Large scale corruption is everywhere in China. Officials appropriate houses for family members; divert business loans to their own accounts; declare bankruptcy rather pay back loans; use government money to fix up their offices and homes. On a smaller scale foreign companies make 12 installment-plan payoffs to government officials to "move their products." Chinese brokerage houses use beautiful women and cash gifts to influence potential clients to win contracts. Foreign banks take government officials on expensive trips to Disneyland and Las Vegas to work out deals. A $100,000 bribe to a government official can reduce the red tape on the purchase of a multi-million dollar piece of property.

Jonathan Watts wrote in The Guardian, “Corruption is endemic. Revelations of bribery, influence peddling and misuse of public funds are a regular staple of the domestic media. Among the most recent cases was the sacking of the railway minister, Liu Zhijun, who was accused of taking 1 billion yuan ($157 million). The Chinese Academy of Social Sciences estimates that 800 billion yuan ($125 billion) was transferred overseas by officials and executives who later fled the country. Far more is likely to have been squirrelled away or lavished on banquets, second homes and lovers inside China. [Source: Jonathan Watts, The Guardian July 1, 2011]

Sometimes the amounts of money involved are staggering. In April 2004, several related brokerage firms affiliated with Deng group were shut down for illegal trading of state bond and taking as much $3.6 billion. In December of the same year Shi Xuem chairman of Huayin Trust and Dalian Securities, was accused of corruption, embezzling public money and state-owned assets. He and other people at the companies are said to have taken $3.2 billion. In January 2004, employees at Southern Securities were accused of illegally using $2.4 billion of investors money up invest n the Hong Kong stock market. In the mid-1990s, leaders in Hainan looted more than $1 billion and used the money to buy big cars, television and other goods from Hong Kong. Many were resold on the mainland black market. Of $25.8 billion allocated for grain purchase between 1992 and 1998, $10 billion was diverted to build hotels and luxury housing projects and speculate on stock and real estate.

The 2008 economic stimulus plan, which pumped 4 trillion renminbi, or $625 billion, into the economy, has been singled out as a key source of rising corruption. At least 700 billion renminbi went to the high-speed rail system in 2010 alone, with "no independent oversight or regulation," Transparency International said. The rail project may be "the biggest single financial scandal not just in China, but perhaps in the world," a Transparency International representative told the New York Times. See Railways and High-Speed railways Under Education and Transportation.

Shaddy Land Deals See Farmers, Agriculture, Economic; Also See Bo Xilai, History

Corrupt Businessmen in China

According to Transparency International bribery is widely used by Chinese companies. Corruption is particularly rife in the real estate market. Officials and developers often obtain choice pieces of property at bargain prices through illegal or underhanded means. Ordinary people have lost their life savings in banks that collapsed because they were stuck with bad loans by developers.

Zhang Tingpu, the manager of an underground maze of shops, was sentenced to 10 years in prison for embezzling $5 million from local merchants. His expenses included $600,000 in bribes to local officials, including the local vice mayor. He was caught after a jilted girlfriend turned in a ledger book he had buried in her garden.

Zhou Henghyo is a Shanghai business tycoon who built a property empire using government-backed bank loans n the 1990s. The investigation of his activities was shelved because of potential ties between the tycoon and Chinese President Jiang Zemin.

American companies involved in corruption scandals include Lucent technologies, which forced Chinese executives in the company to offer bribes to officials in the state-owned telecommunications companies; Diagnostics Products Corp., for giving out $1.6 million in bribes at state-owned Chinese hospitals; and Alitek Information Services, a California-based software company that gave out $1 million in bribes disguised as consulting fees.

Three large multinational corporations — IBM, NCR and Hitachi — were named in a court case that sent Zhang Enzhao, the former head of China Construction Bank, to jail for 115 year prison for accepting more than $500,000 in bribes. “Service fees” presented by IBM and NCR includes a pair of Tiffany watches, a massage chair, and a luxury apartment in Shanghai worth $350,000. The bribes were largely paid through an intermediary named Zou Jianhia.

In February 2008, Chinese appliance tycoon Gu Chunjun, former chairman of the Chinese refrigerator maker Guangdong Kelon Electrical Holdings Co., was sentenced to 12 year prison and fined $944,000 for embezzlement, and falsifying and withholding information.

Corrupt Bankers in China

In the early and mid 2000s there were a number of reports of corruption involving banks, with banking officials taking bribes and taking off with hundreds of millions of dollars worth of funds. The head of China Construction Bank was forced to resign after a lawsuit accused him of taking bribes (See Above). An executive at the Bank of China was sentenced to death for embezzling $2.7 million and accepting $173,000 in bribes. So much money has been embezzled from rural credit banks that 50,000 of them are essentially bankrupt.

One series of investigations in 2006 uncovered $3.6 million stolen by employees at a branch of the Bank of China in Beijing; $3.9 million embezzled by employees from a China Construction Bank branch in northeastern China; $12 million embezzled by 43 employees from the Agricultural Bank of China in Batau in northern China; and $4.5 million embezzled from a Bank of China branch in Dalian by an employee to gamble on soccer matches.

Around $482 million stolen from Bank of China between 1992 and 2001 by using Chinese companies to illegally siphon off money. In some cases loans were given out by the bank and placed in the accounts of dummy companies and transferred to the conspirators.

In early 2005, a branch manager at the Bank of China in Harbin disappeared after transferring more than $123 million of the bank’s fund to offshore accounts. A few weeks later, a dozen employees at another bank were arrested for conspiring to take nearly a $1 billion.

In October 2001, three managers from a Bank of China branch in Kaiping in Guangdong Province fled to the United States via Canada after stealing more than $485 million from the bank. The managers took the money over a 13 year period by taking money from phoney loans, laundering it through Hong Kong, Canada and the United States and then migrated to the United States using false identities. The three managers have been indicted both in China and the United States One of the mangers, Yu Zhendong was returned to China but the others, Xu Chaofan and Xu Guojan, remain at large.

Red Cadres and Red-Hat Businessmen

Russell Hsiao wrote in China Brief, “There is high degree of collusion between party cadres and businessmen has made the issue more acute. Even as the Chinese Communist Party (CCP) leadership ratchets up the rhetoric on fighting graft, more national wealth than ever has been flowing into the coffers of these powerful so-called “clans” (jiazu). Members of a typical clan consist of cadres as well as businesspeople, whose symbiotic relationship has enabled these savvy members of the new aristocracy to accumulate wealth at an astounding speed. “[Source: Russell Hsiao, China Brief, June 24, 2010]

“According to recent reports by the People’s Daily and Nanfang Daily, 3,000 families nationwide control assets worth 1.70 trillion yuan ($248.9 billion), meaning that each of these nouveau riche clans is worth an average of 565 million yuan ($82.72 million). People’s Forum magazine conducted an opinion survey on the phenomenon of super-rich clans, finding that 91 percent of respondents indicated that the newly rich have benefited from networking with government officials and 69 percent said they had a bad impression of the well-heeled families. While 75.56 percent noted that collusion between officials and businessmen was the most serious factor that contributed to the masses’ negative image of the government, 86.5 percent expressed worries about the prospects of weaning business away from political authority.”

“There has been a proliferation of cadres becoming the silent partners, patrons — and accomplices — of unscrupulous businessmen. The recent scandal surrounding Wang Guangyu, former chairman of Gome Electrical Appliances and once China’s richest man, is particularly alarming. Wang, who was last month given a 14-year jail term for crimes including bribery and insider trading, allegedly paid off a dozen-odd senior cadres, including the Assistant Minister of Public Security Zheng Xiaodong....Wang’s case is typical of a growing number of prominent business clans whose affiliates include not only family members but also senior officials from a plethora of party and government departments.”

“There is well-documented evidence that the children of famous cadres, such as late patriarch Deng Xiaoping, ex-president Jiang Zemin, ex-premiers Li Peng and Zhu Rongji, President Hu and Premier Wen Jiabao, are successful entrepreneurs. According to liberal economist Luo Tianhao, a researcher at the Beijing-based Changjiang Business School, red families, meaning those of top cadres, figured prominently among the country’s affluent clans. These business clans boast deep political and economic capital, Luo said. He added that due to their political connections, these families do particularly well in trade, energy and infrastructure, which are sectors that are still wholly or partially controlled by the state. Take, for example, the Li Peng clan. Li’s wife and two children have been active in the energy sector since the 1990s. Son Li Xiaoping is the former chairman of China Huaneng, an energy conglomerate; and daughter Li Xiaolin is the CEO of mammoth China Power International Development.”

Lai Changxing and the $6 Billion Corruption Scandal

In the 1990s hundreds of officials were believed to be involved in $6 billion oil, car, firearms and cigarette smuggling operation that worked out of the port city of Xiamen in southern China. Many of the smuggled goods came in from Taiwan and Hong Kong by ships using import licenses obtained from party officials given huge bribes. When smuggled goods were accidently seized by customs the bribed officials jumped in and retrieved the goods and beat up the customs officers.

The mastermind of the smuggling operation was Lai Changxing (Lai Changsheng), a well-connected trading magnate who built up an empire called the Yuanhua Group. The Xiamen-based firm was involved in real estate, imports and exports, electronics and storage and even owned a soccer team and a popular seven-story luxury brothel called the Red Mansion, where Lai kept his office and entertained high level officials and military officers with girls he called “Miss Temporary’s.” The scandal touched the man widely expected to be chosen next year to lead China, Vice President Xi Jinping. There were rumors that Lai and Chinese President Jiang Zemin shared a mistress.

Lai bribed hundred of officials and ensured their silence by setting them up with prostitutes and secretly videotaping them together and the Red Mansion and blackmailing them if they threatened to squeal. He reportedly tried to bribe Chinese Prime Minister Zhu Rongji which infuriated the premier and increased his resolve to bring Lai to justice. Lai was active when Xiamen (formerly known as Amoy),was a freewheeling coastal “special economic zone” under Xi Jinping when he was governor of Fujian Province. According to reports at the time, Mr. Lai’s flight led the country’s leadership to summon Mr. Xi to Beijing to explain how such an elaborate corruption ring had been allowed to flourish under his watch.

Lai was head of the Yuanhua group, which built an 88-story tower in Xiamen as well as clubs and housing developments. He was accused of heading a $6 billion scheme to bribe customs officials to import cars and oil into China, evading millions of dollars in taxes. When the scandal broke Lai was in the middle of building a huge mansion and had just broken ground on an 88-floor skyscraper. Today the mansion is half finished, the skyscraper site is occupied only by a hole in the ground.

Life of Lai Changxing

For a time Lai Changxing was China’s richest man. He was regarded as a Robin Hood to some and Chinese Gatsby to others. “Rich like Lai” is still considered a complement in the Xiamen area. Jonathan Watts wrote in The Guardian, “Born as one of eight siblings during the famine era of the Great Leap Forward, Lai capitalised on the post-Mao economic reforms to build up a massive business empire. At his peak, Lai was China's biggest private car importer and one of the leading oil traders and distributors of foreign cigarettes. He built hundreds of high-rise apartment blocks in Xiamen and constructed a replica of the forbidden city, where he lavished officials with banquets and prostitutes. [Source: Jonathan Watts, The Guardian May 18, 2012]

Lai was an illiterate farmer and blacksmith when he arrived in Xiamen to make his fortune. He came to Xiamen because it had been selected by Deng Xiaoping as a place to experiment with free-market reforms. Lai first made a living making auto parts but it wasn’t long before he was involved in importing cars — avoiding duties by bribing officials’smuggling cigarettes and oil and speculating on real estate and building apartments. Within a few years he was worth over $1 billion.

Lai insisted that when he arrived in Xiamen as a blacksmith he sought to make his way honestly but was forced to adopt corrupt practices because of officials who demanded bribes for licences. He said when he refused the officials abducted his sister. Lai named his brothel the Red Mansion after a classic Chinese novel. It contained rooms with marble jacuzzis and extra-wide double beds After Lai was prosecuted it was turned into an anti-corruption museum but it became so popular that it was closed down and later turned into training center for migrant workers.

Watts wrote: Lai's web of influence included the deputy mayor of Xiamen, a deputy public security minister, the deputy of an anti-smuggling task force and dozens of other officials and executives who have subsequently been fired, demoted or imprisoned. However, other senior cadres - including one former Politburo member - who were implicated in the scandal have escaped punishment. When he came under scrutiny, state TV released images of his life of excess, including confiscated cars given to corrupt officials, a sack of gold rings, a conference table draped in a tiger skin rug and young women, said to be kept for officials. Such was the prominence of the case that Lai was targetted by the party's top enforcer - Liu Liying, the head of the Central Discipline Inspection Committee.

Li evaded capture in 1999 by fleeing to Hong Kong by speedboat and then flying to Vancouver after being informed he was going to arrested. Before fleeing, he had enjoyed widespread government support, including a prestigious position with a group that advises the governing Communist Party on policy. In August 1999 Lai arrived Vancouver, British Columbia. In November 2000, he was arrested outside a casino in Niagra Falls, Ontario. His wife was also arrested. Both filed applications to remain in Canada as refugees. Later a court ordered his deportation.

Lai presence in Canada set off a diplomatic crisis. Beijing has repeatedly tried to get Lai extradited and even promised not to give him a death sentence. Worries that Lai’s human rights would not be respected in China keep him from being sent back to China.

As of 2007, Lai was under house arrest in Vancouver while appealing his deportation order. He appeared at his trial in Vancouver dressed in a tuxedo, trailed the security guards like member of his entourage.

Book: “Inside the Red Mansion” by Oliver August (Houghton Mifflin, 2007) a book about Lai Changxing

Trial for the $6 Billion Corruption Scandal in China

Lai was accused of running a $9.6 billion smuggling operation. In a series of show trials a number of former associates were forced to denounce him. More than 100 were put on trial and five courthouses were used to handle the large number of defendants, which included Communist party bosses, military personnel, security officials, bankers, customs officials, and local businessmen.

An 18-month investigation of the scandal — which utilized 740 policemen, customs officials and ant-corruption experts — was led by Politburo member and Zhu friend, Wei Jiangxing. The investigation reportedly began after one of Lai's deputies ratted on him because Lai refused to pay up on gambling debts owed to the deputy.

Some members of the Communist party elite were implicated; others were protected. The wife of Jia Qinglin, a Politburo member who once shared an office with President Jiang Zemin, was implicated in the scandal. Jia divorced his wife when the scandal broke and was believed to have been protected from an investigation by Jiang. The son of a Gen. Liu Huqing, one the highest ranking generals in the People's Liberation Army, was also involved. He is believed to have protected by Li Peng, a good friend of the general.

A total of 84 people were convicted in November, 2000. Eleven officials, including several who accept bribes of around $700,000 each, were sentenced to death. Twelve were given life sentences and 58 received lesser jail terms. Among those sentenced to death were the Deputy Mayor of Xiamen, the city customs chief and deputy head of public security.

China Arrests Lai Changxing After Canada Deports Him

In July 2011, Lai Changxing, China’s most-wanted fugitive, was arrested in Beijing after Canadian authorities deported him, ending more than a decade of attempts to escape imprisonment here. The 53-year-old Lai signed a warrant issued for his arrest as he arrived in Beijing. [Source: Ian Johnson and Michael Wines, New York Times, July 23, 2011]

Mr. Lai’s 11-year legal battle to remain in Canada has long soured the two nations’ diplomatic relations. Beijing was furious over the decision by the Canadian government to grant fugitive Lai a work visa in February 2009. Ian Johnson and Michael Wines wrote in the New York Times, "Canadian courts consistently rejected his claim to asylum status but refused to send him back to China. The atmosphere changed this year after the newly elected government of Stephen Harper sent its foreign minister to China. Reversing the government’s previous critical stance on China’s human rights record, he hailed China as a strategic ally and, referring to Mr. Lai, said that 'both the Canadian people and the Chinese people don’t have a lot of time for white-collar fraudsters.”

Johnson and Wines wrote, "Lai long maintained that he could be tortured or killed if returned to China. His lawyer, David Matas, has said that both Mr. Lai’s accountant and his brother had died of unknown causes while in prison, and that Mr. Lai could face the same fate. China’s legal system could not provide him a fair trial, Mr. Matas contended. Finally a Canadian federal court ruled against Mr. Lai, calling him a “common criminal” and saying it largely accepted as “strict, clear and unequivocal” China’s pledges that it would not torture or execute him. He was placed on a Beijing-bound airplane the next day, and was arrested after he landed on Saturday.

Chinese authorities promised the Canadian government that Lai will not be executed or tortured and he will get a fair trial and have access to a lawyer. They promised that he will be tried in public and will be allowed to mount a defense against the smuggling charges. China’s Foreign Ministry welcomed the decision, which capped years of exhaustive diplomatic efforts to have Mr. Lai returned to China to stand trial. In a statement quoted by the official news agency, Xinhua, the State Security Ministry said that “no matter where a criminal suspect flees, he or she cannot evade legal sanctions in the end.”In Beijing, the state-run English-language newspaper China Daily reported Mr. Lai could face life in prison.

Some Western human rights organizations have cast doubt on China’s guarantees of a fair trial. A Hong Kong-based researcher for Human Rights Watch, Nicholas Bequelin, said in an interview that China was likely to avoid “blatant procedural violations” in order to show Western countries that it could deal fairly with sensitive cases, like those of Uighur separatists who have claimed asylum in the West but are charged with crimes in China.”This is undoubtedly a test case,” Mr. Bequelin said. “It will establish a precedent, and much is at stake.”

Lai Changxing Sentenced to Life in Prison

In May 2012 a court in China sentenced Lai Changxing to life in prison. Jonathan Watts wrote in The Guardian: A billionaire entrepreneur who symbolised the wild excesses of China's economic rise in the 1990s has been jailed for life on charges of smuggling and bribery. Lai Changxing's conviction by a court in Xiamen — a port city once considered his personal fiefdom — came after a 12-year extradition battle that ended last year, when Canada handed over the man often described as China's most wanted fugitive on condition that he not be given the death penalty. [Source: Jonathan Watts, The Guardian May 18, 2012]

“In handing down the sentence, the Xiamen intermediate people's court said Lai bribed 64 officials between 1996 and 1999 in building up a business empire worth nearly $3 billion. "The crimes involve massive sums and particularly serious circumstances," the court said, according to a report by the Xinhua news agency.

“Lai fought extradition for more than a decade, claiming that he would be tortured or executed if he returned to his homeland. Chinese leaders have pledged that this would not be the case. Lai claimed he was unfairly targeted for merely doing what many other businessmen of his generation had done to get ahead without elite connections. "I don't have a good family background. I have to do things step by step by myself. That's how people came to respect me. I never fussed about big money," he said in an interview with a domestic newspaper.

“China has changed from the country in which Lai built his empire, according to Oliver August, the author of a book about Lai."It's doubtful there will ever be another Lai Changxing," writes August. "Lai belongs to a dying era: the infancy of modern China's rise dating from Mao's death to perhaps the 2008 Olympics in Beijing.”

Image Sources: 1) AP; 2) Bloomberg

Text Sources: New York Times, Washington Post, Los Angeles Times, National Geographic Smithsonian magazine, The Guardian Times of London, The New Yorker, Time, Newsweek, Reuters, AP, AFP, Lonely Planet Guides, Compton’s Encyclopedia and various books and other publications.

Last updated July 2012

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