Asian money launderers sent region-wide warning

Law enforcement officials in China, Taiwan, Myanmar, Thailand and the Philippines have launched a blitzkrieg targeting money launderers who have been swindling and blackmailing average citizens throughout Asia to the tune of millions of dollars.

The criminals, part of a transnational syndicate, began squeezing funds from companies and individuals in 2007. Phoning their intended victims and claiming to be speaking on behalf of the police, they informed them that their bank accounts were being abused by money launderers and terrorist organizations, then instructed them to transfer funds to "safe accounts" that were in fact controlled and owned by the syndicate.

According to Liu Ancheng, deputy director of China's Criminal Investigation Bureau (CIB), they then withdrew the money via local ATMs in Taiwan and Thailand.

In late May, after a two-year investigation, law enforcement authorities arrested 482 people from Myanmar, China, Taiwan, and Thailand. Ultimately, they will be accused of defrauding victims of funds totaling 73 million yuan (US$11.5 million) in at least 510 cases.

Originally, the group operated out of the Chinese mainland. Following a crackdown there in 2010, operations were move to various locations throughout Asia, including Myanmar, Cambodia, Indonesia, Fiji, Malaysia, Sri Lanka, Taiwan, and Thailand. According to the CIB, the group attracted recruits by promising high salaries and tourist visas and supplying specialized fraud training.

According to the Philippines police, authorities got one of their big breaks in the case when they tracked and geospatially located the Internet Protocol (IP) addresses of the gang, which made its calls using voice over IP. The criminals reportedly worked in cells that carried out the various aspects of the operation: phone calls; maintenance of the telecom network's servers and equipment; and withdrawing, transferring, and eventually, laundering money.

To capture the group, China engaged in unprecedented law enforcement cooperation with Taiwan - staggering in and of itself, since Beijing still considers Taiwan to be sovereign Chinese territory - and six other countries. The CIB has publicly asked other law enforcement agencies for help in tracking those in Asia and Oceania outside its own jurisdiction who are involved in telecrime.

At this juncture, international cooperation is "important to crack down on telephone fraud groups", according to Yang Dong, deputy director of China's criminal investigation department.

What can governments throughout Asia and Oceania do to stop telefraud and money laundering? While global organizations, such as INTERPOL, have an important role to play, it is time for forward-thinking Asian governments to create ASIAPOL as a smaller, more robust, regional association. Europe has EUROPOL, a law enforcement agency whose primary mission is to fight international crime and terrorism. ASIAPOL should fight human smuggling, counterfeiting, terrorism, drug trafficking, money laundering, organized crime, and the like.

Asian countries should also systemically roll out bilateral police cooperation agreements that would, among other measures, fight identity theft, phishing schemes, and fraud. As a corollary, law enforcement attaches assigned to select embassies around the region should be encouraged to help their host nations crack down on criminal activities sponsored by nationals from their home jurisdictions.

Following the money is another crucial tool in capturing criminals, but law enforcement agencies must aggregate and sort through financial intelligence in a smarter way. There are countless pieces of financial information filed internationally by a wide variety of sources, including banks, money service businesses, and individuals.

Law enforcement and intelligence analysts must become proficient in the innovative intelligence and financial tools developed in the last decade, including geospatial and network analysis tools, to attack criminal networks and uncover the financial links among them.

Tools such as Palantir, Analyst's Notebook, ArcGIS, and Google Earth make it easier to manage and sort through vast reams of data and facilitate tracking of financial flows and smuggling routes.

Nevertheless, many government officials do not use them and are not even aware that they exist. Ignoring these innovations hampers their ability to capture and put behind bars members of international crime syndicates, triads, and other illicit actors.

Finally, governments should focus on tightening their laws regarding jail time and fines for those engaging in telecommunications fraud. China, for example, has taken telefraud seriously, and sentences for this type of crime now range from three to 10 years.

A sentence of life in prison is also considered if the amount involved is over 500,000 yuan and the fraud results in someone's death. Keeping in mind the need to also balance human rights and basic liberties, other governments who wish to mitigate this emerging risk should consider following suit.

The criminals are getting better, faster, and smarter at their trade. This should force law enforcement officials to think beyond national borders and increase intelligence sharing capabilities. Lawmakers will also need to do their part by instituting appropriate penalties. All of this is critical for protecting and defending average citizens.

Avi Jorisch

Money laundering: Taken to the cleaners

A probe into the use of banks as conduits for drugs money has exposed systemic failings in finance

Clean up job: a raid on the Mexico City home of businessman Zhenli Ye Gon found more than $200 million

In March 2007, authorities raided the home of Zhenli Ye Gon, a pharmaceuticals magnate based in Mexico City. At his house in the plush suburb of Lomas de Chapultepec, they found $205.6m in hundred dollar bills. The piles of notes were so large they spilled out of the lounge, down the corridors and into the kitchen.

While the raid was going on, Mr Ye Gon was reportedly spotted in Las Vegas indulging in his favourite hobby: high-stakes poker. Now in a US prison awaiting extradition to Mexico, he stands accused of buying from China and then selling to drug gangs the precursor chemicals used to make methamphetamine, a stimulant known in north America as “crystal meth”. As it happens, Mr Ye Gon was also a long-time client of banking giant HSBC.

The episode, contained in a report this week from the US Senate, shows what American lawmakers have called a systemic failure by the UK’s largest bank to control money laundering in its global operations and stop such funds from entering the US.

The multi-year investigation uncovered that HSBC was a conduit for drug money, had clients with alleged ties to terrorism, and stripped details from transactions that would have identified Iranian entities – which may have put the bank in breach of US sanctions against that country. HSBC’s internal culture has been “pervasively polluted for a long time”, said Senator Carl Levin, who led the investigation.

The probe has shaken HSBC; prompted the resignation of David Bagley, the bank’s head of compliance; and – in the wake of the Libor rate-rigging scandal – further battered London’s reputation as a global financial centre.

More than anything, it has shown the reach and depth of the world’s drug-trafficking and money-laundering businesses. From China to Mexico, the names of the locales and participants may seem exotic. Yet the business is often parochial, as Mr Ye Gon’s story shows.

Shortly after his arrest, Mr Ye Gon explained his fondness for gambling. Born in Shanghai in 1963, naturalised in Mexico in 2002, and with no previous criminal record, Mr Ye Gon said he had lost $126m in Las Vegas’ casinos, but as a valued customer, had been given back 40 per cent of his losses, plus gifts of luxury cars.

Although Mr Ye Gon denies all charges, the story of his casino trips offers some insight into one way in which suitcases of money can be laundered. A gambler with dirty money can buy millions of dollars of casino chips and then recoup some of the losses in legitimate cheques and cars.

In the rinse and spin of money cleaning, HSBC was simply one washing machine among many. As Antonio Maria Costa, the former head of the UN Office of Drugs and Crime (UNODC), says: “Today I cannot think of one bank in the world that has not been penetrated by mafia money.”

The global trade in illicit drugs is huge. The UNODC estimates it is worth $380bn in 2008 dollars, about 10 times the annual sales of online retailer Amazon. Indeed, it was because of international drug trafficking that money laundering first vaulted on to the agenda of international crime fighters.

The creation of the Financial Action Task Force in 1989 pooled the G7 group of industrial nations’ money-laundering expertise. The initiative gained real urgency after the 9/11 terrorist attacks in 2001. “Like it or not,” a US justice official then told a gathering of US bankers, “you are going to be on the front line of the coming war on terrorism.”

Yet the impact of this financial war appears limited – so far. Given that the illicit drugs business is blurred and all its numbers are prone to exaggeration, any assessment is difficult. What is clear, though, is that the vast majority of its profits are earned in drug-consuming nations, where the money trail begins.

Take the $35bn a year US cocaine market. Only 1.5 per cent of its proceeds accrue to coca-leaf producing peasants in the Andes. International traffickers get about 13 per cent. The vast bulk, about 85 per cent, is earned by distributors in the US. (European figures are similar.) It is the inadvertent washing of these dirty dollars that HSBC was accused of.

Money laundering is a three step process: drugs are sold, the money “cleaned” of its illegal origins, and then deposited somewhere in the global financial system. From the testimonies of convicted drug kingpins, Mexican authorities believe it has typically worked something like this.

Cocaine cargoes are dispatched from Latin America, say, to Atlanta, where they are sold wholesale to US-based retailers. The wholesalers are paid in cash, typically $10 and $20 bills, which they truck south to border towns, such as El Paso. Drivers charge between 6 and 8 per cent, depending on the distance and load.

The money is then changed into handier $100 bills and filtered across the border, to be fed into classic front businesses – cash-intensive operations such as restaurants – or swapped at exchange houses for pesos. The rinsed dollars are then bought by banks, such as HSBC, from where they can be wired anywhere in the world.

HSBC Mexico was well-placed to hoover up those dollars. At one point after its $1.1bn acquisition of Grupo Financiero Bital in 2002, the bank had more branches in Mexico than in the UK. Yet all of the last stages of this process are legal, even if suspicious. Furthermore, they are camouflaged by larger legitimate money flows.

The Senate report found that HSBC transferred $7bn to its US holding through 2007 and 2008. It seems some of those transfers may even then have been illegal drug trade proceeds. Yet, by comparison, daily turnover in Mexico’s currency markets is $50bn.

Officials are often, therefore, looking for the proverbial needle in the haystack. Their search is further complicated by cunning new practices, such as cleaning dirty dollars via prepaid store cards, a business worth some $550bn a year; or the purchase of legal goods – such as tomatoes or bolts of fabric – which are then legitimately transported across borders.

Money laundering, like drug trafficking, is also something of a vicious circle: bulky dollar bills are often reconverted into handy packets of cocaine, the drugs thereby concealing money rather than the reverse. Another characteristic of the business: someone else is always to blame.

During the Washington hearing, there was some tacit finger-pointing at London – even though the scale of HSBC’s wrongdoing pales next to Wachovia’s. Like HSBC, the US bank did not have rigorous systems. As a result some $373bn in wire transfers, versus HSBC’s $7bn, were made from 2004 to 2007. More than $4bn in bulk cash was also transported from Mexican banks to Wachovia accounts. Bought in 2008 by Wells Fargo, Wachovia has since paid $160m to settle charges, and nobody in the US has gone to jail (versus 15 in Mexico).

HSBC passed the buck. At the hearing, Paul Thurston, head of retail and wealth management, blamed the bank’s lapses on Mexico’s “challenging” environment, including the kidnapping, extortion and bribery risks his staff faced. While that might have been true of a branch manager in a violent border city, it was surely not a threat faced by staff in Mexico City. Mr Thurston’s was “an easy escape attempt,” says one Mexican official.

But Mexicans also find scapegoats. There have been 50,000 deaths since the government began an offensive on organised crime six years ago. Many Mexicans say the offensive is one where “Mexico supplies the deaths, and the US keeps the dollars and supplies the guns”. Yet it is also true that Mexico provides the assassins.

The HSBC case has renewed hopes that the fight against organised crime can be won using “ninja accountants” who will drain its lifeblood with spreadsheets – as happened to Al Capone, who was imprisoned on tax evasion charges. Yet that is doubtful.

Dirty money will always find a weak spot to enter the global financial system – be that opaque countries such as Russia or others that use the US dollar, such as Ecuador. Even in supposedly sophisticated countries the record is poor. In 2010, Federal Asset Seizures totalled just $2.5bn, a fraction of the US’s estimated $65bn annual illegal drugs market. In the UK in 2009/2010, the Serious Organised Crime Agency seized criminal assets worth £318m.

Money-laundering investigations are also slow-moving. Even with HSBC’s full co-operation, the probe took five years. Also, tighter bank regulation and better compliance – HSBC for example says it has doubled spending on compliance and now has 3,500 people on the task – have pushed money-washing into non-financial companies. These are more numerous and harder to monitor.

Estimating the scale of money-laundering is almost impossible. The UN reckons global criminal proceeds total $870bn annually. That is a huge number but, seen in the context of annual global trade of $18tn, or daily foreign exchange turnover of $4tn, it can easily be overlooked. Like a sucker fish riding on a whale, criminal commerce, including money-laundering, is submerged, discreet, usually in cash and hard to capture as it can just swim off somewhere else.

F.T.

Study damns Mekong dams

Xayaburi Dam protesters

BANGKOK - Impoverished Laos is unlikely to cancel a Thai project to build a mega-dam across the Mekong River at Xayaburi, despite warnings from the International Union for Conservation of Nature (IUCN) that it could devastate the region's rich biodiversity.

At least 1,780 known freshwater fish species have been identified in the "Indo-Burma biodiversity hotspot', which includes the Mekong and parts of the Chao Phraya River that flows through Thailand, revealed the 158-page report released last week by the IUCN, ahead of its world congress to be held in Jeju, South Korea from September 6-15.

IUCN, which is based in Switzerland and is the world's oldest and largest global environmental network, assists societies throughout the world to conserve the integrity and biodiversity of nature and to ensure that the use of natural resources is equitable and ecologically sustainable.

"The Mekong ranks third (after the Amazon and Congo) or second in the world in terms of diversity of river fish, depending on whether the verified species total or the higher estimate is accepted," notes the IUCN study, "The Status and Distribution of Freshwater Biodiversity in Indo-Burma".

The study has strengthened a growing anti-dam movement that has united campaigners from several countries in the region that are likely to be affected by the 1,260-megawatt hydropower project being built at a cost US$3.8 billion.

"This is an unprecedented scientific contribution for us to know what is in the river between [the Laotian cities of] Luang Prabang and Vientiane," Robert Mather, head of IUCN Southeast Asia, told IPS. "It shows how little we understand the river or the impact of the planned dam."

The report will feed discussions about dams like the Xayaburi at the IUCN gathering at Jeju, which is expected to include more than 1,200 government and non-government organisations (NGOs) from 160 countries.

"This study will help to shape the real questions that need to be asked when doing EIAs [environment impact assessments] before building the dam," Mather said.

Thai communities rallying against the Xayaburi dam this month lodged a petition against the energy ministry and the state-run Electricity Generating Authority of Thailand (EGAT) in the country's administrative courts, charging these bodies with failure to inform the public about the environmental and social impacts of the dam.

Even so, Norkun Sitthiphong, permanent secretary in Thailand's energy ministry, announced on August 24 that construction work for the Xayaburi dam was on track and that electricity production was scheduled to begin by 2019.

"The Xayaburi power plant plays a crucial role in Thailand's power development," the Thai official said, affirming the close link Thailand has as a major investor of this dam, the first of a cascade of 11 dams being planned to harness the lower waters of Southeast Asia's largest river.

Earlier studies by the Mekong River Commission (MRC), an inter-government agency, estimate that the proposed dams could result in agricultural losses worth more than $500 million annually and reduce dietary fish intake of Thai and Lao people by 30%.

It could also result in the creation of reservoirs along the Mekong, studies by the MRC, in which Cambodia, Laos, Thailand and Vietnam are members and Myanmar (or Burma) and China are dialogue partners.

The MRC is yet to clear construction for the dam and announced in December that it would approach international development partners to study the dam's implications before doing so.

Activists believe that it is not too late to stop the Xayaburi dam especially because of a growing movement against it.

"This is the first time local communities have gone to the Thai courts to stop a cross-border hydropower project," said Premrudee Daoroung, co-director of Towards Ecological Recovery and Regional Alliance, a Bangkok-based green lobby.

"They are turning to a clause in the Thai constitution that requires government agencies to conduct public hearings on projects like the Xayaburi dam, which will impact Thai communities and Thailand's biodiversity," she told IPS.

"Their biggest concern is that the dam will devastate fishing in the Mekong, which has been their main livelihood for generations. Their campaign began out of fear that the Xayaburi dam will affect the annual fish migration in the Mekong."

Loss of biodiversity is another concern. "The currency for measuring fish biodiversity is species, not kilograms, dollars or catch per unit of effort," the IUCN report said.

Grassroots communities in Cambodia and Vietnam have expressed similar concerns in their "Save the Mekong" campaign.

The Xayaburi dam could, they say, threaten the livelihoods of some 60 million people living in the lower Mekong, who harvest an estimated $2.2 billion to $3.9 billion worth of fish annually - or about a quarter of the world's annual inland-water catch.

Besides food security, this campaign, which has been endorsed by nearly 60,000 people, has also forged other bonds.

"The outcry has been strong because of the centrality of the river to millions of people, as well as to the region's history and cultural identity," said Carl Middleton, a Mekong River expert who lectures at the International Development Studies Programme at Bangkok's Chulalongkorn University.

"Just as the river is shared between the countries, so the proposed Xayaburi dam has brought many people together in opposition to the project," he told IPS. "The size of the public response opposed to the Xayaburi dam is unprecedented for a hydropower project in the region."

The protests have produced a mixed response from Laos, one of the poorest of the six countries that shares the Mekong, a 4,880 km-long river that flows through southern China, touching Myanmar and Thailand, and through Laos, Cambodia and Vietnam.

Laos has set its sights on becoming the battery to the region by tapping its rivers through large hydropower projects and selling the energy generated to its neighbors, such as Thailand. The foreign exchange, Vientiane argues, can help one-third of the country's 5.8 million population living in poverty.

Laos has assured neighbors, Western donors and an intergovernmental river development body that it would not proceed with the controversial dam till the cross-border environmental and social impacts have been assessed. In July, Vientiane even announced suspension of the project.

Ch Karnchang Plc (CK), one of Thailand's largest infrastructure builders and owner of 50% of the shares of Xayaburi Power, the controversial dam's developer, suggests otherwise.

In mid-August, CK's chief executive, Plew Trivisvavet, confirmed that the dam developer had not skipped a beat in its construction plans. "We're still working on the project, as no one has told us to stop," he told journalists.

Marwaan Macan-Markar

ASEAN struggles to cope with rival claims in the South China Sea

SIEM REAP, CAMBODIA — Thrown off balance by a cacophony of claims in the South China Sea, Southeast Asia is struggling to cope with the “big and heavy” presence of China and the United States in the region and needs to face up to growing security and political challenges, the secretary general of a regional group said in an interview.

Surin Pitsuwan was speaking Monday after the start of a meeting of economic ministers from the Association of Southeast Asian Nations in the Cambodian town of Siem Reap. It was the first major gathering of regional officials since an acrimonious conclave last month that highlighted deep divisions created by China’s increasingly assertive territorial claims in the South China Sea and rhetorical blasts about the waterway from Beijing and Washington.

At the earlier meeting, in the Cambodian capital, Phnom Penh, foreign ministers could not agree on the wording of a final communique for the first time since the regional association’s founding in 1967.
Pitsuwan, Thailand’s former foreign minister and head of ASEAN’s secretariat since 2008, said in an interview that he was surprised by the breakdown in Phnom Penh, where the group’s customary low-key pursuit of compromise gave way to testy deadlock amid complaints of microphones being abruptly disconnected and allegations of backstage meddling by China.

The failure, Pitsuwan said , was “a wake-up call that these [security] issues will occur and we should be prepared to handle them.”

Cambodia, a close friend of China and the current holder of ASEAN’s rotating chairmanship, refused during the July gathering to accept pleas that the final communique include a mention of recent flare-ups in the South China Sea between China and two ASEAN members, the Philippines and Vietnam.

Manila and Hanoi accused Cambodia of putting its allegiance to Beijing ahead of its obligations to its regional partners and of pushing the 10-nation group to its most severe crisis in years. Cambodia, although heavily dependent on Chinese aid and investment, angrily denied acting on instructions from Beijing.

Tensions in the South China Sea, where five ASEAN members have claims that brush up against those of Beijing, are “becoming more and more of a stress on the system,” Pitsuwan said. That, he added, underscores the urgent need to make progress toward a stalled code of conduct for the disputed waters. The key, he said, is to “get around” questions of sovereignty and focus instead on practical measures to curb the risk of maritime clashes. But, he said, “this will take some time, because it is emotionally charged and extremely volatile. Positions are far apart, but eventually, we will get to a practical solution.”

Role as ‘insulation’
ASEAN, which is meeting near the ancient temples of Angkor Wat under the slogan “one community, one destiny,” has traditionally worked to paper over its differences. The risk of conflict in the South China Sea, however, has exposed the shortcomings of that approach at a time when China and the United States are stepping up their military and diplomatic activities in the region.

Washington takes no position on the territorial disputes. But the Obama administration, which has made a foreign policy “pivot” to Asia, has voiced growing concern over the risks of confrontation in the waterway. Th£e United States has stepped up security cooperation with the Philippines, with which it has a 61-year-old mutual defense treaty, and with Vietnam, which looks to America as a counterweight to a rising China.

Jousting over the South China Sea and over disputed islands to the north claimed by both Japan and China has shadowed booming trade and investment ties across East Asia and added to frictions between Beijing and Washington. The State Department this month criticized China for setting up a military garrison on an island in the South China Sea, accusing it of undermining diplomatic efforts to resolve disputes peacefully. China lambasted the U.S. assertions, with the state-run Xinhua News Agency dismissing them as “groundless and irresponsible” and urging Washington to “draw back its meddling hand.”

The feuding has pushed ASEAN into the uncomfortable role of acting as “insulation between China and the U.S.,” said Carlyle A. Thayer, an Australian expert on regional security and the author of a recent study of the group’s troubles over the South China Sea.

Originally set up in response to fears of communist subversion in Southeast Asia during the Vietnam War, ASEAN was long scorned by China as an instrument of the United States but has in recent years been embraced by Beijing as a vehicle to boost economic ties.

At the same time, China has been alarmed by ASEAN’s moves to become more involved in political and security issues, with some Chinese foreign policy experts warning that the association could go the way of the Arab League, a long-somnolent organization that, reinvigorated by the Arab Spring, has been at odds with Beijing in recent months over what to do in Syria and elsewhere.

China rejects any role for ASEAN in resolving territorial disputes and insists that the ownership of islands and reefs in the South China Sea can be addressed only through bilateral talks. But it has expressed some readiness to discuss a code of conduct for the waterway. “China wants ASEAN to be reasonably strong but also compliant,” Thayer said.

Wary of getting bogged down in arcane but highly contentious maritime quarrels, ASEAN ministers meeting this week are focusing on trade and other economic issues and want to stay clear of the South China Sea. “I’m not going to touch it. This is strictly economic,” said Gita Wirjawan, Indonesia’s trade minister.

Wealth gap a threat
In his opening address, Cambodia’s prime minister, Hun Sen, made no mention of the maritime disputes but instead spoke of the debt crisis in Europe, high oil prices and slowing export growth, and he singled out the wealth gap between member states as “a great threat” to the association’s future.

Pitsuwan, the secretary general, said “political hiccups” over the South China Sea will not slow what he described as an irreversible trend toward greater economic integration.

The association, which includes some of the world’s most dynamic economies as well as some of its weaker ones, such as Burma, Laos and Cambodia, is working to establish a single market in 2015, an important step toward regional integration akin to moves in Europe that led to the creation of the European Union. But, Pitsuwan said, ASEAN has no plans to set up a large central bureaucracy similar to the one in Brussels. The association’s administrative headquarters in Jakarta has only about 200 employees, including clerical staff and drivers. The European Commission in Brussels has more than 33,000.

ASEAN, he said, “needs a strong central mechanism so that it can be a driving force, but that has implications for sovereignty” that member states are not ready to accept.

At a time when Europe’s far more advanced drive for integration has been stalled by the continent’s financial turmoil and tensions between the E.U.’s richer and poorer member states, Southeast Asia “has to be extremely careful,” Pitsuwan said. “Europe for us is an inspiration, not a model.”

Andrew Higgins

ASEAN integration: one step forward, two steps back

Going by its "roadmap", ASEAN will by 2015 become an economic community with a US$2 trillion combined market and become a magnet for integration across the whole of East Asia, the world's most dynamic region.

This concept of an ASEAN Economic Community (AEC) was mooted in 1997 - at the height of the Asian financial crisis.

In their bid to keep ASEAN relevant amid the rise of China and India, the region's leaders sought to build the AEC on four planks - a single market and production base; a competitive community; an area of equitable economic development; and a region integrated into the global economy.

Fifteen years on and less than three years away from the 2015 target, however, there is some cause for concern.

Emeritus Senior Minister Goh Chok Tong, speaking at a recent ASEAN conference organised by the Singapore Institute of International Affairs (SIIA), summed up the zeitgeist: to keep the region plugged into the global economy, ASEAN needs to pursue its economic integration "relentlessly", he said, adding that the bloc will need to work on two issues - liberalising the services sector across the region, and non-tariff barriers.

Therein lies the rub. ASEAN officials regularly tout that - according to a "scorecard" studying the progress of the AEC - 66 per cent of measures to achieve a single market and production base have been implemented. That figure, however, represents low-hanging fruit, such as the removal of tariffs.

While the original ASEAN six - Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand - boast that 99.65 per cent of tariff lines across the region have been removed, the fact is, non-tariff barriers (NTBs) continue to impede business.

In Malaysia, NTBs can be found in the automotive, oil and gas sectors. In Indonesia there are restrictions on beef imports.

In addition to restrictions on the free flow of goods, freedom of workers' movements is another issue holding up the AEC, says Ms Sanchita Basu Das, a lead economic researcher at the Institute of Southeast Asian Studies and the editor of "Achieving The ASEAN Economic Community 2015", a collection of essays studying the AEC's implementation.

In Thailand, for example, the Alien Employment Act prohibits foreigners from being employed in professions such as civil engineering and legal services.

Says Ms Basu Das: "If you say you have the free movement of labour but have restrictions, you cannot say you enjoy such free movement of labour."

In terms of enhancing physical connectivity, ASEAN has come some way. In 2010, it tabled a Connectivity Masterplan to enhance physical and people-to-people links.

But the enabling ASEAN Infrastructure Fund has initial equity of only $485 million. It has been estimated that ASEAN will need to spend $60 billion a year on infrastructure.

"ASEAN has a lot of connectivity initiatives, but a number of them are impeded by structural weaknesses, low responsiveness to users, organisational inefficiencies, insufficient funding and heavy dependence on overseas development aid," says Pushpanathan Sundram, the managing director of EAS Strategic Advice, a consultancy. He was formerly an ASEAN deputy secretary-general.

More importantly, the members of ASEAN at its current stage of development face the same dilemma that other regional bodies such as the European Union have faced - the surrender of more sovereignty to a regional organisation. Put differently, many ASEAN countries struggle with whether to put ASEAN's interests above their own national interests.

A classic example is that of gas pipelines in Thailand and Malaysia, which are held by monopolies. This would hinder the formation of trans-ASEAN gas pipelines.

"For integration to move ahead, we really need a change in mindsets. ASEAN countries have to think regional and act national to implement locally the grouping's regional economic commitments," says Pushpanathan.

This is not to say that all is lost for the AEC. ASEAN, unlike the EU, started out more as a political body than an economic one. The EU started out as an economic body focused on coal and steel, and then took on political dimensions later. As a result, expectations about the AEC should be moderated.

Moreover, the fact that ASEAN remains externally oriented bodes well. During the Cold War, the bloc sought to avoid being used as a geopolitical pawn by the superpowers, leading to perceptions of a "fortress ASEAN". Today, however, it has sought to be part of the great geopolitical game in Asia, seeking to draw in great powers like China and the US. It has made itself relevant by signing free trade agreements with countries such as Australia and China.

More importantly, ASEAN will not lose out to China in the foreign direct investment stakes if the AEC leverages on the fact that the grouping is made up of countries at different levels of development.

Gautam Banerjee, the executive chairman of PricewaterhouseCoopers Singapore, says ASEAN can entice potential investors by getting them to locate "softer" functions such as logistics, treasury and supply chain management in its more advanced countries, say, Singapore, and get "heavy lifting" manufacturing operations done in Malaysia, Thailand and Indonesia.

"If we can ignite some of this thinking … ASEAN can be a credible challenge to China," said Banerjee at the SIIA conference.

To an extent, this is already happening. The Hong Kong Economic and Trade Office says some Hong Kong firms have decided to invest in ASEAN countries rather than mainland China.

There is a combination of push and pull factors, a spokesman adds. In China, labour costs have risen due to the strengthening yuan. In addition, ASEAN's recent strong economic performance and low labour costs have made the region attractive.

Looking ahead, ASEAN's economic prospects would be much enhanced if the private sector - rather than the bureaucrats - took the lead.

However, the entire AEC enterprise is still very much a top-down endeavour and ASEAN watchers say it receives relatively little input from businessmen, the very people who should be spearheading integration.

The experiences of Thai companies are indicative. According to a survey by the University of the Thai Chamber of Commerce, only 11 per cent of firms polled said they understood what the AEC is about. The rest said they had no idea.

No wonder then that the utilisation of the ASEAN Free Trade Area by ASEAN firms stood at only 23 per cent in 2008.

Granted, a group of business leaders - including the chiefs of CIMB Bank, AirAsia and Ayala Group - has launched the ASEAN Business Club, a private-sector initiative to engage in ASEAN integration. But ASEAN still has its work cut out for it.

"ASEAN businessmen have let their bureaucrats run away with whatever they want to do. They need to speak up for themselves," says Dr Suthad Setboonsarng, senior adviser at BowerGroupAsia, a business advisory firm.

"If it wants ASEAN to be effective, the private sector has to guide governments. So don't complain about ASEAN not working, if the private sector is not working."

ASEAN has been in the news recently for failing to come up with a communique amid differences over its handling of the contentious South China Sea issue, which involves China and ASEAN member states such as Vietnam and the Philippines. The South China Sea issue is important, but it will be a political issue that will continue to test ASEAN's leadership and coherence for years to come.

In the meantime, however, effective economic integration - the bread and butter of ASEAN's existence - should deliver the goods that will make ASEAN relevant.

William Choong

China Pushes on the South China Sea, ASEAN Unity Collapses

For more than two decades Beijing has pursued a consistent policy in the South China Sea composed of two main elements: gradually strengthening the country’s territorial and jurisdictional claims while at the same time endeavoring to assure Southeast Asian countries of its peaceful intentions. Recent moves by China to bolster its maritime claims have brought the first element into sharp relief, while reassurances of benign intent have, however, been in short supply. Indeed, far from assuaging Southeast Asian concerns regarding its assertive behavior, China has fuelled them by brazenly exploiting divisions within the Association of Southeast Asian Nations (ASEAN) to further its own national interests.

China Hardens Its Stance

Commentaries in China’s state-run media analyzing the South China Sea issue have become markedly less conciliatory. Opinion pieces highlight several new themes in China’s official line. One theme is that China’s territory, sovereignty as well as its maritime rights and interests increasingly are being challenged by Southeast Asian nations and Japan in the South and East China Seas. China’s response, it is argued, should be to uphold its claims more vigorously, increase its military presence in contested waters, and, if necessary, be prepared to implement coercive measures against other countries. As one commentary notes “Cooperation must be in good faith, competition must be strong, and confrontation must be resolute” (Caixin, July 13).

Another theme is that, while China has shown restraint, countries such as the Philippines and Vietnam have been pursuing provocative and illegal actions in a bid to “plunder” maritime resources such as hydrocarbons and fisheries which China regards as its own (China Daily, July 30).

A third theme is that Manila and Hanoi continue to encourage U.S. “meddling” in the South China Sea and that the United States uses the dispute as a pretext to “pivot” its military forces toward Asia (Global Times, July 11). To reverse these negative trends, Chinese commentators have urged the government to adopt more resolute measures toward disputed territories and maritime boundaries. Nationalist sentiment, they argue, demands no less.

Recent measures undertaken by the Chinese authorities do indeed suggest a more hard-line position. Ominously, some of the initiatives have included a strong military element, presumably as a warning to the other claimants that China is ready to play hardball.

Perhaps the most noteworthy attempt by China to bolster its jurisdictional claims in the South China Sea was the raising of the administrative status of Sansha from county to prefecture level in June. Sansha originally was established in 2007 as an administrative mechanism to “govern” the Paracel Islands, Macclesfield Bank and the Spratly Islands. Sansha’s elevation was an immediate response to a law passed on June 21  by Vietnam’s national assembly, which reiterated Hanoi’s sovereignty claims to the Paracels and Spratlys. Both Vietnam and China protested the other’s move as a violation of their sovereignty (Bloomberg, June 21). Less than a month later, Sansha’s municipal authorities elected a mayor and three deputy mayors and China’s Central Military Commission authorized the establishment of a garrison for “managing the city’s national defense mobilization, military reserves and carrying out military operations (Xinhua, July 20).

Earlier, in late June, China’s Defense Ministry announced it had begun “combat ready” patrols in the Spratly Islands to “protect national sovereignty and [China’s] security development interests” (Reuters, June 28). Embarrassingly for the People’s Liberation Army (PLA) Navy, however, on July 13, one of its frigates ran aground on Half Moon Shoal, 70 miles west of the Philippine island of Palawan and within the Philippines 200 nautical mile exclusive economic zone (EEZ). The frigate was refloated within 24 hours, suggesting that other PLA Navy vessels were nearby when the incident occurred. These developments provide further evidence of the growing militarization of the dispute.

China also has moved to undercut the claims and commercial activities of the Philippines and Vietnam in the South China Sea in other ways.

In June, the state-run China National Offshore Oil Corporation (CNOOC) invited foreign energy companies to bid for exploration rights in nine blocks in the South China Sea. The blocks lie completely within Vietnam’s EEZ and overlap with those offered for development to foreign energy corporations by state-owned PetroVietnam. Accordingly, Hanoi vigorously protested CNOOC’s tender (Bloomberg, June 27). More importantly the blocks are located at the edge of China’s nine-dash line map and seem to support the argument that Beijing interprets the dashes as representing the outermost limits of its “historic rights” in the South China Sea. Under the 1982 United Nations Convention on the Law of the Sea (UNCLOS), however, coastal states are not entitled to “historic rights” on the high seas. It is therefore unlikely that any of the major energy giants will bid for CNOOC’s blocks—although smaller companies may do so if only to curry favor with Beijing with a view to landing more lucrative contracts down the road. If, however, exploration does move forward in any of the nine blocks, a clash between Vietnamese and Chinese coast guard vessels will become a very real possibility.

On the issue of ownership of Scarborough Shoal, scene of a tense standoff between Chinese and Philippines fishery protection vessels in May-June, China position remains uncompromising. At the annual ASEAN Regional Forum (ARF) in Phnom Penh, Cambodia in July, Chinese Foreign Minister Yang Jiechi restated China’s sovereignty claims to the shoal, rejected the notion that it was disputed and accused Manila of “making trouble” (Xinhua, July 13). According to the Philippine foreign ministry, Chinese trawlers―protected by Chinese paramilitary vessels—continue to fish in waters close to Scarborough Shoal in contravention of a bilateral accord whereby both sides agreed to withdraw their vessels [1].

Following the ARF, China kept up the pressure on the Philippines. In mid-July, it dispatched a flotilla of 30 fishing trawlers to the Spratlys escorted by the 3,000-ton fisheries administration vessel Yuzheng 310 (Xinhua, July 15). The trawlers collected coral and fished near Philippine-controlled Pag-asa Island and Chinese-controlled Mischief and Subi Reefs (Philippine Daily Inquirer, July 27). The Philippine authorities monitored the situation but took no action.

The Phnom Penh Debacle

In the past, after China has undertaken assertive actions in the South China Sea it has tried to calm Southeast Asia’s jangled nerves. At the series of ASEAN-led meetings in Phnom Penh in mid-July, however, Chinese officials offered virtually no reassurances to their Southeast Asian counterparts. Worse still, China seems to have utilized its influence with Cambodia to scupper attempts by ASEAN to address the problem, causing a breakdown in ASEAN unity.

In the final stages of the annual meeting of ASEAN foreign ministers (known as the ASEAN Ministerial Meeting or AMM), the Philippines and Vietnam wanted the final communiqué to reflect their serious concerns regarding the Scarborough Shoal incident and the CNOOC tender. They were supported by Singapore, Indonesia, Malaysia and Thailand who felt that ASEAN should speak with one voice. Cambodia—which holds the rotating chairmanship of ASEAN and has close political and economic ties with China— objected because, in the words of Foreign Minister Hor Namhong, “ASEAN cannot be used as a tribunal for bilateral disputes” (Straits Times, July 22). Attempts by Indonesian Foreign Minister Marty Natalegawa to reach a compromise on the wording were unsuccessful and for the first time in its 45-year history the AMM did not issue a final communiqué.

The fallout from the AMM was immediate and ugly. Natalegawa labelled ASEAN’s failure to reach agreement “irresponsible” and that the organization’s centrality in the building of the regional security architecture had been put at risk (Straits Times, July 16). Singapore’s Foreign Minister, K. Shanmugam described the fiasco as a “sever dent” in ASEAN’s credibility (Straits Times, July 14). Cambodia and the Philippines blamed the failure on each other. Cambodia was pilloried by the regional press for its lack of leadership and for putting its bilateral relationship with China before the overall interests of ASEAN. One analyst alleged  Cambodian officials had consulted with their Chinese counterparts during the final stages of talks to reach an agreement on the communiqué [2]. China’s Global Times characterized the outcome of the AMM as a victory for China, which does not think ASEAN is an appropriate venue to discuss the dispute, and a defeat for the Philippines and Vietnam (Global Times, July 16).

A few days after the AMM, Indonesian President Susilo Bambang Yudhoyono dispatched his foreign minister to five Southeast Asian capitals in an effort to restore ASEAN unity. Natalegawa’s shuttle diplomacy resulted in an ASEAN foreign minister’s statement of July 20 on “ASEAN’s Six-Point Principles on the South China Sea” [3]. The six points, however, broke no new ground and merely reaffirmed ASEAN’s bottom line consensus on the South China Sea. In response to the joint statement, China’s Foreign Ministry said it would work with ASEAN to implement the 2002 Declaration on the Conduct of Parties in the South China Sea (DoC) (Chinese Ministry of Foreign Affairs, July 21).

One of the six points calls for the early conclusion of a code of conduct (CoC) for the South China Sea, but the Phnom Penh debacle has made that target highly doubtful.

Although China agreed to discuss a CoC with ASEAN in November 2011, Beijing always has been lukewarm about such an agreement, preferring instead to focus on implementing the DoC. Undeterred, earlier this year ASEAN began drawing up guiding principles for a code and in June agreed on a set of “proposed elements.” While much of the document is standard boiler plate, there are two aspects worthy of attention.

The first is that ASEAN calls for a “comprehensive and durable” settlement of the dispute, a phrase that seems to repudiate Deng Xiaoping’s proposal that the parties should shelve their sovereignty claims and jointly develop maritime resources. Clearly, the four ASEAN claimants have rejected Deng’s formula as it would be tantamount to recognizing China’s “indisputable sovereignty” over the South China Sea atolls.

The second interesting aspect concerns mechanisms for resolving disputes arising from violations or interpretations of the proposed code. The document suggests that disputing parties turn to the 1976 Treaty of Amity and Cooperation (TAC) or dispute resolution mechanisms in UNCLOS. Neither, however, would be of much utility. While the TAC does provide for a dispute resolution mechanism in the form of an ASEAN High Council, this clause has never been invoked due to the highly politicized nature of the High Council and the fact that it cannot issue binding rulings. Moreover, although China acceded to the TAC in 2003, Beijing almost certainly would oppose discussion of the South China Sea at the High Council because it would be outnumbered 10 to 1.

UNCLOS does provide for binding dispute resolution mechanisms, including the submission of disputes to the International Court of Justice (ICJ) or the International Tribunal on the Law of the Sea (ITLOS). China always has rejected a role for the ICJ in resolving the territorial disputes in the South China Sea and, in 2006, China exercised its right to opt out of ITLOS procedures concerning maritime boundary delimitation and military activities.

On July 9, Vice Foreign Minister Fu Ying had indicated to ASEAN foreign ministers that China was willing to start talks on a CoC in September. Two days later, however, as ASEAN wrangled over their final communiqué, Foreign Minister Yang seemed to rule this out when he stated discussions could only take place “when the time was ripe” (Straits Times, July 11). At present ASEAN and China are not scheduled to hold any meetings on the CoC, though officials currently are discussing joint cooperative projects under the DoC.

If and when the two sides do sit down to discuss the CoC, it is probable that Beijing will demand all reference to dispute resolution be removed on the grounds that the proposed code is designed to manage tensions only and that the dispute can only be resolved between China and each of the other claimants on a one-on-one basis. Taken together, these developments have dimmed seriously the prospect of China and ASEAN reaching agreement on a viable code of conduct for the South China Sea any time soon. As such, the status quo will continue for the foreseeable future.

Ian Storey

Notes:

1. “Why There was no ASEAN Joint Communique,” Philippine Department of Foreign Affairs, July 19, 2012 http://www.dfa.gov.ph/main/index.php/newsroom/dfa-releases/5950-why-there-was-no-asean-joint-communique-.
2. Ernest Bower, “China reveals its hand on ASEAN in Phnom Penh,” Center for Strategic and International Studies, July 20 2012.
3. “Statement of ASEAN Foreign Ministers on ASEAN’s Six-Point Principles on the South China Sea,” Cambodian Ministry of Foreign Affairs, July 20, 2012 http://www.mfaic.gov.kh/mofa/default.aspx?id=3206.

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