China; People's Bank of China makes second leap forward

It's a long march to compliance in China but the central bank, The People's Bank of China is - quietly - a long way beyond the first step on a thousand mile journey. Banking regulation is undergoing a revolutionary overhaul in advance of WTO, needed to produce banks that are competitive and well managed and with less of the widely publicised corruption and favour that has plagued the sector for many years.

The new governor of the Bank, Zhou Xiaochuan - a former securities regulator - is considering splitting the functions of central banking and regulation - under the plan they will remain under the same banner but will be operationally discrete. The man tipped for the job of Director of Financial Services Regulation is, rumours say, the Bank of China's President Liu who has created a highly effective compliance regime, with a serious team, at the bank's impressive Beijing headquarters. He has been rooting out bad management practices and bad managers, not an easy thing to do when there remains considerable influence by friends, family and Party in much of China's business community.

President Lui personally heads Bank of China's anti-money laundering efforts and the research and development undertaken by his team has had considerable influence on The People's Bank's policy making.

The People's Bank has been undertaking its own research for some time and in mid 2002 created two special units (The Payment Transaction Monitoring Department and the Anti-Money Laundering Work Office) to develop a system of regulation. Much money laundering activity by people is already covered by China's labyrinthine legal framework but the banks themselves were largely outside those provisions. The State and Foreign Exchange department ("SAFE") has been working on draft regulations since early 2002 and has submitted those to the People's Bank executive for consideration. These deal with large and / or suspicious transaction values. However, there are rumours that the transaction level which may be regarded as "large" will actually be small - as little as the equivalent of USD5,000. Relative to local earnings, this figure is immense but in trade terms, it is minute. However, as much international trade is already subject to considerable scrutiny, the additional burden will be very small.

Now, the People's bank has issued a set of rules that come into force on 21 March: all banks must put in place identification systems, must identify and report suspicious transactions and must not open accounts in fictitious names. This latter is likely to be a significant issue amongst the older Chinese who often have several versions of their name or even are known by several completely different names.

The penalties for failing to comply will be fines and, for individuals, demotion - a serious issue where not only loss of money and status are involved but also considerable loss of face.