Financial fraud is increasing in both volume and complexity and, arguably, is now having a major impact on the lifeblood of China’s economy and society (Cheng and Ma 2009). Although official statistics are underdeveloped and unreliable in China, financial fraud has been described as “one of the most challenging areas of economic crime” by China’s Ministry of Public Security, the nation’s top police authority, and is expected to worsen with rapid economic development (Wu 2008). Some analysts suggest that bank fraud alone has cost Chinese banks more than $2.8 billion annually since 2000 (Zhou 2006).
Although the total costs of financial frauds by offenders outside financial institutions add up to billions of dollars a year, the largest frauds are usually committed or facilitated by insiders, such as bank directors, managers, and loan officers. According to Liu Mingkang, chairman of the Chinese Banking Regulatory Commission (CBRC), insider financial fraud accounts for more than 80 percent of all financial fraud across the country (Liu 2005). In some cases, high-ranking local officials have also assisted outside offenders (relatives, friends, related businesses, and others) in their fraudulent procurement of massive bank loans (CBRC 2005, 2007, 2009a, 2009b). According to the nation’s central bank and the CBRC, China’s financial institutions still hold $161 billion of bad loans (CBRC 2008). In interviews conducted online, a midlevel bank officer said: “Many bank managers or loan officers at first passively, and later more actively, seek opportunities to accept bribes or kickbacks. They regard their power to authorize loans as a tradable commodity, to be used for their own profits” (Cheng and Ma 2009, 167).
Western literature provides competing perspectives on whether the powerful and the powerless receive equal treatment by law enforcement authorities. In the tradition of Durkheim (1997), the consensus position suggests that the criminal justice system embodies commonly agreed upon social norms and values (Friedman 1977). From this perspective, decisions are made impartially and determined by legally defined offense characteristics, such as the seriousness of the crime and the offender’s prior criminal record. Conversely, the conflict perspective suggests that discrimination in criminal justice processing is a result of conflict between relatively powerless offenders and elite social groups who are able to promote and maintain their self-interests (Coleman 2006; Reiman 2007). Donald Black (1976) argues that offenders with higher “rank” in society experience less severe legal responses. Those with diminished status in multiple stratification categories are hypothesized to be at a greater disadvantage in the eyes of the law.
In the case of white collar crime, it has been frequently asserted that criminal justice and regulatory officials are reluctant to pursue white collar offenders even when financial losses are high (Cheng 2004; Cheng and Ma 2009; Coleman 2006; Snider 1993, 2000, 2005; Snider and Pearce 1995; Sutherland 1949). Levi (1995) compared the dispositions of social security frauds and tax frauds committed by the poor and lower-status social groups with securities frauds committed by entrepreneurs and found that the latter cases are not treated as “real” crimes and are more likely to be diverted from the criminal process into the regulatory one. This reluctance has been attributed to a variety of factors, such as cost of prosecution, limited power and/or resources, difficulty of obtaining evidence, fear of negative effect on market confidence, and sympathy for white collar criminals.
Studies of criminal justice decision making related to white collar crime have largely concentrated on convicted offenses (Copes et al. 2001; Holtfreter 2004, 2005; Holtfreter, Piquero, and Piquero 2008). Although police and prosecutorial decision making in white collar crime cases are equally critical, considerably less research has been conducted in this aspect. One recent study of all fraud cases against businesses that were investigated by police in Montreal from January to June 1991 indicates that fraud against large businesses did not receive preferential response by law enforcement agencies (Bacher et al. 2005). The few studies in this area suggest that further research is needed. Given that only a small percentage of cases handled by the system actually reach the sentencing stage, scholars have cautioned against drawing inferences about the criminal justice decision-making process (Diamond 1995; Holtfreter 2008).
The purpose of this chapter is to examine how law behaves in a clearly defined and bounded social context, namely, police and prosecutorial response to financial fraud in China. Is the law itself biased against certain groups of financial fraud offenders? How many police resources are allocated for dealing with financial fraud? What class-related factors, if any, may influence an investigator’s decision making in financial fraud cases? I address these issues through a study of statutes, policy documents, prosecutorial files, court cases, and consultation with legal experts and observers. In addition, I conducted thirty-five semistructured interviews with regulatory officials, police officers, and procurators in China regarding their perceptions of and attitudes toward financial fraud, major challenges they have experienced, and the factors influencing their decision making.
For this study, financial fraud is defined as an intentional act of deception involving financial transactions for the purpose of personal or organizational gain, including loan fraud, mortgage fraud, pyramid schemes, investment fraud, tax avoidance, bank card fraud, check fraud, insurance fraud, and identity theft and scams. Financial fraud can be committed by a person of high social status or by someone from the underclass.
Because the influence of class position on law enforcement is the focus of this chapter, it is important to determine the proper measurement of social class in China. The model of legal response to financial fraud used here suggests that it is a structural position in the social and economic space that influences law enforcement. This is derived from recent Chinese neo-Marxist work on China’s class structure (He 2003; Li 2005). The analysis considers three structural positions: a small elite class, an underdeveloped middle class, and a large marginalized class. The elite class includes three distinct groups that possess different types of resources: political, economic, and intellectual. The political elite includes high-and middle-ranking state and local officials and functionaries of large state-owned nonindustrial institutions. The economic elite includes managers of state banks and large-scale state enterprises, the executives of large and medium companies, and the owners of large or medium private firms. The intellectual elite includes top economists, most influential lawyers, and other powerful experts who control important knowledge capital and ally with the political and economic elites.
The middle class is divided between higher and lower strata. In the top level are managers of medium and small firms, lawyers, white collar employees of firms with foreign investment, and employees of state monopolies; in the lower level are specialized technicians, junior scientific researchers, college and school teachers, rank-and-file employees in the arts or media, rank-and-file functionaries in government, lower-level management in state enterprises, self-employed workers, and traders. The marginalized working class consists principally of those who labor in state enterprises, collectively owned firms, foreign firms, joint ventures, and private firms. It also includes farmers, garbage recyclers, and the unemployed poor. It should be noted that family origin is also important in China for our measurement, so the suddenly wealthy who are from poor families may also be discriminated against if they do not develop connections with the powerful elite.
Political Culture and Criminal Legislation Against Financial Fraud
Although Chinese society has been heavily influenced by the West in recent years, the Confucian social hierarchy still remains the main social or ganization of China, which supports a pyramid-shaped structure where the majority must under all circumstances submit to the few privileged individuals. Confucius believed that by nature all men are benign and therefore famously opposed the coercive rule of law. He argued that the ideal state rested upon a stable and harmonious sociopolitical order achieved by a virtuous and benevolent sovereign through moral persuasion rather than by law (Wright 1960). This political understanding of power and hierarchy arguably still has a fundamental impact on the development of legal thought in modern and contemporary China.
After the Cultural Revolution (1966–1976), the Chinese leadership believed that people had begun to doubt heaven-designated power and thus needed nominal laws to legitimate its rule and the pyramid-shaped class structure. The establishment of a legal system was also necessary as both an instrument and a guarantee for the intended transformation of social and economical life with the economic reform beginning in 1979. Since then, Chinese leaders have increasingly confronted the duality inherent in law: law as an instrument of political power and as an agent for restraining this same power to attract the people’s support for the regime.
This dilemma is reflected in financial fraud laws. An offender from a poor or underprivileged family is generally likely to receive more serious punishment, yet occasionally a few greedy officials and capitalists may also be targeted and heavily sanctioned if they pose a threat to the existence of the regime. For example, the first criminal code of socialist China, the Criminal Law of the People’s Republic of China (adopted by the Second Session of the Fifth National People’s Congress, 1979)1 classified the offenses of taking advantage of official power to make profits (Article 119) and the misappropriation of state funds (Article 126) as “serious” crimes under the heading “Crimes of Undermining the Socialist Economic Order.”
The first major upgrade of Chinese criminal law that took account of financial fraud was the published Decision of the Standing Committee of the National People’s Congress “Regarding the severe punishment of criminals who seriously disrupt the financial order” (adopted by the Fourteenth Session of the Standing Committee of the Eighth National People’s Congress, June 30, 1995). During its passage, the Standing Committee was informed that the law dealing with financial crime was inadequate and that, if nothing were done, there was a real risk that the Chinese financial market and even the Communist Party’s rule could be destroyed. The 1995 decision, which became an amendment to the Criminal Law (1979), introduced seven forms of financial fraud: counterfeiting banknotes, check fraud, bank draft fraud, credit card fraud, letter of credit fraud, as well as embezzlement and bribery of bank officials. The 1997 Amendments of the Chinese Criminal Law, based on the 1990 Decision on Suppressing Drug Dealing, also established the crime of money laundering (Article 191). With the increasing rate of nonperforming bank loans due to major financial frauds committed by the collusion of insiders and outsiders, China again upgraded its legislation under the Amendment to the PRC Criminal Law that took effect on June 29, 2006, which included specific wording that made it a crime to obtain bank loans through fraudulent means. With several other supplementary provisions of the Standing Committee of the National People’s Congress, the current Criminal Law has created a framework for the legal regulation of financial fraud practices.
According to the 2006 Criminal Law, officials in the government or state-owned banks may be sentenced to death if they commit severe graft or bribery. Insider bank dealing (illegally granting loans to related individuals or organizations for self-interest), loan fraud, check and bank draft fraud, letter of credit fraud, credit card fraud, and treasury bill fraud are all criminal offenses, each of which is subject to life imprisonment. However, considering the severe punishment doctrine in Chinese criminal jurisprudence, it is somewhat surprising to see that the maximum punishment for insider misappropriation of bank funds and money laundering is only 10 years’ imprisonment. Illegal enrichment (when the property or expenses of officials in government or state-owned companies clearly exceed their legitimate income) is punishable by only 10 years in prison (increased from 5 years following a 2009 amendment that received long debate). It should be noted that the two offenses receiving relatively light punishment are generally committed by high-status officials and/or business executives.
One major problem worth mentioning is the vague definitions of crime, fraud, severity, and criminal liability under the Chinese criminal code. The National People’s Congress has set the threshold separating a criminal act from an administrative wrongdoing and differentiating a severe crime from a less severe crime, by specifying the seriousness of the consequences and circumstances (Cheng and Ma 2009). It has occasionally defined the seriousness of the consequences in its interpretations of law by setting a fixed monetary amount or by using other criteria to determine the harm resulting from the offense. However, since this criterion has not been applied in consistent or predictable ways, local courts will set different standards as to the amount of fines reflecting severe punishment. Therefore, it is up to local regulatory or law enforcement officers to make the crucial decision on prosecution before they refer the cases to court.
In practice, a number of cases involving high-profile financial fraud offenders are handled as disciplinary or administrative cases or misdemeanor cases, while powerless offenders are more likely to receive more severe sentences, although in many cases they have stolen relatively smaller amounts of money (Cheng 2009; Huang, Wei, and Meng 2004).
Stealing from a Banking Institution, Insider Misappropriation of Banking Funds, or Illegal Enrichment?
One important consequence of the vague definition of financial fraud is that many frauds committed by street criminals are handled as if they were crimes such as theft, which can make the convicted criminal liable to life imprisonment or the death penalty. For example, malicious withdrawal from an ATM is considered “theft from financial institutions.” For “extremely huge amounts,” according to China’s Criminal Code, the minimum statutory penalty for the accused is life imprisonment.
In Guangzhou People’s Procuratorate v. Xu Ting (2007), the accused was a migrant worker. While withdrawing cash from the ATM, he was surprised to find that it had only deducted one yuan (13 U.S. cents) from his account for every 1,000 yuan ($150) withdrawn. Apparently, something had gone wrong with the ATM. According to police, Xu Ting subsequently withdrew 175,000 yuan ($26,000) in 171 transactions and ran off with the money. The trial court convicted him of committing an “especially huge amount of theft from [a] financial institution” and sentenced him to life imprisonment. Widespread criticism of this verdict on the Internet led to popular pressure on the courts to review the provisions in the law. In 2008, the Guangdong Provincial High People’s Court overturned the ruling and asked the lower court to retry the case. Xu Ting was still convicted of the crime of theft but was sentenced to a fixed-term imprisonment of 5 years.
While it is inspiring to see that public opinion can play an important role in accelerating the progress of the rule of law in China, it raises the question of whether media pressure has an undue influence on judicial trials. Even if public opinion helped the accused to get a fair sentence in Xu Ting’s case, in some other cases media coverage has negatively influenced the outcome of trials. More important, the law is still not clear even after this case, as Chinese law, unlike in common-law jurisdictions elsewhere, does not necessarily follow precedent.
The case of Xu Ting sparked an intense debate among scholars, lawyers, and the general public. Some argued that the offense of “illegal enrichment” applied to his actions; others asserted that he should have been tried for embezzlement; still others believed he should have been charged with credit card fraud. At the same time, some argued that the case should be dealt with by tort law rather than by criminal law (Zhou 2008).
The public’s perception of injustice in this case was driven by comparisons with the comparatively minor sentences most corrupt officials receive for financial fraud or corruption. A number of high-ranking officials were convicted of “illegal enrichment,” which, at the time (2007), was punishable by only 5 years’ imprisonment (subsequently increased to 10 years after the 2009 amendment), or of “insider misappropriation of banking funds,” which is punishable with only 10 years’ imprisonment in spite of the huge amounts involved. For example, in Liaocheng People’s Procuratorate v. Jing Changmin, the local Land Administration Bureau chief stole as much as two million yuan ($300,000) and was convicted of receiving 80,000 yuan ($12,000) in bribes and of “illegal enrichment” for the remaining major part of the stolen funds. He was sentenced to only 8 years in prison (later reduced to 3 years). There are many such instances of corrupt officials who are convicted of “illegal enrichment” or other serious offenses for fraud and embezzlement or for receiving bribes of millions or even billions of yuan.
Legal Fundraising, Illegal Fundraising, or Fundraising Fraud?
The vague definition of financial fraud has also greatly favored high-status people in getting loans for business. So-called underground banks and Ponzi schemes became more prevalent in 2008 because financial regulators rejected proposals to legalize certain private lenders, and many banks were reluctant to provide loans to small-and medium-sized enterprises (Ye 2009). While those elite individuals and companies can freely get funds from banks, lower-class individuals can raise funds only through private fundraising or underground banks and thus become targets of law enforcement.
Currently, Chinese law lumps all illegal fundraising into two categories: illegal fundraising and fundraising fraud. The main distinction between the two offenses is the intent to defraud. The former refers to an unauthorized form of banking that involves soliciting and raising funds from the general public. In exchange, investors are promised high interest and principal repayments within specified time periods. The maximum sentence for this crime is 10 years. Fundraising fraud, in contrast, involves an intention to dupe investors, so it is considered far more serious and can incur a death sentence. The powerful, even when they committed fundraising fraud, were seldom charged or were charged with the less severe crime of “illegal fundraising.”
Since it is difficult in practice to determine intent, the subtle distinction between the two offenses can easily be misinterpreted and even abused by enforcement officials and the courts to favor high-status offenders. In my sample, 74 percent of the illegal fundraising cases involving lower-status offenders were charged with fundraising fraud and only 15 percent were charged with illegal fundraising. Of those charged with fundraising fraud, 91 percent were convicted, and 93 percent of those charged with illegal fundraising were convicted. In 83 percent of the convictions involving low-status offenders, the penalty was more than 10 years’ imprisonment. In comparison, 63 percent of the illegal fundraising cases involving high-status offenders were considered legal borrowing and were not charged with any offense, and 37 percent were charged with illegal fundraising. Most of the convicted high-status offenders ended up with a prison sentence of less than 5 years.
It is interesting to note that family origin may also influence interpretation and application of law in this area. In the case of Dongyang People’s Procuratorate v. Wu Ying (2009), the accused, Wu Ying, was a young woman born to a poor peasant family. Unable to afford a university education, she dropped out of an accountancy program in the 1990s to run a small foot massage parlor and beauty salon and later started a car rental company. She then raised funds from a number of private investors for her business during the following decade and ended up with 3.6 billion yuan ($500 million) in assets in 2007. At first, Wu was charged with having illegally raised nearly 390 million yuan ($57 million) for the “purpose of possession,” promising high returns. But as investigators uncovered more evidence against Wu, the charges were changed to fundraising fraud. She was finally convicted on this charge and sentenced to death.
Some observers assert that Wu actually offended local government officials by exposing scandals involving them and local real estate businesses. Some speculate that Wu’s humble family origin and lack of close ties to local officials may be related to her severe sentence. Wu’s attorney, Yang Zhaodong, insisted that his client was innocent even of “illegal fund-raising.” He told the court:
Wu simply borrowed the money but did not cheat anyone…. She used the money for business and did not illegally spend it. Wu told the court she had been investing in highly profitable businesses, including trading companies, hotels, investment guarantee agencies and property developments. The eleven people who lent her money were her friends—not the “general public” as they were defined in the indictments. Wu should not be responsible for the amounts the eleven investors collected from others to give Wu. (Cao 2009, B1)
My analysis of a number of financial fraud cases seems consistent with the family origin hypothesis. When the so-called blue-blooded or second generation of the party or government leaders were involved in financial frauds, their cases were more likely to be handled administratively or incur much lighter criminal punishment.
The Politics of Investigating Financial Fraud
Most financial fraud cases in China are investigated by police departments under the Ministry of Public Security. Criminal offenses committed by government officials, employees, and agencies, however, are investigated directly by procuratorates. The procuratorate’s anticorruption unit conducts investigations of bribery, embezzlement, and other public corruption. The procuratorate also has a government employees misconduct unit, which investigates all other criminal conduct committed by government workers while on official business. Executives and managers of banks and of other financial institutions and state-owned corporations are considered government officials or employees and will be investigated by procuratorates if they commit financial fraud.
Police investigation is reactive in nature, relying very heavily on referrals from the CBRC and information from the banking industry. CBRC staff members are required to inspect a certain number of banks and other relevant financial institutions in the region for which they are responsible. The staff is responsible for investigating all alleged offenses and preparing investigation briefs, which are used either for the commission’s administrative proceedings or for referral to the police or procuratorate for criminal investigation. The commission’s review of the report of its investigators is not a public judicial proceeding, where all interested parties have an opportunity to present their case, but rather a closed-door internal administrative proceeding. A significant enforcement “funnel” operates within the commission: A much lower number of high-profile financial fraud cases are detected and punished than the number actually committed. For example, among the 1,697 employees at financial institutions investigated by the CBRC for financial fraud in the first half of 2005, there were 570 executives and senior managers, including 7 central bank managers and 82 “big four” bank branch heads.2 However, only 10 percent of the high-ranking managers were referred to procuratorates for criminal investigation; yet 80 percent of the low-ranking employees were referred to the police. Penalties for senior executives and managers were usually limited to dismissal, fines, or simply a reprimand (CBRC 2006).
In the present postcommunist neoliberal atmosphere in China, compliance through cooperation between criminal justice agencies and high-ranking government or business officials alleged to have committed financial offenses is normally more important for the current regime. Criminal proceedings are used only where warnings have failed or for unscrupulous offenders who may threaten the rule and domination of the Communist Party. A CBRC enforcement officer summarized these sentiments as follows:
Well, my view of it is that insider financial offenses are a regulatory problem. And our job as a regulator is to deal with important problems and try to correct them. We make banking institutions and officials stick to the bottom line of compliance management. The CBRC considers that preventing banking crimes is a major aspect of supervision, and a major part of the regulatory framework on operational risk management. (Interview transcript, case 009)
Similarly, financial fraud involving powerful criminals is not a priority for police, even though on many public occasions senior police officers have expressed concern about the prevalence of serious financial crimes (Meng 20083). In response to the public outrage about corruption and financial fraud, the central government created the Economic Crimes Investigation Department (ECID) in the Ministry of Public Security in 1998, with branches in local police forces across the nation.
However, the subdivisions for banking and other financial crimes are extremely understaffed. For example, in the Public Security Bureau of Beijing, there are only 20 officers in the ECID branch dealing with insider financial fraud, while 300 officers are assigned to investigate outsider fraud (Wu and Li 2004). In contrast, 10,000 officers are assigned to monitor prostitution. (In China, prostitution in itself is not a criminal offense, and criminal law is not concerned with prostitution unless organized crime is involved. Instead, it is regarded as a “public order” offense punishable via administrative penalties administered by police without public hearing.)
The ECID clearly places a priority on lower-class offenders who are accused of victimizing financial institutions or rich individuals. Because powerful offenders are better able to exploit a complex politically oriented legal system, ECID investigators would prefer poor defendants. They are generally discouraged by local government officials from pursuing high-profile cases involving corporations or high-status individuals. An ECID investigator explained it in the following way:
It is not that we have class bias, and we did find a number of high-profile fraud cases … yet such powerful offenders are protected by strong “connection networks” [guanxi wang] and “protective umbrellas” [baohu san]. Local officials have to consider local interests, their personal profits, their political achievement and promotion, so [they] would interfere in our investigation of the cases. It is much safer for us to pursue the small potatoes. (Interview transcript, case 018)
Ironically, such “connection networks” and “protective umbrellas” also include senior police officers who are involved in major financial fraud cases. Zheng Shaodong, the former assistant minister of public security and director of the ECID, was himself convicted of taking more than 8.3 million yuan ($1.2 million) in bribes from several high-profile financial swindlers from 2001 to 2007. In particular, Zheng and his deputy Xiang Huaizhu were charged with taking bribes from Huang Guangyu, one of China’s richest businesspersons, for covering up Huang’s financial fraud involving the Bank of China’s Beijing branch in 2006. Huang’s omnipotence in the capital market was reportedly related to his deep connections with central and local government officials through frequent bribes. Huang’s case involved not only several ministries in the central government but also senior local officials, indicating that “connection networks” and “protective umbrellas” deeply penetrate the Chinese government both horizontally and vertically (Chen and Zhu 2009).
Some scholars argue that the pursuit of high-profile fraud cases reflects the power struggles within the Communist government: Some controlling leaders use prosecutions as a tool to eliminate rivals and their business supporters, rather than conduct a real “war on financial crimes” (Cheng 2008). In Huang’s case, a number of senior officials involved, including the then ECID director, were from Guangdong and had long-standing ties with Huang, who was himself from Guangdong. Some commentators speculate that they might have been punished in a party power shuffle to weaken the Guangdong Faction (Guangdong Bang) in China’s bureaucracy (Chen and Zhu 2009).
This is a reasonable speculation if we look at many other corruption cases. In a major case in 2008 for instance, Chen Liangyu, the former Shanghai Party Chief and Politburo member and a key member of the Shanghainese Faction (Shanghai Bang), was sentenced to 18 years in prison for accepting the equivalent of $340,000 in bribes and for abuse of power related to his role in a municipal pension fund scandal. Chen’s challenge to President Hu Jintao’s authority played a substantial role in Hu’s decision to investigate this case (Cheng 2008).
The class-based or political-based nature of law enforcement has long been singled out by scholars. Sutherland (1949) pointed out that law enforcement was in the hands of members of a powerful class who are likely to sympathize with offenders from a similar class background. Consistent with this hypothesis, officers interviewed for Sutherland’s study generally sympathized with higher-status offenders and were reluctant to define them as “criminals,” preferring to call them “victims of the imperfect financial system.” Most of the officers interviewed considered low-status offenders “real criminals,” “bad eggs,” or “dishonest crooks” who deserved public blame and criminal punishment.
Such stereotyping is prevalent in contemporary China. With so many “connection networks” existing among high-status individuals in various sectors, the safer approach has been to scapegoat low-status offenders as “folk devils” and to hold them chiefly responsible for financial crime. Media focus on these offenders, even in cases that are spurious, creates the public impression that the government is making great efforts to combat fraud. In 2008, the ECID announced that its nationwide staff had uncovered 9,055 cases of financial fraud during the previous year (Wu 2008). However, it has been suggested that most cases reported were “the easy pickings, the unsophisticated poor criminals, the people under no protective umbrellas” (Interview transcript, case 015).
Some ECID investigators attribute the focus on underclass offenders to a lack of resources and expertise on the part of authorities, as the complexity of financial fraud cases involving high-status offenders often exceeds the ability of law enforcement agencies to investigate them. Most ECID investigators are law school graduates and do not have much experience in, or knowledge of, the financial industry. However, this could easily have been remedied if police leaders had been willing to invest in the training and personnel recruitment necessary to strengthen the ECID’s ability to deal with more sophisticated fraudsters.
As mentioned earlier, the procuratorate is empowered to investigate fraud cases involving government officials, employees, and agencies, as well as officials of state-owned companies, and to prosecute all fraud cases including those dealt with by the police. As a result of the political sensitivity of fraud cases involving government officials, the procuratorate’s ability to decide who and what to investigate is highly circumscribed. This is despite the fact that, according to law, it is not subject to interference by any administrative organ, social or ganization, or individual. Consistent with Beare’s (2007) hypothesis on the relationship between police and politics, the Chinese Communist Party is able to wield its influence on the procuratorate in a number of ways, including the nomination of procurators and the control of financial resources. Political interference is most evident in major and complex cases, such as those involving high-ranking officials. Final decisions in these cases are made by each procuratorate’s prosecution committee, which consists of the chief procurator and deputy chief procurators as well as its divisional or district procurators. Prosecution committees usually make their decisions after consultation with the party’s political-legal committees at corresponding levels, which are led by senior party leaders who also serve as deputy party secretaries. This type of decision-making mechanism opens the door for party cadres and government officials to interfere with procuratorates’ investigation and prosecution process.
In my interviews with ten investigators in several municipal procuratorates of eastern China, they estimated that 30 to 40 percent of their fraud cases were affected by political influence. Political or party leaders “set the tone” for decision making in almost all major cases involving high-status fraud offenders. One local procurator cited a case in which an investigator courageously ignored senior politicians’ demand that he suspend an investigation against a high-status offender. In the end, however, he was fired.
It should also be noted that since almost all senior government officials are party members, the Central Commission for Disciplinary Inspection at the top of the party hierarchy in fact acts as the country’s top anticorruption watchdog. Similarly, each regional party committee has a commission for disciplinary inspection to exercise vigilance over corruption. Under such a system, regional party chiefs are virtually immune to supervision by local watchdogs and can hardly be pursued if they collude with top financial officials, that is, unless political concerns make the case a high priority for the central power.
In principle, there is a division of labor between party discipline inspection commissions and government procuratorates. The party discipline inspection commission investigates violations of party discipline and, if such violations constitute a crime, refers them to the procuratorate for further investigation and prosecution. The procuratorate investigates crimes involving officials, most of whom are party members. In practice, however, discipline inspection committees resolve most high-profile cases without turning cases over to procuratorates. The party has its own set of punishments for violations of party discipline, ranging from warning, dismissal from party positions, and probation within the party, to expulsion from the party. Expulsion, the most severe punishment, is nonetheless mild compared with the primary criminal punishments for financial fraud: imprisonment and death.
Conclusion
The findings presented in this study suggest that the class structure limits the independence of the criminal justice system in China. In financial fraud cases, a pronounced class bias exists in both the law and its enforcement by the police, the Banking Regulatory Commission, and procuratorates. The social class bias is exacerbated by the party agencies’ direct interference with law enforcement.
Although the influence of class status on criminal investigation is complex in China, the law and its enforcement obviously target low-status individuals more than they do high-status individuals and powerful organizations. Despite political and economic elites committing the most serious and harmful fraud, they are least likely to be investigated and prosecuted in a criminal way. The triple helix of political, economic, and intellectual elites in China, organized to share power and capital assets, may explain why the politicians are so interested in protecting major financial offenders from criminal enforcement.
A number of factors make it more likely that investigators will go after poorer violators. These include investigators’ limited power to pursue high-status offenders, discouragement by local officials from pursuing high-status offenders, “connection networks” (guanxi wang) and “protective umbrellas” (baohu san), sympathy for high-status offenders, the vagueness of law, and the lack of resources and expertise. Consequently, we find that poor or marginalized individuals make up the largest number of offenders charged with fraud, and the government uses prosecutions of their cases to appease public anger about financial crime and corruption. The results would seem to support Black’s (1976) central proposition that “law varies directly with stratification.” Thanks to the sharp polarization between the rich and powerful and the rest of Chinese society, differentiated law enforcement based on stratification is clearly evident. However, it will be interesting to see whether the growing Chinese middle class will have an effect on this law enforcement model.
My research also reveals a “double-track” government approach that tolerates the windfall profits of the elite while aiming to maintain long-term political and economic stability. In the past, when financial fraud and corruption of the elite attracted little public attention, regulators and enforcement agencies failed to pursue many cases. This is changing—but slowly. The increasing demands from the poor for equitable treatment in recent years may explain why the central party government has instructed party and government enforcement agencies to pursue more high-profile financial fraud cases. However, it is still too early to predict the future trend of financial fraud enforcement in China. Political complications will present substantial hurdles to law enforcement in the coming years.
Notes
The author would like to thank the University of Saskatchewan for providing the President Social Sciences and Humanities Research Council and Tri-Council Bridge Funding for the research presented in this chapter.
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