Source: 2001
Released by the Bureau for International Narcotics and Law Enforcement Affairs
The People's Republic of China (PRC) remains a major transit country for illegal narcotics produced in the Golden Triangle. China continued to take strong measures to stem the production, abuse, and trafficking of narcotics in 2001, but indications like growing seizures and more domestic drug abusers point to a drug problem in China that is getting worse. Chinese authorities clearly understand the threat posed by drug trafficking in the region, and they have begun to take steps to integrate China into regional and global counternarcotics efforts. Trafficking cases rose in 2001, but the amount of illicit narcotics seized by the authorities rose as well. Preliminary figures for 2001 suggest that heroin seizures by Chinese law enforcement personnel will significantly exceed last year's total by year's end, while seizures of amphetamine-type stimulants (ATS), tracking growing illicit domestic production and trafficking, are up as well.
Throughout 2001, Chinese authorities continued to provide U.S. counternarcotics officials with samples of many types of drugs seized en route to the United States. In 2000 the United States and China signed a mutual legal assistance agreement, which entered into force March 8, 2001. China is a party to the 1988 UN Drug Convention.
China is situated adjacent to both the "Golden Triangle" and the "Golden Crescent." Most seizures of Southeast Asian heroin now occur within Chinese borders. Preliminary figures suggest that heroin seizures in 2001 were the highest in years, easily topping the record 7,358 kilograms seized in 1998. ATS seized in 2001 will likely exceed the quantity seized in 2000. Drug abuse in general continues to rise in China. The Chinese government has reported that there were 900,000 registered drug addicts in 2001, an increase of over 200,000 in two years. Officials privately admit that the actual number of users is likely far higher.
China is a major producer of precursor chemicals, including acetic anhydride, potassium permanganate, piperonylmethylketone (PMK), and ephedra. China monitors all 22 of the precursor chemicals listed in Table I and Table II of the 1988 UN Drug Convention. China continues to be a strong partner with the United States and other concerned countries in implementing a system of pre-export notification of dual-use precursor chemicals. (For details, see the Chemical Controls section of this report.)
Policy Initiatives. In June 2000, the government issued a "White Paper" on drugs, which laid out a comprehensive strategy for fighting narcotics use and trafficking. This strategy, which covered all of the major goals and objectives of the 1988 UN Drug Convention, puts emphasis on education, rehabilitation, eradication, precursor chemical control, and interdiction. In 2001, Chinese counternarcotics authorities proceeded with these efforts.
Cultivation/Production. Through its effective eradication program, China essentially has eliminated commercial narcotic drug cultivation within the PRC. The government continues to target small-scale cultivation in remote areas of the country's northwest. Ephedra, a plant from which the precursor for methamphetamine is made, grows wild in northern parts of China. The government tightly controls exports of this key precursor.
Faced with a growing threat from methamphetamine and synthetic drugs such as ecstasy, the government made closing down illicit drug laboratories a top priority in 2001. These efforts halted many illicit operations, but new ones continue to spring up, especially in China's more remote locations.
Drug Flow/Transit. China shares a 2,000-kilometer border with Burma. The majority of heroin produced in Burma now travels through China en route to the international market. Reflecting China's importance as a transshipment route, most seizures of Burmese heroin now take place in China. Smaller quantities of heroin enter China from Laos, Vietnam, and Southwest Asia, including an increasing flow from the neighboring "Golden Crescent" countries.
Law Enforcement Efforts. Preliminary figures suggest that seizures of heroin by Chinese law enforcement personnel in 2001 were up in virtually all areas compared to the previous year. China accounted for more heroin seizures in 2001 than all other East Asian countries combined. Seizures of methamphetamine also remained high.
In 2001, responding to U.S. requests, Chinese authorities increased their level of cooperation with the United States in sharing drug-related strategic intelligence. Ministry of Public Security (MPS) officials routinely facilitated trips for U.S. law enforcement authorities operating out of the U.S. Embassy in Beijing. On several occasions, MPS officials provided vital intelligence information on suspected drug traffickers that resulted in the identification of several major suppliers.
Corruption. Chinese officials admit that corruption is one of the most serious problems the country faces. Anticorruption campaigns have led to the arrest of hundreds of government officials, but rarely to a vigorous move against some in the Party and government who must be protecting drug producers and traffickers. China's recent entry into the WTO should have the effect of reducing tariff barriers to imports, and it will hopefully reduce smuggling and its attendant corruption. Narcotics traffickers are frequently able to take advantage of "routine, corrupt arrangements" (pay-to-pass the checkpoint) primarily designed to avoid high customs duties. Cases of narcotics-related corruption in China are seldom reported in the press, but clearly play an important role in China's growing drug trafficking and illicit production problem. At the same time, there are clearly a preponderance of officials who move aggressively against narcotics crime despite blandishment of corrupt payments.
Domestic Programs (Demand Reduction). Education and rehabilitation play major roles in China's counternarcotics strategy. According to official statistics, there were 900,000 registered addicts in 2001, but officials admit that the real figure may be many times higher. Individuals identified as addicts are subject to compulsory rehabilitation. China provides counternarcotics education to all school children, and has also taken steps to warn citizens about the link between intravenous drug use and HIV/AIDS. According to official statistics, the number of HIV/AIDS patients in China has risen to over 22,000, up from a reported 12,639 in 1998. Presently, nearly 71 percent of China's HIV/AIDS cases are reported to have become infected via drug injection, as opposed to 67.5 percent in 1998. China has continued to implement "drug free community" programs in order to mobilize entire communities to work together to combat narcotics trafficking and encourage addicts not to relapse.
Agreements and Treaties. China is a party to the 1988 UN Drug Convention, the 1971 UN Convention on Psychotropic Substances, and the 1961 UN Single Convention on Narcotic Drugs, as amended by the 1972 Protocol. China has signed more than 30 mutual legal assistance treaties with 24 countries. On March 8, 2001, a mutual legal assistance agreement between China and the United States entered into force. It potentially constitutes a powerful tool for obtaining evidence important to the U.S. investigation and prosecution of transnational criminals, including narcotics traffickers. China has long refused to provide assistance in response to U.S. requests, and this reluctance has continued since the mutual legal assistance agreement entered into force. In 1999, China and the United States signed a bilateral customs mutual assistance agreement, but China has not yet activated it. This agreement, if brought into force, would facilitate cooperation by customs officials and enhance the flow of narcotics intelligence.
China also cooperates actively with countries in the region in the fight against drug trafficking. Along with the UN Drug Control Program and five Southeast Asian nations (Cambodia, Laos, Burma, Thailand, and Vietnam), China is a member of the Memorandum of Understanding (MOU) program. In the MOU, the members agreed to collaborate on drug-control projects and programs. In August 2001, senior officials from Thailand, Burma, Laos, and China met in Beijing to discuss ways to strengthen regional efforts to fight drug trafficking and the transshipment of precursor chemicals. China and Laos continue to cooperate in combating transnational crimes, including narcotics trafficking. China continues to support crop-substitution initiatives for farmers in Burma and Laos, as well as demand reduction efforts in areas bordering Yunnan province. China participates in the ASEAN-and-China Cooperative Operations in Response to Dangerous Drugs (ACCORD) program, an action plan developed by ASEAN in partnership with UNDCP. ACCORD has four major goals: fostering civic awareness of the dangers of drugs in the community, undertaking effective demand reduction, strengthening rule of law and law-enforcement cooperation, and eliminating illicit drugs through alternative development and eradication. China also participates in the "Six plus Two" Drug Control Mechanism program, with Iran, Pakistan, Tajikistan, Turkmenistan, Uzbekistan, Russia, and the U.S.
Bilateral counternarcotics cooperation improved further in 2001. Chinese and U.S. officials continued to cooperate closely in conducting transnational investigations, exchanging information on existing and emerging threats, and developing Chinese law-enforcement capabilities.
Ministry for Public Security counternarcotics officers attended training courses at the International Law Enforcement Academy in Bangkok, Thailand, such as the Narcotics Unit Commanders Course, and the Transport Interdiction Course, and a training course organized by the DEA for forensics officials. In 2001, Chinese authorities provided their U.S. counterparts drug samples on numerous occasions.
The Road Ahead. Despite these advances, there is much room for improvement in U.S.-China cooperation on narcotics control, particularly in expanding and strengthening cooperation by exchanging narcotics-related intelligence. The United States has proposed holding regular meetings of working-level counternarcotics officials to discuss specific topics and targets of mutual interest, but little progress has been made in this area to date. The United States also continues to encourage China to provide more samples of narcotics seized. As in the past, the United States will continue to monitor both the transshipment of Burmese heroin through China and the threat posed by the explosive growth of methamphetamine trafficking in China.
China has a major chemical industry. It is a large producer of potassium permanganate, a key cocaine essential chemical, and a major producer of acetic anhydride and ephedrine, two other important precursor chemicals. The country is a party to the 1988 UN Drug Convention and has regulations for record keeping and import/export controls on the 22 chemicals listed in Tables I and II of the Convention. Several provinces, including Yunnan (which shares a border with Burma), have more stringent controls than called for in the Convention. China also requests "letters of no objection" from importing countries prior to authorizing exports of methamphetamine precursor chemicals.
Internally, the government has issued regulations tightening controls on transportation licenses for ephedrine, a methamphetamine precursor. One result has been to drive up the price on the black market for the chemical.
China actively cooperates with multilateral initiatives to control chemicals in international commerce, and it has been a strong partner with the United States and other countries in implementing a system of notification of dual-use chemicals. It reports the highest number and largest quantities of potassium permanganate shipments to the Operation Purple control system. It is participating in Operation Topaz, the acetic anhydride tracking initiative that became operational in March 2001. China and the United States also cooperate in Operation Icebreaker, a regional initiative to combat the diversion of precursor chemicals for the production of crystal methamphetamine.
China cooperates closely with the U.S. on chemical control issues. The two countries have in place a strong pre-export notification system for shipments of ephedrine and pseudoephedrine. Chinese officials routinely take part in chemical control courses sponsored by the Department of State and taught by DEA. Information is exchanged through mechanisms such as operations Purple and Topaz and in the course of normal counternarcotics cooperation.
As the People's Republic of China (PRC) has become more prosperous, money laundering, bank fraud, embezzlement, and other financial crimes have become more common. Other areas of increased criminal activity include narcotics-trafficking, illegal alien smuggling, and intellectual property violations. Corruption figures prominently into financial crimes such as smuggling, embezzlement of public funds, and tax evasion. The use of alternative remittance systems to move criminal proceeds and to evade foreign currency control measures is on the rise. The PRC's legal, regulatory, and enforcement sectors require additional reforms to counter the growth in financial crimes and money laundering. Law enforcement agencies are ill prepared in training and equipment to prevent, investigate, and prosecute crime.
The PRC has taken modest steps in 2001 to improve its anti-money laundering regime. As a means of cracking down on illegal foreign exchange trading that facilitates money laundering, among other financial crimes, the State Administration for Foreign Exchange (SAFE) and the Ministry of Public Security (MPS) issued a joint circular in early September 2001 for local departments of both agencies to cooperate more closely in scrutinizing foreign exchange transactions.
The various agencies responsible for developing the PRC's anti-money laundering regime are studying how best to incorporate anti-money laundering measures into the PRC's legal and financial environments. An impediment to the PRC's participation in international money laundering fora, such as the Asia/Pacific Group on Money Laundering (APG), is the question of what to call Taiwan in the APG. The PRC participated in the initial meeting of the APG and hosted the first round of working group meetings in Beijing in July 1997. The PRC has not attended subsequent meetings of the APG citing Taiwan nomenclature issues as an obstacle to the PRC's participation.
While awaiting the adoption of comprehensive money laundering measures, the PRC's primary legal tool to combat money laundering is Article 191 of the 1997 Criminal Code. It lists three offenses--narcotics-trafficking, organized crime, and smuggling--in connection with which money laundering is treated as a criminal offense. Additionally, Article 312 criminalizes complicity in concealing the proceeds of criminal activity. The PRC is currently investigating 70 money laundering cases tied to these predicate offenses.
The April 2000 statute that requires bank clients to use their real names and show identification cards to open bank accounts has been effective in preventing criminal proceeds from being easily deposited into bank accounts opened under pseudonyms and withdrawn freely. In response to the closure of this loophole, Chinese officials have noted a rise in cross-border money laundering, particularly of funds derived from bribery or embezzlement headed to Hong Kong and returning to the PRC disguised as foreign investments. Under provisions of this statute, anonymous accounts will be totally phased out by 2005.
The United States and the PRC continue to hold discussions on cooperation on money laundering and other enforcement topics through the auspices of the US-PRC Joint Liaison Group (JLG) on law enforcement cooperation. The next JLG meeting is scheduled to occur in early 2002 in Washington.
The United States and the PRC signed a Mutual Legal Assistance Agreement (MLAA) in June 2000, the first major bilateral law enforcement agreement between the countries and an interim step towards the conclusion of a Mutual Legal Assistance Treaty. The MLAA entered into force in March 2001. In February 2002 the PRC agreed to the establishment of a legal attache office in Beijing to be staffed by the FBI. The PRC is a party to the 1988 UN Drug Convention, and has signed but not yet ratified the UN Convention against Transnational Organized Crime.
Building upon Article 191 and the ancillary financial regulations adopted in the past few years, China should criminalize money laundering for all serious crimes and implement anti-money laundering measures in line with international standards. As China integrates itself into the global anti-money laundering effort, the adoption of laws and regulations compatible with partner nations will allow it to more effectively combat money laundering domestically as well as internationally.
Under the one country-two systems principle that underlies Macau's 1999 reversion to the People's Republic of China, Macau has substantial autonomy in all areas except defense and foreign affairs. Macau's free port, lack of foreign exchange controls, significant gambling industry, and ongoing reorganization of its law enforcement agencies create an environment that can be exploited for money laundering. In addition, Macau is a gateway to China, and can be used as a transit point to remit funds and criminal proceeds to and from China, Hong Kong, and other Asian countries. Macau has a small economy and is not a financial center; however, significant amounts of criminal proceeds are laundered in Macau.
The gambling sector is a critical part of Macau's economy. It accounts for approximately 40 percent of GDP and direct taxes from gambling comprised 36 percent of government revenue in 2000. The Macau Special Region Administrative Region Government (MSARG) is planning to restructure the industry early in 2002 by ending the monopoly held by one company and expanding the number of licensed operators to three. Under the monopoly framework, organized crime groups were associated with the gambling industry through their control of VIP gaming rooms and activities such as racketeering, loan sharking, and prostitution. As a result, the gambling industry in particular provides an avenue for the laundering of illicit funds.
Macau's anti-money laundering legal framework is broadly in line with international anti-money laundering standards. The most important laws are: the Macau Financial System Act, approved by Decree Law Number 32/93/M on July 5, 1993; the Law on Organized Crime, approved by Decree Law Number 6/97/M on July 30, 1997; and Decree Law Number 24/98/M of June 1, 1998. The U.S. has no law enforcement cooperation agreements with Macau, though international cooperation is granted on the basis of international conventions in force in Macau. The Government of Macau (GOM) respond to U.S. requests for law enforcement assistance; however, Macau judges in two recent cases (in one with the concurrence of the Macau government) concluded that in the absence of a law enforcement cooperation agreement with the US, they did not have a legal basis to provide financial records requested by U.S. authorities. To facilitate its ability to provide increased law enforcement assistance to the United States, the GOM has prepared legislation to enable it to negotiate mutual legal assistance agreements.
The Financial System Act lays out regulations to prevent the use of the banking system for money laundering. It requires the mandatory identification and registration of financial institution shareholders, customer identification requirements, and external audits that include reviews of compliance with anti-money laundering statutes. These regulatory measures are applicable to credit institutions and financial companies headquartered in Macau and branches of credit institutions headquartered abroad. The Macau Monetary Authority has issued anti-money laundering guidelines to banks. Article 10 of the Law on Organized Crime criminalizes money laundering for the proceeds of all domestic and foreign criminal activities and contains provisions for the freezing of suspect assets and instrumentalities of crime. Legal entities may be civilly liable for money laundering offenses, and their employees may be criminally liable. The preventive measures in Decree Law Number 24/98/M set forth requirements for reporting suspicious transactions to the Judiciary Police and other appropriate supervisory authorities. These reporting requirements apply to all legal entities supervised by the MSARG regulatory agencies including pawnbrokers, antique dealers, art dealers, jewelers, and real estate agents.
Only a small number of suspicious transaction reports (Str) have been filed since the implementation of Decree 24/98/M. None has led to prosecution. Concern in the banking industry about possible retribution from criminal elements is one reason for the small number of Strs from this sector. The Inspectorate of Gaming has not played an active role in preventing money laundering in the casinos. The casinos have not filed any suspicious transaction reports. Activities and transactions that occur within quasi-private VIP rooms that cater to clients seeking anonymity within Macau's gambling establishments are especially removed from official scrutiny. Given the gambling industry's important economic role, there is concern in Macau about the economic effects of anti-money laundering efforts.
Despite having anti-money laundering laws, the MSARG in the past did not have an active enforcement effort in practice. However, over the past year, the MSARG has taken a series of important initial steps to create an effective anti-money laundering regime. It requested and provided full cooperation with an Offshore Group of Banking Supervisors (OGBS) and an Asia-Pacific Group (APG) review in April 2001 of its anti-money laundering regime. The MSARG is now taking steps to comply with the review's recommendations. These steps include: drawing up plans for establishment of a financial intelligence unit; drafting and sending out for comment revised anti-money laundering guidelines for banks; drafting and sending out for comment new anti-money laundering guidelines for money changers and remittance agents; and beginning an anti-money laundering public awareness campaign.
The MSARG joined the Asia/Pacific Group on Money Laundering (APG) as a full member in May 2001, and is also a member of the Offshore Group of Banking Supervisors. It has participated in anti-money laundering training programs offered by other countries and multilateral organizations. The MSARG is also drafting regulations specifically designed to prevent money laundering in the gambling industry as part of its restructuring of that sector. The People's Republic of China is a party to the 1988 UN Drug Convention, and through it the Convention is applicable to Macau.
It is too early to judge whether MSARG efforts to create an effective anti-money laundering regime will be successful. Further efforts are necessary, particularly ensuring that regulations, structures, training, and adequate resources are put in place to prevent money laundering in the gambling industry. The MSARG should also consider measures that provide for cross-border bulk currency and threshold reporting, ensure that anti-money laundering guidelines are provided to all business entities, including remittance agents, boost public awareness of the money laundering problem, and improve interagency coordination and cooperation on this issue.