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. 

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ComplyTech: GoldTier

GoldTier is a client onboarding system and compliance solution. It is now Thomson Reuters Client On-Boarding, a product within Risk Management Solutions.

GoldTier is a leading provider to financial firms of software for onboarding new clients in compliance with KYC regulatory requirements. Having reliable and up-to-date due diligence on potential clients is necessary to comply with KYC and similar regulatory requirements. The incorporation of Avox data into GoldTier’s onboarding system will provide financial institutions with streamlined access to constantly updated, quality data throughout the client management lifecycle. – Reuters

 


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.


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ComplyTech: Metavante/FIS Global

Metavante is a risk and compliance solution from FIS (Fidelity National Information Services), a major Financial Service Technology company. It focuses on regulatory information and reporting. MoneyCompliance has focuses quite a bit on tools for fraud and anti-money laundering, but this is different from those tools. This is very much a monitoring tools. The software solution used to be called Prime Compliance Suite. Because FIS focuses on payment technology, the compliance solution has taken a back seat. However, companies using FIS products are likely to see quite a lot of what used to be the Compliance Solutions integrated into the products by way of Fraud Management, ID Verification and ID Authentication.

 


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.


ComplyTech: Accuity Compliance Solutions

Accuity is a technology company focused on the financial services industry. MoneyCompliance reviewed the database search product it developed for American Bankers Association early this year. (Not so great when it launched.) The company has a solution for compliance needs. No information could be gathered about what institutions are using the product.

A review of its offers seems to be along two lines: provides a centralized source of public data and integration into its other products. Accuity is clearly focused on providing more to its existing clients with its Compliance Solutions. Technology-wise, it is also much simpler to provide additional solutions to self-developed products.

This really means that the additional tools, when standing alone, compete with much bigger rivals like Thomson Reuters and Factset. Plus, one of its products seems to be powered by LexisNexis, so, it is merely an integration of another vendor’s product into its own product.

Not that there is no value in these solutions, but there isn’t a great amount of value unless Accuity is a primary vendor for your compliance department. That goes back to our first claim, which is that we do not know of any financial institution that uses Accuity.

However, there is great potential of Accuity. It is a subsidiary of Reed, a business information company. Should they really decide to invest in competing in this space, financial institutions will have more options. The question for Accuity is whether it has missed to boat on becoming the primary source of information for the compliance officer.


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.


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ComplyTech: Actimize

Nice Actimize

Actimize is the industry leader in ComplyTech. It was acquired by NICE, a software company that focused on big data analysis. Actimize brought with it financial industry knowledge, regulatory compliance and customers. Among the top 100 largest banks in the world, more than 25 of them probably use Actimize. Actimize is as close to a full service Compliance Suite as it gets so far. Even still, with its focus on the financial crime side of the department, it is lacking in tools for regulatory compliance. NICE would do very well by creating a joint venture with Thomson Reuters or Bloomberg or some other financial information company and making Actimize the Compliance Department’s sole function tool. (Obviously, it couldn’t compete with the ERP systems for the business management activities, though.)

 


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.


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FinCEN defines dealers/retailers of precious metals, precious stones, jewels or other money substitutes

[EXCERPT]

Dealers and certain retailers engaging in the purchase and sale of precious metals, precious stones, or jewels are financial institutions under FinCEN regulations. FinCEN defines a dealer as “a person engaged within the United States as a business in the purchase and sale of covered goods and who, during the prior calendar or tax year (i) purchased more than $50,000 in covered goods; and (ii) received more than $50,000 gross proceeds from the sale of covered goods.” 11 FinCEN includes in the definition of “dealer” those persons “… engaged within the United States in the business of sales primarily to the public of covered goods… who during the prior calendar or tax year… purchased more than $50,000 in covered goods from persons other than dealers or other retailers (such as members of the general public or foreign sources of supply.”12 The term “covered goods” includes precious metals as listed in 31 CFR § 1027.100(d). Based on your letter, and subject to the monetary threshold and type of supplier considerations explained above, the purchases and sales the Company entered into on its own account would make the Company a dealer in precious metals, and therefore a financial institution subject to FinCEN regulations.

When acting as either a money transmitter or a dealer in precious metals, precious stones, or jewels, the Company must assess the money laundering risk involved in its non-exempt transactions, and implement an anti-money laundering program to mitigate such risk. In addition, the Company must comply with the recordkeeping, reporting, and transaction monitoring requirements under FinCEN regulations. Examples of such requirements include the filing of reports relating to currency in excess of $10,000 received in a trade or business (31 CFR § 1027.330) whenever applicable, general recordkeeping maintenance (31 CFR § 1027.410), and recordkeeping related to the sale of negotiable instruments (31 CFR § 1010.415). Furthermore, to the extent that any of the Company’s transactions constitute a “transmittal of funds” (31 CFR § 1010.100(ddd)) under FinCEN’s regulations, then the Company must also comply with the “Funds Transfer Rule” (31 CFR § 1010.410(e)) and the “Funds Travel Rule” (31 CFR § 1010.410(f)). Additionally, as a money transmitter, the Company must register with FinCEN within 180 days of starting to engage in convertible virtual currency transactions as an exchanger (31 CFR § 1022.380).


Do you agree with this inclusive definition of dealers/retailers as well as precious metals, precious stones, jewels or other money substitutes?


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.



 

ComplyTech: Tonbeller Compliance Solutions

Tonbeller Compliance Solutions is a competitor to Actimize. It also provides AML/Financial Crimes solutions, but it focuses more of Governance, Risk and Compliance solutions. That is to say, it is a GRC controls tool, primarily.

FICO is a network that Tonbeller is the primary partner of. FICO, Fair Isaac Corporation, is where a consumer’s FICO score comes from.


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.


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