Capital Flight Accompanies Corruption in China, Bank Warns

The multifarious schemes used by corrupt Chinese officials to get their money abroad were revealed in unflattering detail in an official report recently.

The report, titled “Investigation on the Asset Transfer Routes Used by Corrupt Officials and the Corresponding Surveillance Methods,” was released by the Bank of China on June 13. The message: illegal asset transfer damages China’s financial stability.

The report unveils eight routes used to transfer assets overseas, including cash smuggling, bundling illicit funds with legitimate projects, foreign-exchange trading, credit card expenditures, padding the accounts receivable, drug trafficking, counterfeiting, and fraudulent foreign investments. Those who took advantage of foreign investment to transfer assets illegally were mostly high-level executives of large enterprises, or people in charge of specific projects.

The number of government and/or Party officials who fled the country since the mid 1990s was between 16,000 and 18,000, and the embezzled capital nearly 800 billion yuan (US$123 billion). The corrupt officials were mostly public security officers, cadres in the judiciary, executives of state-owned enterprises, and staff members of foreign governments’ offices.

The official investigation, which was completed in June 2008 and embargoed until now, cited research data from the Chinese Academy of Social Sciences. The report was covered in the Oriental Morning Post on June 15.

Until now there was little data on the problem, which is an embarrassing one for the ruling Communist Party: it indicates that rank-and-file Party members and government officials lack confidence in the current system, and believe their assets, and futures, are safer elsewhere.

Countries around China like Thailand, Myanmar, Malaysia, Mongolia, and Russia are the main destinations for lower-ranking officials whose embezzlement is on a medium scale. The big fish usually aim for developed countries in the West, such as the U.S., Canada, Australia, and the Netherlands.

Others, unable to wrangle visas directly to developed Western countries, targeted Africa, Latin America, or East Europe first, before waiting for the chance to transfer elsewhere. A substantial portion of the officials fled China through Hong Kong.

Flight is often accompanied by wealth transfer, too, such as high-value credit card transactions, or huge cash withdrawals that is then moved overseas.

“Cases of serious corruption uncovered in recent years indicate a new trend that funds are being transferred to specially-related personnel overseas,” said the report. These “specially-related personnel” are defined to include “close relatives, mistresses or people with a common interest.”

In an attempt to stem the growing tide, the report recommends that the Central Bank’s anti-money laundering unit look out for large, suspicious transactions, and correlate them with police data.

The industries sensitive to embezzlement include financial services, the construction industry, foreign trade, and state-owned enterprises—all areas monopolized by Party officials or those with connections to the Party.

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