By FAN REN

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‘Serious embezzlement and fraud were found in central budget implementation.” This was the unflattering statement made by Li Jinhua, Auditor-General of China’s National Audit Office, after completing the audit of 2003 budget implementation in 55 departments and units under the State Council.

In his auditing work report on the implementation of the 2003 central budget to the Standing Committee of the National People’s Congress (NPC), Li used the word “astonishing” to describe the serious financial malpractice, which he listed under the following categories:

—Large amounts. Some cases involved more than 100 million yuan ($12.08 million).

—Shocking. A huge amount of relief fund for disaster-hit areas was used for the construction of office buildings, guesthouses and auditoriums.

—Involvement of high-ranking departments. Some ministries and commissions were involved in embezzlement and fraud cases.

—Concentrated exposition. Some cases that had been concealed for 10 years were exposed in a concentrated way in the latest auditing investigation.

Poor Management

Li disclosed that seven units obtained a total of 96.73 million yuan ($11.68 million) of financial funds by fabricating payroll and construction projects. For instance, the Academy of Forest Inventory and Planning under the State Forestry Administration, together with other three units, fabricated seven sand-control and afforestation programs, taking 4.15 million yuan ($501,208) from discount of loans.

The auditing work report reveals that altogether 41 departments embezzled as much as 1.42 billion yuan ($171.5 million) of funds for special projects and used the money to construct residence and office buildings for their own departments and distribute as subsidies to their employees. According to Li, since 1999, the State General Administration of Sports has embezzled 131 million yuan ($15.82 million) from the country’s Olympic special funds, with 109 million yuan ($13.16 million) used to build residential buildings for its employees, and 22.04 million yuan ($2.66 million) used as employees’ subsidies and investment in attached units.

Still, some departments, which are authorized to distribute budget funds, retained a large portion of the budget fund in the beginning of 2003. For instance, the Commission of Science, Technology and Industry for National Defense pocketed 6.29 billion yuan ($759.66 million), or 38.8 percent of its total budgeted fund of 16.21 billion yuan ($1.96 billion) that year. The Ministry of Science and Technology kept 1.7 billion yuan ($205.31 million), the total for scientific research that should be distributed at the beginning of 2003, until August and November of that year.

Huge Profits Concealed by SOEs

The investigation also exposed the financial malpractice of state-owned enterprises (SOEs) in the following aspects.

—Concealing profits. Take former State Power Co. as an example. The company reported its profits in 2003 as 21.5 billion yuan ($2.6 billion), but the auditing investigation disclosed that the profit was 24.7 billion yuan ($2.98 billion). From 1998 to 2002, the company concealed 7.8 billion yuan ($942 million) in profits by writing more cost, but less income and profits.

—Failure in decision-making. The investigation also disclosed that among the State Power Co.’s 6,818 business activities, including investment, borrowing, guarantee, large volumes of purchases and major changes of equity, 631 registered losses, involving 7.84 billion yuan ($946.86 million). Of this, 3.28 billion yuan ($396 million), or 42 percent, was caused by leaders’ malpractice in decision-making or law-violating activities. Another example is the Power Supply Corp. of Beijing. The company once served as the guarantor of the Beijing Weikeri Co. for a loan of 1.12 billion yuan ($135.27 million). After the bankruptcy of Weikeri, the corporation suffered a loss of 457 million yuan ($55.19 million), for bearing corresponding responsibility of compensation.

—State assets drain. State assets have drained off 4.5 billion yuan ($543.48 million) due to regulation-violating activities. Of this total, 2.97 billion yuan ($358.7 million), or 66 percent, was caused by transaction of state assets and 15.3 percent by other activities, such as investment, fraudulently obtaining loans, and serving as guarantors.

Disaster Relief Fund Embezzled

Investigations show that nine of the 14 flood-hit counties in the Huaihe River Valley, and Anhui, Henan and Jiangsu provinces, grafted 136 million yuan ($16.43 million) from the disaster relief fund, by reporting more disaster-hit households than the real numbers.

Seven of the nine earthquake-hit counties in Yunnan Province embezzled a total of 8.68 million yuan ($1.05million) by cheating the upper-level government.

Huoqiu County in Anhui Province embezzled 3.6 million yuan ($434.782), which should have been distributed to 1,804 disaster-stricken households for housing construction. In Funan County of Anhui, 17 cadres from three towns pocketed 200,000 yuan ($24,154) earmarked by the Central Government for the resettlement of people in flood discharge areas.

The same problem was also found in southwest China’s Yunnan Province in earthquake relief. The state treasury earmarked 120 million yuan ($14.49 million) to earthquake-hit areas in 2003. But up to March this year, 51.74 million yuan ($6.25 million) was still kept by the county financial authorities, and 41.11 million yuan ($4.96 million) was used to balance the local budget or build office buildings, auditoriums and guesthouses.

Tax Dodging

RUINED LANDS: The parameter fence of a golf course in Hunan Province built on farmland

The investigation conducted among 788 enterprises in 17 provinces showed that these enterprises evaded taxes of 13.3 billion yuan ($1.61 billion) in 2002 and 11.8 billion yuan ($1.43 billion) in the first nine months of 2003.

The problem was caused by following reasons:

—Dodging or delaying collection of tax. Half of the 788 enterprises investigated dodged or delayed tax payment, resulting in a drain of 10.6 billion yuan ($1.28 billion) in 2002 and 10.2 billion yuan ($1.23 billion) in the first nine months of 2003. Take the Taxation Bureau of Tangshan City, Hebei Province, for an example. It allowed 13 iron and steel plants to delay paying 1.06 billion yuan ($128 million) in tax for expanding production.

—Slack management. Due to the slack performance in tax collection and arbitrary tax exemption and reduction granted to enterprises, 2.76 billion yuan ($333 million) of state revenue from taxation has drained off. Some 169 enterprises were involved in these cases, making up 21 percent of the total number of enterprises surveyed.

Besides, dereliction of duty by taxation authorities also caused a huge loss in state tax revenue. Take Xuchang City in Henan Province for example. The receipt management once was out of control. Some enterprises that did not engage in transportation also obtained receipts used for the business, embezzling 5.13 million yuan ($619,565) of state tax revenue.

Illegal Requisition of Farmland

The investigation also disclosed severe problems in farmland requisition and trade.

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In Hongshan District, Wuhan City, 61.8 hectares of forestland were illegally traded four times. During the transactions some units and individuals embezzled 40 million yuan ($4.83 million). In December 2003, the State Food and Drug Administration sold 14.4 hectares of farmland in Changping District, which had been allocated to it by the state for free, to two developers for 85 million yuan ($10.27 million) without authorization. The activity goes against the Law on Land Administration and the state regulations on rectifying the land market order.

Similar problems were also found in the construction of university cities in Nanjing, Hangzhou, Zhuhai and Hebei’s Langfang. In 2001-02, the developer of Dongfang University City in Langfang colluded with five village committees in Langfang and Beijing’s Tongzhou District, and leased 400 hectares of land from local farmers, including 382 hectares of farmland, to build five golf courses under the pretext of building accessory facilities for the city's university.

New Financial Risk

The investigation on the Industrial and Commercial Bank of China and its 21 branches revealed 30 cases of illegally granting loans, involving 6.9 billion yuan ($833 million). For instance, the branch bank in Shanghai’s Waigaoqiao Bonded Area granted 71.41 million yuan ($8.62 million) to a person named Yao Kangda for housing speculation.

Between 2000-02, the Bank of Communication Jinzhou Branch, colluding with local courts, used fake documents to write off 221 million yuan ($26.69 million) of non-performing loans for 175 debtors. But the debtors, who were not informed about this, continued to pay for their loans. The money they paid entered the “small exchequer’’ of the bank, while the courts charged 853,000 yuan ($103,019) of court costs from the fabricated lawsuits.