Chapter 11: Money Laundering and Anti-Money Laundering in Free Trade Zones: International Experience and Shanghai Strategies

Preferential and facilitative policies in free trade zones (FTZs) bring about not only conveniences for business transactions but also risks for money laundering (ML). It has been internationally acknowledged that the anti-money laundering (AML) supervision should be strengthened. The FTZs across the world prove to be extremely attractive to money launderers and terrorist financiers for their loose regulations due to the following reasons: (1) absence or inadequacy of AML and anti-terrorist financing (ATF) framework; (2) loose regulation and low transparency; (3) great difficulty in cross-system/department coordination; and (4) “natural” ML risks brought about by high risk goods. Trade-based money laundering (TBML) is one of the most frequently used ML methods by money launderers. The cases in this chapter show clearly the existence of ML/TF risks and vulnerabilities of FTZs. Besides, FTZs have also been used to predict crimes of money laundering (smuggling and drug trafficking) and the cleaning of relevant illegal gains. Based on its experience in international AML practice, Financial Action Task Force (FATF) has proposed risk indicators concerning money laundering in FTZs and six AML principles; and Caribbean Financial Action Task Force (CFATF) has made AML suggestions for FTZs from various aspects. In this context, AML supervision in Shanghai FTZ must be based on the existing AML laws and regulations and rely on relevant financial institutions; and advantages of the Shanghai headquarters in AML monitoring, analysis and supervision must be made full use of to construct an effective AML mechanism in China (Shanghai) FTZ. To this end, first, financial institutions should take the main responsibilities in AML actions in the FTZ; second, efforts should be made to develop a reporting system for suspicious transactions based on the principle of “reasonable doubt”; third, targeted strengthening of AML supervision in the FTZ should be implemented accordingly; fourth, a coordination mechanism should be built between AML competent authority and other departments in charge of customs, taxation, industry and trade; fifth, AML training and education need to be strengthened; sixth, more researches on TBML types and distinctive characteristics should be done and Internet technology and instruments should be developed and applied; and seventh, financial and trade data should be integrated to build a secondary AML monitoring analysis system in PBC Shanghai Head Office (complementing the monitoring center in the PBC Beijing Head Office).