greater china anti-money laundering banking insights€¦ · greater china anti-money laundering...

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Greater China Anti-Money Laundering Banking InsightsApril 2015

www.wolterskluwerfs.com

FRSGlobal


MILSTE and Wolters Kluwer

Financial Services launched their

anti-money laundering (AML)

survey across Greater China

from late January 2015 to early

March 2015. The survey was

distributed to AML, legal and

compliance decision makers in

leading banks across Greater

China – China, Hong Kong and

Taiwan.

The overarching objectives of the AML survey included:• Capturing industry perceptions of evolving

local and international regulations and to what extent banks use software and consultants;

• Evaluating the current regulatory environment;

• Assessing decision-making processes within AML and compliance departments, along with opportunities and threats the banks are seeing; and

• Identifying key issues related to fraud detection, regulatory expectations and the usage of technology.

The survey covered critical issues that banks within the region are facing including monitoring suspicious transactions, know your customer (KYC) processes and procedures, recruitment and training of AML professionals, and increasing internal and external reporting requirements, along with anti-bribery and corruption activities and actions.

AML Survey Methodology

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Greater China Anti-Money Laundering Banking Insights 2015

A common trend that runs throughout all three regions in Greater China is the need to improve KYC processes, implement reporting systems and, most importantly, to improve internal control systems and administrative rules. With many of these requirements being deemed as difficult to implement or build internally, banks in the region will seek international vendors who have expertise in building robust AML programmes.

Although the three areas that

constitute Greater China –

Mainland China, Taiwan, and Hong

Kong – are in different stages of

development in terms of their AML

structures, procedures, and software

advancements, the region shares

common issues, such as keeping up

with evolving internal and external

regulations, managing costs,

maintaining advanced analytical

software to identify suspicious

transactions, challenges with KYC

processes and heightened scrutiny

from regulators.

Mainland China’s regulator, the People’s Bank of China (PBoC), has been relatively easy on banks in the last few decades, but they have made major progress in developing their AML and Counter Terrorist Funding (CTF) regime. This includes strengthening enforcement mechanisms, reforming its legislation, and implementing international cooperation initiatives. Chinese authorities are keeping a closer eye on bribery and corruption more than ever before, creating a new awareness amongst Chinese financial institutions.

With the dawn of new and enforced regulations set by the PBoC, the regulators have been recently pushing banks to improve their AML processes and procedures. Lower-tier Chinese banks are now taking AML seriously at an executive level, but basic procedures in internal AML risk control systems and transactional monitoring processes are still in their nascent stages of development. Seeking expertise and advanced analytical tools has become a priority to comply with the regulator’s stringent AML regulations. So far, only a few Chinese banks have moved beyond this point, but all will be forced to do so in the near future.

Similar to Mainland Chinese banks, regional and local Taiwanese banks are now seeing their regulator, the Financial Supervisory Commission (FSC), applying pressure to improve their overall AML structures and

processes. New guidelines were published in late 2014 as a first step to tighter regulation. Banks in Taiwan will have to improve their internal control mechanisms and administrative rules beyond regulatory requirements, as the FSC’s new leadership is expected to issue clearer regulations in late 2015. Structural changes inside Taiwanese banks, such as company culture and comprehensive AML training, remain largely absent in many banks and in their peripheral branches, which will continue to set them behind current regulatory demands.

As Taiwanese banks continue to become regional and expand across Mainland China and Southeast Asia, having the proper reporting tools and the capabilities to report and analyze suspicious transactions remain major priorities.

Although Hong Kong has a well-developed AML regulatory regime, both local and foreign institutions operating in China’s Special Administrative Region are attracting closer attention by Hong Kong’s regulator, The Hong Kong Monetary Authority, with the increasing wealth entering via Mainland Chinese investors. Banks operating in the region are seeing increased onsite examinations from the regulator, which is pushing local Hong Kong banks and newly established foreign banks in Hong Kong to quickly build an advanced AML architecture.

Executive Summary

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AML in Mainland China – Creating a Proper AML Regulatory Regime

In China, with the introduction of

the “Four Comprehensives” strategic

plan, mapped out by China’s President

Xi Jinping, a comprehensive

elaboration of the overall framework

for China’s future administration

and development will guide the

modernizing of the nation’s

governance systems and capabilities.

The survey identified the following main challenges that Chinese banks are facing regarding establishing a comprehensive approach towards complying with relevant AML regulations:

• Establishing a comprehensive KYC process

• Implementing an effective compliance monitoring and audit system

• Training and educating front-office staff regarding AML procedures.

Source: MILSTE

One of the goals of “comprehensively deepening reform” will be a continuing process of opening up the financial markets. This puts even greater emphasis on the need to have proper oversight of these markets and ensure compliance with the law. In this respect, the Four Comprehensives are closely interlinked as a single government strategy. One crucial area of focus to ensure financial stability will be combating money laundering and terrorist funding.

Regulators are becoming more serious about ensuring that their banks are complying with local and international regulations, and have the proper tools and resources to defend against money laundering and terrorist funding.

The Chinese regulator, The People’s Bank of China (PBoC), has taken notable steps to aid its banks in mitigating money laundering activities and achieving sustainable growth. Since 2003, the PBoC has been responsible for issuing the country’s AML regulations, and since 2006-2007, it has issued significant

regulations such as the Anti-Money Laundering Law. Since the PBoC’s efforts to improve controls in the financial services industry, China’s banking industry has made significant advances in establishing AML programmes. However, banks across China, especially smaller entities, are facing significant challenges in screening clients, monitoring suspicious transactions, training staff, and implementing software that allows them to have an enterprise-wide view of the movement of funds.

“Increased pressure from regulators will encourage banks to look into their AML structures in depth. We now need to be thinking about, at an executive level, if we are able to fully comply with the PBoC’s stricter regulations,” said a senior compliance executive in a northern Chinese bank.

Three key areas of focus were a common theme amongst bankers interviewed in China with more than half concurring that KYC processes needed to be strengthened, effective automated systems were needed to continually monitor compliance and AML training needed to be boosted.

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Chinese banks in need of proper AML infrastructureJoint-stock banks and lower-tier Chinese banks have begun, at an executive level, to take complying with money laundering laws seriously. They are keen to implement enterprise-wide transactional monitoring systems in order to spot suspicious transactions at the branch level and over online platforms. Currently, many of them are either working with local vendors that have implemented systems that do not satisfy all the demands of the bank, or have just begun looking into working with technology vendors who are able to allow them to create sophisticated regulatory reports and aid their team in preventing money laundering throughout all business lines.

“Building reporting and monitoring systems internally is not plausible with our current resources and knowledge. We will be looking to work with a vendor who not only understands Chinese AML regulations, but also international regulations as well,” said a compliance executive in a Chinese joint-stock bank.

Tier-three and tier-four Chinese banks are burdened with manual processes in their AML and compliance departments, and they lack the human resources to meet the demand of these tasks. Sometimes they even lack the essential knowledge of local regulations. As the PBoC continues to pressure all Chinese banks to crack down on money laundering and terrorist funding, lower-tier Chinese banks will need to continue to work with international vendors and experts to build their AML programmes.

“ The regulator has set standards for Chinese banks in building an AML architecture, including the importance of real-time monitoring and capturing client information. Failing to do this could result in frequent visits from the regulator and even fines and bad publicity.”


The future of AML in ChinaThere is no doubt that all Chinese banks will have to comply with the regulations set by the PBoC in the next few years. As Chinese banks continue to expand regionally, nationally and internationally to increase their customer base, they will have to build a more sophisticated infrastructure that allows them to implement proper customer due diligence and track the movement of funds. Failing to do so could result in costly fines and reputational damage.

“The regulator has set standards for Chinese banks in building an AML architecture, including the importance of real-time monitoring and capturing client information. Failing to do this could result in frequent visits from the regulator and even fines and bad publicity,” said a senior compliance executive in Beijing.

The stage is set: complying with the PBoC’S regulationsWith the backdrop of recent regulations issued by China’s PBoC, regional and city-level Chinese banks are forced to take their AML procedures and processes to a global standard. Currently, many of them are still contemplating how they will begin their journey in establishing a robust AML programme. But with stricter and clearer rules set by regulators, Chinese banks will now have to work with experts to aid them in creating the proper procedures and processes to comply with regulations. These demands will increasingly flow down through the entire financial network to encompass even the smallest entities over the coming years.

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AML in Taiwan – Revamping AML Procedures and Architecture

Taiwan’s AML regime is lagging behind that of leading Chinese and Hong Kong-based banks. That said, Taiwanese banks are strengthening their internal processes and procedures to comply with domestic and international standards. Under the new Financial Supervisory Commission (FSC), the first major regulation called “Guidelines Governing Anti-Money Laundering and Combating the Financing of Terrorism by the Banking Sector” was introduced in late 2014. The new requirement forces banks operating in Taiwan to deepen their KYC processes, undertake extensive customer due diligence measures, and to continue ongoing monitoring of accounts and transactions using a risk-based approach.

“The new leadership in the FSC is clearly more proactive in building an AML regulatory regime than the last one. We need to continue to look into the FSC’s latest regulations from late 2014 and continue to improve our processes and procedures for future developments,” said a senior AML officer from a Southern Taiwanese bank.

In Taiwan, 80% of the bankers interviewed highlighted a lack of automated transaction monitoring systems and controls, particularly within smaller banks, weak management of documentation in KYC processes and a need to move forwards as the FSC is now starting to ramp up the regulatory requirements to bring Taiwan up to international standards.

Customer due diligence is another major cause of concern for the FSC, as local Taiwanese banks have not historically gathered the proper information and data to comply with regulations. With the new FSC’s leadership in place, Taiwanese banks will have to strengthen their due diligence processes and bring in global best practices.

“Ensuring that we acquire the proper information from our clients when opening an account is critical in complying with current regulations. We are seeking to improve our processes and educate our front-line staff to do this,” said a regional Taiwanese AML banking executive.

The majority of lower tier Taiwanese banks are lacking key systems and processes to comply with the new regulation, and with international AML standards. The three main challenges that Taiwanese banks are facing are:

• Lacking the proper infrastructure to monitor and detect suspicious transactions, especially within lower tier banks

• Keeping track of the proper documents when clients open accounts and cleaning and organizing data; and

• Complying with domestic AML guidelines and regulations set by the FSC

As Taiwanese banks continue to expand abroad into new markets to aid their businesses and find new revenue streams, they will be forced to comply with international and local regulations of their new jurisdictions. Before these banks become established abroad, it’s important that they look into the laws and regulations of the land, and ensure that they are able to meet regulators demands.

The future of AML in TaiwanThe new FSC leadership is set to strengthen Taiwan’s financial services industry’s AML regulations and raise the island’s regulations to meet global standards in advance of the next Financial Action Task Force (FATF) inspection in Q4 2016. Taiwanese banks have a long way to go before they are able to comply with AML regulations. However, with new guidelines issued in 2014 and the possibility of more enforcement and regulations coming in 2015 and 2016, Taiwanese banks will be forced to move from using manual processes, which are currently inefficient, inaccurate and ineffective, to a solution that automates processes, saves time, and reduces risks. Only automation can deliver a risk-based approach to AML controls.

Catching up with new AML standardsThe FSC’s issuance of AML rules and regulations in late 2014 is a precursor of what’s to come. Taiwanese banks, especially at the regional and citywide level, are aware that the FSC is planning to force banks to advance their AML programmes to a global level. Currently, with the lack of enforcement and clarity of regulations from the previous FSC administrations, Taiwanese banks lack the proper regulatory reporting tools, transactional monitoring systems, and AML culture needed to comply with evolving regulations. Taiwanese banks will be playing a game of catch up in the next few years, and will have to seek external aid to rapidly revamp their AML infrastructures to meet current and future regulatory requirements.

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AML in Hong Kong – Becoming the Role Model for Greater China

Out of the three regions that make up Greater China, Hong Kong has the most developed AML regulatory environment. The Hong Kong Monetary Authority (HKMA) has historically taken AML issues seriously, which can be seen by the increasing number of onsite examinations and its introduction of AML compliance under the law with the 2012 Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance.

Due to the HKMA’s strict adherence to global standards, the majority of the international banks operating in Hong Kong have sophisticated systems and procedures in place to track the movement of funds and detect suspicious activities and transactions. Hong Kong banks, though, are still seeking to improve their KYC, and enhance their capabilities to ensure that they are compliant with regulations as Chinese high-net-worth individuals move funds from the Mainland to Hong Kong.

Whilst systems and controls are generally of a higher standard in Hong Kong, nearly 45% of those interviewed stated that the influx of high net worth individuals from the Mainland increased the need to monitor transactions closely, that the regulator was becoming ever more demanding, with a particular focus currently being on improving KYC systems and procedures.

Compliance with regulation is considered a high priority in Hong Kong with the common pain points identified by our survey being:

• Monitoring the increased number of Mainland Chinese clients’ transactions and activities

• Continuing to keep up with changing regulations and reporting demands

• Continuing to strengthen KYC procedures and processes.

in Hong Kong to meet the regulators’ requirements, continuing to ensure that one’s institution is at the forefront of real-time monitoring will be the key to staying one step ahead.

“The Hong Kong Monetary Authority has been paying banks more frequent visits in 2014 and early 2015 to ensure that we have proper systems in place. The rise of Mainland Chinese clients is forcing banks to re-evaluate their whole AML infrastructures to ensure that we do proper customer due diligence and spot any suspicious transactions,” said a Chief Compliance Officer from an international bank based in Hong Kong.

Although large international banks operating in Hong Kong are relatively advanced, local Hong Kong banks and smaller foreign bank branches are behind in terms of advanced analytical software, training staff in AML procedures, and establishing comprehensive KYC processes.

The future of AML in Hong KongAlthough many Hong Kong banks are advanced in their AML processes, technologies and procedures, they will have to continue to stay up-to-date with regulations as the regulator continues to strengthen its resources towards AML supervision. Banks in Hong Kong are taking AML seriously, and are discussing it more in meetings and will continue to devote more resources to AML measures. Local Hong Kong banks and smaller foreign bank branches are further behind than their larger international counterparts, and will have to take more serious measures to comply with local and international regulations. There will likely be a move to more risk-based automated solutions to mitigate the increasing cost of compliance.

Becoming the beacon of high standards in AML in Hong KongWith increased visits and strengthened regulations from the Hong Kong regulator, international banks have mostly established an enterprise-wide AML culture and infrastructure. Continuing to install advanced reporting and monitoring software will be the trend for international and local banks operating in Hong Kong. In order for banks

Although many Hong Kong banks are advanced in their AML processes, technologies and procedures, they will have to continue to stay up-to-date with regulations as the regulator continues to strengthen its resources towards AML supervision.

8


The Stage is Set – Building a Comprehensive AML Architecture

Regulators in Greater China have awoken from being generally passive towards

money laundering to becoming staunch advocates in cleaning their financial

systems and rising to higher moral and ethical standards. In Mainland China in

2014, the regulator made history by investigating some of the largest banks

in the country for suspected money laundering. In Taiwan, the new FSC in late

2014 published new directions for Taiwanese banks to follow in improving their

AML programmes and infrastructures. And in Hong Kong, the regulator has

been paying more frequent visits to the offices of chief compliance officers of

local and domestic banks to ensure that they have the proper monitoring and

reporting systems in place to mitigate money laundering in the territory.

Greater China’s recent push comes at a time when the region’s banks have been focused more on accumulating clients and protecting their privacy than on working with regulators regarding AML standards. With the rise of directions, rules and regulations set by the region’s three regulators, banks have made establishing proper AML systems, procedures and processes a major priority in the next few years.

With regulators now seeking to elevate the region’s AML regulations to global levels, banks are still far behind in having the proper systems in place to meet regulatory challenges. Chinese tier-two, joint-stock and citywide banks are still manually checking for suspicious transactions, and many are not performing proper customer onboarding procedures, examining critical connections between people and assets, and assessing AML and CTF risk across their customer bases.

As banks across Greater China now take AML and CTF as serious and pertinent issues, and with the rise of enforcement from regulators, banks are now seeking to work with global technology vendors that can deliver leading reporting and monitoring systems, accelerate identity certification, and automate due diligence and customer monitoring. Failing to do this will be costly not only financially, but it could also cause long-term reputational damage that could take years to repair.

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Banks are now expected to maintain the highest standards in AML/CTF technology and procedures, not only to comply with regulatory demands but also to maintain public trust and confidence.

How should banks operating in Greater China address these challenges?Banks in Greater China are witnessing a new wave of standards and expectations from their regulators. The challenge for them is to develop and implement a comprehensive AML/CTF strategy and architecture that will allow them to meet the increasing reporting demands from the regulators, and properly manage the risks that come with money laundering, financial crimes and terrorist financing.

Across Greater China, there are multiple deficiencies in banks’ AML/CTF programmes, which include:• Failure to spot and report suspicious

transactions,• Inadequate KYC processes and procedures,

and• Inability to produce proper and timely

reports for regulators.

Banks must enhance their AML/CTF solutions so they can be configured to local regulatory requirements. The solutions implemented must be able to take a holistic and unique approach of bringing together leading technology with intimate knowledge of local and international regulatory standards.

The AML/CTF compliance programme must include:• Customer Identification Programme (CIP),• Enhanced Due Diligence (EDD) processes,• Suspicious activity detection,• Customer AML/CTF risk assessment,• Case investigation, and• Suspicious Activity Report (SAR)

submission.

In addition to a comprehensive automated solution, expertise and knowledge are essential elements to help banks comply with the local and international regulations. Banks must hire people with extensive experience or acquire external expertise to ensure that as they continue to expand, they can continue to comply with regulatory challenges. Banks are now expected to maintain the highest standards in AML/CTF technology and procedures, not only to comply with regulatory demands but also to maintain public trust and confidence.

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About MILSTE

MILSTE is a leading provider of intelligence for the banking industry in the

Asia Pacific Region. The firm produces data-supported reports about wealth

management, private banking, competition, and especially technologies within

banks. MILSTE also creates insightful yearly publications that capture the main

trends occurring in the region, and organizes executive training for banking

executives across the Middle East and Asia Pacific.



FRSGlobal

About Wolters Kluwer Financial Services

Whether complying with regulatory requirements or managing financial transactions, addressing a single key risk, or working toward a holistic enterprise risk management strategy, Wolters Kluwer Financial Services works with customers worldwide to help them successfully navigate regulatory complexity, optimize risk and financial performance, and manage data to support critical decisions. Wolters Kluwer Financial Services provides risk management, compliance, finance and audit solutions that help financial organizations improve efficiency and effectiveness across their enterprise. With more than 30 offices in 20 countries, our prominent brands include: AppOne®, AuthenticWeb™, Bankers Systems®, Capital Changes, CASH Suite™, GainsKeeper®, NILS®, OneSumX®, TeamMate®, Uniform Forms™, VMP® Mortgage Solutions and Wiz®. Wolters Kluwer Financial Services is part of Wolters Kluwer, which had 2014 annual revenues of €3.7 billion ($4.9 billion), employs 19,000 employees worldwide, and maintains operations in over 40 countries across Europe, North America, Asia Pacific, and Latin America. Wolters Kluwer is headquartered in Alphen aan den Rijn, the Netherlands. Its shares are quoted on Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices. Please visit www.wolterskluwerfs.com for more information.

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