With the changes in the global financial environment and the increasing complexity of cross-border capital flows, foreign exchange risk management by banks has become an important area of focus for regulatory agencies. The "Interim Measures for the Management of Foreign Exchange Risk Trading Reports by Banks" is a new regulatory document that raises higher requirements for the transparency, compliance, and risk management of banks and their foreign exchange trading activities. For foreign exchange traders, the implementation of this measure may bring a series of direct or indirect impacts, covering various aspects such as trading operations, risk control, and reporting obligations.
I. Obligations and Responsibilities of Banks
Monitoring and Reporting of Risk Transactions: When banks discover or reasonably suspect foreign exchange risk trading behaviors involving false trade, illegal cross-border financial activities related to virtual currencies, etc., they are obligated to monitor and report in a timely manner. Comprehensive and effective monitoring standards must be established, referencing information released by the central bank, foreign exchange administration, public security, and judicial authorities, as well as various factors related to their own business situation, to manually analyze and identify trading information.
For transactions classified as risk transactions, the entire analysis process must be recorded; for those not classified as such, the reasons for exclusion must be documented. Reports must be submitted electronically in a timely manner after confirming the information, no later than 5 working days. For illegal cross-border financial activities, screening information must be reported directly as required by the foreign exchange administration. Additionally, reports must be corrected promptly based on notifications from the foreign exchange administration or issues discovered by the banks themselves, and monitoring standards should be regularly evaluated and optimized.
Cooperation with Supervision and Inspection: Banks must actively cooperate with the foreign exchange administration's supervision and inspection work, providing various relevant documents, materials, data, and information truthfully, accurately, completely, and in a timely manner. They must not refuse, obstruct, or conceal information, ensuring that regulatory work proceeds smoothly.
Internal Management Measures: Banks should develop and improve internal management systems based on the measures, standardizing the workflow for foreign exchange risk trading reporting and effectively supervising the implementation by branches. A sound foreign exchange risk trading information monitoring system should be established to comprehensively collect the identities and trading information of trading entities, providing strong support for the work.
At the same time, internal information sharing should be realized, reasonably determining the degree and scope of sharing based on the sensitivity of the information and its relevance to foreign exchange risk trading management. Relevant materials should be retained for at least 5 years from the date of generation. If they involve suspected violations under investigation by foreign exchange management departments and the investigation is not concluded, they must be retained until the investigation is completed. Furthermore, information obtained through the implementation of these measures must be kept strictly confidential and must not be disclosed or illegally provided to others.
Liability for Violations: If banks violate the provisions of the measures, they will face penalties in accordance with the "Regulations on Foreign Exchange Management of the People's Republic of China." However, if banks can prove that they have diligently identified unreported foreign exchange risk trading information and that the reasons for not reporting are reasonable, they may not be held legally responsible.
II. How do banks determine if there is "reasonable suspicion" when conducting cross-border fund transfers according to Article 3 of the Measures? What standards do banks use to make this determination?
When determining whether there is "reasonable suspicion" regarding cross-border fund transfers, banks will conduct a comprehensive assessment, focusing on transaction amounts, frequency, and fund flows.
In terms of transaction amounts, if an individual or corporate account shows large cross-border fund flows that are severely inconsistent with their economic strength or normal business scale, banks will be suspicious. For example, a small family business with an annual turnover of only a few million suddenly receives a cross-border fund transfer of tens of millions and quickly disperses it to multiple overseas accounts, which is clearly abnormal.
Regarding transaction frequency, unusual changes will attract the bank's attention. For instance, if a sole proprietor usually has only a few cross-border procurement expenditures each month but suddenly has dozens of cross-border transactions daily for a period, with varying amounts far exceeding normal business scope, the bank will consider this a suspicious signal.
The direction of fund flows is also key; if the flow of funds does not match the claimed purpose by the client or flows to high-risk areas, banks will be cautious. For example, if a client claims the funds are for normal trade payments, but the money flows to areas unrelated to trade and flagged by international anti-money laundering organizations, the bank will suspect the transaction is abnormal.
Additionally, banks will reference their own business characteristics and regulatory information. If a client in a certain industry deviates from normal fund transfer patterns or encounters specific risk transactions flagged by regulators, banks will conduct focused investigations.
III. If participating in virtual currency trading and cross-border transfers, can banks consider it a risk transaction? According to Article 3, is virtual currency easily classified as high risk, and what is the attitude of banks and other financial institutions towards this?
In theory, virtual currency trading is easily classified by banks and financial institutions as high-risk. According to the "Interim Measures for the Management of Foreign Exchange Risk Trading Reports by Banks," cross-border financial activities involving virtual currencies are explicitly regarded as high-risk transactions. For example, if Xiao Zhang makes a large cross-border transfer through a bank account to a virtual currency trading platform, and the bank's monitoring system detects that the transaction amount is large and frequently involves cross-border transfers, it may mark it as a risk transaction, suspend related account transactions, and report to regulatory authorities.
In other financial institutions, the situation is similar. For instance, if a payment platform detects that a customer frequently transfers funds to virtual currency-related accounts, even if the customer tries to conceal it, the platform may identify the anomaly through big data analysis and promptly stop payment services.
Regulatory agencies such as the People's Bank of China have clearly stated that virtual currency trading is prone to illegal fund transfers and money laundering due to a lack of effective regulation, significant price volatility, and strong anonymity. Regulatory authorities emphasize that financial institutions must remain highly vigilant regarding virtual currency trading and implement strict control measures to maintain financial market stability and prevent risks.
IV. If conducting large fund transfers or frequent cross-border transactions, will banks classify them as abnormal transactions? What factors do banks typically consider to determine if a transaction is abnormal?
Large fund transfers or frequent cross-border transactions are likely to be classified as abnormal transactions. When determining whether an abnormality exists, banks will consider multiple angles.
If the transaction amount far exceeds the account's daily income and expenditure range, especially if a regular account suddenly has a large transfer, banks will pay close attention.
A sudden increase in transaction frequency within a short period is also a key focus for banks, as this may indicate abnormal fund flows.
If the direction of funds is unclear or unrelated to the account's normal business activities, banks will often suspect the transaction and conduct further scrutiny.
Virtual currency trading also exhibits similar risk characteristics in this regard.
High-frequency trading and complex, difficult-to-trace fund paths will raise banks' alertness. Particularly when the source and use of funds do not match, or there are frequent exchanges between fiat currency and virtual currency, banks are likely to classify such transactions as risk transactions. For example, some users may frequently deposit and withdraw funds during swing trading, and this high-frequency inflow and outflow of funds not only increases the difficulty of monitoring for banks but also raises suspicions about the legality of the transactions.
Transactions without clear trading documentation or that do not align with the actual use of the account are also likely to be deemed abnormal. Such transactions will trigger further scrutiny by banks, aimed at identifying potential risks of money laundering and illegal fund transfers.
Therefore, whether it is large fund transfers or virtual currency trading, banks will remain highly vigilant when handling these transactions and will carefully analyze and intervene in any potential abnormal behaviors based on relevant monitoring standards.
V. If a bank determines that a transaction is risky, what measures will it take? For example, freezing accounts or restricting fund transfers, how should traders respond, and can they avoid being frozen?
According to the Measures, if a bank determines that a transaction is risky, it will take a series of measures:
Increase Risk Level and Strengthen Review: Raise the foreign exchange compliance risk level of the trading entity and implement enhanced review measures for subsequent foreign exchange business. For instance, if a certain enterprise is found to have risk transactions, the bank will conduct stricter reviews of relevant documents and transaction backgrounds for subsequent foreign exchange business.
Adjust Approval Levels: Clarify that establishing or maintaining foreign exchange business relationships with the trading entity or processing subsequent foreign exchange business requires a higher approval level. For example, if an individual applies for a foreign exchange loan, which could originally be approved by a branch, it may now require approval from the head office due to risk transactions.
Restrict the establishment of new foreign exchange business relationships, refuse to process subsequent foreign exchange business, or even terminate existing foreign exchange business relationships. For instance, if a customer is involved in suspicious transactions, the bank will refuse their new foreign exchange remittance applications.
Limit Non-Face-to-Face Business: Reasonably limit the amount, frequency, and types of foreign exchange business that the trading entity can conduct through non-face-to-face methods.
Freeze Accounts and Other Measures: In extreme cases, accounts may be frozen or fund transfers restricted.
To avoid being frozen, it is essential to ensure that transactions are legal and compliant, providing clear and reasonable explanations of the transaction background and relevant documentation. For example, if a sole proprietor conducts cross-border transactions that are reasonable and legal, and can provide complete contracts, invoices, and other materials for each transaction, even if there is a large transaction, the bank may determine it to be normal after review and will not freeze the account. Banking experts also emphasize that clients' compliance with operations and proactive cooperation with bank investigations can effectively reduce the likelihood of being classified as risk transactions and having their accounts frozen.
For instance, Mr. Liu operates a small import-export trading company, primarily trading with Southeast Asia. Recently, the bank monitored that the company's account had several large fund transfers suddenly flowing to regions with weak financial regulation, often used for illegal fund transfers, and the transaction frequency was significantly higher than normal business needs, while the company could not provide a reasonable and clear explanation for these transactions. Based on this, the bank determined that these transactions posed a risk, raised the company's foreign exchange compliance risk level, and implemented enhanced review measures for subsequent foreign exchange business, requiring more detailed trade contracts, logistics documents, and other materials for each foreign exchange settlement and remittance, and some business that could originally be processed at the branch was required to be escalated to the head office for approval.
VI. If a bank freezes an account, is this measure short-term or long-term? What is the usual duration of the freeze, will it have a long-term impact on fund flows, and how can the account be restored to normal?
The Measures do not explicitly mention whether the bank's account freeze is short-term or long-term, the usual duration of the freeze, or whether it will have a long-term impact on fund flows. This is because the primary audience of the regulatory scheme is banks, and the regulatory targets are also banks, so specific steps for traders to restore their bank accounts are not clearly outlined.
However, in general, if an account is frozen due to foreign exchange risk transactions, it is advisable to proactively explain the transaction background and purpose to the bank in detail and clearly, providing legal, compliant, and complete transaction documentation and other relevant materials, and actively cooperate with the bank's investigation. Once the bank confirms that the transaction poses no risk after review, the account may be restored to normal status.
VII. Under the measures that banks may take against risk transactions, what specific impacts will virtual currency trading participants (including "U merchants," etc.) face? For example, will banks' restrictions or monitoring and reporting of transactions related to virtual currencies lead to limited fund flows, increased transaction costs, or greater compliance pressure for U merchants?
As banks strengthen risk monitoring, restrictions, and reporting of virtual currency transactions, virtual currency trading participants ("U merchants") may face limited fund flows, increased transaction costs, and heightened compliance pressure. For example, when banks enhance monitoring of large or high-risk cross-border transactions, they may restrict or freeze platform users' bank accounts, especially when requiring additional transaction proof and customer information, U merchants may not be able to operate funds freely, affecting platform liquidity and user experience.
Moreover, the monitoring measures by banks may lead to increased transaction costs. Banks may charge additional fees for virtual currency transactions or require platforms to provide more compliance materials, such as anti-money laundering (AML) and know your customer (KYC) checks. These additional requirements will increase the operational costs of the platform, and some of these costs may ultimately be passed on to users, leading to an overall increase in transaction costs.
More importantly, as bank regulation strengthens, U merchants face greater compliance pressure. In cross-border transactions, platforms need to comply with regulations from different countries, investing more resources in compliance reviews and risk control, which increases operational costs and may affect efficiency. This is especially true for small platforms, where the compliance burden may be overwhelming. Overall, bank regulatory measures may restrict fund flows, increase transaction costs, and intensify compliance pressure, impacting the overall operation of U merchants.
This represents the personal views of the author and does not constitute legal advice or opinions on specific matters.
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