Draft rules to buttress clean funds law
Customer due diligence touted as elixir to financial crimes, risk management
The recently released draft rules for the administration of customer due diligence for financial institutions complements China's newly amended Anti-Money Laundering Law by introducing more targeted requirements for high-risk customers, while easing obligations for low-risk ones. Experts said financial institutions will need to strike a better balance between meeting AML due diligence obligations and safeguarding customer experience and privacy.
China's central bank and financial regulators have released the new draft rules for the administration of customer due diligence and preservation of client identity materials and transaction records by financial institutions for public feedback.
Dong Ximiao, chief researcher at Merchants Union Consumer Finance and deputy director of the Shanghai Institution for Finance & Development, said the new measures adopt a "differentiated approach" — simplifying checks for low-risk clients and strengthening scrutiny for high-risk cases.
Customer due diligence is the process by which financial institutions collect and assess information on customers or potential clients. Dong describes it as a continuous, dynamic exercise that extends beyond basic identification to a full understanding of a client's activities, intentions and risk profile.
He said CDD is vital to enforcing the Anti-Money Laundering Law, preventing and combating financial crimes, safeguarding financial stability and meeting international AML standards. It also plays a key role in protecting client funds and mitigating financial risks.
"With telecom and online fraud still rampant, improving identity verification is both important and urgent. Once customer information is more complete, financial institutions can offer more tailored products and services, improving service quality and capability," he said.
Unlike the measures in effect since March 1, 2022, the current draft does not require banks to inquire about and record the source and purpose of funds for cash deposits or withdrawals over 50,000 yuan ($6,962) by individuals. Dong urged financial institutions to conduct CDD in a "reasonable and appropriate "manner, avoiding "one-size-fits-all" procedures that could disrupt normal business and infringe on legitimate rights.
Zeng Shengjun, senior researcher at the Greater Bay Area Institute of Finance Research of Bank of China's Shenzhen branch, said removing the source-of-funds registration requirement for deposits and withdrawals over 50,000 yuan is intended to improve capital flows and encourage consumption.
He recommended banks streamline procedures for low-risk customers, strengthen checks for high-risk ones, expand use of digital tools for document verification, strictly limit personal data collection to what is strictly necessary, and choose methods that minimize impact on individual rights.
The draft also mandates that financial institutions retain customer identity and transaction records for at least 10 years after a business relationship or transaction ends, moving toward full electronic storage with safeguards against leaks and ensuring all transactions can be traced.
While industry insiders expect higher short-term compliance costs from system upgrades, staffing and data purchases, they say greater standardization and automation will reduce human errors, mitigate compliance risks and stabilize costs over the long run.
jiangxueqing@chinadaily.com.cn
