Increasing regulatory pressure from domestic and international regulators as well as an explosion in the number of sanctions and politically exposed persons (PEPs) are among the issues weighing heavily on financial institutions in China as they continue to ramp up efforts to mitigate the risk of money laundering and terrorist financing.
Institutions are also facing more significant penalties for anti-money laundering (AML) violations. As of 2018, People’s Bank of China (PBOC) has fined financial institutions ranging from 700,000 yuan to 10 million yuan for failing to perform proper customer identification checks, keeping customer data and transaction records, and reporting large or suspicious transactions.
While some progress has been made, gaps still remain. This was noted in the June 2019 International Monetary Fund (IMF) report, which reviews compliance with the Financial Action Task Force (FATF) 40 Recommendations. Institutions appear to grasp their obligations regarding anti-money laundering and combating the financing of terrorism (AML/CFT), but don’t always understand the full risks and exposures of these financial crimes. As a result, they fail to apply a “risk-based approach” that is commensurate with the type of risk identified. The IMF report also cited weaknesses in ongoing due diligence and transparency in beneficial ownership.
To gain further insights, Accuity conducted a survey with the leading banks’ compliance and AML professionals in China. Results of the survey highlighted the compliance screening issues, processes, and challenges financial institutions are facing and the steps they are taking to respond.
Identifying compliance challenges
60% of survey respondents cited repeated checks/manual processes as the number one challenge in the compliance screening process. Lack of quality reference data and extended working hours were the next most-cited challenges and were tied at 44%.
The reliance on manual processes – which indicates a lack of automation – and absence of dependable reference data are significant foundational issues that contribute to the other “downstream” challenges highlighted by respondents: multiple checks, longer working hours, difficulty in implementing internal compliance policies, and lack of an audit trail for explainability.
The search for quality data
Gathering critical reference data is increasingly difficult, particularly with sanctions and PEP lists growing daily. Accuity observed that, overall, there has been a 36.6% increase in just OFAC sanctions record counts in the last five years, with 242 updates from major regulators in economic sanctions in 2019. These included Her Majesty’s Treasury (HMT) in the UK, the United Nations (UN), the European Union (EU), and OFAC.
Another issue compounding the difficulty of gathering reference data is the lack of an authoritative definition of a PEP and corresponding database. As a result, financial institutions are finding that various reference lists of PEPs don’t always align. This holds true as well for sanctions published by disparate issuing bodies. In fact, the lack of comprehensive reference data was noted in the IMF report and reiterated as an issue by nearly half of survey respondents.
When asked which reference data sets would most enhance Know Your Customer (KYC) screening, it’s not surprising that 67% of respondents said sanctions and PEP lists were the most needed. AML/CFT lists by the People’s Bank of China followed closely with a 64% response. Access to quality data is the critical foundation for effective KYC screening.
Shedding light on beneficial owners
With the requirement of collecting information on ultimate beneficial owners (UBO), financial institutions have more names to be screened, and many are doing that. Nearly two-thirds of institutions in the Accuity survey screen UBOs of correspondent banks and corporate customers, demonstrating that they are being more aggressive in applying enhanced due diligence across their customer database.
However, collecting UBO information is inefficient and time consuming. Data needs to be gathered from multiple sources, including customers, public databases, in-house research and third-party providers. Banks need to consider the hours of research and manual mapping of financial ownership structures as well as the associated resource costs involved in collecting UBO information.
Plugging the gap
The survey showed that financial institutions are not just well aware of the challenges, but they also understand the improvements that need to be made to their AML/CFT screening systems.
Although nearly 60% of respondents felt that implementing an automated ongoing screening solution was the primary improvement needed to boost AML/CFT measures, there was far less agreement on other changes. Enhancing screening accuracy (including setting alerts for high-risk accounts and payments), having a better audit trail/record keeping, improving workflow and reducing false positives were all closely aligned.
Many of the needed changes respondents identified in the survey are interrelated and can be greatly improved with automated screening.
Download the infographic for further insight into the current AML and KYC compliance challenges of banking professionals in China.