-Caveat Lector- from: http://www.aci.net/kalliste/ <A HREF="http://www.aci.net/kalliste/">The Home Page of J. Orlin Grabbe</A> ----- ------------------------------------------------------------------------ Today's Lesson From Big Dragon by Daniel Burstein and Arne De Keijzer It is a hot, humid August night in Beijing in 1995... We have invited the editors of a new Chinese magazine called Strategy and Management to dinner... Over drinks, we peruse the contents. It becomes clear that this is a magazine with a very distinct edge. The first photograph accompanying the first article is one of Vietnam War vintage: the famous image, rarely seen these days, of Phan Thi Kim Phuc, a nine-year-old girl running naked from a village after an American napalm bomb attack. This picture, worth much more than the proverbial thousand words in identifying the magazine's editorial stance, is accompanied by other oddities, the most incomprehensible of which is a twenty-three-page article by Lyndon LaRouche, the American political extremist (once of the "Left," now of the "Right"), who argues that China's present course of economic reform--and foreign investment in particular--will destroy the country. This we find truly surprising. Over dinner, we ask: "...Give us an example of one of the trends about the future you have identified." The reply was instantaneous and sure: "That the United States will become the enemy of China." ===== Money Laundering Chinese Cash Funneled Through Small California Bank by Tim Golden and Jeff Gerth Late in the spring of 1996, federal bank examiners discovered that the central bank of China was moving tens of millions of dollars into the United States, depositing it in a maze of accounts controlled by a fast-rising Chinese executive at a small California bank. The regulators struggled for almost two years to understand the transactions, guessing finally that they might have been intended to hide the private fortunes of Chinese officials. They turned their findings over to the Justice Department, the State Department and the FBI, but officials said no legal or diplomatic action was ever taken in the case. But only in recent months, prodded by Congressional investigators, have U.S. officials started fitting together some of the most significant pieces of the story. The banker in California, Nan Nan Xu, turned out to have a series of ties to a Chinese military officer who has been identified as the conduit for at least $300,000 sent from the military's intelligence chief to a Democratic fund-raiser, officials said. And almost half of the $92 million that eventually flowed from China into the California bank, Far East National, came from a Hong Kong investment firm controlled in part by two men who American officials say have been associated with Chinese intelligence agencies. The purpose of the money remains a mystery. Some federal officials now suspect that it might have been intended to pay for Chinese intelligence operations. Others believe that it could have been amassed for political contributions or to purchase sensitive military technology. And officials do not rule out that it could be related to legitimate business dealings. But a close look at the case, based on interviews and confidential Government documents, shows that the Clinton administration was slow to pursue or even pull together the disparate leads uncovered over several years by different agencies. The discovery of the Chinese money flow was the sort of information that typically sets off alarms among government investigators and the bank examiners alerted Justice Department officials early on. But officials said the department initially gave the matter only a cursory review, even as it was separately searching elsewhere for evidence of Chinese contributions to American political campaigns. Federal prosecutors in Los Angeles examined the case last year, but then referred it back to the Justice Department in July, asking that its international-affairs section determine whether the transactions might involve criminal activity in China. A law enforcement official said the case was investigated further, but declined to say how. A spokesman for the Justice Department, Myron Marlin, would not comment on the inquiry but he said the department was "vigorously pursuing every credible allegation that has come our way." The State Department also agreed last year to consider raising the issue with officials in Beijing, but then decided against it, officials said. The FBI -- which had helped Ms. Xu, a Chinese national, to gain legal residency in the United States in 1992 and then tried unsuccessfully to recruit her as an informer -- paid relatively little attention to her in the years when her banking activities became suspect, several officials said. "She just fell off the screen," one federal investigator familiar with the case said. Critics of the administration contend that the handling of the inquiry reflects a pattern of sluggish government responses to indications of Chinese military and espionage activity in the United States in recent year. "This information was in the hands of the Department of Justice, Department of State, and the FBI," the Republican chairman of the Senate Select Committee on Intelligence, Richard Shelby of Alabama, wrote in a letter last Friday asking the Senate Banking Committee to continue an inquiry into the matter begun by the Intelligence Committee last year. "We also provided this and additional information to the FBI and the Justice Department on numerous occasions during the course of our investigation," Shelby continued. "It is my understanding, however, that nobody from the federal campaign contributions investigation has followed up in any significant manner." In interviews, Ms. Xu and her former boss at Far East National Bank, Henry Hwang, denied any wrongdoing in their handling of the Chinese money, and the bank's president, Robert Oehler, said it had not been cited for any regulatory violations in connection with the affair. But Ms. Xu and Hwang declined to explain where the $92 million had come from or how they managed it, citing client confidentiality. Nor would Ms. Xu describe her involvement with Chinese officials in detail, other than to emphasize that she does not work for the Chinese government. Ms. Xu told banking regulators that much of the money consisted of Chinese loans to small investment companies that she and Hwang had established in California, documents show. Yet a detailed report on the matter written last year by investigators for the Office of the Comptroller of the Currency cast doubt on that explanation, concluding that the money was probably being hidden for Chinese officials. "Xu's explanation does not resolve this central issue," the lawyers wrote in the 76-page report, a copy of which was obtained by The New York Times. "We believe the likely explanation lies with Xu's connections and self-dealing by Chinese officials." Unlikely Partners for a Central Bank Neither Hwang nor Ms. Xu were obvious partners for Peoples' Bank of China, as the country's central bank is called. Hwang, 69, is a well-known figure among Chinese-Americans in Los Angeles, an elder statesman who delights in telling the story of his rise to the boardroom from a job in a laundry. His office is decorated with photographs of himself with various American presidents, including Bill Clinton, and with a poster from "M. Butterfly," the Broadway hit written by his son, David Henry Hwang, who was formerly a director of the bank. Henry Hwang helped start Far East National Bank in 1974 with $1.5 million in capital and a single branch office in the Chinatown section of Los Angeles. By 1997, when it was sold to Banc SinoPac of Taiwan, it had $514 million in assets and 10 branches around the state, but it remained a community bank with profits that rarely exceeded $5 million a year. In 1989, Hwang was at the center of a major scandal in Los Angeles when it was disclosed that he had hired the then-Mayor, Tom Bradley, as a paid consultant. Bradley had also received a loan from the bank, and appeared to have helped it secure a $2 million deposit of city funds. Bradley said he was supposed to help the bank develop business abroad but had been of little use before he was forced to resign from the consultancy. Hwang, however, was soon having better luck with overseas business. The key to his success was Nan Nan Xu. Ms. Xu (pronounced "shoo"), 48, came to the United States in 1987 with a student visa and plans to learn some English. Her references were excellent: A physician by training, she is the daughter of a member of the Communist Party's old guard, Xu Yunbei, a former deputy minister of health and minister of light industry. But she had no banking experience at all when she walked into Hwang's office and persuaded him to give her a $900-a-month job helping Far East National drum up Chinese business in California. "They didn't understand mainland China very well," Ms. Xu said over tea in the offices she now keeps in a business tower in downtown Los Angeles. She was by all accounts a stunning success. Using contacts at the consulate that China had then just opened in Los Angeles, she persuaded scores of Chinese firms to leave big banks for Far East National. She also began to build the bank's business in China, winning approval from the Chinese authorities to open an office for the bank in Beijing. "Without her connections, we could not have gotten a representative office there," Hwang, now the bank's vice chairman, said of Ms. Xu. "I go to China to carry a briefcase for Nan Nan Xu." Ms. Xu was made a senior vice president in 1993, a managing director in 1994 and, according to Hwang, was its highest-paid executive after himself at one point before she left the bank in 1997 a consulting firm. A Flood of Money Raises Suspicions As Far East National's China business was starting to flourish, the bank was also quietly taking in huge deposits of Chinese government money. In late November of 1992, Far East National received the first $5 million in a series of wire transfers from the Peoples' Bank of China, from one of its apparent subsidiaries, and from another state bank. Initially, the money went to an account for Far East International Trading Corp., a shell company that Hwang had incorporated a decade earlier. In January 1993, Ms. Xu incorporated her own California shell company, Four Earth Investment and Trading Corp., and over the next 32 months, it absorbed a flood of Chinese money. Another $40 million came from the central bank. The China Construction Bank wired $5 million. More than $42 million came from United Wide Investments, a Hong Kong concern that American regulators believe was controlled by the Chinese Government. Officials said one of Ms. Xu's accounts also received an early deposit of almost $50,000 from a Chinese military company that manufactures and markets advanced weaponry. Ms. Xu has given varying accounts of these dealings. At one point, she told bank regulators the Chinese funds were investments that she was handling with the help of outside brokers. In other instances, she characterized transfers in and out of the accounts as loans. Records show that Ms. Xu wasn't much of an investor, losing more than $5 million on a large purchase of Mexican pesos in 1994, just before the currency was devalued. But most of the money she received from China was paid back with some interest. Government documents show the regulators found many of her transactions suspicious, sometimes because she often moved the Chinese money through different accounts before placing it, and other times because she could not document purported loans. As far as the investigators could determine, $10 million was never repaid to the Peoples' Bank of China. Some of the activity in Ms. Xu's accounts, like some of her business in China, points to an influential Chinese official whom she described to regulators as an old friend: Chen Yuan, a former deputy governor of the central bank and the son of a powerful Chinese official of the 1970's and '80's. Investigators believe that Chen, who is now president of the China Development Bank, may have been responsible for at least some of the funds moved into Ms. Xu's accounts. And among her few expenditures that can be traced are more than $200,000 paid to Chen's son, including $46,000 to cover some of his tuition at Cornell University. In Beijing, an aide to Chen Yuan said he had no involvement with the money sent to Far East National Bank and would therefore have no comment on it. A spokeswoman for the central bank also did not respond to questions about the matter. In his letter to the Banking Committee, Shelby warned that he was especially concerned about accusations that the former comptroller of the currency, Eugene Ludwig, had blocked an investigation of Far East National. Both Ludwig and a spokesman for the comptroller's office strongly denied that. Interviews with two people who participated in the investigation also suggested that there was no evidence to support those claims, which were made in an Aug. 27, 1996 memorandum from a Federal Reserve examiner. While the comptroller's office expressed pride about their inquiry, other officials said the investigation was slow to get underway and might never have taken place had it not been for prodding by the Federal Reserve. The comptroller's office began its investigation in mid-July 1996. On Aug. 5, Hwang, a lifelong Republican, gave $10,000 to the Democratic Party, records show. He said his contribution was prompted by President Clinton's sympathy and support for ethnic minorities in America. A week later, the examiners began a second, more specific inquiry. But according to officials and internal documents, Federal Reserve officials came away dissatisfied with both the bank's forthrightness and the resolve of the comptroller's office to force its disclosure of key documents. In a letter to the comptroller's senior aide for enforcement matters, Daniel Stipano, a senior Federal Reserve official, Herbert Biern, wrote that examiners suspected fraudulent activities at Far East National, but felt the bank's lack of cooperation had prevented a "thorough review." "There is a perception that there could be some sensitivity relating to this case within the OCC because of a personal relationship between Hwang and the comptroller," Biern continued, apparently echoing the allegations of the examiner, Philip Holt. "Although this may have absolutely no basis in fact, we thought you should be aware of it because under the circumstances, you may want to take steps to assure that even the appearance of preferential handling is avoided." In interviews, Ludwig said that while he might have met Hwang at bankers meetings, he never intervened on his behalf. "This guy is no buddy of mine," said Ludwig, who retired as comptroller in 1998 and is now the vice chairman of Bankers Trust. Shortly after Biern's Nov. 19 letter, the comptroller's office gave final approval for a formal investigation of Far East National. On June 23, 1997, about six months into the inquiry, Stipano convened from the Justice Department and other law-enforcement agencies to describe its initial findings. "We were not oblivious to the fact that this could be money laundering, that it could be embezzlement, that it could be campaign-finance related," one official said. The inquiry was completed early the next spring. No charges were brought, and no regulatory actions taken. At the time of the June 1997 meeting, Justice Department and FBI officials were already searching for flows of Chinese money into American political coffers. And they were focusing closely on one of Ms. Xu's relatives by marriage, a Chinese military officer and aerospace executive named Liu Chao-ying. A California businessman, Johnny Chung, told authorities Ms. Liu was the conduit for $300,000 from the head of China's Military Intelligence Directorate, Gen. Ji Shingde, officials said. Federal investigators have traced a small amount of that money to Democratic campaigns. Ms. Xu said she was not questioned by federal investigators until almost a year later, and then only briefly. She said the officials asked about her role in setting up a checking account for Ms. Liu in 1991, but dropped the matter after she explained that Ms. Liu was the sister of her younger brother's wife, and that she had no other business involvement with her. They are not my favorite people," Ms. Xu said of her in-laws. "I live in a different world." Several American officials privately questioned that assertion, saying Ms. Liu traveled to China with Ms. Xu at least once, in 1991. Ms. Liu has also used Ms. Xu's identity as an alias on at least one occasion, officials said. On June 3, 1998, the comptroller's office called a second, larger interagency meeting to present the findings of its investigation into Far East National. "This was a situation where we had identified a piece of a much bigger puzzle," Stipano, the agency's enforcement director, said. "And the rest of the puzzle was not something that we had the ability or the authority to investigate." Because the investigators thought some of the $92 million might have been diverted by Chinese officials, a State Department official was asked to consider raising the matter with Beijing. The Department decided against that. "It was not a foreign policy issue that one raises with the Foreign Ministry," one official said. At the FBI, an official said the matter was initially passed on to a task force investigating campaign-finance cases questions. The task force later referred it back to the bureau's headquarters in Washington, which forwarded it to the FBI field office in Los Angeles. Although the field office brought the case to the office of the U.S. attorney there, word of it only belatedly reached agents in foreign counterintelligence -- those who knew the most about Ms. Xu. The New York Times, May 12, 1999 Gold Market Smuggling Gold in India Taxes and duties create a black market, as usual Last year's 60 per cent increase in India's import duty on gold has led to a premium over world prices, despite their downward trend, and to the resumption of large-scale smuggling. The increase has countered the aims of the then government when it liberalised the import of gold in 1990 by repealing the Gold Control Act, which led to a big reduction in smuggling. "[Back then] smuggling would take care of more than three-quarters of domestic demand," said a trade official. "Gold in India today commands a 9 per cent premium to world prices and this is bringing smugglers back into the business." The government's objective is to optimise revenues from gold imports without opening the floodgates to smuggling. Although it does not feel "too comfortable" about the jump in gold imports, which are second only to oil imports of around $7.5bn, it has nominated several banks and trading houses to "import the metal without any limits". In 1992, the import entitlement of non-resident Indians was doubled to 10 kg every six months and there is now a special import licence for jewellery exporters. "The unrestricted import facility and a low customs duty of Rs250 ($5.84) per 10 grammes took the wind out of smugglers' sails. Therefore, we were surprised when the government raised the import duty by 60 per cent to Rs400 per 10g in January last," said the official. According to the World Gold Council, gold holds a unique position in rural India, where the banking system is not well developed and the people are not aware of other investment options. Villagers like gold because it is easily sold for cash and can be pawned to make emergency payments. When India harvests are good demand for gold, mostly in the form of jewellery, rises. "The bumper food-grains harvest of over 200m tonnes, including a record 73m tonnes of wheat, in 1998-99 (April to March) will leave a lot of surplus cash with the farmers, whose faith in the yellow metal remains as strong as ever," said J. Chandra, vice-chairman of PC Chandra, India's leading jeweller. Mr Chandra said the share of rural India in the country's annual gold consumption is about 65 per cent, but this goes up in a good crop year. Indians are buying a lot more gold this year but prices are still drifting lower because of higher imports and in keeping with the world trend. "Besides the push given by a good harvest, what is also boosting demand in India is that gold jewellery is back in fashion with women and the men have also started using a lot of accessories made of gold," said a World Gold Council official. "The improvement in urban demand has also got much to do with the industry acquiring the capability to make jewellery to world standards. The creation of gold hallmarking institutes at the behest of the WGC and the Bureau of Indian Standards has led to significant improvement in the quality of jewellery. Indians today are buying jewellery with a greater degree of confidence," said Mr Chandra. Indian jewellers discovered only last year that occasions such as Valentine's Day and Mother's Day could be exploited to promote the sale of gold. The idea came from the WGC. Its appetite for gold has made India the world's biggest consumer of the metal. The WGC says gold imports were up more than 10 per cent to 719 tonnes in 1998. A lot of undeclared income in urban areas is also invested in gold. The WGC estimated that in 1996 some 365m Indians owned gold. By now, half India's more than 1bn people are said to own gold. Some estimates say Indians own over 10,000 tonnes of gold worth more than $100bn. The size of the market and the growth in demand have made India the focus of WGC attention. Its offices in Bombay, Delhi, Calcutta and Madras are promoting gold in a variety of ways. "We are trying to upgrade the skills of Indian artisans. Promoting Indian jewellery abroad, particularly in Europe and the US, is a major concern for us," said an official. According to WGC, more than 2m Indian artisans make gold jewellery which is sold through 250,000 retail outlets. The Financial Times, May 12, 1999 ----- Aloha, He'Ping, Om, Shalom, Salaam. Em Hotep, Peace Be, Omnia Bona Bonis, All My Relations. Adieu, Adios, Aloha. Amen. 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