Source: 2007
Released by the Bureau for International Narcotics and Law Enforcement Affairs
The People's Republic of China is a major factor in the regional drug market, serving as a transit country and an important producer/exporter of Amphetamine Type Stimulants (ATS). China continues to have a domestic heroin problem along with an upsurge in the consumption of synthetic drugs such as Ecstasy and crystal methamphetamine, known locally as "ice." Chinese authorities view drug trafficking and abuse as a major threat to its national security, its economy, and its national and regional stability, but corruption in far-flung drug producing and drug transit regions of China limits what dedicated enforcement officials can accomplish. Authorities continue to take steps to integrate China into regional and global counternarcotics efforts. Cooperation with U.S. counternarcotics officials has steadily improved over the past year. A successful joint operation in 2005/2006 dismantled a Colombian drug organization operating in Southern China. China is a party to the 1988 UN Drug Convention.
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, Chinese officials note that the "Golden Crescent" is the source of increasing amounts of illicit drugs trafficked into Western China, particularly Xinjiang Province. China's 97-kilometer border with Afghanistan is remote, but Chinese authorities are increasingly concerned that opium from Afghanistan can find its way into China through other countries. Beijing claims that there are no heroin refineries in China. China is a major producer of licit ephedrine and pseudoephedrine used in the manufacture of methamphetamine. There is a widespread belief among Asian law enforcement agencies that large-scale methamphetamine producers in other Asian countries are using China-produced ephedrine and pseudoephedrine, and there are numerous examples from criminal investigations to confirm this suspicion. Diverted Chinese precursor chemicals may sustain synthetic drug production in other countries as far away as Mexico, Belgium and the Netherlands. Although China recently enacted enhanced precursor chemical control laws and is fully engaged in multilateral and bilateral efforts to stop diversion from its chemical production sector, it has not matched the size of its large chemical industry with sufficient resources to effectively ensure against diversion.
As for drug abuse within China, according to the Chinese Government, drug abuse continues to rise. There were, by the end of 2005 (the most current statistics available), 1,160,000 registered drug users, down 440,000 from 2004, but officials acknowledge the actual number of addicts is higher, and there have been published reports that China might have as many as 15 million drug abusers. The majority of registered drug addicts, 78.3 percent (700,000 people), are heroin users. Youth between the ages of 17-35 comprise the largest percentage of addicts.
As China'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. The number of abusers of new drugs is increasing and drugs such as crystal methamphetamine, Ecstasy, ketamine, and triazolam have become more popular. Synthetic drug use has surpassed that of traditional drugs in Northeast China's three provinces of Heilongjiang, Jilin, and Liaoning. Nightclubs and karaoke bars have become hotbeds for such recreational drugs.
With a large and developed chemical industry, China is one of the world's largest producers of precursor chemicals, including acetic anhydride, potassium permanganate, piperonylmethylketone (Ecstasy), pseudoephedrine, ephedrine, and ephedra. China monitors all 22 of the chemicals on the tables included in the 1988 UN Drug Convention. 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. According to the PRC's National Narcotics Control Commission (NNCC), China seized over 157 metric tons of precursor chemicals in 2005, prevented 3,250 metric tons of precursor chemicals from being exported abroad, and dismantled 34 labs. Nevertheless, diverted Chinese-source precursor chemicals are regularly encountered abroad during the course of criminal investigations.
Policy Initiatives. China takes active measures to combat the use and trafficking of narcotics and dangerous drugs. China's Ministry of Public Security (MPS) is in the midst of its National People's War on Illicit Drugs, begun in 2005 at the initiative of Chinese President Hu Jintao. MPS has designated five campaigns as part of this effort: drug prevention and education; drug treatment and rehabilitation; drug source blocking and interdiction; "strike hard" drug law enforcement; and strict control and administration, designed to inhibit the diversion of precursor chemicals and other drugs. In November 2005, China passed an Administrative Law on Precursor Chemicals as well as an Administrative Regulation on Narcotic Drugs and Psychotropic Substances. In the same month, China issued Provisional Administrative Regulations on the Export of Precursor Chemicals to Special Countries, strengthening the regulation of exports of 58 types of precursor chemicals to countries in the "Golden Triangle." In June 2004, MPS Bureau of Narcotics Control implemented a nationwide drug-related information gathering, sharing and storing network allowing data comparison alerts, and improved overall coordination in counternarcotics operations.
China continues to participate in UNODC demand reduction and crop substitution efforts in areas along China's southern borders and worked closely with Burma to implement an alternative crops program. With UNODC support, NNCC conducted training in cross-border drug enforcement cooperation, ATS data collection, and combating ATS crimes in Southern China. China routinely participates in counternarcotics education programs sponsored by the International Law Enforcement Academy (ILEA), located in Bangkok, Thailand.
Accomplishments. China's biggest success in 2005/2006 was the dismantlement of a Colombian drug trafficking organization in Southern China in cooperation with U.S. DEA. DEA, Hong Kong, and mainland Chinese agencies jointly tracked a drug trafficking organization as it moved cocaine from Colombia to China. In March 2006, China's Customs Anti-Smuggling Bureau made several arrests and seized 136 kg of cocaine in Zhongshan City in Guangdong Province. China continues to cooperate with regional and international partners to stem drug trafficking. China has eradicated opium poppy cultivation in China and Chinese 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. Special interagency organizations were set up in 18 key provinces and cities to actively oversee and carry out the National People's War on Illicit Drugs.
According to the NNCC 2006 Report, Yunnan Province (bordering Burma and Laos) and Guangxi Autonomous Region (bordering Vietnam) conducted stepped up counternarcotics efforts in 2005. Yunnan authorities solved more than 10,000 criminal narcotics cases and seized 5.19 tons of heroin, 124 kg of morphine, 2.62 tons of methamphetamine and 2.05 tons of opium and arrested 13,500 suspects. Solved cases and seizures increased by 8.7 percent and 1.3 percent respectively. Yunnan forestry authorities seized 2.97 tons of poppy shells and the State Postal Administration in Yunnan helped solve more than 30 drug-related cases. Guangxi Autonomous Region solved 159 cases involving heroin from Vietnam, an increase of 115 cases over 2004, and seized 66.8 kg of heroin, up 124 percent over 2004. Both regions mounted special operations to combat drug-related money laundering. In 2005, Xinjiang Autonomous Region uncovered nine cases involving drugs coming from the "Golden Crescent" by air, with 14 foreign couriers arrested and 14.5 kg of heroin seized, a dramatic increase over 2004.
Altogether in 2005, Chinese law enforcement agencies arrested 46,359 drug suspects, prosecuted 33,750 drug cases involving 46,013 persons, and solved 45,400 drug criminal cases, including 1,794 cases involving seizures from one to ten kg and 342 cases with seizures of more than ten kg. China also dismantled 1,550 drug trafficking gangs, arrested 58,000 suspects, and seized 6.9 tons of heroin, 5.5 tons of methamphetamine, 2.3 tons of opium, 2.34 million "Ecstasy" tablets, 2.6 tons of ketamine, and 941 kg of cannabis. Authorities solved 34 precursor cases, arrested 44 suspects, and seized 50.4 tons of precursor chemicals. Chinese authorities seized drug-related funds amounting to 47.92 million RMB, 140 thousand U.S. dollars, and 410,000 Hong Kong dollars.
Prior to 2003, narcotics enforcement was handled by one organization and focused primarily on heroin. The NNCC reorganized its enforcement operations in 2003 and established separate heroin and ATS enforcement groups at both the ministerial and provincial levels in order to better focus on ATS enforcement.
In 2005, China continued to strengthen its cooperation with United States law enforcement agencies. This included major DEA successes, such as the joint efforts against the Colombian drug organization. MPS continues to provide strategic and concrete information to its DEA counterparts to actively target drug rings. MPS has allowed DEA to interview witnesses in carrying out case investigations and has allowed DEA to jointly conduct other investigative activity to help identify drug rings. In addition, MPS routinely facilitates the travel of U.S. law enforcement personnel based at the U.S. Embassy in Beijing.
China has actively participated in an international cooperative effort with its neighbors in the Golden Triangle to reduce poppy cultivation in Laos and Burma in recent years, resulting in a 27 percent decrease in the total area of production since 1995. Nevertheless, according to the NNCC's 2006 report, Burma remains the major source of opium entering China.
The Chinese Government successfully conducted joint counternarcotics operations with neighboring countries. NNCC reports that after an 11-month investigation, police forces from five countries arrested 70 suspects in September 2005 and finally dismantled an international drug trafficking group headed by Han Hongwan and covering China, Burma, and Thailand.
Corruption. China has a very serious corruption problem. Anticorruption campaigns have led to arrests of many lower-level government personnel and some more senior-level officials. Most corruption activities in China involve abuse of power, embezzlement, and misappropriation of government funds, but payoffs to "look the other way" when questionable commercial activities occur are 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 China 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. China is engaged in an anticorruption dialogue with the United States through the U.S.-China Joint Liaison Group on Law Enforcement Cooperation (JLG). 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 Chinese officials engage in laundering the proceeds from illegal drug transactions. Narcotics-related corruption does not appear to have adversely affected ongoing law enforcement cases in which United States agencies have been involved.
As part of its efforts to stem the flow of corrupt Chinese officials who embezzle public funds and flee abroad to evade punishment, China ratified the United Nations Convention Against Corruption in January 2006, shortly after the Convention entered into force in December 2005.
Agreements and Treaties. China actively cooperates with other countries to fight against drug trafficking and has signed over 30 mutual legal assistance agreements with 24 countries. China has signed 58 bilateral treaties on legal assistance and extradition with 40 countries. 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. The United States and China cooperate in law enforcement efforts under a mutual legal assistance agreement signed in 2000. There is no extradition treaty between the United States and China. In January 2003, the United States and China reached agreement on the Customs Mutual Assistance Agreement (CMAA.). In February 2005, NNCC and DEA signed a memorandum of intent to establish a bilateral drug intelligence working group to enhance cooperation and the exchange of information. They jointly sponsored a drug-related money laundering workshop in August 2006. China continues to cooperate with international chemical control initiatives, "Operation Purple" and "Operation Topaz," and strictly regulates the import and export of precursor chemicals. China continued its participation in the ASEAN and China Cooperative Operations in Response to Dangerous Drugs (ACCORD).
Cultivation/Production. The PRC has effectively eradicated the cultivation of drug-related crops within China. China's mountainous and forested regions where illegal cultivation can occur are subject to aerial surveillance, field surveys, and drug eradication. Chinese officials state that there are no heroin refineries in China.
China is a main source for natural ephedra, which is used in the production of ephedrine. China is also one of the world's largest producers of licit synthetic pseudoephedrine. China has a large pharmaceutical industry and ephedra is used for legitimate medicinal purposes. The Chinese central government, supplemented by stricter controls in critical provinces such as Yunnan and Zhejiang, makes efforts to control exports of this key precursor. Despite these efforts, there is a widespread belief among law enforcement authorities in Asia that large-scale production of methamphetamines, most notably in super and mega-labs, in the Asia Pacific Rim, use China-produced ephedrine and pseudoephedrine. Large-scale seizure of chemicals diverted from China is almost commonplace in law enforcement investigations around the world.
The Chinese Government continues to make shutting down illicit drug laboratories a top priority. China dismantled 34 labs in 2005.
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. China shares a 2000-kilometer border with Burma, much of which lies in remote and mountainous areas, providing smugglers unrestricted crossing into China. In addition, there are many official crossings on the Burma/China border that also provide access. Transit of drugs through Yunnan and Guangxi to Guangdong for storage, distribution, or repackaging has been especially widespread. Traffickers continue to use Guangzhou, Shenzhen, and Zhuhai in Guangdong Province as transit/transshipment points for heroin and crystal methamphetamine leaving China. Chinese authorities report that much of Burma's heroin travels through China en route to the international market. It is estimated 78 percent (8,468 kg) of the total amount of heroin (10,837 kg) seized in China during 2004 was produced in the Golden Triangle area and entered China from the Muse and Kohkang areas of Northern Burma. In 2005, Chinese authorities seized a total of 6.9 tons of heroin nationwide.
Chinese authorities acknowledge that Western China is experiencing significant problems as well. Chinese officials are becoming increasingly concerned about the growing source of opium from the Golden Crescent and have seen a steady increase in the flow of heroin from that region. They report that drugs such as opium and heroin are being smuggled into Xinjiang Province for distribution throughout China. MPS and DEA report that Pakistan serves as a key trafficking route for heroin from Afghanistan into China. In 2005, Pakistan reportedly solved 22 cases involving drugs intended for China. China itself reported nine cases of drugs smuggled by air into China from Pakistan.
Domestic Programs (Demand Reduction). MPS figures indicate there were 1,160,000 registered drug addicts in China in 2005, down 440,000 from 2004. Officials acknowledge that the actual number of addicts is higher, with some published reports speaking of 15 million drug abusers. An estimated 700,000 people, or 78.3 percent, of registered drug abusers are addicted to heroin.
As part of its National People's War on Illicit Drugs, China takes a multi-agency approach to educating people about drug prevention. This effort involved producing a film, "Memory of Black and White," on drug prevention and education; creating a drug enforcement hero character, Wu Guanlin, and promoting him and his deeds in five provinces; disseminating thousands of drug control fliers and pictures for prominent display on TV, buses, and in public spaces; designating five well-known public figures as "image ambassadors"; setting up training courses in schools in key provinces that reach millions of students; mobilizing 1,000 college students to go to villages during holidays to publicize drug control; antidrug training in discos and pubs, targeting high-risk groups and promoting drug awareness; special courses in re-education-through-labor camps; periodic placement of pieces in newspapers, magazines, and TV news programs including Focus Talk, Face to Face, Dialogue, etc. China continued to give high priority to controlling the spread of HIV/AIDS in 2005. 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.
Bilateral Cooperation. Counternarcotics cooperation between China and the United States continues to develop in a positive way. The information shared by China is leading to progress in attacking drug-smuggling rings that have an impact on the U.S. and is yielding significant operational results.
Road Ahead. The most significant problem in bilateral counternarcotics cooperation remains the lack of progress toward concluding a bilateral Letter of Agreement (LOA) enabling the U.S. Government to extend counternarcotics assistance to China. Reaching agreement on the LOA is a major U.S. goal that, if achieved, would greatly increase counternarcotics cooperation between the two countries. While China has provided the DEA on a case-by-case basis with some 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 enforcement cooperation remains on track and is expected to continue to improve over the coming year.
Money laundering remains a major concern as China 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 currently under investigation involve funds obtained from corruption and bribery. Narcotics trafficking, smuggling, alien smuggling, counterfeiting, fraud and other financial crimes remain major sources of laundered funds. Proceeds of tax evasion, recycled through offshore companies, often return to China disguised as foreign investment, and as such, receive tax benefits. Continuing speculation following the July 2005 adjustment of the renminbi (RMB) exchange rate system also fueled illicit capital flows into China throughout 2006. Hong Kong-registered companies figure prominently in schemes to transfer corruption proceeds and in tax evasion recycling schemes. The International Monetary Fund estimated that money laundering in China may total as much as $24 billion annually.
On October 31, 2006, the National People's Congress passed a new Anti-Money Laundering Law, which came into effect January 1, 2007. This new law broadens the scope of existing anti-money laundering regulations to include any institution involved in money laundering. It mandates that financial and some nonfinancial institutions maintain records on accounts and transactions, and that they report large and suspicious transactions. The law more firmly establishes the Central Bank's authority over national anti-money laundering efforts, but does not clearly define "nonfinancial institutions" for this purpose. The law also increases the number of predicate offenses for money laundering, to include fraud, bribery, and embezzlement. China has taken steps to enhance its anti- money laundering regime. After conducting studies on how to strengthen the system, the People's Bank of China (PBC) and the State Administration of Foreign Exchange (SAFE) 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.
Additional regulations were announced in 2006 aimed at further strengthening China's anti-money laundering efforts. In December, 2006, China's central bank issued two new regulations--"Rules for Anti-Money Laundering by Financial Institutions", which will come into effect January 1, 2007, and "Administrative Rules for Reporting of Large-Value and Suspicious Transactions by Financial Institutions", which will come into effect March 1, 2007. Together, these regulations revise earlier PBC regulations implemented in March, 2004. The new regulations will require all financial institutions--including securities, trust companies and futures dealers--to report large and suspicious transactions. Any cash deposit or withdrawal of over RMB 200,000 or foreign-currency withdrawal of $10,000 in one business day must be reported within five days if electronically or within 10 days in writing to the PBC. Money transfers between companies exceeding RMB 2 million or US$200,000 in one day or between an individual and a company greater than RMB 500,000 or US$100,000 must also be reported. The regulations are slated for implementation between January and March of 2007.
These regulations enhance a prior March 2004 PBC regulation entitled "Regulations on Anti-Money Laundering for Financial Institutions," which strengthens 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 in particular were required to report suspicious foreign exchange transactions--but not all transactions, as in the new regulations--of more than $10,000 per person in a single transaction or cumulatively per day in cash, or noncash foreign exchange transactions of $100,000 per individual or $500,000 per entity either in a single transaction or cumulatively per day. Under the regulation, banks were further required to submit monthly reports to the PBC outlining suspicious activity and to retain transaction records for five years. Banks which failed to report on time can be fined up to the equivalent of approximately $3,600.
Under the December 2006 regulations, financial institutions that fail to meet reporting requirements in a timely manner can have their licenses or business operations suspended.
On April 12, 2006, the PBC proposed a series of measures aimed at curbing money laundering in the insurance, banking and securities sectors. The proposed regulations, which were circulated for comment until May 8 2006, would require institutions to report all "block transactions"-defined as transactions worth more than 50,000 RMB (approximately $6,241) or $10,000 per day-to the PBC's anti-money laundering center for review. The proposal would also define the following as "block transactions": noncash transactions of more than 200,000 RMB or $100,000 per day and transactions between institutional accounts amounting to more than 1 million RMB or $500,000 per day. However, the current status of these proposed regulations is unclear.
The new Anti-Money Laundering Law passed in 2006 builds on China's 1997 Criminal Code. The 2006 law amended Article 191 of the Criminal Code to criminalize money laundering for seven predicate offenses, expanded from the original three predicate offenses, which were narcotics trafficking, organized crime, and smuggling. In 2001, Article 191 was amended to add terrorism as a fourth predicate offense. Article 191, however, still does not encompass all of the twenty designated categories of offenses identified by the Financial Action Task Force (FATF), even after passage of the 2006 law. Additionally, the 2006 law amended Article 312 to make it an offense to launder the proceeds of any crime through a variety of means. Article 312 criminalizes complicity in concealing the proceeds of criminal activity. 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 RMB (approximately $2,500) or, in foreign currency, up to $5,000, into or out of the country on each trip, up from 3,000 RMB (approximately $360) previously. New provisions allowing the use of RMB in Hong Kong have also created new loopholes for money laundering activity.
Authorities are also allowing greater use of domestic, RMB-denominated, credit cards overseas. Such cards can now be used in Hong Kong, Macau, Singapore, Thailand, and South Korea. To address online fraud, the PBC tightened regulations governing electronic payments. In 2005, the Central Bank announced new rules that consumers could not make online purchases of more than RMB 1,000 (approximately $124) in any single transaction or more than 5,000 RMB (approximately $620) in a single day. Enterprises are limited to electronic payments of no more than 50,000 RMB (approximately $6,200) in a single day.
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.
However, primary authority for anti-money laundering efforts remains with the PBC, the country's Central Bank, while enforcement is handled by the Ministry of Public Security.
In 2004, the PBC established a central national Financial Intelligence Unit (FIU), the China Anti- Money Laundering Monitoring and Analysis Center, whose function is to collect, analyze and disseminate suspicious transaction reports and currency transaction reports. 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. According to the China Anti-Money Laundering Monitoring and Analysis Center, 683 suspicious money laundering cases had been reported to the police by the end of 2005. They involved 137.8 billion yuan ($17.2 billion) and over one billion U.S. dollars.
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 PBC in late 2003 to coordinate all anti-money laundering efforts in the PBC 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. 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 increased efforts in recent years to crack down on such underground lending institutions. In December, 2006, authorities in Shanghai announced they were investigating the country's largest-ever money laundering case, totaling about five billion yuan ($633 million). The case involves underground banks, according to Chinese media reports.
To remedy information deficiencies, the PBC launched a national credit-information system in early 2005. The system officially began operation in January 2006. Although still very limited, this system will allow banks to have access to information on individuals as well as on corporate entities. PBC rules obligate financial institutions to perform customer identification, due diligence and record keeping. SAFE implemented a new regulation on March 1, 2004 requiring nonresidents, 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.
China supports international efforts to counter the financing of terrorism. Terrorist financing is now a criminal offense in China, 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, Chinese 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 Xinjiang Uighur Autonomous Region. 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 quite possibly larger-makes monitoring of China's cash-based economy very difficult.
China is a party to the 1988 UN Drug Convention, and the UN Convention against Transnational Organized Crime. China became as party to UN Convention against Corruption, and to the UN International Convention for the Suppression of the Financing of Terrorism in 2006.
China has signed mutual legal assistance treaties with 24 countries. The United States and China 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 United States and China cooperate and discuss money laundering and other enforcement issues under the auspices of the U.S.-China Joint Liaison Group's (JLG) subgroup on law enforcement cooperation. JLG meetings are held annually in either Washington, D.C., or Beijing. In addition, the United States and China have established a Working Group on Counterterrorism that meets on a regular basis. The PRC has established similar working groups with other countries as well.
In late 2004, China joined the Eurasian Group (EAG), a Financial Action Task Force (FATF)-style regional group which includes Russia, Belarus, China, Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan. In January 2005, China became an observer to the FATF and seeks to become a full member of the FATF. The FATF conducted a mutual evaluation of China in November, 2006.
In 2005, China's CBRC signed a memorandum of understanding with the Philippine Central Bank, Bangko Sentral ng Pilipinas, to share information on suspected money laundering activity. China's financial intelligence unit, the China Anti-Money Laundering Monitoring and Analysis Center, also signed its first MOU with a foreign counterpart at the end of 2005, with South Korea's FIU, allowing the two to exchange information related to money laundering, terrorist financing and other criminal financial activity.
The Chinese Government should continue to build upon the substantive actions taken in recent years to develop a viable anti-money laundering/terrorist financing regime consistent with international standards. Important steps will 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 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, and that a system of suspicious transaction reporting (STR) is adequately implemented. It will be important for China's FIU to join the Egmont Group of Financial Intelligence Units as soon as possible to ensure it has access to vital financial information on possible illicit transactions occurring in other jurisdictions. China should provide for criminal penalties for noncompliance with requirements that financial institutions perform customer identification, due diligence, and record keeping. China should also ensure effective implementation of the many regulatory changes it has put in place over the past three years in seeking to build a highly functional anti-money laundering regime.
China has one of the world's largest chemical industries, producing large quantities of chemicals that can be used for illicit drug manufacture such as acetic anhydride (heroin), potassium permanganate (cocaine), PMK (Ecstasy) and pesudoephedrine and ephedrine (methamphetamine). The country is a party to the 1988 UN Drug Convention and has laws and regulations meeting or exceeding the Conventions requirements. A November 2005 administrative law strengthening chemical control included provisions to control domestic chemical sales; previous laws and regulations focused solely on imports and exports. Despite the adequate legislation, the size of China's chemical industry is not matched by a law enforcement structure adequate to effectively monitor all its production and international trade. Because of resource constraints and lack of training, provincial police generally only address controlled chemicals when they are discovered at a clandestine laboratory.
China continues to be a strong partner with the United States and other concerned countries in international chemical control initiatives targeting the precursors of greatest current concern. These are Project Cohesion tracking acetic anhydride and potassium permanganate and Project Prism targeting synthetic drug chemicals. In addition, the National Narcotics Control Commission (NNCC) issues Pre-Export Notifications for all proposed transactions in bulk ephedrine and pseudoephedrine and requires a Letter of No Objection from the importing country before authorizing shipments. U.S. and Chinese cooperation in chemical control is good. Information is exchanged within the frameworks of Projects Cohesion and Prism and in the course of normal counternarcotics cooperation. China is the Asian representative on the Project Prism Task Force. 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. The Chinese signed a memorandum of understanding with the Netherlands on October 22, 2004, governing the sharing of information on precursor shipments to prevent diversion, and the Dutch assigned a law enforcement liaison officer to Beijing in July 2005. Additionally, in July 2006, the Office of National Drug Control Policy (ONDCP) and the Chinese National Narcotics Control Commission (NNCC) signed a Memorandum of Intent on behalf of their two countries to increase cooperation in combating drug trafficking and abuse.
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, and significant gambling industry create an environment that can be exploited for money laundering purposes. 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.
Macau has a small economy heavily dependent on gaming, but is emerging as a financial center. Its offshore financial sector is not fully developed.
Main money laundering methods in the financial system are wire transfers; currency exchange/cash conversion; the use of casinos to remit or launder money; and the use of nominees, trusts, family members, or third parties to transfer cash. Macau has taken several steps over the past three years to improve its institutional capacity to tackle money laundering. On March 23, 2006, the Macau Special Administrative Region (MSAR) Government passed a 12-article bill on the prevention and repression of money laundering that incorporates aspects of the revised FATF Forty Recommendations. The law expands the number of sectors covered by Macau's previous anti-money laundering (AML) legislation, calls for the establishment of a financial intelligence unit (FIU), and includes provisions on due diligence. The 2006 anti-money laundering law broadened the definition of money laundering to include all serious predicate crimes. The law provides for 2-8 years imprisonment for money laundering offenses, and if a criminal is involved in organized crime or triad-related money laundering, the penalties would increase by one-half. The new law also allows for fines to be added to the time served and eliminated a provision reducing time served for good behavior.
The 2006 law also extended the obligation of suspicious transaction reporting to lawyers, notaries, accountants, auditors, tax consultants and offshore companies. Covered businesses and individuals must meet various obligations, such as the duty to confirm the identity of their clients and the nature of their transactions. Businesses must reject clients that refuse to reveal their identities or type of business dealings. The law obliges covered entities to send suspicious transaction reports (STRs) to the relevant authorities and cooperate in any follow-up investigations. This law also requires casinos to submit STRs.
On March 30, 2006, the MSAR also passed new counterterrorism legislation aimed at strengthening measures to combat the financing of terrorism (CFT). The law generally complies with UNSCR 1373, making it illegal to conceal or handle finances on behalf of terrorist organizations. Individuals are liable even if they are not members of designated terrorist organizations themselves. The legislation also allows prosecution of persons who commit terrorist acts outside of Macau in certain cases, and would mandate stiffer penalties. However, the draft legislation does not mention how to freeze without delay terrorist assets, nor does it discuss international cooperation on terrorism financing. In January 2005, the Monetary Authority of Macau issued a circular to all banks and other authorized institutions requiring them to maintain a database of suspected terrorists and terrorist organizations.
While Macau's new AML and CTF laws should create a more robust legal framework to combat money laundering, Macau will also need to enforce these laws. In an August 2002 "Assessment of the Regulation and Supervision of the Financial Sector of Macao", the IMF concluded that Macau was "materially noncompliant" with the Basel Committee's anti-money laundering principles, and recommended a number of improvements. On September 15, 2005, the U.S. Department of Treasury designated Macau-based Banco Delta Asia as a primary money laundering concern under the USA PATRIOT Act. According to the U.S. Treasury Department, Banco Delta Asia provided financial services for more than 20 years to North Korea and facilitated many of that regime's criminal activities, including circulating counterfeit U.S. currency. Macau's Monetary Authority has taken control of Banco Delta Asia and is cooperating with the U.S. Treasury Department in an ongoing investigation of the bank.
Macau's financial system is governed by the 1993 Financial System Act and amendments, which lay out regulations to prevent use of the banking system for money laundering. The Act imposes requirements for the mandatory identification and registration of financial institution shareholders, customer identification, and external audits that include reviews of compliance with anti-money laundering statutes. The 1997 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 1998 Ordinance on Money Laundering sets 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 regulatory agencies of the MSAR, including pawnbrokers, antique dealers, art dealers, jewelers, and real estate agents. In October 2002 the Judiciary Police set up the Fraud Investigation Section. One of its key functions is to receive all suspicious transaction reports (STRs) in Macau and to undertake subsequent investigations. In November 2003, the Monetary Authority of Macau issued a circular to banks, requiring that STRs be accompanied by a table specifying the transaction types and money laundering methods, in line with the collection categories identified by the Asia/Pacific Group on Money Laundering. Macau law provides for forfeiture of cash and assets that assist in or are intended for the commission of a crime.
There is no significant difference between the regulation and supervision of onshore and of offshore financial activities.
Macau is in the process of establishing a Financial Intelligence Unit (FIU). A Macau Monetary Authority official has been designated to head the FIU. As of October 2006, in addition to the FIU Head, the staff consisted of two officials (seconded from the Insurance Bureau and the Monetary Authority), a judiciary police official, and two information technology staff. The FIU is working on creating an operations manual, and is working with the Macau Police on dissemination of suspicious transaction reports (STRs) and with the Public Prosecutors Office on prosecution of cases. The FIU is currently working out of temporary office space but plans to move into permanent office space in January 2007 when it will begin accepting STRs.
The gaming sector and related tourism are critical parts of Macau's economy. Taxes from gaming comprised 73 percent of government revenue in the first eight months of 2006. Gaming revenue increased 12.6 percent during the first eight months of 2006, compared with a year earlier. The MSAR ended a long-standing gaming monopoly early in 2002 when it awarded concessions to two additional operators, the U.S.-based Venetian and Wynn Corporations. . Macau now effectively has six separate casino licenses, three concession holders Sociedade de Jogos de Macau (SJM), Galaxy and Wynn and three subconcession holders Las Vegas Sands, MGM and PBL/Melco. Las Vegas Sands opened its first casino, the Sands, on May 18, 2004. In addition, MGM began constructing a casino in conjunction with Pansy Ho, the daughter of local businessperson Stanley Ho, the largest casino operator in Macau, whose company, Sociedade de Jogos de Macau (SJM), previously held a monopoly on casino operations. Wynn opened its casino in September 2006 and MGM and the Venetian are scheduled to open casinos in 2007. A consortium between Australia's PBL and Macau's Melco, led by Stanley Ho's son Lawrence Ho, as yet operates no casinos, but runs several slot machine rooms in Macau.
Under the old monopoly framework, organized crime groups were, and continue to be, associated with the gaming industry through their control of VIP gaming rooms and activities such as racketeering, loan sharking, and prostitution. The VIP rooms catered to clients seeking anonymity within Macau's gambling establishments, and were shielded from official scrutiny. As a result, the gaming industry provided an avenue for the laundering of illicit funds and served as a conduit for the unmonitored transfer of funds out of China. Unlike SJM and new entrant Galaxy, the Sands does not cede control of its VIP gaming facilities to outside organizations. This approach impedes organized crime's ability to penetrate the Sands operation.
The MSAR's money laundering legislation includes provisions designed to prevent money laundering in the gambling industry. The legislation aims to make money laundering by casinos more difficult, improve oversight, and tighten reporting requirements. On June 7, 2004, Macau's Legislative Assembly passed legislation allowing casinos and junket operators to make loans, in chips, to customers, in an effort to prevent loan-sharking by outsiders. The law requires both casinos and junket operators to register with the government.
Terrorist financing is criminalized under the Macau criminal code (Decree Law 58/95/M of November 14, 1995, Articles 22, 26, 27, and 286). The MSAR has the authority to freeze terrorist assets, although a judicial order is required. Macau financial authorities directed the institutions they supervise to conduct searches for terrorist assets, using the consolidated list provided by the UN 1267 Sanctions Committee and the list of Specially Designated Global Terrorists designated by the United States pursuant to E.O. 13224. No assets were identified in 2005.
The Macau legislature passed a counterterrorism law in April 2002 that is intended to assist with Macau's compliance with UNSCR 1373. The legislation criminalizes violations of UN Security Council resolutions, including counterterrorism resolutions, and strengthens counterterrorist financing provisions. China signed the UN International Convention for the Suppression of the Financing of Terrorism on November 13, 2001, and the Standing Committee of the 10th National People's Congress ratified it in February 2006. The Instrument of Ratification was delivered to the UN on April 21, 2006, and stipulated that in accordance with Article 138 of the Basic Law of the Macao Special Administrative Region of the People's Republic of China, the Government of the People's Republic of China had decided that the Convention shall apply to the MSAR.
The increased attention paid to financial crimes in Macau since the events of September 11, 2001, has led to a general increase in the number of suspicious transaction reports (STRs); however, the number of STRs remains low. Macau's Judiciary Police received 107 STRs in 2003, 109 in 2004, 194 in 2005, and 396 STRs from January to September of 2006, from individuals, banks, companies, and government agencies. In 2003 Macau opened two money laundering cases and prosecuted one. In 2004 Macau opened ten money laundering cases and prosecuted zero. In 2005 Macau opened nine money laundering cases and prosecuted two. In the first half of 2006 Macau opened twelve money laundering cases and prosecuted one. In May 2002, the Macau Monetary Authority revised its anti- money laundering regulations for banks to bring them into greater conformity with international practices. Guidance also was issued for banks, money changers, and remittance agents, addressing record keeping and suspicious transaction reporting for cash transactions over $2,500. For such transactions, banks, insurance companies, and moneychangers must perform customer due diligence.
In 2003, the Macau Monetary Authority examined all money changers and remittance companies to determine their compliance with these regulations. The Monetary Authority of Macau, in coordination with the IMF, updated its bank inspection manuals to strengthen anti-money laundering provisions.
The Monetary Authority inspects banks every two years, including their adherence to anti-money laundering regulations.
The United States has no law enforcement cooperation agreements with Macau, though informal cooperation between the United States and Macau routinely takes place. The Judiciary Police have been cooperating with law enforcement authorities in other jurisdictions through the Macau branch of Interpol, to suppress cross-border money laundering. In addition to Interpol, the Fraud Investigation Section of the Judiciary Police has established direct communication and information sharing with authorities in Hong Kong and mainland China. In July 2006, the MSAR enacted the Law on Judicial Cooperation in Criminal Matters, enabling the MSAR to enter into more formal judicial and law enforcement cooperation relationships with other countries. The law became effective in November 2006.
The Monetary Authority of Macau also cooperates internationally with other financial authorities. It has signed memoranda of understanding with the People's Bank of China, China's Central Bank, the China Insurance Regulatory Commission, the China Banking Regulatory Commission, the Hong Kong Monetary Authority, the Hong Kong Securities and Futures Commission, the Insurance Authority of Hong Kong, and Portuguese bodies including the Bank of Portugal, the Banco de Cabo Verde and the Instituto de Seguros de Portugal.
Macau's Monetary Authorities are cooperating with the U.S. Treasury Department investigation of Banco Delta Asia. The Monetary Authorities have taken control of Banco Delta Asia and have frozen accounts linked to North Korea worth approximately US$ 24 million. The Government of Macau announced in September 2006 that it would continue to maintain control over Banco Delta Asia for at least six more months as the Banco Delta Asia investigation continues.
Macau participates in a number of regional and international organizations. It is a member of the Asia/Pacific Group on Money Laundering (APG), the Offshore Group of Banking Supervisors, the International Association of Insurance Supervisors, the Offshore Group of Insurance Supervisors, the Asian Association of Insurance Commissioners, the International Association of Insurance Fraud Agencies, and the South East Asia, New Zealand and Australia Forum of Banking Supervisors (SEAZA). In 2003, Macau hosted the annual meeting of the APG, which adopted the revised FATF Forty Recommendations and a strategic plan for anti-money laundering efforts in the region from 2003 to 2006. In September 2003, Macau became a party to the UN Convention against Transnational Organized Crime as a result of China's ratification. Macau also became a party to the 1988 UN Drug Convention through China's ratification. Macau has taken a number of steps in the past three years to raise industry awareness of money laundering. During a March 2004 IMF technical assistance mission, the IMF and Monetary Authority of Macau organized a seminar for financial sector representatives on the FATF Revised Forty Recommendations. The Macau Monetary Authority trains banks on anti-money laundering measures on a regular basis.
Macau should implement and enforce existing laws and regulations, and ensure effective implementation of its new legislation. Macau should ensure that regulations, structures, and training are put in place to prevent money laundering in the gaming industry, including implementing as quickly as possible regulations to prevent money laundering in casinos, including the VIP rooms. The MSAR should take steps to implement the new FATF Special Recommendation Nine, adopted by the FATF in October 2004, requiring countries to put in place detection and declaration systems for cross- border bulk currency movement. Macau should increase public awareness of the money laundering problem, improve interagency coordination, and boost cooperation between the MSAR and the private sector in combating money laundering. The Government of Macau should ensure that its financial intelligence unit meets Egmont Group standards for information sharing. It should expedite the drafting and issuance of implementing regulations to its new AML and CTF laws. The Government of Macau also should be more proactive in identifying and freezing accounts related to money laundering by weapons proliferators and counterfeiters.