China cannot relax war on corruption;; Western banks must also take care not to fuel illegality

China cannot relax war on corruption

Western banks must also take care not to fuel illegality

January 22, 2014 7:07 pm

When Xi Jinping became leader of the Chinese Communist party a little more than a year ago, he made the fight against corruption a central theme of his leadership. Over the past year China has seen the detention of dozens of top officials on suspicion of financial improprieties. More than 180,000 people have been punished for corruption. Mr Xi has left little doubt that he believes unchecked graft threatens the future of the Chinese Communist party. Yet two events this week raise doubts about how sincere his drive really is.
First, there is the trial of Xu Zhiyong, a human rights lawyer, which has started in Beijing. Mr Xu is part of a loose group of civic activists who are campaigning for rules requiring government officials to disclose their financial assets. The demands he is making appear to be perfectly in line with the leadership’s anti-corruption drive. But he is now on trial for “gathering crowds to disrupt public order” – suggesting that Mr Xi’s campaign has its limits.
The second event was publication of a report by a Washington- based organisation called the International Consortium of Investigative Journalists. The report claims that more than a dozen family members of China’s top political and military leaders are making use of offshore companies based in the British Virgin Islands.
Financial records received by the ICIJ reveal that more than 21,000 mainland Chinese and Hong Kong residents have used offshore tax havens in the Caribbean to store their wealth. It is unclear how much of this activity is illegal under Chinese law. But the report is a reminder that the Chinese public has been left largely in the dark about how their country’s elite has amassed its wealth – and where its money is deposited.
The scale of corruption among Chinese officials is undoubtedly one of the biggest threats to the Communist party’s long-term survival. China’s rapid economic growth is creating internal tensions because of widening income differentials. If the popular perception grows that Chinese leaders are spending more time lining their own pockets than running the country effectively, then political unrest will surely follow.
We should not dismiss the way Mr Xi is trying to deal with the problem. After all, there are limits to how quickly he can act. If he allows the anti-corruption drive to gather pace at uncontrolled speed, he may undermine the Communist party completely. This may explain why the Chinese leadership wants to set limits to the role played by activists such as Mr Xu. Still, the Chinese middle class is weary of the corruption and backhanders that have plagued the country’s commerce. Mr Xi runs the risk of alienating the public unless he demonstrates that the anti-corruption campaign is waged with a minimum of fear or favour.
In the meantime, western financial and corporate leaders need to realise that Chinese corruption is not an issue to which they can turn a blind eye, either. This is because the ICIJ suggests that western banks and accountancy firms have acted as middlemen in the establishment of offshore companies for Chinese clients.
There is still much we do not know about the offshore investments by the Chinese elite. But over recent years, several banks have fallen foul of international authorities because of their support for illegal activities. In 2012 HSBC was fined $1.92bn by US regulators after illegally conducting transactions on behalf of customers in Iran, Libya and Cuba. A decade ago a number of European banks were embarrassed when it emerged that they were handling billions of dollars of assets linked to the former Nigerian leader Sani Abacha. Whatever the challenges of doing business with China may be, western banks should make sure that they are not fuelling corrupt practices.