Walter Hutchens’ Blog

The PRC Anti-Money Laundering Law (反洗钱法 or fan xi qian fa, a literal translation) was passed today as expected by the Standing Committee of China’s National People’s Congress. The law comes into effect January 1, 2007. Its full text in Chinese is here.

More will doubtlessly be published tomorrow, but a brief English China Daily report on the draft is here.

Chinese Commentary on the law from this spring is available here, here and here.

There NPCSC held a press conference this evening. A trasnscipt (or “script”) is on the NPC’s website here (with some pictures and a minute-by-minute chronology!). Below is a quick translation of a fairly vapid exchange concerning the new anti-money laundering law:

Oriental Morning Post Reporter: I’d like to ask two questions about the Anti-Money Laundering Law. First, before this law was passed today, how have administrative agencies investigated and handled money laundering crimes? Second, will a new department be established as the principle agency for anti-money laundering, or an Anti-Money Laundering Bureau? How will the authority be delineated? Thank you.

Mr. Lang Sheng [Director of the Penal Code Section of the NPC Standing Committee's Rule of Law Working Committee]: Anti-money laundering is a new issue that emerged after our socilist market economy developed and is a new challenge we confront in constructing a market economy. Relevant departments of the State Council have worked actively and consistently to respond to this situation over the last several years. Administrative agencies have already promulgated specific anti-money laundering measures for financial institutions and instituted a reporting system for large, suspicious transactions as well as creating an “actual name” system for depositors. This constitutes a series of anti-money laundering measures. According to our understanding, in recent years the State Council’s department in charge of anti-money laundering activities has taken a number of effective enforcement actions. According to information they have provided, last year alone they investigated more than 1,000 entities and disposed of more than a hundred cases. You can consult with the anti-money laundering agency concerning specific cases. Law stipulates that the People’s Bank of China shall be the principal administrative agency for anti-money laundering.

I’m not an expert in this area, but, yes, I’d have to imagine it’s a step forward in anti-money laundering that one can no longer open a bank account in China under the name Mr. Monkey King or Ms. Watermellon.

Separately, 60-odd new laws or regulations came into force today, as detailed on this chart.

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This report on ICBC’s IPO in The Hindu is misguided and perhaps unduly alarmist.

It posits that, “China’s nascent capital market has received a shot in the arm in its bid to compete with India with the infusion of nearly $22 billion in the world’s largest Initial Public Offering by the country’s largest lender, the Industrial and Commercial Bank of China.”

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The Jurist site has done a nice, pithy roundup of English language reports on China’s forthcoming (we think) property law.

ICBC, the world’s largest IPO, did not involve a listing on a US stock market.

The Bank of China did not list shares in the US.

China Construction Bank did not list shares in the US.

Of course, US investors can buy shares in these companies—Hong Kong is outside of China’s Great Currency Wall. But there is a large eco-system around US stock markets (accountants, lawyers and the exchanges themselves) that surely doesn’t like to see these mega IPOs steering clear of the US.

China IPOs aside, there is growing sentiment to trim back some of the perceived excesses of the Sarbanes-Oxley Act. The New York Times reports here on a couple of groups cooking up recommendations on SOX reform and other matters.

One of the groups is headed by Hal Scott, a Harvard professor who also happens to oversee an important annual symposium on China’s financial system.

While I imagine it is unlikely to emerge as a recommendation (or get traction if it does), the Times reports that one prominent securities law scholar has advised scrapping private enforcement of securities fraud altogether. Columbia’s John Coffee suggests the US eliminate private securities litigation, an approach even more draconian than China’s current stance (which requires that a government authority find wrong doing before private shareholder suits can proceed against a company, but at least allows suits once such a finding has been made):

John C. Coffee, a professor of securities law at Columbia Law School and an adviser to the Paulson Committee, said that he had recommended that the S.E.C. adopt the exception to Rule 10b-5 so that only the commission could bring such lawsuits against corporations.

But other securities law experts warned that such a move would extinguish a fundamental check on corporate malfeasance.

“It would be a shocking turning back to say only the commission can bring fraud cases,” said Harvey J. Goldschmid, a former S.E.C. commissioner and law professor at Columbia University. “Private enforcement is a necessary supplement to the work that the S.E.C. does. It is also a safety valve against the potential capture of the agency by industry.”

I agree with Commissioner Goldschmid; it would be shocking, almost on the order of overturning Marbury v. Madison (in which the Supreme Court granted itself the power of judicial review), to eliminate private causes of action under Rule 10b-5. Private enforcement of securities disclosure rules (or, more practically, the threat of private enforcement) is a bedrock of US securities law. It seems virtually indispensable for keeping issuers honest. Jail and administrative enforcement are important, but the investor who loses money (and his or her lawyer) has the greatest incentive to sue to recover some of that loss; we shouldn’t have to simply hope a regulator acts (which probably wouldn’t lead to any recovery for investors, anyway). Coffee is wrong.

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The New York Times reports here on a “small” ($180 million) private equity China-focused fund Lehman Bros. and IBM have created.

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China worked hard to get into the WTO, and now is being asked to live by the terms of it WTO membership.

You can’t do much shopping (or even walking around) in China without running into flagrant IPR violations, but for a more nuanced appreciation of the problem I highly recommend Andrew Mertha’s book The Politics of Privacy: Intellectual Property in Contemporary China. He explains how even the best-intended efforts to enforce IPR standards can be frustrated by China’s splintered and evolving political landscape.

It’s certainly fair for trading partners to hold China to the terms of its WTO membership, but given current political winds in China, I suspect a WTO action will tend to spur resistance or empty gestures more than real cooperation. U.S. politics are of course also at play—perhaps in the timing of this announcement days before elections?

Generally, as China gets richer I am seeing more and more “real stuff” for sale. The other night I walked into an outdoor store with real-deal expensive hiking boots and camping equipment. I’ve seen plenty of North Fakes, but the legit stuff is on sale now, too. There’s a growing domestic lobby for greater IPR enforcement, as well as a thriving black market.

To test the efficiency of China’s piracy trafficking, in my Doing Business in China travel courses I’ve offered a bounty to the student who brings me the first copy of a Hollywood movie released right around the time of our arrival in China (it was a Star Wars installment one year, the Da Vinici Code another). Invariably, the disc is on the streets of Shanghai as soon as (if not before) it is in theatres.

Piracy feels great to consumers (the whole Sex in the City corpus for US 8 instead of 200!), but I follow-up by asking students to name their favorite Chinese brand. Sometimes they think of Qingdao. Maybe Lenovo. Haier or Galanz if they’ve done the assigned reading. But clothes? Silence. I then ask them to check their labels for “Made in China” when they get home; everybody wears stuff made here, nobody can name a Chinese designer brand. More disturbingly, what breakthrough drugs has China discovered in the last 30 years of economic reforms? Despite all their scientific talent, they are under-contributing to human progress and retarding the development of some parts of their own economy. That’s the real cost of rampant knock-offs.
 

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