AML Scrutiny Tightens: How SMEs Should Prepare for Bank Audits in China (I)
In recent months, China has significantly strengthened its Anti-Money Laundering (AML) regulatory framework, with the implementation of the Measures for the Administration of Anti-Money Laundering Special Preventive Measures (hereinafter referred to as the “Measures”) on February 16, 2026, marking a key milestone in regulatory upgrading.
This new regulation, together with the revised Anti-Money Laundering Law of the People’s Republic of China, has expanded the scope of obligated entities and clarified compliance obligations, bringing small and medium-sized enterprises (SMEs) into the spotlight of AML supervision. For foreign-invested SMEs and those engaged in cross-border business in China, understanding the latest regulatory trends and preparing for bank AML audits has become an urgent task to avoid operational risks.
Unlike large enterprises with mature compliance systems, SMEs often face unique challenges in AML compliance due to limited resources, insufficient professional personnel, and inadequate understanding of regulatory requirements. However, the tightening of AML scrutiny means that banks are now conducting more rigorous audits on all cooperative enterprises, regardless of their size. A failed AML audit can lead to severe consequences, including frozen bank accounts, suspended fund transfers, fines, or even the termination of cooperative relationships with banks-risks that SMEs can hardly afford. This article will break down the latest AML regulatory requirements for SMEs in China and provide practical guidance on preparing for bank audits.
The New Regulatory Landscape: SMEs Are No Longer “Exempt”
The revised Anti-Money Laundering Law explicitly includes “designated non-financial institutions” in the scope of AML obligations, and the supporting Measures further clarify the specific obligations of these entities. Although SMEs may not all fall into the “designated non-financial institutions” category, it emphasizes that all entities and individuals bear basic AML obligations, they must not engage in money laundering activities, must not facilitate such activities, and must cooperate with lawful customer due diligence measures conducted by financial institutions.
A notable regulatory update is “the inclusion of bills in the scope of assets subject to ‘restriction on transfer’ under special preventive measures”. This means that if a bank identifies suspicious transactions involving bills, it has the legal right to block the transfer, endorsement, or discount of the bills, which directly affects the capital turnover of SMEs that frequently use bills for settlement.
Banks, as the first line of defense against money laundering, have also strengthened their internal audit mechanisms. According to the Measures for the Supervision and Administration of the Combat of Financial Institutions Against Money Laundering and Financing of Terrorism, banks must establish an independent AML audit system, covering all branches and affiliated institutions, and the scope and frequency of audits must be adapted to the risk level of the institution and its cooperative enterprises. For SMEs, this means that bank audits will no longer be perfunctory, every transaction detail and customer information may be subject to in-depth inspection.
Key Focuses of Bank AML Audits for SMEs
To prepare effectively for bank audits, SMEs must first understand the key areas that banks focus on during AML inspections. Based on the latest regulatory requirements and typical audit practices, the key focuses include the following aspects:
1. Customer Due Diligence (CDD) and Know-Your-Customer (KYC) Compliance
Banks will carefully check whether SMEs have conducted adequate due diligence with their customers (including upstream suppliers and downstream clients).
This includes verifying the customer’s identity, confirming their scope of business and actual controllers, and assessing the reasonableness of the business relationship.
For SMEs, common issues in this area include failure to verify the actual controllers of customers (especially shell companies), failure to update customer information in a timely manner, and lack of written records of customer background checks.
For example, if an SME partners with a customer that has no actual business premises or operational capacity, this will raise suspicions during a bank audit.
2. Transaction Background and Fund Flow Verification
Banks will focus on verifying whether the funds of SMEs have real trade backgrounds, especially for large transactions or abnormal fund flows.
This includes checking whether there are corresponding contracts, invoices, logistics documents, and other supporting materials for each fund transfer, and whether the amount, time, and purpose of the transaction are consistent with the business scope of the SME.
A typical risk point is the “split transaction”, splitting a large amount of funds into multiple small transactions to avoid the reporting requirement for large transactions (usually a single or cumulative transaction of more than 5 million yuan for non-financial institutions in commodity trading).
3. Record-Keeping and Reporting Obligations
According to regulatory requirements, SMEs must keep customer identity information, transaction records, and supporting materials for at least 5 years after the termination of the business relationship or transaction. Banks will check whether SMEs have established a complete record-keeping system, whether the records are complete and accurate, and whether they can be retrieved in a timely manner.
4. Internal Control and Compliance System
Banks will also assess whether SMEs have established basic AML internal control systems, including appointing special personnel to be responsible for AML work, formulating AML operation procedures, and conducting regular staff training. For SMEs with limited resources, a simple but effective internal control system is sufficient.
Conclusion
In summary, China’s anti-money laundering (AML) regulation has entered a phase of strict enforcement, and the pressure on SMEs from bank audits continues to grow.
Identifying the core focus areas of bank audits is essential for SMEs to prepare for compliance and mitigate operational risks.
In our next article, we will focus on practical implementation, breaking down the specific steps SMEs should take to prepare for bank AML audits. We aim to provide actionable compliance guidance to help SMEs successfully pass bank audits and ensure the stability of their operations.
If you have any questions, feel free to contact us to discuss further.
