Global banks with U.S. operations are identifying and reassessing their links to China amid the prospect of new sanctions and rising geopolitical tensions with the country, sources told ACAMS moneylaundering.com.
Their assessments are a direct result of the U.S. Treasury Department’s focus on China under President Donald Trump. Since January 2017, the department’s Office of Foreign Assets Control, or OFAC, has issued 20 rounds of sanctions against Chinese entities accused of facilitating illicit transactions, primarily with North Korean or Iranian counterparties.
The department’s Financial Crimes Enforcement Network proposed in June 2017 to bar U.S. correspondent transactions with Bank of Dandong, a Chinese lender near North Korea’s border. OFAC two months later blacklisted Mingzheng International Trading, an alleged Hong Kong-based front for a North Korean bank, alongside 14 other Chinese and Russian entities.
In response to those measures, a European bank with U.S. operations conducted a China-specific risk assessment last year to map out all clients and counterparties most likely to form ties with sanctioned entities in the future, a New York-based compliance officer for that institution said.
The review included an accounting of the industries in which Chinese clients are involved, the banking products they use and all potentially high-risk counterparties to their transactions.
“In prior years, it was easier to ring-fence sanctions,” the compliance officer said, referring to avoidance of specific industries or countries. “The nature of China and its importance in the banking industry … is adding an additional layer of complexity, [and] it’s now far more complex than understanding whether you have a presence in those countries.”
U.S. officials also considered blacklisting two of China’s largest lenders—China Construction Bank and Agricultural Bank of China—alongside Bank of Dandong in 2017, but shelved the plan for fear of severely damaging the global financial system, sources told Bloomberg last year.
The Trump administration’s apparent focus on taking action against Chinese entities conducting business with or on behalf of North Korea or Iran is not the sole domain of the Treasury Department.
China’s business ties to the Islamic Republic in particular made news in December with the arrest in Canada of Meng Wanzhou, the chief financial officer of Chinese telecom Huawei, pursuant to a U.S. warrant.
Court records outlining federal charges including bank fraud, wire fraud and money-laundering conspiracy against Wanzhou’s company underscore the extent to which banks must rely on representations from their customers when managing the risk of potentially sanctioned entities.
In a 25-page indictment made public in January, federal prosecutors in New York claim that Huawei secretly conducted transactions with Iran through a Hong Kong-registered subsidiary, SkyCom, from 2007 to 2014, while concealing those ties from at least four global banks.
Huawei used those banks to clear payments from Iran in U.S. dollars. One of the lenders, identified only as “financial institution 1,” processed at least $100 million in correspondent transactions tied to SkyCom from 2010 to 2014, then severed ties with Huawei in 2017.
In June 2013, after Reuters reported links between Huawei and SkyCom, Wanzhou gave a PowerPoint presentation to that institution, reassuring executives that the telecom did not conduct business with Iran, according to the indictment. The lender kept the account open.
“Had the victim institutions known about Huawei’s repeated violations of [Iran-related sanctions], they would have reevaluated their banking relationships with Huawei,” prosecutors wrote.
Public news outlets have identified the lender as HSBC. The bank’s third-party monitor flagged at least some Huawei-linked transactions as suspicious, The Wall Street Journal reported in December. Sources subsequently told Reuters that HSBC internally investigated the matter in 2016 and 2017 and presented findings to federal prosecutors.
U.S. officials during the Trump administration have stressed the risks of exposure to Chinese entities in discussions with global financial institutions, citing general cyber-risks as well as potential sanctions issues, according to John Smith, a former leader of OFAC.
Those conversations have prompted some lenders to re-examine the risks posed by their own customers in China, said Smith, now a Washington, D.C.-based attorney with Morrison & Foerster.
“They won’t say ‘Don’t deal with China,’ they’ll say ‘Be cautious in dealing with China,'” Smith said. “It doesn’t give you much to go on.”
China in the meantime appears to have increased business with Iran despite U.S. sanctions. A U.S. congressional panel reported in November that China accounted for more than 25 percent of Iran’s oil exports in the first half of 2018.
Banks routinely require corporate customers in high-risk markets to sign attestations that they do not engage in prohibited transactions with U.S.-blacklisted parties.
Banks are less clear on which transactions require more than simply screening parties and counterparties against blacklists, said Sean Kane, a former deputy assistant director at OFAC. Further investigations would include determining whether each payment comports with the client’s business profile or carries indicia of sanctions-evasion techniques, he said.
“The bank can’t ignore information that’s been made available to them … [but] provided you’ve got the protocols in place, if something slips through because the customer misrepresented something to you, that is generally where regulators will turn their attention to the customer,” said Kane, now counsel at Dechert LLP in Washington, D.C.
Contact Daniel Bethencourt at firstname.lastname@example.org
|Topics :||Anti-money laundering , Sanctions|
|Source:||China , U.S.: Department of Treasury , U.S.: OFAC|
|Document Date:||April 1, 2019|