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April 2019

Anti-money laundering and counter-terrorist ?nancing measures China Anti-money laundering and counter-terrorist financing measures

People's Republic

of China

Mutual Evaluation Report

2019
The Financial Action Task Force (FATF) is an independent inter-governmental body that develops and

promotes policies to protect the global financial system against money laundering, terrorist financing

and the financing of proliferation of weapons of mass destruction. The FATF Recommendations are recognised as the global anti-money laundering (AML) and counter-terrorist financing (CTF) standard. For more information about the FATF, please visit the website: www.fatf-gafi.org. This document and/or any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. This assessment was led by staff of the International Monetary Fund, and adopted by the FATF at its February 2019 Plenary meeting.

Citing reference:

© 2019 FATF-. All rights reserved.

No reproduction or translation of this publication may be made without prior written permission. Applications for such permission, for all or part of this publication, should be made to the FATF Secretariat, 2 rue André Pascal 75775 Paris Cedex 16, France (fax: +33 1 44 30 61 37 or e-mail: contact@fatf-gafi.org).

Photo Credit

- Cover: © Getty Images FATF (2019), Anti-money laundering and counter-terrorist financing measures - People's Republic of China, Fourth Round Mutual Evaluation Report, FATF, Paris

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MUTUAL EVALUATION REPORT ................................................................................................ 19

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CHAPTER 1. ML/TF RISKS AND CONTEXT .............................................................................. 21

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CHAPTER 2. NATIONAL AML/CFT POLICIES AND CO-ORDINATION ............................. 41

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CHAPTER 3. LEGAL SYSTEM AND OPERATIONAL ISSUES ................................................ 49

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CHAPTER 4. TERRORIST FINANCING AND FINANCING OF PROLIFERATION ............ 89

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CHAPTER 5. PREVENTIVE MEASURES ................................................................................... 113

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CHAPTER 6. SUPERVISION ......................................................................................................... 131

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CHAPTER 7. LEGAL PERSONS AND ARRANGEMENTS ...................................................... 155

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CHAPTER 8. INTERNATIONAL CO-OPERATION .................................................................. 165

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TECHNICAL COMPLIANCE ANNEX .......................................................................................... 181

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Glossary of Acronyms ........................................................................................................................ 275

Executive Summary 1. This report provi des a summary of the anti-money laund ering/combating the

financing of terrorism (AML/CFT) measures in place in -Š‡ 0‡‘"Ž‡ǯ• 2‡"—"Ž‹... ‘ˆ China

(China)1 as at the date of the onsite visit (July 9Ȃ27, 2018). It analyses the level of compliance with the Financial Action Task Force (FATF) 40 Recommendations and the how the system could be strengthened.

Key Findings

a) China has undertaken a num ber of i niti atives sinc e 200 2 that have contributed positively to its understanding of ML/TF risk, although some important gaps remain. Its framework for domestic AML/CFT co-operation and co-ordination is well established.

36 PBC provi ncial branches has high potenti al to produce finan ci al

intelligence that supports the operational needs of competent authorities but its current functioning results in incomplete access by all parts of the FIU to all data, a fragmented analysis and disseminations, and limits the development of a holistic view. Therefore, major improvements are needed. c) LEAs ha ve access to and use a wide rang e of finan cial in telli gence throughout the lifetime of an investigation, but financial intelligence is not driving ML investigations. When using financial intelligence, LEAs identify predicate cri minal behaviours and a ctively investi gate these. Predicate crime investigation outcomes reflect that China has capable LEAs that are skilled in the inv estigation of complex financial crime and associated predicate cri me. Effective, proport ionate, and dissuasi ve sanctions are available and are applied for ML. d) China has an institutional framework in place to investigate and prosecute TF activities, in line with its understanding of TF risks and in line with its strategy to prevent TF and disrupt TF channels. Since the implementation

1 The following territories were not included as part of this assessment: Hong Kong Special

Administrative Region ( Hong Kong, China ), Macau Sp ecial A dministrative Region (Macau

China) and Chinese Taipei.

6 Ň 6 Ň )$7)C0(201ED 6 Ň

6 | EXECUTIVE SUMMARY of a new counterterrorism law in 2015 and related interpretations, the

number of TF prosecutions and convictions has increased. e) The implementation of TF and PF targeted financial sanctions is negatively affected by three fundamental deficiencies, related to (i) scope of coverage of the requirements and a lack of a prohibition covering all persons and entities; (ii) the types of assets and funds of designated entities that can in practice be frozen, and the type of transactions that can be prohibited; and (iii) a lack of implementation without delay for non-domestic designations. That said, the CTL and relevant PBC Notice are a good starting point for future updates to the legal system in line with revised FATF standards, and to improve effectiv e implementation. While not covered by the FAT F standards, authorities have taken measures in relation to other aspects of

UNSCRs related to DPRK.

f) While FIs have a satisfactory understanding of their AML/CFT obligations, they have not dev eloped a sufficient under stan ding of risks. Measures implemented to miti gate ri sk are generally not co mmensurate wi th different risk situations. g) ǯȀT supervisory system is almost exclusively focused on the financial sector, as t here are no effe cti ve prevent ive or supervisory measures in res pect of the DNFBP sector. Th e PBC has an inadequate understanding of risks overall. A lthou gh their unders tand ing of risk impacting the financial sector is adequate, its understanding of institution- rather than that of the authorities. h) China handle s MLA and extraditi on requests in accordance with the procedures and stan dards for approval stipulated by dom esti c laws, bilateral treaties and multilateral conventions, but due to a complicated decision-making structure for providing MLA or executing extradition requests, it is often a protr acted process. A t the s ame ti me, China can arrange an expedited procedure for urgent requests or cases. There is an effective cooperation in some areas b etween China and some of its neighbours, however, there is a lack of data that would establish effective implementation of ML/TF related co-operation.

Risks and General Situation

2. The main proceeds-generating predicate cr imes i n China are illegal

fundraising, fraud, traffic king in i llicit drugs, corruption and bribe ry, tax crimes, counterfeiting of products, and illegal gambling.

3. China face s a serious th reat fro m terrorism. From 2011 to 2016, C hina

registered 75 terrorist incidents that killed 545 people. The main conflict area and focus for t he authorities is the northwest provi nce of X injiang, from where the "Eastern Turkistan Islamic Movement" (ETIM) operates, but attacks occur

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foreign terrorist fighters in Syria and Iraq2.

4. With total assets of approximately RMB 252 trillion, banks dominate financial

sector activity in China. Based on nature of their products/services and volume of activity, they are considered to be highly vulnerable to abuse with respect to ML/TF. China has witnessed a rapid increase i n the activi ty of online lending entities, primarily via mobile phone platforms

5. The lack of coverage of designated non-financial businesses and professions

(DNFBPs) by the AML/CFT framework is a significant vulnerability. The absence of coverage of do me stic politically exposed per sons (PEPs) is another s ignificant vulnerability, which is particularly noteworthy in the context of a country where corruption is a major predicate offence and state-owned-enterprises play a dominant role in the economy.

6. A large amount of illicit proceeds flows out of China annually. As noted in the

NRA, between 201 4 and 2016 , illi cit pr oceeds totalling RMB 8 64 billion were repatriated to China from over 90 countries. China indicates that illicit proceeds also flow out of the country through underground banking operations. There are several instances in which criminals have fled the country, including suspects in corruption cases. The abuse of legal persons has also been identified as a method of laundering illicit proceeds. Such abuse is facilitated, in part, by ineffective arrangements in place for registering and retaining beneficial ownership (BO) information. Overall Level of Effectiveness and Technical Compliance

7. China has a good legal framework with respect to the criminalization of ML

and TF, national coordination arrangements, the powers and responsibilities of law enforcement authorities and arrangements for international cooperation. There is scope for strengthening the legal framework with respect to a number of preventive measures and the coverage and supervision of DNFBPs.

8. An incomplete understanding of risk impacts negatively on the effectiveness

2 See for example The Soufa n Group Fore ign Fighters Upd ate Final 2015

(www.soufangroup.com/foreign-fighters), but also see paragraph 230 of this report for other estimates (up to 300 persons).

8 Ň 8 Ň )$7)C0(201ED 8 Ň

8 | EXECUTIVE SUMMARY implementation of preventive measures by FIs, the supervision of these institutions

and the in vestigation and prosecution of ML. We akness es in ins tituti onal arrangements and related practice s impac t negatively on the effec tiveness with respect to the use of financial intelligence.

9. There are si gn ificant weaknesses in both tec hnical compliance and

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