Source: 2005
Released by the Bureau for International Narcotics and Law Enforcement Affairs
I. Summary
The People's Republic of China (PRC) is a major factor in the regional drug market, serving as a transit country and an important producer/exporter of Amphetamine Type Stimulants (ATS). The PRC continues to have a domestic heroin problem along with an upsurge in the consumption of synthetic drugs such as Ecstasy (MDMA) and crystal methamphetamine, known locally as "ice". PRC authorities view drug trafficking and abuse as a major threat to national security, the economy and national and regional stability, but corruption in far-flung drug producing and drug transit regions of the PRC limit what dedicated enforcement officials can accomplish. Authorities continue to take steps to integrate the PRC into regional and global counternarcotics efforts. The PRC is a party to the 1988 UN Drug Convention.
Cooperation with United States counternarcotics officials has steadily improved over the past year. This was highlighted by a joint operation involving the DEA and several PRC law enforcement agencies in October 2004, which led to the world's largest seizure of Mandrax, totaling 18 metric tons. In 2004, the Chinese Government also continued to provide U.S. counternarcotics officials with samples of drugs seized on a case-by-case basis.
II. Status of Country
Mainland China is situated adjacent to both the major narcotics producing areas in Asia, Southeast Asia's "Golden Triangle" and Southwest Asia's "Golden Crescent." While the "Golden Triangle" area poses a longstanding problem, PRC officials admit that the "Golden Crescent" is a source for increasing amounts of illicit drugs trafficked into western China, particularly Xinjiang Province. The PRC itself is also an important producer of ATS. Diverted Chinese precursor chemicals sustain synthetic drug production in many other countries, including ones as far away as Belgium and the Netherlands. According to the PRC Government, drug abuse in China continues to rise and there were, as of 2004, 1.6 million registered drug addicts, double the number in 1995. Youths made up 74 percent of the registered drug addicts. The majority of registered drug addicts are heroin users. Illegal drug use was recorded in 2,148 cities, counties, and districts across China. The PRC Government reports about 25,000 deaths of drug addicts from overdoses in past years (seeking data for 2004).
As the PRC's economy has grown and its society has opened up over the last decade, the country's youth have come to enjoy increasing levels of disposable income and freedom. This has been associated with a dramatic increase in drug abuse among the country's youth in large and mid-sized cities. In large cities like Beijing and Shanghai a Western style rave culture has begun to take root, accounting for the increasing popularity of recreational drugs, such as Ecstasy and ATS, particularly at local nightclubs. Despite increased awareness by police and several highly publicized campaigns, results have been limited.
With a large and developed chemical industry, China is one of the world's largest producers of precursor chemicals, including acetic anhydride (AA), potassium permanganate, piperonylmethylketone (PMK), pseudoephedrine, and ephedra. China monitors all 22 of the chemicals on the 1988 UN Drug Convention watch list. PRC authorities claim to have seized over 96 tons of precursor chemicals August through November 2004. China continues to be a strong partner of the United States and other concerned countries in implementing a system of pre-export notification of dual-use precursor chemicals.
III. Country Actions Against Drugs in 2004
Policy Initiatives. In June 2004, the PRC published an authoritative five-year plan to tackle the drug problem, which provided the Ministry of Public Security (MPS) with a mandate to step up counternarcotics efforts. The national budget for counternarcotics efforts has seen regular increases. While the MPS's National Narcotics Control Commission (NNCC), China's counternarcotics coordinating body, received an annual budget of less than $1 million in the mid-1990's, by 1998 this amount had increased to approximately $4.5 million and to about $17.5 million in 2003 Sources say funding was flat this year, but we have not received official statistics yet. The total narcotics budget, however, is significantly higher, because each province administers its own counternarcotics budget.
Accomplishments. The September 2004 seizure of 10 tons of pseudoephedine tablets in Los Angles was the result of strengthened bilateral cooperation with U.S. law enforcement agencies (see below under law enforcement cooperation). China continued to cooperate with regional and international partners to stem drug trafficking. China has eradicated opium poppy cultivation and PRC authorities continue efforts to destroy illicit drug laboratories within China's borders.
Law Enforcement Efforts. The Chinese Government has continued its aggressive counternarcotics campaign. The coordination between China's Beijing-based counternarcotics efforts and those at the provincial level has grown substantially with increased training and exchange programs. In November 2004, the Anti-Smuggling Bureau (ASB) in Guangdong seized 469 kilograms of MDMA tablet inside shipping containers.
In order to increase its effectiveness in law enforcement, the NNCC reorganized its enforcement operations, establishing separate heroin and ATS enforcement groups at both the ministerial and provincial levels. Prior to 2003, enforcement was handled by one organization and focused primarily on heroin. With this reorganization, the NNCC can better focus on ATS enforcement.
In 2004, PRC authorities continued to strengthen cooperation with U.S. law enforcement entities. As an example, the September 2004 seizure of 10 tons of pseudoephedine tablets in Los Angles resulted from strengthened bilateral cooperation with U.S. law enforcement agencies. The MPS continues to provide strategic and concrete information to its DEA counterparts to actively target drug rings. In addition, the MPS routinely facilitates travel of U.S. law enforcement personnel based at the U.S. Embassy in Beijing. In part due to international cooperation with its neighbors in the Golden Triangle, the MPS reports that poppy cultivation in Laos and Burma has been reduced by 44,000 hectares in recent years, which amounts to a 27 percent decrease in the total area of production since 1995.
Corruption. Official corruption in China is a serious problem. Anticorruption campaigns have led to arrests of many lower-level government personnel and some more senior-level officials. Most corruption activities in the PRC involve abuse of power, embezzlement and misappropriation of government funds, but payoffs to "look the other way" when questionable commercial activities occur are clearly another major source of official corruption in China. While narcotics-related official corruption exists in China, it is seldom reported in the press. MPS takes allegations of drug-related corruption seriously, launching investigations as appropriate. Most cases appear to have involved lower-level district and county officials. There is no specific evidence indicating senior-level corruption in drug trafficking. Nevertheless, the quantity of drugs trafficked within the PRC raise suspicions that official corruption is a factor in trafficking in certain provinces bordering drug producing regions, such as Yunnan, and in Guangdong and Fujian, where narcotics trafficking and other forms of transnational crimes are prevalent. Official corruption cannot be discounted among the factors enabling organized criminal networks to operate in certain regions of China, despite the best efforts of authorities at the central government level. As a matter of government policy or practice, China does not encourage or facilitate the laundering of proceeds from official drug transactions, nor are there any indications that senior PRC officials engage in laundering the proceeds from illegal drug transactions. Narcotics-related corruption does not appear to have adversely impacted on-going law enforcement cases in which U.S. agencies have been involved.
Agreements and Treaties. China actively cooperates with other countries to fight against drug trafficking. The U.S. and the PRC cooperate in law enforcement efforts under a mutual legal assistance agreement signed in 2000. China is a party to the 1988 UN Drug Convention, as well as to the 1961 UN Single Convention and its 1972 Protocol and the 1971 Convention on Psychotropic Substances. In January 2003, the United States and China reached agreement on the Customs Mutual Assistance Agreement (CMAA.) The PRC continues to cooperate with DEA's chemical initiatives, "Operation Purple" and "Operation Topaz," and strictly regulates the import and export of precursor chemicals. Leakage into the illicit market nevertheless occurs despite this effort.
The PRC continued its participation in the "ASEAN and China Cooperative Operations in Response to Dangerous Drugs (ACCORD)." China, along with its ASEAN partners, held meetings in order to map out a regional counternarcotics cooperative mechanism in pursuit of making the region drug-free by 2015. In June, Burma, China, India, Laos and Thailand signed the Chiang Rai Declaration pledging to implement cooperative counternarcotics programs and exchange counternarcotics information. The PRC also continues to participate in UN Office of Drugs and Crime (UNODC) demand reduction and crop substitution efforts in areas along China's southern borders. China routinely participates in counternarcotics education programs sponsored by the International Law Enforcement Academy (ILEA), located in Bangkok, Thailand. The PRC actively participates in the annual International Drug Enforcement Conference (IDEC) and Regional Targeting Meetings, which are intended to boost regional law enforcement cooperation against drug trafficking.
The Chinese Government sometimes conducts drug operations with its neighbors. In 2004, Burma-China cooperation led to the closure of 9 heroin-processing plants in Burma. The joint operations netted 275 kilograms of semi-processed heroin, 120 kilograms of ATS, 26 tons of poppy seeds and 47 tons of precursor chemicals.
Cultivation/Production. The PRC has effectively eradicated the production of drug-related crops within China. Opium appears no longer to be cultivated in China. The PRC is a main source for natural ephedra, which is used in the production of methamphetamine. China is also one of the world's largest producers of synthetic ephedra. However, ephedra is also used for legitimate medicinal purposes. The Chinese central Government --- supplemented by stricter controls in critical provinces, notably Yunnan and Zhejiang --- makes laudable efforts to control exports of this key precursor. Despite these efforts, there is little question that some Chinese ephedra finds its way into the illicit market, both in China and abroad.
The PRC Government continues to make shutting down illicit drug laboratories a top priority. MPS seized 198 drug-processing laboratories between July and August 2004.
Drug Flow/Transit. China continues to be used as a transshipment route for drugs produced in the "Golden Triangle" to the international market, despite counternarcotics cooperation with neighbors such as Vietnam, Thailand and Burma. Drug transportation in Yunnan and Guangdong Provinces has been especially pervasive. While China's southern and southwestern provinces constitute the PRC's major drug flow and transit areas, Chinese authorities acknowledge that western China is experiencing significant problems as well. They claim that drugs such as opium and heroin are being smuggled into Xinjiang Province and are then distributed throughout China. The border areas with North Korea are also problematic, with amphetamine and heroin production possible on both sides of the border.
Domestic Programs (Demand Reduction). According to the MPS, China had 1.6 million illegal drug users registered by law enforcement departments. The majority of registered drug users are addicted to heroin. The Ministry of Education (MOE) has expanded drug education and prevention programs, aimed at preventing children from ages 12 to 18 from getting involved in drugs. Chinese officials report the distribution of over 1.16 million drug education posters and 580,000 leaflets in 2002, reaching out to an estimated 300 million people In 2004, major cites such as Shanghai and Beijng introduced drug education into the curriculum for all elementary school students.. China gave higher priority to controlling of the spread of HIV/AIDS in 2004. The MPS also stepped up campaigns targeting young people in its fight against banned narcotics, and created more drug-free residence communities and villages for rehabilitating addicts.
IV. U.S. Policy Initiatives and Programs
Bilateral Cooperation. Counternarcotics cooperation between China and the United States continues to develop in a positive way. This cooperation is yielding significant operational results. The information shared by China is leading to progress in attacking drug-smuggling rings operating between the two countries. Chinese authorities continue to share drug samples with U.S. colleagues on a case-by-case basis. In August 2004, the DEA, in conjunction with the NNCC, convened two conferences on precursor chemical control in Shanghai and Nanling, Guangxi Province to provide training to law enforcement officers from China police and customs.
Road Ahead. While China has on occasion provided the DEA with samples of drugs seized in the PRC intended for U.S. markets, the U.S. Government would welcome routinely receiving samples of all drugs seized by Chinese authorities. Despite these issues, bilateral cooperation remains on track and should steadily improve over the coming year.
China has a large and developed chemical industry and is a major producer of acetic anhydride, potassium permanganate, ephedrine, and pseudoephedrine, all chemicals on Table 1 of the 1988 UN Drug Convention. The country is a party to the 1988 UN Drug Convention and has regulations for record keeping and import/export controls on the 23 chemicals included in it. Several provinces, including Yunnan (which shares a border with Burma), have more stringent controls than called for in the convention. In 2004, Zhejiang Province, one of the largest chemical producing areas in China, announced strict controls over precursor chemicals, requiring special approval from two offices with duel oversight to ship these products.
The Chinese Public Security Bureau maintains a small chemical control unit in Beijing to investigate chemical diversion and to verify the legitimacy of chemical handlers and transactions. In the provinces, provincial police only address controlled chemicals when they are discovered at a clandestine laboratory. China also requests "letters of no objection" from importing countries prior to authorizing exports of methamphetamine precursor chemicals.
Despite the adequate legislation, China remains a significant source country for chemicals diverted worldwide for the illicit production of cocaine, heroin, methamphetamine, and Ecstasy. The country lacks the infrastructure to monitor adequately its large chemical production capacity and its international trade in chemicals.
U.S. and Chinese cooperation in chemical control is good, within the limits of Chinese capabilities. China is a participant in Operations Purple and Topaz, and Project Prism. Information is exchanged through these operations and in the course of normal counternarcotics cooperation. China is also a participant in Operation Icebreaker, an effort to combat diversion of precursor chemicals for the production of crystal methamphetamine. DEA has Diversion Investigator positions in its Beijing and Hong Kong offices.
Money laundering remains a major concern as the People,s Republic of China (PRC) restructures its economy. A more sophisticated and globally connected financial system in one of the world,s fastest growing economies will offer significantly more opportunities for money laundering activity. Most money laundering cases now under investigation involve funds obtained from corruption and bribery. Narcotics trafficking, smuggling, alien smuggling, counterfeiting, and fraud and other financial crimes remain major sources of laundered funds. Proceeds of tax evasion, recycled through offshore companies, often return to the PRC disguised as foreign investment, and as such, receive tax benefits. Speculation on a possible currency revaluation has also been fueling illicit capital flows into China throughout 2004. Hong Kong-registered companies figure prominently in schemes to transfer corruption proceeds and in tax evasion recycling schemes. The International Monetary Fund estimates that money laundering in China may total as much as $24 billion.
After conducting studies on how to strengthen the PRC,s anti-money laundering regime over the past few years, the People,s Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE) have promulgated a series of anti-money laundering regulatory measures for financial institutions. These include: Regulations on Real Name System for Individual Savings Accounts, Rules on Bank Account Management, Rules on Management of Foreign Exchange Accounts, Circular on Management of Large Cash Payments, and Rules on Registration and Recording of Large Cash Payments.
New measures came into effect in 2003 that further strengthened China,s anti-money laundering efforts. In March, a new PBOC regulation entitled "Regulations on Anti-Money Laundering for Financial Institutions" took effect, strengthening the regulatory framework under which Chinese banks and financial institutions must treat potentially illicit financial activity. The regulation effectively requires Chinese financial institutions to take responsibility for suspicious transactions, instructing them to create their own anti-money laundering mechanisms. Banks are required to report suspicious or large foreign exchange transactions of more than $10,000 per person in a single transaction or cumulatively per day in cash, or non-cash foreign exchange transactions of $100,000 per individual or $500,000 per entity either in a single transaction or cumulatively per day.
Banks are also required to report large renminbi transactions, including single credit transfers of over 1 million renminbi (RMB) ($120,500), cash transactions above 200,000 RMB ($24,000), and domestic fund transfers of over 200,000 RMB, and are expected to report suspicious RMB transactions and refuse services to suspicious clients. Under the regulation, banks are further required to submit monthly reports to the PBOC outlining suspicious activity and to retain transaction records for five years. Banks which fail to report on time can be fined up to the equivalent of $3,600.
These measures complement the PRC,s 1997 Criminal Code, which criminalized money laundering under Article 191 for three categories of predicate offenses-narcotics-trafficking, organized crime, and smuggling. In 2001, Article 191 was amended to add terrorism as a fourth predicate offense. Additionally, Article 312 criminalizes complicity in concealing the proceeds of criminal activity, and Article 174 criminalizes the establishment of an unauthorized financial institution.
While official scrutiny of cross-border transactions is improving, the Chinese Government is also moving to loosen capital-account restrictions. For example, as of January 1 2005, travelers can take up to 20,000 renminbi ($2,400) in or out of the country on each trip, up from 3,000 renminbi ($360) previously. New provisions allowing the use of renminbi in Hong Kong have also created new loopholes for money laundering activity. Authorities are also allowing greater use of domestic, renminbi-denominated, credit cards overseas. Such cards can now be used in Hong Kong, Macau, Singapore, Thailand, and South Korea. SAFE reported that in the first six months of 2004, it uncovered 300 money laundering cases involving more than $1 billion. Over 50 percent of suspicious transactions came through Hong Kong, followed by the United States, Japan, and Taiwan.
In 2003, the Chinese Government established a new banking regulator, the China Banking Regulatory Commission (CBRC), which assumed substantial authority over the regulation of the banking system. The CBRC has been authorized to supervise and regulate banks, asset management companies, trust and investment companies, and other deposit-taking institutions, with the aim of ensuring the soundness of the banking industry. One of its regulatory objectives is to combat financial crimes. Primary authority for anti-money laundering efforts remains with the PBOC, the country,s Central Bank, along with the Ministry of Public Security in terms of enforcement.
A new anti-money laundering law is being drafted under the direction of a ministerial-level coordinating committee that was created in 2004. This new law is expected to broaden the scope of existing anti-money laundering regulations and to establish more firmly PBOC,s authority over national anti-money laundering efforts. No date has been set for passing the new law, but authorities expect passage during 2005.
In 2004, the PBOC established a Financial Intelligence Unit (FIU) called the Anti-Money Laundering Monitoring and Analysis Center, which will supervise the monitoring of suspicious transactions. This move was an important accomplishment of the Anti-Money Laundering Strategy Team tasked with developing the legal and regulatory framework for countering money laundering in the banking sector. The team is chaired by a Vice-Governor of the PBOC and is composed of representatives of the PBOC,s 15 functional departments. It had earlier set up an office in the PBOC,s Payment System and Technology Development Department to design a system for monitoring the movement of suspicious transactions through PBOC-licensed financial entities.
In September 2002, SAFE adopted a new system to supervise foreign exchange accounts more efficiently. The new system allowed for immediate electronic supervision of transactions, collection of statistical data, and reporting and analysis of transactions. A separate Anti-Money Laundering Bureau was established at the PBOC in late 2003 to coordinate all anti-money laundering efforts in the PBOC and among other agencies, and to supervise the creation of the new FIU.
In spite of China,s efforts, institutional obstacles and rivalries between financial and law-enforcement authorities continue to hamper Chinese anti-money laundering work and other financial law enforcement. Continuing efforts by some Chinese officials to strengthen the relatively weak legal framework under which money laundering offenses are currently prosecuted in the Chinese criminal code have yet to bear fruit. Also, anti-money laundering efforts are hampered by the prevalence of counterfeit identity documents and cash transactions conducted by underground banks, which in some regions reportedly account for over one-third of lending activities. China has made some efforts in recent years to crack down on underground lending institutions. In an August 2004 speech, PBOC Governor Zhou Xiaochuan said the government had closed 153 underground money centers and illegal banks since 2002.
Another structural impediment is the absence of a nationwide automated network to monitor banking transactions through the PBOC. Many inter-banking transactions from one region to another are conducted manually, which delays the PBOC,s ability to prevent money laundering. As a result, weaknesses in the Chinese banking and criminal regulatory structure continue to be exploited by both domestic and foreign criminal enterprises.
To remedy these deficiencies, the PBOC is launching a national credit-information system in early 2005. Using this system, banks will have access to information on individuals as well as on corporate entities. PBOC rules obligate financial institutions to perform customer identification and due diligence, and record keeping. However, there is currently no legislative instrument --- only administrative rules --- requiring customer due diligence and record keeping. SAFE implemented a new regulation on March 1, 2004 requiring non-residents, including those from Hong Kong, Macau, Taiwan, and Chinese passport holders residing outside mainland China, to verify their real names when opening bank accounts with more than $5,000.
The PRC supports international efforts to counter the financing of terrorism. Terrorist financing is now a criminal offense in the PRC, and the government has the authority to identify, freeze, and seize terrorist financial assets. Subsequent to the September 11, 2001 terrorist attacks in the United States, the PRC authorities began to actively participate in U.S. and international efforts to identify, track, and intercept terrorist finances, specifically through implementation of United Nations Security Council counterterrorist financing resolutions.
China,s concerns with terrorist financing are generally regional, focused mainly on the western province of Xinjiang. Chinese law enforcement authorities have noted that China,s cash-based economy, combined with its robust cross-border trade, has led to many difficult-to-track large cash transactions. There is concern that groups may be exploiting such cash transactions in an attempt to bypass China,s financial enforcement agencies. While China is proficient in tracing formal foreign currency transactions, the large size of the informal economy --- estimated by the Chinese Government at about 10 percent of the formal economy, but probably larger --- makes monitoring of China,s cash-based economy very difficult. There were examples in 2003 of Chinese law enforcement,s ability to link transactions within the state-run banking sector to suspected terrorist entities, but there has been no such example with regard to cash transactions. Senior representatives of the U.S. Government visited China in February 2003 in an effort to improve bilateral ties between the United States and China on the issue of terrorist financing.
The PRC signed the UN International Convention for the Suppression of the Financing of Terrorism on November 13, 2001, but had not ratified it as of December 2004. The United States, PRC, Afghanistan, and Kyrgyzstan jointly referred the Eastern Turkistan Islamic Movement, an al-Qaida linked terrorist organization that carries out activities in the PRC and Central Asia, to the UNSCR 1267 Sanctions Committee for inclusion on its consolidated list. In December 2003, China unilaterally decided to list several individuals and "East Turkistan" groups as terrorists, and requested that domestic and foreign financial entities freeze their financial assets. East Turkistan is the name for Xinjiang province used by these separatist groups.
The PRC has signed mutual legal assistance treaties with 24 countries. 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. The MLAA entered into force in March 2001 and provides a basis for exchanging records in connection with narcotics and other criminal investigations and proceedings. The FBI-staffed legal attache office opened at the U.S. Embassy in Beijing in October 2002. The PRC is a party to the 1988 UN Drug Convention, and in 2003 ratified the UN Convention against Transnational Organized Crime.
The United States and the PRC cooperate and discuss money laundering and other enforcement issues under the auspices of the U.S.-PRC Joint Liaison Group,s (JLG) subgroup on law enforcement cooperation. The JLG meetings are held periodically in either Washington, D.C., or Beijing. The next one is scheduled for February 21, 2005. In addition, the United States and the PRC have established a Working Group on Counter-Terrorism that meets on a regular basis. The PRC has established similar working groups with other countries as well. Bilateral cooperation on anti-money laundering was further strengthened through a series of training seminars conducted by the U.S. Treasury Department and the National Committee on U.S.-China Relations in July 2004.
In late 2004, China joined the newly-created Eurasian Group (EAG), a Financial Action Task Force (FATF)-style regional group which includes Russia and a number of Central Asian countries. China had previously declined to join the Asia/Pacific Group on Money Laundering (APG), the Asia Pacific regional FATF-style body, due to Beijing,s concerns over Taiwan,s membership in the APG.
The Government of the People,s Republic of China should continue to build upon the substantive actions taken in recent years to develop a viable anti-money laundering/terrorist financing regime consonant with international standards. Important steps include expanding its list of predicate crimes to include all serious crimes, and continuing to develop a regulatory and law enforcement environment designed to prevent and deter money laundering. China should clarify Article 120 of its criminal code to make clear whether the law applies to third parties. China should ensure that the FIU is an independent, centralized body with adequate collection, analysis and disseminating authority, including the ability to share with foreign analogs and law enforcement. China should provide for criminal penalties for non-compliance with requirements that financial institutions perform customer identification, due diligence, and record keeping as well as incorporating the suspicious transaction-reporting requirement into law. China should also become a party to the UN International Convention for the Suppression of the Financing of Terrorism.