As foreign investors doing business in China, you may be not aware of the situation that some of your China-based business transaction may face a living nightmare of mandatory investigations by Chinese financial institutions under certain circumstances. Trying to avoid such investigations? Firstly, you will have to get some ideas about under which circumstances your transaction movements will trigger the bank investigations.
China is now in the stage of deepening anti-money laundering and Anti-terrorism work. According to Article 3 of the Anti-Money Laundering Law of the People’s Republic of China:
“The financial institutions established within the territory of the People’s Republic of China and the special non-financial institutions that are required by relevant regulations to perform the obligation of anti-money laundering shall, in accordance with law, perform their anti-money laundering obligation by adopting preventive and monitoring measures and establishing sound systems for distinguishing clients’ identities, and preserving the data for clients’ identities and records of transactions, and a report system for transactions involving significant amount of money and for doubtful transactions.”
For the purpose of regulating the reporting of significant amount and doubtful transactions by financial institutions, the People’s Bank of China (“PBOC”) issued its Administrative Measures for the Reporting of Large-value and Suspicious Transactions by Financial Institutions (“Administrative Measures”) which enforced on July 1, 2017. In accordance with these Administrative Measures, typically speaking there are two scenarios for which the foreign invested China based business will face the investigation ran by the banks. One is operating a significant amount transaction, and the other is operating a transaction that is reasonably deemed as doubtful transaction by any bank.
According to Article 5 of the Administrative Measures, “A financial institution shall report the following large-value transactions:
1. cash deposit, cash withdrawal, foreign exchange settlement or sale in cash, banknote exchange, cash remittance, payment of cash notes and cash receipts and payments in other forms with a single or the total RMB transaction(s) or foreign currency transaction(s) on the current day up to CNY50,000 or more, or the equivalent value of USD10,000 or more;
2. fund transfer between bank accounts of a non-natural person client and any other client with a single transfer or a cumulative total on the current day up to CNY2 million or more, or the equivalent value of USD200,000 or more;
3. domestic fund transfer between bank accounts of a natural person client and any other client with a single transfer or a cumulative total on the current day up to CNY500,000 or more, or the equivalent value of USD100,000 or more; and
4. cross-border fund transfer between bank accounts of a natural person client and any other client with a single transfer or a cumulative total on the current day up to CNY200,000 or more, or the equivalent value of USD10,000 or more.
The cumulative amount of transactions shall be calculated for each client, of which the receipts or payments of money shall be calculated accumulatively unilaterally and be reported, unless otherwise provided for by the PBOC.
The PBOC may adjust as necessary the reporting criterion on significant amount transactions as prescribed in Paragraph 1 of this Article.”
Regarding the standard for the banks to initiate preparation for and submit a report on doubtful transaction, it is prescribed in Article 11 of the Administrative Measures, stating that:
“a financial institution shall submit a report of doubtful transaction if it discovers or has reasonable grounds to doubt that any of its clients or funds or other assets, transactions or attempted transactions thereof is related to money laundering, terrorist financing or any other criminal activity, regardless of the amount of the funds or value of the assets involved.”
Although there is no detailed definition or classifications on the “doubtful transaction” in such Administrative Measures, references may be made to the following situations:
1. Fund being moved out in large quantities after coming into a financial institution in small amounts and in many batches within a short period of time or vice versa;
2. The frequency and amount of fund movement apparently not commensurate with the magnitude of an enterprise’s business operation;
3. Direction of fund movement apparently not commensurate with the range of business operation of an enterprise;
4. Current fund movement apparently not commensurate with the features of an enterprise’s business operation;
5. Regular occurrence of frequent fund movement apparently not commensurate with the nature and business operation of an enterprise;
6. Frequent fund movement within a short period of time between the same receiving party and the same paying party;
7. Sudden and frequent fund movement in and out of an account that has been dormant for a long time;
8. An enterprise frequently receiving individual remittance that is obviously unrelated to its range of business within a short period of time;
9. Cash deposit and withdrawal whose amount, frequency and use are apparently different from the normal fund movement of a customer;
10. The accumulated cash movement through an individual bank settlement account exceeding RMB one million yuan within a short period of time;
11. Frequent fund transfer within a short period of time to and from customers located in regions with serious drug-trafficking, smuggling and terrorist activities;
12. Accounts being opened and closed frequently, and experiencing large fund movement before being closed;
13. Breaking large-value fund movement up into small amounts deliberately in order to escape significant amount transaction monitoring.
Therefore, when doing business transactions in China, enterprises should, as far as possible, pay attention to the definition and scope of the significant amount and doubtful transactions in order to prevent and avoid relevant investigations ran by Chinese financial institutions in a timely manner.