China's steps to tighten regulation will likely force fintechs to build the world’s largest financial crime operations – if they haven’t started already.
Much of the discussion around China’s tighter regulation of fintechs has focused on the monopolistic behavior and quasi-bank lending practices of the large social networking cum transaction apps such as Tencent’s Weixin and Ant’s Alipay.
But a recent announcement by the People’s Bank of China (PBoC) that apparently fully co-opts them in the country’s anti-money laundering regime may end up having much larger implications.
More Than a Billion Users
Part of the reason is simply the sheer numbers. Tencent for example, claims Weixin has more than 1.2 billion users (its sister Wechat is for overseas use only).
Alibaba for its part says over 300 million daily active clients use its mobile apps, including Alipay. By contrast, the top six web properties in the US had around 200 million unique visitors a month, led by Google at 271.8 million.
If we simply take current money laundering regulation and discount the revisions coming up this August, it is abundantly clear that both companies should be building two of the world’s largest financial crime operations, if they do not have them already.
Simply put, it is a very tall order to even manage the basics – identity verification, suspicious transaction reporting and transaction limit thresholds, when you are dealing with 1.5 billion people.
Little to Show
But you don’t get the impression either of them has a large-scale operation. Tencent buried its anti-money laundering disclosure on page 145 of its 312-page annual report. In a spare 505 words that don’t fill a complete page, they say they have to «sort out the six major systems of AML management», which they then list as risk governance, risk assessment, control, system, identification and transaction monitoring, with no additional information provided on any of these in Tencent's first quarter 2021 results presentation yesterday.
Alibaba, in much the same vein, discusses in a space that is less than half that of this article about the things they need to comply with. They don’t actually say whether they do, or mention anything about processes, governance – or much of anything else.
Last Year's Dressing Down of Jack Ma
It seems clear that they have been surprised by the recent turn of events in China after last year’s dressing down of Jack Ma. Most likely, they had been paying lip service to this stuff.
It probably means that there are two teams of people sitting somewhere in China desperately trying to figure out how to build some of the world’s largest financial crime operations from little more than scratch.
Heated August
Things get worse from August when the new law comes into effect. At that point, it appears likely that the companies will have to enhance their internal controls in a way that is commensurate with their size. They will also have to start a periodic, and likely arduous, risk assessment process that is regularly submitted to the PBoC.
It all sounds very «big bank». In other words, China’s once-vaunted fintechs will become a future generation of lumbering, bureaucratic behemoths – or something they themselves would have poked fun at.