On July 1, China will become the next president of the Financial Action Task Force (FATF or GAFI), the global standard-setter for international anti-money laundering. After serving as the vice president of FATF over the last year, China’s assumption of the presidency will provide Beijing with the unique opportunity to set the FATF agenda over the next year, when it will preside over the FATF plenary sessions and determine which financial crimes issues it considers most important.

Yet there are reasons to be concerned about China’s presidency. First, China’s own financial crimes compliance (FCC) house is not in order. While the exact amount of illicit financial activity occurring within China and exported by China remains difficult to quantify, some analysts estimate that the number of illicit financial outflows from China may be as high as one trillion dollars over a decade. According to a 2014 study undertaken by Global Financial Integrity, a group monitoring illicit financial flows, illicit outflows from China between 2002 and 2011 totaled approximately $1.08 trillion.

Second, China has serious deficiencies in its own anti-money laundering/combating the financing of terrorism (AML/CFT) system that allow drug traffickers, money launderers, sanctions evaders, and other illicit actors to exploit the Chinese financial system. According to the FATF’s most recent Mutual Evaluation Report of China, the country has failed to effectively implement measures designed to prevent shell companies from being used to launder money or finance terrorism; prevent terrorist organizations from raising and moving funds; require lawyers, accountants, and other professionals to abide by AML/CFT regulations; and impose measures to target proliferators of weapons of mass destruction.

While FATF assessors routinely find regulatory and compliance shortcomings in the countries they evaluate, China’s AML/CFT regulatory regime was judged to have low effectiveness across a range of important issues – so low that a plausible case exists to recommend China into FATF’s International Cooperation Review Group process, where it would be reviewed for these failures and be required to work with FATF to remedy these deficiencies. Awkwardly, this could happen at the same meeting where China assumes the FATF presidency.

Third, there have been a number of high-profile instances in recent years of major Chinese companies engaging in clear violations of financial crimes laws and regulations, including economic sanction prohibitions, raising concerns about China’s commitment to the anti-money laundering/combatting the financing of terrorism (AML/CFT) mission. U.S. law enforcement and regulatory agencies identified instances of Chinese firms intentionally evading and violating U.S. economic sanctions and export controls on Iran, including by knowingly shipping U.S. products to sanctioned jurisdictions and lying to U.S. investigators about the activity. This includes major Chinese companies such as ZTE and Huawei. Such activities undoubtedly run afoul of AML/CFT global standards, which emphasize the need to prevent proliferation financing, sanctions evasion, and export control violations. Yet Beijing is very unlikely to take any actions against these entities for these violations. This raises serious concerns that the Chinese government is not sufficiently dedicated to the fight against illicit finance and financial crime, which is critical to leading the global standard-setting body.

China’s shortcomings are made more pressing because of its upcoming role as the FATF president.

FATF has become recognized as the standard-setter for international AML/CFT compliance global standards. Countries increasingly pay attention to – and care about – how they are evaluated and scored under FATF’s standards. Law enforcement agencies, regulators, and the private sector worldwide have increasingly focused on the risks that AML/CFT shortcomings pose to national security, economic prosperity, and companies’ bottom lines.

China is taking on more than a titular role as FATF’s president; countries serving as the FATF president have enormous power to set the FATF agenda for the next year, and presidents have used this power to define which challenges to the integrity of the international financial system they think most important, including trade-based money laundering, the use of virtual currencies by terrorist organizations and other actors, and the need to work more closely with the financial technology (FinTech) community to more effectively combat financial crime.

For example, over the last year, under the leadership of the United States and FATF President and Assistant Secretary of the Treasury for Terrorist Financing and Financial Crime Marshall Billingslea, FATF has pursued meaningful efforts to set global standards related to virtual currency, terrorist financing, and the proliferation of weapons of mass destruction. Under the U.S. presidency, FATF has focused on tackling AML/CFT challenges in the virtual currency space and, as part of these efforts, issued a revised interpretive note to Recommendation 15, which clarifies important requirements related to the regulation of virtual currency exchangers and others with respect to their AML/CFT obligations.

China’s own FCC failures and its assumption of the presidency threatens to undermine the premier status of the organization. Further, if China is not committed to the AML/CFT mission, it may fail to prioritize critical issues or ignore addressing critical deficiencies in the global financial system because they highlight shortcomings in its own compliance regime.

In addition, there are concerns about whether China can assume the FATF presidency without many of the typical political and diplomatic constraints that impact Chinese foreign policy. China’s assumption of the presidency is another instance of the country taking a leadership role in an important international standards-setting body. But a significant reason for FATF’s credibility is its technical nature, and there are good reasons to question whether China can avoid playing politics and letting its particular foreign policy concerns influence its presidency. For example, will the Chinese view the presidency as an opportunity to impact particular financial centers like Hong Kong in ways that serve its parochial interests? Likewise, how will China treat issues related to Taiwan, which is a member of the Asia/Pacific Group on Money Laundering (a FATF-style regional body associated with FATF)? How China addresses these political issues during its presidency will speak volumes about its maturity to helm the international standards-setting body.

China’s assumption of the FATF presidency comes at a key moment for the organization. While FATF grows in importance, a number of key issues will challenge its continued, strengthened role. For example, while one of FATF’s primary strengths since its inception has been its focus on technical evaluation of countries’ AML/CFT programs, the organization risks being pulled into political debates about certain problem countries. The most notable example of this is Iran, which was subject to FATF countermeasures that were subsequently suspended following the Joint Comprehensive Plan of Action (JCPOA) nuclear accord. While Iran has continued to fail to fulfill its Action Plan requirements under the FATF process, the organization has not yet re-imposed countermeasures. Whether FATF re-imposes these countermeasures at the next plenary will be a major test of the organization’s willingness to confront Iran’s continued failure to meet global AML/CFT standards.

China’s credibility gap in its own AML/CFT structure creates additional concerns about how the pre-eminent standards-setter for AML/CFT issues can be led by a country whose track record is problematic.