China’s Complicated Compliance

Shanghai Stock Exchange

China has many of the same compliance rules in its stock market exchanges as the major exchanges around the world. But as with many other things in China, there is an unavoidable twist.

The recent drops in the market at the Shanghai Stock Exchange has uncovered some of the nastiness that had been hidden. A recent report came out stating that state-owned Citic Securities has found price manipulation going on by its employees. This seems like a simple case since it is the work of a group of employees. Fire and prosecute those employees.

But is it that simple?

The police investigators have uncovered a government-promoted vicious cycle. If the employees were doing what they were supposed to, then they were supposed to help the state manipulate the price of stocks higher.

Here’s how it works. The government promotes to Chinese citizens to invest in the market, which Citic Securities, along with others, sell shares. Citic and their counterparts are supposed to, then, drive the price of the stock up so that the investors are richer. Citic, of course, receives a portion of the rise in the market. And, as long as Citic continues its role as price drivers, the China Securities Regulatory Commission has no problem with it.

Since providing false information is important for the Chinese government, sending the true information might get you in trouble. While it is unknown about what happened at Citic specifically, but the Chinese news agency The People’s Daily Online is taking a hit. Its Editor in Chief has been arrested. A little too much truth slipped through the censorship, one might guess. The charge, one would assume, would be spreading false information, although “false” would have to be qualified in this case.

So, now it is up to the CSRC to prosecute this case. CSRC has the difficult job of seeking actions taken by these employees that show the Chinese people that the Citic employees were not doing what Citic wanted them to do and the means of which they were doing their illegal activity was for their own benefit. Both need to be satisfied because simply not doing what they were supposed to be doing isn’t likely to be a prosecutable regulatory offense but a company issue. And, if the activities were for the benefit of the Chinese market, then it is an excusable action.

For the director who was involved, this might be easier to find. The lower level employees are a little more difficult. Director has the power to help decide what is good for Citic, its clients and for the market. But the employees have no power to do the same, making them executors of the director’s decisions.

Riding a fine line to prove this will be important because without it, what the Communist Party will have on its hands is a way for investors to file suit on the government for encouraging the creation of a bubble, requiring it to compensate the investors for their losses.

If you’ve been following the news on the Chinese stock market, you may have heard that China has begun to sell US Treasuries. This is to pay back some of the investors on their losses. Currently, there seems to be some sort of strict criteria to cashing out and then getting compensated, but with this case, the CCP will be faced with a choice of intervening in the market on the side of the investors/citizens or taking down large sections of the securities trading operators.

You probably do not have access to the Shanghai Stock Exchange, but have you bought into Chinese funds?

Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses. He is a member of ACAMS and ACFE. 

Many Banks Cut Clients Over Money Laundering Fears
(credit: Robert Kaplinsky)

Many banks have cut clients over money laundering fears. With fewer clients, low interest rates and low volatility, there are less ways for financial institutions with multiple lines of businesses can earn money. Bank of America, Citigroup and JPMorgan Chase combined cut 50,000 jobs in 2014. Industry wide, some have reported 80,000 cuts. Profits are up at banks because of the job cuts, not because of improving economy.

One area that hasn’t seen a decline in headcount is Compliance. All compliance-related areas of the bank (Compliance, Legal, Risk, Controls, Audit) have all seen headcount increases. For many of the areas, skills from other areas of the bank is quite transferable. Knowledge as well.

But knowledge of AML is particularly lax. And, sadly, many of the top decision makers are not versed enough in AML issues to figure out a way to restructure the organization to keep clients. So, the only thing they can do is to cut clients.

While this might be good for the domestic banking industry, on the long run, this will be bad when these firms are trying to compete with their large Chinese competitors. The five largest Chinese banks have an edge on AML programs, should they choose to implement it: government support.

Because Chinese banks are essentially government owned, AML programs in these institutions can implement government level standards even with bank secrecy laws. This integrated approach is at the risk of bank secrecy laws, but it also means that even without knowledge of AML, top decision makers can decide to keep all clients and adjust AML programs as the government sees fit.

This issue has been playing out the last few years because the US has been seeking ways to punish Chinese bank clients through their correspondent accounts for revenue from counterfeit products they sell. The measure should really be tied to counterfeit products that are made, not those that are sold, but that’s especially difficult since the US government has no jurisdiction in production abroad. But US laws allow extra-jurisdictional reach on banking when correspondent bank accounts are in the US. But, of course, Chinese banks are against this. So is the Chinese government. On the other hand, the Chinese government doesn’t want their economy to be so heavily depended on counterfeit products. So, the conundrum is for the Chinese government. The US is enforcing the type of laws they would like to implement, but the punishment will be doled out in the US. If the Chinese government also pursues this, the punishment will be on both sides. And the Chinese government also has to look out for the short term economy, which is heavily depended on counterfeits.

So, at least US and European banks can breath one sigh a relief: the clients they are dropping must find banks within the western government jurisdictions because shifting the economics of counterfeit financing and transactions would provide more leverage to implement more stringent AML programs on the institutions that currently do not have such programs.

About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.


Visa: Everywhere you want to be (in the US)



Last month, US arrested Zhao Shilan and her ex husband Qiao Jianjun, both 51, in Newcastle, Washington, a suburb of Seattle. This isn’t the normal visa fraud story. It has multiple parts.

House in Newcastle, WA from South China Morning Post
House in Newcastle, WA from South China Morning Post

US has laws that allow a wealthy foreigners to own a business in the US with an investment of at least $500,000 and must create some jobs to gain a visa, specifically an EB-5. The idea is to encourage foreign direct investment. The minimum required is $500,000. The Chinese couple, they were married at the time, bought a home in Newcastle for $500,000.

Here’s the string of lies:

  • Zhou and Qiao are married, but they aren’t, so, Qiao doesn’t qualify as family.
  • Neither owns any business in China.
  • Qiao performed an illegal transaction at a grain storehouse, where he was a director, to acquire the funds for this real estate purchase.

Zhou has been arrested and faces charges for immigration fraud and money laundering, which could land her in jail for 30 years if she were to do them consecutively. Qiao is a fugitive and has not been found.

Qiao Jianjun from The Chinese Journal
Qiao Jianjun from The Chinese Journal

About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses. He is the author of the forthcoming book History of Money Laundering: How criminals got paid and got away.


Bank in Andorra helped money launderers
Banca Privada D’Andorra Logo

Do you know where Andorra is?

Probably not. It is the Switzerland of the Pyrénées.

It shares many traits as Switzerland. It is a tourist economy. It has a successful ski resort industry. It is a tax haven. And it has bank secrecy laws that make it a attractive for the wealthy to hide their wealth.

Anywhere bank secrecy laws make it easy to hide wealth is a place that attracts those who acquire wealth through illicit business. Andorra is no exception.

The Chief Executive Officer of the Banca Privada d’Andorra is facing money laundering charges. He is accused of helping clients from China, Russia and Venezuela and possibly others after a more comprehensive investigation commences. The arrest is a reaction to the bank being placed on US Treasury list of “primary money-laundering concern.” Entities and persons on this list are often barred from the US financial system, which, in return, cascades to reciprocal severances from other financial systems.

About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.


China’s New Corporate PR Problem

Corruption in the People’s Republic of China is nothing new to Western media consumers. The usual story is some corrupt politician in one of the ministries or provincial government who has been giving favorable contracts to friends and family for kickbacks. But in the past couple of years, a rise in a new type of corruption has been coming to light: corporate corruption.
from China Daily Mail

Major Chinese corporations are generally state-owned and state-controlled. This makes these corporations arms of the government, even though they are participating in the private sector like other private sector firms. So, when corporate corruption takes place, the Chinese government is on the hook for them.

Chinese state-owned enterprises, especially China Construction Corporation (CCC), have been bidding for construction contracts in South Asian, Middle East and Africa against, primarily, South Korea. With the financial backing of the Chinese government, these firms have been winning the contracts for building infrastructure in Africa and private real estate projects elsewhere. Though these firms are working outside of China, their practices haven’t changed. Client-governments have been receiving bills that are twice as expensive as comparable projects, environmental studies and other feasibility studies have not been performed, and local officials have been getting offers to look the other way on these activities.

In a bold move, the Chinese government has primarily taken to defending CCC, asking client-governments to respect the contracts and pay up. Local governments find it hard to swallow such counter-accusations when China won’t produce evidence of work being done properly or at all. The Chinese government has a difficult time with diplomacy under such circumstances because they are considered intimately involved in these firms.

Corruption for Chinese firms like CCC puts Chinese government in a bind because it has been trying to crackdown on corruption in the government and cleanup its image. In the technology sector, firms like Xiomi has been able to prove to the world very quickly that it can compete fairly by producing better phones. If other sectors in China are to attempt to work across its borders, it’ll have to learn to compete with rules it can’t break.

About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.


Alibaba is being kicked out of Taiwan
Jack Ma, Founder & CEO, Alibaba Group

Alibaba, the Chinese AmazoneBayPaypalDHL all-in-one, has been ordered to leave the Taiwanese market by Taiwanese regulators. It ran afoul of a law that required all mainland Chinese companies to go through a special registration in Taiwan to do business there. The Taiwanese subsidiary was registered as a fully controlled entity of Alibaba’s Singaporean subsidiary. The Singaporean subsidiary is a wholly controlled by the Mainland company, making the Taiwanese subsidiary a Singaporean company in name only.

Regulators discovered that Alibaba had not passed the registration process required of Mainland companies when reviewing Alibaba’s filings with the SEC in the United States. Alibaba filed papers with the SEC to publicly trade its equity shares in the US markets.

The purpose of the law is to prevent the Communist Party from taking a hold on the island.

Founder and CEO of Alibaba is the every so charismatic Jack Ma.

Taiwan’s official name is Republic of China, not to be confused with Mainland’s official name, People’s Republic of China. The Taiwanese government was formed when the Communist Party kicked out the party from the Mainland. In the early days after the communist revolution, most western powers recognized the Taiwanese government to be the legitimate government of China. Unofficially, US President Richard Nixon recognized the Communist Party as the ruling party. And officially, US President Jimmy Carter recognized the Communist Party as the ruling party. Since the turn of the century, Republic of China has been on a campaign to consider itself an independent nation, seeking a seat of its own in the United Nations and developing diplomatic relationships across the globe. Also, it has supported a grassroots campaign in the United States to have US citizens and permanent residents of Taiwanese decent to identify themselves as “Taiwanese,” rather than Chinese, in public and on the census.

About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.


Obama to Create New Central Cybersecurity Agency

The private sector plays a more central role in spotting and responding to cyber incidents than they do in the counterterrorism realm, where the government largely takes the lead. – Lisa O. Monaco, President’s Homeland Security and Counterterrorism Advisor
Seal of the Office of the Director of National Intelligence

Lisa Monaco announced the launch of Cyber Threat Intelligence Integration Center (CTIIC), which will provide analysis to policymakers and intelligence operatives using private sector data.

CTIIC will report to the Director of National Intelligence.

This was also written about in a previous post.




About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.