Source: 2008
Released by the Bureau for International Narcotics and Law Enforcement Affairs
I. Summary
The People’s Republic of China is a major drug transit country to regional drug consumers in neighboring parts of Asia as well as for international drug markets (though not the U.S.). China continues to have a domestic heroin consumption problem along with an upsurge in the consumption of synthetic drugs such as Ecstasy and crystal methamphetamine, known as “ice.” Chinese authorities view drug trafficking and abuse as a major threat to China’s 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. China is a party to the 1988 UN Drug Convention.
II. Status of Country
Mainland China is situated adjacent to major narcotics producing areas in Asia, Southeast Asia’s Golden Triangle, Southwest Asia’s Golden Crescent, and Northeast Asia’s Golden Azalea (North Korea). Burma continues to be the major source of opiates entering China. While the Golden Triangle area has been a longstanding problem, Chinese officials note that the Golden Crescent is the source of increasing amounts of heroin trafficked into Western China, particularly Xinjiang Province. China’s 97-kilometer border with Afghanistan is remote, but Chinese authorities are increasingly concerned that opiates from Afghanistan can find their way into China through other countries in South and Central Asia. Quantities of heroin and methamphetamine produced in North Korea continue to find their way into China’s northeastern provinces that border North Korea. Beijing claims that there are no heroin refineries in China. However, China is a major producer of licit ephedrine and pseudoephedrine which when diverted from licit uses can be used in the manufacture of methamphetamine. There is a widespread belief among law enforcement agencies, worldwide, that large-scale illicit methamphetamine producers in other countries use Chinese-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 enacted enhanced precursor chemical control laws in November 2005 and is fully engaged in multilateral and bilateral efforts to stop diversion from its chemical production sector, Chinese efforts have not matched the size of its enormous chemical industry with sufficient resources to effectively ensure against diversion.
Statistics on drug usage within China are contradictory. The National Narcotics Control Commission (NNCC) recently claimed that the number of drug users had declined. However, data from non-government sources indicate that drug abuse continues to grow at a moderate rate. 2006 NNCC statistics claim there are over 1,160,000 registered drug users in China, but some officials acknowledge the actual number of addicts is most likely much higher, and there have been published reports that China might have as many as 15 million drug abusers. Government reports indicate that 78.3 percent (700,000 people) of all registered drug addicts are heroin users. Youth between the ages of 17-35 comprise the largest percentage of registered addicts (59.3 percent), fueled largely by a dramatic increase in the disposable income of urban youth. Although the per capita reported HIV/AIDS rate in China is relatively low at 0.08 percent or 1 case in every 1,300 citizens, nevertheless, the government reported that 70.8 percent of all confirmed HIV/AIDS cases were intravenous heroin 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.
Ecstasy’s popularity is increasing among the young in nightclubs and karaoke bars along China’s wealthy east coast, particularly in Beijing, Shanghai, Nanjing, Guangzhou, and Shenzhen. According to the Beijing University National Surveillance Center on Drug Abuse (BUNSC), nearly 23 percent of drug abusers get their drugs at entertainment sites. In Beijing, nine entertainment venues were recently found to be selling drugs and shut down. With a very large, widely scattered, and developed chemical industry, China is one of the world’s largest producers of precursor chemicals, including acetic anhydride, potassium permanganate, piperonylmethylketone, pseudoephedrine, ephedrine, and ephedra. China produces and 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 U.S. and other concerned countries in implementing a system of pre-export notification of dual-use precursor chemicals. China tries to strictly regulate the import and export of precursor chemicals. According to NNCC, Chinese authorities investigated 968 cases involving precursor chemicals in 2006 and seized 1460.88 tons of precursor chemicals, a significant increase over the 157 tons reported seized in 2005. In 2006 the NNCC issued 747 precursor chemical pre-export notifications involving 89,318 tons of precursor chemicals. Nevertheless, diverted precursor chemicals from China are a major source for methamphetamine production around the world, and most observers believe that China is also the source for precursor chemicals in Golden Triangle heroin production as well.
III. Country Actions Against Drugs in 2007
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 third year 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 June 2004, MPS Bureau of Narcotics Control (BNC) implemented a nationwide drug-related information gathering, sharing, and storing network allowing data comparison alerts, and improved overall coordination in counternarcotics operations. 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. According to China’s State Food and Drug Administration (SFDA), the government is currently reviewing a new law, the Narcotics Control Law of China, regarding ephedrine and pseudoephedrine preparations and expects to approve it in 2007. In June 2007 MPS Minister and NNCC Director Zhou Yongkang announced China would intensify its war against drugs and called for reinforced efforts to fight heroin and curb the spread of new types of drugs. The People’s Procurate and the Supreme Court have improved legal standards for cases involving new types of drugs. 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. China continues to participate in United Nations Office of Drug Control (UNODC) demand reduction and crop substitution efforts in areas along China’s southern borders and has worked closely with Burma to implement an alternative crops program. In May 2006 the State Council authorized a 250 million RMB fund (approx. $32.5 million) for crop substitution projects in Northern Burma and Laos. Nevertheless, according to the NNCC’s 2006 report, Burma remains the major source of opium entering China. China continues to build on the counternarcotics MOUs with Laos, Cambodia, Thailand, Vietnam, Burma, and the UNODC and regularly hosts and/or participates in conferences and bilateral meetings. With UNODC support, NNCC conducted ongoing training in 2006 in cross-border drug enforcement cooperation, amphetamine type stimulant (ATS) data collection, and combating ATS crimes in Southern China. China participates in counternarcotics education programs sponsored by the International Law Enforcement Academy (ILEA), located in Bangkok, Thailand, and has provided training to neighboring countries. Chinese law enforcement agencies also participate in DEA sponsored professional exchanges. China has several anti-narcotics and transnational crime agreements with Shanghai Cooperation Organization (SCO) member countries in Central Asia.
Law Enforcement Efforts. The Chinese Government continues its aggressive counternarcotics campaign. In China, three agencies have primary responsibility for controlling the licit/illicit drug markets: the Ministry of Public Security (MPS), the State Food and Drug Administration (SFDA), and the General Administration of Customs (GAC). All three are part of the National Narcotics Control Commission (NNCC) that forms drug policy in China similar to the Office of National Drug Control Policy (ONDCP) in the U.S. In 2006, 58 drug smuggling investigations involving Golden Crescent heroin resulted in the arrest of 110 suspects and the seizure of 106.4 kg of heroin. Southwest Asian heroin seizures continued to increase in the first half of 2007. China Customs Anti-Smuggling Bureau (ASB) reported the arrests of 180 suspects and the seizure of 229 kg of suspected Afghan heroin between January 1 and June 15, 2007. To curb the growing Golden Crescent heroin threat specifically, Chinese authorities have stepped up border and airport checks in Guandong, Beijing, Shanghai, and Xinjiang. Overall, China invested RMB 110 million (U.S. $13.75 million) in 2006 to improve the counternarcotics system in police, border, railway, aviation, customs, and postal departments nationwide. In the first half of 2007, police seized 1.8 tons of heroin, down 43 percent over the same period last year; 244 kg of opium, down 68 percent; 2.8 tons of methamphetamine, down 9 percent. However, police seized 3.6 million methamphetamine tablets, a 283 percent increase over the same period last year, and 1.9 tons of ketamine, up 42 percent.
According to the 2007 Annual Report on Drug Control in China, Chinese authorities were involved in 46,300 drug-related cases and apprehended 56,200 suspects in 2006. China seized 5.79 tons of heroin (a 16 percent decrease from 2005), 1.69 tons of opium (a 26.8 percent decrease from 2005), 454,000 Ecstasy tablets (an 80 percent decrease from 2005), 1.79 tons of ketamine (a 32 percent decrease from 2005), and 5.95 tons of methamphetamine (an 8 percent increase from 2005.) In 2006, the NNCC investigated 968 cases involving precursor chemicals and seized 1460.88 tons of precursor chemicals, a huge increase over the 157 tons seized in 2005.
NNCC regards 2007 as a transition year, when drug use moves further away from traditional to synthetic drugs. However, because almost 80 percent of China’s drug addicts use heroin, the Golden Triangle and Golden Crescent will remain areas of serious concern for China. In 2006, in cooperation with Laos, Burma, Thailand, and the Philippines, Chinese authorities carried out an operation and captured and extradited 37 Chinese nationals living outside of China who were wanted as suspected leaders of drug trafficking rings, according to the Ministry of Public Security.
On a case-by-case basis, MPS provides DEA with strategic and operational intelligence which is used to target international drug rings. MPS has allowed DEA to interview witnesses in China and has allowed DEA to jointly conduct other investigative activity to help identify drug rings. In addition, MPS helps to facilitate the travel of U.S. law enforcement personnel, based at the U.S. Embassy in Beijing. DEA received several drug samples from MPS and Customs for analysis. DEA provided Chinese law enforcement counterparts with lead information that assisted in the development of an ongoing enforcement operation, “Operation Vulture Hunting,” to target the flows of Southwest Asian heroin into China. During the first three months of the operation there were 81 arrests and the seizure of approximately 80 kg of heroin. In January 2007, a joint operation among China, Canada, and the U.S. resulted in the seizure of approximately 25 kg of cocaine in New York and the arrests of one defendant in Canada and six defendants in China. The Chinese Government also successfully conducted joint counternarcotics operations with neighboring countries. According to the NNCC, China and Pakistan have strengthened counternarcotics cooperation, to include information-sharing and joint operations. Philippines, Hong Kong, Guangdong, and Beijing Police counterparts worked together to break up an international “ice” making and trafficking gang headed by a Fujian Province native. In June 2007, Chinese and Vietnamese police jointly destroyed 381 kg of narcotics including heroin, ketamine powder, and Ecstasy pills at Pingxiang Friendship Pass.
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. The government reported that it investigated more than 32,000 persons in 2005 for alleged corruption and more than half were found guilty. Most of the investigations involved people accused of taking bribes, dereliction of duty, or gambling. There were more cases involving higher level officials accused of taking bribes and embezzlement than in past years. One case involved the former Medicine Registration Division Director of the State Food and Drug Administration, Cao Wenzhuang, who was executed for accepting RMB 2.4 million (U.S. $320,000) in bribes.
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 anti-corruption dialogue with the U.S. through the U.S.-China Joint Liaison Group on Law Enforcement Cooperation (JLG). Narcotics-related corruption does not appear to have adversely affected ongoing law enforcement cases in which U.S. 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 has used its legal assistance channels with foreign countries to capture 70 people overseas suspected of corruption. According to MPS, of these, 37 corrupt officials were repatriated to the Chinese mainland in 2006 from Hong Kong, Macao and 11 countries, including the U.S. and Canada.
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, the 1961 UN Single Convention as amended by the 1972 Protocol, the 1971 Convention on Psychotropic Substances, the UN Convention against Corruption and the UN Convention against Transnational Organized Crime. The U.S. and China cooperate in law enforcement efforts under a mutual legal assistance agreement signed in 2000 and which entered into force in March 2001. In January 2003, the U.S. and China reached agreement on a Customs Mutual Assistance Agreement (CMAA.). In February 2005, NNCC and DEA signed a memorandum of intent to establish a bilateral drug intelligence working group (BDIWG) to enhance cooperation and the exchange of information. In July 2006 ONDCP and NNCC signed a Memorandum of Intent to increase cooperation in combating drug trafficking and abuse.
China cooperates with international chemical control initiatives in Operation Purple and accounts for 70 percent of the worldwide seizures of potassium permanganate that have been made under that operation. China also participates in Operation Topaz, an intergovernmental operation to detect and prevent precursor chemicals used for the illicit manufacture of heroin, and Project Prism, targeting synthetic drug chemicals. China continued its participation in the ASEAN and China Cooperative Operations in Response to Dangerous Drugs (ACCORD).
Cultivation/Production. China has eliminated 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. Due to China’s effective law enforcement, opium poppies are only grown in small quantities by ethnic minority groups for local consumption. Chinese officials state that there are no heroin refineries in China. Coca is not cultivated 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 ephedrine, licit synthetic pseudoephedrine, and ephedra products. China has a large pharmaceutical industry and these products all have legitimate medicinal use, but they can also be used in the production of ATS. The Chinese central government, supplemented by stricter controls in critical provinces such as Yunnan and Zhejiang, makes efforts to control exports of these key precursors. 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 Chinese-made chemicals that have been diverted is almost commonplace in law enforcement investigations around the world. Chinese authorities continued to seize clandestine methamphetamine laboratories. In the past, the majority of the labs were discovered and/or seized in the southern provinces of Fujian and Guangdong, although recently there have been laboratories seized in northeast China, specifically Shenyang and Liaoning Province.
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. Chinese authorities report that the majority of heroin produced in Burma travels via China to the international market. 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. Transshipment of drugs through Yunnan and Guangxi to Guangdong for storage, distribution, or repackaging has been especially widespread. Smaller amounts of heroin are also coming from Laos, Vietnam, and other Southeast Asian countries. Traffickers continue to use Guangzhou, Shenzhen, and Zhuhai in Guangdong Province as transit and transshipment points for heroin and crystal methamphetamine leaving China. In addition, Xiamen and Fuzhou in Fujian Province have also recently become major exit points. Between January 2006 and March 2007, Guangzhou seized 415.5 kg of heroin and arrested 510 suspects (309 of which were not Chinese) for attempted narcotics smuggling on commercial airlines. Chinese counternarcotics police have strengthened their efforts in Guangdong in 2006, disabling 17 foreign drug-trafficking gangs and capturing more than 30 foreign drug dealers. Chinese authorities acknowledge that Western China is experiencing significant problems as well. They report that drugs such as opium and heroin are being smuggled into Xinjiang Province for distribution throughout China. They are 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, specifically from Afghanistan. They have seen an increase in the number of Afghan heroin seizures in western China. MPS and DEA report that Pakistan serves as a key trafficking route for heroin from Afghanistan into China. In 2006, Pakistan arrested 54 couriers from airports in Lahore, Islamabad, and Peshawar destined for China. They seized an average of 0.75 kg of Golden Crescent heroin from each courier.
Domestic Programs (Demand Reduction). The most recent MPS statistics indicate there are over 1,160,000 registered drug users in China, but officials acknowledge the actual number of addicts is higher, with some published reports indicating there may be as many as 15 million drug abusers. Government reports indicate that 78.3 percent (700,000 people) of all registered drug addicts are heroin users. Youth between the ages of 17-35 comprise the largest percentage of addicts. Although the per capita reported HIV/AIDS rate in China is relatively low at 0.08 percent or 1 case in every 1,300 citizens. The government reported that 70.8 percent of all confirmed HIV/AIDS cases were intravenous heroin addicts. In addition to the standard reform through labor camps, the government is using media campaigns, the establishment of drug-free communities, compulsory drug rehab treatment, and voluntary rehab centers to reduce drug demand. Gansu Province assigned 2000 drug control officers to communities and villages and set up 30,000 after-care groups covering 96,000 drug users. NNCC and MPS set up an online drug users’ database to improve monitoring and information sharing across agencies. According to NNCC figures, 269,000 drug addicts underwent compulsory drug rehabilitation, 71,000 drug addicts were re-educated through labor, and 36,000 drug addicts underwent community rehabilitation. As part of its National People’s War on Illicit Drugs, China takes a multi-agency approach to educating people about drug prevention. China Central Television (CCTV) produced 80 special programs on drug control, and other Chinese news media published more than 4500 stories on drug control. CCTV held a Drug Control Publicity Week featuring in-depth reports on drug control and an eight-hour special on the People’s War on Drugs. There was extensive coverage of a successful China-Philippine joint counternarcotics investigation. The Ministry of Education held special classes in middle and primary schools on drug prevention. Guizhou Province conducted special training courses on new-type drugs for owners and managers in 16,000 entertainment locations. A 30-part TV play, “Borderless Operation,” addressed the fight against transnational drug organizations. NNCC produced a drug control fairy tale, “Escaping Terrorist Island,” published a mini novel, “Behind the Heaven,” and composed a popular song, “Let Life Be More Splendid”, all dealing with counternarcotics themes. Two well known movie stars, Liu Yuanyuan and Tao Hong, became counternarcotics spokespersons, performing in public awareness messages airing on TV and radio. Shanghai distributed 2.4 million booklets to families, and Guangdong set up 1000 village-level drug control education bases.
IV. U.S. Policy Initiatives and Programs
Bilateral Cooperation. Counternarcotics cooperation between China and the U.S. continues to develop. Chinese authorities are working with the U.S. on a number of ongoing investigations and initiatives, including use of precursors in the production in China of steroids and human growth hormones that are subsequently illegally exported to the U.S. DEA hosted the second annual bilateral drug intelligence working group (BDIWG) in June 2006 at DEA Headquarters and discussed ways to enhance strategic and investigative cooperation. China also has police liaison officers posted in several countries around the world, including the U.S. The 2005 Memorandum of Intent between DEA and MPS in February 2005 has led to a steady improvement in U.S.-China efforts to combat drug trafficking.
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, 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 improve over the coming year.
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, potassium permanganate, piperonylmethylketone (PMK) and pseudoephedrine and ephedrine. 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. Chinese law regulates drug preparations containing precursor chemicals, but as medicines rather than regulated chemicals. 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 domestic and international trade. The sheer scale of China’s chemical industry—nearly 80,000 chemical companies, according to one estimate—presents widespread opportunities for chemical diversion, and regulatory oversight remains a major challenge for China’s central authorities, particularly in some provinces. Although provincial police are taking a more active role to investigate illicit chemical transactions, the lack of officers assigned to investigate these potential diversions on a full-time basis may mean many suspect and clearly illicit transactions go unnoticed. It is also unclear whether sufficient controls exist to safeguard the storage and transit of precursor chemicals, and drug preparations containing them, across the country to guard against theft.
China is a major producer of licit ephedrine and pseudoephedrine, as well as ephedra, all of which can be used in the manufacture of methamphetamine. There is a widespread belief among law enforcement agencies, worldwide, that large-scale illicit methamphetamine producers in other countries use Chinese-produced ephedrine and pseudoephedrine, and there are numerous examples from criminal investigations to confirm this suspicion. Diverted Chinese precursor chemicals may undergo synthetic drug production in other countries as far away as Mexico, Belgium, and the Netherlands. Although China enacted enhanced precursor chemical control laws in November 2005 and is fully engaged in multilateral and bilateral efforts to stop diversion from its chemical production sector, Chinese efforts have not matched the size of its enormous chemical industry with sufficient resources to effectively ensure against diversion.
In 2006, the State Food and Drug Administration, the Ministry of Commerce, and Customs held 1,300 training courses for 47,500 law enforcement officers on precursor chemicals. According to the National Narcotics Control Commission (NNCC) 2006 report, China established an inter-agency working group to help tighten control of precursor chemicals. According to the NNCC, various Chinese ministries and agencies began to exchange data on the production, use, and export destination of precursor chemicals.
According to the NNCC, Chinese authorities investigated 968 cases involving precursor chemicals in 2006 and seized 1461 metric tons of precursor chemicals, a significant increase over the 157 tons reported seized in 2005. Sichuan Province inspected 2638 chemical enterprises, found 42 instances of illegal activity and corrected them. It solved five cases involving the illegal purchase and sale of precursor chemicals and seized 142 tons of chemicals. In 2006 the NNCC issued 747 precursor chemical pre-export notifications involving 89,318 MT of precursor chemicals. Statistics for 2007 were not available by the time of publication.
China continues to take earnest efforts to act as a 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 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, within the limits of China’s capabilities. 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. In July 2006, the Office of National Drug Control Policy (ONDCP) and the NNCC signed a Memorandum of Intent on behalf of their two countries to increase cooperation in combating drug trafficking and abuse.
Over the past five years, the Government of the People’s Republic of China has made significant progress in developing anti-money laundering and counter-terrorist financing measures including through legislative reform, strengthening enforcement mechanisms, and international cooperation efforts. However, money laundering remains a serious concern as China restructures its economy and develops its financial system. Narcotics trafficking, smuggling, trafficking in persons, counterfeiting of trade goods, fraud, tax evasion, and other financial crimes are major sources of laundered funds. Most money laundering cases currently under investigation involve funds obtained from corruption and bribery. Chinese officials have noted that most acts of corruption in China are closely related to economic activities and accompanied by illegal money transfers. Proceeds of tax evasion, recycled through offshore companies, often return to China disguised as foreign investment and, as such, receive tax benefits. Underground banking and trade-based money laundering are an increasing concern. According to the International Monetary Fund, money laundering in China may total as much as U.S. $24 billion per year and officials with the People’s Bank of China reported a total of 1,239 cases involving illicit money flows involving 362.6 billion Chinese yuan renminbi (RMB) (approximately U.S. $45.3 billion) in 2006.
The People’s Bank of China (PBC), China’s central bank, maintains primary authority for anti-money laundering and counter terrorist finance coordination. The PBC also shares some anti-money laundering responsibilities with other financial regulatory agencies, including: the China Banking Regulatory Commission (CBRC), which supervises and regulates banks, asset management companies, trust and investment companies, and other deposit-taking institutions; the China Insurance Regulatory Commission (CIRC), which supervises the insurance sector; and the China Securities Regulatory Commission (CSRC), which supervises the securities sector. The Ministry of Public Security’s Anti-Money Laundering Division and Anti-Terrorism Bureau lead anti-money laundering and counter-terrorist finance-related law enforcement efforts.
Within the PBC’s Financial Intelligence Unit (FIU), the Anti-Money Laundering Bureau (AMLB) handles the coordination of all anti-money laundering programs and carries out administrative and policy oversight, while the China Anti-Money Laundering Monitoring and Analysis Center (CAMLMAC) collects, analyzes, and disseminates suspicious transaction reports and currency transaction reports. According to CAMLMAC, which was established in 2004, 683 reports on suspicious transactions, involving RMB 137.8 billion (approximately U.S. $18.9 billion), were identified for further investigation by the end of 2005. From July 1, 2005 to June 30, 2006, CAMLMAC received 619,962 RMB suspicious transaction reports and 2,245,267 foreign currency suspicious transactions. The 2007 FATF mutual evaluation of China noted that consideration should be given to the problem of how to effectively manage and exploit such a large volume of STRs coming directly to CAMLMAC, which has a staff of only sixty people.
Since its inception, the FIU has transferred 57 files (involving about 80,000 separate suspicious transactions) to the Ministry of Public Security (MPS) for investigation. Nine referrals have resulted in cases being filed for investigation; and one has been referred for prosecution. Since October 2005, approximately ten suspicious transaction dossiers have been transferred to other agencies, including five to the Ministry of State Security (MSS). Four of these cases are still being investigated by the MSS. The other referral was closed after investigation.
The MPS is China’s main law enforcement body, responsible for following up on STRs and for guiding and coordinating public security authorities across China in investigations involving money laundering and the seizure, freezing and confiscation of proceeds of crime. Most of these responsibilities are concentrated in the AML Division of the MPS Economic Crime Investigation Department (ECID). The Anti-Terrorism Bureau of the MPS is responsible for investigating general crimes relating to terrorist financing. Crimes against state security (including terrorism and related crimes) are the responsibility of the Ministry of State Security (MSS). The Supreme People’s Procuratorate (SPP) supervises and directs the approval of arrests, prosecution, and supervision of cases involving money laundering crimes. The Supreme People’s Court (SPC) supervises and directs the trial of money laundering crimes. Both can issue judicial interpretations. Law enforcement agencies are authorized to use a wide range of powers, including special investigative techniques, when conducting investigations of money laundering, terrorist financing and predicate offences. These powers include seizing articles relevant to the crime, including all (customer) records held by financial institutions. Reportedly, law enforcement and prosecutorial authorities currently focus on pursuing predicate offences, to the exclusion of AML/CTF.
China has criminalized money laundering under three separate articles of the Penal Code. Article 349 of the Penal Code was introduced in December 1990 to criminalize the laundering of proceeds generated from drug-related offenses. In June 2006, Article 191 of the Penal Code was amended to expand the criminalization of money laundering to seven predicate offenses, which now include fraud, bribery, and embezzlement, in addition to narcotics trafficking, organized crime, smuggling, and terrorism. Article 312 was also amended in June 2006 to make it an offense to launder the proceeds of any crime through a variety of means, and it criminalizes complicity in concealing the proceeds of criminal activity.
A new Anti-Money Laundering Law, which covers AML/CTF preventative measures for the entire financial system, took effect January 1, 2007. The law broadened the scope of existing anti-money laundering regulations by mandating that financial institutions maintain thorough records on accounts and transactions, and report large and suspicious transactions. These actions firmly established the PBC’s authority over national anti-money laundering efforts.
The PBC executed a revised regulatory framework in early 2007 to support the new Anti-Money Laundering Law. “Rules for Anti-Money Laundering by Financial Institutions” (AML Rules) took effect January 1, 2007, and “Administrative Rules for Reporting of Large-Value and Suspicious Transactions by Financial Institutions” (LVT/STR Rules) took effect March 1, 2007. Under the revised rules, all financial institutions-including securities, insurance, trust companies and futures dealers are considered accountable for managing their own anti-money laundering mechanisms and must report large and suspicious transactions. The LVT/STR Rules were amended on June 21, 2007 to require financial institutions to report suspicious transactions related to terrorist financing.
Under the AML and LVT/STR Rules, any cash deposit or withdrawal of over RMB 200,000 or foreign-currency withdrawal of over U.S. $10,000 in one business day must be reported within five days electronically or within 10 days in writing to the PBC Financial Intelligence Unit. Money transfers between companies exceeding RMB 2 million (approximately U.S. $274,000) in one day or between an individual and a company greater than RMB 500,000 (approximately U.S. $68,500) must also be reported. The new rules also require that all financial institutions submit monthly reports outlining suspicious activities and retain transaction records for five years. Financial institutions that fail to meet reporting requirements in a timely manner are subject to a range of administrative penalties and sanctions including having their licenses or business operations suspended.
The Administrative Rules for Financial Institutions on Customer Identification and Record Keeping of Customer Identity and Transaction Information (CDD Rules) became effective on August 1, 2007. These rules require all financial institutions to identify and verify their customers, including the beneficial owner. Specific requirements relating to the identification of legal persons (e.g. requirements to verify their legal status by obtaining proof of incorporation) have been extended to all financial institutions. The CDD Rules also introduce specific requirements for financial institutions in relation to foreign Politically Exposed Persons (PEPs), including having to obtain approval from senior management before opening an account and determining the source of funds.
China has implemented a cross-border disclosure/declaration system operated by the General Customs Administration (GCA). All cross-border transportations of cash exceeding RMB 20,000 for local currency (approximately U.S. $2,740) or for foreign currency must be declared. Bearer negotiable instruments do not need to be declared, but cross-border transportation of RMB through the mail system or in vehicles is not permitted. China has also implemented a disclosure system based on a risk-based targeting system. The GCA is authorized to conduct checks of persons entering or leaving the country, seize undeclared cash, and question, detain and sanction anyone who violates any requirement. Those who carry out physical cross border transportation related to money laundering or terrorist financing are also subject to criminal sentences. New provisions allowing the use of RMB in Hong Kong have also created loopholes for money laundering activity. From January 2005 to October 2006, there were 4,926 cases involving travelers who did not disclose cash being carried, but this data is not effectively being utilized for money laundering or terrorist financing investigations. .
China’s cash-based economy, combined with robust cross-border trade, contributes to a high volume of difficult-to-track large cash transactions. While China is proficient in tracing formal financial transactions, the large size of the informal economy—estimated by the Chinese Government at approximately ten percent of the formal economy, but quite possibly much larger—means that tracing informal financial transactions presents a major obstacle to law enforcement. Anti-money laundering efforts are further hampered by the prevalence of counterfeit identity documents and underground banks, which in some regions reportedly account for over one-third of lending activities. Only banks are authorized to provide money or value transfer services in China. Banks are not allowed to have agents that could offer such services. According to Article 174 of the Penal Code, it is a criminal offense to operate an illegal financial institution or provide financial services illegally in China. Authorities have expressed concern that criminal or terrorist groups could exploit underground banking mechanisms to bypass law enforcement. According to the FATF, China has had some success at combating illegal underground banking. Authorities destroyed 47 underground banks in 2005; in 2006, Chinese police uncovered seven underground banks and seized laundered assets totaling more than 14 billion RMB (approximately U.S. $1.92 billion).
The extent of underground banking’s link to the large expatriate Chinese community is not known. Traditionally, “flying money” or fei-chien networks, are operated by money changers, gold shops, and trading companies. The international Chinese underground banking system is dependent on close associations and family ties that are resistant to most law enforcement countermeasures. Value transfer via trade goods, including barter exchange, is a common component in Chinese underground finance. Many Chinese underground trading networks in Africa, Asia, the Middle East, and the Americas are involved in the trade of Chinese-manufactured counterfeit goods, in violation of intellectual property rights. There are reports that the proceeds of narcotics produced in Latin America are laundered via trade by purchasing Chinese manufactured goods (both licit and counterfeit) in an Asian version of the Black Market Peso Exchange.
To remedy information deficiencies, the PBC launched a national credit-information system in January 2006. Although still very limited, this system allows banks to have access to information on individuals as well as on corporate entities. The new Anti-Money Laundering Law also explicitly prohibits financial institutions from opening or maintaining anonymous accounts or accounts in fictitious names, and PBC rules obligate financial institutions to perform customer due diligence, regardless of the type of customer (business or individual), type of transaction, or level of risk.
To address online fraud, the PBC has tightened regulations governing electronic payments. In 2005, the PBC announced new rules prohibiting consumers from making online purchases of more than RMB 1,000 (approximately U.S. $137) in any single transaction or more than RMB 5,000 (approximately U.S. $688) in a single day. Enterprises are limited to electronic payments of no more than RMB 50,000 (approximately U.S. $6,900) in a single day. In March 2007, Chinese regulators announced additional online restrictions regarding the use “virtual money;”—online credits sold by websites to customers to pay for games and other web-based services—amidst rumors that such credits were being used to launder money.
China is a party to the 1988 UN Drug Convention and the UN Convention against Transnational Organized Crime. In 2006, China became a party to the UN International Convention for the Suppression of the Financing of Terrorism and the UN Convention against Corruption.
China has signed mutual legal assistance treaties with over 24 countries and has entered into some 70 MOUs and cooperation agreements with over 40 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 enforcement issues under the auspices of the U.S./China Joint Liaison Group’s (JLG) subgroup on law enforcement cooperation. In addition, the United States and China have established a Working Group on Counterterrorism that meets on a regular basis. China has established similar working groups with other countries as well.
China has signed extradition agreements with 30 countries to make it more difficult for economic criminals to seek shelter abroad. According to China’s Ministry of Public Security, approximately 800 Chinese economic crime suspects have reportedly fled abroad with more than 70 billion RMB (approximately U.S. $9.1 billion) involved.
In late 2004, China joined the Eurasian Group (EAG), a FATF-style regional body that includes Russia, Belarus, China, Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan. In January 2005, China became an observer to the FATF and gained full membership in June 2007. FATF published its Mutual Evaluation Report on China in June 2007. China’s FIU has applied for membership to the Egmont Group.
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 counter-terrorist financing resolutions. According to the FATF, China has not implemented UNSCR 1267 and UNSCR 1373 in a manner that meets the specific requirements of FATF Special Recommendation III. China’s primary domestic concerns with terrorist financing focus on the western Xinjiang Uighur Autonomous Region. Terrorist financing is a criminal offense in China. However, the terrorist financing laws lack clarity in a number of critical areas.
The Chinese Government significantly strengthened its anti-money laundering regime through legislative and regulatory reforms, law enforcement mechanisms, and membership in international organizations, in particular the FATF. The Chinese Government should continue to build upon actions taken in recent years to develop a viable anti-money laundering/counter-terrorist financing regime consistent with international standards. Important steps include expanding the list of predicate crimes to include terrorism, including terrorist financing, as a predicate offense. China should continue to develop a regulatory and law enforcement environment designed to prevent and deter money laundering, and it should raise awareness within the judiciary of money laundering as a criminal offense. China should ensure that law enforcement and prosecutorial authorities specifically pursue money laundering and terrorist financing offenses, and not simply treat them as a subsequent byproduct of investigations into predicate offenses. China’s Anti-Money Laundering Law and related regulations should also apply to a broader range of nonfinancial businesses and professions. The application of sanctions for noncompliance with requirements that financial institutions perform customer identification, due diligence, and record keeping should be assessed to ensure that they have a genuinely dissuasive effect. In addition to strengthening its counter-terrorism finance regime, Chinese law should specifically define the term “terrorist activities” to be consistent with international standards. The Penal Code should also specify the definition of “funds” and criminalize the act of collecting funds for terrorist purposes. In addition, China should strengthen its mechanisms for freezing terrorist assets. Chinese law enforcement authorities should examine domestic ties to the international network of Chinese expatriate brokers and traders that are often linked to underground finance, trade fraud, and trade-based money laundering.