The invisible empire

The Chinese business community is growing stronger and more visible around Europe Yet it has earned a reputation for tax evasion and labor exploitation

Chinese businessman Gao Ping, the alleged ringleader in the Operation Emperor money-laundering case, leaves Spain's High Court.
Chinese businessman Gao Ping, the alleged ringleader in the Operation Emperor money-laundering case, leaves Spain's High Court. CLAUDIO ÁLVAREZ

As Hu Yong Zhang drives his gleaming Mercedes along Vía Pistoiese, through an industrial estate dominated by hundreds of Chinese-owned wholesalers and textile factories in the small city of Prato, in the Italian region of Tuscany, he tells the rags-to-riches tale of how he built up a clothing empire that has made him a multi-millionaire in two decades.

"When I arrived, I first worked in my parents' restaurant. Then, in the 1990s, I set up one of the first Chinese workshops in Prato. Little by little, we moved up the value chain, replacing the Italians," says the 43-year-old who was born in Wenzhou, in the southeastern province of Zhejiang. Hu's recipe for success was simple: make clothes for the big fashion houses that trade on the prestigious Made in Italy brand but at prices and delivery speeds that only Chinese labor is able to deliver. Thanks to this model, Prato's Chinese community is among the wealthiest in Europe, generating turnover of around two billion euros a year. But many Chinese living in this city of 200,000 people are there illegally, and working for slave labor wages with no legal guarantees.

Mattia Ianniello, a member of the region's tax investigation unit, has been looking into the activities of Prato's Chinese business community for the last six years. Last year, he took part in Operation Cian Ba, which raided several factories. "There were people living there in inhuman conditions; some were tied to beds at night," he says.

"We decided to investigate working conditions after we learned from a delivery company that their biggest earner was transporting Chinese people. They were making millions of euros from small businesses each month. The first business we looked into was a bookshop that was sending remittances by Chinese workers back to China. The floor space was around 10,000 square meters, but it was sending a million euros a day divided into amounts of less than 2,000 euros each."

Such sums would have required hundreds of customers throughout the day, but police noticed that barely a handful of people went into the Ou Hua bookshop in the center of the city, which is run by a well-known Chinese family — the same family that controlled another 13 money transfer outlets throughout Italy, as well as a financial services company called Money 2 Money. Where did the money come from, and why was the company avoiding using banks?

His recipe was simple: make Italian brand clothes at Chinese prices

The Italian police say the system worked in the following way: the shop received several million euros each day in cash from Chinese businesses in the city. Most of it was generated without paying taxes on imported clothing and other goods, but it also included earnings from people trafficking, prostitution, smuggling and fake designer goods. This was then sent to China as remittances. The more cash they sent, the more false passports and identity cards required to justify the payments, which were always under the 2,000-euro amount allowed per person, per quarter, by the Bank of Italy. In this way, say the Italian authorities, around 4.5 billion euros was being taken out of the country each year without tax being paid on it.

Spain's police know that what is going on in Italy is also happening here, and throughout Europe. Examination of dozens of cases in Spain, France, Italy, Portugal, Austria and Romania, along with hundreds of interviews with police officers, tax inspectors, customs officers, and civil servants all point to the existence of an ever-growing multi-billion-euro economy that is invisible, and built on crime and exploitation.

"Most Chinese people living in Spain like to project a positive image of the community, but I would like to talk frankly," says one leading figure in the Chinese business community here who is prepared to talk about the situation — albeit under condition of anonymity. "It is almost impossible for the Chinese to make money in Europe if they pay taxes: their businesses are not that profitable. In the wholesale business, everybody does the same, because there is so much competition. In the restaurant business, if they used legal workers, it would be impossible to survive," he says over lunch in Wenzhou.

"It is impossible to put a stop to this, because the Chinese exploit the weaknesses of the system. And people always want to make more money. If they don't catch you, you can make a lot of money," he laughs. Every investigation into suspected illegal activities by Chinese businesses in Spain has uncovered the same practices: the importing of huge amounts of Chinese-produced goods on which little tax or duty is paid.

Some members of the Chinese business community in Spain are also involved in contraband tobacco, and fake designer goods and medicines. The exploitation of Chinese migrants without papers is also widespread. And finally, the Chinese also create complex networks to get their money out of Spain tax free, which is then invested in the Chinese property market.

People were living in inhuman conditions; some were tied to their beds at night"

This is organized crime, but not in the sense of the Mafia or the dreaded Triads. The people involved range from self-made businessmen and women to low-profile criminals able to take advantage of the many loopholes in the European legal system. An example of the latter might be Gao Ping, the alleged head of an organization that laundered an estimated 1.2 billion euros over a four-year period who was arrested as part of the Spanish police's Operation Emperor last year. These are not people involved in crime per se, but who are prepared to go to extreme lengths to make their licit activities as profitable as possible.

At a warehouse at Valencia's container terminal, the country's largest, it is easy to see why so many imports from China escape the attention of the authorities. A group of officials is inspecting one such container which has been issued with a red ring on the recommendation of Rita, the Tax Office's supercomputer, which has detected inconsistencies in the owner's tax declaration.

Unofficial sources say that less than 10 percent of the containers entering and leaving the port of Valencia are physically checked. The risk analysis carried out by Rita is a vital tool in controlling goods entering Spain because the enormous amount of trade makes it impossible to check containers without bringing the port to a standstill. In other words, ideal conditions for crime. The usual trick is to falsify the amount, the value, and the nature of the goods inside a container so as to save on import duties and sales tax. The same goes for the weight, the origin of the content and the identity of the importer, which is normally hidden by the creation of front companies, all of which means that the container gets the green ring, and soon leaves the port. The bigger the amount being defrauded, the more competitive the goods and the greater the profit margin.

The first port to sound the alarm was Naples. By 2004 it had become the favorite entry point for Chinese contraband, thanks to a deal with the Camorra, which controls the southern Italian port. As soon as inspections were beefed up, traffic began to spread out to other ports, such as Valencia, until the Spanish improved security, which led to goods being pushed through less stringent ports, such as Constanta, Athens, Lisbon, Southampton, and even Hamburg. And so the cat-and-mouse game continues whereby the criminals, as usual, are seemingly always one step ahead, able to take their pick of the myriad ports within the European Union.

"This is fraud on a massive scale, widely known, extensive, and the Chinese aren't the only ones at it," say sources at the Tax Agency.

A worker in a Fuenlabrada industrial park reads a Chinese newspaper.
A worker in a Fuenlabrada industrial park reads a Chinese newspaper.luis sevillano

The scale of the fraud is staggering: "Everybody is doing it in the textile and shoe sectors, because if they didn't, they wouldn't be able to sell their goods at the price their competitors do, and they would be out of the market," say police sources.

Nobody is able to put a figure on the amount of goods Chinese importers are bringing into Europe. But you can extract a few conclusions from the larger police raids on the Spanish industrial estates where the importers are based. The first big operation against economic crime was carried out by the Civil Guard in 2011, when it dismantled the business and money-laundering empire of Wen Hai Ye Wang, AKA Luis Ye.

Luis Ye came to Spain at the end of the 1980s and opened a couple of Chinese restaurants in Madrid with members of his family, then a supermarket selling Asian food, and then later became involved in importing goods during the boom years, a time when hundreds of Chinese-run shops were opening in the capital. But that wasn't enough.

Over time, he created a holding company of at least 25 businesses that he used to bring in Chinese workers illegally, say the Civil Guard, who checked the papers of around 300 people. He also became involved in bringing in falsified designer goods and tobacco, activities that made him very rich: a container of tobacco can be sold for 700,000 euros, at a cost of 100,000 euros. He then used the money he made to put the migrants he had brought in to work, employing them in restaurants, shops, hairdressers, bars, and other small businesses. According to the Civil Guard, the loans he was making from his parallel bank "originated in his organization's illicit money."

The Spanish police say that in last year's Operation Emperor, a series of companies run by Gao Ping from an industrial estate in the north of the capital was found to be importing around 1,500 containers of goods a year. Between 10 percent and 20 percent of the real value of the contents was declared, and the rest generated earnings in the black economy of hundreds of millions of euros each year.

This is fraud on a massive scale and the Chinese aren't the only ones in on it"

Police say that the same story is being repeated in the town of Elche, in Alicante, which has a long tradition of shoemaking. In 2004, several Chinese businesses in the city were damaged in protests against what local producers say is unfair competition based on non-payment of import duties, use of cheap labor, tax evasion, and other practices. "We are in exactly the same situation as a decade ago," says Luis Ángel Mateo, the city's employment councilor, complaining about the authorities' failure to tackle what he says are systematic abuses by Chinese businesses. These run from non-payment of Social Security contributions to keeping the vast majority of their activities off the books to avoid tax, as well as health and safety infractions, or simply opening their shops outside legal trading hours.

Elche's Chinese community plays an important role in the commercial life of the city, running around 150 of the companies operating out of its main industrial estate, and has since expanded its operations to the nearby town of Crevillent. Operation Heijin, carried out by the police in the area earlier this year, exposed widespread tax and customs duty evasion, with one shoe importer, Ou Lin Li, shown to have declared just a fifth of its activities to the authorities, avoiding the payment of an estimated 103 million euros between 2009 and 2011.

The negative publicity generated by the police operation has prompted complaints by some within the Chinese community in Elche, who say they are being scapegoated. "The Spaniards are unemployed, and have no money. They blame us for everything. But they are wrong, we work 13 or 14 hours a day," says an employee of one of the companies investigated by the police in the city.

Luis Ángel Mateo, a local politician, replies: "Police harassment? If the foreign companies operating in Elche obeyed the law, there would be no police harassment."

Where does the money generated by this hidden economy go? Part of it is smuggled out of the country by Chinese returning home to visit, or, as in Italy, it is sent to China disguised as remittances. But part of the money remains in Spain, where it is often used to open small shops, which are then rented at high rates of interest to other Chinese. The police say this explains the rapid spread of Chinese shops in countries such as Spain, France and Italy in recent years.

The availability of large sums of cash also accounts for the growth of industrial estates in the outskirts of Madrid and other cities. Nobody is questioning the Chinese' willingness to work long hours, and it would be wrong to assume that all Chinese businesses in Spain are based on tax evasion and exploitation. That said, those who have witnessed the growth of Chinese-run businesses in Spain say that back in the boom years of the 1990s, the Chinese who set up in Fuenlabrada, in the south of Madrid, for example, did so using large amounts of cash to buy large warehouses, sometimes for as much as five million euros.

Fuenlabrada's Plaza Oriente was valued at around 65 million euros when it was officially inaugurated by the minister for public works under the former Socialist government in 2011. It was meant to be the capital's Chinatown, a symbol of the economic presence of the Chinese in the capital. But so far there have been no takers for most of the premises inside the Fénix building, a huge steel and glass structure that was to house shops, nightclubs, sports facilities, bars and restaurants — only one supermarket has opened there. For the moment, it seems that the Chinese empire is remaining invisible, hoping to ride out the crisis.

H. Araújo and J. P. Cardenal are the authors of La silenciosa conquista China (The silent Chinese conquest) and have just pubished El imperio invisible (The invisible empire).

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