Complex transactions challenge banks' money-laundering battle

The nation's anti-corruption campaign and drive to track down economic fugitives and corrupt officials may help banks crack down on money laundering, analysts said.

Banks have been updating watchlists for suspected money-laundering activities and heightening scrutiny of transactions and accounts. But they may be challenged by new forms of money laundering as China further opens its financial markets, with trade financing, private banking and offshore company financing among the likely sectors.

Money laundering is difficult to detect because the activities can involve many parties and locations, and they are also highly structured and complex.

During a teleconference on money laundering held by the People's Bank of China, the central bank, in January, experts said that in this complex environment, domestic banks must shoulder more responsibility and prove they can handle these emerging challenges.

As complexity increases, "more technologies and measures are required from financial institutions and compliance officers", said Manhim Yu, partner in global accounting firm EY's fraud investigation and dispute services practice.

The recent penalties and fines imposed on major global banks for money laundering show that simplely screening and monitoring customers and transactions are insufficient to manage the current compliance risks, said Yu.

Banking sources said that one problem is synthesizing the data that can help identify suspicious transactions and accounts.

"My bank has divided its business into several sectors, like many banks, such as retail banking, corporate banking and private banking. If an account in retail banking shows abnormal activity, and I want to see if the client has conducted transactions in his private banking account or the corporate banking account of a company under his name, it may take days to communicate with other departments and find out, because the information platforms are not linked and we must operate under privacy protection guidelines," said Chen Mei, compliance officer with a Shanghai-based commercial bank.

Chen said the situation can be even more complicated at multinational banks, because one can open accounts in various locations around the globe.

When it comes to money laundering, "it is a basic rule to 'know your client'. We have invested heavily in this area to improve our understanding of clients and verify information", said Chen.

Banks in China have already rated clients' risk of criminal conduct on a scale of one to five as part of efforts by the PBOC to curb laundering and fraudulent transactions, according to a post on the central bank's official website.

Financial institutions must identify their riskiest clients and use discretion to report suspect deals. The accounts of high-risk clients must be checked frequently, the PBOC said.

Guo Qingping, deputy head of the PBOC, said fighting money laundering will serve the national interest and help financial institutions develop in a sound way.

Eric Young, who specializes in forensic data at E&Y, said that data mining and risk forecasts based on real-world scenarios are crucial. Intelligent business insights can allow banks to make strategic decisions, he said.