China Law Update December 2006

Transcription

1 China Law Update December 2006

2 table of contents In this issue of China Law Update, we summarize a variety of new banking laws and regulations that were enacted in late Revised PRC Banking Supervision and Administration Law 3 PRC Anti-Money Laundering Law 5 Provisions on the Administration of Foreign-Funded Banks 5 Implementing Rules of the Provisions on the Administration of Foreign-Funded Banks 6 Bulletin on Relevant Issues after Publication of the Implementing Rules of the Provisions on the Administration of Foreign-Funded Banks W W W. F A E G R E. C O M D e c e m b e r

3 The PRC Anti-Money Laundering Law establishes a unified nationwide system designed to control money laundering. All banks, insurance companies and securities companies are affected by this law and forthcoming regulations, which is intended to control widespread money laundering caused by corruption and other criminal activity. China opened the domestic RMB business to foreign banks with a series of laws and regulations issued in November However, these regulations require foreign banks to first establish legal person status in China, under the strict supervision of Chinese authorities. In addition, China requires foreign-funded banks to comply with strict rules governing capital adequacy and other ratios, which may be difficult or even impossible for foreign banks, even with an allowed transition period. Revised Banking Supervision and Administration Law Original Issuing Date: December 27, 2003 Issuing Body: The Standing Committee of the National People s Congress Revision Date: October 31, 2006 Revising Body: The Standing Committee of the National People s Congress Effective Date of Revision: January 1, 2007 This amendment to the PRC Banking Supervision and Administration Law includes several new articles that expand the investigative powers of municipal branches of the China Banking Regulatory Commission (CBRC) in order to enable them to supervise bank operations more strictly and efficiently. According to these new provisions, officials in CBRC municipal branches may, with the approval of the director of CBRC municipal branches, question individuals and representatives of businesses, refer to and make copies of related documents, and keep documents related to suspect organizations and individuals. This amendment took effect on January 1, PRC Anti-Money Laundering Law Issuing Body: The Standing Committee of the National People s Congress Issuing Date: October 31, 2006 Effective Date: January 1, 2007 W W W. F A E G R E. C O M D e c e m b e r

4 Under the PRC Anti-Money Laundering Law (the Anti-Laundering Law ), the People s Bank of China (PBC) will now supervise nationwide efforts to prevent, detect, and punish money laundering. In addition, the China Banking Regulatory Commission (CBRC), the China Securities Regulatory Commission (CSRC), and the China Insurance Regulatory Commission (CIRC) will all examine the anti-money laundering systems in the establishment and approval procedures of banks, securities companies and insurance companies. Eventually the CBRC, CSRC, and CIRC will publish separate regulations designed to prevent, detect, and punish money laundering within the scope of their supervision. All financial service organizations are required to establish a client identification system and should verify and record client identification information when providing any service or making any transaction involving a large amount of cash. According to measures issued by the PBC on November 14, 2006, large amount transactions that should be reported include: (1) any single transaction or series of transactions in one day (including cash deposits, withdrawals, foreign cash settlements or exchanges, cash remittances, and the cashing of checks) that total 200,000 RMB or more, or foreign currency equivalent to US$10,000; (2) one or more transfers between accounts of an organization in a single day that total two million RMB or more, or that involve foreign currency equivalent to US$200,000 or more; (3) a single transfer or a series of transfers in one day between individuals or between an individual and organizations that combined total more than 500,000 RMB, or that involve foreign currency equivalent to US$100,000; and (4) cross-order transactions between individuals or between individuals and organizations that combined total more than the equivalent of US$10,000. Financial institutions must not transact with or provide service to unidentified clients, and must not open anonymous accounts or accounts under false names. Client identification and transaction information must be preserved for at least five years after completion of a transaction. Banks are also required to establish a large amount transaction reporting system and a suspect transaction reporting system in accordance with detailed rules to be published by the PBC. The Anti-Laundering Law further provides that officials may, with the approval of provincial PBC branches, refer to and copy account information and transaction records of a person who is suspected of laundering money, and may retain relevant documents that might otherwise be removed. Officials of the PBC and its branches can require a bank to freeze a suspect account for up to 48 hours upon approval of the in-charge person at the PBC. The account must be released after 48 hours, however, unless the bank is authorized by the Bureau of Public Security or another competent authority to extend such an action. Financial organizations, including banks, stock companies, and insurance companies, that violate the Anti-Laundering Law may be fined up to five million RMB by the PBC for violations of the law that result in money laundering. The PBC may further order the violating financial organization to stop doing business or revoke its finance W W W. F A E G R E. C O M D e c e m b e r

5 permit if the money laundering is extremely serious. Directors, senior managers, and others who are directly responsible for the violation may also be fined up to 500,000 RMB and may be prohibited from working in financial industries. The Anti-Laundering Law also stipulates that client identification and transaction information should be kept confidential; that information obtained by the PBC and other authorities should be used only for the investigation of money laundering allegations; and that information obtained by courts and other judicial organizations should be used only for criminal litigation involving allegations of money laundering. In addition, the PBC has published anti-money laundering provisions that govern all types of financial organizations covered by the Anti-Laundering Law, while the CBRC, the CIRC, and the CSRC have all published drafts of their anti-money laundering regulations for comment. It is reasonably expected that China s system for the regulation, control, and enforcement of laws designed to restrict money laundering will be established and strictly implemented in The goal is to lessen and eventually eliminate the enormous amount of money laundering in China that results from corruption, financial misconduct, drug trafficking, smuggling, and other criminal activity. Provisions on the Administration of Foreign-Funded Banks Issuing Body: The State Council Issuing Date: November 11, 2006 Effective Date: December 11, 2006 Implementing Rules of the Provisions on the Administration of Foreign-Funded Banks Issuing Body: China Banking Regulatory Commission Issuing Date: November 24, 2006 Effective Date: December 11, 2006 W W W. F A E G R E. C O M D e c e m b e r

6 Bulletin on Relevant Issues after Publication of the Implementing Rules of the Provisions on the Administration of Foreign-Funded Banks Issuing Body: China Banking Regulatory Commission Issuing Date: November 24, 2006 Effective Date: December 11, 2006 The Provisions on the Administration of Foreign-Funded Banks (the New Foreign Bank Provisions ), which were issued by the State Council, replace the Provisions on the Administration of Foreign-Funded Financial Organizations that were issued in 2001 (the 2001 Provisions ). The China Banking Regulatory Commission (CBRC) later issued the Implementing Rules of the Provisions on the Administration of Foreign-Funded Banks (the Foreign Bank Implementing Rules ) and the Bulletin on Relevant Issues after Publication of the Implementing Rules of the Provisions on the Administration of Foreign-Funded Banks (the Foreign Bank Bulletin ), which together allow for a transition period for foreign-funded banks entering or expanding operations in China. The New Foreign Bank Provisions are supposed to fully open the retail banking business, both personal and commercial, to foreign banks in accordance with China s commitment to implementing WTO rules. Foreign banks may be disappointed, however, because their existing branches in China still are not allowed to provide full RMB retail services (for example, they can only accept individual deposits of more than one million RMB). Only foreign-funded banks that are legally incorporated in China are allowed to provide a full range of retail RMB services. Under the New Foreign Bank Provisions, foreign banks are entitled to engage in nearly all types of Renminbi (RMB) and foreign currency business if they are incorporated in China (a China-based legal person ). Branches and representative offices of foreign banks (non-chinese legal persons) that do business in China, however, are subject to several limitations on their business operations. No foreign funded banks in China (including branches and subsidiaries) are allowed to issue financial bonds, perform as agent for government bonds, or act as the agent to accept and pay money for, to, or on behalf of others, including companies and government agencies. Definition of Foreign-Funded Bank Under the New Foreign Bank Provisions, foreign-funded banks in China include: 1) Banks that are entirely owned by a single foreign bank or jointly owned by one foreign bank and other foreign financial organizations, and that are incorporated W W W. F A E G R E. C O M D e c e m b e r

7 in China (the China legal person subsidiaries of foreign banks); 2) Banks that are jointly owned by one or more foreign financial organizations and one or more Chinese enterprises, and that qualify as a China legal person (collectively, the banks described in 1) and 2) are called Subsidiary Banks ); 3) branches of foreign banks in China ( China Branches ); and 4) representative offices of foreign banks in China ( Representative Offices ). The New Foreign Bank Provisions remain silent on the wholly foreign-owned and joint venture financial companies that fell under the scope of the 2001 Provisions. The Foreign Bank Bulletin, however, requires extant foreignfunded financial companies to become Subsidiary Banks. Thresholds: Registered Capital and Operating Funds According to the New Foreign Bank Provisions, the minimum registered capital of Subsidiary Banks should be one billion RMB or the equivalent in freely convertible currencies, the same threshold as Chinese-funded banks. The amount of capital registered at the relevant branch of the State Administration of Industry and Commerce should be actually paid up capital, not including promised or scheduled contributions. The operating fund for each new branch of a Subsidiary Bank should be no less than 100 million RMB or its equivalent in freely convertible currencies; however, the total operating funds given to all branches combined may not exceed 60 percent of the Subsidiary Bank s capital. Foreign banks must provide China Branches with no less than 200 million RMB or its equivalent in freely convertible currencies as operating funds. Shareholder Qualification Shareholders of a wholly foreign-owned Subsidiary Bank should be financial organizations, with the single or controlling shareholder also complying with the following conditions: 1. It is a commercial bank; 2. It has had at least one Representative Office established in China for more than two years; 3. It had at least US$10 billion total assets at the end of previous year; and 4. Its capital adequacy ratio complies with both the financial rules of its home country and Chinese financial rules. W W W. F A E G R E. C O M D e c e m b e r

8 Foreign shareholder(s) and the major Chinese shareholder of joint venture Subsidiary Banks should be financial organizations, with the single foreign shareholder or the major foreign shareholder satisfying the following conditions: 1. It is a commercial bank; 2. It has established at least one Representative Office in China; 3. It had at least US$10 billion total assets at the end of the previous year; and 4. Its capital adequacy ratio complies with both the financial rules of its home country and Chinese financial rules. New shareholders of established Subsidiary Banks may be exempted from the above requirements on Representative Offices by the CBRC. Generally, the thresholds for establishing branches of foreign banks in China remain the same as in the 2001 Provisions. Approvals The Foreign Bank Implementing Rules specify the approval process for foreignfunded banks as well as the process for transforming China Branches into Subsidiary Banks. Generally, the establishment process will take at least ten months or so, and has four steps: 1) application to the CBRC for approval in preparation of establishment of the bank; 2) application to the CBRC for approval of opening to business after the application is checked and accepted by the appropriate provincial branch of the CBRC; 3) application for a Finance Permit to approve the bank opening for business; and 4) registration at the provincial Administration of Industry and Commerce. The entire process may take at least ten months for transformation of a China Branch into a Subsidiary Bank, and at least 15 months to establish a new Subsidiary Bank. If a foreign bank decides to keep one extant branch to engage in foreign currency business in China, it should also determine the distribution of creditors, debts and taxes of current China Branches between its proposed Subsidiary Bank and the preserved China Branch. (This approval process may take at least three months.) The Foreign Bank Implementing Rules also stipulate that the operating funds of current branches can be transferred to the registered capital of a Subsidiary Bank. According to reports, more than ten foreign banks from around the world, including the Hong Kong and Shanghai Bank Corporation, Standard Chartered Bank, Citibank, Algemene Bank Netherland AMRO, the Bank of East Asia and others, have submitted applications for the transformation of extant China Branches into Subsidiary Banks. W W W. F A E G R E. C O M D e c e m b e r

9 According to the Foreign Bank Implementing Rules, Subsidiary Banks that intend to provide all types of RMB business must still apply for approval to the CBRC, which may take at least seven months. This application process has two steps: first comes approval from the CBRC to prepare for doing business; then the provincial branch of the CBRC will inspect the application and issue a Permit of Finance if all is in order. Branches of Subsidiary Banks that are authorized to conduct RMB business should also first prepare a business plan, then obtain a verification letter for providing RMB business from the CBRC after acceptance by the provincial CBRC branches. Branches of Subsidiary Banks may have to wait until 2008 to actually begin providing RMB services due to the extremely complex approval process. Personnel Qualifications The required qualifications for top managerial personnel of Subsidiary Banks, China Branches and sub-branches have been raised. Under the new rules, upperlevel managers, including presidents, directors, chief officials, heads of compliance departments, heads of internal audit departments, and chief representatives of foreign banks, as well as presidents and vice presidents of branches and sub-branches, should be verified and approved by the CBRC or its provincial branches, depending on the person s position and importance. In addition, the CBRC requires that top managerial personnel, including directors and top managers, should be familiar with Chinese laws and regulations and have a good personal record of compliance with the law. The requirement to be familiar with Chinese laws and regulations, however, is not clearly defined, which may be a barrier for foreign banking professionals wishing to practice in China. Those who have failed to repay large personal debts should not be directors, top managers, or the chief representative of foreign-funded banks. Proposed directors and top managers must submit a statement asserting that they have no record of criminal convictions, or of failing to repay personal debts, and that they are committed to following all Chinese laws and regulations. Business Scope Subsidiary Banks are now entitled to engage in nearly all types of RMB banking business, such as taking Chinese individual deposits and providing bank cards. Additionally, with approval of the PBC, Subsidiary Banks may also engage in the business of foreign exchange settlements and selling foreign currencies. Branches of Subsidiary Banks may operate all types of business as authorized by their heads, subject to CBRC approval. China Branches, however, are not permitted to engage in the bank card business, and can only take fixed-term deposits from individual Chinese citizens with a minimum of one million RMB. W W W. F A E G R E. C O M D e c e m b e r

10 The New Foreign Bank Provisions also establish additional requirements for foreign banks wishing to provide RMB services, effectively limiting the ability of newcomers to enter China s banking market. Only banks that have been established in China for more than three years, and that have earned a profit during each of the previous two years, are qualified to apply for permission from the CBRC to provide RMB business. The operating time of existing branches of foreign banks can be included in calculation of the above two periods, if those extant branches will be transformed into Subsidiary Banks. Operations According to the New Foreign Bank Provisions, Subsidiary Banks in China must meet the requirements on assets-to-liabilities ratio of China s Commercial Banking Law: 1. The bank s capital adequacy ratio is greater than or equal to eight percent; 2. The ratio of the balance of loans to deposits is less than or equal to 75 percent; 3. The ratio of the balance of floating assets to floating liabilities is greater than or equal to 25 percent; and 4. The balance of loans to one client is less than or equal to ten percent of the bank s capital. Subsidiary Banks that are being transformed from extant branches of foreign banks but do not comply with these ratios are entitled to a transition period. According to the Foreign Bank Bulletin, foreign-funded banks have until December 31, 2009, to meet the requirements of clause 4 (maximum loan to a single client), with the balance of loans to one client and its affiliated enterprises not exceeding 25 percent of the bank s capital during the three-year transition period. Banks must meet the requirements of clause 2 (loan-to-deposit ratio) before December 31, 2011 (a five-year transition period). The New Foreign Bank Provisions impose more limits on China Branches. Existing China Branches that are not transformed into Subsidiary Banks should deposit 30 percent of their entire operating fund in the form of earning assets as indicated by the CBRC. The Foreign Bank Implementing Rules further specify that 30 percent of the branch s foreign currency operating fund should be saved in the form of foreign currency fixed deposits with a term of six months or longer; and 30 percent of the branch s RMB operating fund should be saved in the form of RMB national debts or RMB fixed deposits with a term of six months or longer. W W W. F A E G R E. C O M D e c e m b e r

11 Compared to the 2001 Provisions, the New Foreign Bank Provisions also increase penalties for violations by foreign-funded banks, and further provide for penalties on directors and senior managers of foreign-funded banks. The new laws allow the government to order foreign-funded banks to replace any director or senior manager who has violated the law and to prohibit him or her from working in the banking business in China. Tax Issues The New Foreign Bank Provisions say nothing about the income tax rate on foreignfunded banks, meaning that all types of foreign-funded banks are still subject to the existing 15 percent rate. It has been reported, however, that the income tax rate on all banks in China, both domestic and foreign, might be set at a unified rate of 24 percent. W W W. F A E G R E. C O M D e c e m b e r

12 Faegre & Benson s Greater China Practice Faegre & Benson LLP has extensive experience advising U.S., European and Asian clients on entering the China business environment, as well as on investment, trade and commercial matters throughout the Greater China region. From our offices in Shanghai and Minneapolis, lawyers in our China practice regularly provide international structuring, documentation and negotiation assistance for transactions both inbound to and outbound from Mainland China, Taiwan and Hong Kong. The core of our team includes highly experienced legal professionals who have studied and practiced in both the U.S. and in China. In addition, we collaborate with an extensive informal network of local law firms, which possess expertise vital in an often ambiguous regulatory environment, where local custom and practice can vary. Lawyers in our China practice represent clients ranging from privately held emerging companies to Fortune 50 multinationals in connection with their cross-border business dealings involving China. Our experience includes work in the industrial manufacturing, consumer products, telecommunications, hospitality, financial services, software, automotive, engineering, chemical products, pharmaceuticals, infrastructure, restaurant, and construction industries. W W W. F A E G R E. C O M D e c e m b e r

13 Lawyer Contacts for the Greater China Practice George D. Martin Phone: George leads the firm s Greater China practice, and is a partner in the firm s Minneapolis office. He has extensive experience in both China and Central Europe, advising U.S. and European multinational companies on investment and operational matters including international joint ventures, mergers and acquisitions, and franchising; establishment of wholly foreign owned enterprises, including assembly and processing facilities in free trade zones; licensing and technology transfer arrangements, including trade secret protection; commercial contracting for overseas operations; investment restructuring and review; Foreign Corrupt Practices Act compliance; and government relations, negotiations, and approvals. Peter A. Neumann Phone: pneumann@faegre.com Peter is a partner in the Shanghai office, has been resident in China since 1993 and is fluent in spoken and written Mandarin Chinese. Peter practices principally in broad-based foreign direct investment, mergers and acquisitions, private equity, technology and commercial matters. He has represented a wide range of publicly-held and privately-held companies based in the U.S., Europe, U.K. and Asia in such industries as electronics, industrial manufacturing, fine chemicals, software, telecommunications and Internet. Peter s experience includes advising and assisting companies on acquisitions, greenfield investments, financing, restructuring, sourcing, sales and distribution, site acquisitions, customs and foreign exchange controls and regulatory compliance. Yiqiang (Lee) Li Phone: yli@faegre.com Lee is a partner in the corporate practice in Shanghai office and provides a full range of legal services in connection with foreign investment and commercial matters in China. He is also licensed to practice law in the United States. Lee s practice is focused on the telecommunications, automotive, manufacturing, architectural, hospitality, insurance and finance industries, as well as restructuring and bankruptcy matters. W W W. F A E G R E. C O M D e c e m b e r