The threat of China’s crime crackdown to businesses

The latest prong of China’s anti-corruption campaign targets organised crime groups. This round of purges will heighten third-party, reputational, and legal risks for corporates operating on the mainland.

The directive

On 24 January, the ruling Communist Party of China (CPC) announced a nationwide crackdown designed to disentangle its officials from organised crime groups, locally known as heishehui (‘black-society elements’) or eshili (‘evil forces’). (The word ‘triad’ is not used.) The campaign aims to tackle widespread collusion between CPC officials, police and criminals as part of President Xi Jinping’s war on corruption, which began in 2012 and has so far ensnared more than 100,000 ‘tigers and flies’ – the phrase used to emphasise that powerful senior CPC officials are being targeted as well as low-level bureaucrats.

This symbiotic relationship between CPC functionaries and organised crime undermines public trust in, and the efficiency of, the ruling party and bureaucracy, and it exists partly because the incentives for corruption within the CPC have yet to be effectively tackled, such as China’s opaque and unpredictable judicial system.

The most corrupt provinces are the ones being most heavily targeted in the anti-organised-crime campaign

In the first two weeks of its introduction, governments in the provinces of Henan, Kunming, Shanxi, and Zhejiang among others have already arrested more than 6,000 ‘black society’ individuals. However, as with many rules and regulations in China, the central government’s directive is interpreted and applied differently across regions. In the Tibet autonomous region, the focus has been on elements connected to the exiled Dalai Lama, who Beijing views as a violent separatist. In Chongqing, Shanxi and Zhejiang, the emphasis has been on criminal groups which challenge political and social stability.

The most corrupt provinces are the ones being most heavily targeted in the anti-organised-crime campaign. One example is the northern industrial province of Shanxi, the country’s top coal-producing region. Between 2012 and 2015, ten of 13 members of the provincial party’s standing committee, the province’s de facto governing body, were removed over corruption allegations; many corruption cases occurred in the coal sector. On 13 February, Shanxi’s police said they had already broken up 54 crime syndicates.

Organised crime in China

Organised crime syndicates in China tend to be small (fewer than 200 people) and focused on highly localised areas or specific market sectors. Industries which are traditionally susceptible to organised crime include mining, construction, and real estate. Criminals are usually involved as developers or contractors, typically using intimidation and violence to evict residents and harassing smaller real estate firms to drive them out of the market. For instance, gang members engaged in a firefight in December 2010, as they competed for work at a construction site where a Hong Kong property developer was building its 5-star hotel in the south-western city of Chengdu. In recent years, criminal activities have become more prevalent in other sectors, such as entertainment, logistics, transportation, and wholesale distribution.

The absence of any nationwide criminal groups is due to systematic efforts by the CPC to crack down on powerful organisations which could challenge its monopoly on power

The absence of any nationwide criminal groups is due to systematic efforts by the CPC to crack down on powerful organisations (whether criminal, political or religious) which could challenge its monopoly on power. Nevertheless, even local syndicates can wield significant control in their area of operations when they co-operate with corrupt local politicians and police officers. In some cases, gang leaders are closely linked to senior provincial leaders. One example was Wen Qiang, a high official in the city of Chongqing responsible for security. He was a central figure in the city’s organised crime scene, offering protection to his sister-in-law’s gang. In 2010, the city’s high court sentenced him to death after finding him guilty of corruption and bribery.

Another prominent case was that of Liu Han, a billionaire who chaired Hanlong Group, at one point the largest private conglomerate in the south-western province of Sichuan. He was executed in February 2015 for organised criminal activity that ranged from loan-sharking and gun-running to contract killings. Aside from his wealth, Liu was politically connected, having served on Sichuan’s CPC standing committee. Liu was also a friend of the prefectural-level party secretary.

Business implications

China’s anti-crime campaign is risk-positive for foreign investors in the short term, as organised criminal groups are likely to be less active during this period in order to avoid detection. However, the size and scale of the initiative increases the likelihood that corporates could be implicated, heightening contract, legal and regulatory risks.

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