International Law

China's Campaign Against Corruption

By Dan

By: Steve Dickinson

Earlier this month the PRC National Audit Office ??? issued its first two reports of the year. Report 1 provides the results of a major audit of state owned agencies and banks conducted at the request of the National People's Congress. Report 2 details 28 court cases involving fraud uncovered during the audits. These reports have been published in conjunction with the central government's current campaign to demonstrate that the problem of official corruption is being addressed. The very public display of these reports is part of a similar campaign for transparency in government affairs.

Report 1 provides the following statistics on the results of the audit campaign:

• RMB 122.3 billion in assets were recovered.

• RMB 7.7 billion in losses were averted.

• RMB 48.2 billion in irregularities were corrected.

• 1103 people received administrative punishment.

• 104 people were referred for criminal prosecution, with 95 convictions to date.

Report 2 provides a brief report on 28 'typical' matters that were referred for prosecution. These involved the following bad acts:

• Obtaining loans from government owned banks on false pretenses. The most common method was using real property as security for loans where no such property exists. More complex schemes involved creating entirely fake business divisions.

• Converting government owned property to private use/using loan funds for personal projects.

• A common theme involves government relief payments. The standard scheme is to create a group of fake residents and then having payments due to such residents paid into the corrupt official's bank account(s).

The extensive government funded construction in China is a fertile ground for corruption. A standard scheme works as follows: an officer is in charge of a construction project. He hires a friend to act as general contractor. The general contractor bills for the work at an inflated price. The two share in the illegal profit. The report discusses this sort of scheme as well.

The issuance of these reports is a good news/bad news event.

On the good news side, Report 1 shows that the central government is taking strong steps to rid government, banks and state owned enterprises of financial corruption. Report 2 breaks with tradition and lists the full names of the defendants and provides full details of the fraudulent activities, making clear that the government is serious about transparency. On the bad news side, the amount of corruption and fraud uncovered is a tiny fraction of the almost endemic fraud that pervades Chinese government, banking and business. Most Chinese, when reading this report, extrapolate out to what they see as the real magnitude of the problem. The result is a feeling of concern rather than a feeling of accomplishment.

There are two messages here for foreign companies doing business in China. First, be on guard at all times against fraud within your own company and in connection with those with whom you do business. Second, avoid getting involved in this kind of activity at all costs. Though the chance of discovery and prosecution may be small, the chance is real and I can assure you that you will not enjoy a 14 year stay in a Chinese jail.  

Full post as published by China Law Blog on January 25, 2011 (boomark / email).