Interpretation of the "Regulations on Due Diligence and Exemption for Bank Forex Business": Clarifying Forex Business Rules and Responsibilities

Recently, the State Administration of Foreign Exchange issued the "Regulations on Due Diligence and Liability Exemption for Bank Foreign Exchange Business (Trial)". This document clearly defines the boundaries of responsibility and the circumstances for liability exemption in bank foreign exchange operations. This article will delve into the important significance and key points of these regulations, helping readers to fully understand the rules and responsibilities in foreign exchange business.

The introduction of this regulation aims to avoid excessive regulation and ensure financial stability. It not only relates to the daily business operations of banks but also closely connects to the vital interests of every trader.

The Main Obligations of Banks

1. Due diligence obligations: Banks must fulfill the responsibilities of "knowing the customer, knowing the business, and conducting due diligence" throughout the forex business process and implement effective risk management measures.

2. Compliance Review Obligations: Conduct compliance audits on clients' forex accounts, fund transfers, and foreign exchange transactions, strictly in accordance with foreign exchange management regulations.

3. Reporting obligations for monitoring: When implementing forex facilitation policies, carry out trading risk monitoring, promptly identify potential compliance risks, and report them to the foreign exchange management department.

4. Compliance with International Rules and Reporting Obligations: Adhere to the internationally accepted rules for cross-border operations and report promptly when any compliance risks are identified.

5. Obligation to cooperate with the appeal review: During the investigation initiated by the foreign exchange bureau, promptly fill out and return the "Appeal Form" and relevant evidence, and actively cooperate with the investigation.

Consequences of Non-Performance of Obligations

If the bank fails to fulfill the above obligations, it will face legal liabilities, including administrative penalties, based on the Administrative Penalty Law of the People's Republic of China and the Foreign Exchange Management Regulations of the People's Republic of China.

High-Risk Trading Activities

The risk trading behaviors that banks may report include:

• Suspected of false trade and false investment financing
• Underground money house activities
• Cross-border gambling
• Fraudulently obtaining export tax rebates
• Illegal cross-border financial activities involving virtual currency
• Other suspected illegal cross-border capital flows

In cryptocurrency trading, typical high-frequency and high-risk trades include:

• Frequent deposits, withdrawals, and swing operations
• Complex capital flow paths
• Large remittances or capital splits are credited without a reasonable commercial background.
• The sources and uses of funds do not match.
• Flowing through multiple wallet addresses or trading platforms
• Use a mixer for anonymous transactions

High-Risk Trading Groups

In the field of virtual currency, groups that are easily identified as risk traders include:

1. Frequent arbitrageurs: A group of people who frequently exploit market arbitrage opportunities by repeatedly buying and selling between different exchanges.

2. Anonymous traders: Individuals who use complex trading paths to hide the flow of funds and trade with anonymous tools or in regions with weak regulation.

3. Participants with abnormal capital operations: Those whose account funds fluctuate frequently and involve large amounts, inconsistent with their personal financial situation, and who cannot provide a reasonable explanation.

Situations Beyond Bank's Review Capability

Certain transactions may exceed the review capacity of banks, mainly including the following situations:

1. Technical and resource limitations: For example, if virtual currency transactions involve a large number of anonymous overseas wallet addresses or are conducted through decentralized trading platforms, banks find it difficult to trace the true source and destination of funds.

2. Regulations and Information Transparency: Virtual currencies lack a unified international regulatory framework, there are significant differences in regulations among countries, making it difficult for banks to accurately assess the compliance of transactions.

3. Transaction is exceptionally complex: For example, funds go through multiple mixing operations and transfers between several "shell" company accounts, resulting in extremely chaotic fund flows, making it difficult for banks to clarify the entire transaction chain.

Handling Conflicts Between International Rules and Domestic Regulations

When international rules conflict with domestic regulations, banks usually prioritize following domestic regulations. This is because banks conduct business domestically and must comply with domestic supervision, and adhering to domestic laws is the foundation for ensuring the stability of the financial order.

For traders, these potential conflicts must be given special attention. Before engaging in trading, it is essential to fully understand domestic regulatory policies to avoid damage to one's own interests due to rule conflicts, and to be aware that banks may refuse to process certain transactions that seem feasible under international rules due to compliance requirements.

The Role of Traders in Bank Complaints

When a bank is investigated and appeals due to violations, traders may play the following roles:

1. Assist in investigation: You may need to provide business-related information to restore the true nature of the transaction.

2. Potential liability association: There are certain risks in providing evidence. If there are issues with the evidence provided, it may not only affect the bank's appeal but also expose the trader to potential investigation.

Traders should exercise caution during the bank complaint process and provide evidence truthfully to protect their own and the bank's legitimate rights and interests. If the transaction is legal, cooperating with the investigation and providing evidence is a civic duty that should theoretically be protected by law. However, if the transaction itself is in violation, the evidence provided may expose the wrongdoing, leading to legal risks.