BEIJING – Sweeping revisions to China’s law against money laundering are in the works, as the world’s second-largest economy steps up efforts to curb illicit capital flows that could threaten not just the security of its financial system, but also its international reputation.

China’s legislature reviewed last week a new draft of the law – which has not been updated since its promulgation in 2007 – and is now soliciting public feedback on the text until May 25.

China is grappling with new technologies that complicate anti-laundering efforts by obfuscating the source of funds, such as cryptocurrencies and other virtual fintech assets.

The revisions to the law also precede an upcoming evaluation of China’s anti-money laundering regime by the Financial Action Task Force (FATF), a leading international watchdog that sets global standards.

“In recent years, our anti-money laundering efforts have exposed a number of problems,” China’s central bank governor Pan Gongsheng was reported by state media to have said.

Among these are institutions’ inadequate fulfilment of anti-laundering obligations, insufficient information sharing, and “new types of money laundering risks” against which safeguards have “yet to be strengthened”.

These are on top of several deficiencies the FATF had flagged when it last evaluated China’s efforts from 2018 to 2019, the reports noted.

To plug these gaps, China’s new draft law – which now has 62 articles, up from the previous 37 – spells out institutions’ anti-laundering requirements in greater detail, provides for more scrutiny of their actions, and imposes harsher penalties for non-compliance.

It stipulates that financial institutions pay attention to risks stemming from “the use of new technologies and products”, with experts highlighting that virtual assets have become an oft-used tool by money launderers and are a pressing challenge.

“Underground banks which use high-tech methods like virtual currencies to move funds have become a priority target for China’s Ministry of Public Security,” Professor Wang Xin of the Peking University Law School told The Straits Times.

In 2022, the Chinese police arrested 63 people accused of laundering 12 billion yuan (S$2.3 billion) in criminal proceeds via the cryptocurrency Tether, which is pegged at a 1:1 ratio with the US dollar, despite the trade in cryptocurrencies being illegal in the country.

The laundering came to light after the suspects had the cryptocurrency converted to yuan – and the authorities were alerted to high transaction volumes in one of the suspects’ bank accounts.

An estimated 20 to 30 per cent of the cases handled by the fintech-focused Mankun Law Firm in Shanghai involves virtual currencies entangled in money laundering-related investigations, said the firm’s director Liu Honglin, who expects a further crackdown by the authorities on this front.

Apart from this, the draft law makes clear it is not just financial institutions that have anti-money laundering obligations. They also apply to non-financial entities that deal in assets such as real estate, securities, precious metals and gemstones.

This specification would patch loopholes that allow illicit funds to come in through these channels, and address some of the deficiencies identified by the FATF, which is scheduled to commence its next review of China’s anti-money laundering regime in 2025, said Prof Wang.

Among other new provisions in the law is one establishing an entity to monitor and analyse high-value and/or suspicious transactions; and another applying China’s laws to money laundering activities that take place abroad but are assessed to infringe on Chinese security and rights.

Experts that ST spoke to said China’s anti-money laundering efforts have ramped up in recent years.

The number of people prosecuted in China for money laundering offences has increased every year since 2020, from 707 then to 2,971 in 2023, according to figures from the Supreme People’s Procuratorate. And in early 2022, China launched a three-year campaign to fight money laundering, in the name of safeguarding national security.

Not all of the laundered funds are generated in China. Some are derived from criminal activities abroad, such as through illegal gambling operations in South-east Asia, the proceeds of which are then channelled back to key stakeholders in China, said Mr Liu, the lawyer.

Money laundering is a problem for the Chinese leadership, not least because the illicit flow of funds could feed crimes like terrorism or corruption, but also because the movement of such funds both into and out of the country could sidestep China’s capital controls and potentially affect the stability of its financial system.

But even as China steps up its pursuit of dirty money, innocent funds could easily get caught in the crosshairs, said Mr Liu.

These include cross-border remittances that, en route to China, come into contact with accounts suspected of moving tainted funds and then get frozen by Chinese authorities investigating money laundering offences. This has been the experience of some Chinese nationals using non-bank third-party services to send money home from Singapore.

Mr Liu noted from his clients’ experience that it was difficult to get their funds unfrozen while investigations were ongoing, even if they had provided proof that their source of funds was legitimate.

“While we can understand the anti-money laundering requirements, we hope that the implementation of the law does not extend to those whose funds are untainted and can prove their own innocence,” he said.