SIM REPORT: Northeast Asia

issue 01, 11 SEPTEMBER 2019

Taiwan: Increased AML likely to boost investor confidence  

Premier Su Tseng-chang on 29 August promised that individuals who helped Taiwan to reach the best category in international anti-money laundering (AML) efforts would be given ‘special rewards’, according to local media. This follows the Asia/Pacific Group on Money Laundering (APG) – an intergovernmental organisation dedicated to combating money laundering and terrorism financing – upgrading the country’s status from ‘enhanced follow-up’ to ‘regular follow-up’ on 28 June after a peer review concluding a third round of mutual evaluations that began in late 2018. Su’s promise of rewards for improvements in AML measures indicates that reforms were perhaps more likely driven by face-saving concerns rather than ethical qualms. 

From best to worst, countries’ possible statuses are: ‘regular follow-up’, ‘enhanced follow-up’, ‘transitional follow-up list’ and ‘non-cooperation’. Members in the lowest tier ‘non-cooperation’ list may be sanctioned. It received ‘substantial’ ratings for seven out of 11 key factors related to AML measures, including risk, policy, and coordination, international cooperation, financial intelligence, and confiscation. Ratings are, from best to worst: ‘high’, ‘substantial’, ‘moderate’, and ‘low’. 

Lack of regulations banning terrorist financing regulations was a significant concern in the APG’s evaluation report for Taiwan in 2007, the year in which it first relegated the island to the ‘regular follow-up’ list. In 2011, the island was again downgraded to the ‘enhanced follow-up’ list. In 2014, the island was further downgraded to the ‘transitional follow-up’ list. Up until regulations were tightened, the island was known as a money laundering haven, due to cases including smuggling of cash, illegal solicitation of capital, and cross-border telecom fraud.

Taiwan has climbed back to the top in 2019 as one of five out of 41 APG members that have reached the best AML status. This is due to comprehensive reforms implemented since early 2017, according to the APG. Reforms include a requirement by professionals such as lawyers and accountants, as well as financial firms, to report high-value or suspicious transactions. Significant amendments to the Money Laundering Control Act, as well as passage of a terrorism financing prevention act, and amendments to the Code of Criminal Procedure and Criminal Code came into effect in June 2017.

Reforms in 2017 were prompted by a 2016 corporate scandal in which authorities in New York fined the Taipei-based Mega International Commercial Bank, Taiwan’s third-largest bank by assets, a sum of USD180 million. The authorities described the bank’s AML compliance programme as a ‘hollow shell’. Reforms may also have been prompted by 2017 media reports that said that some money from an alleged 2016 cyber heist of the Union Bank of India were transferred through the island’s Bank SinoPac. AML fines in Taiwan increased 256-fold from 2016 to 2018, with fines in 2016 totalling TWD51,200,000 (USD1,637,862), compared to just TWD200,000 each year in 2013-2015, according to figures from the Taiwan Financial Supervisory Commission. 

The upgrade signals an increased compliance burden for companies in Taiwan. In the long run, though, this is likely to benefit its economy, as it gives Taiwan an advantage in participating in international finance. Companies operating under tightened regulatory scrutiny will appear to be more adherent to regulations. It is also likely to boost investor confidence, as it improves the reputation of the island’s financial sector. As an associate member of the Financial Action Task Force (on Money Laundering) (FATF) – an intergovernmental organisation that develops AML and counter terrorism financing policies – that requires its members to adopt the FATF’s AML recommendations, the decision is likely to be noted by the FATF’s 37 members, which include China and the United States. Foreign businesses with supply chains in Taiwan such as Apple Inc. are also likely to benefit from the upgrade, due to positive externalities driven by a likely increase in investments in the island.

Taiwan: Increased AML likely to boost investor confidence

On 3 September, the South Korean government announced it is strengthening inspections on fishery products imported from countries including China and Japan, citing public health concerns relating to potential radioactive contamination. Eight seafood products are impacted by the announcement, undergoing more rigorous controls from 5 September until 31 October. Suppliers that do not provide country-of-origin labels on their products will be fined up to KRW10 million (USD8,225), with fraudulent labels incurring penalties such as a fine of KRW150m or 10 years in prison. Japan is the second largest exporter of seafood to South Korea, accounting for approximately 19.4 per cent of total imports after China, which accounts for 31.6 per cent of imports. 

Although the decision to strengthen inspections was ostensibly made over contamination concerns, it is a likely further retaliation in the ongoing South Korea-Japan trade dispute, which has involved boycotts by South Korean businesses and consumers of Japanese products and tourism to Japan, removal of the countries from preferential trading white lists, and the scrapping of a military intelligence-sharing pact. Bilateral relations began deteriorating when Tokyo in July severely curbed its exports of high-tech materials to South Korea that its major conglomerates need to produce chips used in devices including phones; shipments of hydrogen fluoride gas, an essential material for semi-conductors, that month slumped by 83.7 per cent compared to the previous month. 

According to Tokyo, it imposed the restrictions due to allegations that Seoul has allowed the exporting of hydrogen fluoride, one of the substances included in the restrictions that can be used to make chemical weapons, to North Korea; regional security concerns relating to North Korea have escalated since North Korea increased its firing of missiles into the Sea of Japan (also known as the East Sea) in response to annual joint US-South Korea military drills that Pyongyang has described as ‘blatant pressure’. However, the restrictions are more likely for a result of increased frictions between the two countries stemming from an October 2018 South Korean court case which ruled that Japanese companies should be forced to compensate victims of forced labour during Japanese occupation, a long-standing historical grievance, as well as allegations that a South Korean naval destroyer locked its fire-control radar onto a Japanese maritime patrol aircraft in December 2018. 

South Korea is in a weaker negotiating position than Japan in bilateral negotiations, due to a trade imbalance favouring Japan, in which South Korea is reliant on Japan for imports on goods including materials used for semiconductors. However, one distinct advantage that South Korea can leverage is Japan’s reliance on South Korea for imports on kerosene, a petroleum-derived fuel used in fan heaters and portable stoves. Although domestic production accounts for around 90 per cent of consumption, South Korea is the largest exporter of the fuel to the country; in 2018, South Korea accounted for approximately 79 per cent of kerosene exports to Japan, with the goods accounting for 13 per cent of total requirements. An export ban by Seoul on the product during winter would likely cause shortages that could lead to sharp price increases. Such surges would be further exacerbated by external factors such as a particularly harsh winter or refinery outages. 

However, Tokyo ultimately holds significant leverage over Seoul due to South Korea’s slowing economic growth; South Korea on 29 August announced a budget increase of 8 per cent for 2020 to counter this issue. Given the emotionally-driven nature of the trade dispute and an increasingly unlikely rapprochement, it is probable that a protracted trade dispute will include further retaliations that adversely impact businesses – especially in the aviation, tourism, retail, and technology sectors – in the three to six-month outlook. Possible retaliatory measures include a further tightening or expansion of export restrictions, as well as tariffs that could disrupt supply chains.

CHINA: Political risks likely to increase as government implements surveillance programme

The European Union Chamber of Commerce on 28 August published a report warning that the corporate version of the social credit system (SCS) – a data-driven system being introduced by the government that will reward or punish companies and individuals on the basis of certain metrics – will be a ‘major shift’ in market access restrictions for foreign companies in the country. The system, which is due to be fully implemented by the end of 2020, will involve the government assigning companies 30 ratings. These encompass most aspects, including pricing, data transfers, tax and custom records, regulatory compliance, licences, environmental protection, and product quality. Negative ratings can result in penalties ranging from small fees and exclusion from tax rebates and subsidies, to blacklisting. Both domestic and foreign firms to share information with the government and install surveillance cameras in their offices.

The legal ramifications of the SCS as outlined in the report are likely to be particularly concerning to businesses, however. A company’s rating is determined by a range of stakeholders, including its partners, suppliers, high-ranking members of management, and legal representatives. Companies sanctioned by one government entity will be sanctioned by others, due to the sharing of information regarding incidents of non-compliance across participating agencies, according to The FCPA Blog, a widely cited anti-corruption compliance website. This will lead to a lower willingness to grant licences and permits, difficulties obtaining unrelated administrative approvals, targeted audits, and higher inspection rates, as the SCS tries to centralise, systematise, and expand blacklisting for corruption-related violations, according to the blog.

Nonetheless, since the government began implementing the SCS in 2014, the criteria determining the credit scores or ‘trustworthiness’, as well as associated rewards and punishments, have been diffuse. While in one area of the country a high credit score can merit access to a government job, in another area it can simply merit a free annual medical check-up and a certificate of good behaviour. Furthermore, a majority of people who are blacklisted are not notified in advance, and many are insufficiently aware of what warrants such a blacklisting. The implementation of the system is, as such, neither fully centralised nor clear in its determining criteria. This may be due to  the fact that, while political power in the country is highly centralised, economic decision-making is more decentralised, allowing a certain degree of regional flexibility.

 The ambiguities of the SCS in fact accentuate the political risks posed by the SCS, as it provides leeway for seemingly arbitrary application of rewards or punishments. The system may obfuscate, for example, whether the sanctioning of a foreign company may have been politically motivated or whether genuine compliance issues were identified. Companies from countries engaged in diplomatic rows with China, such as Canada and the United States, for example, may be unfairly punished within the SCS. It is also likely that firms sanctioned in the system will also be included in the country’s upcoming entity list, and vice versa. In summation, the ambiguity of the SCS, combined with the sweeping surveillance mechanisms it entails, are likely to greatly increase political risks to both domestic and foreign businesses in the one-year outlook.

Open-Source Review of significant risk developments from August to September



9 September 2019

South Korean president appoints justice minister despite scandals

An embattled law professor began his duty as South Korea's justice minister after receiving presidential approval on Monday (Sep 9), despite an ongoing probe by state prosecutors into alleged misconduct by his wife.

Cho Kuk was appointed to the role by President Moon Jae-in, the presidential Blue House said, with a mandate to reform the prosecutor's office.

Source: Channel News Asia




21 August 2019      

US risks China's anger after sealing $8bn deal to sell Taiwan 66 fighter jets

The Trump administration has approved the sale of 66 F-16 fighters to Taiwan in a move expected to anger Beijing. Taiwan will get the latest version of the Lockheed Martin-built fighter, the F-16C/D Block 70, in the $8bn deal, the state department said. Taiwan’s plan to upgrade its air defences comes amid increasing Chinese military incursions into its air space.

Source: The Guardian 


23 August 2019

How China used Facebook, Twitter, and YouTube to spread disinformation about the Hong Kong protests

On Monday, both Facebook and Twitter announced plans to take action on coordinated attempts by the Chinese government or those associated with it to manipulate information on social media about massive protests underway in Hong Kong. Then on Thursday, Google said it had found something similar on YouTube, which it owns.

Source: Vox


24 August 2019

UK consulate worker detained in China is freed in Hong Kong, says family

A staff member at the British consulate in Hong Kong who was detained in mainland China has been released, his family said on Saturday, ending an ordeal that lasted more than two weeks. Simon Cheng, 28, a trade and investment officer for Scottish Development International, travelled to Shenzhen, a city that borders Hong Kong, on the morning of 8 August. He disappeared after sending messages to his girlfriend as he was about to cross back over the border at about 10pm.

Police in Shenzhen said Cheng was released as scheduled after 15 days of administrative detention and had “confessed to his illegal acts”, the statement said, without providing further details. In recent years, many Chinese activists have been forced to speak against their will and confess to alleged crimes on state media.

Source: The Guardian


28 August 2019

Exclusive: Fake-branded bars slip dirty gold into world markets

Gold bars fraudulently stamped with the logos of major refineries are being inserted into the global market to launder smuggled or illegal gold, refining and banking executives tell Reuters. The fakes are hard to detect, making them an ideal fund-runner for narcotics dealers or warlords. It is not clear who is making the bars found so far, but executives and bankers told Reuters they think most originate in China, the world’s largest gold producer and importer, and have entered the market via dealers and trading houses in Hong Kong, Japan and Thailand. Once accepted by a mainstream gold dealer in these places, they can quickly spread into supply chains worldwide.

Source: Reuters


3 September 2019

FedEx says correctly handled Hong Kong package, disputing Xinhua report

FedEx Corp (FDX.N) on Tuesday said it correctly handled a package containing restricted types of knives that was bound for Hong Kong after China’s state-run Xinhua news agency, citing sources, said the package was suspected of being handled illegally.

Source: Reuters

A2 Global comments: The development signals increasing political and reputational risks faced by foreign companies – especially US-based ones – operating in China. Such companies have been increasingly targeted, particularly due to China’s overall weaker negotiating position in ongoing Sino-US trade war talks and limited options in responding to the US government’s actions against the country.


4 September 2019

Japan to demand greater accountability from audit firms

The Financial Services Agency decided Tuesday to demand greater accountability from audit firms that check corporate financial reports, by revising auditing standards. The decision, made at an FSA accounting council meeting, came after Toshiba Corp.’s auditor drew criticism from domestic and overseas investors for its inadequate information disclosure when the electronics and machinery-maker was shaken by an accounting scandal.

The revised standards will apply to earnings for the current fiscal year ending in March 2020.

Source: Japan Times


9 September 2019

Apple, Foxconn say they overly relied on temporary workers in China

Apple Inc and manufacturing partner Foxconn Technology Co Ltd on Monday rebutted allegations of lapses in people management levelled by a non-profit monitor of worker rights, though confirmed they employed too many temporary workers.

Source: Reuters


9 September 2019

8 firms fined 3.1 bln won over price fixing

South Korea's antitrust regulator said Monday it has fined eight logistics companies a combined 3.1 billion won ($2.6 million) for colluding to fix their bidding prices for a state-run utility firm and its three power generation units.

Source: Korea Herald


10 September

Huawei drops lawsuit against U.S. over seized equipment: court filing

China’s Huawei Technologies Co Ltd has dropped a lawsuit against the U.S. government after Washington released telecommunications equipment it had seized on suspicion of violations of export controls, according to a court filing on Monday.

Source: Reuters

A2 Global comments: The seizure of Huawei’s equipment in 2017 highlights the increased political risks that Chinese technology companies face, especially in countries that are members of the Five Eyes anglophone intelligence alliance. The alliance – members of which have taken actions against Huawei over security concerns – comprises Australia, Canada, New Zealand, the United Kingdom, and the United States.




21 August 2019

Fukushima radiation becomes lightning rod in escalating South Korea-Japan feud

South Korea’s Food and Drug Safety Ministry said on Wednesday it will double the number of samples and test frequencies in inspections for radioactive substances on some processed foods and agricultural products from Japan.

Source: South China Morning Post

A2 Global comments: Though ostensibly motivated by safety concerns, the move is likely a retaliation motivated by the ongoing trade dispute between the two countries. Although Japan has assured the safety of its exported products, South Korean anti-Abe protesters have applied pressure on Seoul to mitigate apparent health risks posed by contaminated Japanese food.




23 August 2019

Canadian Consulate Suspends Travel for Hong Kong Staff

The Canadian Consulate in Hong Kong said Friday it has suspended official travel for local staff, following the detention of a U.K. Consulate employee during a trip to mainland China.

A spokesperson for the Canadian mission confirmed the new measure in an email to TIME but did not elaborate on its reasons or the scope of travel restrictions. “At present, locally-engaged staff will not undertake official business travel outside of Hong Kong,” the spokesperson said.

Source: Time




3 September 2019

Huawei says U.S. enticing, coercing staff to provide company info

China’s Huawei Technologies on Tuesday said the U.S. government had instructed law enforcement to “coerce” and “entice” its employees to turn against the company, as it steps up its pushback against a U.S. campaign that could threaten its survival.

Source: Reuters

A2 Global comments: If verified, Huawei’s claims would indicate an elevated political risk to Chinese technology firms operating in the United States. The US government’s placement of an export ban on the company in May over national security and foreign policy concerns severely hampered its supply chain, and it remains a pawn in ongoing Sino-US trade war negotiations. 

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