REGULATIONS
Financial Crime in China
May 11, 2006
Luo Xiang, Lecturer, China University of Political Science and Law

With current economic development and the Beijing 2008 Olympics coming up, there is increasing international investment and trade between China and other countries. At the same time, financial crime is a serious long-term threat to democratic socio-economic development. The development of the financial industry, which is important to China's transition into a market economy, requires a strong legal framework to deal with financial crime, such as banking fraud, bogus investment deals, credit card fraud and money laundering.

The economic power of China has grown rapidly but because the changes have been so sudden, they have left the supervisory structures of finance behind. Only in recent years has China been able to implement legal and regulatory bodies to control financial crime.

Financial Crime Cases
The D'Long case, which is the largest-ever financial crime case in China, is currently being tried in China. Tang Wanxin, the head of the notorious and now bankrupt D'Long Group, went on trial in January for illegally accepting deposits, manipulating stock prices and embezzlement. The judicial investigation showed that billions of yuan, more than 2,500 institutions and 32,000 people in about 20 provinces were involved in this case.

Money laundering is also a large component of financial crime in China. Published reports indicate that money laundering in the People's Republic of China (PRC) has increased to about RMB 200bn (US$25bn) annually, representing about 2 per cent of the nation's GDP.

In recent years, some corrupt officials have been involved in money laundering. In Article 191 of the current Criminal Law of the PRC, the activities that constitute as the crime of money laundering are drug-related crimes, organized crime, terrorist activities and smuggling. That is to say, currently, the only recognized criminal behaviors for money laundering are these four crimes. Since the current Criminal Law of the PRC narrowly defines the activities of money laundering, the government is unable to prosecute corrupt officials for the crime of money laundering because their offences do not fall under any of the defined categories. This is an obvious problem with regard to anti-money laundering work.

New Characteristics of Financial Crime in China
There are three new characteristics of financial crime in China according to recent cases. Firstly, the methods of financial crime are changing, and criminals are increasingly using IT. High-tech financial crime represents a new threat to the lives, property and privacy of citizens, and threatens safety and confidence in cyberspace. In order to effectively tackle this problem, not only is inter-governmental co-operation called for, it is also vital that the government and financial industry build continuous co-operative relationships.

Secondly, there is an increasingly noticeable trend whereby financial criminal groups obtain illegal profits through corruption and also use these profits to bribe officials to escape the punishment of regulation. Anti-corruption is playing a key role in the Chinese government's fight against financial crime.

Thirdly, it is clear that financial crime is changing and becoming more and more sophisticated and global. It is important that China should make every effort to close legal loopholes and build an adequate system for the control and supervision of financial institutions through international judicial and law enforcement co-operation.

Dealing with the Problem
In recent years, the Chinese government has placed emphasis on dealing with financial crime. Chinese policymakers and financial supervisors are trying to find effective measures to protect the financial system. In reviewing the Chinese experience, there are three levels for China to combat financial crime.

Legislation
First, at the broadest level, the Chinese government deals with financial crime through legislation and its implementation. For example, there are three parts to China's anti-money laundering legal regime. The first comprises laws passed by the National People's Congress, such as the Criminal Law and the Anti-Money Laundering Law, currently being enacted. The second comprises Executive Regulation issued by the State Council, such as the regulation on the use of real names on individual savings accounts. The third comprises rules issued on order of the State Council by anti-money laundering departments and the People's Bank of China (PBOC), including the Financial institutions Anti Money Laundering Regulation, the Rules for Administration of Reporting Financial Institutions Large Amounts and Suspicious Foreign Exchange Capital Transactions and the Rules for the Administration of Reporting Large Amounts of RMB and Suspicious Payment Transactions.

These three regulations set the rules for anti-money laundering supervisory requirements for financial institutions with banking functions, and clearly establish the basic framework of China for anti-money laundering reporting and information monitoring system.

The China Banking Regulatory Commission (CBRC)
At the second level, it is more important than ever for China to build an independent financial supervisory authority and a transparent and accountable financial sector. The frequent occurrence of serious bank crime results from old systems, the social credit environment, the traditional banking culture in China, as well as the impotency of the supervision mechanism.

The creation of the China Banking Regulatory Commission (CBRC) has been the most important step in deepening financial reform, strengthening financial supervision and improving the financial system to better meet the challenges arising from World Trade Organisation (WTO) membership for the country's financial industry.

The CBRC is responsible for the regulation and supervision of banks, asset management companies, trust and investment companies as well as other deposit-taking financial institutions. The founding of an independent financial supervisory authority has significant implications for the safety, soundness and efficient functioning of the financial system in China and for the reduction of financial risks.

Furthermore, the CBRC has set a timetable for the country's state-owned commercial banks to do something about the rise in the number of financial crimes. The four biggest banks - the Bank of China, China Industrial and Commercial Bank, China Construction Bank and the Agricultural Bank - all set up teams to specifically curb bank-related crimes in February 2005.

Co-operation with other countries
Finally, co-operation between China and other countries is a vital method in the fight against financial crime in China. Financial crime is becoming increasingly sophisticated through the abuse of information and communications technology. With the development of IT, the methods of financial crime have become more advanced and globalized, and this leads to the necessity to undertake initiatives against financial crime at an international level, through improving legal systems, and judicial and law enforcement co-operation between different countries. Without international co-operation, there can be no effective measures against financial crime, which is increasingly an international phenomenon.

Knowing the importance of international co-operation, the Chinese government has strengthened communication and collaboration with other countries and organizations. For instance, making full use of international resources in staff training plays an important role in the international co-operation of China. In recent years, the PBC, the Ministry of Public Security and the State Administration of Foreign Exchange (SAFE), in collaboration with international organizations, such as the UN, the World Bank and the International Monetary Fund (IMF), have held a series of seminars and training sessions. The PBC has also organized several anti-financial crime seminars and training sessions and provided technical support for anti-financial crime work in China.

The Chinese government has also attached importance to co-operating with international organizations and regional groups. At present, China has signed the UN International Convention for the Suppression of the Financing of Terrorism and the UN Convention against Corruption. Moreover, in 2005, China became an observer of the Financial Action Task Force (FATF), an inter-governmental body whose purpose is to develop and promote national and international policies to combat money laundering and terrorist financing. Now, China is trying to work with the FATF in order to gain full membership.

Conclusion
With the deepening integration of China's economy with the world economy and new changes in social conflicts, strengthening anti-financial crime is of great significance. In the future, China will continue to carry out effective measures to combat corruption and advocate an honest government. Improving and strengthening an anti-financial crime legal system is also an urgent task for the Chinese government. Improving the supervisory system can encourage financial institutions to improve internal anti-financial crime procedures to forestall financial risks and safeguard the stability of the financial industry. Finally, further strengthening international co-operation can help China to play a more active role in the fight against financial crime.

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