China Proposes Major Amendments to Anti-Money Laundering Law to Modernize and Strengthen Compliance
In a decisive move to enhance its anti-money laundering (AML) framework, China has introduced a draft of its amended Anti-Money Laundering Law, marking the first significant revision since its enactment 17 years ago. Submitted to the Standing Committee of the National People’s Congress (NPC) for its second reading on September 10, 2024, the proposed changes underscore China’s commitment to aligning with evolving international standards and tackling emerging financial threats.
Key Highlights of the Draft Amended AML Law:
1. National Security Emphasis
For the first time, China’s AML Law explicitly includes national security as a primary objective, alongside maintaining financial order and the public interest. This amendment reflects the government’s heightened focus on ensuring that AML efforts contribute directly to safeguarding the country’s sovereignty and overall security (Article 1).
2. Expanded Definition of Money Laundering
The revised law broadens the scope of money laundering to include activities that conceal proceeds from any criminal conduct, including terrorist financing. Previously, money laundering was defined more narrowly, focusing on profits from crimes such as drug trafficking, terrorism, and corruption (Article 2).
3. Extended Compliance Obligations to Non-Financial Institutions
The amended AML Law expands compliance requirements beyond financial institutions to include “specific non-financial institutions.” This includes real estate developers, accounting firms, law firms, notary offices, fund managers, and dealers of precious metals and gemstones, highlighting China’s intention to address money laundering risks across a broader range of industries (Articles 6 and 64).
4. Obligation for KYC Cooperation
The proposed amendments place a strong emphasis on collaboration for Know Your Customer (KYC) processes. All entities and individuals in China are prohibited from facilitating money laundering and must cooperate with financial and specified non-financial institutions in KYC investigations (Articles 7 and 38).
5. Stricter Protection of Personal Information
The law also aims to protect personal data obtained during AML activities, ensuring confidentiality unless disclosure is required by law. Government agencies and financial institutions are obligated to safeguard personal information, which can only be used for specific purposes, such as AML investigations or judicial proceedings (Article 8).
6. Extraterritorial Jurisdiction
The draft law extends China’s AML jurisdiction beyond its borders, covering money laundering and terrorist financing activities outside China that threaten its security or disrupt financial order. Chinese authorities may now pursue such cases globally and request cooperation from foreign financial institutions based on reciprocity (Articles 12 and 49).
7. Beneficial Ownership Identification
A major addition to the revised law is the requirement to identify and verify the beneficial ownership of legal entities. This measure ensures financial institutions and other specified entities perform due diligence not only on customers but also on those who ultimately benefit from such entities (Article 19).
8. Enhanced Customer Due Diligence
The new law significantly expands customer due diligence (CDD) requirements, increasing from eight to sixteen articles. It mandates verification of customer identities, including agents and ultimate beneficiaries, and requires assessments of the business relationship, intended transactions, and sources of funds—especially for high-risk clients (Articles 28-31).
9. Continuous Monitoring and Record Retention
Financial institutions will be required to continuously monitor customer activity throughout their relationship, with a focus on mitigating money laundering risks. The retention period for customer documents is extended from five to ten years following the termination of the relationship (Articles 30 and 34).
10. Use of Third-Party Service Providers
The amended law allows financial institutions to engage third-party service providers for KYC due diligence. However, institutions must assess the risk profile and AML capabilities of these providers before contracting them, ensuring the financial institution retains ultimate responsibility for AML compliance (Article 32).
11. Legal Remedies and Customer Rights
The amended law empowers financial institutions to restrict, suspend, or terminate customer accounts if they refuse to comply with AML requirements. Customers who disagree with these actions can seek recourse through administrative petitions or litigation in a people’s court (Article 39).
12. Decentralization of Investigative Authority
To enhance the efficiency of AML enforcement, investigative powers will be delegated from provincial to municipal-level enforcement agencies, streamlining the investigation process and improving response times (Article 43).
13. Restrictions on Cross-Border Data Sharing
The amended law imposes strict controls on cross-border data sharing, requiring Chinese subsidiaries of international financial institutions to report data transfers involving customer information to Chinese authorities. This may present challenges for multinational financial institutions trying to comply with group-level policies, especially given China’s data protection regulations (Article 50).
14. Increased Penalties for Violations
The amended law proposes substantial penalties for AML violations. Fines for failing to establish internal AML systems or neglecting CDD requirements will be increased to RMB 2 million, and penalties for serious offenses involving concealment of criminal proceeds may reach up to RMB 10 million, or up to 200% of the amount involved if exceeding RMB 10 million (Articles 51-59).
Addressing Emerging Threats
The amended AML Law is designed to tackle financial crimes linked to new technologies, such as virtual currencies, livestreaming, and digital platforms. By introducing stricter requirements for beneficial ownership identification and continuous monitoring, the law aims to prevent misuse of these platforms for illicit purposes.
Implications for Multinational Financial Institutions
Multinational institutions face unique challenges under the revised law, especially regarding compliance with group-level AML and sanctions requirements. Restrictions on cross-border data transfers and prohibitions on sharing customer information with overseas offices without authorization may create obstacles in adhering to international compliance standards. The requirements to report data exchanges to Chinese authorities add an additional regulatory layer that these institutions must navigate carefully.
National Security and Broader Enforcement
By incorporating national security concerns into the AML framework, China broadens the scope of its anti-money laundering efforts beyond traditional financial crime. This could lead to more comprehensive enforcement actions, with a particular focus on activities that infringe upon China’s broad interpretation of national security.
Looking Ahead
China’s amended AML Law is expected to bolster the country’s ability to combat money laundering and terrorist financing, ensuring that its regulatory framework aligns with global standards while addressing domestic challenges. As the amendments undergo further readings, financial institutions—both domestic and international—must prepare for a more rigorous compliance environment, enhanced oversight, and the challenges posed by these wide-reaching reforms.
The upcoming amendments signify a major shift in China’s approach to financial regulation, signaling its commitment to combatting evolving financial crimes while placing increased emphasis on data security and national interests. The final impact of the amended AML Law will depend on its implementation, but it already highlights China’s determination to stay ahead of growing global financial threats.
