Tracing proceeds of corruption in China

Tracing proceeds of corruption in China

Article Type: Editorial From: Journal of Money Laundering Control, Volume 17, Issue 4

Corruption has affected the Chinese Communist Party’s reputation, damaged the nation’s international image and destroyed the public’s confidence in justice and equality. The Party’s effort in rectifying internal corruption has been inconsistent. However, more recently rules have been tightened. Under the Communist Party’s rules of conduct, when under investigation, suspected corrupt officials are “required” to report their violation to an assigned place and at an appointed time (Shuanggui). Often however, these officials are secretly arrested and detained in operations led by the Communist Party’s Committees for Discipline Inspection (CPCDI) pending a prolonged investigation. Although not a law enforcement agency, it has a fearsome reputation. The CPCDI is capable of deploying all resources and taking a variety of investigatory measures, beyond normal legal process, in order to access intelligence, gather evidence, make arrests, interrogate suspects and educate and penalise corrupt officials in line with the Party rules. In the event that an official’s conduct is identified as having breached the law, the case will be transferred to The People’s Procuratorates for prosecution. There are tensions here. Corrupt officials in higher positions within this department may be the ultimate arbitrators of other corruptive deeds. Lower ranking and disloyal officials are sacrificed to meet the needs of anti-corruption campaigns. Year by year the CPCDI has appeared to only visit the bottom tiers of the bureaucratic structure, while leaving untouched the provincial and central government.

The situation has begun to change since Xi Jinping took power during the Chinese top leadership transition in 2013. In contrast to his predecessors, Xi, a princeling of Chinese politics, has launched an impressive and powerful attack on corruption. The anti-corruption initiative has broadened to cover a variety of industries such as infrastructure construction, the energy industry, land requisition, mining rights and exploration, government procurement, the financial and insurance industry, law enforcement and the army; wherever grand corruption could possibly take place. The secretive nature of, inter alia, corruption cases prohibits a detailed analysis of the size and status of these cases. Having said this, it is reported that in May 2014, approximately 60,000 cases were filed for investigation – an increase of 34.7 per cent compared to 2013. More than 30 corrupt officials of vice ministerial level or above were arrested and investigated within the same period of time. Xi’s determination and action to root out grand corruption is unprecedented, not only within the history of the Chinese Communist Party, but also throughout all ruling regimes in Chinese history. Xi has not only toppled high ranking officials such as Bo Xilai, party chief of ChongQing city, but has also targeted top-level political “tigers”. Xu Caihou, one of China’s most senior military officials, and Zhou Yongkang, former Secretary of the Central Political and Legislative Committee, are currently also under investigation. So far, Zhou is identified as the highest ranking official being investigated for corruption in the Communist Party’s history, with alleged proceeds reaching some £30 billion.

The public have been overwhelmed by the startling figures of bribes and appear to be satisfied that severe sentences have been imposed on corrupt officials, including personal asset confiscation. However, there is limited information on the actual proceeds recovered from corruption. Given their years of experience in carrying out prosecutions and witnessing executions in corruption cases as a result of Shuanggui, it would appear some corrupt officials are limiting the risks they take.

A number of officials have hidden or laundered a proportion of proceeds on mainland China or abroad, as part of their risk management plan, though the amount and percentage of their gains thus laundered remains in contention.

Despite successful prosecutions, it seems criminal convictions are still not a sufficient deterrent to either completely root out corruption or, for some, diminish the motivation to commit a crime. To limit the risk of proceeds being traced, officials may simply hide the cash under their beds, or, by increasingly sophisticated money laundering methods, may attempt to dispose of their bribes safely to reduce the risk of being caught. Zhang Shuguang, deputy chief engineer of Ministry of Railways, is alleged to have stashed approximately £1.8 billion in overseas bank accounts.

The country has recently seen the emergence of so-called “naked officials”. The term “naked” suggests these individuals live on their own in China because their families have secretly fled abroad to Southeast Asia, Europe, Australia and North America. The officials are prepared to sacrifice themselves with imprisonment or the death penalty (the price paid for their corruption) to use their laundered proceeds to fund their children’s education in expensive private schools, purchase properties and financially support their family overseas. The number of such “naked officials” is not insignificant. In Guangdong province, approximately 2,190 “naked officials” were identified this year. In addition, a large number of officials have absconded from China. Their departure has followed the successful laundering of their illicit proceeds in safe havens. Yang Xiuzhu, deputy Mayor in charge of urban construction of Wenzhou City, fled to Singapore and then the USA under a false name. She is alleged to have accepted bribes amounting to approximately £23.5 billion, of which only approximately £4.24 million has been recovered and £7 million frozen. It is speculated that increasing anti-corruption initiatives in China have led to a massive export of capital and/or money laundering, as a reaction to the clamp-down. This has been seen as a major contributory factor to the recent property boom in major Western cities such as New York and London.

To deter money laundering and increase transparency of public financial status, China has enacted and implemented laws, regulations and intra-party disciplines. The 2006 Chinese Anti-Money Laundering (AML) Law allows China to enhance its internal control system to increase transparency of officials’ accounts, to monitor their financial transactions and to identify anonymous or accounts under false names and beneficial owners of suspicious transactions. The Regulations on Leading Cadres’ Report of Relevant Personal Matters require senior public officials to honestly report their incomes, housing and investments owned or made by themselves, their spouses and children living with them, as well as the employment status of their spouses and children. The Regulations on Strengthening Management of State Functionaries Whose Spouses and Children Have Emigrated Abroad aim to increase oversight of potential “naked officials”.

The jurisdiction grants absolute power to imprison any corrupt officials as well as the beneficial owners of criminal proceeds. However, the party’s willingness and ability to trace bribes abroad is questionable. An example is the son of Bo Xilai’s, who is still able to afford expensive university tuition fees in the USA, despite an interruption in his financial support after his parents’ incarceration. There is speculation the Party and Bo have reached a deal in exchange for his son’s freedom and continuous use of untraced bribes. Nevertheless, this case also shows the weakness of China’s AML system in preventing or reporting grand corruption in the first place.

China has recently begun focusing on combating corruption within state-owned enterprises listed overseas. The scale of corruption within these enterprises is predictably extensive. Such an initiative inevitably drives money laundering activities to launder “black” proceeds into “white”. In addition, the majority of high-level executives in these enterprises hold overseas green cards, or even foreign citizenship, which inevitably makes it more difficult for China to trace criminal proceeds laundered abroad or owned by foreigners.

China has signed a number of international treaties on international co-operation and asset recovery. However, considering the nation’s total losses to corruption, it has yet to be demonstrated how fruitful – as retribution, recovery or deterrence – asset recovery is there. China lacks an effective and fair, legal and institutional infrastructure, where information can be shared more effectively, evidence can be effectively utilised, and proceeds are reasonably shared with and recovered from the rest of the world. Moving towards a genuine mutual legal assistance model will open up the Chinese system more than at present and will require China to show willingness to deal with foreign criminals whose assets are in China as well as vice versa. Effective collaboration with the international community to trace and recover corruption proceeds is a key goal of the next few years.

Xuebin Li

Chinese Criminal Law, BPP University, London, UK - 18 August 2014