In-depth Interpretation of the "Bank Forex Business Due Diligence Exemption Regulations": Clarifying Forex Business Rules and Responsibilities

Recently, the State Administration of Foreign Exchange issued the "Regulations on the Due Diligence and Exemption of Responsibilities for Bank Foreign Exchange Business (Trial)", which clearly defines the boundaries of responsibility and the circumstances for exemption in bank foreign exchange business. The introduction of this regulation aims to avoid excessive regulation and maintain financial stability, which is closely related not only to the daily operational activities of banks but also to the interests of every trader.

The Main Obligations of Banks

1. Due diligence obligations: Banks must fulfill the responsibilities of "know your customer, know your business, and conduct due diligence" throughout the forex business process, implementing effective risk management measures.

2. Compliance Review Obligations: Conduct compliance audits on clients' forex accounts, fund receipts and payments, and foreign exchange trading, strictly implementing foreign exchange management regulations.

3. Reporting obligations: Conduct transaction risk monitoring, promptly identify potential compliance risks, and report to the forex management department.

4. Compliance with international rules and reporting obligations: When conducting business in accordance with international rules, if any violation risks are detected, they should be promptly reported to the forex management department.

5. Duty to cooperate in the review of the appeal: When the foreign exchange bureau investigates suspected violations, banks should provide timely feedback and cooperate with the investigation.

Consequences of Non-Performance of Obligations

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

High-Risk Trading Behavior

Banks may focus on the following trading behaviors:

• Involving transactions related to false trade, false investment and financing, underground banks, etc.
• Cross-border gambling, fraudulent export tax refund related transactions
• Illegal cross-border financial activities of virtual currencies
• Other cross-border fund flows suspected of illegal activities

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

• Frequent deposits, withdrawals, and swing trading
• The flow of funds is complex, involving multiple accounts or directly connecting to foreign exchanges.
• Large remittances or fund splits credited without reasonable commercial background
• The source and use of funds do not match.
• Flowing into overseas accounts or foreign exchanges through multiple wallet addresses or trading platforms
• Use a mixer for anonymous transactions

High-Risk Trader Community

1. Frequent arbitrageurs: such as traders who engage in cryptocurrency arbitrage.

2. Anonymous traders: Individuals who use complex trading paths to hide the flow of funds.

3. Abnormal fund operators: Traders whose account funds are frequently deposited and withdrawn in large amounts, inconsistent with their personal financial situation.

Situations Beyond Bank's Review Capability

1. Technical and resource limitations: For example, virtual currency transactions involve a large number of anonymous offshore wallet addresses, or are frequently conducted through decentralized trading platforms.

2. Regulations and Information Transparency: The lack of a unified international regulatory framework for virtual currencies, along with significant differences in regulations across countries, makes compliance assessment difficult.

3. Transaction is extremely complex: for example, funds undergo multiple coin mixing operations and are transferred through several "shell" company accounts, resulting in extremely chaotic fund flows.

Handling Conflicts Between International Rules and Domestic Regulations

When international rules conflict with domestic regulations, banks typically prioritize domestic regulations. This is because banks conduct business domestically and must comply with domestic oversight, and adhering to domestic laws is fundamental to ensuring the stability of the financial order.

For traders, it is essential to pay special attention to these potential conflicts. Before engaging in trading, one should fully understand domestic regulations and policies to avoid damage to their own interests due to regulatory conflicts, while also being 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 banks are investigated and appealed for violations, traders may play the following roles:

1. Assist in investigation: You may need to provide business-related information, such as transaction contracts, fund transaction records, etc.

2. Potential Liability Association: Providing evidence carries certain risks. If a trader submits false materials or conceals important information, it may not only affect the bank's complaint but they may also be investigated for participating in illegal cross-border financial activities.

Overall, traders should remain cautious during the bank complaint process, providing evidence truthfully to protect their own and the bank's legal rights. Traders conducting normal compliant transactions who provide evidence truthfully typically do not increase the risk of being identified as engaging in illegal cross-border financial activities.