[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]





 CORRUPTION IN CHINA TODAY: CONSEQUENCES FOR GOVERNANCE, HUMAN RIGHTS, 
                       AND COMMERCIAL RULE OF LAW

=======================================================================

                               ROUNDTABLE

                               before the

              CONGRESSIONAL-EXECUTIVE COMMISSION ON CHINA

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                           NOVEMBER 21, 2013

                               __________

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              CONGRESSIONAL-EXECUTIVE COMMISSION ON CHINA

                    LEGISLATIVE BRANCH COMMISSIONERS

Senate

                                     House

SHERROD BROWN, Ohio, Chairman        CHRISTOPHER SMITH, New Jersey, 
MAX BAUCUS, Montana                  Cochairman
CARL LEVIN, Michigan                 FRANK WOLF, Virginia
DIANNE FEINSTEIN, California         ROBERT PITTENGER, North Carolina
JEFF MERKLEY, Oregon                 MARK MEADOWS, North Carolina
                                     TIM WALZ, Minnesota
                                     MARCY KAPTUR, Ohio
                                     MICHAEL HONDA, California

                     EXECUTIVE BRANCH COMMISSIONERS

     NISHA DESAI BISWAL, U.S. Agency for International Development

                    Lawrence T. Liu, Staff Director

                 Paul B. Protic, Deputy Staff Director

                                  (ii)


















                             C O N T E N T S

                              ----------                              
                                                                   Page

                               STATEMENTS

Opening Statement of Lawrence Liu, Staff Director, Congressional-
  Executive Commission on China..................................     1
Fewsmith, Joseph, Professor of International Relations and 
  Political Science, Boston University...........................     3
Li, Xiaorong, Independent Scholar................................     5
Wedeman, Andrew, Professor, Department of Political Science, 
  Georgia State University.......................................     8
Chow, Daniel, Professor of International Law, Ohio State 
  University, Moritz College of Law..............................    11

                                APPENDIX

Wedeman, Andrew..................................................    26
Chow, Daniel.....................................................    29

 
              CORRUPTION IN CHINA TODAY: CONSEQUENCES
                FOR GOVERNANCE, HUMAN RIGHTS, AND 
                COMMERCIAL RULE OF LAW

                              ----------                              


                      THURSDAY, NOVEMBER 21, 2013

                            Congressional-Executive
                                       Commission on China,
                                                    Washington, DC.
    The roundtable was convened at 3:05 p.m., in room SVC 209-
208, Capitol Visitor Center, Lawrence Liu, Staff Director, 
presiding.
    Present: Paul Protic, Deputy Staff Director and Anna 
Brettell, Senior Advisor.

      OPENING STATEMENT OF LAWRENCE LIU, STAFF DIRECTOR, 
          CONGRESSIONAL-EXECUTIVE COMMISSION ON CHINA

    Mr. Liu. Thanks, everyone, for joining us today. I wanted 
to welcome you on behalf of our chair, Senator Sherrod Brown, 
to this CECC roundtable and introduce myself. My name is 
Lawrence Liu, and I am the Staff Director for the Commission.
    To my left is Paul Protic, who works for Congressman Chris 
Smith, our cochair. Then to his left is Anna Brettell, our 
Senior Advisor, who has done great work in preparing for this 
roundtable.
    I wanted to just introduce everyone to the topic real 
quickly and then introduce the witnesses, and then we can hear 
their remarks.
    The topic of today's roundtable is corruption in China, 
which is a major source of discontent among the Chinese people 
and a barrier to commercial rule of law. Corruption takes many 
forms in China, from corrupt officials at all levels using 
their public office for private gain, and seizing land for 
development, to corrupt state-owned enterprises gaming the 
system to their advantage.
    Corruption continues to be among the root causes of rights 
abuses against Chinese citizens. Chinese citizens have long 
voiced concern about corruption. In 1989, corruption was among 
the main reasons leading to massive citizen protests. Today, 
thousands of citizens file complaints and provide tips about 
corrupt practices.
    Chinese leaders have also long voiced concern about the 
issue, linking the Party's legitimacy to its ability to manage 
corruption. For over 20 years, Party and government leaders 
have issued numerous laws, regulations, and policies to combat 
corruption.
    Following some major corruption scandals last year, for 
example, President Xi Jinping himself launched a new 
anticorruption campaign, focusing especially on reducing very 
visible extravagant spending.
    Despite these measures, corruption in China does remain 
rampant, raising important questions regarding the sincerity 
and effectiveness of these efforts, and ultimately whether 
China can be successful, given that it lacks free elections, a 
free press, an independent judiciary, and other checks and 
balances to hold officials accountable.
    At the same time, officials continue to crack down on 
independent and citizen-led efforts to combat corruption, 
raising questions regarding the role the Chinese Government 
sees ordinary citizens playing in its campaign against 
corruption.
    Finally, corruption in China raises important questions 
regarding China's commercial rule of law development, 
particularly with respect to China's powerful state-owned 
enterprises, who are a main source of corruption.
    We have brought together a great group of panelists today 
who will address these questions. I will introduce them now and 
they will give their opening remarks, and then we'll have Q&A.
    Our first speaker will be Joseph Fewsmith, a Professor of 
International Relations and Political Science at Boston 
University. Professor Fewsmith has written numerous articles 
published in well-known journals and is the author or editor of 
eight books, including most recently ``The Logic and Limits of 
Political Reform in China.'' He is one of seven regular 
contributors to the China Leadership Monitor, a highly 
respected and widely read Web publication analyzing current 
developments in China. Thank you for joining us.
    Our next speaker will be Xiaorong Li, an independent 
scholar who was a research faculty member at the University of 
Maryland, College Park. Her academic fields have included 
political philosophy and ethics, with a focus on human rights, 
democracy, and civil society development.
    She has published numerous articles and books on these 
subjects. Since 1989, she has co-founded human rights 
organizations and has served as an executive director and a 
board member for those organizations, and she has also been a 
frequent contributor to our work. Thank you for joining us.
    We will next hear from Andrew Wedeman, a Professor of 
Political Science at Georgia State University. Dr. Wedeman has 
published numerous articles and chapters and several books on 
corruption in China, including ``Double Paradox: Rapid Growth 
and Rising Corruption in China.'' That book was selected by 
Foreign Affairs as one of the 30 best international relations 
books of 2012. Thank you for joining us.
    Finally, we will hear from Daniel Chow, Joseph S. Platt-
Porter, Wright, Morris & Arthur Professor of Law at Ohio State 
University's Michael E. Moritz College of Law. At Ohio State, 
Professor Chow writes and teaches in the areas of international 
trade, international business transactions, international 
intellectual property, and the law of China. He is the author 
of several leading casebooks in these areas, as well as many 
articles.
    Previously, he lived in China and served as in-house 
counsel for a major U.S. corporation, where he handled all 
legal matters for the company and was involved firsthand in 
issues involving counterfeiting, commercial bribery, and 
government corruption. Thanks for joining us, Professor Chow.
    So without further ado, Professor Fewsmith?

   STATEMENT OF JOSEPH FEWSMITH, PROFESSOR OF INTERNATIONAL 
       RELATIONS AND POLITICAL SCIENCE, BOSTON UNIVERSITY

    Mr. Fewsmith. Thank you very much. It is a pleasure to be 
here this afternoon. Thank you for your invitation. I'll see 
what I can contribute to you in seven minutes.
    The topic of corruption, I know, has gotten a lot of 
attention lately. There are a lot of sensational stories that 
are published and so forth, and I do think that some of those 
cases have had some serious impact on China as we see in the 
campaign that Lawrence Liu just mentioned of Xi Jinping 
launching his attack on corruption.
    From what we can see in this early development of this 
campaign it may be the most serious and sustained attack 
against corruption in the last 30 years that I've been watching 
China. I'll get back to that in a minute.
    But what I'd like to do is take the problem of corruption 
out of the headlines and look at it a little bit more in terms 
of the structure of the system because I think the problem of 
corruption is really deeply intertwined with the cadre 
evaluation system on the one hand, and the fiscal system on the 
other.
    Local cadres are under a lot of pressure to develop their 
local economies. Higher levels are more concerned with what 
they do than how they do it. If some investment funds are 
diverted but tasks are still completed, then higher levels are 
generally willing to turn a blind eye.
    It should be noted that this high-pressure system has had 
some real positive benefits for China. It is this system that 
has driven Chinese economic development over the last 30 years. 
The down side is it imbeds corruption into the fabric of the 
body politic.
    The fiscal system is important because of the way it 
interacts with local government. For instance, the 1994 tax 
reform, which recentralized a lot of the taxes in China, left 
lower levels of government--and by ``lower levels of 
government'' I mean particularly the county, township, village 
levels--with fewer sources of funds, but the cadres remain 
under the same pressures to develop the local economies.
    So now the job is what we in Washington might call an 
unfunded mandate, do the job, but you don't have the resources. 
Well, they need the resources, so where do they go and get the 
resources but from the peasants? So the central government 
mandate was that the agricultural tax, the tax on peasants, 
could not exceed 5 percent of income, but it regularly went up 
to 30, even 40 percent of income.
    So you see the pressure the cadres are under to raise 
income so that they can do their jobs, and needless to say they 
also deploy some of those funds for themselves and for some of 
their colleagues.
    I think that it is no coincidence that the number of so-
called mass incidents took off roughly from this time forward. 
In 1993, there were, according to official figures, 8,700 mass 
incidents. In 2005, the last year that official figures were 
published, there were some 87,000 mass incidents, 10 times as 
many as a decade or so previously.
    It is precisely this steady increase in local violence that 
led central authorities in 2006 to abolish the collection of 
the agricultural tax and miscellaneous fees. This was a major 
decrease in the financial burden on the peasants, but it also 
further reduced--even eliminated in some areas--the fiscal 
revenues of local government.
    For those local townships that had no or little amount of 
industry as opposed to agricultural, elimination of the 
agricultural tax was disastrous. They were still under 
pressure, however, to develop their local economies but had no 
funds to do it with. But land was becoming a very precious 
commodity.
    Industry was looking for places to expand, moving from the 
coast to the interior, or from coast to more of the interior 
even on coastal provinces. So land is becoming very valuable, 
so that's where you begin to get the reports of officials 
seizing property and giving peasants little or no compensation 
for that. Then they use the land to attract investment, and of 
course that becomes a major source of corruption.
    So the number of mass incidents, surprisingly enough given 
that you have abolished the agricultural tax, has apparently 
continued to increase. There are no official statistics on 
this, but one widely cited figure put the number of mass 
incidents at 180,000 in 2010.
    Besides the pressures from above to develop the economy, 
the temptation for corruption was simply enormous. Let me just 
cite one figure. In 2005, there were 163,000 hectares of state-
owned land that were sold. One-third was sold through bidding, 
auction, in other words at market prices, while the other two-
thirds were sold through non-market, non-transparent means.
    The difference in price between the land sold openly at 
market prices and the land sold through non-market means was 
four to five times. That is a huge difference. It amounts to 
about 5 million renminbi per hectare, roughly $800,000 in U.S. 
dollar terms. That was just as land prices were taking off, so 
we have to assume that over the last nearly decade that that 
differential and the temptation to use the profits of that land 
have simply grown.
    So the temptation to requisition land, sell it to 
investors, and pocket some of the proceeds was simply enormous 
and apparently it was not resisted by very many. The cadre 
system in China is a very hierarchical system and places a 
great deal of authority in the hands of Party secretaries at 
all levels.
    In other words, there is a strong tendency toward a 
personalization of power at each level. Given the great power 
that comes with office, the temptation to simply buy and sell 
offices is great. For instance, one example is a Party 
secretary in a county in Shaanxi Province in the northwest that 
simply transferred 400 cadres at one time. When you see large 
personnel movements of that sort there is a great suspicion 
that that was in exchange for bribes, moving to more profitable 
ones.
    A Party secretary in a county in Fujian transferred 545 
cadres in several different batches. So in other words, you 
have all these Party secretaries that control personnel, and 
personnel want to move to more lucrative jobs so there is 
actual buying and selling of office.
    Now, the recent third plenum that just ended about two 
weeks ago passed a decision that calls for increasing the power 
of the Discipline Inspection Commission, the watchdog, at each 
level of the Party.
    The language of the decision is not entirely clear but it 
does say that the Discipline Inspection Commission at one level 
should have the primary responsibility for nominating the 
Discipline Inspection Commission head at the lower level. That 
would centralize or lift up, raise the level of responsibility.
    It seems like, in Chinese terms, that they are changing the 
so-called professional relationship, this dual leadership 
system, and the leadership relationship, that those two are 
being reversed. It is not altogether clear at this point, but 
if so that is an important change in the organization of these 
things.
    I mention this because that suggests that this campaign 
against corruption could really have some teeth to it. On the 
other hand, I will also say that this is not the first time 
that the Party has tried to strengthen the Discipline 
Inspection Commission and it has not worked in the past for a 
number of reasons, including the fact that if you have somebody 
who is basically over the local Party secretary then the Party 
system itself becomes disrupted, so they have always reverted 
to leaving the Party secretary in charge.
    So I have to say that we have seen calls to crack down on 
corruption almost every year over the last 30 years. I just did 
not have time last night to go down to the basement and try to 
look up a speech that Hu Yaobang gave in 1986. I remember 
reading that at that time. It was a real barn-burner, you know: 
if we don't crack down on corruption the Party just cannot 
stand. Well, that was 30-plus years ago and we still have the 
same calls for crackdowns on corruption, and I think the 
urgency is at least as great.
    So the record of the past three decades, of course, is 
really not very encouraging, so I think that the best we can 
really hope for in this present crackdown on corruption is 
slowing down the rate of growth in corruption.
    Despite this change of the Discipline Inspection 
Commission, I just don't think that you can eliminate, or even 
significantly retard, corruption at the lower levels. As long 
as local cadres are being evaluated on their ability to develop 
the economy, there will be these pressures and they will 
continue to do as they have for the last three decades.
    Thank you.
    Mr. Liu. Thank you very much.
    Ms. Li?

         STATEMENT OF LI XIAORONG, INDEPENDENT SCHOLAR

    Ms. Li. Thank you. That was a nice opening Professor 
Fewsmith, which sets up for what I'm about to say. I think the 
structural analysis that Professor Fewsmith emphasizes is very 
helpful. Somehow, maybe I will take it to a less optimistic 
conclusion than his.
    Mr. Fewsmith. That was optimistic?
    Ms. Li. I'm going to discuss the connection between 
corruption and human rights abuses, and the ongoing crackdown 
on independent efforts to fight corruption, or more 
specifically, the puzzling behavior of the Chinese Government 
under the leadership of Xi Jinping, who has himself vowed to 
clean up corruption, while his government is striking hard on 
anticorruption activists.
    It is pretty obvious that government corruption is one of 
the important causes for some of the serious human rights 
violations in China today. If you have been watching what's 
going on, you may have wondered: Why are the officials and 
policemen so ferocious to the petitioners--petitioners are 
those who try to get a hearing from higher authorities about 
their grievances against local officials? Why? Because those 
who carry out the abduction, detention, those who run the 
``black jails,'' tend to be promised money. The money comes 
from local government officials who want to have petitioners 
from their own jurisdictions locked up in ``black jails,'' 
threatened into submission until they stop petitioning. This is 
because local officials have so much at stake: their 
performances or political future depends on whether they could 
stop petitioners from telling on them to higher authorities. 
And the higher authorities also ordered them to stop the 
petitioners out of a fear of them as a source of threat and 
instability.
    This is also why officials continue to force psychiatric 
institutions to take petitioners or activists, even after the 
new Mental Health Law was enacted, which bans involuntary 
confinement of anybody in psychiatric institutions. Local 
officials who are zealous in enforcing the one-child family 
planning policy are often mindful about revenues from fines 
that they could collect from those they accused of violation of 
the birth quotas. Another area of rights violations often in 
the news is land seizure, forced eviction, and demolition of 
housing. Why are the commercial developers so emboldened and 
blatant in using violence and the police tend to look the other 
way or join them? The developers have the backing of government 
officials, who receive huge kickbacks when they issue permits 
to developers to grab land from farmers or demolish urban 
housing.
    What about seeking justice and legal remedies through the 
court? The Chinese judiciary has no independence from the Party 
and the government. An office known as the ``Political and 
Legal Committee'' presides over the court, interfering in court 
proceedings and dictating the verdicts in important cases, such 
as cases involving dissidents, or whistleblowers who disclosed 
corruption of powerful officials, or journalists who reported 
on polluting factories that are cash cows for government 
officials.
    Now I turn to the question of why the Xi Jinping government 
is staging a crackdown on citizens who simply acted upon Xi 
Jinping's own call to fight corruption. The first point, and a 
very basic one, that I want to make is that, in the lack of an 
accountable and representative government, without a rule of 
law, a free press, or a robust civil society, no government can 
clean up corruption. This simple lesson has been tested many 
times in modern Chinese history--ever since Chairman Mao, 
Chinese leaders for several generations have had their own 
noisy campaigns against corruption in the CCP [Chinese 
Communist Party] and the government. In fact, the Party has 
developed an elaborate extrajudicial system to punish and 
discipline CCP members and officials. The system, known as 
shuang-gui, is complete with detention cells and interrogation 
chambers, where torture and mistreatment of fallen leaders are 
known to be rampant. You can't say they didn't try. But 
corruption has only become worse today.
    So it's not surprising that President Xi Jinping is again 
making anticorruption a priority of his new leadership. The new 
leaders worry that corruption is eroding any remaining 
legitimacy that the CCP still has. A decade ago, one might be 
able to argue that the CCP struck a deal with the population: 
People were allowed to make money, get rich, as long as they 
don't challenge the CCP's monopoly of power; and this was said 
to be a sort of social contract. But today, the middle classes 
find that they got a lousy deal: They don't just want to make 
money, they want health, clean air, fair share of their work, 
and they want to protect what they earned and have some say in 
decisions that affect them. But the political system does not 
allow them access to information and the decisionmaking 
process. And corrupt officials rob them of what they consider 
rightfully belonging to them. Press censorship and political 
interference in the judicial system obstruct them from seeking 
remedies. Growing social conflicts must have made the ruling 
elite feel very insecure. Xi Jinping's anticorruption campaign, 
along with some of the small concessions to popular demands, 
such as those rolled out last week by the CCP Central 
Committee, is intended to ease the crisis of the CCP's 
legitimacy and prolong its rule. It is to placate popular 
anger--showing the people that ``we are on your side and we too 
want to end corruption.''
    Yet, Xi Jinping, with his pedigree as princeling of a 
revolutionary elder, may have more at stake than Jiang Zemin 
and Hu Jintao in preventing the collapse of the political 
system under his watch, though he might try to patch up some 
cracks and adopt small fixes. Unless fundamental reform of the 
political system takes place, however, Xi Jinping's 
anticorruption campaign, that is said to go after ``flies and 
tigers,'' will never succeed beyond ``killing a few chickens to 
frighten the monkeys.'' So far, the campaign has only been 
instrumental in getting rid of political rivals like Bo Xilai.
    The point I am trying to make is that it is inevitable that 
the Xi leadership is presiding over a crackdown on civil 
society activists who campaigned against corruption. Since last 
March, the government has criminalized journalists and 
microbloggers for exposing corruption. And police have 
criminally detained several dozens of activists in Beijing and 
the provinces. The activists face criminal charges for publicly 
calling on the country's 200-plus top leaders to disclose their 
personal wealth. Their alleged crimes include ``inciting 
subversion,'' ``unlawful assembly,'' and ``gathering a crowd to 
disrupt public order.'' Among those detained are the legal 
scholar and activist, Xu Zhiyong, and a few other democracy 
activists like Zhao Changqing, and human rights lawyers like 
Ding Jiaxi, who were key members of the ``New Citizens' 
Movement.''
    So here is the key to solve our puzzle: Both the leaders 
and the civil society activists understand that genuine efforts 
to clean up corruption must take aim at fundamentally changing 
the one-party-ruled authoritarian system. But Xi Jinping wants 
to protect the system and his own power, by taking out a few 
corrupt officials and political rivals, while Xu Zhiyong and 
his colleagues want to change the system and bring democratic 
and rule-of-law reforms by starting with tackling official 
corruption.
    There was an illuminating exchange between Xu Zhiyong and 
the police interrogators. The interrogators tried to get him to 
acknowledge that the Party was heading in the right direction. 
Xu conceded that fighting corruption is good, but insisted that 
``the problem is the system.'' It is impossible to end 
corruption, he said, while maintaining a system in which all 
the powers are controlled by one political party--including the 
press, the courts, the schools, and the economy.
    The Chinese leaders no doubt could see Xu's point. But they 
cannot end the one-party rule; their power would perish with 
it. To maintain their power, they must crush the citizen-led 
anticorrup-
tion campaign and jail its leading activists.
    The swiftness and harshness of this crackdown is perhaps a 
good measure of the strength of Chinese civil society activism. 
Organized public actions were rare even a few years ago, and 
the government now regards activists like Xu Zhiyong as a 
serious threat. Xu's police interrogators told him that they 
watched his ``New Citizens' Movement'' swell to several 
thousand members in just a few months. ``If we do not put a 
stop to this immediately, it will bring chaos and instability 
all over the country,'' they said. But the Chinese leaders may 
want to think about this: Whether imprisoning and silencing 
anticorruption activists can help fight corruption, quiet 
public anger, and ultimately, whether more repression can 
prolong the Party's rule. Thank you.
    Mr. Liu. Thank you.
    Dr. Wedeman?

STATEMENT OF ANDREW WEDEMAN, PROFESSOR, DEPARTMENT OF POLITICAL 
               SCIENCE, GEORGIA STATE UNIVERSITY

    Mr. Wedeman. Well, I have the advantage of going third, so 
I can respond to the people who came before me. Joe Fewsmith 
suggested at the beginning of this talk that this current 
campaign was perhaps the most serious and sustained we had seen 
in several decades and that it might well have teeth, but then 
toward the end of his talk he had talked himself off that 
position to a similar position of Li Xiaorong, basically to say 
perhaps this is just another iteration of the same old song and 
dance.
    You can go back to Hu Yaobang, you can go back to Jiang 
Zemin, you can go to Hu Jintao. They have all said the same 
thing: If we don't fight corruption it will kill the Party. Of 
course, wags in China then go on to say, and if they fight 
corruption it will certainly kill the Party.
    There is a fundamental question here that we confront in 
the wake of the Bo Xilai and the more recent scandals, and that 
is, is corruption worse in China today than it was in the past? 
It is a very difficult question to answer because we actually 
can't figure out what the actual level of corruption is in 
China.
    All we've got are two very imperfect measures. We've got 
something I call the revealed rate of corruption, which is 
quite simply the body count: How many people are indicted, how 
many people are tried, how many people are sent to prison?
    The other measure is the one that Transparency 
International and others have created. I call it the perceived 
level of corruption. It's the best guess of experts, multiple 
experts, done in a scientific poll, so on and so forth, but 
it's basically a guess.
    And where do you think they get their guess? From the body 
count. So what does the body count tell us? Actually, there are 
three different body counts. There's the body count of the 
people that get investigated by the Party, there's the body 
count of people who get indicted by the Supreme People's 
Procuratorate, and there's the body count of people who are 
tried and convicted in the People's Court.
    The Party is the first step in the process. The Party also 
is one of the least willing to share their data, so the data we 
have on the Party is relatively imperfect. Probably the most 
systematic data we have is from the procuratorate, and 
essentially what we have is the number of people indicted--in 
Chinese terms, the cases filed--every year.
    Well, for the past decade it's been about 35,000. It has 
not gone up significantly, it has not gone down. It varies a 
little bit each year. My projection for this year, it's going 
to be as the Chinese say ``cha bu duo,'' it'll be about the 
same as the year before, about 34,000. Of those 34,000, 90-plus 
percent are rank-and-file officials. About 2,200, 2,300 are 
people who hold leadership positions at the county and 
departmental level, about 200 are at the municipal and bureau 
level.
    Somewhere between 5 and 10 are at the provincial or 
ministerial level. The numbers have not changed. The numbers 
that we're looking at for the current campaign, I think I've 
got eight at the most senior level versus five last year. Does 
that mean that this is a significant gain? Yes? Maybe? I can't 
tell. I think actually the number to really look at is the mid-
level number, and we won't know that until we get the official 
report.
    So right now it doesn't look like, in fact, things actually 
have gotten worse. We've had all these great scandals, right? 
Bo Xilai, the Minister of Railways, et cetera. The problem is 
that when you look at a corruption case, there are two 
important dates. There's the stop date, which is the date they 
get arrested, detained, et cetera, and that's an interesting 
measure of changes in enforcement.
    If we look at the stop date it doesn't look like it has 
moved very much. In other words, they are arresting about as 
many people each year this year as they were last year and the 
year before, et cetera.
    The more important date, if we're really interested in the 
question ``is corruption getting worse,'' is the start date. If 
you go back and you look at the major cases that have been 
revealed in this campaign, they're not new cases, they're old 
cases.
    Bo Xilai's case began in 1994, 20 years ago. That's when he 
became corrupt. In 2012, he stopped being corrupt when he was 
detained, imprisoned, et cetera. So we turn around and we say, 
well, is corruption worse under Xi Jinping? Well, we would have 
to know an awful lot of data about start dates, yet what we 
have mostly is stop dates. So that complicates the analysis.
    The second area that I want to comment on, is when you look 
at a corruption campaign in one level, as Li Xiaorong says, it 
is an exercise in taking out your political rivals. It is an 
opportunity to go after people. But a campaign operates on 
multiple different levels. On one level it is political, and I 
will say a little bit more about the politics of this 
particular one.
    The other part of it is, it's an exercise in public 
relations. You get a scandal, you get Bo Xilai with the dead 
Englishman in the out-of-the-way Chongqing hotel, tales of 
arsenic and old lace, et cetera, you have got to respond to it 
and you have got to, as Li Xiaorong says, you have got to kill 
some chickens or you have got to get some tiger pelts.
    So they'll take out some senior level people not purely for 
political reasons, but for PR reasons. They need to go out and 
get some people to show that they're really ready to fight 
corruption, at least to convince the people, if in fact I think 
as Joe ended up suggesting, they probably really aren't making 
any real headway.
    The other thing is, this particular anticorruption campaign 
has a feature that the ones in the past did not. Early on, even 
before Xi got into office, the Internet was driving part of 
this campaign. There were these numerous exposures, some of 
them having to do with excess property, some with mistresses, 
some with mistresses and property, expensive watches, and so on 
and so forth. That drove the campaign at the lower levels 
because these are mostly targeting officials who were in the 
public view. So there's that level. There's also the political 
level.
    I started looking at the cases, and if you pick up the 
document I dropped off and I think it's available out front, I 
started looking at cases that would attach to Zhou Yongkang, 
the former head of the Politics and Law Commission of the 
Central Committee. It is astounding how many people are 
connected to--how many of the cases that we are tracking now 
track back to him. So there's a clearly political element to 
the campaign. Yes, Xi Jinping is taking out political rivals. 
He seems to be taking out an awful lot of them. Now, I don't 
think he's going to go after Zhou.
    You look at Zhou, you track him back to Zeng Qinghong, who 
tracks back to the old Shanghai gang, and before you know it 
you're suddenly looking at the grand old man of Chinese 
politics Jiang Zemin. If you are Xi Jinping trying to 
consolidate your position as the new General Secretary, my 
advice to you as a political advisor is, do not take on Jiang 
Zemin. So, do not take out Zhou Yongkang, take out a lot of 
people around him.
    The final thing I will point out about this campaign is it 
continues to intensify a drive that began in about 2006, which 
is targeting corruption within the business sector. It is 
targeting two parts of that, both within the state-owned 
sector, which Professor Chow will talk about, but also within 
the private sector as well.
    One of the things the Chinese are beginning to realize, and 
the United States realized in the mid-1970s, is if you're going 
to fight corruption you can't just fight official corruption 
because official corruption is the supply side. You have to 
fight the demand side as well. Businessmen--I know lots of 
businessmen. I know honest ones and I know some dishonest ones.
    A bribe is just a cost if you can get away with it. Often 
it is very profitable. You are not going to really make real 
headway on corruption among officials unless you start going 
after the people who pay the bribes, as well as the people who 
take the bribes.
    One of the features of this campaign that I have really 
been struck by is how many of the people getting taken out are 
on the business side. So the final question I have about the 
campaign is, how far are they going to go in attacking business 
corruption? All that said, I think the campaign is on its way 
out. I think we are at the near end of it. These are things you 
only want to fight so long. You want to kill some chickens, you 
want to get some tiger pelts, but you don't want to push it too 
far. So I think we're on the verge of seeing it begin to wind 
down, and I will close there.
    Mr. Liu. Thank you very much, Dr. Wedeman.
    Our last speaker, Professor Chow.
    [The prepared statement of Mr. Wedeman appears in the 
appendix.]

STATEMENT OF DANIEL CHOW, PROFESSOR OF INTERNATIONAL LAW, OHIO 
            STATE UNIVERSITY, MORITZ COLLEGE OF LAW

    Mr. Chow. I am going to focus on the recent crackdown on 
commercial bribery, the role of state-owned enterprises in 
commercial bribery, and the impact of these anticorruption 
campaigns on U.S.-based multinational companies doing business 
in China.
    So, now, I am a lawyer so some of this is going to be a 
little bit legal, so I am warning you in advance. So as I see 
it, there are two recent developments which pose threats to 
U.S.-based multinational companies doing business in China.
    The first, is the recent emphasis, as Professor Wedeman 
alluded to, on cracking down on commercial bribery. So first 
and foremost, let's get this out of the way. What is commercial 
bribery? Commercial bribery--I'm just going to simplify it a 
little bit. In my paper it's going to be a little bit more 
elaborate. But commercial bribery occurs when a company, a 
business, pays a bribe in order to get business. That's 
commercial bribery.
    So a company pays a bribe, perhaps, to another company to 
get business or it pays a bribe to a government official to get 
business. That is commercial bribery, it is when a company pays 
a bribe for the purpose of getting business.
    Distinguish that from, say, government graft, government 
corruption. I will give you an example. Suppose that a state-
owned oil company borrows hundreds of millions of dollars from 
a state-owned bank in order to buy an oil well overseas and 
they overstate the price of the oil well by $100 million.
    So what they do, is they get the loan, they buy the oil 
well, and they keep $100 million. Now, that is not commercial 
bribery, that is graft. That is official corruption, so that is 
not what I am referring to. I am referring to, now, when a 
company gives a bribe to get business.
    Now, I'm going to focus on company-to-company bribes as 
opposed to company-to-government official bribes, and I'm going 
to focus on company-to-company bribes, or business-to-business 
bribes because, on the one end of the transaction is often a 
multinational company that is giving the bribe and on the 
receiving end of the bribe is often a state-owned enterprise 
that is receiving the bribe and will give the multinational 
some business.
    Now, since I mentioned state-owned enterprise, I suppose 
now we need to make sure we know what a state-owned enterprise 
is, and I'm going to give you a rather simple, straightforward 
definition here. That is, a business entity which has been 
established by the central or the local government and which is 
subject to supervision by the government or by the Communist 
Party.
    Now, supervision could be because there is a government 
bureau that supervises the state-owned enterprise, and in 
addition the Communist Party will place key officials within 
the state-owned enterprise to make sure they control it.
    Now, I want to mention so that we are all clear that today 
there are over 200,000 state-owned enterprises. It depends on 
how you count them, and there is some disagreement, but I would 
say there's certainly at least 120,000, and some people, the 
law firms, say that there are 200,000. They dominate in all 
core industries in China.
    So what do I mean by that? Petroleum, banking, 
telecommunications, transportation, auto, electric supply, oil 
and gas, electronics, chemicals. All of the core industries are 
dominated by state-owned enterprises, which means what? It 
means that the Communist Party controls the core economic 
sectors of China.
    Now, in addition to this recent emphasis on cracking down 
on commercial bribery, I want to mention that there is a new 
interpretation issued by the Supreme People's Court, together 
with the Supreme People's Procuratorate, about a year ago which 
now emphasizes enforcement against the payor of the bribe, 
whereas emphasis in the past has been on the recipient, or the 
payee, of the bribe.
    Now, I think this is consistent with the crackdown on 
commercial bribery, because when you focus on the payor of the 
bribe, that is often a multinational company. Now, just think 
about it for a second. There are two choke points when it comes 
to bribery. One, is you can go after the bribe taker or you can 
go after the bribe giver. If you go after the bribe taker you 
are going to implicate government officials. You may implicate 
Party officials.
    But if you go after the bribe giver, you are going after 
GlaxoSmithKline, you are going after Eli Lilly, you are going 
after the multinational companies and you are going to score a 
lot of political points and it is going to have a lot of 
symbolic impact.
    So I think these two developments, the emphasis on 
commercial bribery, the focus on the payor of the bribe, create 
significant risks for U.S.-based multinationals doing business 
in China. But the risk that is created for the U.S.-based 
multinationals is not prosecution under Chinese law, it is 
prosecution under U.S. law under a law called the Foreign 
Corrupt Practices Act, which prohibits U.S. companies from 
paying bribes to foreign officials--this is a technical term, 
foreign officials--in order to obtain or retain business.
    Now, I am going to put the risks under the Foreign Corrupt 
Practices Act, due to the new emphasis on commercial bribery, 
into three categories, all involving state-owned enterprise. 
First, many multinational businesses sell their products to 
state-owned enterprises.
    State-owned enterprises are known to be highly corrupt. 
This is common knowledge in China and it is common for state-
owned enterprises both to make and receive bribes in doing 
business. Now, under the Department of Justice interpretation 
of the Foreign Corrupt Practice Act, every employee of a state-
owned enterprise is deemed to be a foreign official, from the 
most highest ranking to the lowest ranking clerical employee.
    So what is a very common scenario, which I am going to 
describe in a second, is going to create problems under the 
Foreign Corrupt Practices Act for multinational companies. 
Suppose a sales agent in a multinational company gives a 
kickback, a bribe, to a purchasing agent, which is a low-level 
employee in a state-owned enterprise to induce that purchasing 
agent to buy, say, chemicals or to, say, buy a radiation 
detector--a real case--from the multinational's China business 
entity.
    Although the purchasing agent is deemed to be of the state-
owned enterprise, is deemed to be a low-level employee, the 
Department of Justice could consider the employee to be a 
foreign official and could consider the payment of the kickback 
to be a bribe given to a foreign official in order to obtain 
business to complete the sale.
    That would be a violation of the Foreign Corrupt Practices 
Act and, in my opinion, with the crackdown on commercial 
bribery by China, more of these transactions will come to 
light, leading to more investigations under the Foreign Corrupt 
Practices Act by the Department of Justice.
    The Department of Justice monitors the media in China. They 
do not know about these kickback schemes. But if the Chinese 
authorities go after somebody, it gets in the media and the 
next day the Department of Justice contacts the U.S. company 
and demands an explanation.
    Now, of the 12 Foreign Corrupt Practices actions filed last 
year by the Department of Justice, 5 of them involved China, 
all of them in one sector, the healthcare sector. China has 
announced crackdowns on commercial bribery involving 
pharmaceutical companies. GlaxoSmithKline, which is based in 
England, has been the subject of a crackdown and they are the 
payor of the bribe.
    GlaxoSmithKline could well be investigated under the 
Foreign Corrupt Practices Act. It is a British company, but 
they issue securities on the New York Stock Exchange, which 
means that they qualify as an issuer under the Foreign Corrupt 
Practices Act as is thus subject to the anti-bribery, as well 
as the books and records provisions.
    China has now announced that it is going to go after 60 
pharmaceutical companies and investigate these companies for 
illegal payments, again, the emphasis on the commercial nature 
of the payment to get business and the emphasis on the payor. 
The pharmaceutical companies give kickbacks to doctors so that 
the doctors can prescribe medicines in China. Everybody in 
China knows this.
    The second category of risk is that multinational companies 
doing business in China deal with state-owned enterprises all 
the time and state-owned enterprises have a pervasive culture 
of what I call petty corruption, meaning that when 
multinational companies deal with procurement issues, that is, 
selling to state-owned enterprises, the state-owned enterprise 
employees will demand gifts.
    The Foreign Corrupt Practices Act prohibits the giving of 
``anything of value,'' so a job for a son, a job for a 
daughter, an internship for a son, that is something that would 
be a possible violation of the Foreign Corrupt Practices Act.
    Kickbacks in China demanded by state-owned enterprises 
[SOEs] are very common. They happen every single day. This type 
of petty corruption is tolerated by many people in China just 
as a cost of doing business.
    The third category of risk that I see for multinational 
companies as a result of these recent developments is that many 
multinationals must deal with third parties in China. 
Multinational companies--and this I think is one of the 
greatest areas of exposure.
    So for example, a multinational company doing business in 
China might form a joint venture [JV] with a local Chinese 
company, often the state-owned enterprise. In fact, certain 
industries are required by law for the multinational to form a 
JV.
    The multinational cannot go it alone in certain industries. 
So you form your joint venture with the state-owned enterprise 
as your local partner and the state-owned enterprise has been 
used to giving bribes for years.
    Now it is your joint venture partner and they continue to 
give bribes. When they give bribes, the multinational company 
is deemed to be liable for the actions of the joint venture, 
right, because that is your joint venture, it is in China, it 
is your agent, you are liable under the Foreign Corrupt 
Practices Act for the actions of the local partner.
    Finally, I want to say that multinational companies deal 
with so-called consultants, lawyers, public relations people, 
distributors all the time and a lot of these third parties pass 
through bribes. You get a bill from the third party consultant, 
a miscellaneous expense for $10,000. Now, what is that? Well, 
that is often going to be a bribe. That is something that many 
multinationals have to face, and that is dealing with third 
parties.
    So the crackdown on commercial bribery, I think, will 
create higher exposures for U.S.-based multinational companies 
doing business in China, not under Chinese law, because Chinese 
authorities really have no interest in destroying or really 
hurting GlaxoSmithKline. That's like cutting off your nose to 
spite your face. It is a big, huge company, earns tremendous 
revenues. They want to teach them a lesson but they do not 
really want to hurt them. However, under the Foreign Corrupt 
Practices Act the penalties can be extremely severe and the 
crackdown by China could bring the attention of the Department 
of Justice [DOJ] to Foreign Corrupt Practices Act cases.
    I am just going to close with one point, and that is that 
in my opinion this crackdown on corruption involving state-
owned enterprises, that really isn't going to change anything 
if there isn't going to be any fundamental reform of state-
owned enterprises. The issue in state-owned enterprises is that 
they enjoy monopoly power, monopoly power over something like 
petroleum involving billions of dollars.
    You have an official who makes--some of the top officials 
now actually make quite a bit of money, over $100,000, 
$500,000, maybe $1 million. But they look around and they know 
they control hundreds of millions of dollars, so it's the 
monopoly power, the relatively low salaries of executives in 
state-owned enterprises which creates what appears to be an 
irresistible temptation to engage in commercial bribery.
    Thank you.
    [The prepared statement of Mr. Chow appears in the 
appendix.]
    Mr. Liu. Thank you very much, Professor Chow.
    Thank you to all of our panelists for an extremely 
informative presentation covering various aspects of this very 
important issue. I wanted to allow some time for some 
questions. I know our staff have a few questions, and then we 
can open it up to the audience.
    I believe Anna Brettell from our staff, our Senior Advisor, 
has a question.
    Ms. Brettell. Yes, I have a question. Since 2010, Party and 
government organizations have issued regulations regarding the 
disclosure of officials' assets or the assets of their 
families, as well as information regarding family members who 
had gone abroad.
    Since the third plenum, there have been a couple of news 
articles with commentary by people who thought that Chinese 
officials should disclose their assets to the public, because 
the previous regulations just required officials to disclose 
their assets to the Party or to the organization within which 
they work.
    Do you think that there may be some regulations coming down 
the pike that would require certain officials, and also leaders 
of SOEs, to disclose their assets to the public? Anybody is 
free to answer.
    Mr. Fewsmith. It is really hard to imagine, it really is. 
This has been talked about in China for several years and we do 
not see anything on the public disclosure side. I guess I would 
have to be very surprised if you had anything serious. Of 
course, you could put assets under the name of relatives or 
something like that and get around such regulations, but I just 
find it hard to believe that you'll see anything serious in 
this regard. Andrew would like to disagree.
    Mr. Wedeman. No, actually, I fully agree. Taiwan actually 
implemented an assets disclosure law back in the 1990s and the 
Lifa Yuan, the parliament, was under a lot of pressure to do 
this. So they passed a sweeping law: All government officials 
must disclose their assets.
    But they did something very interesting. They then failed 
to fund an agency to read the forms. They gave them enough 
money to check off that the form was submitted, but nobody 
bothered to go through the form and actually check out if it 
was honest.
    I looked at hundreds of these. It was amazing. Poor 
Taiwanese politicians and officials had no money in the bank, 
because you could get a bank account under any name, and of 
course if there was no one to check who those accounts belonged 
to, you didn't have to list it.
    I don't know what the status of that is at this point, but 
as long as you require officials to disclose assets and you 
don't have public or governmental auditing of those 
disclosures, they're basically meaningless. Given that in the 
past few weeks there have been new regulations on the 
disclosure of things that had been on the Internet, like 
property records, I see them actually going the opposite 
direction to try and keep whatever--anything that is disclosed 
will be a state secret in order to protect the guilty.
    Ms. Brettell. I have another quick question. Daniel Chow, 
you started talking about how China was changing its focus of 
corruption investigations, going after the bribers instead of 
the receivers of the bribe. Do you see this as part of a trend 
where Chinese officials are targeting international or 
multinational companies [MNCs] or do you think that the Chinese 
officials are just going after corruption anywhere it rears its 
head?
    I read one article where someone argued that Chinese 
officials are not intentionally going after multinational 
companies, but that they are targeting these companies first as 
a trial--and that these efforts are for PR value. Do you have 
any thoughts on that?
    Mr. Chow. Yes. Well, I think that as I mentioned, when you 
think about it, there are two choke points when you deal with 
bribery. One is the recipient, to go after the recipient, and 
the other is to go after the giver of the bribe.
    Now, China has been focused almost entirely on the 
recipient of the bribe, but in 2012, in December 2012, is when 
the Supreme People's Court and the Supreme People's 
Procuratorate passed a new law in which they said that we're 
going to focus on the giver, or the payor, of the bribe. The 
remedies are actually quite serious and they talk about the 
possibility of criminal liability for certain bribes.
    Now, are they targeting or going unfairly after 
multinationals? Well, when you say ``unfairly,'' multinationals 
give bribes. I mean, they have been doing that for a long time 
because everybody says that this is how you have to do 
business. So in my opinion they do want to make examples of the 
multinationals and they're going after the multinationals.
    However, I do not think they really want to hurt the 
multinationals. What they do want, is they want to investigate 
a few people, maybe give them a jail sentence here or there, 
but they have no interest, in my opinion, in really harming the 
multinationals and taking away their business license.
    So I think they do want to go after the multinationals 
because people are so angry about corruption. This is an area 
that they have not focused on until recently, but in my opinion 
it is largely symbolic. I do not think that they are really out 
to hurt, shut down GlaxoSmithKline, shut down Eli Lilly. I 
don't think they're trying to do that. I think they're trying 
to make a symbolic point.
    Mr. Wedeman. They've actually been cracking down on 
commercial bribery since 2006. Lo and behold, in 2006 when they 
introduced the category, 80 percent of bribery cases were 
suddenly commercial bribery. They have obviously been 
prosecuting these cases for a long time, and my recollection is 
the original laws banning the paying of bribes for commercial 
purposes date to the mid-1990s, but it was not until 2006 that 
they started enforcing it.
    I think actually part of the reason why they're going after 
the MNCs is they saw all the cases being prosecuted by DOJ, and 
they said, ``Well, gee, if DOJ is catching all these people 
then maybe we should go after them, too.'' I agree with you 
that there is a political element in the current atmosphere, 
striking at foreign bribes and payoffs has political 
advantages.
    Mr. Protic. I have a question. Have Chinese journalists 
tried to take on corruption, and what have been the results?
    Ms. Li. That question requires a long answer, but I think 
many Chinese journalists are taking on corruption, and 
obviously they are also taking great personal risk for doing 
that. There have been quite a number of cases in recent months 
of journalists or citizen journalists including bloggers or 
Internet commentators who have been prosecuted for exposing 
official corruption. What is happening here is that the 
officials who are being personally vindicated when these 
reporters disclosed their involvement in corruption would take 
revenge and try to cover up themselves by using their power to 
silence or criminalize the reporters. These officials would 
turn the tables around and accuse the journalists of using 
bribery to get the scoop, for example, or using the information 
for some illicit purposes.
    So at the end of the day, it's the journalists who reported 
on corruption who might lose their jobs or serve jail time. But 
going after official corruption seems to be one of the areas 
where the younger generation of journalists and cyber 
commentators are willing to take the risk and they are doing 
some inventive investigative journalism in this area.
    Mr. Liu. Thank you. I just had one more question, I think, 
from our side of the table and then I wanted to open it up to 
the general public. But we have some U.S. policymakers in the 
audience, Hill staff, and I wanted to get your thoughts on how 
U.S. policymakers should be thinking about this issue, whether 
we should be in any ways supporting the Chinese leadership's 
campaign against corruption, given the fact that many of you 
have expressed skepticism regarding it and whether it is more 
for PR purposes. How should U.S. policymakers here on the Hill 
and in the U.S. Government be thinking about this issue, and 
how should they address it with the Chinese? Any of you?
    Mr. Fewsmith. I'm not sure. I haven't really thought this 
one through, but it seems to me this one might be one where the 
U.S. Government might actually want to be a bit more 
restrained. Corruption doesn't--except if they are 
systematically going after U.S. companies, that's one thing, if 
there's evidence of that sort of thing.
    But if they're trying to crack down on their own 
corruption, that's a good thing. If they fail in their 
campaign, well, that is a bad thing for China, for the Chinese 
Government, for the Chinese people. But I just can't see points 
of pressure, that it would be particularly--there are a lot 
bigger fish to fry than their own internal problems.
    Mr. Chow. I do want to say that the U.S. Government is 
cooperating with China and they are working together on 
implementing the UN Convention Against Bribery, which is 
different from what I've been talking about, the Foreign 
Corrupt Practices Act, or the U.K. Bribery Act, because the UN 
Convention allows for asset recovery, which means that you can 
recover the assets which have been illegally obtained.
    A lot of those assets have made their way to the United 
States as corrupt officials have bought real estate in the 
United States, and so the United States is working with the 
Chinese Government to recover some of those assets and maybe 
extradite some of these corrupt officials who think, I can get 
rich in China and I can retire to America. So there is some 
cooperation there. I certainly think that there should be 
further cooperation between the United States and China on 
these issues.
    Mr. Wedeman. I agree with Professor Chow. What I'm told, 
though, is the problem isn't that the United States isn't 
willing to go after assets and go for extradition, the Chinese 
side won't provide sufficient evidence to get the United States 
to seize assets and extradite people because they don't want to 
reveal the internal documents from their investigation.
    So what I was told by an agency of the U.S. Government, 
somebody who worked for it, they know that there are corrupt 
officials hiding here. They know that there is dirty money, but 
the Chinese will not go after it. It is fascinating to me that 
the Chinese have made no effort, as far as I know, to go after 
Bo Guagua, who is paying $50,000 a year to attend Columbia 
University and he has no income. His father is in jail, his 
mother is in jail. All of their assets have been seized. Where 
is he getting the money? I mean, the U.S. IRS could go after 
him, right? Somebody is paying his bills.
    Mr. Chow. This must have been part of the deal they struck, 
right, when they said we'll give you a life sentence and so 
forth. It was part of the deal, we're not going to go after 
your son. You can criticize various people in your trial. Maybe 
that was part of the deal.
    Mr. Wedeman. Perhaps. But that doesn't mean the United 
States couldn't go after him for tax evasion, right?
    Mr. Chow. That's true.
    Ms. Li. For U.S. lawmakers, the Chinese leaders' 
anticorruption slogan, whether it is for PR, or as a political 
tool to get rid of political rivals, could be an entry point to 
start a conversation about the systemic problems. The 
conversation could, for example, start with the point that it 
is good that the Chinese leaders said they wanted to get rid of 
corruption; now here are some of the changes that need to be 
made or measures to be taken, which we have learned are 
necessary to cleaning up government; and our experiences told 
us that there should be government transparency and power must 
be checked and balanced, et cetera.
    So a conversation that begins with anticorruption can lead 
to discussions of some of the structural problems. As Professor 
Fewsmith pointed out, the root of corruption is really in the 
system, the political structure, which is ultimately 
responsible for the continuing existence of incentives for 
abusing power, loopholes for evading accountability, et cetera.
    Vice President Joe Biden is going to China soon. We know 
that he had a nice rapport with President Xi Jinping, so maybe 
he could start the conversation with Xi: If you're serious 
about cleaning up corruption, look, here are some fundamental 
changes to make in order to deal with some of the root 
problems.
    Mr. Fewsmith. But I don't think that China has the least 
bit of interest in changing the system. In fact, I might hazard 
a guess that it has less interest in it now than it did 10 
years ago.
    Ms. Li. That is what I said.
    Mr. Liu. All right. Thank you. Oh, sorry. Go ahead.
    Mr. Wedeman. They're not unaware of how the United States 
went out and combated corruption. You go to Chinese 
universities, they have departments of Public Administration. 
They don't have political science departments, by and large. 
That is because that is the way we did it, we did it through 
civil service reform with resisting political reform to a 
certain extent. When did the era of machine politics end? The 
1970s in Chicago? Or perhaps not, if you look at Southern 
California politics.
    So I think on a technical level, Chinese scholars are aware 
of what should be done. But I would agree with Joe, the one 
thing you don't want to give up is the monopoly on political 
power held by the Communist Party. Until you get rid of that, 
you don't break the powers of the Party secretaries, you don't 
eliminate their ability to buy and sell offices, seize land, 
skim off from public works, et cetera, et cetera.
    Mr. Chow. Yes. Well, the committee that investigates 
discipline, which is another word for corruption, is controlled 
by the Communist Party, so the Party is investigating itself. 
So, of course, there is going to be a limit on what is going to 
happen in this campaign and how far up they will go. They're 
not going to go very far up.
    Mr. Liu. I want to give us the last 15 minutes for the 
audience to be able to ask any questions they may have for our 
excellent group of panelists. If you want to raise your hand. 
We have two microphones, one on this side of the stage and the 
other in the back there. This is being webcast and there will 
be a transcript, so you don't have to introduce yourself or 
give your affiliation. If you just want to ask a question, you 
are welcome to do so. Yes, go for it.
    Participant. I do have a technical question about how to 
measure corruption in China. You mentioned the [inaudible] 
measure. It seems to me this measure is pointless or useless. 
The reason is simple. Because although you have official 
statistics about how many officials are prosecuted or convicted 
every year, you just don't have another important statistic, 
that is how many officials are there in China. For example, 
about--the provincial-level corruption. You just don't know how 
many provincial officials are there in China. For example, you 
may offer a guess of several thousand or tens of thousands, but 
there is no public figures there. So I don't see why you count 
every year how many provincial officials are prosecuted because 
you don't know the total number. If you don't know the total 
number, what is the point to count how many are investigated 
every year? That's the question. Thanks.
    Mr. Wedeman. I don't think you're right. I think we do know 
the number. We do.
    Participant. Really? Okay. So how many?
    Mr. Wedeman. I haven't looked it up recently, but we 
probably do know. The percentage is obviously quite low in the 
number of people being prosecuted. The second reason why you 
look at the number, is you want to look at the number compared 
to the year before. I mean, that's an indicator of something. 
Yes, we don't know what percentage of officials are corrupt. We 
don't know that anywhere. I don't even want to suggest that 
perhaps some Members of the Congress are on the take, or 
bureaucracy. The only way we know is when they get caught. 
There is no way to know it.
    So the thing is, the objection that the data are no good, 
the alternative is, well, I do not want to look at hard data, I 
just want to make up my own opinion. So I think you've got to 
pay attention to the data. When you look at those numbers, 
basically I look at them and what they tell me is, in 
statistical terms, nothing has happened. They go up, they go 
down. I can't tell if it means anything, can't tell if it means 
nothing at all. So yes, you do. I mean, you can't just throw 
the numbers out because they're not perfect because it's the 
only data you have.
    Mr. Fewsmith. You do actually have data on the size of the 
[inaudible] every year will say so many people were convicted 
and the amounts are going up year by year. So we do have some 
data.
    Participant. But you don't have the percentage.
    Mr. Fewsmith. No, no. But that would be so small.
    Mr. Liu. Yes, the gentleman here in the third row.
    Michael. Hello. Michael is my name. Two questions. Perhaps 
you've touched on them, but I didn't hear it. One of them 
concerns corruption or bribery in the medical profession. You 
had mentioned the public health sector.
    And the second, is in the military. I understand that there 
is considerable bribery, including the purchasing of ranks. But 
I wonder if the panel would care to venture into either of 
those two minefields, the medical or the military.
    Mr. Chow. Well, let me just talk about, right now, that 
there is an ongoing emphasis on commercial bribery in the 
pharmaceutical sector so that we have 60--China just recently 
announced that they are going to start investigating 60 
pharmaceutical companies which have been involved in giving 
kickbacks to doctors who prescribe their medications.
    It's a sophisticated scheme which involves the use of 
travel agencies. So you set up a travel agency or you work with 
a travel agency and you submit to the travel agency false 
expense documents, or excuse me, the travel agency supplies 
those to you. You take them to your company and you get 
reimbursed. That's the money you get to give to the doctors for 
the kickbacks.
    The other thing that has happened is that doctors have been 
given trips to resort locations. You know, you get to go to 
Macau, for example, for the weekend for a medical conference 
and nothing happens except you play golf. So that is something 
that China is focused on.
    So actually, China is focused on three areas right now. 
Health care is a focus, banking is a focus because there is so 
much money there, and then real estate development is also a 
focus because the real estate speculation is so tremendous. So 
that's what's been going on in the pharmaceutical sector.
    So GlaxoSmithKline is currently being investigated. Four 
executives have been detained. Pfizer has been investigated by 
the Justice Department and they have reached a settlement with 
the Justice Department. Eli Lilly has been investigated. So 
that's one area in which there is quite a bit of activity that 
is going on in China.
    Michael. I meant to include the bribery that citizens 
throughout China have to pay in order to get access to medical 
care. Somebody needs surgery, you can't get that surgery unless 
the bribe reaches stage X.
    Mr. Chow. Well, also if you go to a hospital in China you 
know you're not going to get good treatment unless you give the 
doctor a red envelope. So nothing is being done about that as 
far as I know, because that involves just ordinary people. So 
as far as I know, that continues to go on.
    Mr. Wedeman. Corruption among the military is the black 
hole of information in China. The military controls its 
investigations internally. We see nothing, we hear nothing, 
except occasionally there is a very small number of cases. But 
one has to assume that there's quite a bit more.
    You can't be building up the military at the rate that they 
are building it up without a lot of corruption. Military 
procurement programs worldwide are infamous for $600 toilets, 
to go back to the 1980s in the United States. The military also 
controls a great deal of real estate, and that can be parlayed 
into some very lucrative deals. The fact that there are 
lucrative opportunities means that it is lucrative to buy and 
sell ranks. But how much, who, where, when? Good luck on that.
    Michael. And no indication that the Party is looking?
    Mr. Wedeman. The Party says it's cracking down on it, but 
the military handles it internally and it does not make 
Liberation Daily headlines.
    Mr. Liu. The gentleman back here.
    Participant. I'm glad this gentleman asked about the 
corruption in the military and medical. I think to talk about 
that we have to mention the organ harvesting that has happened 
in the last decade in China. There has been more and more 
evidence showing that this killing by demand has been happening 
there. This is called, by a professor in Biomedics at New York 
University, killing by demand. Probably tens of thousands of 
Falun Gong practitioners have been killed and organs have been 
sold for a huge profit. So that's my comment.
    I do have a question to the panel. Recently, the Chinese 
Communist Party has announced the closing of labor camps. A lot 
of the people applauded that. But actually from the victims 
that we know in China, the persecution of a lot of people, 
especially Falun Gong practitioners, has not been lessened at 
all. They simply change the forms of the persecution.
    For example, they changed the signs at the labor camps from 
The Center of Reeducation Through Labor to Legal Education 
Center, or they simply directly transported those people from 
labor camps to existing Legal Education Centers, or they put 
more people through a show trial to give them prison sentences. 
So actually the persecution has been even intensified.
    Because we talk about corruption, I think it has to do with 
the legal system. If the legal system simply cannot protect the 
basic human rights of the people, we certainly cannot expect 
that to prevent the corruption from happening.
    So my question to the panel is, what do you think would be 
the effective way to pressure the Chinese Communist regime to 
stop the religious persecution there, especially the 
persecution of the largest victim group, Falun Gong? Thank you.
    Ms. Li. It's very interesting that you pointed out that the 
to-be-abolished reeducation through labor [RTL] camps are just 
a matter of changing names. I think that is one of the dangers 
here because we know, since early this year, several provinces 
announced that they would phase out the use of RTL. As far as 
we could see, there have been fewer cases involving people 
being sent to RTL since early 2013.
    One obvious question to ask is: Where have those taken away 
by police been detained? The number of people being detained or 
deprived of their freedoms has not seemed to go down. There 
have been reports of petitioners, practitioners of Falun Gong, 
activists being detained. So they must have been kept somewhere 
other than the RTL.
    One thing we should watch closely is, while RTL may be 
abolished, it might be quietly replaced by other extrajudicial 
detention facilities, including what you mention as legal 
education centers, ``black jails,'' which is just any facility 
turned into makeshift detention cells by authorities to lock up 
people without any judicial oversight. It could be government 
offices, hotels, official guest houses, et cetera.
    The Chinese Communist Party Central Committee Third Plenum 
announced last month in its decision, under Article 34, that 
RTL will be abolished. It also announced that the government 
will put out a draft law authorizing another system of 
punishment called Illegal Behavior Education and Correction. 
This is an interesting development, but one has to watch very 
carefully what is shaping up as a replacement for RTL. 
Supposedly, those who are minor criminals should instead be 
sent to those correction centers. Such correction is supposed 
to be conducted in what the decision called ``communities.''
    What do they mean by ``community? '' Here lies another 
potential problem. The existing so-called ``legal study 
classes,'' the ``black jails,'' are handled by local officials. 
Is that what the government means by ``community correction 
centers? '' Who is going to be supervising those ``community 
correction centers'' operated by local officials? What judicial 
procedure is going to be put in place to oversee the trials and 
the verdicts of those to be sent to ``community correction 
centers? '' In other words, will the decision go through court 
procedures or be decided by local officials or police, like 
under the RTL system? These are some of the interesting things 
to watch. When it comes to depriving liberty, involving human 
rights questions, how are such decisions going to made and 
overseen? What will authorities do with those whom they 
previously would send to RTL?
    This year, we have seen that when police detain 
petitioners, or practitioners of Falun Gong, or rights 
activists, who would previously have been sent to RTL, police 
have put them either under criminal detention, charged with 
various, often trumped-up crimes, such as ``gathering a crowd 
to disrupt public order,'' or ``creating trouble,'' a crime 
that is like a sack in which police could practically put in 
anything. It seems that, in the place of RTL, authorities have 
increased the use of the criminal system.
    We also observed an interesting reversal of the course of 
prohibiting ``black jails.'' A couple of years ago, the state 
press and government officials openly talked about the problem 
of illegal detention in ``black jails.'' The government claimed 
that it was cracking down and persecuting people who ran 
``black jails,'' and it made a few scapegoats. But now 
government officials simply deny the existence of ``black 
jails.'' Chinese diplomats did just that when asked during the 
UN Human Rights Council's Universal Periodic Review in October 
and during the UN Committee on Rights of the Child's review of 
China's treaty obligations in September. Have ``black jails'' 
disappeared? Not really. They continue to operate even in the 
nation's capital. We have seen many reports of their existence.
    Mr. Liu. Any other questions from the audience? Oh, Susan, 
actually, back there in the red. Go ahead.
    Participant. I have something short, because I missed 
Professor Fewsmith in the beginning. It took me a long time to 
struggle down here.
    Mr. Fewsmith. I can repeat.
    Participant. Well, I'll get you afterward. But did somebody 
talk about the law of open government information, the 
regulation, I mean? Because underlying all of this is an 
absence of reliable information. I remember when I was watching 
that regulation in the beginning, the cases would be rarely 
accepted, or if they were accepted they would be thrown out for 
a small reason. So if somebody were watching that, it really is 
the--[inaudible], I think, in thinking that's the key to 
getting corruption under control. Anybody have thoughts on 
that?
    Mr. Fewsmith. I'll take a crack at that. I haven't done a 
lot of work on that, but I remember after hearing about them I 
went down to Guangdong, which is one of the places where it 
seems to have been implemented, and I had a long interview with 
somebody who had been involved in it. It was very clear that 
there was not much there. It just was not being implemented in 
a very concrete way, according to him.
    Participant. We did have a draft that went to various 
different provinces. One of them was a lady in central China 
who is famous for doing information laws. We went to these 
places and tried to do a clinical program in a couple of local 
law schools and help students with those kinds of suits. But it 
turned out to be that, nobody wanted--professors didn't want to 
prosecute that kind of suit. They felt they would be retaliated 
against. I think the fear is of retaliation. So maybe there is 
something to be done to address that.
    Mr. Fewsmith. Yes.
    Mr. Liu. Okay. I think we have time for one more question. 
This gentleman on the left here.
    Participant. You mentioned some of the proceeds of corrupt 
payments flowing offshore into U.S. real estate markets. I was 
wondering if any of the panelists might be able to discuss 
further some of the corporate and financial plumbing that is 
involved in facilitating and concealing the payments.
    Mr. Wedeman. That's a tough one. I have had descriptions of 
how the money flows. It's complicated. Who knows if the stories 
are true or not. The money flows in the same way that narcotics 
money flows. I was told that somebody could arrange to take a 
tractor trailer full of renminbi across the border into Hong 
Kong. That was the point where I felt that the conversation was 
going in a direction that I really didn't want to know much 
more.
    Money moves around the Cayman Islands, the Jersey Islands, 
the Bahamas, lots of shell companies. Good lawyers with not-so-
great ethics will get you money moved around the world. But 
yes, I assume there are multiple subterranean channels.
    Mr. Chow. But the U.S. Government, the U.S. Attorney's 
Office, as well as the Department of Justice is very good at 
asset recovery if they have some information, but they need to 
have more information that they are getting from the Chinese 
Government in order to go after these assets.
    Mr. Liu. Well, I think we have gone over by a few minutes. 
We started a little late. So I wanted to end the proceeding 
here and thank the witnesses, each of you, for your excellent, 
insightful presentations and responses to the questions, and 
thank the audience for coming today.
    This roundtable is adjourned.
    [Whereupon, at 4:41 p.m., the roundtable was adjourned.]
                            A P P E N D I X

=======================================================================


                          Prepared Statements

                              ----------                              


                  Prepared Statement of Andrew Wedeman

     Xi Jinping's Anti-Corruption Campaign and the Third Plenum\1\

                           november 21, 2013
    A year ago, Xi Jinping assumed the office of General Secretary of 
the Communist Party of China (CCP) in the wake of the most serious 
corruption scandal since 2006 when Shanghai Municipal Party Secretary 
Chen Liangyu was caught diverting upwards of Y40 billion (US$4.8 
billion) from the municipal pension fund to speculative real estate and 
financial investments. In February 2012, Wang Lijun, who had headed the 
Chongqing Public Security Bureau until being abruptly ``re-assigned'' 
four days earlier to head the city's educational and environmental 
offices, fled to the US Consulate in Chengdu allegedly in hopes of 
obtaining political asylum in the United States. Wang's failed 
``defection'' brought to light allegations that Politburo member and 
Chongqing Municipal Party Secretary Bo Xilai's wife Gu Kailai had 
murdered an English businessman in an out of the way Chongqing hotel. 
In the weeks that followed, the Chinese rumor mill buzzed about 
possible coup plots involving Bo and the head of the party's legal and 
security committee Zhou Yongkang. Wang, Gu, and Bo was subsequently 
convicted of bribery, embezzlement, and abuse of power, with Wang also 
being convicted of treason. Coming hard on the heels of a scandal 
involving the former Minister of Railways Liu Zhijun, the Bo case put 
Xi under tremendous pressure to launch a major anti-corruption campaign 
as soon as he entered office. In his first speech as CCP General 
Secretary, Xi declared:
---------------------------------------------------------------------------
    \1\ Originally posted by the China Policy Institute - University of 
Nottingham, available on line at http://blogs.nottingham.ac.uk/
chinapolicyinstitute/2013/11/15/xi-jinpings-anti-corruption-campaign-
and-the-third-plenum/.

        There are many pressing problems within the Party that needs to 
        be resolved urgently, especially the graft and corruption cases 
        that occurred to some of the Party members and cadres, being 
        out of touch from the general public, bureaucracy and undue 
        emphasis on formalities--they must be resolved with great 
        efforts. The whole Party must be vigilant against them. To 
        forge iron, one must be strong. Our responsibility is to work 
        with all comrades in the party, to make sure the party 
        supervises its own conduct and enforces strict discipline . . . 
---------------------------------------------------------------------------
        (CNN, 11/15/2012).

    In a subsequent address to the Politburo, Xi doubled down, saying:

        A mass of facts tells us that if corruption becomes 
        increasingly serious, it will inevitably doom the party and the 
        state. We must be vigilant. In recent years, there have been 
        cases of grave violations of disciplinary rules and laws within 
        the party that have been extremely malign in nature and utterly 
        destructive politically, shocking people to the core. (NYT, 11/
        19/2012).

    Strong words, however, only have meaning if they are translated 
into concrete actions. As the party approaches its Third Plenum a key 
question is how vigorously has Xi attacked high level corruption over 
the past year?
    Measuring the intensity of an anti-corruption campaign is 
difficult. Absent any way of measuring the actual rate of corruption it 
is impossible to know if inroads are being made into the number of 
officials who are corrupt. It is possible, however, to crudely track 
changes in the intensity of enforcement by looking at changes in the 
reported number of officials detained. Figures released in October 2013 
on the number of corruption cases ``filed'' by the Procuratorate 
suggest that the total number of cases was up about 3.8% in the first 
eight months of 2013 compared to the same period in 2012. Other figures 
released by the Procuratorate for all of 2012, however, reported a 5.4% 
increase in cases filed that year and a 6.4% increase in the number of 
individuals charged. If the two sets of data are comparable, which they 
may not be, the more recent data would suggest that Xi's anti-
corruption campaign has not produced much of an increase in the number 
of officials charged with corruption. Moreover, past experience 
suggests that using partial year figures to extrapolate totals for the 
year tends yield overestimates. It thus seems likely that Xi's new 
campaign will not produce a significant increase in the number of 
corruption cases filed but will instead yield numbers approximately 
equal to those we have seen over the past decade (see Figure 1).


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    Numbers, however, tell only part of the story. To more fully assess 
Xi's anti-corruption campaign, one must look at who has been targeted. 
According to press reports, thus far Xi's campaign has claimed eight 
``tigers''--high level, high profile officials (see Table 1). Eight 
senior officials is about the number of senior officials indicted on 
corruption charges in recent years (five were indicted in 2012, seven 
in 2011, six in 2010, and eight in 2009). Xi's campaign has, however, 
also snared a number of senior executives of major state-owned 
companies, including over half a dozen executives of the China National 
Petroleum Corp (CNPC) and its subsidiaries Sinopec and PetroChina, as 
well as a number of mid-level officials and business persons linked to 
Li Chuncheng, a former Deputy Secretary of the Sichuan Provincial Party 
Committee. Arrests of executives, in fact, are one of the few aspects 
of the current campaign that set it apart from previous drives.


----------------------------------------------------------------------------------------------------------------
                                              Table 1   Big Tigers
-----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Liu Tienan                      Vice Minister State Development and Reform Commission
----------------------------------------------------------------------------------------------------------------
Wu Yongwen                      Deputy Director Hubei People's Congress Standing Committee
----------------------------------------------------------------------------------------------------------------
General Gu Junshan              Deputy Commander PLA General Logistics Department
----------------------------------------------------------------------------------------------------------------
Huang Sheng                     Vice Governor Shandong
----------------------------------------------------------------------------------------------------------------
Ni Fake                         Vice Governor Anhui
----------------------------------------------------------------------------------------------------------------
Tian Xueren                     Vice Governor Jilin
----------------------------------------------------------------------------------------------------------------
General Xi Caihou               Vice Chairman PLA Central Military Commission
----------------------------------------------------------------------------------------------------------------


    Many of those detained have direct or indirect ties to former 
Politburo Standing Committee member Zhou Yongkang (see Figure 2). A 
native of Wuxi in Jiangsu, Zhou was trained as a petroleum engineer in 
the mid-1960s and worked in the Liaohe oilfields in Liaoning until he 
was appointed Vice Minister of the Ministry of Petroleum Industry in 
1983. Five years later, he moved to CNPC, servicing as deputy party 
secretary and then party secretary before becoming its General Manager 
in 1996. A year later, he was elected a full member of the 15th CCP 
Central Committee. In 1998, he was appointed Minister for Land and 
Resources but then moved to Sichuan to become secretary of the 
provincial party committee in 1999. Four years later, he returned to 
Beijing when he was appointed Minister for Public Security and became a 
member of the Politburo at the 16th Party Congress. In 2007, he left 
the Ministry of Public Security to become the Secretary and then 
Director of the Central Committee's powerful Politics and Law 
Commission, a position that put Zhou in charge of China's internal 
security and police apparatus, and was elected a member of the 
Politburo Standing Committee, positions he held until the 18th Party 
Congress in 2012, at which point he retired. In the course of his 
career Zhou apparently built up a sprawling network of proteges in the 
oil, resources, and security apparatus. In the spring of 2012, he was 
rumored to be connected to Bo Xilai and his campaign to gain a seat on 
the Politburo Standing Committee. Today, many see Zhou as a threat to 
General Secretary Xi Jinping's efforts to consolidate power within the 
leadership. It is widely speculated, therefore, that Xi's anti-
corruption campaign is actually a cover for a major drive against Zhou 
and his allies. Some observers have, in fact, linked the announcement 
of a new National Security Council as Xi's attempt to bypass Zhou's 
allies in the party's Law and Politics apparatus.



[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    Targeting Zhou and his allies is, however, a potentially dicey 
proposition because Zhou has ties to Zeng Qinghong, a former member of 
the Politburo Standing Committee, who is said to have played a major 
role in Zhou's accent to the inner leadership. Zeng, who worked in the 
petroleum sector before moving to the Shanghai municipal party 
committee in 1984, is considered be to one of Jiang Zemin's ``Shanghai 
Gang,'' a group that also includes former Politburo Standing Committee 
member Huang Ju and former Shanghai party secretary Chen Liangyu, the 
latter now serving an eighteen years sentence after being convicted of 
corruption in 2008. Should Xi opt to take down Zhou, there could be a 
considerable risk that he would foment a major political backlash lead 
by some of the party's most powerful elders.
    If part of the current anti-corruption campaign is being driven by 
Xi's need to consolidate his power within the leadership and respond to 
public pressures for a new drive against corruption unleashed by the Bo 
case, the dynamics of the campaign have been driven in part by forces 
that Xi does not control. Over the past several years, social media has 
played an increasingly important role in exposing corrupt officials. 
During the early days of the current campaign, reports on the internet 
fingering officials for owning multiple luxury apartments, sporting 
luxury watches, and engaging in immoral activity led to a series of 
quick resignations, sackings, and arrests. Most of those exposed on the 
internet were mid or low-level officials. Nevertheless, social media 
had made it impossible for these sorts of officials to quickly sweep 
allegations against them under the rug and quash attempts to expose 
their wrongdoing. The threat of uncontrolled outings clearly spooked 
the regime, which responded with draconian regulations that would 
criminalize those who spread ``rumors'' on the internet. Thus far, it 
appears that the new rules have had a chilling effect and there has 
been a notable dropping off in social media reports of corruption.
    At the Third Plenum in November 2013, corruption received 
surprisingly little attention. Xi did not take the opportunity to 
report dramatic progress or to unveil bold new measures designed to 
curb corruption. Instead, he opted to stress economic reform and 
announced reforms of the judicial system designed to increase its 
independence from the political establishment. The lack of attention to 
corruption during the plenum likely signals Xi's anti-corruption 
campaign has run its course and that it will be allowed to quietly die 
down. Based on the available evidence, the campaign does not seem to 
have made noticeable inroads into China's corruption problem. A lack of 
dramatic progress is, ultimately, hardly surprising. A war on 
corruption is by definition a protracted fight in which the regime 
``wins'' by preventing corruption from worsening. The officials caught 
in the current campaign did not become corrupt under Xi. On the 
contrary, most had been on the take for years or even decades. As such, 
Xi is now fighting to clean up a mess created under his predecessors, 
neither of whom made great strides toward eradicating corruption.
                                 ______
                                 

                 Prepared Statement of Daniel C.K. Chow

  China's Crackdown on Commercial Bribery, Corruption in State-Owned 
Enterprises, and the Impact on U.S.-based Multinational Companies Doing 
                           Business in China

                           november 21, 2013
    The recent high profile crackdown on commercial bribery by China 
may result in increased legal risks to U.S.-based multinational 
companies (MNCs) doing business in China. Commercial bribery, further 
defined below, often involves a state-owned enterprise (SOE) as one of 
the actors in the bribery transaction. China's SOEs are known for their 
culture of corruption in which SOEs both give and receive bribes as a 
matter of course in doing business on a daily basis. As part of the 
crackdown on commercial bribery, China has issued an important legal 
interpretation that emphasizes enforcement against the payor of a 
bribe. This could indicate a shift in emphasis because China has been 
primarily concerned so far with focusing on the recipient of the bribe. 
A focus on the payor of the bribe could expose MNCs to liability 
because MNCs are often the payor of bribes to SOEs and government 
officials. Although this crackdown is not publicly aimed at U.S. and 
other foreign multinational companies, this crackdown creates a 
significant increased risk for U.S.-based multinational companies doing 
business in China. The highest risk is not in China's prosecution of 
its anti-bribery laws, but in prosecution by the U.S. Department of 
Justice and the Securities and Exchange Commission for violations of 
the Foreign Corruption Practices Act (FCPA),\1\ a federal law that 
prohibits the giving of bribes by U.S. companies to foreign officials 
for the purpose of obtaining or retaining business. As further 
explained below, the crackdown by Chinese authorities will expose 
practices, now hidden, which might be considered by the United States 
to violate the FCPA and result in an FCPA investigation. The United 
States regularly monitors the Chinese media and any serious national 
crackdown will draw the attention of U.S. authorities.
---------------------------------------------------------------------------
    \1\ See 15 U.S.C. Sec. Sec.  78m et seq. (2006).
---------------------------------------------------------------------------
                   i. crackdown on commercial bribery
    President Xi Jinping became China's head of state on March 14, 
2013, a once in a decade transition of power. On November 18, 2002, he 
warned that ``corruption could kill the party and ruin the country,'' a 
sentiment reiterated repeatedly at local levels. President Xi warned 
that he would target ``tigers and lilies''--high level as well as low 
level officials. As part of this anti-corruption campaign, China seems 
now to be intensifying its crackdown on commercial bribery. On November 
20, 2008, the Supreme People Court's and the Supreme People's 
Procuratorate jointly issued an interpretation focusing on commercial 
bribery \2\ and, more recently, on December 26, 2012, both institutions 
also issued an opinion, effective as of January 1, 2013, focusing 
criminal prosecution of the payor of the bribe.\3\ China also recently 
announced a sweeping investigation of the pharmaceutical sector 
focusing on MNCs giving bribes to doctors and administrations of state 
owned hospitals for the purpose of influencing the doctors and 
officials to buy their pharmaceuticals. Local officials in Guangdong 
Province, a regional economic powerhouse, publicly announced their 
intention to crack down on commercial bribery, among other economic 
crimes.
---------------------------------------------------------------------------
    \2\ Opinions of the Supreme People's Court and the Supreme People's 
Procuratorate on Certain Issues concerning the Application of Law in 
Handling Criminal Cases of Commercial Bribery (effective on November 
20, 2008).
    \3\ The Interpretation of the Supreme People's Court and the 
Supreme People's Procuratorate of Several Issues Concerning the 
Specific Application of the Law in the Handling of Criminal Bribery 
Cases (effective as of January 1, 2013).
---------------------------------------------------------------------------
    In this context, commercial bribery refers to a transaction in 
which the payor, usually a business entity, gives the recipient a bribe 
in order to obtain business or some other illegitimate business 
benefit. In many cases, both of the actors, the payor and the 
recipient, are business entities. These are business-to-business 
corruption cases or commercial bribery, an area of recent focus by 
China, which differs from government corruption. An example of 
commercial bribery is when an employee of one company that sells 
commodities gives a kickback to an employee of a company that purchases 
commodities. Another example is when the payor of the bribe gives cash 
to a vice director of the Ministry of Railways in order to obtain 
business, such as a contract to build a high speed train. This is also 
the gift of a bribe in order to obtain business so is considered to be 
commercial bribery. The key element in commercial bribery is the use of 
the use of a bribe to obtain business or another illegitimate benefit 
related to business. Contrast this type of transaction with a 
transaction in which both actors are government entities such as a 
state oil company and a state bank. The bank lends money to the state 
oil company to buy a foreign oil field but the loan is for a greater 
amount than the market value of the oil field. An official from the 
state-owned oil company keeps the extra amount of the loan and deposits 
the amount in his private offshore account. This would be an example of 
government graft or corruption. While China has focused on government 
graft, the Chinese government appears to now be focusing in addition on 
commercial bribery.
           ii. commercial bribery and state-owned enterprises
    Since commercial bribery often involves a company-to-company 
transaction, an MNC and an SOE are often involved in the transaction. 
An MNC is involved on one end as the payor of the bribe and an SOE on 
the other end as the recipient of the bribe. Several factors indicate 
that with China's increased attention on commercial bribery, U.S.-based 
MNCs will be exposed to additional legal risk. As noted earlier, the 
greatest risk is not with the prosecution by Chinese authorities of its 
anti-bribery laws, but with exposure under the Foreign Corrupt 
Practices Act. There is increased exposure for the following reasons.
A. State-Owned Enterprises and the Business Culture of Corruption
    State-owned enterprises are ``business entities established by 
central and local governments and whose supervisory officials are from 
the government.'' \4\ Most people in China believe that SOEs commonly 
give and receive bribes when they do business. Most people in China 
accept petty corruption by SOEs and other government officials as a way 
of doing business. Many MNCs must constantly do business with SOEs 
because SOEs dominate in all core industries in China: petroleum and 
gas, financial services, including banking and insurance; automotive; 
electric, gas and water; real estate development, metals, mining, and 
telecommunications. When SOEs engage in procurement (i.e. buying 
commodities) or selling commodities, they often use bribes, gifts, and 
favors as part of the transaction. When MNCs deal with SOEs, MNCs often 
face demands for payments, gifts, and favors made by low level or mid-
level employees at SOEs. For example, in a commercial bribery 
transaction, a sales agent from an MNC might feel pressure to give a 
kickback or bribe to the purchasing agent of an SOE to induce the 
purchasing agent to place an order to buy products from the sales agent 
and the MNC. From the perspective of the purchasing agent of the SOE, 
it makes little difference whether the agent places an order with any 
particular supplier since the purchasing agent, a low level employee, 
receives a fixed salary. The kickback or bribe serves as an inducement 
to the purchasing agent to place the order with the MNC because it 
gives the purchasing agent extra cash.
---------------------------------------------------------------------------
    \4\ State Owned Enterprises in China: Reviewing the Evidence, OECD 
Working Group on Privatisation and Corporate Governance of State Owned 
Assets 3 (Jan. 26, 2009)
---------------------------------------------------------------------------
    Under the FCPA, U.S. companies are prohibited from giving bribes to 
``foreign officials'' \5\ for the purpose of obtain or retaining 
business. The U.S. Department of Justice considers all employees of 
SOEs from the highest ranking to the lowest to be ``foreign 
officials.'' This could well mean that a kickback or bribe given by an 
MNC to a SOE will be viewed as a bribe to a foreign official and 
trigger liability under the FCPA. With the increased emphasis on 
commercial bribery and on payors of bribes, Chinese authorities might 
begin an investigation against the MNC for paying bribes. This could 
draw the attention of the U.S. Department of Justice, which could then 
begin an investigation under the FCPA.
---------------------------------------------------------------------------
    \5\ See 15 U.S.C. Sec. Sec.  78dd-1(a)(1), 78dd-2(a)(1), 78dd-
3(a)(1).
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B. ``Anything of Value''
    The FCPA prohibits the giving of not just money but ``anything of 
value'' \6\ in order to obtain or retain business. Under China's own 
anti-bribery laws, a payor must give ``money or property'' to be guilty 
of a bribe.\7\ In China's current and traditional business culture, the 
giving of favors is viewed as a common form of doing business; many 
employees in SOEs and in MNCs may not view giving a non-monetary gift 
or a favor for a family member--such as giving an internship to the 
daughter of a government official--as doing anything illegal or wrong, 
but the same type of action might be viewed by the U.S. Department of 
Justice as giving something of value in violation of the FCPA.
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    \6\ See 15 U.S.C. Sec. Sec.  78dd-1(a), 78dd-2(a), 78dd-3(a).
    \7\ See, e.g., Article 389 PRC Criminal Law (1997) (``Whoever, for 
the purpose of securing illegitimate benefits, gives money or property 
to a state functionary shall be guilty of offering bribes.'').
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C. Dealing with Third Parties
    Many MNCs find that they must do business with third parties or 
hire third party independent contractors on a regular basis in China. 
In many instances, a U.S.-based MNC sets up a joint venture in China 
with an SOE as the joint venture partner. In this context, the joint 
venture is a China business entity formed under Chinese law and is 
jointly owned by the MNC and the local partner, often an SOE. The MNC 
contributes capital and technology and the local partner contributes 
its knowledge of the local market and its business and official 
connections. In some industries, joint ventures are required by law; an 
MNC is not permitted to set up a wholly foreign owned subsidiary but 
must partner with a local Chinese company. If the local partner is an 
SOE, the SOE might be used to giving bribes as part of how it did 
business in the past and once it becomes a partner in the joint 
venture, the SOE local partner might continue to give bribes to secure 
business from other SOEs or from government entities. This is exactly 
what happened to RAE Systems, a Delaware corporation, which formed 
several joint ventures with local SOEs. RAE had a majority interest in 
the joint ventures while the SOEs had a minority interest. The joint 
venture made chemical and radiation detectors and sold them to various 
government bureaus and departments. Before they entered into the joint 
ventures with RAE, the Chinese SOEs were paying bribes (kickbacks) to 
government bureaus to obtain sales. After they entered into the joint 
ventures, the Chinese employees from the SOEs continued to give 
kickbacks not only in money but in the form of jade, fur coats, kitchen 
appliances, and business suits. The actions of the joint ventures (as 
the agents of RAE) are attributable to RAE, the parent company under 
the FCPA. The U.S. Department of Justice intended to charge RAE with 
violations of the FCPA but the parties settled the case.
    MNCs also have a common practice of hiring third parties as 
consultants for their China business entities. These third parties can 
be business consultants, public relations firms, private investigation 
companies, or lawyers. These third party consultants have been known to 
make payments (bribes) to government officials on behalf of the MNC and 
report the bribe to the MNC as a miscellaneous expense. The FCPA has a 
provision that giving money or anything of value to a third party 
knowing that the money will be given to a foreign official can 
constitute an FCPA violation.\8\
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    \8\ See 15 U.S.C. Sec. Sec. 78dd-1(3), 78dd-2(a)(3), 78dd-3(a)(3).
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        iii. consequences on the crackdown on commercial bribery
    China's recent crackdown on commercial bribery could expose MNCs to 
increased legal exposure, but the highest exposure does not lie in 
China's enforcement of its laws against MNCs but in the U.S. Department 
of Justice's enforcement of the FCPA against MNCs. The Chinese 
government sees a political and strategic value in cracking down on 
commercial bribery. In any bribery case, there are two choke points: it 
is possible to pursue the payor/giver of the bribe and also the 
recipient/taker of the bribe. So far China's emphasis has been on the 
recipient/taker of the bribe. In many cases, the recipient of the bribe 
can be a government official and a member of the Communist Party. In 
pursuing the recipient of the bribe, the Communist Party risks 
embarrassment as its own members are exposed as corrupt. A related risk 
to the CPC is any Party member that is accused of receiving a bribe 
might implicate other Party members higher in the Party order. From the 
Party's perspective, pursuing a commercial bribery case against an MNC 
carries fewer political risks but will also serve a political and 
symbolic purpose in demonstrating to the public that the Party is 
serious about cracking down on corruption. However, the CPC does not 
wish to inflict serious penalties on MNCs. Although the CPC might 
pursue individual executives within an MNC and even impose prison 
sentences on such executives, the CPC is unlikely to shut down the 
MNCs. Many MNCs have invested substantial capital and technology in 
their foreign-invested enterprises in China. The CPC realizes that 
shutting down or inflicting serious losses on MNCs and disrupting their 
businesses will ultimately harm China's economy and China's own long 
term interests. On the other hand, the penalties under the FCPA can be 
significant and can include terms of imprisonment for U.S.-based 
directors or officers of the company. The U.S. Department of Justice 
can also impose heavy monetary penalties. In recent cases, the U.S. 
Department of Justice settled an FCPA investigation with Total SA, a 
French company, for $398 million and with JGC Corp. for $218.8 million. 
In addition, any U.S. company that is the subject of an investigation 
by the U.S. Department of Justice could suffer immediate adverse 
publicity.
                             iv. conclusion
    The increased emphasis on enforcement against commercial bribery, 
which often involves an SOE as the recipient of the bribe, and a shift 
in emphasis on enforcement against the payor of the bribe (as opposed 
to the recipient) might pose significantly higher risks to MNCs doing 
business in China. The highest risk is not prosecution under China's 
anti-bribery laws for commercial bribery but prosecutions under the 
FCPA, which has much stiffer monetary penalties and also the 
possibility of imprisonment for U.S. executives involved directly or 
indirectly in the giving of the bribe.