China’s banks beef up risk management, compliance following probes in U.S., EU
China’s biggest banks are beefing up their risk management and compliance programs, following a series of high-profile judicial investigations and regulatory probes in the United States and Europe.
These legal and regulatory headaches are likely to be a drag on their aggressive overseas expansion until suitable anti money-laundering (AML) and know-your-customer (KYC) controls are in place, bankers and compliance experts say, but they are taking action.
A survey by LexisNexis Risk Solutions, which provides compliance services to China’s big state-owned commercial banks and smaller financial services companies, showed that about half expect to increase their compliance budgets by 20 percent or more this year, and the rest will raise it by a lesser amount.
“Chinese banks are going through a learning curve,” said Ellen Zimiles, Global Head of Investigations and Compliance at Navigant Consulting in New York. “They’re going to have to come up to standards if they’re going to have branches in the United States and Europe.” China’s top four banks, which together control $700 billion of overseas assets, have added more than 70 branches and offices to their global network in the last three years, following Chinese businesses abroad and extending their reach in countries from the Czech Republic to Chile.
The expansion has exposed shortcomings.
Last year the U.S. Federal Reserve instructed both Bank of China Ltd (BoC) and China Construction Bank Corp (CCB) (0939.HK) (601939.SS) to improve their AML procedures.
Their failings pale next to the abuses some European banks have been recently fined for by U.S. authorities, but a senior banking source said the deals BoC and CCB struck with the Fed would likely prevent them opening new branches or lines of business for at least three years. In Spain, six Industrial and Commercial Bank of China Ltd (ICBC) (601398.SS)(1398.HK) bankers were arrested in February, suspected of facilitating money laundering and fraud. The bank has said it implemented AML regulations and operated strictly within the law.
In Italy, prosecutors are seeking a trial for BoC officials in a money laundering investigation into billions of euros allegedly smuggled back into China. BoC has denied any wrongdoing.
Global Financial Integrity, a Washington-based watchdog, estimated that in the decade between 2004 and 2013 China was the world’s biggest source of illicit outflows, accounting for about 28 percent of the $4.885 trillion in illicit funds moving from the 10 biggest source economies.
