Over the last several years, diplomatic relations between the United States and China have been contentious to say the least. In just the last year, the Trump Administration authorized sanctions against Chinese citizens, including top government officials, and companies determined to be responsible for human rights violations occurring in the country – a decision that ruffled feathers at the international level given the mixed emotions associated with Hong Kong’s pro-democracy movement. The U.S. Department of Justice (DOJ) also repeatedly condemned China’s efforts to pilfer the intellectual property of American firms operating across a number of industries in what John Demers, the head of the DOJ’s National Security Division (NSD), coined “economic espionage.” While the stance that newly minted Presidential-elect Joe Biden will ultimately take on China remains to be seen, it is likely that these economic and geopolitical tensions will continue into this novel phase of American democracy – this due in large part to recent developments seen over the past over the past two weeks.
This week, the U.S. Congress passed an eye-opening bill called the Holding Foreign Companies Accountable Act (S.945) with the purpose of forcing private and publicly-traded foreign (but more specifically Chinese) companies to comply with U.S. audit rules and regulations or face being delisted from U.S. exchanges. The bill, which passed with rare unanimous bipartisan support, would call for foreign firms to submit to increased oversight by the U.S. Public Company Accounting Oversight Board (PCAOB) should the measure be signed into law by President Trump. While coming as a shock to American traders and investment managers dabbling into overseas markets and promising companies such as Alibaba Group and JD.com, this response was far from unwarranted. For years Chinese companies have been abusing the system, disallowing overseas inspections of the pertinent financial records of its companies while creating a remarkably unfair trading environment, one that has put investors from the United States and other countries at a major disadvantage. Chinese-based companies like Luckin Coffee and iQIYI have dominated the news of late after it was alleged that these entities have been purposefully inflating their earnings and overall profits with little resistance, effectively conning investors out of collective millions upon millions of dollars on an annual basis. With the PCAOB restricted in its inspection and verification efforts in China, it is easy to speculate just how wide the scope of these illicit operations have grown over the past decade alone, demonstrating that this strong stance by the U.S. government is long overdue.
The bill’s sponsors, Senators John Kennedy (R-La.) and Chris Van Hollen (D-Md.) believe that this measure will in a sense help to level a playing field that has been slanted for years in the favor of the Chinese. While U.S. companies have been bound to strict financial audits and regulations, Chinese companies have had nothing to hold them back from nefarious and unethical business practices. In a statement released following the act’s passing, Kennedy affirmed, “Communist China is right now using U.S. stock exchanges to exploit American workers and families—people who put their retirement and college savings in public companies. U.S. policy is letting China flout rules that American companies play by, and it’s dangerous.”3 Thus far, each of the Chinese companies alleged of this wrongdoing have unsurprisingly been quick to vehemently deny these claims. The China Securities Regulatory Commission (CSRC) – China’s primary regulator of the securities industry –has also come to the defense of these firms, scoffing at the legislation and claiming that all Chinese companies are already following U.S. laws and regulations for financial reporting and information disclosure.3 The CSRC has also gone on record stating they are in active talks with U.S. federal regulators on an agreement that would allow for joint inspection of the auditors that audit Chinese companies, though any tangible results of such discussions remain lacking.
Another negative development in the relationship between these two world powers arose in early December following accusations that China had been knowingly tampering with ongoing international sanctions against embattled North Korea. Reuters writes that U.S. Deputy Assistant Secretary for North Korea Alex Wong has claimed that China is attempting to undo a United Nations sanctions regime pressuring the East Asian country to forfeit its nuclear weapons program. Wong reports that China has continued to host thousands of North Korean workers in spite of the U.N.’s measures, adding that over the past year, the United States had observed ships carrying prohibited coal or other sanctioned goods from North Korea to China on 555 separate occasions.1 In response to these claims, a Chinese foreign ministry spokeswoman again attempted to downplay this activity, stating that her country always follows international sanctions protocols appropriately. This representative then threw a jab of her own at the intergovernmental body, saying other countries should place greater importance on how these sanctions are affecting the “humanitarian livelihood” of North Korea and its citizens.1 Despite these counter-claims, the reality remains that China has shown increasing disregard for U.N. and U.S. sanctions and has expanded the spectrum of goods that they trade with North Korea. Iron, steel, seafood, textiles, gravel, industrial machinery, and vehicles are all goods that have been routinely moved between the two countries in recent weeks as China has sought to once again gain an economic advantage by breaking the rules.
Backing his claims, Deputy Assistant Secretary Wong announced that the United States is offering a reward of up to $5 million to anyone who can provide substantial information on the sanctions evasion practices of this variety. The U.S. government has also claimed that China has aided North Korea in laundering funds from cybercrimes carried out both domestically and abroad as part of an effort to continue funding its weapons programs. Wong threatened the Chinese with the possibility of new sanctions should they choose to continue to blatantly disregard the ones already in place, stating, “we have imposed numerous such sanctions designations in the past, and, I want to tell you, more are forthcoming.”1
U.S. Probing Lebanese Central Bank’s Ties to Corruption, Terrorism
The United States government is reportedly increasing the pressure on Lebanon’s central bank (Banque due Liban) to increase transparency into its dealings, calling for a forensic audit to investigate alleged illicit financial activity that could include money laundering on behalf of the country’s infamous terror group, Hezbollah. The Wall Street Journal writes that Washington and its western-allies are “leveraging Beirut’s desperate need for emergency financing, demanding the examination in the hope of shedding light on long-opaque central-bank operations.”4 Thus far however, such investigations have failed to gain any traction. On November 20th, an independent auditor based in New York withdrew from the probe due to the lack of access the firm was provided to the central bank’s records and financial documents, essentially rendering the investigation pointless. The U.S. government believes that several powerful Lebanese political and economic figures, including the bank’s long-tenured governor and Lebanese regulators, have actively worked to obstruct international investigations into the bank. The lack of supervision over the institution has culminated in the spread of systemic corruption throughout the country, with U.S. officials believing that the bank also heavily contributes to the financing of sanctioned militant group Hezbollah. Limited central bank records that have reached the public eye have demonstrated that Banque de Liban “allowed known Hezbollah accounts at a Lebanese private bank to operate even after being directed by the U.S. to shut them down.”4 The U.S. is now hoping that the Middle Eastern country’s dire economic straits to potentially bring change to the Lebanese political system, which analysts believe might cripple Hezbollah’s regional sway.
International Foreign Corruption Enforcement Reaches All-Time High
In spite of the COVID-19 pandemic wreaking havoc on the way of life of financial professionals across the globe, criminals and corrupt politicians have attempted to capitalize on this unprecedented period for personal gain. With this uptick in suspect activity coupled with an increase in international bribery laws coming to pass over the last few years, the U.S. government and its international counterparts have seen record high enforcement figures on foreign bribery and corruption-related misconduct in 2020. The Wall Street Journal writes that authorities in the U.S. and abroad have imposed approximately $7.76 billion in fines/penalties for these illicit activities this year, far surpassing the $2.83 billion worldwide total reported in 2019.5
The U.S. Foreign Corrupt Practices Act (FCPA) – a measure that prohibits firms and individuals from paying bribes to foreign officials to further business deals – has set a record for corporate penalties collected from stateside entities in its own right. Altogether, roughly $3.2 billion of the fines/settlement decisions reached globally have been paid to the U.S. Justice Department (DOJ) and Securities and Exchange Commission (SEC), two prominent federal governmental bodies that enforce the Act.5 In a statement released as part of a FCPA conference late last week, acting Assistant Attorney General Brian Rabbitt of the Justice Department’s criminal division summed up the progress made by his agency to date, noting “It is no exaggeration to say that the criminal division’s work in 2020 has been historic—both in terms of the results we have achieved and the circumstances under which we have achieved them.”5
FATF Holds Annual AML/CFT Joint Experts Meeting
The Financial Action Task Force (FATF), the premier intergovernmental organization combatting money laundering and illicit finance across the globe, concluded its renowned Joint Experts’ Meeting last week. With over 400 attendees from the public and private sector, the conference is held on an annual basis to address developments in the realm of AML/CFT and discuss current FATF solutions/projects, while improving information sharing and cross-border networking to improve the international fight against financial crime. Among the notable topics discussed at this year’s summit were the financing of ethnically or radically motivated terrorism, environmental crime (including illegal logging and mining practices), illicit arms trafficking and terrorist financing, and the digital transformation that is taking the financial sector by storm.2
Of course, the ongoing COVID-19 pandemic was also a major talking point, with FATF President Marcus Pleyer reiterating just how important the varying roles of compliance officials were in managing this evolving risk landscape. The meeting also allowed operators from the private sector to voice their opinions on the challenges facing their organizations, which will allow the FATF to design catered tools and protocols to better meet these demands with respect to money laundering and terror financing.
- Brunnstrom, David. “U.S. Accuses China of ‘Flagrant’ N.Korea Violations, Offers $5 Million Reward.”Reuters, Thomson Reuters, 1 Dec. 2020.
- “Joint Experts’ Meeting 23-26 November 2020.”Financial Action Task Force (FATF), 26 Nov. 2020.
- Nicodemus, Aaron. “Congress Passes Bill Forcing Chinese Companies to Comply with U.S. Audit Rules.” Compliance Week, 3 Dec. 2020.
- Talley, Ian. “Lebanon’s Central Bank Fuels Corruption, Extremism Concerns.”The Wall Street Journal, Dow Jones & Company, 30 Nov. 2020.
- Tokar, Dylan. “Foreign Bribery Enforcement on Track for Record-Breaking Year.” The Wall Street Journal, Dow Jones & Company, 4 Dec. 2020.