China's Latest Corruption Target: Overseas Real Estate

Some of them have laid the groundwork for years; one common ploy is to send a son or daughter overseas to a private university as a way to legitimize sending funds out of China. For example, the leaked Chinese central bank report on corruption showed that former ministry of finance official Xu Fangming deposited roughly one million RMB into the bank account of a son studying abroad. Perhaps not coincidentally, the number of Chinese students studying abroad has jumped in recent years. In the United States, it more than doubled to 194,000 in the 2011/2012 school year from five years ago.

Another popular strategy for gaining a foothold overseas is securing a foreign passport through “immigrant investor” programs.

The ultimate goal in transferring money out of China, said Transparency International’s Liao, is that either the official or his offspring will have a happy life after they leave China. The new crackdown on overseas assets is designed to stop this process.

“The government wants to make them hopeless,” Liao said. The message is “You can’t just steal money from China and then enjoy life in Canada.”

Whether the Beijing’s hunt for overseas properties will be a success, and perhaps even impact home prices in Los Angeles or London, remains to be seen.

Seizing and recovering assets in a foreign country can be a tough slog for any government, experts in the field say. While China and most Western nations are signatories to the United Nations Convention Against Corruption, in which countries pledge to help each other recover the stolen funds, the process is lengthy, arduous, and fraught with diplomatic and legal complications.

In the United States, for example, the party hoping to seize a home needs to prove that it was purchased entirely with funds derived through corruption. “In drug-related cases you seize the house and the car,” quickly and authoritatively, said Edmonds. But corruption-related cases are often more complicated, because tainted funds are mingled with other, legitimate, funds, he said.

Another glaring vulnerability in any U.S.-Chinese cooperation on asset seizure is the lack of a “Mutual Legal Assistance Treaty” between the two countries, which allows governments to seize foreign assets related to crime, said Daniel F. Roules, a Shanghai-based partner with Squire Sanders. That means Chinese authorities need to rely on cooperation from their U.S. counterparts.

And while U.S. government officials have pledged to help, Laio of Transparency International said that Chinese officials he’s spoken with aren’t getting as much assistance as they would like. The U.S. State Department and Department of Justice declined to comment.

British courts, on the other hand, see themselves as “world leaders in asset recovery,” Osman said, because there are powerful laws on the books, a long line of precedents and relatively straightforward laws.

A £10 million ($16 million) home in Hampstead Gardens, a wealthy London suburb, purchased by Saadi Gaddafi, son of the deposed Libyan dictator, was seized in 2012 by the Libyan government after British courts ruled that Saadi could not have made enough money to purchase it on his military salary. Often officials hoping to pursue property they believe was purchased by the fruits of corruption will “get a judgment here [in the U.K.] and get it enforced in another jurisdiction,” Osman said.

A U.K. judgement can sometimes be used successfully in the United States, as it was to seize a mansion in Houston and two Merrill Lynch brokerage accounts belonging to Nigerian governor James Onanefe Ibori.

Whether the Chinese campaign to halt corruption and seize overseas assets will have real impact on property markets in the United States, Australia and Canada has less to do with international laws than it does what happens in Beijing in coming months.

“What it comes down to is political will,” said Osman. Given the changing winds of politics, a push towards recovering assets of one person or group can sometimes be halted abruptly. “These by their very nature are lengthy proceedings and sometimes the political will fades,” he said. In one case he worked on involving a South Asian country, “the guys’ assets we were tracing a few years ago are now the guys in power.”

Heather Timmons is an Asia correspondent for Quartz.

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