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THE NEED TO PREVENT MONEY LAUNDERING - EVERYWHERE China is toughening its money laundering prevention by taking a closer look at many more business sectors. Aziz Rahman explains the thinking behind this – and what it means for everyone trading abroad.

6 October 2017

The authorities in China can usually be relied on to make bold statements about the country. But the latest announcement regarding money laundering will have major implications for many who do business there.

In recent years, the Chinese government has been keen to be seen to take a tough line on money laundering. It has often reiterated its desire to crack down on any form of corruption; even if much of it has allegedly involved figures within the state machinery.

It has now said that it will dedicate resources to tackling money laundering and terrorist funding – which it sees as being linked to laundering – in the country’s non-financial sectors. While previously, the war against money laundering has been largely waged in its financial institutions, the government now believes it has to go beyond this.

"Money laundering and terrorist financing activities are gradually spreading to some non-financial sectors," the People's Bank of China (PBOC), the country's central bank, said in a statement. PBOC has already mentioned that sectors such as real estate and jewellery are among those set to come under scrutiny. It is also set to work with the relevant government departments to devise and enforce anti-money laundering rules in the non-financial sector.

There is little doubt that prevention has improved in China’s financial sector since its anti-money laundering law was introduced in 2007. Banking, securities, insurance, non-banking payment institutions and bank card clearing agencies all now appear to be less vulnerable to money laundering.

What there can also be little doubt about, however, is that Chinese authorities will expect similar success as they extend this scrutiny to other commercial sectors. It is likely that those sectors will already be popular with those who either invest in China or do any kind of business in that country. That is why anyone with such a relationship needs to think long and hard about how they ensure they are not participants in money laundering in China.

Prevention

So what should they do? The simple answer is prevention. It always is. China is a country with many unique characteristics. It differs from other nations in many ways. But ensuring you do not become embroiled in money laundering in any country involves the same precautions: assess the risk of criminal behaviour, introduce measures to prevent it and make sure those measures are effective in preventing it.

Whatever the country you trade in and whatever the sector of business you are in, if you fail to take those steps you will be vulnerable to the money launderers – and will have little or no defence should the authorities start investigating.

China may be a country with an identity all of its own. But it is just one of many that is taking a tougher stance on preventing and prosecuting money laundering. One example closer to home is the Fourth EU Money Laundering Directive (4MLD), which came into force in June this year. This places more obligations on banks and other financial institutions, removes certain customers’ exemption from due diligence checks, demands greater scrutiny of people and organisations from “high risk’’ countries and requires increased transparency on beneficial ownership.

China’s actions and 4MLD are just two legal developments worldwide that indicate a tightening of the loopholes that have allowed money laundering to flourish and place a duty on those in business to prevent it.

Recognition

If those in business are to prevent money laundering, however, they need to know what it is and be able to recognise it (or at least the signs of it).

Money laundering is the disguising of the origins of money that is the proceeds of crime. A person can launder their own criminal proceeds or have it done for them by another person.

In the UK, money laundering carries a maximum sentence of 14 years under the Proceeds of Crime Act 2002 (POCA): Section 327 makes it an offence to conceal, disguise, convert, transfer or remove criminal property from the jurisdiction, Section 328 makes it illegal to enter into or become concerned with an arrangement to acquire, retain or use the proceeds of crime, while Section 329 makes it an offence to possess criminal property. Sections 330 to 332 of POCA make it an offence to fail to disclose knowledge or suspicion of money laundering. Suspicion, in such cases, was defined in Da Silva (2006) as “a possibility, which is more than fanciful, that the relevant facts exist’’.

Preventing money laundering does not involve a one-off action that will magically protect you from it. It involves recognising the risk of it in your business, creating procedures that are designed specifically to reduce that risk and then making sure those procedures are introduced and executed effectively. It is an ongoing process.

If you create proper, well thought-out procedures, you massively reduce the chances of your company being involved in money laundering. Even if, for whatever reason, money laundering does still happen, you do have a strong defence against the allegations as you can show that you did everything possible to prevent it.

If a company is not sure how to devise such procedures, seeking specialist legal help is an option. What is not an option is doing nothing or throwing together preventative procedures that are little more than an afterthought or a box ticking exercise.

Your procedures have to be a genuine, intelligent effort to remove the money laundering risks that you have identified.

They should include:

  • Scrutiny of any potential client, investor or trading partner’s identity and background.
  • Checks on anyone who has expressed an interest in moving money into, out of or around the business.
  • Research on who stands to gain from a deal – the true beneficiaries – and the exact relationships between all the parties.
  • A proper system for anyone to report concerns about a deal. For example, somebody being unclear or reluctant to disclose exactly who or what amounts are involved in a transaction, asking for unusual conditions to be adhered to or suddenly suggesting a deal for no obvious reason.
  • A no-cash policy on transactions of a certain size.
  • Careful examination of the funding that has been brought into a deal.
  • Restrictions on access to, and use of, company bank accounts.
  • Keeping all financial records up to date and filed correctly.
  • Training of staff so they are all aware of the legal obligations to identify and report possible money laundering.

Anything less than this can mean problems if the authorities suspect money laundering – wherever in the world you are trading.

Authors


Azizur Rahman
Senior Partner
aziz.rahman@rahmanravelli.co.uk
+44 (0)1422 346666



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