China applies new money laundering law to corruption

by Hongwei Shang on March 25, 2008

in AML

At the end of October 2006, the Standing Committee of the People’s Congress – China’s legislative body – completed the third reading of the country’s anti-money laundering bill and enacted it into law, clearing the last major obstacle to China’s admission as a full member of the FATF.

China’s previous AML legislation only applied to drug trafficking, organized crime, terrorism and smug- gling, whereas this new law encompasses a wider range of predicate of

Yet, even before the law expanded the list of specified unlawful activities, the Chinese FIU received 683 sus-picious transaction reports involving more than $18 billion (USD) from the time it was established in 2004 to the end of 2005. Since those activities now include such crimes as fraud, corruption and financial malfeasance, the number of reports and the amounts in-volved are expected to increase dramatically under the new legislation.

China’s corruption problem is probably the single greatest threat to the country’s stability and, therefore, is of enormous concern to its government. The, new legislation will enable the government to investigate and prose-cute more cases. Its reporting requirements create a conduit for reliable financial information independent of corrupt law enforcement agencies.

Corruption has undermined public confidence in law enforcement agencies and all levels of government, which has led to widespread social unrest throughout the country in recent years, particularly when that corruption involves the appropriation of private land for property development in rural areas.

The Central Government responded by tackling high-level corruption with an unprecedented degree of openness, which underscores the enormous political importance of those efforts.

For example, the Party Secretary in Shanghai was abruptly suspended last September because of corruption. Plus, a number of senior politicians, officials and business executives from private companies have been removed from their positions, detained and questioned. Those limited disclosures are indicative of a corrupt culture the government is anxious to eradicate.

The law enforcement challenges in that enormous country dwarfs anything seen elsewhere. The Chinese National Audit Office discovered that corrupt officials embezzle or otherwise divert government funds for illegal activities at a rate of more than $3 billion a month. That doesn’t include bribes received by corrupt officials in exchange for contracts and other favorable decisions.

More than 47,000 senior government officials were disciplined by reg-ulatory authorities in 2005 alone, and nearly 4,000 corrupt government officials have fled the country in recent years, taking approximately $50 bil-lion (USD) with them. A Xinhua news report in July identified 40 of those in-dividuals, as well as the countries they fled to and the amounts of money they allegedly misappropriated. The United States is one of the "most favored nations. " The chart below shows a sample of Xinhua’s findings.


Country to which the officials fled officials who fled of money they took in millions (USD)
USA 9 $1,113
Thailand 5 $694
Australia 5 $1,238
Burma 4 $81
Russia 3 $13
Canada 3 $1,340
New Zealand 2 $40
Hungary 2 $2
Panama 1 $500
Philippines 1 $100
Ecuador 1 $55
Romania 1 $7
MMoonnggoolia 1 $2
Cambodia 1 $1

While bringing these fugitives back for trial is important, many governments, including the United States, have refused to extradite individuals to China if they face the death penalty for non-violent offenses. Some believe such policies are hypocritical and undermine the integrity of Chinese crim-inal law, especially when the United States, for example, doesn’t hesitate to send its citizens to the electric chair for domestic offenses.

However, in April 2004, the United States did extradite former Bank of China branch president Yu Zhendong to China to face trial for his part in embezzling $483 million on the condition that he would not be executed or sentenced to more than 12 years in prison. The Canadian and Chinese governments are expected to make a similar agreement for the extradition of China’s most wanted fugitive, Lai Changxing, who is accused of running a $10 billion smuggling operation in Fujian. Although Changxing will certainly attain some leniency, some of his subordinates already were tried and executed.

The de facto situation, therefore, is that the United States remains the most popular destination for corrupt government officials and other Chinese criminals to seek sanctuary and launder their ill-gotten wealth. Land-ing on American soil essentially guarantees they will escape the death penalty for their crimes, even if re-turned to China to face trial. When the Chinese government begins prosecut¬ing corrupt senior officials under its new anti-money laundering law, those officials will have even more incen-tive to flee the country.

The new law took effect January 1, just as China opened the retail banking market to foreign competition. The People’s Bank of China is expected to publish regulations implementing the new legislation in the near future. When it does, the AML policies of international financial institutions expanding into China will certainly receive scrutiny.

Foreign businesses that fail to understand China’s fundamentally different environment, may find their business plans obstructed by govern-ment policies. In the same way, that lack of understanding will certainly hinder their abilities to comply with its antimoney laundering legislation.

It is not a case of right or wrong, it is just different.

—Peter A. Gallo,

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