Topic:

Analysis on current situation and

countermeasures of money laundering crime in
China


Name: Yau Y. K.

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Introduction
In this era, globalization across most of the countries regardless of their region,
leading to a more open economy, as well as freer capital inflow and outflow,
however, it comes along with more frequent money laundering across globe,
including China. Data from International Monetary Fund (IMF) has shown that
scale of money laundering is skyrocketing that it rose 33% from 2005 to 2009.
In addition, as estimated by Mei and Gao in 2015, the total amount of money
laundering increases by 14 times from 2000 to 2011, which arouses great concern
to Chinese government and forces government to cope with the situation. Yet,
though China is the second largest economy in the world, her legal and
financial structure may not as mature as United States and European Countries
as they has opened their economy much longer than China. Therefore, there
are still flaws and improvements in Chinas countermeasures regarding to
money laundering.

The impact of money laundering is not just a mathematic game or number
transferred from accounts to accounts; it does real harm to individual, society
and also the state. To individual, money laundering promotes process of unfair
reallocation of wealth from the good (victim) to the bad (offender) as the
money was gained by offenses like fraud, drugs and tax evasion, which are not
legitimately belonged to the offender. Money laundering can also increase
crime rate as the apparently legitimate capital gives economic power to
offender to commit other crime and continue illegal business, thus encouraging
criminal behavior (Markrell, 1996). In addition, money laundering may
undermine political institution. When the money launders hold significant
amount of assets in economy, they may attempt to increase their political
control through corruption or bribery to gain preference in business operation
(Tanzi, 1997).

Thus, since the money laundering trend is rising and its impacts are significant,
this paper will analyze the current situation and trend of anti-money
laundering in global and in China, and thus giving evaluations and
recommendations on countermeasures. However, before this, the term money
laundering will be first defined in universal sense, as well as in Chinese legal
system perspective in order to facilitate the following analysis.

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Definition

The term Money Laundering is originated from a former gangster Al Capones,
who had a habit to funnel his gains from illegal activities through launderettes
to construct the disguise of legitimate proceeds (Van Duyne, von Lampe &
Newell, 2003). For current definition across globe, money laundering can refer
to processing of criminal proceeds to the aims of disguising their illegal origin
or criminal nature, where the gain is not only limited to money, but also
valuable things like stock, property (Unger, 2006; The Financial Action Task
Force (FATF), 2016).

In China, the definition of money laundering is similar to the universal
standard (i.e. FATF standard), where it refers to the behaviors attempting to
conceal the origin and nature of criminal proceeds (Mei and Gao, 2015). In a
more specific legal sense, it denotes people who violate the Criminal Law of the
Peoples Republic of China Article 312, knowingly conceals, transfers,
purchases or helps to sell illegally acquired goods, which is the most inclusive
article related to money laundering as the verbs conceals, transfers, purchases
or helps are broad enough to include all the offender who desire to process
their criminal proceeds (Chou, 2016).

Phrases in Money laundering
In general, money laundering can be divided in to three phrases including
placement, layering and integration (Reuter, 2004). The placement stage
involves the physical movement of illegal currency or other funds to a place
where law enforcement authorities is hard to investigate or it is convenient for
offender to access. In most cases, the proceeds are flowed into financial
institution for further procession. In layering stage, offenders separate the
proceeds from their illegal source by using complex financial transaction to
hide from audit trail and investigation. In the last stage of money laundering,
offenders covert the proceeds into apparently legitimate earning through
normal business operation.

Analyze on current situation

When countries relationship are getting closer and affected by political and
economic factors across globe, the direction of work in combating money
laundering also changed when time passes.

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First, the focus of anti-money laundering is on implementation and
effectiveness of measures instead of structuring mechanism only. The cruxes of
the countermeasures are effective only when it is designed and implemented
well. However, some countries just enacted anti-money laundering law in
combating the crime to avoid being censored by FATF, an inter-governmental
organization in combating money laundering. Consequently, the enacted law is
just fake pills to bring deterrence effect to money launders and fail to cure the
disease. As a result, FATF no longer put the evaluation of compliance prior to
effectiveness evaluation of measures, but weight them at same level in 2014
(FATF, 2014).

Second, political factor needs not be neglected in designing countermeasures.
As the frequency of terrorism and war has increased in recent years, combating
money laundering, terrorist financing and proliferation of weapons of mass
destruction and its financing are no longer own business, but impacting a series
of countries, in which FATF even firstly mentioned in its recommendation in
2012, showing its importance in the field of combating money laundering. Thus,
China needs to alert its political sensitivity when designing countermeasures;
otherwise, it may disrupt the diplomatic relations to others.

Third, the transformation on the format of money laundering changed rapidly.
In the preliminary stage of the countermeasures, Chinese government deemed
cash transaction to be the most frequent way to wash money1, however, after
government strike hard on cash transaction and the popularity of e-banking,
money launders start taking advantage of complexity of financial mechanism or
even bribe financial practitioners to hide the illegal proceeds (Tong, 2014).

Fourth, risk-based approach (RBA) becomes a trend in combating money
laundering. The approach requires countries should first identify and
understand money laundering risks within the country and then implement
countermeasures to prevent or mitigate money laundering corresponded with
the risks identified. This approach is not aimed at formulating any forms in
countermeasures, but provides a concept in designing and evaluating the
effectiveness of the measures.


1

Cash transaction refers to the transactions that close a deal in a short period of time, not more
than one day.

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Analyze on current countermeasures

Legislation
Before 1997, there were only Article 312 and 349 in Criminal Law of Peoples
Republic of China to prosecute money launders who knowingly conceals,
transfers, purchases or helps to sell illegally acquired goods or shields
offenders engaged in smuggling, trafficking in, transporting or manufacturing
of narcotic drugs or whoever harbors, transfers or covers up, in which defines
the broad sense of money laundering in China. However, after 1997, Article 191
was established as a nature to specify the act of money laundering in financial
field2. The establishment reveals some problems when Chinese government
dealing with the crime, which will be analyze below.

First, the establishment of Article 191 reveals that the government is following
international standard without considering its practicability in own country. In
the nature of proposing Article 312 and 349, it was to fight against all kinds of
act regarding to money laundering (Chou, 2016). However, the purpose of
Article 191 was specified to fight against the acts of money laundering in
financial field, in which the previous articles have already covered the scope,
especially in related to drug money laundering. There is no real need to set up
another article to deal with the crime. In addition, as the ways and forms of
money laundering have changed quickly, the Article 191 was even amended by
The Supreme Peoples Court to extend its scope to non-financial field so that its
applicability can be improved. In numeric evidence, the use of Article 191 was
only about twenty to investigate criminal liability of the offender while Article
312 was used over thirty thousand from 1997-2009(Wong, 2011).

We can see that the practicability of Article 191 is low in China, however, due to
the pressure of other countries from Vienna convention, which require China
to set up similar law to link up to international standard, China stills establish

2
Article 191: Whoever commits any of the following acts in order to cover up or conceal the
source or nature of the funds shall, in addition to being confiscated of the said proceeds and
gains providing fund accounts, including exchange property into cash or any financial
negotiable instruments; transfer ;capital through transferring accounts or any other form of
settlement; remit funds to any other country; cover up or concealing by any other means the
nature or source of the illegally obtained proceeds and the gains derived therefrom.

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the article without consider the its real situation and leads to low effectiveness
of the countermeasure in legal aspect. If China keeps this attitude to blindly
linking up with the international standard without exploring the trend and
need in combating money laundering of China, it is foreseeable that the trend
will just keep growing.

Another problem is lack of foresight in its legislation. As mentioned, the trend
of legislation process in China is to keep pace to the international standard (i.e.
FATF), in this sense, the process will always be slower to deal with the rapid
change in money laundering field since the international standard takes time to
integrate and collect the data across globe before it releases.

Technology in banking system
Apart from legislation, countermeasure in bank also plays a vital role as the
current trend of money laundering is taking advantage on the complexity,
highly changeable and concealable in the finance system. In current practice,
commercial bank relies on Administrative Measures for the Financial
Institutions Report of Large-sum Transactions and Doubtful Transactions, in
which the central system calculates all the transaction data and notice the
anti-money laundering institution if they are match with the standard of large
sum transaction or suspicious transaction (Peoples Bank of China, 2007).

However, due to the increasing trend of using e-banking and new ways of
payment or transaction occur like Aliapy in China, the transaction data is
skyrocketing and the loophole occurs, making the anti-money laundering
institution more difficult to investigate (Chou and Pun, 2016). Thus, it is quite
of concerns that the government cannot keep pace with the technology
changed in the environment and giving chance for criminal to money
laundering.

Recommendation

After analyzing the current and potential problems in combating money
laundering, recommendations are given to improve the situation.

Risk-based approach
Though in the above analysis has criticized the act of blindly following
international standard, principles or approach can still adopted as long as it is

MONEY LAUNDERING CRIME IN CHINA 6


based on the real circumstances in China. Thus, Risk-based approach (RBA) is
highly recommended to combat the crime, since it is an approach to anticipate
the risk and implement corresponded measure which focus on fighting with a
target but not aimless, like the establishment of article 191.

Under this approach, resources are allocated in different field according to their
level of risk. For example, a bank should first evaluate the risk of loophole and
its impact on different payment methods before allocating extra resources on
the field. In addition, this approach requires an active role for the manager to
analyze the data instead of waiting the system to detect any suspicious
transaction according to Administrative Measures for the Financial
Institutions Report of Large-sum Transactions and Doubtful Transactions,
since the techniques of money laundering are more diversify and concealable
(Tin and Suan, 2015).

Data mining technology
The active analysis cannot do by manager only, but also by technology support.
In the era of big data, the high volume, high velocity and high variety data has
provided many opportunities for the risk management. Importing data mining
technology can be a way to dig out suspicious transaction pattern and allow
manager to actively investigate cases (Cheng, 2014). As a result,
countermeasures can be effectively implemented towards different forms of
money laundering.

Conclusion

Money laundering is foreseen to be more diversified, concealable and
transboundary crime along with technology improvement and globalization. In
other words, no country can manage and combat the crime alone without more
frequent cooperation and setting countermeasures together, not even China.
However, following international treaty or standard does not mean to blindly
copy all the things into China, but to be flexible to amend it according to its
domestic needs and trend based on anti-money laundering principle such as
risk-based approach. On the other hand, even the direction in combating
money laundering in governmental level is connected to the international
standard, the implementation needs to be on ground and improve when
technologies develop in tremendous pace. For example, choosing updated
database and information technology can be crucial in financial field to

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evaluate money laundering risk in advance. In conclude, China needs to be
flexible and active in combating money laundering and these recommendations
are hoped to improve the current situation that China is facing and reduce the
negative impact that money laundering brings to the citizens.

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