CHINA | Moving to a Risk-based Approach

On March 1, 2022, the Measures for Financial Institutions on Customer Due Diligence and Client ID Information, and Transaction Records Management (‘Measures’) came effective.

The Measures issued by the People’s Bank of China, the Bank of China insurance regulatory commission, and the China Securities Regulatory Commission. It aligns with the current financial landscape. And international anti-money laundering standards by establishing a risk-based framework for financial institutions. And moves to a risk-based approach.

Risk-based Approach 

With the development of financial products, financial institutions (‘FI’) need to respond more intuitively to money-laundering threats. A risk-based approach enables FI to implement ongoing proactive judgement, identify risks and deploy countermeasures.

In practice, financial institutions are required to assess both new and existing customers. And apply enhanced due diligence procedures to customers with higher risks. Equally, varying levels of due diligence will be utilised depending on the nature of the risk profile and transaction.  

The Measures stipulate the following directives for financial institutions:

  • Identify and verify the identity of customers through reliable and independent certification materials, data or information; 
  • Understand the purpose and nature of the client’s business relationship and transaction;
  • Obtain relevant information according to the risk situation; 
  • In cases where there is a high risk of money laundering or terrorist financing, understand the source and use of clients’ funds, and take enhanced due diligence measures according to the risk situation; 
  • During the business relationship, take continuous due diligence measures on the customers, review the status of the customers and their transactions;
  • confirm that the various services and transactions provided to the customers are consistent with the financial institutions’ understanding of the customers’ identity background, business needs, risk status and the source and use of their funds; 
  • Identify and take reasonable measures to verify the beneficial owner of the customer if the customer is a legal person or an organization without legal personality.

What Does It Mean For Companies in China?

With enhanced customer due diligence, companies should update anti-money laundering (‘AML’) policies. And improve discipline, control, and responsibility across the workforce to decrease risks.

Specifically, we recommend evaluating current AML practices, training staff, and updating company procedures. Failure to update current practices or establish a concrete framework for international companies could lead to white-collar investigations. And reputation damages.  

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