One tool countries use to fight money laundering – which is often tied to corruption – is keeping track of people with political links or political influence.
These politically exposed persons (PEP) often mean higher levels of risk for banks as their activities come under close scrutiny. They tend to be politicians with close business associates or familiy connections, but in China this list also includes local government officials and party members.
Beijing has taken steps to tighten its anti-money laundering (AML) legislation. A new law passed in 2006 coupled with tougher regulations drew praise from the Paris-based Financial Action Task Force (FATF) in a report published last June.
However, the country’s system is not ideal – partly because of a reluctance to create a PEP database.
Money laundering is a big issue. Whether revenues come from selling fake DVDs, international drug trafficking rings or kickbacks in exchange for political favors, dirty money has to become clean currency if it is to be moved around. In 1996 the International Monetary Fund noted that global money laundering could account for up to US$1.5 trillion, 5% of the world’s gross domestic product. In 2005 China reported investigating some 683 cases of money laundering worth US$18 billion.
In its August newsletter, the FATF noted that “the amount of money laundered in China is significant … In addition to drug crimes, smuggling and crimes against property, money laundering has been connected to a number of corruption cases.”
Common money laundering methods include cash smuggling, using the financial system through fake identities and using trade to launder the cash or the country’s large underground banking system.
Michael Zeldin, a principal at accountancy Deloitte, accepts that monitoring domestic politicians and their associates may be too much for financial institutions in countries new to such kinds of legislation, be he agrees this excuse can’t be used forever.
“I think the failure to cover domestic politicians and their close business associates given the growth that is being experienced and the Olympics and the World Fair is going to be a problem,” said Zeldin.
A big part of the problem is that China virtually runs on political connections, so a database of PEPs would have to cover tens – if not hundreds – of millions of people.
Then there is the fact that criminals with experience in this field are very difficult to stop.
“Most banks would accept that yes, they have the systems in place, but if a person is sufficiently sophisticated there is nothing they can link into to say yes, this is money laundering,” said Mark Tantam, a partner at Deloitte’s forensic and dispute consulting practice.