Banking Industry Anti-money Laundering Mechanism

In this paper, the author first reviews the literature concerning anti-money laundering, and finds that they are of great help in understanding the situation of anti-money laundering in Chinese banking system. Though the relevant literature is plentiful, there are limitations regarding the research framework and methodology.After this brief review, the author analyzes the status quo of and the problem facing Chinese banking system, and points out that, in comparison with the anti-money laundering mechanism in advanced countries, the mechanism in China is very simple and want of binding competence, due to its incompletion of legislation, inappropriateness of organizational arrangements, lack of public and media supervision. By analyzing the development and institutional arrangements of anti-money laundering in foreign countries, it is found out that having not joined the international anti-money laundering organizations has put China in a disadvantageous situation when carrying out its anti-money laundering causes. In the circumstances of increasing international cooperation in this field, China must not only handle domestic money laundering cases, but it also has to deal with the various and diversified organized cross-border criminal acts, since these criminal organizations may take advantage of the leaks in China's anti-money laundering legislation and its lack of expertise due to the inadequacy of participating in international cooperation in this field.After introducing the problem facing Chinese government, the author goes on to the analysis of the institutional arrangements in USA and European countries, and discovers that complete legislative arrangements, scientific organizational structure, effective financial regulations and binding supervision have brought to the effectiveness of anti-money laundering in these western countries. In contrast, owing to the fact of its late beginning and short history of development, China is facing many problems in this field, such as the incompletion in relevant legislation, inadequacy of media supervision and lack of social credit system. The simple "cloning" of anti-money laundering mechanism from western countries is surely not enough for Chinese anti-money laundering causes. China needs to construct its own anti-money laundering system taking into full consideration its particular characteristics.In order to construct a satisfactory anti-money laundering mechanism, the authorventures to put forward the hypothesis of "constraint-incentive arrangement of anti-money laundering". Since the model of "static game" is used in the analysis in most of the literature concerning anti-money laundering in China, they often neglect the problem of incentive in the case of anti-money laundering so as to improve Chinese anti-money laundering ability. The paper constructs a dynamic principal-agent model, putting together the constraint and incentive in a single model on the basis of asymmetric information. By simulating the equilibrium, not only the influence of constraints and incentive on the banking system's anti-money laundering is disclosed, but also the relationship between different parameters is made apparent. It further illustrates that China must consider both the effect of and expenditure in anti-money laundering. Without doing so, to optimize the effect of anti-money laundering in China is simply impossible.Based on the model constructed, the author makes his endeavor in initiating an incentive system, and obtains promising parameters by calculation. In comparison with current literature, it is a brand new and hard attempt, especially when considering the difficulty in attaining relevant data. With such data, the author evaluates the relative parameters to achieve a reasonable incentive principle and the level thereof. On the basis of limited data, the author works out a framework for the incentive concerning anti-money laundering and substantiates that such an incentive arrangement is a "Pareto improvement" in the Chinese anti-money laundering mechanism.In the end, the author draws some conclusion and implications of the research, makes some policy suggestions, and points out the limitations of the research and the problems worth further studying.