Chinese fund houses on high alert for money laundering

Fund houses in China have been told to keep an eye out for customers whose names might be on the state's list of terrorists, criminal suspects, convicted criminals and enemies.

Since December last year, China has signed six currency-swap arrangements, with Argentina, Belarus, Hong Kong, Indonesia, Malaysia and South Korea. With the Chinese renminbi playing an ever-expanding role in international trade, the logic goes, aspiring money launderers seeking to benefit from the appreciation of the renminbi should deposit their laundered money in renminbi assets. Where better than the 500+ funds offered by the Chinese fund management industry?

But potential terrorists, convicted criminals, wanted suspects, enemies of the state and any subversive individuals already tagged by the People's Bank of China (PBOC) may think twice before taking their business to China from now on, as the Chinese government-endorsed and self-regulatory body of the industry, the China Securities Association, wants to avoid such a scenario.

The association is especially concerned following the China Securities Regulatory Commission's (CSRC) recent approval for fund houses to start pursuing high-net-worth assets through the newly expanded framework for multi-client segregated business. The new line of business allows fund houses to offer clients customised products that are more discreet, flexible and attractive in returns.

The CSRC opened up the possibility for customisation with the aim of bolstering the domestic fund industry's direct distribution power and levelling the playing field between regulated mutual funds and the murky private fund world. However, with more eager but less experienced fund houses, this new business may become a source of fresh headaches for the industry.

With that in mind, the CSA has advised fund houses to start tagging customers as high-risk, medium-risk or low-risk in an effort to improve trade monitoring and compliance operation. The client is categorised according to its identity, location, nationality, industry, occupation and trading patterns.

Fund houses are urged to conduct reviews with high-risk customers at least every six months and investigate the source of funds, use of funds, financial conditions and latest status of such customers. Low- and medium-risk clients may be revised less frequently.

According to the latest statistics made available by China Clear, as of August 14 there were more than 30 million fund accounts in the country. In the first week of August alone, 76,900 new accounts were opened. The complete database of suspected terrorist, criminal and high-risk individuals on the PBOC's watchlist is thought to exceed a million.

Fund houses have been instructed to undergo their first complete review of client databases and resolve risk classifications for client accounts established before August 1, 2007 by the end of this year. The industry will have until the end of 2011 to complete reviews for client accounts established after August 1, 2007.

The CSA has advised fund houses to conduct their work on the principles of "totality, prudence, sustainability, confidentiality and risk consciousness".

Fund houses are obliged to report suspected individuals to the local police body, the PBOC and its associated China Anti-Money Laundering Monitoring & Analysis Centre (CAMLMAC). However, there is no requirement at this stage for fund houses to share information of tagged individuals, and fund houses still have discretion to decide whether to maintain business relationships with individuals deemed to be suspicious.

According to the last statistics made available by CAMLMAC, in 2005, the centre processed 102 million transactions -- 280,340 of which are "suspicious" trades denominated in renminbi and 93.6 million in foreign currencies. The asset management industry's 60 fund houses will be the latest participants to provide the centre with data on money laundering, joining the 206 banks, 78 state, provincial and municipal credit agencies and one postal saving institution already within the scheme.

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