Expanding into China offers significant opportunities for international businesses. That said, navigating the country’s complex regulatory landscape can be challenging. With strict compliance requirements, particularly around KYC and AML standards, even well-established companies can run into legal and financial risks.
As China continues to attract multinational investment, businesses must stay ahead of evolving regulations to avoid costly mistakes. Here are five common compliance pitfalls companies face in China and how to prevent them.
Misunderstanding Data Localisation Requirements
China’s stringent data storage requirements under Personal Information Protection Law (PIPL) create logistical and operational hurdles for global firms that depend on centralised data management systems.
Key Provisions of the PIPL
Under the PIPL, the personal data of Chinese citizens is required to be stored domestically in China unless it meets strict security requirements for cross-border transfer. These types of cross-border transfers must adhere to regulations set by the Cyberspace Administration of China (CAC).
The PIPL also includes provisions for consent-based data processing, meaning businesses must seek explicit consent from Chinese citizens before processing their personal data. Ultimately, this adds another layer of complexity to the KYC process for multinational companies.
Further, businesses processing data from over 1 million Chinese users must pass a government security review before transferring data overseas. All cross-border data transfers require user consent, increasing administrative complexity for global companies.
Steps to Ensure Data Localisation Compliance
To comply with China’s strict data localisation requirements, businesses must adopt strategies that align with local regulations while maintaining operational efficiency. This typically involves integrating KYC systems with China’s National ID system, establishing partnerships with local regulatory bodies and implementing secure data storage practices.
Failing to Identify UBOs (Ultimate Beneficial Owners)
In light of the 2024 revision of China’s AML law, the government rolled out stricter requirements for the financial and non-finacnial sectors. The latest iteration of AML legislation includes provisions for UBOs that international businesses must account for.
Importance of UBO Identification
Ultimate Beneficial Ownership (UBO) identification has become increasingly critical under China's recent AML law revisions. Authorities are tightening regulations to prevent financial crimes such as money laundering, tax evasion and fraud. The updated laws require businesses to implement enhanced due diligence (EDD) measures to identify and verify the individuals who ultimately control or benefit from a company, ensuring transparency in corporate structures.
Failure to comply with the updated regulations can result in severe penalties, including hefty fines, personal liability for executives and reputational damage. By implementing robust UBO identification processes, businesses can ensure regulatory compliance, mitigate financial crime risks and build trust with regulators and financial institutions operating in China.
Tools to Simplify UBO Monitoring
Artificial intelligence (AI) and Machine Learning (ML) are transforming UBO monitoring by automating complex compliance processes, improving accuracy and reducing the risk of financial crime.
For example, Data Zoo’s automated KYC solution provides identity verification and compliance solutions tailored to China's regulatory landscape. Our AI-powered data sequencing offers best-in-class match rates and response times.
Overlooking Cross-Border Compliance Needs
Chinaʼs growth continues to influence global trade routes, making it a key market for international business operations and the source of numerous cross-border transactions.
Managing cross-border fund transfers in China is complex due to strict capital flow controls and financial crime prevention measures. As such, companies must align their transaction processes with Chinese regulations to prevent operational disruptions.
Under the PIPL, businesses handling data from over 1 million Chinese users must undergo a stringent government security review before transferring information overseas. All international data transfers require user consent, adding compliance challenges for global firms. Additionally, companies must store Chinese citizens’ personal data within China or face a thorough security assessments before moving data across borders.
How to Prepare for Government Assessments
Regulatory bodies like the Peopleʼs Bank of China (PBOC) and the CAC have increased their oversight, requiring regular audits and compliance reviews for cross-border businesses. To prepare for Chinese government assessments, international businesses should take a proactive approach to compliance, documentation and risk management. This involves implementing robust KYC and Know Your Business (KYB) protocols, conducting enhanced due diligence (EDD) on high-risk transactions and politically exposed persons (PEPs), and ensuring UBO identification is up to date.
Best Practices for Cross-Border KYC Processes
When it comes to complying with cross-border KYC regulations in China, businesses must take a multifaceted approach. By implementing a range of different measures, you’ll be better positioned to cover all your compliance requirements.
Here are some best practices for ensuring compliance with cross-border KYC processes:
Conduct multi-layered customer due diligence (CDD) by implementing a risk-based approach to KYC measures and categorising customers according to their risk level,
Leverage technology, including AI and ML, for automated compliance,
Ensure real-time transaction monitoring and fraud detection,
Adhere to the People’s Bank of China (PBOC) guidelines,
Maintain comprehensive and secure data records, and
Establish strong working relationships with key Chinese financial institutions and regulatory bodies.
Not Investing in the Right Technology
While technological advancements are driving evolving KYC and AML regulations to combat financial crimes, investing in the right technology is also key to helping businesses remain compliant.
Benefits of AI and Machine Learning in KYC
AI is transforming customer identity verification by making KYC processes faster and more precise. Advanced algorithms analyse large datasets in real time, reducing human error and improving accuracy.
By detecting patterns and anomalies, AI enhances fraud prevention and helps financial institutions stay compliant with AML regulations. AI-driven solutions also enable businesses to scale their KYC operations efficiently, managing high transaction volumes without sacrificing reliability.
Choosing the Right Compliance Software
Effective compliance software integrates AI and ML as well as other innovative technologies like blockchain, biometric authentication and dynamic data sequencing. Better yet, some software providers, like Data Zoo, partner with local compliance experts or Chinese financial institutions to more effectively navigate the complexities of the Chinese regulatory system.
Data Zoo offers a tailored Chinese identity solution that’s compliant with current Chinese AML and KYC requirements. Our innovative identity verification system leverages advanced technologies, including AI and dynamic data sequencing, to streamline KYC processes, reduce costs and maintain compliance.
Ignoring the Importance of Local Partnerships
When it comes to navigating local compliance laws and regulations, you can’t underestimate the power of local partnerships.
Advantages of Collaborating with Local Experts
No one understands their country’s KYC and AML requirements like local experts and financial institutions. By partnering with Chinese specialists, you’ll be provided with unparalleled insight into the Chinese KYC and AML landscape, allowing you to navigate the system and maintain compliance more effectively.
Local firms will often have insight into informal regulatory expectations, helping businesses avoid common compliance pitfalls. They might also be able to provide pre-approved frameworks and documentation templates, helping to reduce setup time when first establishing a presence in China. Plus, access to bilingual legal teams ensures seamless communication with Chinese authorities.
By collaborating with local KYC and AML experts, businesses can reduce regulatory risks, streamline compliance processes and enhance cross-border operations in China. Their insider knowledge, government connections and strategic risk management ensure that companies operate efficiently while meeting stringent financial regulations.
So, if you’re looking for a new and improved KYC solution that’s tailored to the Chinese market and other global data sources, you can’t go past Data Zoo. To learn more about our identity verification offerings and how our platform can serve your business, book in for a free demo.