Last November, Oriental Outlook magazine printed a diary that Hunan entrepreneurs Mao Shijian and Zhou Difan had kept during the eight months they spent trying to get their fireworks business registered. The publication of the diary, whose 105 entries each recorded a gift or a bribe paid out to local bureaucrats, eventually resulted in thirty-six officials and party functionaries being disciplined.
But corrupt bureaucrats were only one part of a considerably more sensational story. After the local government issued its report in April, China Youth Daily did a follow-up investigation and discovered a sordid tale of greed, family politics, thugs, guns, and revenge.
Because Zhou and Mao were not well-connected in town, they sent their gifts through Zhou’s brother, Zhou Dixuan (called Liang Wenkuan in the Oriental Outlook article). As a result, the favor they curried belonged solely to Zhou Dixuan even though he didn’t put up any cash. Once Zhou Dixuan forced Zhou and Mao out of the picture, he and his wife began to systematically fleece their investors and franchisees by taking their money and then stalling when it came time to approve permit applications. One franchisee, who was ostensibly responsible for overall company strategy, was held at gunpoint when he questioned the boss’s financial planning.
According to Chinese law, prosecution for bribery can take place only when gifts total more than RMB 200,000; although Zhou and Mao gave Zhou Dixuan more than RMB 300,000 to build relationships with local officials, the authorities only confirmed that RMB 180,000 had been accepted. Despite all of the publicity, there’s a good chance that most of the people involved will get off with little more than a slap on the wrist.
Everyone except for Zhou Difan and Mao Shijian, that is:
The director of one government agency in Lianyuan once told investors: “You’ve got to give gifts to get anything done these days. When Zhou Dixuan and Chen Aimin get out, they’ll settle your hash.”
Last year’s article illustrated the difficulties that small-town entrepreneurs have in navigating local bureaucracy. The latest report is more instructive: paying out bribes is likely to backfire, and if you must curry favor with the authorities to get your business off the ground, make sure you do it in person.
A full investigation into the Hunan “gift diary”
by Hong Kefei / CYD
At the end of 2007, an “entertainment and gift diary” for Xianglian Co., a small private enterprise, surfaced online. The diary, which ran to more than one hundred entries, recorded the bribes that the Lianyuan, Hunan fireworks company paid out over the course of eight months.
The gift diary was treated seriously by the Hunan provincial leadership. Provincial party secretary Zhang Chunxian, vice-secretary Mei Kebao, Discipline Inspection secretary Xu Yunzhao, and Publicity chief Jiang Jianguo issued instructions requesting that the matter be thoroughly investigated and that the persons responsible be severely disciplined.
In April, 2008, the Loudi Discipline Inspection Committee had determined that the gift diary was genuine and had identified thirty-eight people involved. However, a short while after the “gift diary” report was issued, shifting social conditions did not meant that skies did not clear up for Xianglian’s rural investors, who had been forced to become informants.
“A giant net had fallen on our heads.” Zhou Difan, one of the informants, said that once the gift diary was made public, they became the targets of criticism and accusations. The stockholders had borrowed most of their investment money from friends and family, so now that things were at a standstill, the big issue was how to continue in the future.
“The diary is out there and Zhou Dixuan has been arrested, but apart from Zhou and his wife, there’s been no legal proceedings brought against anyone else. And Zhou himself might not be charged with bribery.” The stockholders said that they are now waiting for the company to start up again so they can restore order to the market and avoid future losses.
In June and July, Zhou Difan and Mao Shijiang took multiple trips to Changsha to submit petitions, but their own circumstances continued to decline.
The Xianglian company offices at the entrance to Lianyuan City were three storefronts that they and a few other stockholders had rented. They were utterly empty, and even though the doors were always locked, the new fireworks display cabinets were covered in a layer of dust.
“We wanted to restart normal company operations here, but now it looks like that’s impossible,” Zhou said. The Xianglian company seal and paperwork was held by his sister-in-law, Chen Aimin, and since Chen Aimin’s case had been transferred to the justice system, the seal and other materials were now in the hands of the police and prosecutors. Business operations were suspended. “Xianglian had more than 300 outlets bringing in annual profits of more than 2 million. Losses are serious now that things have stopped.”
Mao Shijian had run a small shop in the town of Hetang and sold fireworks on the side. In November, 2004, the variety store was the only licensed seller of fireworks in Lianyuan. Because the wholesalers in town only gave a profit of 3%, while those in the next town over gave 10%, Mao went over to import 3,000 worth of fireworks. However, his shipment was seized by the police.
It so happened that Zhou Difan was a guest at Mao’s home just them. Mao asked him whether he knew anyone who could contact the police squad to get his fireworks back. Zhou’s brother, Zhou Dixuan, was an official with the justice department, so he asked him to talk to the police leadership. After sending gifts and taking them to dinner, they got the fireworks back.
After this experience, Mao found a new goal: to obtain a fireworks sales license unrestricted by the variety store.
Coincidentally, fireworks had just been brought under the administration of the Work Safety Bureau, which had begun to issue sales licenses. Zhou Dixuan told Mao Shijian: “Get together twenty or thirty thousand and I’ll help you get a wholesaler license.” Zhou stipulated that he would not be a shareholder, but that he would serve as the legal consultant for the wholesale company and draw a consulting fee of RMB 24,000 a year.
[Brief narrative of the bribe diary omitted; see earlier report.]
On 15 March, 2005, a wholesale permit was obtained from the Fireworks Wholesale Department, and on the 18th, the company’s operating license was obtained.
By this point, according to the gift diary, Mao Shijian had spent RMB 190,000 and Zhou Difan had spent nearly 80,000.
The legal representative of the wholesale company was Zhou Difan, and there were three shareholders in all: Zhou and Mao each held 37.5%, while Zhou Dixuan’s wife Chen Aimin held 25% as a member of the board of supervisors. Chen’s shares were non-voting.
On 28 April, the wholesale company expanded its registration to become the Xianglian Fireworks Sales Co., Ltd., and was in possession of one of just 2 operating licenses in Lianyuan. According to Mao’s records, to accomplish this, he had spent RMB 410,000 and Zhou had spent more than RMB 100,000, or nearly RMB 520,000 in all. Most of this money came from their friends and relatives.
Although the new company had spent such a large sum, it was all in the realm of entertainment and gifts. There had been no investment in salaries, inventory, or office equipment.
Entertaining and giving gifts had a noticeable effect: according to the Business Operating License issued by the Lianyuan Bureau of Industry and Commerce, the Lianyuan Xianglian Fireworks Sales Company was established on 28 April, 2005. However, the Fireworks Sales Permit issued to Xianglian by the Loudi Work Safety Bureau clearly shows that it was issued on 16 March, indicating that even before the company was established, it had already obtained from the Work Safety Bureau a permit to sell fireworks.
The biggest change in the newly-registered company was to its ownership structure. Out of total registered capital of RMB 800,000, Chen Aimin held 280,000, Zhou Difan 260,000, and Mao Shijian 260,000. Chen Aimin became CEO, and Zhou Difan lost his position as legal representative.
Mao Shijian and Zhou Difan let Zhou Dixuan know that they weren’t happy about this: They put up the money but Chen Aimin only held non-voting stock. How is it that she gets to be in control of the company as majority shareholder and CEO? “But Zhou Dixuan said that Chen Aimin had to have RMB 20,000 more than the two of us, or else we could forget about the company.” Zhou Difan said that although he was Zhou Dixuan’s brother, Zhou Dixuan didn’t treat him well at all. “At first, he didn’t know that you could make so much money in this business, but then he asked around and discovered that it really had a good future. If business was good, then it wouldn’t be unusual to make 10,000 a day. There was lots of room for profit. So he changed.”
Zhou Difan believes that he and Mao Shijian were vulnerable because the two of them were from the countryside and had no connections in the government. It was Zhou Dixuan who went out whenever gifts were given or banquets were held. So even though all the money spent was theirs, the relationships belonged to Zhou Dixuan.
Zhou Dixuan and his wife took full control of Xianglian.
After the gift diary was made public, the police tapped HN Dragon as an expert to audit the company, and on 19 March, 2008, it issued a report that read, in part: “Chen Aimin was the company’s legal representative, and her husband Zhou Dixuan was the company’s legal consultant who also was deeply involved in company operations. Their daughter Zhou Hong was nominally the company accountant, but in actuality it was Chen Aimin who handled the accounting. Her skills were limited, leading to frequent errors and omissions. This caused the company’s operations and financial affairs to be joined into one monolithic entity whose management was imperfect and only nominal under internal control.”
Xianglian seemed to be Zhou Dixuan’s masterpiece. According to stockholder records, when the company was launched on 30 September, 2005, Zhou and his wife spent RMB 100,000 on a lavish display and presented government leaders in every department red envelopes of cash. Zhou’s family also streamed in to watch the spectacle, and each of them received an envelope containing RMB 200.
Zhou had previously worked at the Bureau of Justice, and Chen Aimin had worked at the Bureau of Culture. Neither husband nor wife had much experience in the fireworks sector or in business operation; under their control the company became disorganized and cash-poor.
Zhou Dixuan’s main strategy was to use the company’s future prospects to attract new investment. According to the expert audit, he took at least RMB 2.07 million from eight investors, including Zhou Jianming and Liu Sheng’e, but these individuals became illegal investors who were never registered. At the same time, Chen Aimin received quality guarantee deposits from fireworks factories and security deposits from the supply and distribution network. But not all of this money was used toward company operations; instead, company funds were repeatedly used for matters unrelated to normal company operation, ultimately putting Xianglian seriously in the red.
Contractor and gift-giver Zhou Jianming
At this point, Zhou Jianming arrived in the position of a “digital supervisor.” Zhou Dixuan had been secretary of the youth committee in Zhou Jianming’s hometown of Maotang, and even today Zhou Jianming calls him “Secretary Zhou.”
“I knew right away that the company was a mess, but it really did have a bright future.” Zhou Jianming told the reporter that when Zhou Dixuan first advised him to invest, he hesitated, but eventually Zhou Dixuan told him in front of the rest of the investors: “Zhou Jianming, you’re an entrepreneurial whiz who can take this company red-hot. When you join up, the company will be run according to your ideas, under digital control.”
Zhou Jianming was from the countryside, but he had run a kindergarten as well as a small village business that opened three locations in Maotang, so he did have some experience.
In May, 2006, Zhou Jianming gathered together RMB 300,000 to buy in and was named corporate secretary. In December, he signed a five-year contract with Chen Aimin and handed over his 300,000.
However, the actual term of contract did not even last a month. “The real length of my contract was less than 20 days, which were all profitable,” Zhou said. “But this was just something to make the scam go down easier.”
Zhou Jianming first needed to obtain a transport permit, but he was unable to get one in the more than ten trips he made to the PSB — Chen Aimin retained the company seal and had given him the brush-off.
Zhou went to the next level of the security branch of the Loudi PSB and met a branch leader named Liu, from whom he received the following answer: any legal contractor can file the paperwork for a transport permit; there’s no need to pay any fees or send any gifts. The branch leader even organized a stockholders’ meeting for them in an attempt to solve the problem. However, because Chen Aimin and Zhou Dixuan refused to take part or supply the company seal, the paperwork remained incomplete.
Zhou Dixuan and Chen Aimin had their own plans, as it turned out. On 7 February, 2007, the Lianyuan PSB declared that Zhou Jianming would be detained for ten days for “illegal transport.”
Because the last day of his detention was the first day of the Spring Festival, “to get me out earlier so I could spend the holiday with my family, Zhou Dixuan and Chen Aimin took RMB 40,000 from me to pull some strings.”
At the same time he was detained, a large quantity of fireworks were confiscated, and his losses amounted to nearly RMB 200,000. This put Zhou Jianming in a difficult position.
After Zhou Jianming became a contractor, Zhou Dixuan got him wrapped up in gift giving. Zhou Jianming gave the reporter a record of the gifts he had given in the course of business. In just February and March, 2007, when Xianglian was applying to be upgraded from a B-level to an A-level company, the numbers were as follows:
20 Feb: RMB 5,000;
26 Feb: RMB 46,000;
1 Mar: RMB 40,000;
5 Mar: RMB 32,000;
15 Mar: RMB 60,000
In all, he gave Zhou Dixuan RMB 228,000 to give gifts to government leaders. The contractor agreement stated, “Contractors may work together to build relationships with administrative departments; all such expenses are the responsibility of contractors themselves.”
“After spending so much time with the kids in the kindergarten, he’s an honest man. He always felt that if he put his heart into making those payments, he’d be able to win over Zhou Dixuan and his wife,” Zhou Difan and Mao Shijian said. And because of this belief, even when he encountered obstacle after premeditated obstacle, Zhou Jianming still continued to make investments.
During his short time as a contractor, Zhou Jianming put in more than RMB 2 million. The loans piled up and he eventually came to the end of his rope. At last he had to write a letter to the other shareholders: “It’s all because I wanted too much to make the company better. But there are too many time bombs buried in it. Otherwise, I wouldn’t in the straits I am now.”
After he was let out of detention, Zhou Jianming’s operating contract was basically meaningless. Zhou Dixuan and his wife revoked his operating rights.
Zhou Jianming at gunpoint
On 12 and 13 June, 2007 Chen Aimin and Zhou Dixuan called Zhou Jianming several times to request that he bring his investment paperwork and the receipts that Zhou Dixuan had given him to a stockholders’ meeting to be held at 8am on the 14th, where they would settle accounts.
Zhou Jianming believed this, but when he arrived at Zhou Dixuan’s home, he discovered that no other stockholders were present. Only five fireworks inspections officers whom Zhou Dixuan had invited over were hanging around the front gate.
Zhou Jianming said that he will never forget what happened next.
On the third floor, after checking over the data, Chen Aimin set aside some of the receipts Zhou had brought and put them in a folder. The rest she returned to him in the plastic bag he had brought.
After lunch, Zhou picked up the bag and turned to leave. Chen caught hold of the bag: “You can’t take this. They’re suing us, and if you take these receipts, you’ll be sorry. You’re guilty of sending gifts, too.”
Zhou said, “Then write out a temporary receipt for me.” Chen said, with an edge in her voice, “No. Bring the rest of them with you tomorrow and I’ll give you a real receipt for them all.”
Zhou felt something wasn’t right: “Then was today all just a scam?”
Right then, Zhou Dixuan charged in with three of the officials who had been waiting outside, and Chen shouted, “Zhou Jianming hit me!”
Then Zhou Dixuan said, “Zhou Jianming never listens! Let me take care of him!” Closing the door, he grabbed Zhou Jianming by the neck, and said to Chen, “Hand it to me!”
Chen snatched a gun from the bedroom and gave it to Zhou Dixuan, who removed it from its holster and leveled the barrel at Zhou Jianming’s temple. “Obey, or you’re dead!” Panicked, Zhou Jianmin’s hands released the bag of their own accord.
Then Chen Aimin grabbed the bag and pushed Zhou Jianming out the door.
“It was important to stay alive, so I didn’t want the bag any more. I ran down the stairs and heard Zhou Dixuan shout, ‘Sanyazi, if that schemer tries to make any trouble, I want you to kill him!”
From that day forth, Zhou Jianming had nothing more to do with Xianglian.
After the “gift diary” was made public and the case team was set up, investigators found a gun and some of the receipts at Zhou Dixuan’s home. The case team arranged for a four-day meeting between Zhou Jianming and Zhou Dixuan at the Loudi Procuratorate, during which time the two reenacted for the investigators the scene of Zhou Jianming being held at gunpoint.
At least 36 officials accepted cash and bribes
In November, 2007, after the Loudi Discipline Inspection Committee (DIC) sent a letter to its provincial counterpart urging it to handle the case, the Lianyuan Committee organized a preliminary investigation. On 29 November, Liu Hesheng, secretary of the Loudi DIC and a member of the municipal standing committee, visited Lianyuan.
Deng Kairu, head of the team handling the “gift diary” case, told the media that the Loudi and Lianyuan DICs had transferred more than twenty people specifically to take part in the case work.
“The tax, business administration, and public security bureaus sent core members to take part in the case, so the number of participants was actually more than just twenty.” Zheng said, “It’s been many years since we’ve seen so many provincial and municipal leaders paying such close attention to a single case. Though the amount of money involved isn’t all that much, it could have an extremely harmful influence.”
The 105 items revealed in the “gift diary” involved many government departments, including the tax, business administration, work safety, and public security bureaus. The large number of people and the relatively small amount of money involving each one led the Loudi DIC to decide to “seriously punish a minority but educate the majority.”
At the beginning of December, the DIC issued a notice to work units requesting that the individuals involved in the “gift diary” case write self-examinations. It noted that reduced punishment would be considered for anyone who gave their account to the case team within 5 days and returned the money and gifts they had taken.
On 15 December, the investigators had reached general conclusions about disciplinary violations involving government and party staffers.
On 17 December, the standing committee of the Loudi DIC decided to give the 36 government and party officials involved in the case another four days to perform their self-examinations. The investigators explained that during this period, most of the people involved in the case made statements to the case team and voluntarily turned over ill-gotten funds in the amount of RMB 42,660. But there were still a few people involved who had not performed the requested self-examination.
Chen Aimin petitioned several government offices in Beijing claiming that she had not engaged in bribery.
Therefore, beginning on 21 December, the case team concentrated its attention on speaking to the people involved in the case in Loudi and Lianyuan. Those who had accepted large amounts of cash and goods, namely Tong Guohui, the vice-director of the Loudi Department of Work Safety, Wang Zhu’an, a section chief with that department, Yuan Xingguo, a deputy office superintendent with the department, Dai Xinnian and Li Xiongqi, director and vice-director of the Lianyuan Department of Work Safety, and Zeng Yihua, director of the training section, were dismissed, demoted, stripped of party membership, or placed on party probation.
The other thirty party and government staffers who accepted what the Loudi DIC felt to be gifts and monies of relatively small value (between RMB 1,000 and 7,000) and who had voluntarily them in during self-examination, were given individual warnings but were not charged. Those thirty individuals included nine with the Work Safety Department, nine with the Tax Bureau, six with Business Administration, four with the PSB, and two others.
Significantly, although the Loudi DIC determined that Zhou Difan and Mao Shijian gave at least RMB 300,000 to Zhou Dixuan for entertaining and giving gifts to various government departments, the investigation only turned up RMB 180,000 in bribes, a figure that falls short of the RMB 200,000 needed to bring a prosecution for bribery. This “gift” case may might not involve the crime of bribery after all.
The future of the informants
After the investigation concluded, business was still suspended for Zhou Difan and the others. What had them more worried was the progress of the case. They believed that the departments handling the case had not pegged Chen Aimin and Zhou Dixuan with any of their crimes — misappropriation of company assets, defrauding investors, bribery, and possession of a firearm.
But the informants were even more troubled by what the director of one government agency in Lianyuan once told them: “You’ve got to give gifts to get anything done these days. When Zhou Dixuan and Chen Aimin get out, they’ll settle your hash.”
When Zhou Difan and his lawyer visited a certain government office on business, workers there threw them out.
“It’s obvious that this is revenge. Lots of people are intentionally making things difficult. And whenever I look them up, they treat me like the god of pestilence and avoid me. True, they no longer take our gifts, but it’s still difficult to get anything done,” Zhou Difan said.
“That’s what society is like these days. It’s impossible to avoid sending gifts,” said one official in Loudi, who suggested that the disclosure of the gift diary’s disclosure would have subtle, long-lasting effects.
The cartoon in this post (by Xu Jian) comes from a China Youth Daily article published in January that reported findings about corruption in China: in contrast to the heavy punishment faced by officials who accept, the people on the other end typically realize a ten-fold return on their “investment.”