national security interests, reflecting the high importance that China attaches to financial security.
2.2 Expanding the Definition of AML. Article 2 expands the definition of AML so that AML refers to actions taken against all forms of money laundering and related criminal activities (currently, only seven crimes are dealt with under the AML), as well as terrorist financing, which greatly expands the applicability of the law.
2.3 Emphasis on Money Laundering Prevention and Management. Article 3 indicates the importance of money laundering prevention and management and requires entities to establish sound risk prevention systems.
2.4 AML Obligations. Articles 5 and 36 emphasize the obligations of entities and individuals in AML work, including cooperating with due diligence checks, and reporting suspicious transactions. Financial institutions have the right to take measures against anyone who refuses to cooperate.
2.5 Extra-territorial Applications and Cross-border AML Investigations. Article 10 clarifies that the Amended AML may apply to money laundering and terrorist financing activities that occur overseas. Article 46 provides that China’s state organs may, based on the principle of reciprocity or upon consensus, require overseas financial institutions and their domestic agencies to cooperate with money laundering and terrorist financing investigations, and may punish overseas financial institutions that refuse to cooperate or place it on the sanction list. Pursuant to Article 47, domestic financial institutions shall not directly respond to a foreign country or organization’s requests for information or actions taken against such assets, without authorization and shall promptly report this to the financial authorities of the State Council. Domestic financial institutions’ legal provisions regarding overseas information shall comply with Chinese laws and regulations on data security and personal information protection.
2.6 Clarifying the Concept of Beneficial Owners. Article 61 defines a beneficial owner as a natural person who ultimately owns or controls a legal person or unincorporated organization or enjoys the ultimate benefits of the legal person or unincorporated organization. Articles 17 and 55 require institutions to update, keep and report the relevant information of the beneficiary owners to the registration authorities in a timely manner. Financial institutions and specific non-financial institutions shall inquire and check information regarding beneficial owners according to the law when performing AML obligations.
2.7 Expanding the Scope of Entities Subject to AML Obligations. Pursuant to Articles 59 and 60, non-bank payment institutions and specific non-financial institutions are subject to AML obligations. It also defines the scope of non-financial institutions.
2.8 Clarifying Regulatory Inspection Measures and Procedures. Articles 19, 20, and 41 provide detailed provisions for the regulatory inspection measures and procedures that can be taken by regulatory authorities against financial institutions.
2.9 Delegating Investigative Power. Pursuant to Article 40, the AML investigative power is delegated to cities with districts, which improves the efficiency of investigations.
2.10 Legal Status of Third-party Service Providers. Articles 24 and 30 clarify the legal status and obligations of third-party service providers such as AML consultants, information technology, and professional competence evaluation agencies. However, financial institutions remain primarily responsible for AML work, and they should bear responsibility for the negligence of third-party service providers.
2.11 Strengthening and Extending Current KYC Obligations. Article 26 requires financial institutions to conduct due diligence on customer identities, transaction backgrounds, and risk status, which extends the KYC obligations of financial institutions under the existing AMLL. Article 29 stipulates that financial institutions should not open accounts for customers who use other identities. This means that financial institutions are obligated to verify authorizations to open accounts for others. Article 31 stipulates that financial institutions are authorized to make inquiries regarding other administrative institutions outside the public security and administration of market regulations for customer due diligence purposes, including but not limited to administrative institutions for civil affairs, taxation, immigration management, and telecommunications management. This will enhance the capabilities of financial institutions regarding information-sharing and cooperation.
2.12 Ongoing Risk Management Requirements. Article 28 requires financial institutions to continue customer due diligence and other money laundering risk management measures during business relationships.
2.13 Information Sharing and Confidentiality Obligations. Article 35 requires Chinese financial institutions and financial holding companies that have branches or control other financial institutions domestically or overseas to establish a unified AML regime at the headquarters or group level. It also sets forth the information sharing mechanism and confidentiality obligations.
2.14 Legal Remedies.Articles 37 and 38 set out the legal remedies for entities and individuals who have objections to the money laundering risk management measures taken by financial institutions or state organs, including raising objections to relevant financial institutions, or filing administrative complaints, administrative reviews, and/or court proceedings against the relevant state organs.
2.15 Increasing Punishments. Articles 49 to 54 increase the punishment for violations of AML regulations, including penalties for financial institutions, their directors, supervisors, senior executives, and directly responsible personnel. Financial institutions that violate AML regulations may be fined up to RMB 10 million, or from half to twice the amount involved, or up to five times the amount of the total economic losses caused. Financial institutions, their directors, supervisors, senior executives, and directly responsible personnel may be restricted or prohibited from engaging in work in the financial industry by financial regulatory authorities. These individuals need to prove that they have diligently and responsibly taken AML measures in order to be exempt from liability.
3. Implications for Financial Institutions
The Amended AMLL imposes stringent compliance requirements on financial institutions, particularly in the areas of customer due diligence, risk management, and internal controls. Financial institutions will need to review and strengthen their AML policies and procedures to ensure compliance with the new legal standards.
4. Implications for Specific Non-Financial Institutions
Specific non-financial institutions, including real estate developers or their intermediaries, accounting firms, law firms, notaries, and dealers of precious metals and gems, will be subject to AML obligations. They will need to establish AML internal controls and fulfill customer due diligence obligations required by law.
5. Implications for General Entities and Individuals
The Amended AMLL emphasizes the AML obligations of all general entities and individuals, including cooperating with due diligence checks and reporting suspicious transactions. A heightened awareness and proactive approach to AML work across all sectors of society is needed and it requires building a basic AML mechanism to deal with business activities that may involve money laundering risks.
6. Outlook
After the formal promulgation of the Amended AMLL, AML supervision in China will be tightened and China’s AML legal framework is expected to become more robust and rigorous. Financial institutions and relevant entities and individuals will need to closely monitor the legislative process and adjust their compliance strategies to adapt to the new legal environment.
For further information, please contact:
CHEN, Xin (Michael), Partner, JunHe
chenxin_michael@junhe.com
1. http://www.npc.gov.cn/npc/c2/c30834/202404/t20240424_436673.html
2. http://www.npc.gov.cn/flcaw/userIndex.html?lid=ff8081818e750bc6018f1482a3b71a57
