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How To Launder Money Like a Chinese Billionaire

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Robber barons built America, but were brought to heel following scandals and evidence of corruption and abuses. If muckrakers and gutsy leaders hadn't taken them on a century ago, the place might have become another banana republic without the bananas.

Fortunately the lessons of history have not been forgotten. In 2012, China's President Xi Jinping launched a sweeping anti-corruption campaign to clean up the country's culture of graft.

The man in the middle, as head of the Central Commission for Discipline and Inspection, is China's sixth most powerful man, Wang Qishan, who happens to be a historian. His favorite television show is House of Cards, the Netflix series about Machiavellian tactics in Washington, and two years ago Wang suggested to his colleagues that they read Ancien Regime and the French Revolution to underscore that only reforms can derail insurrections.

Without reform, China will, and should, be a no-go zone for businesses. Without reform, the Chinese will suffer too, their wealth concentrated in a few undeserving hands and their economy looted by officials on the take who hide billions abroad.

According to Global Financial Integrity, a non-profit group that traces illicit flows of capital, US$1.06-trillion left China between 2002 and 2011 despite tough currency controls. This is equivalent to China's GDP in 2002 and roughly US$10-billion a month.

Recently, a leaked report from China's central bank estimated 18,000 officials and employees of state-owned enterprises pilfered US$123-billion and fled to the U.S., Canada, Australia and the Netherlands. Recouping these assets will be on the agenda, but efforts must focus on removing the culprits at home to create a meritocracy and deploy the nation's capital to build wealth, not to build political buildings or bridges that line politicians' pockets.

"Our current task is to alleviate the symptoms [of corruption] in order to give us time to eventually cure the underlying disease," said Wang in a speech late last year.

The anti-corruption crackdown began in 2012 following the high-profile arrest, then conviction, of Wang and President Xi's colleague, Bo Xilai, for bribery and corruption and Bo's wife for murder.

In 18 months, nearly 250,000 officials and others in governments and state-owned enterprises have been held for detention or charged. Some 70 have died or committed suicide while in custody.

In recent weeks, investigators have shocked the world with the detention of Zhou Yongkang, former head of PetroChina and the secret service; oil executives (with Canadian connections); the country's most popular TV anchor (taken into custody just before the evening's broadcast) and with money laundering allegations about the Bank of China itself.

Investigators are unraveling schemes that embezzle, launder and export bribes, kickbacks or the proceeds of crime.

Some involve bribing a bank officer to take a deposit then wire funds offshore.

Another option is to drive truckloads of cash into the backdoor of friendly casinos in Macao where the cash is blended then paid out, minus a fee, as gambling winnings in another currency.

Macao and Hong Kong are semi-independent jurisdictions called Special Administrative Regions of the People's Republic of China. Macao's casinos enjoy six times' the gaming revenue of the Las Vegas Strip and Hong Kong has obliging banks. A more appropriate label for the two would be the Special Laundering Regions of China.

In China, crooks don't have to go to the casino because intermediaries called "junkets" will swap Yuan for gambling chips that can be cashed into Hong Kong or Macao currency at the casino then wired by Hong Kong banks to tax havens or accomplices offshore.

The goal is to buy a condo or luxury goods with funds from a trust managed by a shell company in Grand Cayman, owned by another trust in Guernsey with an account in Luxembourg managed by a Swiss banker who doesn't know who the owner is.

More devious schemes by big shots have moved tens of billions offshore without handling cash or involving banks. For instance, money managers are paid inflated fees to invest Chinese corporate funds abroad. The catch is that half of the fees are paid out to shell companies owned secretly by Chinese officials or paid out to buy them condos or art.

Other tactics involve bribing officials or executives by selling assets at a loss so they can pocket immediate profits; overpaying for offshore assets in return for kickbacks or wiring cash to "fronts" owned by officials or their children who wash the bribes as though they were legitimate income.

China isn't the only country with capital flight problems. Russia is in second place with US$880-billion in illicit capital flows between 2002 and 2011. But whatever the source, Canada must stop being naïve and aiding and abetting such crimes.

Australia got smart years ago, and requires foreign buyers of real estate or companies to fully disclose their identities and obtain permission from the federal government. In Canada, there are no restrictions or disclosure requirements with the result that Toronto and Vancouver housing costs have been driven up artificially due to frenzied buying by anonymous foreigners. This is why Toronto has 130 high-rise residential projects or as many as New York City with dramatically more people and immigrant arrivals.

The China crackdown has just started and will reach into Canada and other "host" countries.

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