anti-money laundering in the age of alipay

The digital payments and mobile banking industries are growing rapidly in China, with companies now offering wealth management products as well as transaction-focused services. These developments increase opportunity and flexibility for a historically under-banked society, but they also present new challenges for those seeking to verify source of wealth or prevent financial crime writes Danielle Vrublevskis.

Walk down a street in any major Chinese city, cash in hand, and you’ll find yourself part of a dwindling minority. China is rapidly becoming a cashless society and everybody, from luxury retailers to vegetable stall vendors, is being swept along. Digital payment has grown in China at a dizzying pace. In 2017 alone, approximately USD 15.4 trillion in transactions were conducted via third-party Chinese mobile digital payment platforms. As a comparison, Visa reported transactions of USD 7.3 trillion across all its worldwide payment products in 2017.

The digital payment market in China is dominated by two platforms: Alipay, a subsidiary of Alibaba Group, China’s largest e-commerce platform, and WeChat Pay, part of Tencent Holdings, one of China’s largest internet services companies. Together, these two platforms account for 94 percent of the total market share. Many digital payment companies offer accompanying wealth management products, such as Yu’e Bao, a money market fund that draws money from Alipay users and which was established just five years ago. Yu’e Bao has over 370 million account holders and CNY 1.32 trillion (USD 190 billion) in assets, making it one of the largest funds of its type in the world. As a comparison, the JPMorgan Prime Money Market Fund, a major US-based fund, reported total fund assets of USD 42.82 billion in October 2018. These investment products allow clients to invest using their mobile payment app and offer both greater convenience and higher returns than traditional wealth management products.

As these platforms proliferate, so does the risk that they will be used for illicit activities. Not only do the velocity and volume of payments present a challenge to anti-money laundering procedures, but the products themselves cause difficulties for anyone trying to verify an individual’s wealth. As first-hand experience tells us, this is particularly true when confronted with subjects who only report assets held via mobile payment applications, such as Yu’e Bao.


Regulations are only likely to tighten in the coming months and years, as China grapples with a newly digitized economy in which some shopkeepers are even refusing to take cash

A digital client

To take a hypothetical example, a fictional Chinese national Zhang Xiuying, approaches a UK bank to open a bank account. Zhang lives in Beijing and reports to work as a web developer. She uses Alipay and reports that she holds USD 14,000 of assets in Yu’e Bao, approximately half of the maximum permitted amount.

Zhang’s profile presents three know-your-customer (‘KYC’) challenges. The first is a lack of documentation. Zhang can print out or screenshot her balance in Yu’e Bao, but she cannot request an official bank statement. Unlike bank statements, screenshots and printouts cannot be verified, and there is a risk that Zhang’s documents have been manipulated or falsified.

The next challenge is confirming whether Zhang is indeed the owner of the account. There have been numerous incidents of impersonation of Alipay customers. In October 2018, the Hong Kong Monetary Authority ordered the suspension of automatic transfers by units of Alipay and WeChat Pay after customers were defrauded of a total of HKD 180,000 (c. USD 23,000); several of the victims reportedly had their personal details stolen, which were used to establish other e-wallet accounts.

Finally, Zhang pays into her Alipay account from her personal card and so any details about the original source of funds are omitted. The use of proxies is common in the PRC, where individuals move money on behalf of friends and acquaintances for myriad reasons, including tax avoidance and attempts to circumvent China’s outward-bound capital restrictions. This lack of transparency is compounded by inadequate procedures at PRC financial institutions. PRC banks have struggled with enforcing anti-money laundering (‘AML’) and KYC procedures:  in 2016, Agricultural Bank of China was fined USD 215 million by New York’s financial regulator for enabling money laundering, and masking suspicious transactions involving sanctioned parties. Digital banking is under less regulatory scrutiny than traditional banking and has consequently engaged less with AML and KYC compliance. This problem is not unique to China. Regulators in the US and Europe have struggled to keep pace with developments in digital payment, although recent AML measures approved in May 2018 by the EU have helped close fintech regulatory loopholes. However, the high penetration of digital payment in China makes it especially relevant for Chinese regulators. In May 2017, China’s central bank fined Alipay and WeChat Pay for inadequate anti-money laundering measures; neither company had complied with the requirement to prove the identity of at least 90 percent of their customers.

Looking ahead

China is aware of the risks linked to the rise of digital banking and is taking action. In August 2017, China’s central bank announced the requirement for mobile payment groups to channel payments through a central clearing house, placing them under more effective regulatory oversight. This clearing house, named Wanglian, launched in June 2018 following a trial period; however, details on its operations are scarce. China has also increased restrictions on digital payment providers, with measures including capping the daily spending limit available via quick response (‘QR’) codes to USD 79 and cutting the maximum limit for individual accounts with Yu’e Bao. These regulations are only likely to tighten in the coming months and years, as China grapples with a newly digitized economy in which some shopkeepers are even refusing to take cash. Despite this, regulators will continue to play catch up, and companies and institutions conducting KYC or AML checks on Chinese clients with digital assets must remain alert to this unique and ever-changing risk. As first-hand experience shows, source of wealth verification and risk identification within this space can be very challenging. A good starting point is to understand the digital platforms themselves, and the context in which they have become so prominent in China’s digitized economy.

Abu Sayyaf Returns?

Maritime Kidnappings in the Sulu and Celebes seas in 2018

The September 2018 kidnapping of three Indonesian fishermen has raised concerns that the Abu Sayyaf Group has resumed its kidnap for ransom activities in the Sulu and Celebes seas after 18 months of relative inactivity, writes Rob Attwell.

In September 2018, armed assailants abducted three Indonesian fishermen off the coast of Semporna, a town in Malaysia’s eastern Sabah State. The case has renewed concerns regarding the Abu Sayyaf Group (‘ASG’)’s involvement in maritime kidnappings in the Sulu and Celebes seas after an 18-month period of relative inactivity.

According to local media, the three victims were docked at a local jetty when the kidnapping took place. An eyewitness – a crewmember who avoided detection by the kidnappers – told local police that two armed assailants carrying assault rifles boarded the fishing vessel at around 01h00 local time before forcing the victims to disembark and board their speedboat. The perpetrators were overheard speaking Suluk, a dialect common in the southern Philippine province of Sulu, where ASG is primarily based. The dialect, combined with the tactics employed and weapons used, led investigators to conclude that ASG militants were likely responsible for the incident. Neither Philippine nor Malaysian authorities have confirmed whether ASG has issued a ransom demand for the three Indonesian victims.

However, the case has raised concerns that the group is resuming its maritime kidnapping activities as a means of generating revenue for its militant activities. For example, shortly after the above kidnapping incident, three other Indonesian hostages were released by ASG in Indanan, Sulu Province, in exchange for a hefty sum. These hostages had also been abducted off the Sabah coast in January 2017 and were released after a representative from the Moro National Liberation Front (‘MNLF’), an ethnic Moro Muslim separatist group which signed a peace agreement with the Philippine authorities in 1996, negotiated with ASG on behalf of the Philippine and Indonesian authorities. While authorities have not confirmed if a ransom was paid, Philippine media investigations indicate the Indonesian government paid several million USD to secure the release of all three hostages.

Maritime kidnappings by ASG have remained a consistent threat to foreign tourists, local fishermen, and shipping industry employees in the region for almost two decades

The Rise and Fall of Maritime Kidnappings in the Sulu and Celebes Seas

Maritime kidnappings by ASG have remained a consistent threat to foreign tourists, local fishermen, and shipping industry employees in the region for almost two decades. However, the number of incidents off the coast of the southern Philippines and eastern Malaysia increased dramatically between 2016 and 2017. This figure jumped from zero in 2015, to 28 in 2016, and 10 in the first quarter of 2017. The majority of victims were employed in the fisheries and shipping industries, and several were foreign tourists.

The kidnappings have served both ASG’s financial and ideological objectives. The latter motivation became especially important after the group declared allegiance to the Middle East-based Islamic State (‘IS’) group in July 2014, and reiterated their support in 2016. ASG has historically alternated between being primarily engaged in militant and criminal activities, and its involvement in the latter delegitimised it in the eyes of many would-be foreign Islamist militants and fundraisers. However, through its affiliation with IS, the group improved its image among global Islamists by adopting similar propaganda tools, including the release of IS-inspired execution videos, such as the filmed beheading of a German hostage in February 2017. Following the adoption of these techniques, ASG reportedly received increased foreign donations and recruits, including fighters from the Middle East, Europe, and the Caucasus.

The 2016-2017 spike in maritime kidnappings prompted Philippine, Malaysian and Indonesian authorities to enhance maritime security cooperation in June 2017. These measures included enhanced information sharing and joint maritime patrols. After these measures were adopted, the number of maritime kidnappings declined dramatically, with no further incidents being reported until September 2018.

Rise Again?

The September 2018 kidnappings have raised concerns about the continued effectiveness of these maritime security measures. Specifically, ASG’s apparent 18-month hiatus from maritime kidnappings has allegedly seen Philippine, Malaysian, and Indonesian maritime security personnel grow complacent, thereby allowing militants to slip by undetected. Further indicative of this trend, several instances of maritime piracy by either ASG or local criminal groups also occurred in the Sulu and Celebes seas in 2018 despite enhanced trilateral cooperation.

ASG also needs to recoup lost resources following failed militant operations in the southern Philippines, further increasing the threat of maritime kidnappings. Notably,  ASG, along with the Maute Group, another group affiliated with IS, significantly depleted its human and financial resources during the failed May-November 2017 attempt to capture the city of Marawi, Lanao del Sur Province. The group’s most prominent commander, Isnilon Hapilon, was killed during the fighting, as were an estimated 975 additional ASG and Maute Group militants. Kidnapping for ransom has historically been the group’s primary means of generating revenue and, going forward, the group will likely view such tactics as an attractive means of recovering lost resources and funding future militant operations.

Both the apparent complacency of regional security forces, and ASG’s need to generate revenue in light of its failed activities in Marawi, are expected to contribute to an elevated threat of maritime kidnappings in the Sulu and Celebes seas. The most likely targets will include shipping industry and fisheries sector employees, as well as foreign tourists. Consequently, these industries are advised to closely monitor regional developments in order to ensure the continued safety of their personnel and maritime assets.