Beijing’s Interest in Offshore Tax Evasion Limited to Corrupt Officials

November 17, 2014 Updated: November 28, 2014

Fifty-one countries signed the Multilateral Competent Authority Agreement in Berlin on Oct. 29 to fight offshore tax fraud and evasion. The agreement aims to put an end to banking secrecy by sharing tax-related information with member states.

Missing from the signatory list are the United States and China. China’s absence seems somewhat strange given its global “fox hunt” for corrupt officials who have fled the country.

Hunting Foxes vs. Beating Tigers

The United States has good reasons to stay out. With the enactment of its 2010 Foreign Account Tax Compliance Act or FATCA, the United States has been pioneering the fight against tax evasion.

The Organization for Economic Cooperation and Development (OECD) has played a leading role in the development and negotiation of the Multilateral Competent Authority Agreement. OECD Secretary-General Angel Gurria commented that the United States has provided strong support in the process.

China, on the other hand, has made no comment on the Agreement and has not been mentioned by the OECD. Beijing’s indifference to the international anti-tax evasion campaign forms a sharp contrast to its highly propagandized effort to hunt down runaway officials.

Tax evasion is a serious federal felony in the United States. For Chinese, however, hunting corrupt officials and recovering taxes are two very different things from an ethical perspective. The former targets corrupt officials who fled the country with illegally obtained assets, while the latter involves all wealthy Chinese who have transferred their wealth abroad.

Besides members of the red magnates, these wealthy people also include private business owners who have transferred money abroad. Therefore, the capital affected by tax recovery efforts is not 100 percent illegal income.

However, the amount of money involved in corrupt official hunting and tax recovery is very different.

Since the 1990s, 16,000 to 18,000 Communist Party cadres and government officials have fled China, taking with them 800 billion yuan (about US $130 billion at today’s exchange rate), according to Party mouthpiece Xinhua News Agency.

In a report published on Jan. 21, the International Consortium of Investigative Journalists (ICIJ) revealed that nearly 22,000 offshore clients with addresses in mainland China and Hong Kong hold companies in tax havens. (See “Leaked Records Reveal Offshore Holdings of China’s Elite“)

Among them are relatives of the “red nobility,” the wealthy, and Chinese congress members, according to the report.

“By some estimates, between $1 trillion and $4 trillion in untraced assets have left the country since 2000,” the report stated.

Compared to the 800 billion yuan that corrupt Chinese officials took abroad, the $1-4 trillion is a much larger amount. Furthermore, quite a large portion of the $1-4 trillion was obtained illegally.

Beijing is reluctant to cast the net to “catch the tigers” while enthusiastically “hunting foxes” globally, because the two campaigns target different groups.

“Fox Hunt” Targets Eloped Corrupt Officials

The “fox hunt” is a campaign to hunt down officials and senior management of state-owned enterprises who have fled the country with embezzled or illegally obtained money.

China launched the campaign globally in July with much publicity. In a series of eight articles called “China’s Fight Against Runaway Corrupt Officials,” Party mouthpiece provided a comprehensive account of the global manhunt.

The latest news is that China agrees to follow the international practice of sharing the illicit assets with countries that help capture the fugitives and recover the money. In the meantime, although China has not yet signed extradition treaties with the United States, Canada, or Australia, these three countries have been collaborating with China in various ways to hunt down economic fugitives.

The majority of the runaway officials used to work in lucrative departments such as finance, state-owned monopoly enterprises, transportation, land management, construction, taxation, trade, and investment.

In the past, the number of captured fugitives was never disclosed. Now, however, China has provided official statistics for the first time: 6,694 defecting economic crime suspects were brought back to the country from 2008 to 2013 through extradition, repatriation, persuasion, and prosecution abroad.

The United States, Canada, and Australia are the defecting officials’ top choices since these traditional immigration targets provide good living conditions and high-quality education. It is said that “corrupt official neighborhoods” and “corrupt official offspring villages” can be found in these countries.

So how high-ranking are these officials? A list of defecting corrupt officials in the seventh article of the series shows that the highest-ranking officials are Lu Wanli, former Director of Guizhou Province Transportation Department, and Yang Xiuzhu, former Vice Director of Zhejiang Province Construction Department.

In recent years the Chinese government is said to have made a great effort to hunt down corrupt officials who have fled abroad. It has signed 107 judicial assistance agreements with 63 countries, including those under negotiation, and followed the international practice of sharing the recovered assets with the assisting countries (40 to 80 percent of the assets will be shared depending on the contribution of the country).

Beijing swore to “bring the corrupt officials to justice even if they fled to the corners of the earth.”

Tax Recovery a Gold Mine

Although tax recovery is a gold mine, Beijing won’t dig into it for reasons that can’t be mentioned.

The reason tax recovery is so tricky for Beijing is that many of those who transfer assets abroad on a large scale are relatives and descendants of the red nobility.

I’d like to first explain the difference between the red nobility and senior officials. In pre-communist eras, “nobility” referred to relatives of the royal family and those who were granted nobility due to great achievements or contributions.

There is an old saying: “Official titles are to appoint the capable, and nobility titles are to reward contributions.” Official titles cannot be passed down to the officials’ children, while nobility titles can be inherited.

The Chinese Communist Party (CCP) stated they would “smash the old world,” so they could not adopt the old “feudal system” they said they would crack down on. However, the CCP never attempted to restrain the privileges of the red nobility who “won the world” for Mao.

Such privileges not only allow their children to easily become senior officials or officers, but also allow them to do business and take advantage of their parents’ political power.

Some red princelings argue that most of the second-generation red officials lead an ordinary life without any privileges. This is true, but there are reasons behind it.

The first reason is that there are differentiations among the “second red generation.” It is an unspoken rule that only the original generals in Mao’s era or the department heads in the 1950s or earlier qualify as “red nobility” who enjoy privileges above the law. Most of the second red generation do not belong to this group, so their privileges are limited.

The second reason is that not all red princelings have the ability to do business.

It has been proven by sources inside and outside China that a large portion of the wealthy class in China are from red nobility families. In a series of articles published in 2010, People’s Forum, a magazine published by the People’s Daily, publicly admitted for the first time that the majority of China’s nouveau riche are the “red families.”

The articles also pointed out that the red families have a high starting point and easy access to social resources due to their political and capital advantages. Most red families do business in industries that require government approval, such as trade, infrastructure, and energy. Real estate is another favorite business of this group.

The red family members, not being very rich, worry about the security of the mammoth assets in China, so they transfer their money overseas through various channels. According to the ICIJ report, over 100 researchers searched the list of 37,000 Chinese offshore company holders looking for “public figures”: Politburo members, military commanders, mayors of large cities, billionaires listed in Forbes and Hurun’s rankings of the mega-wealthy, and so-called princelings (relatives of the current leadership or former Communist Party elders).

The team identified family members of at least five current and former members of the Politburo (China’s top leadership group consisting of 7 to 9 members) who hold offshore companies in the British Virgin Islands and the Cook Islands. Among them are Deng Xiaoping’s son-in-law Wu Jianchang, a former prime minister’s daughter Li Xiaolin, Wen Jiabao’s son Wen Yunson and son-in-law Liu Chunhang, Xi Jinping’s brother-in-law Deng Jiagui, and Hu Jintao’s nephew Hu Yishi, to name a few.

The report exposed the CCP interest group’s true nature as thieves, and it greatly undermined the CCP’s legitimacy. Therefore, the CCP continues to ignore this report.

Of the 800 billion yuan that corrupt officials took abroad, over 10 billion was recovered over the past 15 years. However, even if the rest is fully recovered, the amount is not comparable to the tax on the $1-4 trillion in assets transferred abroad.

Even an elementary school student can tell which is more important. Yet the Chinese government has no interest in the Multilateral Competent Authority Agreement, but focuses only on hunting down the corrupt officials abroad.

Such an obvious problem is entirely due to the different target groups of the corrupt official hunt and tax recovery. In other words, it is a case of “identity discrimination,” as I pointed out earlier when commenting on Beijing’s anti-corruption campaigns.

Originally published in Voice of America.