From Nation, page 9, issue no. 342, November 19th 2007
Translated by Liu Peng
Original article: [Chinese]
EO exclusive: Subsidiaries of two major Chinese state-owned enterprises have used the services of an underground banking network.
The Shenzhen-based money laundering ring broke headlines as the largest in the country ever discovered by authorities, and continuing investigations have revealed the involvement of several high-profile Chinese businesses.
The EO has learned that oil product sales companies affiliated to Petrochina and Sinopec in Shenzhen had tapped the illegal network to transfer funds from Hong Kong.
On June 26th, Shenzhen Public Security Bureau and Foreign Exchange Administrative Bureau jointly busted the illicit network with funds running into 4.3 billion yuan.
On August 6th, the State Administration of Foreign Exchange announced on its website that some established state-owned companies were linked to the scandal but did not name them.
Because investigations are still in progress, the authorities are not revealing many details. Yang Jun, office director of Shenzhen's State-owned Assets Supervision and Administration Commission, told the EO that the companies involved are Shenzhen-based branches of central and provincial level state-owned enterprises.
But details on a funds transfer list originating from the illegal network betrayed the companies concrete identities: Sinopec Shenzhen Oil Products Branch Company (hereafter as Sinopec Shenzhen) appeared as a receiver in the list from January 2006 to May 2007.
The paying party is Shenzhen Zhong Hengda Trade Company, which has been identified by the police as a fund transfer agency managed by the underground network.
Also in the list are Shenzhen Lianjia Liang'antian Gas Station company (hereafter Lianjia) and Shenzhen Fang Xing Da Gas Station under Fangxing Industry Company.
Business and financial data reveals that Lianjia has two shareholders. One is Shenzhen Long'gang Oil Company, a Sinopec Shenzhen subsidiary, holding 10 percent of Lianjia shares.
The EO discovered that the illegal network had at one point transferred funds four times a day to Sinopec Shenzhen, totaling 370,114 yuan.
When contacted by the EO, Sinopec Shenzhen replied in an email dated November 15th, "The investigation is ongoing. We are giving our full support and cooperation to the investigating authorities. This is not a convenient time to entertain media interview request."
Fang Xingda has been taken over by PetroChina Shenzhen Oil Products Supply Company (hereafter as PetroChina Shenzhen) since July 2001. One manager from PetroChina Shenzhen who wishes to remain anonymous has confirmed that the company is being investigated.
The EO learned that both the Sinopec and PetroChina subsidiaries were dragged into the scandal due to oil products trading transactions with Hong Kong based clients.
Trouble from Hong Kong
The above anonymous manager recalls that about a year ago, a Hong Kong based company contacted PetroChina Shenzhen for oil product purchases, "After confirming the company is a legally registered firm in Hong Kong, we reached an agreement. Subsequently, the company made numerous purchases at our Fang Xingda Gas Station."
In fact, it is common for Hong Kong-based companies to come to Shenzhen to source for oil products, as the island's oil prices include additional tax and are more expensive than the one in the mainland. The cheaper oil prices have also attracted Hong Kong motorists to flood gas stations in Shenzhen to top up their tanks.
PetroChina Shenzhen Gas Station in Fang Xingda is located at a strategic location frequented by Hong Kong motorists. The station, often lined with long queues, registers the highest sales record among eight outlets managed by PetroChina Shenzhen.
The local government does not prevent Hong Kong motorists from filling their tanks in Shenzhen, however, the Hong Kong custom treats the case as oil smuggling. Upon requests from Hong Kong clients, some mainland petrol stations add potassium permanganate into the oil to make it appears blue like the one sold in the island.
Active oil trading between the two places has allowed the illegal banking network to play a role. The anonymous manager from PetroChina Shenzhen explains that the company does not have the right to trade in foreign currency, adding that PetroChina also forbids companies under its banner to accept foreign currencies.
As a result, its Hong Kong client suggested using an intermediary company to convert Hong Kong currency into yuan for payment. The intermediary company later turned out to be operated by the illegal banking network busted by the authorities.
"Who would have imagined the company would be managed by an illegal network?" the manager laments, "As a state-owned company, we have to respond to the local government's call to support demands from Hong Kong, but we also have to avoid various risks. Despite being cautious, we still got into trouble."
To date, police investigations into the underground money laundering network have been concluded and six suspects will be prosecuted. However, dust has yet to settle over the involvement of Sinopec and PetroChina. Should the two state owned enterprises be held responsible for illegal transactions?
On November 13th, the EO faxed the Shenzhen branch of the People's Bank of China a request for information concerning the matter, but had yet to receive a reply when this article went to press.
Chen Jianning, section chief of the State Administration of Foreign Exchange (SAFE), has once said that when dealing with state-owned companies' involvement in illegal foreign currency transactions, one has to take into account if their participation was active or passive. The EO has learned that Shenzhen SAFE has proposed to penalize the companies according to relevant laws and regulations.
Based on the Foreign Exchange Regulation and Penal Code, illegal buying and selling of foreign currency that leads to disorder in the financial market is punishable with a fine up to five times the amount of the illegal transactions; and if the crime is considered serious, besides the above penalty, all property can be confiscated.
For institutions that commit the crime, the institution's "person-in-charged" is publishable with imprisonment or detention of up to five years. In severe cases, the imprisonment term can be extended beyond five years.
"Shenzhen SAFE tells us that most likely we will be slapped with a small fine," the anonymous manager discloses, he says PetroChina Shenzhen is unwilling to foot the fine or to admit guilty. However, the decision is still pending a directive from above.
"We have no means to inspect how and where the Hong Kong Company got the yuan. It is beyond our control, it is not our responsibility," the manager says. "We only request our Hong Kong client to pay in yuan. We don't care about other things."
PetroChina Shenzhen is not the only company crying innocent; many implicated companies have also contacted SAFE saying that their participation was passive and they were unaware that the transactions were illegal.
Zhu Liuyu, director of Guangdong Guoding law office, says ignorance is not an excuse for immunity in the eyes of law. He adds that the companies fully understand that foreign exchange is controlled by the government, and they have no excuse to refuse paying fines.
He believes many similar cases occurred in the coastal cities, which reflects loopholes in China's foreign exchange control. As such, relevant laws need to be reviewed and improved upon.
