NANJING BANKER ON MONEYLAUNDERING AND OTHER FINANCIAL

C O N F I D E N T I A L SECTION 01 OF 02 SHANGHAI 000061 SIPDIS TREASURY FOR AMB HOLMER/WRIGHT/TSMITH TREASURY FOR OASIA/INA -- DOHNER/HAARSAGER/WINSHIP/CUSHMAN TREASURY FOR IMFP -- SOBEL/MOGHTADER USDOC FOR ITA DAS KASOFF, MELCHER, MAC/OCEA NSC FOR WILDER/LOI/KUCHTA-HELBLING STATE PASS CEA FOR BLOCK STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/KATZ/MAIN STATE PASS CFTC FOR OIA/GORLICK E.O. 12958: DECL: 2/3/2034 TAGS: CH ECON EFIN PGOV PTER SUBJECT: NANJING BANKER ON MONEYLAUNDERING AND OTHER FINANCIAL ISSUES CLASSIFIED BY: Christopher J. Beede, Pol/Econ Chief, U.S. Consulate, Shanghai, Department of State. REASON: 1.4 (d),(e) CLASSIFIED BY: Christopher J. Beede, Pol/Econ Chief, U.S. Consulate, Shanghai, Department of State. REASON: 1.4 (d),(e) ¶1. (C) Summary. The People's Bank of China (PBOC) office in Nanjing is organizing monthly anti-moneylaundering training sessions, according to the chief representative of the Standard Chartered Bank branch there. New bank regulations imposing a tax on overseas borrowings are causing concerns for the representative. Other concerns include slow-moving regulators and lack of local English-speaking bank management talent. End summary. ============================ PBOC Stepping Up Anti-Moneylaundering Oversight ============================ ¶2. (C) The PBOC office in Nanjing on a monthly basis organizes training related to anti-moneylaundering, Leo Lai, General Manager and Head of Business Development, Nanjing Branch, Standard Chartered Bank told Congenoffs on January 21, 2009. The PBOC typically sends teams to the bank, where they brief relevant Standard Chartered employees. (Note: This Standard Chartered branch is locally incorporated in Nanjing. End note.) ¶3. (C) PBOC also recently increased the frequency of required reporting on large, unusual financial transactions, said Lai. Standard Chartered is now required to make weekly reports. Lai commented that the PBOC's intent appears to be largely to catch untaxed business transactions, and to a much less extent to implement China's counter-terrorist financing measures. ============================ Concern About New Tax on Foreign Funding ============================ ¶4. (C) New Chinese regulations implementing a business tax on interest paid for overseas borrowing is one of his chief concerns on the regulatory side, Lai said. This was particularly true because the regulations requiring banks based in China to withhold business tax on interest paid on overseas funding, announced in November and in force since January 1, exacerbate the liquidity difficulties faced by foreign banks, Lai said. First, the new regulations impose business tax on the total interest paid, not just the net interest. (Note: Technically, this is "re-lending." At one point, the regulations were worded to require only that tax be paid on the net interest -- the difference between the cost of funds for the foreign lender and the interest rate charged to the China-based bank. However, this loophole was later closed. According to Chinese media reports, the financial sector pays a 5 percent business tax. End note.) Second, locally incorporated foreign banks are still dependant on funding from overseas sources. In a related comment, Lai said he had heard that the China Banking Regulatory Commission (CBRC) last fall issued a blacklist of foreign banks to which Chinese domestic banks were forbidden to lend. ============================ Comments on the Nanjing Banking Sector ============================ ¶5. (C) Lai said that he views CBRC officials as slow-moving SHANGHAI 00000061 002 OF 002 bureaucrats who are blocking development of China's financial sector. In Nanjing, Shenzhen-based China Merchants Bank is the benchmark by which other banks judge themselves, Lai said; Nanjing is China Merchants' second-largest profit center nationwide. Lai ranked the Industrial and Commercial Bank of China and China Construction Bank second and third on his list of the most important banks in Nanjing. ¶6. (C) It is difficult to recruit the right personnel for Standard Chartered, Lai said. A key requirement is English ability, because all of the bank's internal communications are in English. This has put limits on Standard Chartered's expansion in the Nanjing market. (Note: Standard Chartered has been in Nanjing for over 15 years, and is the largest foreign bank in Nanjing; given the strong local competition, it focuses on interest rate swaps, currency exchange, and cash management for foreign firms. End note.) CAMP