Special Audit Report on Anti-money Laundering Related Work of Jiangsu Jingjiang Rural Commercial Bank

To Jiangsu Jingjiang Rural Commercial Bank Co., Ltd.:

We have been commissioned by your bank to perform a special audit on anti-money laundering related work carried out by Jiangsu Jingjiang Rural Commercial Bank (hereinafter referred to as JJBANK) in January 2017 from May 21, 2018 to May 25, 2018. The audit is performed on matters including the establishment of anti-money laundering system, identification of clients, risk classification of money laundering performed by clients, identification and report of block trade and suspicious transactions, publicity and training on anti-money laundering and reporting of information related to anti-money laundering, etc. We have conducted the audit in accordance with the Auditing Standards for the Chinese Certified Public Accountants, Method of Supervision and Management for Anti-money Laundering of Financial Institutions (YF [2014] No.344) of the People’s Bank of China, and systems and rules of Jiangsu Rural Credit Union and JJBANK. During the audit, we have carried out procedures that we deem as necessary, including interviews, reference to materials and on-site observation, based on the actual situations of JJBANK. Necessary materials are provided by and under the charge of JJBANK. It is our responsibility to give audit comments on the progress of anti-money laundering related work carried out by JJBANK and to issue an audit report.

I. Basic information

 (I) Organization overview

JJBANK is a local shareholding financial institution that was established in November 2009 under the reform of integral system of Jingjiang Rural Credit Union. At present, there are 32 branches, 3 sub-offices, 1 non-local branch and 21 self-service outlets in villages and towns around the city. As of the end of 2017, there were 565 employees.

 (II) Setup and system construction of anti-money laundering institution

In order to strengthen the management of JJBANK on anti-money laundering related work, JJBANK has established a Leading Group of Anti-money Laundering, the head of which is served by the Governor of the bank; the vice head of which is served by the Deputy Governor of the bank in charge of operation; members of which include heads of the Operation and Management Department, Financial Market Department, Human Resource Department, Risk Management Department, Compliance Department, Audit Department, Corporate Finance Department, Personal Finance Department, Credit Administration Department, International Business Department, Information and Technology Department, Security Department, Offices, E-banking Department, Inspection Office, etc. The Leading Group of Anti-money Laundering has a sub-division of Anti-money Laundering Office, which is responsible for the daily work of anti-money laundering of JJBANK. The office for daily works is under the Operation and Management Department, the head of which also serves as Director of Anti-money Laundering Office. The Leading Group of Anti-money Laundering works under the leadership of the Governor Office, which is responsible for the supervision and management of work related to anti-money laundering of JJBANK.

Till the end of 2017, there were 105 qualified personnel responsible for anti-money laundering in JJBANK, where 2 specialized anti-money laundering personnel were provided for the Operation and Management Department of the head office. The qualified anti-money laundering personnel have spread over the banking offices and departments of the head office. In addition, Job responsibilities of the anti-money laundering compliance personnel have been established.

JJBANK has successively developed systems for anti-money laundering, such as the Management Method for Client Identification and Maintenance of Client Identification Materials and Transaction Records of Jiangsu Jinjiang Rural Commercial Bank, Management Method for Report on Block Trade and Suspicious Transactions of Jiangsu Jinjiang Rural Commercial Bank, Confidential System for Anti-money Laundering Related Work of Jiangsu Jinjiang Rural Commercial Bank, Management Method for Training and Publicity of Anti-money Laundering of Jiangsu Jinjiang Rural Commercial Bank, Management Method for Investigation of Anti-money Laundering of Jiangsu Jinjiang Rural Commercial Bank and Management Method for Risk Assessment and Classification of Money Laundering Performed by Clients of Jiangsu Jinjiang Rural Commercial Bank. The anti-money laundering system of JJBANK is complete, which basically covers each step of anti-money laundering related work.

II. Progress of anti-money laundering related work

 (I) Client identification

In accordance with the principle of “understand your client”, it strengthens the verification of the authenticity of a client while opening an account; pays attention to the authenticity of client’s willingness to open an account and avoid opening an account with spurious materials. When handling the businesses of taking deposits or settlement business, etc., for corporate account client, it is able to demand the client to provide valid documentary evidences and materials and verify and register the responsible person in accordance with the regulations of the People’s Bank of China. When opening an account for an individual, it is able to review relevant materials in accordance with regulations of the real-name system; when there are changes to the client identity information, it is able to strictly re-identify the client as required.

JJBANK is able to make full use of the scientific and technological means to improve the efficiency of client identification. Till the end of 2017, there have been identity information of over 830,000 clients and synthetic imageries of over 290,000 clients in JJBANK. The number of client as natural person and institutional client identified for the first time is 27,260 and 3,014 respectively; according to the re-identification or the continuous identification, the number of client as natural person and institutional client is 28,787 and 2,550 respectively.

 (II) Special measures for high-risk clients

In 2017, the risk level of 707 corporate account clients and individual account clients that had been inquired by the judicial authority in term of freeze and deduct were raised. The risk level of client identified by the branch as higher than high risk shall be reported to the head office for review and approval. In addition, the review period for high-risk clients shall be set as no longer than half a year.

Currently, Jiangsu Rural Credit Union develops a blacklist for hundreds of fugitives published by the Ministry of Public Security. The blacklist includes a total of 10,348 terrorist organizations and terrorists published by relevant departments and organizations of the State Council.

Till the end of 2017, there were 707 clients of high risk, 165 clients of relatively high risk, 3,221 clients of average risk, 387,460 clients of relatively low risk and 369,791 clients of low risk in JJBANK.

 (III) Report on block trade and suspicious transaction

In accordance with the Management Method for Report on Block Trade and Suspicious Transactions (People’s Bank of China Order [2016] No.3) and by referring to the dividing standard of Jiangsu Rural Credit Union for suspicious and terrorist financing transactions of rural financial institutions, timely upgrade and supplement reasons for distinguish. Payment transactions with typical anomalous characteristics will be automatically screened out based on the highly automated e-payment transaction report system. In 2017, 87,524 block trades were reported, where 16,392 suspicious transactions were excluded and 181 suspicious transactions were reported. Among them, a severely suspicious transaction was reported to Taizhou Central Branch of the People’s Bank of China. The timeliness rate of the report of block trade and suspicious transaction is 98.99%.

 (IV) Publicity of anti-money laundering

In March 2017, JJBANK carried out the “publicity on anti-illegal fund-raising and anti-money laundering”; from July to October, it had carried out the publicity on “cracking down on crime of money laundering and building a harmonious society”; in September, it carried out the “publicity on cracking down on the emerging telecom crimes and cyber crimes”. During the publicity, the LED screen, multimedia information distribution system and televisions of branch offices showed scrolling slogans and videos of anti-money laundering. The lobby manager and counter clerk conducted the face-to-face publicity. Anti-money laundering related information and publicity videos were popped out by WeChat official account. Publicity station was established in communities. Poster foldout was given out to residents of neighborhoods. In addition, JJBANK explained the behavior characteristics of money laundering as well as the harm, identification and prevention of illegal fund-raising and money laundering to the public in combination with typical money laundering cases revealed by the media. The publicity of money laundering campaigns further improves the public knowledge of the harms of money laundering, enhances the public awareness of anti-money laundering and anti-terrorist financing, creates a good social atmosphere of anti-money laundering, effectively prevents and cracks down on campaigns and crimes of money laundering, maintains the stability of social and economic order, and sets up a good model for anti-money laundering related work.

 (V) Training on anti-money laundering

First of all, it carries out various forms of training on anti-money laundering. Contents of anti-money laundering are included into the theory test organized each quarter, the proportion of which is no less than 20%. In addition, the question bank of anti-money laundering is included to the WeChat test platform of “Daily Exercise”, where all staffs can take a test at any time. The exercise results are published regularly. Secondly, it actively participates in the anti-money laundering training organized by the superior department. In April 2017, Branch Governor and Department Responsible Person as well as specialized personnel for anti-money laundering went to Taizhou Branch to participate in the training on “block trade and suspicious transaction of financial institution”; in June 2017, the Branch Governor and Responsible Person of Anti-money Laundering Department went to Jiangsu Rural Credit Union to participate in and implement the special training on “No.3 Order” on anti-money laundering. The specialized personnel for anti-money laundering organized the sub-training for relevant personnel from the Anti-money Laundering Department of the head office and operation managers from each branch office. In addition, each branch office was required to carry out a sub-training for all tellers. In October, it organized the managers of each branch office to learn the job responsibilities for anti-money laundering and the operation process of the anti-money laundering system. In addition, it instructed the work of reporting data of anti-money laundering system.

 (VI) Situation of supervision, inspection and audit

1. It establishes the daily supervision system for anti-money laundering related work. Firstly, the Subsequent Supervision Center of the head office includes the works on anti-money laundering into the scope of key supervision, especially in term of “real name system” for account opening, deposit and withdrawal of large amounts of cash, record of client information and system for identification of agent identity. From January to November 2017, there were 326 errors in the work related to anti-money laundering. Therefore, for responsible person, 1,076 points were deducted and 7,200 yuan were fined. Secondly, the Operation and Management Department arranges special personnel to supervise the reporting status of the anti-money laundering system every day. It gives Supervision Notification to branches whose reports are delayed or have omissions or whose data reported is incomplete. The supervision results are considered during the evaluation and assessment of the branch operation and management, which greatly improves the executive capability of tellers.

2. It enhances the intensity of special inspection and internal audit. First of all, it lists the anti-money laundering related work as the necessary inspection item during the comprehensive audit carried out by the Audit Department. In January 2017, special audit was carried out for the anti-money laundering related work of the Operation and Management Department and five branches. The responsible person was deducted of 33.6 points and fined of 1,800 yuan. Secondly, in June 2017, the Operation and Management Department organized the inspection on the execution of anti-money laundering system of all bank offices under its jurisdiction. Considering the list of frequent trading and corporate account with abnormal large sum exported by the Science and Technology Department, the inspection on the execution situation of identification of client identity and report on block trade and suspicious transactions was implemented. The implementation of supervision and inspection greatly improved the quality of anti-money laundering related work.

III. Main existing issues

It is found through the audit on anti-money laundering related work of JJBANK that JJBANK still has some deficiencies in the work related to anti-money laundering:

 (I) Anti-money laundering for RMB

1. Some provisions of the anti-money laundering system are inconsistent. The requirements of Article 8 of JJBANK Management Method for Risk Assessment and Classification of Money Laundering Performed by Clients “in principle, the review period for clients with the highest risk level shall not exceed half a year; the review period for clients with one level lower shall not exceed that twice of the period of clients with one level higher” are inconsistent with that of Article 11 of the Management Method for Client Identification and Maintenance of Client Identification Materials and Transaction Records “for clients of this institution with relatively high risk level, the review period shall not exceed half a year and the review shall be conducted at least every half a year; the review period for clients with one level lower shall not exceed that twice of the period of clients with one level higher” are inconsistent.

2.  Client identification shall be further improved

 (1) The review of contents filled in the application form is not strict.

① On January 3, 2018, Jinjiang Branch of Nanjing Gaodu Property Management Co., Ltd. opened a corporate settlement account at Banking Department. The registered capital filled in the application form was 10 million yuan. However, this company was a branch and had no legal personality or registered capital.

② On January 17, 2018, Jincheng Jiangping Bicycle Accessories Store of Jingjiang City opened a corporate settlement account at Banking Department. However, the registered capital was not filled in the application form, the actual amount of which was 100,000 yuan; On January 26, 2018, Jinjiang “Old Pal Pub” opened a corporate settlement account at Banking Department. However, the registered capital was not filled in the application form, actual amount of which was 2 million yuan.

③ On January 4, 2017, Zhu Xiafeng opened a personal e-bank and applied for mobile banking service at Banking Department; however, the effective period of ID card filled in the application form was December 24, 2028, which was actually July 24, 2035. On January 5, 2017, Qiao Huaqin opened a personal e-bank and applied for mobile banking service at Banking Department; however, the effective period of ID card filled in the application form was July 21, 2029, which was actually March 21, 2036.

2. For clients whose ID cards expire, it is common that there is no indication reminding the client to update the identity information or stopping the business

① For example, on January 4, 2017 and January 5, 2017, Zhu Xuehua applied for mobile banking service and changing information of mobile banking service and the effective date of the ID card was April 29, 2017; on January 5, 2017, Liu Hongyan applied for mobile banking service and the effective date of the ID card was July 23, 2017. Till the date of the audit day, the ID cards of the above mentioned clients had all expired while there was no in-time indication reminding the clients to update their identity information.

② After the expiration of the ID card, Zhu Xuehua, as mentioned above, had several deals through e-bank and ATM. JJBANK did not stop the client from deals when such client had not updated the identity information. It is inconsistent with the requirements of Article 19 of Management Method for Client Identification and Maintenance of Client Identification Materials and Transaction Records of Financial Institution “if the identity document or identification document submitted by the client expires and such client has not updated it within a reasonable period without reasonable reasons, the financial institution shall stop handling deals for such client”.

3. The identification of clients newly opening accounts is not timely. Till May 22, 2018, there were 342 clients who opened accounts newly while were not identified, where the effective identification date of 51 clients were expired.

4. The re-identification of existing clients is not carried out in time. Till May 22, 2018, 10 of JJBANK existing clients were not identified, while the effective identification date of all of whom were expired.

5. Reasons for the exclusion of suspicious transactions are inconsistent with the reality. On January 2, 2018, Zhang Cuiyu had a suspicious transaction of 938,400 yuan at Southern Park Branch. The reason for the suspicious transaction was that “there is frequent receipt and payment between the same receiver and payer within a short period and the transaction amount is close to the standard for block trade”; the exclusion reason was that “the client is the legal representative of Jiangsu Guangyu Construction Group Co., Ltd. and the fund transferred is the deposit for bidding”. However, it was investigated that the legal representative of Jiangsu Guangyu Construction Group Co., Ltd. was Cai Yongjin rather than Zhang Cuiyu.

6. The annual training program for anti-money laundering has not been prepared. JJBANK did not prepare the annual training program for anti-money laundering for the year of 2018, which was inconsistent with the requirements of Article 5 of Management Method for Training and Publicity of Anti-money Laundering “the bank shall prepare the annual training program for anti-money laundering and shall organize the implementation of such training with a serious attitude”.

7. The procedure for consulting the files of anti-money laundering is not standardized. Our company demanded for consulting the files and relevant materials of anti-money laundering during the audit, while the institution under audit did not ask our company to go through the procedure for approval and registration of consultation, which was inconsistent with the specifications of Article 12 of Confidential System for Anti-money Laundering Related Work “if it is necessary to consult or inquire the files of anti-money laundering, follow the procedure specified internally for approval and registration of consultation; it is forbidden to duplicate, photograph or copy the files of anti-money laundering without authority”.

 (II) Anti-money laundering for foreign currency

1. Documents of remittance are inconsistent with the transactions. On January 4, 2018, Yongsheng Photoelectricity Technology Co., Ltd. of Jinjiang remitted USD 11,257.75. It was noted on the packing list, as one of remittance documents, that the goods were diffuser, while the actual imported goods were luminescence diode. The goods noted on the packing list were inconsistent with the actual goods.

2. The application for remittance has not been completely filled. On January 4, 2018, Yongsheng Photoelectricity Technology Co., Ltd. of Jinjiang remitted USD 226,360.50 to SHARP ELECTRONICS (MALAYSIA) SDN.BHD.HONG KONG BRANCH. The amount in words, address of remitter, organization code and details of payment were omitted from the application form. It was inconsistent with the specification of Article 9 of Management Method for Client Identification and Maintenance of Client Identification Materials and Transaction Records “when helping the client to remit fund to the abroad account, register relevant information such as the remitter name, account number and address and the receiver name, address and contact information; record the above information in the remittance receipt and provide the abroad organization receiving the remittance with relevant information such as the remitter name, account number and address and receiver name, account number and address”.

3. There is no evidence of withholding or payment of VAT when the client pays commission to abroad institution. On February 5, 2018, Jiangsu New Yangtze Shipbuilding Co., Ltd. paid the commission of USD 28, 098.12 to INTLCO SHIPBROKING & SERVICE CO., LTD. Of British Virgin Islands; on February 6, it paid the commission of USD 50, 000.00 to SITC BROKERS CO., LTD. of Hong Kong; on the same day, it paid the commission of USD 42, 147.16 to ASIA SHIPBROKERS LIMITED of Hong Kong. The amount of VAT were noted on the invoices that were provided, while there was no receipt of withholding or payment of VAT, therefore it was not able to confirm whether the obligation of paying taxes had been executed. It was inconsistent with the specification of Article 6 of Measures for the Implementation of Pilot Project of Replacing Business Tax with VAT (CS [2016] No.36) “for foreign companies or individuals without operating units in the People’s Republic of China that are subject to taxes within the country, the purchaser shall be obligate to pay VAT”.

4. The nationality of remitter filled in the remittance report is wrong. On January 31, 2018, Yongsheng Photoelectricity Technology Co., Ltd. of Jinjiang remitted USD 263, 604.20 to SHARP ELECTRONICS（MALAYSIA）SDN.BHD HONG KONG BRANCH. The nationality of remitter in the 50K field of Report 103 was wrongly filled as CHI.

5. Materials provided by the remitter are in contradiction. On February 6, 2018, Jiangsu New Yangtze Shipbuilding Co., Ltd. paid the commission of USD 296, 100.00 to WALTER J. HINNEBERG GMBH of Germany. It was noted on the Commission Agreement that the purchaser of 3800 TEU CONTAINER VESSEL BEARING HULL NO.YZJ2015-1204 was PETER DOHLE SCHIFFAHRTS KG, while the purchaser on the Contract of Ship Purchasing provided was indicated as CAS CHARLOTTE LIMITED, the two of which were not a same company.

IV. Audit conclusion

It is believed after the audit that JJBANK is able to establish the Leading Group of Anti-money Laundering, define the job responsibilities, establish and improve the management systems for anti-money laundering, strengthen the management, publicity and training of anti-money laundering, and execute the functions of supervision and inspection in accordance with the requirements of regulatory departments and Jiangsu Rural Credit Union for works related to anti-money laundering. Except for the impacts that may be generated by the above issues, the work of JJBANK on anti-money laundering has progressed in a good condition. The internal control of anti-money laundering is relatively effective. There is no severe anti-money laundering case or risk.

V. Comments of audit

 (I) Facilitate the upgrade and revision of internal control system for anti-money laundering so as to standardize the system for better execution.

 (II) Further strengthen the effective monitoring and analysis of block trade and suspicious transaction so as to crack down on the illegal behavior of money laundering.

 (III) Further strengthen the identification of client during the duration; pay attention to the work training on front-line employees for anti-money laundering and improve their skills for anti-money laundering.

 (IV) Further intensify the publicity of anti-money laundering so as to improve the public awareness of work related to anti-money laundering.

 (V) Standardize the confidentiality system to ensure the success implementation of anti-money laundering related work.

Zhongtianyin Certified Public Accountants Co., Ltd. China Certified Public Accountant

Jiangsu Branch

China Certified Public Accountant

July 4, 2017