November 14, 2012, 10:24 AM

http://blogs.wsj.com/corruption-currents/2012/11/14/chinas-illicit-flows-are-big-issue-for-money-laundering/

Banks face a risk from money laundering in China because of large flows of illicit money, weak controls and the difficulties of screening names, said a new report from research and consulting firm Celent.

The report was commissioned by Dow Jones Risk & Compliance, which, like this blog, is owned by Dow Jones & Co., a News Corp. company.

Money laundering is “a big issue” in southern China, Celent said, because of the informal nature of capital flows there. “Money changers, institutions and individuals who act as remittance agencies enable money transfers between counterparties in China and Hong Kong, often in violation of foreign exchange regulations,” it said.

With increased international exposure to the yuan as its use grows in commerce and finance, the report urged regulators and financial institutions, “to step up efforts to curb money laundering activities.”

China’s government has taken money laundering more seriously since 2006-2007, according to the report, with new regulations introduced, but fines on institutions for non-compliance have been “insignificant.”

The relaxed regime in Hong Kong recently came under the spotlight in the case of Yan Suiling, a saleswoman, insurance agent and restaurateur in the southern Chinese city of Guangzhou. She was convicted of money laundering after depositing in a Hong Kong account a check from the proceeds of a mortgage fraud.

Hong Kong’s Court of Final Appeal, its highest court, freed her after 18 months of jail time after an appeal by her lawyers. The court found no crime had been committed by Ms. Yan in her use of an “underground” bank, which are legal in Hong Kong but not in mainland China.

Chinese banks have weak internal controls and corporate cultures for tackling money laundering, Celent said. “Most of them take a siloed approach towards [anti-money laundering], with rule-based transaction monitoring and elementary training for employees just to avoid regulatory pressure,” the report said.

One of the major issues is screening transactions. A survey of 25 banks with Chinese operations included in the report revealed that 60% found technology issues were a challenge in using Chinese names in international payments and 56% found the same challenge with messaging systems. The survey was conducted in July and August.

“One major technological challenge is regarding the use of Chinese names and Chinese characters and transliterating them into the Latin alphabet for use in transaction monitoring purposes,” Celent said. “Many Chinese characters have the same or similar pronunciation, making it difficult to identify which characters a transliterated name represents.”

Also, a questionnaire sent with the survey showed banks find local Chinese blacklists of undesirable customers harder to use than the standard list of sanctioned individuals from the Office of Foreign Assets Control, part of the U.S. Treasury Department.

Most banks can screen the OFAC list using technology, but one questionnaire respondent said monitoring the Chinese lists requires “eyeball checking.”

Some Chinese banks have started to improve their performance in this area, the report said, but most of their focus for money laundering risk is on “high value” transactions.