Money Trail in Probe of China Funds Turns Cold

The federal probe into a suspected Chinese scheme to buy influence in the American political system has become stalemated by the inability of U.S. investigators to track a complex trail of funds moving from the Beijing regime into the United States, according to U.S. officials familiar with the investigation.

The money trail has gone cold, U.S. officials say, with what they believe to be an elaborate money-laundering effort, making it very difficult for the FBI and other federal agencies to gather sufficient evidence to build a successful criminal case.

The allegation of a Chinese influence-buying effort has emerged as the most explosive element of the sprawling campaign finance controversy, raising the specter of a major foreign power using political agents and illegal money to affect American foreign policy.

The FBI was initially tipped off to the suspected plan as early as 1995 through communications between the Chinese Embassy in Washington and Beijing that were intercepted by the National Security Agency, the U.S. government’s supersecret code-breaking and eavesdropping service. Communications from the Chinese consulate in Los Angeles were also intercepted by the NSA.

The intercepts showed that Beijing, angered by the Clinton administration’s decision in 1995 to grant a visa to Taiwan President Lee Teng-hui to visit the United States, launched a covert operation to counter what Chinese officials believed was Taiwan’s inordinate political influence in the United States, investigators have said.

Senior Chinese officials have repeatedly denied that they made any effort to illegally direct money into U.S. political campaigns or improperly influence political events through other means.

But based on what they heard in the intercepts, U.S. officials say Beijing decided to funnel at least $2 million into congressional races and other political campaigns in 1996, while also ordering Chinese consular officials to develop new ties to young, local politicians around the country who might become important national figures in the future.

In response, the FBI warned six Congress members about the alleged Chinese operation in the spring of 1996. A team of three FBI special agents warned the lawmakers that they had been targeted by Beijing for political contributions. The FBI also notified the National Security Council at the White House, although NSC officials considered the warning to be so vague that they didn’t pass it on to more senior White House aides or President Clinton until after the fund-raising controversy broke in the news media.

The intercepted communications helped federal investigators identify at least one suspected Chinese political agent, Ted Sioeng, an Indonesian entrepreneur who was an executive of a Chinese-language newspaper in Southern California. Sioeng’s family acquired the International Daily News in Monterey Park in 1995 or early 1996, and changed its independent editorial stance to one that is pro-Beijing. A family attorney has denied any wrongdoing by family members.

Yet, despite the evidence generated by the intercepts and other sources, U.S. officials say they have been frustrated by what they describe as elaborate money-laundering techniques used to cloak the sources of the funds flowing to American recipients.

Federal investigators have made some progress. In a number of cases, suspicious money transfers have been traced from government-controlled banks or companies in China to U.S. accounts. For example, federal investigators have raised questions about $1 million they have traced to an account held by the Chinese Embassy at the Bank of New York. And a number of contributions have flowed to U.S. political organizations, through straw donors, that investigators suspect originated in China. But investigators have been unable to make definitive connections.

The missing links have hampered the FBI’s efforts to corroborate the leads generated by the intercepted Chinese communications, officials say.

So even though U.S. intelligence and law enforcement officials have privately briefed Congress on some evidence developed in the probe, the Justice Department has yet to gather enough to make a successful criminal case.

“You haven’t seen any indictments yet, have you?” one senior U.S. government official asked rhetorically. “We have been unable to connect the dots, and there is a reason for that. Their money-laundering was very advanced. A lot of very sophisticated techniques were used to conceal the flows of money into this country.”

With the investigation now running into a brick wall, frustrated federal officials are trying to analyze the way the money trail might have been concealed.

That has led to finger-pointing throughout Washington, with Congress raising questions about whether U.S. intelligence and law enforcement officials provided training in American money-laundering-detection techniques to Chinese officials--training that was then turned against the United States.

Congressional investigators initially believed that the FBI had provided training in money-laundering techniques to Chinese intelligence. But FBI Director Louis J. Freeh recently told Congress that “another agency” of the federal government was involved.

In fact, U.S. officials now say that in December 1992, the CIA’s Counter-Narcotics Center conducted a seminar and briefing for the Chinese Ministry of State Security, the Chinese intelligence service. The briefing included officials from the Drug Enforcement Administration and the Financial Crimes Enforcement Network (FinCen), an agency of the Treasury Department that specializes in money-laundering detection.

U.S. intelligence and law enforcement officials say the seminar focused on combating narcotics trafficking in Southeast Asia, an issue on which the United States hoped to gain Chinese cooperation. Included in the seminar was a discussion of money-laundering by drug lords in Southeast Asia.

But officials familiar with the seminar insist that the information given was not detailed or advanced enough to help Chinese intelligence avoid American detection of money laundering.

“I would be shocked and amazed if they could go from that elementary training to being able to avoid detection by the U.S. of money laundering,” said one source familiar with the briefing.

Yet congressional investigators are not convinced they have been told the full story. They suspect that the Chinese obtained training in techniques that went far beyond a simple briefing on the drug money flowing through Southeast Asia. Officials also note that FinCen is perhaps the best agency in the federal government at detecting money laundering.

Whether or not the Chinese drew upon training they received from U.S. agencies, officials say it is clear that a Chinese influence-buying operation would be skillfully conducted to hide the funds.

While U.S. officials say some individuals caught up in the campaign finance inquiry appear to have been quite clumsy in bringing money directly from Chinese banks into the United States for campaign donations, there is still no direct evidence linking those individuals to a Chinese government influence-buying scheme.

“It is clear they [Chinese government officials] were pretty wary of our abilities at money-laundering detection,” said one U.S. official.

Investigators are still focusing on the activities of Sioeng, who has been out of the country, apparently in Asia, since the fund-raising controversy erupted. Sioeng’s family took an active role in the Democratic national campaign last year, in part through an association with John Huang, the former Los Angeles banker and Democratic fund-raiser who has been at the center of the controversy over improper contributions.

Sioeng’s daughter, Jessica Elnitiarta, gave the Democrats a total of $250,000 in person and through a family company, Panda Estates Investment Inc., in 1996. In addition, Sioeng contributed to Matt Fong, California’s Republican state treasurer, who returned $100,000 in contributions dating back to 1995 from the businessman and from Panda Estates.