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Explainer: The fight against money laundering and terrorist financing

MD Staff

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The European Commission put forward a series of measures designed to further strengthen the EU’s framework to fight against money laundering and terrorist financing:

  • An Action Plan for a Comprehensive EU policy on Preventing Money Laundering and Terrorist Financing
  • A refined and more transparent methodology to identify high-risk third countries
  • An updated list of high-risk third countries

To ensure inclusive discussions on the development of these policies, the Commission launched a public consultation today on the Action Plan. Authorities, stakeholders and citizens will have until 29 July to provide their feedback.

Action Plan for a Comprehensive EU policy on Preventing Money Laundering and Terrorist Financing

Why is the Commission adopting this Action Plan now?

While current EU rules are far-reaching, and even go beyond international standards, they are not applied in a fully coherent manner across the EU. This leads to fragmentation between Member States. The challenge lies not only with specific pieces of legislation but with how these rules are implemented effectively across the EU. There is a clear need to tackle this lack of coherence and ensure a more harmonised implementation of the rules across the EU.The recent increase in criminal activities in the context of the Coronavirus pandemic is a reminder that criminals will exploit all possible avenues to pursue their illicit activities to the detriment of society. The EU needs to be equally determined in ensuring that they do not benefit from the proceeds of these crimes.

In July 2019, the Commission adopted an Anti-Money Laundering Communication, which highlighted a number of measures that could be taken to remedy the weaknesses in the EU’s current anti-money laundering rules.

Following this, the European Parliament and the Council invited the Commission to investigate what steps could be taken to achieve a more harmonised set of rules across the EU, including better supervision at an EU level and improved coordination among Member States’ Financial Intelligence Units (FIUs).

Today’s Action Plan is the Commission’s reply to these calls and is a first step towards a new, comprehensive framework to fight money laundering and terrorist financing in the EU.

How is the EU going to stop money laundering and terrorist financing?

Money laundering is a difficult crime to detect. Its consequences can have a severe impact on the EU’s economy and on its financial system. Therefore, the EU needs to have a multi-faceted approach to properly tackle money laundering and terrorist financing. Action is needed on several levels.

This is why the Commission has today put forward a series of measures aimed at closing any loopholes or weak links in the EU’s anti-money laundering rules.

Today’s Action Plan is built on six pillars, each of which is aimed at improving the EU’s overall fight against money laundering and terrorist financing, as well as strengthening the EU’s global role in this area. When combined, these six pillars will ensure that EU rules are more harmonised and therefore more effective. The rules will be better supervised and there will be better coordination between Member States’ authorities.

The six pillars are as follows:

Effective application of EU rules: the Commission will continue to monitor closely the implementation of EU rules by Member States to ensure that the national rules are in line with the highest possible standards. In parallel, today’s Action Plan encourages the European Banking Authority (EBA) to make full use of its new powers to tackle money laundering and terrorist financing.

A single EU rulebook: while current EU rules are far-reaching and effective, Member States tend to apply them in a wide variety of different manners. Diverging interpretations of the rules therefore lead to loopholes in our system, which can be exploited by criminals. To combat this, the Commission will propose a more harmonised set of rules in the first quarter of 2021.

EU-level supervision: currently it is up to each Member State to individually supervise EU rules in this area and as a result, gaps can develop in how the rules are supervised. In the first quarter of 2021, the Commission will propose to set up an EU-level supervisor.

A coordination and support mechanism for Member States’ Financial Intelligence Units:Financial Intelligence Units in Member States play a critical role in identifying transactions and activities that could be linked to criminal activities. In the first quarter of 2021, the Commission will propose to establish an EU mechanism to help further coordinate and support the work of these units.

Enforcing EU-level criminal law provisions and information exchange: Judicial and police cooperation, on the basis of EU instruments and institutional arrangements, is essential to ensure the proper exchange of information.The private sector can also play a role in fighting money laundering and terrorist financing. The Commission will issue guidance on the role of public-private partnerships to clarify and enhance data sharing.

The EU’s global role: the EU is actively involved within the Financial Action Task Force (FATF) and on the world stage in shaping international standards in the fight against money laundering and terrorist financing. We are determined to step up our efforts so that we act as a single global actor in this area. In particular, the EU will adjust its approach to third countries with strategic deficiencies in their anti-money laundering and countering terrorist financing regimes that pose significant threats to our Single Market. The new methodology issued alongside this Action Plan today provides the EU with the necessary tools to do so. Pending the entry into force of this revised methodology, today’s updated EU list ensures better alignment with the latest FATF (Financial Action Task Force) list.

What about the effective implementation of current EU rules?

The Commission closely monitors the implementation of all EU rules in its Member States. For example, infringement proceedings were opened in February 2020 against all those Member States that failed to notify transposition of the 5th Anti-Money Laundering Directive.

In parallel, we continue to verify that Member States have fully and correctly transposed the 4th Anti-Money Laundering Directive. The Commission has also started checking how Member States are implementing this Directive in practice. This is done in the context of the European Semester cycle. The Commission has also contracted a study by the Council of Europe, which has extensive experience in such checks. This study will feed into the report on effectiveness that the Commission is required to submit by 2022 under the Anti-Money Laundering Directive.

The Commission expects the European Banking Authority (EBA) to use its new powers to improve the effectiveness of supervisory action in the financial sector by conducting on-site examinations to assess AML framework across the EU.

Will this Action Plan lead to a new Regulation? What rules will be harmonised in the future?

This will be subject to a thorough analysis to ensure that we reach as high a level of harmonisation as possible. Current EU rules do function but Member States tend to apply them in a wide variety of different manners. Diverging interpretations of EU law therefore lead to loopholes in our system, which can be exploited by criminals. To combat this, the Commission will propose a more harmonised set of rules in the first quarter of 2021.

A number of areas where divergence should be minimised were highlighted, namely the list of obliged entities, customer due diligence requirements, internal controls, and reporting obligations.

Is current supervision sufficient or should an Agency at EU level be created?

Following recent EU reforms, the European Banking Authority (EBA) has been empowered to act quickly and decisively in the fight against money laundering and terrorist financing. It is now equipped with concrete tools to ensure the exchange of information between anti-money laundering and financial supervisors.

The latest amendments of the Anti-Money Laundering Directive also give national authorities more powers to act where banks, or financial and non-financial entities, breach their anti-money laundering obligations. These amendments also improve the exchange of information between authorities.

Nevertheless, as outlined in a Commission Report on the assessment of recent alleged money laundering cases, some structural weaknesses in the EU’s anti-money laundering framework persist, even after all the new measures have been fully implemented.

These weaknesses may endanger the security and reputation of the EU’s financial system. Therefore, it is essential that the EU’s anti-money laundering rules can also be supervised at an EU level.

The role and scope of this EU-level supervision – as well as the supervisory body that should be tasked with carrying out this role – will be proposed following a thorough assessment of all options, also based on the feedback we will receive in the open public consultation launched today.

The EU-level supervisor will be established as part of a comprehensive new policy to fight money laundering and terrorist financing. The Commission has set the political objective to achieve this within this mandate, and we count on the support of the European Parliament and the Council to ensure that the legislative work will progress as swiftly as possible.

Will all operators be supervised by this EU-level supervisor?

This matter will be thoroughly analysed. As the Action Plan notes, there are several options regarding the scope of EU-level supervision, ranging from a narrow to a broad scope. Each of these options has pros and cons, and the Commission’s proposal will be based on a careful assessment of all options, also based on the feedback we will receive in the open public consultation launched today, ensuring that the future supervisory framework is of the highest quality and leaves no weak links nor loopholes in the system.

What about the national Financial Intelligence Units (FIU)?

Financial Intelligence Units(FIUs)in Member States play an important role in identifying transactions and activities that could be linked to criminal activities. However, several technical difficulties in the functioning of the secure communication channels (FIU.net) have created difficulties.

Several Financial Intelligence Units fail to comply with their obligation to exchange information with other Financial Intelligence Units. In addition, some Financial Intelligence Units have not managed to engage in a meaningful dialogue by giving quality feedback to private entities, as required by the Anti-Money laundering Directive. The Action Plan sets the ground for the creation of an EU support and coordination mechanism for these Units.

The aim of this mechanism is to remedy the weaknesses that were identified in how Financial Intelligence Units work. This support and coordination mechanism would support cross-border cooperation and analysis. It would also streamline how information is exchanged between Member States’ FIUs and the FIUs of third countries. Finally, this support mechanism will operate as the host and as a secure communication channel for the FIU.net.

The private sector can play a critical role in fighting money laundering and terrorist financing. What will the Commission do to support its involvement?

Private operators are the gatekeepers of our financial system and our economy. They are the first ones to detect whether a transaction or activity might be suspicious. With their day-to-day experience, they can certainly contribute to fighting money launderers and those who fund terrorist activities.

The Commission fully recognises the benefits of the public and the private sector working together in this area. At the same time, it is important that these partnerships develop in a sound manner. To this end, the Commission will issue guidance, including sharing of good practices, and will consider whether to request the opinion of the European Data Protection Board in this work.

Will the list of private operators subject to anti-money laundering/terrorist financing requirements be expanded?

We will analyse whether the current scope of operators subject to these rules is adequate. Recent reviews of international standards suggest that, as a minimum, virtual asset service providers should be requested to comply withthe relevant rules.

This is also an area where we can learn from Member States’ experiences. Some countries have expanded the list of professionals subject to these rules to include, for example, crowdfunding platforms. All these examples should be analysed, also based on the feedback we will receive in the open public consultation launched today, to arrive at a harmonised list of obliged entities.

New methodology for identifying high-risk third countries

Why do you need a new methodology to identify high-risk third countries?

Identifying and tackling money-laundering activities is a moving target. Criminal techniques develop fast and take into account the latest technological developments. The new methodology aims at tackling these issues and updating our capacity to successfully identify high-risk third countries with strategic deficiencies in their anti-money laundering and countering terrorist financing regimes that pose significant threats to our Single Market.

In addition, under the Anti-Money Laundering Directive (AMLD), the Commission has a legal obligation to identify high-risk third countries with strategic deficiencies in their legal systems regarding money laundering and terrorist financing. This is to ensure that enhanced due diligence measures are applied, for example, by relevant EU businesses when carrying out financial transactions involving those third countries.

The 5th AMLD, adopted in July 2018, further strengthened the criteria for the identification of high-risk third countries, going beyond the criteria of the Financial Action Task Force (FATF), in particular as regards beneficial ownership information.

The Council objected to the list presented by the Commission on 13 February 2019. The Commission has worked within that legal framework to address concerns expressed by the Council as regards the transparency of the process and the need to incentivise third countries and respect their right to be heard.

The key new elements of today’s refined methodology for identifying high-risk third countries concern: (i) the interaction between the EU and FATF listing process; (ii) an enhanced engagement with third countries subject to the autonomous assessment; and (iii) reinforced consultation of Member States experts. The European Parliament and the Council will have access to all relevant information at the different stages of the procedures, subject to appropriate handling requirements.

What are the criteria used for listing a third country at EU level?

The 4th Anti-Money Laundering Directive (AMLD) sets out the technical criteria for identifying high-risk third countries. These requirements have been revised by the 5th Anti Money Laundering Directive in order to provide even more robust criteria.

Under the AMLD, the Commission takes into account strategic deficiencies of those countries, in particular in relation to the legal and institutional AML/CFT (anti-money laundering / countering the financing of terrorism) framework such as:

o   criminalisation of money laundering and terrorist financing,

o   customer due diligence and record keeping requirements,

o   reporting of suspicious transactions,

o   the availability and exchange of information on beneficial ownership of legal persons and legal arrangements;

o   the powers and procedures of competent authorities;

o   their practice in international cooperation;

o   the existence of dissuasive, proportionate and effective sanctions.

As a general requirement, the effectiveness in applying those AML/CFT safeguards will be considered. When carrying out its assessment, the Commission considers relevant evaluations, assessments or reports drawn up by relevant international organisations and standard setters – in particular those issued by FATF – as well as other information sources.

Once the new methodology is in place, who will be consulted?

Member State experts will be consulted at every stage of the process regarding the assessments of third country regimes, the definition of mitigating measures, third countries’ implementation of “EU Benchmarks” and the preparation of the Delegated Regulation. This consultation will include specific Member State competent authorities (law enforcement, intelligence services, Financial Intelligence Units). The European Parliament will be fully involved in those consultations.

The Commission is committed to ensuring appropriate reporting to the European Parliament. Both the European Parliament and the Council will have access to all relevant information at the different stages of the procedures, subject to appropriate handling requirements.

How often will the list be updated?

The EU list will be updated one month following the publication of an updated FATF list, which the Commission considers as a baseline. In addition, the Commission will identify further third countries based on its own autonomous assessment, after having engaged with those countries as set out in the refined methodology published today. The Commission will immediately identify those countries that refuse to take commitments to address their strategic deficiencies (“non-cooperative jurisdictions”) or those third countries that have an overriding level of risk. Third countries taking commitments to address concerns, as part of the Commission’s autonomous assessment, will benefit from a 12-month observation period. In case they do not implement those commitments within the agreed period, the Commission will proceed with a listing.

How does the FATF lists interact with the EU list?

Third countries listed by the Financial Action Task Force (FATF) will in principle also be listed by the EU. For countries de-listed by FATF, the Commission will assess whether the reasoning for de-listing is also sufficiently comprehensive from the EU’s point of view.

With regard to EU Accession countries, the Commission may develop other mitigating measures in the context of the accession negotiations that address the identified strategic deficiencies. Accession countries could take commitments that go beyond the FATF action plans. This will be closely monitored by the Commission. This option does not apply to third countries that are not in the process of acceding to the EU.

In specific circumstances – for example, if a third country has strategic deficiencies in its anti-money laundering and countering terrorist financing regime that pose a significant threat to the EU or if certain requirements related to beneficial ownership transparency are in question – certain EU requirements can “top up” the existing FATF Action Plan.

If a third country presents a risk and is not yet subject to the FATF procedure, the Commission or Member States should flag this in FATF before considering adding this country to the EU’s autonomous list.

What is the link between the AML listing process and the EU’s list of non-cooperative tax jurisdictions?

The EU list of non-cooperative tax jurisdictions and the EU’s AML lists may overlap on some of the countries they feature, but they have different objectives, criteria, compilation processes and consequences. The EU’s tax list is a Council-led process, whereas the EU’s anti-money laundering (AML) list is established by the Commission based on EU anti-money laundering rules. The high-risk third country (AML) list aims to address risks to the EU’s financial system caused by third countries with deficiencies in their anti-money laundering and counter-terrorist financing regimes. On the basis of this list, banks must apply higher due diligence controls to financial flows involving those high risk third countries. The anti-money laundering list is compiled by the Commission. On the other hand, the common EU list of non-cooperative tax jurisdictions addresses the external risks to Member States’ tax bases, posed by third countries that do not comply with international tax good governance standards. It is managed directly by the Member States, through the Code of Conduct Group, with the support of the Commission. The Code of Conduct Group decides which jurisdictions should be listed and makes a recommendation to EU Finance Ministers, who take the final decision. Nonetheless, the two lists complement each other in ensuring a double protection for the Single Market from external risks.

Why does the Commission not propose a “grey list” of countries being assessed?

Unlike the EU’s list of non-cooperative tax jurisdictions, the Anti-Money Laundering Directive only provides for one single list of “high risk third countries” based on identification of strategic deficiencies in the anti-money laundering and counter terrorist financing regime in a given country. It does not provide for a “black list” or “grey list.” As a result, the Commission considers that such a “grey list” cannot be issued, as no firm conclusion would be reached on the existence of strategic deficiencies. The Commission will, however, ensure full transparency with the European Parliament and Council throughout the process of engaging, in cooperation with the European External Action Service, with third countries, so that the co-legislators can monitor progress in the implementation of this new methodology, including in the drafting of EU benchmarks and assessing their implementation within the given timeframe.

New EU list of high-risk third countries

Why is the Commission presenting a new list of high-risk third countries?

Criminals and terrorists are not sitting back during the Coronavirus pandemic. Europol has provided a recent assessment of new threats posed by criminal groups trying to take advantage of the pandemic.

The EU is committed to protecting the integrity of its financial system and preventing financial flows involving countries with strategic deficiencies in their anti-money laundering and countering terrorist financing regimes. In line with the risk-based approach, banks and other obliged entities must apply enhanced due diligence in case of financial flows to/from high-risk third countries identified in the EU list.

As defined under the 4th and 5th Anti-Money Laundering Directives, the EU has to establish a list of high-risk third countries, to make sure that the EU’s financial system is equipped to prevent money laundering and terrorist financing.

The Commission issued the first such list in 2016, and updated it subsequently over the past years. Since the adoption of the 5th Anti-Money Laundering Directive, the criteria by which a third country is assessed have been extended substantially, thereby requiring the Commission to carry out an autonomous assessment. This required an adaptation of the listing process based on a refined methodology. This also follows calls from the European Parliament to have an autonomous list. Today, the Commission has amended the list of high-risk third countries, via a Delegated Act, in order for it to be better aligned with the lists published by FATF. This update is necessary since the EU list has not reflected the latest FATF lists adopted since October 2018. Further updates will take place once the Commission has engaged with third countries subject to the EU’s autonomous assessments, according to the refined methodology published today.Given the Coronavirus crisis, the date of application of today’s Regulation listing third countries – and therefore applying new protective measures – only applies as of 1 October 2020. This is to ensure that all stakeholders have time to prepare appropriately. The delisting of countries, however, is not affected by this and will enter into force 20 days after publication in the Official Journal.

What countries have been added to the EU list?

The Commission took into account the latest lists issued by FATF. As a consequence, the Commission has listed 12 new countries on the EU list. Based on the FATF “Compliance documents”, the Commission considers that The Bahamas, Barbados, Botswana, Cambodia, Ghana, Jamaica, Mauritius, Mongolia, Myanmar, Nicaragua, Panama and Zimbabwe meet the criteria set out in article 9(2) of Directive (EU) 2015/849. Those countries have expressed a high-level political commitment to implement an action plan agreed with FATF to address their strategic deficiencies. We welcome those commitments and invite those jurisdictions to implement them swiftly.Given the Coronavirus crisis, the date of application of today’s Regulation listing third countries – and therefore applying new protective measures – only applies as of 1 October 2020.

What countries have been removed from the EU list?

Following progress made, the Commission has removed 6 countries from the EU list. The Commission’s review concluded that Bosnia-Herzegovina, Guyana, Lao People’s Democratic Republic, Ethiopia, Sri Lanka and Tunisia addressed their strategic deficiencies and should therefore be delisted.This decision will enter into force 20 days after publication in the Official Journal.

What is the situation of other countries recently delisted by FATF?

For those countries delisted by FATF since the adoption of Delegated Regulation (EU) 2016/1675, the assessment by the Commission is still ongoing (i.e., Afghanistan, Iraq, Trinidad and Tobago and Vanuatu).

Regarding Iraq and Afghanistan, the available information and the security situation in the countries did not allow the Commission to conclude, at this stage, whether they effectively addressed their strategic deficiencies. This is due in particular to the fact that those countries were delisted by FATF based on a former procedure that did not assess the effective application of AML/CFT measures. Effective application of AML/CFT measures is a criteria explicitly included in the requirements set out in the AML Directive.

Regarding Vanuatu and Trinidad and Tobago, the available information did not allow the Commission to conclude, at this stage, whether they addressed their strategic deficiencies, notably as regards the transparency of beneficial ownership, which is a specific requirement set in the AML Directive.

The Commission will review the anti-money laundering regime of those countries as a matter of priority and will engage with them as appropriate, based on the refined methodology.

What is the situation of Albania with regard to its AML/CFT regime?

The assessment of high-risk third countries is applicable to enlargement countries – which can be listed in case strategic deficiencies are identified. As set out in the methodology, the Commission can also address these issues in the framework of the accession process where the Candidate Countries are requested to fulfil a set of stringent criteria. Therefore, alternative mitigating measures can be put in place in such instances within the framework of other EU policies, as part of the enlargement policy.

In February 2020, Albania made a high-level political commitment to work with FATF and the Council of Europe to strengthen the effectiveness of its AML/CFT regime. Similarly, the Commission developed additional mitigating measures that were put in place to address key concerns. Albania expressed a high-level political commitment towards the Commission to implement further mitigating measures, notably further aligning with the EU Anti-Money Laundering Directive and putting in place registers of beneficial ownership. These commitments go beyond the action plan agreed with FATF. Therefore those mitigating measures are considered as appropriate to address risks posed to the EU financial system at this stage. This option does not apply to third countries that are not in the process of acceding to the EU.

What are the consequences of the listing for financial institutions?

Under to the 4th Anti-Money Laundering Directive, banks and other financial institutions (“obliged entities”) have to apply extra checks (“enhanced customer due diligence requirements”) for transactions involving high-risk third countries identified on the list.

Customer due diligence corresponds to a series of checks and measures that a bank or an obliged entity has to use in case they have suspicions of high risk of money laundering or terrorist financing. Enhanced due diligence measures include extra checks and monitoring of those transactions by banks and obliged entities in order to prevent, detect and disrupt suspicious transactions.

The Fifth Anti-Money Laundering Directive clarifies the type of enhanced vigilance to be applied, which includes obtaining additional information on the customer and on the beneficial owner or obtaining the approval of senior management for establishing a business relationship.

The listing does not entail any type of sanctions, restrictions on trade relations or impediment to development aid but requires banks and obliged entities to apply enhanced vigilance measures on transactions involving these countries.

What are the consequences of the listing for the financial system?

According to the 4th AMLD, banks and other obliged entities are required to apply enhanced vigilance in transactions involving high-risk third countries (so called “enhanced customer due diligence requirements”). This is also in line with international obligations, where FATF already calls on its members to apply enhanced due diligence to high-risk jurisdictions. Those enhanced measures will lead to extra checks and monitoring of those transactions by banks and obliged entities in order to prevent, detect and disrupt suspicious transactions.

These measures do not entail any type of sanctions, restrictions trade relations or impediment to development aid but it aims to apply enhanced vigilance measures in those cases. In order to further clarify the type of enhanced vigilance to be applied, the 5th AMLD, adopted in June 2018, harmonises those enhanced measures.

What is the impact of the EU anti-money laundering list on EU-funded financial operations?

The listing process does not affect EU humanitarian assistance, EU development policy or the provision of grants, procurement and budget support.

The use of EU funded financial instruments and budgetary guarantees is subject to stricter provisions in relation to anti-money laundering and countering terrorist financing. According to the EU’s Financial Regulation and the European Fund for Sustainable Development Regulation, there is a prohibition against “Implementing Partners” (such as International Financial Institutions or National Promotional and Development Banks) entering into new or renewed operations with entities established in countries on the EU’s list of high risk third countries, when carrying out financial operations supported by the EU budget.

There is however an exemption when the action is physically implemented in the third country in question (subject to the absence of other risk factors). That means that when an action is physically implemented in a listed jurisdiction (i.e. when the financial operation supported by the Union budget is implemented in a listed jurisdiction exclusively for the purpose of financing a project in that same jurisdiction), the Implementing Partner can still carry out financial operations with entities established in that jurisdiction with the support of the EU. Therefore, there should be no adverse effect with regard to actions physically implemented in listed jurisdictions.

Why will the new protective measures only apply as of 1 October 2020?

The very exceptional and unpredictable situation arising from the Coronavirus pandemic has a global impact and is leading to significant disruption for economies and national administrations around the world. Therefore, the date of application of today’s Regulation listing third countries – and therefore applying new protective measures – only applies as of 1 October 2020. This is to ensure that all stakeholders have time to prepare appropriately. The delisting of countries, however, is not affected by this and will enter into force 20 days after publication in the Official Journal.

Will there be any technical assistance available for the countries identified as high-risk third countries?

The EU is committed to providing technical assistance to the countries identified as high-risk third countries. The Commission is one of the world’s leading donors when it comes to providing targeted support to tackle anti-money laundering / countering terrorist financing. The Commission currently has a programme (€20 million) under the Global Facility (AML/CFT) to support countries in the world to monitor, disrupt and deny the financing of terrorism and money-laundering. The Commission aims at supporting more partners to address AML/CFT issues. This process is demand-driven – i.e. countries will have to define their needs and request technical assistance to improve their AML/CFT regimes in the framework of the external aid policy of the Commission.

What are the next steps?

The Delegated Regulation has now been transmitted to the European Parliament and to the Council for a 1-month scrutiny period (extendable by 1 more month). If there is no objection during this period, the Delegated Regulation will be published in the Official Journal in view of its entry into force. The Commission will re-initiate its reviews under the autonomous assessment and come up with, at an appropriate time, a new autonomous list. These assessments will be subject to consultation of Member States’ experts and appropriate engagement with third countries, in cooperation with the European External Action Service (EEAS), as set in the refined methodology. The European Parliament and the Council will have access to all relevant information at the different stages of the procedures, subject to appropriate handling requirements. The Commission will continue to engage in FATF in order to ensure increased synergies between the EU and the FATF listing process.

Finally, as part of the planned review of AML/CFT rules at EU level, the Commission will conduct an impact assessment and propose legislative proposals in early 2021. Input from today’s open public consultation will feed into this impact assessment. The legislative proposals should ensure that risks posed by third countries are appropriately addressed.

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Intelligence

CIA National Intelligence Estimates on the Cross-Strait and Sino-Russian Relations

Michael Lambert

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In July 2011, the US Central Intelligence Agency (CIA) published a declassified National Intelligence Estimate on “Russian-Chinese Relations: Perspectives and Implications” dating back to September 2000. The 45-page report highlights growing concerns in the American intelligence community about the future of Sino-Russian defense and trade cooperation, which could undermine Washington’s Smart Power in Central Asia and the South China Sea. However, the document also underlines the relationship between Russia and China “would not deepen much beyond its current state» and could even be «subject to occasional friction“.

The People’s Republic of China is perceived by the CIA as sceptical of US influence abroad at the moment of the publication of the National Intelligence Estimate (September 2000), the bombing of the Chinese embassy in Belgrade (May 7, 1999) becoming the symbol of animosity between the two countries.

Twenty years later, geopolitical tensions remain, as underlined by American support for the protests for greater autonomy in Hong Kong (2019), and Washington’s pressure on Beijing with the accusation of the military origins of Covid-19 (2020).

In 2020, all US attempts to implement Western Soft Power in China — with the exception of Hong Kong and Macao — have had mixed success. Washington’s struggle to establish mutual trust with Beijing is similar to that of Western European countries, and the tormented past and Chinese colonisation by the West is still a contentious issue.

In Western institutions, Chinese recovery of sovereignty goes back to December 20, 1999, with the transfer of Macao from Portugal to the People’s Republic of China. To the Chinese leadership, the inference by Western power is still going on with the US support to Taiwan (sales of US arms) and the Japanese presence around the Diaoyu Dao and its affiliated islands (Japanese Senkaku Islands) backed up by Washington.

Ministry of Foreign Affairs of the People’s Republic of China, statement by Yang Jiechi in July 2019:

“Taiwan is an inalienable part of Chinese territory. The sale of US arms to Taiwan seriously violates the One China Principle and the three joint China-U.S. communiqués, undermines China’s sovereignty and security interests, and seriously undermines peace and stability across the Strait.”

Ultimately, Beijing’s desire to overtake the United-States (eg. Chinese space program) would be motivated by the post-colonial trauma, the desire to regain control of Taiwan and attempts to gain the respect of former European colonial powers and Washington.

Sino-Russian relations may prove to be better than Sino-American relations. Nevertheless, and as the declassified CIA document of 2000 points out, bilateral cooperations between Moscow and Beijing remain difficult because of the Soviet Union’s Changing Policies on China’s Nuclear Weapons Program (Zhihua Shen and Yafeng Xia. Between Aid and Restriction: The Soviet Union’s Changing Policies on China’s Nuclear Weapons Program, 1954-1960. Asian Perspectives, 2012).

As of today, Beijing is ready to support Moscow because the two countries share the same views on multilateralism. However, Beijing has not shown any support to Russia’s diplomacy in the Black Sea (Crimea, Abkhazia and South-Ossetia) and the Middle East (Syria). To date, China does not recognize the Crimea as part of the Russian Federation, and has rejected offers to recognize Abkhazia and South Ossetia as independent countries.

This research paper will focus on two reports — CIA National Intelligence Estimate (1999) “China-Taiwan: Prospects for Cross-Strait Relations” and CIA National Intelligence Estimate (2000) “Russian-Chinese Relations : Prospects and Implications” — to explain how the CIA views Beijing-Taiwan and Beijing-Moscow relations in the late 1990s, after the return of Hong Kong (United Kingdom until 1997) and Macao (Portugal until 1999) to the People’s Republic of China.

The analysis will also highlight how the Balkans and the Black Sea conflicts have a direct impact on Chinese diplomacy according to the two declassified intelligence estimates of the CIA.

The CIA National Intelligence Estimate on “China-Taiwan: Prospects for Cross-Strait Relations” (NIE 99-13 – September 1999)

After the return of Hong Kong and Macao to the People’s Republic of China, the United States is the only Western power capable of hindering Chinese territorial ambitions in the South China Sea (Taiwan). CIA reports in the 1990s, unlike those produced earlier by the CIA during the Cold War, attempted to determine whether Taiwan should remain an independent country backed up by Washington or follow the British and Portuguese examples of Hong Kong and Macao.

The CIA’s National Intelligence Estimate “China — Taiwan: Prospects for Cross-Strait Relations” published in September 1999, supposed to cover the evolution in the upcoming 3 years (2000–2003), and declassified in July 2011, answers this question and highlights the scenarii in which China could decide to regain control of Taiwan by military means.

The report has been produced at a critical moment in Sino-American relations because the return of Hong Kong and Macao under Chinese tutelage leaves the United States as the only military power capable of counterbalancing China’s regional ambitions, as Japan and South Korea do not have a nuclear strike force, unlike Great Britain.

Mention should be made of China’s rise to power, which is implied in the report. With the incorporation of Hong Kong and Macao, China has increased its GDP by attaching two bastions of capitalism, thereby weakening the British and Portuguese economy on the one hand and increasing the financial performance of Beijing on the other.

The CIA report also comes at a time when tensions between Washington and Beijing are increasing due to the NATO bombing of the People’s Republic of China embassy in Belgrade (May 7, 1999). The Balkans (Serbia) and the Caucasus (Chechnya) are recurring themes in the NIE on Taiwan, but also in the analysis on Russian-Chinese relations (CIA National Intelligence Estimate “Russian-Chinese Relations: Perspectives and Implications“).

The NIE is relying on complementary analysis conducted by several US institutions, including the following ones mentioned in the beginning:

  • NIE 98-05, “China’s Conventional Military Forces: Current Status and Future Capabilities (1998-2008)”, released in June 1998
  • China’s Strategic Priorities and Behaviour“ supposed to be published later in 1999

The number of specialized reports on Cross-Strait relations underlines the priority for the CIA to increase its expertise on the People’s Republic of China for military and diplomatic reasons in the late 1990s. These reports, which cover a period of three years, also highlight the rapid evolution of Chinese diplomacy and military power after the Cold War.

Beijing’s approach regarding partially recognized states in Asia (Taiwan)

The bombing of the Chinese Embassy in Serbia is considered a key moment in relations between Beijing and Washington, and the CIA National Intelligence Estimate does not mention the voluntary or involuntary nature of the bombing.

CIA director George Tenet testified before a congressional committee that the bombing was the only one in the campaign organized and directed by his agency. According to George Tenet, the CIA had identified the wrong coordinates for a Yugoslav military target on the same street (Tenet George (1999). DCI Statement on the Belgrade Chinese Embassy Bombing House Permanent Select Committee on Intelligence Open Hearing. Central Intelligence Agency). It is therefore interesting that the NIE does not mention the nature of the bombing. However, a report mentioning the voluntary nature of such an action would probably not have been declassified.

Following the bombing, China’s position vis-à-vis the United States presence in Asia will become even more sceptical and, unlike the United-Kingdom and Portugal, the possibility of negotiating with Washington regarding Taiwan’s future tainted by the bombing in Serbia.

The CIA considers that Beijing has a comfortable position in Asia since the Europeans left Hong Kong and Macao, and believes that “China is convinced that Taiwan will not gain more influence” and that “greater economic interdependence between China and Taiwan will bring the two entities closer together.”

Unlike other de facto states such as Abkhazia and South Ossetia in Europe, which live on economic and military aid from Moscow because Georgia and the West do not want to increase their economic relations with the two territories, Beijing seems to have adopted an innovative strategy regarding Taiwan (also considered to be a de facto states according to the People’s Republic of China’s law). China is thus developing its commercial relations with the Island, hoping to see the two entities move closer together.

Beijing wishes to develop its relations with Taiwan in order to bind a prosperous territory when the time comes (like Hong-Kong and Macao) and to user Soft Power and economic ties instead of Hard Power. That is why Beijing wants to put more pressure on the United States to reduce the sale of arms to Taiwan and focus on economic cooperation.

Moreover, the NIE mentions that Beijing wants to make Hong Kong an instrument of Chinese “One country, two systems” propaganda. In this way, Chinese leadership wants to present the future of Taiwan as similar to the future of Hong Kong, with a commitment to economic prosperity and more freedom compared to Mainland China.

The Chinese approach is presented as slow and gradual. According to the report, China has no deadline for reunification and the certainty Taiwan “will not gain influence in the coming years”. In addition, the CIA claims that China will not engage in a military confrontation with Taiwan as this would be detrimental to its economy and international trade. China’s wish is therefore to impress and frighten Taiwan and the United States.

China’s Smart Power and the United Nations

In order to recover control over Taiwan, Beijing is ready to use a combination of Smart Power and international pressures in international institutions such as the United Nations (UN).

According to the NIE, Beijing suspects that Japan and Taiwan have a secret military agreement. In addition, China is trying to weaken the United States and all states — such as Panama — that have good relations with Taiwan, using all available means to ensure Taiwan will be internationally isolated.

Moreover, the CIA believes the more tension there is between China and the United States, the more Washington will be willing to support the island. In this sense, there is an interest for Taiwan to push for more confrontation between the two superpowers in order to improve the bilateral relationship between Taiwan and Washington.

According to the analysis, if the United States does not show firmness towards Beijing, the possibility of a domino effect is to be feared, and recovering control over Taiwan will then lead to increased pressures from Beijing on Japan and South Korea. In that sense, Taiwan needs to be defended by the United-States in order to contain China’s influence in the whole South-East Asia. Following this reasoning, and according to the CIA analysis, the reunion of Taiwan and China will mark the beginning of the United States’ withdrawal from the Asian continent and further changes for Japan and South-Korea.

Finally, the most singular point of the CIA report on Cross-Strait Relations is that it takes us back to the Balkans several times. Beijing is said to have put pressure on Northern Macedonia (Macedonia before 2019) because of its diplomatic relation with Taiwan. China is said to have vetoed the presence of peacekeepers in North Macedonia at the UN to show Beijing’s power on the European continent, a strong signal sent to several countries that might require UN assistance in the future.

Beijing could thus use the UN and other international institutions to influence the entire Balkans and the Black Sea by recognizing new countries or refusing to recognize them (eg. Abkhazia) and destabilize the European continent.

The CIA analysis thus lays the foundations for the Chinese strategy regarding the non-recognition of Kosovo (de jure a part of Serbia before partial recognition in 2008) to weaken the West, and at the same time the non-recognition of Abkhazia, Transnistria, South Ossetia to weaken Russian, and the non-recognition of Nagorno-Karabakh to weaken Armenia.

Beijing’s policy in Europe regarding de facto and partially recognized states will have consequences for the recognition of Taiwan and vice versa. In this sense, the CIA underlines how international institutions can be used by Beijing to achieve its objectives and how its policy in Europe is related to Taiwan.

The CIA’s Red Lines

These are the scenarii that could prompt Beijing to conduct a direct military attack on Taiwan:

  • Taiwan new referendum on Independence
  • Foreign support for pro-independence forces in Taiwan
  • Taiwan development of nuclear weapons
  • Political instability on the island

Despite this, the CIA believes that China will follow its plan to develop Soft Power in the coming decades, as relations with Russia will bring economic prosperity and military cooperation in order to counterbalance American influence in Asia.

The relationship between Moscow and Washington is not present in the NIE on “China-Taiwan: Prospects for Cross-Strait Relations” and we have to focus on the National Intelligence Estimate on “Russian-Chinese Relations: Perspectives and Implications” to understand how Sino-Russian relations are done in order to diminish the US influence in Taiwan.

A section entitled “What if we were wrong” also shows that the CIA is unsure of future developments, although it does present possible scenarii. Moreover, Washington does not seem to be ready for military intervention (no details in the report) and military support to Taiwan will probably take the form of military equipment only.

Conclusions on the National Intelligence Estimate “China-Taiwan: Prospects for Cross-Strait Relations

In May 2020, the US State Department authorized a possible sale of eighteen MK-48 Mod6 Advanced Technology Heavy Weight Torpedoes and related equipment for an estimated cost of $180 million to Taiwan.

In response to the announcement Chinese Ministry of Foreign Affairs Spokesperson Zhao Lijian said on May 21, 2020, that:

“China is firmly opposed to the US arms sales to Taiwan and has made solemn representations to the US. We urge the US side to strictly abide by the one-China principle and the provisions of the three Sino-US joint communiques, and stop arms sales to Taiwan and military links between the United States and Taiwan to avoid further damage to Sino-US relations and peace and stability in the Taiwan Strait.”

Some 20 years after the publication of the CIA National Intelligence Estimate report “China-Taiwan: Prospects for Cross-Strait Relations,” the approach between the United-States and China seems to show no significant change. Beijing opposes any US military presence and equipment sales to Taiwan, while the United States is not ready to abandon the island for fear of losing influence in South Korea and Japan.

Another element that emerges from this report is the CIA’s anticipation of China’s diplomacy regarding de facto and partially recognized states in Europe and the influence they have on contemporary Chinese diplomacy at the UN, bilateral relations with Moscow (Crimea, Transnistria, Abkhazia and South-Ossetia), Armenia (Nagorno-Karabakh), and the West (Kosovo).

The report also bears witness to the upcoming ambivalence of relations with Russia, which wants China to recognize Abkhazia and South Ossetia (de jure independent according to Russia and de jure part of Georgia according to the West).

On reading the CIA report, it is clear that Beijing will not vote in favour of diplomatic recognition of any de facto states in Europe in the late 2000s, forcing it to reopen the debate on the recognition of Taiwan and the application of the Montevideo Convention.

As the CIA shows, relations between China and Taiwan will lead to a debate on the recognition of Kosovo, Abkhazia, South Ossetia and possibly Transnistria and Nagorno-Karabakh. Although apparently focusing on Taiwan-China relations, the report provides multiple references that link Taiwan and Chinese diplomacy to the Balkans and the Caucasus, as evidenced by the reference to the bombing of the Chinese embassy in Belgrade and the lack of support for UN Peacekeepers in North Macedonia.

The CIA National Intelligence Estimate on “Russian-Chinese Relations: Perspectives and Implications” (NIE 2000-10C–September 2000)

Alongside reports on Beijing’s growing influence in Asia, the CIA conducted a study on relations between Russia and the Republic of China during the same period (1999-2000). The NIE on “Russian-Chinese Relations: Perspectives and Implications” is partially declassified, and a considerable part of this study remains “top secret” (pages 27-36) to this day.

The early release raises the question of whether it is worthwhile for CIA archivists to provide access to the document in question, especially in view of the classification, which usually includes results that must not be accessible to the public before several decades:

  • The elements of the report that are now accessible are no longer of strategic interest (which is the case for the majority of declassified archives).
  • The CIA report shows that relations between Russia and China are ambiguous, and could lead to a form of discord between the two superpowers.
  • Technological developments (Russian S-400; Chinese J-20) are showing the report no longer covers contemporary military threats.

It seems important to mention that at the time of disclosure (2011), Russia has not yet returned to the international arena and is in the process of losing ground in Central Asia and the Black Sea area. Russia’s comeback goes back the Crisis in Crimea (2014 — nowadays) and the launch of the Eurasian Economic Union (2015).

The CIA could therefore have downgraded a document, like those on the USSR, without envisaging that the latter might have a deeper strategic relevance a decade later in 2020 and that Russia would experience a significant resurgence of influence.

Political Coordination and the fight against American unilateralism

From the very beginning, the NIE on Russia-China relations mentions the next 5 years ‘would not develop in a manner that is threatening to the US and might even stabilize Asia.’ The report adds that the 2000s will see an increase in arms sales between the two countries, particularly of SA-10 and SA-20 (S-300PMU-1/2 (SA-20)) from Russia to China.

Sino-Russian relations, in line with the CIA’s vision, should stagnate and focus on economic cooperation without any further political and military integration. The CIA also claims that the new Russian president, Vladimir Putin, will continue to sell military equipment because the Russian economy would struggle to without China. Beijing should also agree on buying more Russian military equipment because the People’s Liberation Army wants to scare Taiwan with military technology that can compete with that of the United States. According to the report, the Russian approach would be to sell military equipment in the hope that this would lead to the sales of other non-military products to China in the future.

As the NIE shows, Sino-Russian relations should not lead to supranational cooperation:

  • The Kremlin is afraid China could become more powerful economically and militarily and thus threaten Washington’s influence in Asia and Moscow’s influence in Central Asia.
  • China is skeptical regarding Russian policy since the 1950s because of the lack of support from Moscow for the development of an independent Chinese military nuclear programme (Chinese CHIC projects).

However, both countries wish to witness the emergence of a multipolar world and the attitude of American diplomacy in the 1990s has exacerbated tensions because neither Russia nor China seems capable of opposing Washington’s military ambitions. Indeed, Washington’s military power in the 1990s is such that the United States are able to bypass international bodies such as the United Nations.

The CIA therefore openly mentions the reasons for the fears of China and Russia in the 1990s, as these two countries were not able to contain American Smart Power:

  • Russia and China are angry at the American decision to launch air strikes against Baghdad (December 1998). France, Russia and China opposed such military intervention at the UN without any results.
  • Suspicion of NATO’s revised strategic concept of April 1999, which expands the geographic scope and justifications for the use of force.
  • Outrage at the US approach to the Balkan crisis from March to June 1999 and the accidental bombing of the Chinese embassy in Belgrade in May 1999.

Contrary to the CIA’s National Intelligence Estimate (1999) “China-Taiwan: Prospects for Cross-Strait Relations,” the bombing of the Chinese embassy in Belgrade is mentioned as ‘accidental’ in the “Russian-Chinese Relations: Perspectives and Implications” NIE.

The CIA adds that cooperation between Japan and the United States could weaken both China and Russia, bringing Moscow and Beijing to adopt a shared policy in Asia. Moreover, to counterbalance American influence, Russia has decided not to support Taiwan, and China has decided to support Russian involvement in Chechnya. The CIA establishes a direct link between China’s diplomacy regarding Chechnya and Russia’s policy towards Taiwan.

The NIE does not fail to add that anti-American sentiment in both countries is also based on the fact that Moscow and Beijing are dealing with internal instability in the late 1990s.

The Balkan Crisis and the Sino-Russian Cooperation

Another part of the report which concerns the sale of arms from Moscow to Beijing requires attention. The CIA thus mentions that China will not hesitate to ‘shop around’ to find the best military equipments available on the international market. Although Beijing appreciates Russia for its quality and affordability, China seems to be interested in another supplier. The name of the country has been removed from the NIE and there is no evidence to identify it.

The National Intelligence Estimate states that the crisis in the Balkans is a key moment in Sino-Russian relations because it has brought Moscow and Beijing closer together in international institutions (UN) and in their anti-Americanism. However, the CIA believes Putin, contrary to Yeltsin, is “sceptical” when it comes to China. The NIE also mentions the new Russian president has a “mercenary” approach in his relations with Beijing (page 24).

What could undermine Sino-Russian relations?

The NIE tells a policy by Vladimir Putin aimed at redirecting arms sales to the West rather than to China could have a negative impact on bilateral relations. With regard to arms sales in the 2000s, it can therefore be said that the West, and in particular the United States, have chosen not to weaken relations between Beijing and Moscow. Indeed, the CIA could have encouraged partner countries to purchase Russian military equipment and thus counterbalance the economic weight of China in the Russian economy.

This option might have been considered at the beginning of the 2000s. However the successive crises — Kursk submarine disaster (2000), September 11 attacks (2001), Iraq War (2003), the financial crisis of 2007–08 — have made it difficult for a rapprochement between Russia and Western countries.

The report adds that Russia’s lack of support for China’s ‘One Country, Two Systems’ project could also have a negative influence on relations. In the 1990s, Russia supported a more autonomous policy in non-recognized states. The CIA speculates that Russia might consider recognizing Taiwan, Abkhazia, South Ossetia and Transnistria on the basis of the Montevideo Convention, which it will do for Abkhazia and South Ossetia in 2008. The possibility of Russia recognizing Taiwan to justify its own recognition of Abkhazia and South-Ossetia is therefore a hypothesis suggested by the CIA in its report.

Finally, the analysis considers that China’s refusal to allow Russia to exert influence in Xinjiang and China’s western territories, as well as tensions in the Russian Far-East, could undermine bilateral cooperation.

In 2020, the context is rather similar and Beijing’s influence in Central Asia remains an issue as much as China’s influence in the Russian Far-East. Projects such as the Eurasian Economic Union (2015) are aimed at securing Russian control over Central Asia and halting the possibility of a political partnership between China and Central Asian countries. In fine, tensions between Moscow and Beijing remain, however both countries seem to have found a compromise with the coexistence of the Eurasian Economic Union supported by Russia and the One Belt One Road project sponsored by Beijing.

Sino-Russian Cooperation in Military Intelligence and/or Energy Cooperations (Classified)

The NIE remains partially classified to this day, and a considerable part (pages 27-36) has been deliberately omitted and its content is unknown. The US Department of Energy participated in the report (mentioned page 42) and the missing part might focus on Sino-Russian economic energy cooperations and pipelines.

However, the conclusion of the CIA report and the annex are mentioning a cooperation between Russia and China in the field of military intelligence (‘Russia-China Military Exchange’). It therefore seems inconsistent to see a conclusion on cooperation in this specific field when only one mention is made of it in the report (page 18). This first element leads us to believe the remaining part classified is linked to this issue. Moreover, the CIA had already made public a report on the subject “Soviet espionage schools” dating back to 1946. It therefore seems likely that the CIA will mention Sino-Russian intelligence cooperation in the National Intelligence Estimate on “Russian-Chinese Relations: Perspectives and Implications.”

On the basis of the report “Soviet Espionage Training Schools” (1946) report, one could put forward the idea that the NIE on Sino-Russian cooperation covers the following topics:

  • Suspicion of joint training between Russia and China in Tientsin and Beijing (mentioned in the 1946 report).
  • Joint training in Harbin at the National Defence Technology University. The CIA designates Harbin as the epicentre of Russia-China military relations, and to this day the National Defense Technology University remains an essential element in the training of China’s military elites.

In the NIE, the CIA also mentions that Russia is training Chinese troops in the handling of Su-27 (page 38) and Su-30 for a period of 6 months at the Krasnodar Foreign Pilot Training Centre.

In March 2000, Chinese students at the Smolensk Army Air Defence University are studying the strategy and systems of the SA-10 and SA-20 (S-300PMU-1/2 (SA-20) known as S-300 (NATO’s report name SA-10 Grumble), a series of long-range ground-to-air missile systems, first Soviet and then Russian, produced by NPO Almaz, based on the initial version of the S-300P.

The CIA claims that Russian commanders of the Siberian and Far Eastern military districts meet regularly with their Chinese counterpart in the Shenyang military region. The Russian GRU leader Korabel’nikov would have visited the PLA’s head of intelligence, Xiong Guangkai in June 1999.

Conclusion on the National Intelligence Estimates

The publication of the two NIE a decade later shows the capabilities of the US intelligence community and is an essential part of the CIA’s Soft Power. In fact, few intelligence agencies in the world can afford to produce and release such documents on the People’s Republic of China and Russia, and to provide details about the military cooperations between the two superpowers.

The choice to publish the National Intelligence Estimates may be linked to the fact that the documents are no longer relevant to the United-States and US allies. In January 2011, China unveiled its Chengdu J-20 fighter jet, and Russia’s weight in the Chinese defense industry is not the same as in the late 1990s, making the report outdated. Consequently, the documents are providing some interesting historical elements but need to be updated, especially when it comes to Russian and Chinese diplomacy regarding de facto and partially recognized states.

In 2000, it was difficult to know whether Beijing would be ready to recognize Kosovo, Transnistria, Abkhazia, South Ossetia or even Nagorno-Karabakh. On decade later in 2011, it is clear that Chinese diplomacy will not recognize Abkhazia and South Ossetia (recognized by Russia in 2008) and that Moscow will not venture to recognize Taiwan.

Finally, the report could shed light on the tensions between Russia and China in the 1990s, and its disclosure would therefore be aimed at creating tensions between the two countries.

It is also possible that the report’s analyses are irrelevant or even incorrect, and that its disclosure is intended to suggest that the CIA has shortcomings in Russian-Chinese relations, whereas the CIA would keep the best reports on the subject without disclosing them.

Both documents are based on previous CIA analysis on China and Russia. It can thus be seen that between 1946 and 2000, the CIA monitored relations between China and Russia and had at its disposal strategically knowledge such as the location of the joint training centre for Russian and Chinese officers in Harbin.

The most original aspect of these two NIEs remains the relationship between Europe (Balkans and the Black Sea area) and Chinese policy regarding Taiwan. The bombing of the Chinese embassy in Belgrade is perceived to be a key element in Sino-Russian relations, bringing the two countries closer together in their anti-Americanism. Moreover, the reports are establishing a connection between events in Europe and Asia, underlining both Moscow and Beijing have a global strategy regarding de facto states (Taiwan, Kosovo, Abkhazia, South-Ossetia, and Nagorno-Karabakh).

The CIA report therefore takes on an additional dimension. Whereas organisations such as the Organization for Security and Co-operation in Europe (OSCE) bring together de facto states in Europe to do a comparative analysis, the CIA has a worldwide approach and also includes Asian de facto states (Taiwan). Russia and China seem to have adopted the same approach and the Chinese policy in Chechnya is interconnected with the Russian diplomacy in Taiwan.

It can therefore be said that the US, Chinese and Russian strategies towards Taiwan, as well as towards partially and unrecognized states in Europe, are global and interconnected, raising questions about Washington’s interest in recognizing Kosovo in February 2008. The CIA was aware the diplomatic recognition of Kosovo would have an impact not only on the stability in the Balkans, but also on Russian and Chinese diplomacy in the Black Sea area (eg. recognition of Abkhazia and South-Ossetia by Moscow) and the South China Sea (more tensions between China and Taiwan).

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Intelligence

Cyberwar between the United States and China

Giancarlo Elia Valori

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How is the new “Cold War 2.0”,which currently characterizes the ever less collaborative relations between the United States and China, developing?

Some data may be interesting in this regard. On March 3, 2020 the Chinese cybersecurity company Qihoo 360 accused CIA of having hacked many Chinese companies for over 11 years.

 They are – almost obviously – aviation companies, large global commercial Internet networks, research institutions and certainly also Chinese government agencies.

Not to mention the cryptocurrency operations often organized by people and entities traceable to the North Korean government.

Both the Chinese and the US governments, in fact, use various and complex entities and mechanisms to operate in cyberwar. Firstly, the “front companies”. Just think of the Chinese group APT40, which even hires hackers – as everybody does, after all. Secondly, the intrusions to collect cyberdata in the large multinational companies, or even in State agencies, which often remain blocked for a few days and, in that phase, transfer vast masses of data to the “enemy”.

 Thirdly, the theft of IP and trade secrets- another mechanism that everybody uses.

Obviously this is not the case of Italian Agencies, which, at most, can entrust a small, but good Milanese company to do some hacking, possibly in accordance with the law.

 It now seems that the Italian ruling classes are composed above all of what in the 1920s Gaetano Salvemini called “the Paglietta of the Naples Court”.

On the military level, the United States believes that today the Chinese Joint Chiefs of Staff can hit well and quickly any opposing C3 system (Combat, Control, Communication) and that it can also carry out automated, but smart warfare operations, from the very first moments in which a significant regional military clash occurs.

Although many US experts in the sector also maintain that, still today, the United States hasa better base of action and, probably some advanced technologies that could enable the United States to have a better and wider cyber action. Nevertheless, this is not necessarily the case.

Certainly China is well aware that the Western and especially North American response to a harsh cyberattack would entail an even harsher, immediate and ruinous reaction against Chinese targets in the homeland and in the other regions.

Hence cyberwar’s parallel IT operations are mainly carried out by Russia: just think of the attack on French TV5Monde in 2015 or on Ukrainian energy companies in late December 2015, as well as on Sony in 2014. We can also mention the 2017 attack – through the use of a computer virus, WannaCry – which, however, was a cyberattack attributed by the United States to North Korea.

 On the technical-legal level, the Chinese legislation that governs the Chinese cyberwar is mainly contained in the National Security Law of 2015 and finally in the Intelligence Law of 2017, in which it is laid down that cyber operations can be conducted both by the Ministry of National Security, the old guoan, and by the Office for Internal Security of the Public Security Ministry.

 The operations abroad normally concern the Centre for the Evaluation of Intelligence and Technology (CINTSEC), which is an integral part of the Ministry for State Security.

 The other autonomous cyber networks operating within the People’s Liberation Army(PLA) add to this official network.

At geopolitical level, China does not want to trigger any conflict with the United States. Neither a traditional conflict nor a cyber one. Quite the reverse.

China’s current real goal is to bridge the technological and operational gap between the two cyberwars, both on a strictly military level and, above all, on the economic and technological one.

 China knows that – as Napoleon said – “wars cost money” and it is good not to make them if they can be avoided.

 For the United States, China needs cyberwar to win “particularly informationalised local wars”.

Conversely, for Chinese theorists, cyberwar is the only real strategic war of the 21st century, as it was the case for nuclear war in the 20th century.

 In other words, the technological and doctrinal area that allows to win a medium and large conflict and then sit at the peace negotiating table with of Phaedrus’s motto Quia sum Leo.

 Also on a global and commercial level, China even plans to build a large private company that can compete on an equal footing with what in China is called “the eight Kongs”, namely Apple, Cisco, Google, IBM, Intel, Microsoft, Oracle and Qualcomm.

 Therefore, at military level, China wants first of all its full cyberspace security so as to ensure the security of critical intelligence, both of regions and economic activities.

Also on the American side, however, there is currently a tendency to reduce the Chinese cyber penetration power, both at military and commercial levels. Some analysts maintain that,in recent years, the Chinese cyber presence has been very exaggerated.

There is a psywar operation – this time, certainly, of North American origin, but recently present on the Web – which currently makes us add a further analytical factor on the intelligence cyberwar and, above all, on the implementation of cyber criteria in psywar.

Nowadays there is a sort of “Report of a Military Contractor” available on the Web- as it is officially entitled – which is supposed to reveal just what the United States would like to hear still today, i.e. that Covid-19 is just a “Chinese virus” that was designed and made in the now very famous Wuhan laboratory.

 This report was drafted by a previously unknown Multi-Agency Collaboration Environment (MACE), a group of cyber and non-cyber experts, whose site is only part of the Sierra Nevada Corporation.

However, it is still a current relevant contractor of the US Department of Defence.

Hence the usual “external centre” that is used to say things that it would be unreasonable to say directly.

 The report states it is based on evidence related to the posts of the intra-and extra social networks, both of the laboratory and its employees, as well as on the data provided by non-military satellites and finally on the positioning data of mobile phones.

 All this in view of even saying that “something” happened – probably by chance and accidentally, but in any case extremely severe and uncontrolled – in the Wuhan laboratory, only with regard to the Covid-19 virus.

 This is a further phase of the modern misinformation technique: at first, it was said that the virus deliberately came out of the Hebei laboratory, while now it is underlined that it probably “escaped” unintentionally from its microscopic cage.

It is easy to understand what they really want to communicate: even if the Chinese government were not responsible, international lawsuits for claiming damages would still be possible.

 Nowadays, at least in the West, misinformation is carried out at first by hardly hitting the opponent and later possibly apologizing for saying something inaccurate or wrong. A psychological warfare technique that creates the “aura” of the case without later supporting and corroborating it. It is very dangerous.

 A really dangerous tactic, especially in the presence of an increasingly evolved and advanced Network.

The document, however, does not report as many as seven locations of mobile and institutional phones within the Wuhan laboratory – too great a flaw to be accidental.

 MACE also states that, allegedly, a whole conference inside the Hebei laboratory was “cancelled”, due to an unspecified disaster, while, again in the documents of the laboratory, there are pictures with a clear internal date concerning precisely that event, the conference of November 2019.

 One of these pictures was also found in the social media of a Pakistani scientist who had participated.

 Even the aerial photographs provided by the company Maxar Technologies are a sign of obvious and normal repairing of roads, certainly not specific roadblocks placed due to an unforeseen and very severe event.

A few days ago President Trump stated that the “virus came out of the lab because someone was stupid”. Too easy and, I believe, useless even for a legal and insurance case against the Chinese government itself.

 Moreover, these is the more or less manipulated data which, however, has certainly been useful to develop and spread the theory of “Chinese fault” for the outbreak of the epidemic and then pandemic, just in the midst of the great “acquisition of intelligence data” to which Trump and Pompeo referred.

 All this just to reaffirm, without any reasonable doubt, the wilful or culpable guilt of the Chinese government in the outbreak of the coronavirus pandemic, and hence to stop the development of China and make it retreat, – with huge legal costs – from a development rate that was already within reach.

 Moreover, the aforementioned MACE report lacks some data that we would simply call cultural intelligence, i.e. not knowing that the first week of October is a “golden” week for China, e.g. the National Day which commemorates the foundation of the People’s Republic of China, announced by Mao Zedong in a very famous speech at the Square of Heavenly Peace Square, with an even more famous phrase: “the Chinese people have stood up!”

 How can they not know this, even believing they are intelligence people?

 The same happened with a US report on the coronavirus issue transmitted from US to Australian intelligence agencies and later immediately published in a Sydney newspaper. Obviously everyone also “manipulate” documents to defame the opponent, but there are many ways and means of doing so.

On a more strictly doctrinal level, however, the issue brings us back to the analysis developed in 1999 by the two famous PLA Colonels, Quiao Lang and Wang Xiangsui, entitled Unrestricted Warfare.

 It was a manual on what we would today call asymmetrical warfare.

Today, however, Quiao Liang thinks that – even at this stage of the conflict -war is still linked to the manufacturing industry. This means you can have excellent scientific research and a good network of research centres, but if you do not turn all this into mass and important industrial products, as Quiao Liang says, “you have just won a medal, but nothing more”.

 Liang also maintains that the United States is therefore using up its weapons and industrial equipment stocks.

Furthermore, the more the coronavirus crisis worsens -considering the scarcely effective reaction of the US economic and health system – the more the consumption of North American military and civilian stocks increases, although the ability to produce them decreases more than proportionally.

Hence has the United States still have a manufacturing and mass industry, as well as the ability to turn technological evolution into mass products, to wage an asymmetrical or conventional war but, above all, to continue it until the final victory?

  The Chinese Air Force General seems to imply that this is not the case.

Hence, in his mind, currently the only reasonable solution for China is to expand its production system, but never underestimate the “traditional” medium-low technology manufacturing industry, which is the one that reproduces and expands production forces and enables it to last over time, which is the only real guarantee of victory.

 You do not eat fintech products, but rather Californian tomatoes and Midwest meat.

 Those who want to collect technological jewels can certainly do so and – as the General maintains – obviously also China must do so, but what is still and always needed is the great mass production and items that, coincidentally, have become scarce all over the world: masks, respirators, food, traditional infrastructure, as well as means of transport.

It is fine if you believe that war and the economy are a superhero scenario, but you have to win, i.e. “to last one minute more than your opponent” – hence you need to go back to a mass, industrial, stable and growing civilization for the “real” economy.

 The myth of high technology as the key to everything, induced by the development of the current United States, has made everyone else in the world lose the true sense of modernization, the key concept of the Chinese political narrative, from Deng Xiaoping to present days and in the future.

You cannot think of a future civilization in which social verticalisation is such that a share of over-rich countries slightly higher than 1% follows the vertical impoverishment of all the others.

 A mass impoverishment which also leads to a reduction of manufacturing production. The products are later sent to “Third World” countries to trigger a process of social pyramidalization that is almost unprecedented in human history. And what is it for? For uselessly spending the mad money produced by fintech?

 Therefore, the Chinese General believes that a US decoupling from China – as all the economists close to the White House preach-is needed to prevent China from taking all the most important technological and defence patents. In his opinion, however, also China must not decouple from the USA at all. This is not useful for high technology, but if anything, to avoid doing the same as the United States on a mass level.

 If there is decoupling – as the current US economists preach – the Chinese products will become more competitive compared to the US and US-related products. Hence the US monetary hegemony would soon disappear and the same would be true for the its double use of the dollar that made an old FED Governor say to his European colleagues: “the dollar is our currency,but it is your problem”.

Therefore, in the long run, it will also be impossible to let China – with its low-cost productions – be replaced by Vietnam, Myanmar and the other countries in the so-called “pearl necklace” of Southeast Asia.

Moreover, if after the coronavirus crisis, there will be further robotization of the workforce, how will it be possible to maintain many and sufficiently high wages which, after the pandemic, will obviously be distributed to a smaller number of available workers?

 Low wages – and hence also scarce tax revenues – as well as crisis of State spending and decrease in social and military spending, especially in the high tech sector, which always has a very high unit cost.

 Therefore, just to recap, the Empire is facing severe danger.

 As the Chinese General maintains, “we must not dance with wolves”, i.e. we must not follow the pace of US dance to reap only the technological fruits, but rather maintain and expand the great manufacturing production and, above all, even avoid taking up the cultural, industrial and scientific traits of the United States, which the Chinese General deems to be at the end of its civilization cycle.

According to Chinese analysts, the United States is a “country that has gone directly from dawn to decadence”, just to put it in the words of a French ambassador.

Hence China needs to solve the Taiwan issue autonomously, as well as also harshly oppose the actions against Huawei, by reacting blow-for-blow with the U.S. companies in China, such as IBM, Cisco, etc., and stopping their activities in China, where necessary. Anything but hybrid warfare.

 Here we are at a commercial and quasi-conventional war between two powers, i.e. an old Western power,on the one side, and an Asian power on the other which, however, does not want at all to be relegated and closed in the Pacific, as implied and assumed by the new US military projects for closing the Ocean, from California to Japan, or for trying to block the expansion of the Silk Road or still trying to block the expansion line to the South and East of China, as President Xi Jinping has recently advocated.

Certainly China is currently not lagging behind on the cyberwar issue. Nevertheless it does not want to use it as a substitute for conventional war or psywar for dual-use technologies, nor to play the game of the total defeat of a hypothetical “enemy”.

China can now avail itself of the Third Department of the People’s Army, the network dedicated to cyberwar within the PLA, but also of the Strategic Support Force.

 This will be the new “Cold War 2.0”, i.e. a series of IT, economic and industrial guerrilla warfare actions, and of actions of defamation – specifically at military level – of confidential information to be stolen from the enemy in a tenth of a second, as well as of cultural manipulation and-eventually, but only in the end-of fake news.

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Reconciling Public Safety and National Security Via A Renewed Focus on Biosecurity

M Waqas Jan

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As the broad ranging consequences of the COVID-19 pandemic wreak havoc across the global political economy, there have also simultaneously come up several issues pertaining to policy and governance particularly related to International Security. These include for instance the growing emphasis now being laid on biosecurity which under the current context of an unprecedented global pandemic has greatly exposed the failings and lack of preparedness of even some of the world’s most developed countries.

One has to merely glance at the fast-rising death tolls in the US, UK, Italy and Spain to gauge how some of the world’s foremost economies and health services have been left devastated owing to a severe lack of preparedness. Countries which boast some of the world’s most robust military industrial and technological complexes, have been unable to otherwise safeguard not only the health and safety of their own populations, but also to preserve what can be only described as their entire way of life. Something for which they have been more than ready to go to war in the past.

Its hence no surprise that the US for instance, in its incessant need to scapegoat (or to just simply bomb) and divert mounting public outrage has been consistently directing blame towards China. This has ranged from alleging China to have deliberately engineered the virus, to holding the Chinese government accountable for having initially covered up the severity of the outbreak in a bid to safeguard its own economic and diplomatic standing. While it is unlikely that the US would go to war with China solely over this, the dramatic deterioration in relations that has been witnessed in the kind of rhetoric and proposals that have been coming out from both countries stands as cause for grave concern for the world at large.

Yet, what’s lost amidst this blame game that has dominated headlines for over a month, has been perhaps the more important and timely discussion that had arisen on the importance of incorporating more robust bio-security measures. This is understandable considering how the term biosecurity has itself over the last two decades come to be associated more in relation to enacting safeguards against bio-terrorism and bio-chemical weapons. Aspects that were directly based for instance on the anthrax and smallpox scares that had dominated US policy discourse shortly after the September 11 attacks. Or for instance from the more recent threats issued by ISIS regarding the use of such weapons against Western targets. The above linked report from the Hudson institute for instance evaluates the US’s need to enact such biodefense (or biosecurity) measures within exactly such contexts.

However, it is this very context related to terrorism and homeland/national security which in dominating US policymaking circles is more attuned towards focusing on the perpetrators of such threats; be they state or non-state actors. Consequently, the whole aim of the US – and also arguably its closest allies -has been to justify its more interventionist and hands-on approach to mitigating such threats before they reach US shores. Hence, the emphasis being more on preventing such biological ‘attacks’ from occurring in the first place as opposed to dealing with them once they’ve ‘hit’.

While justifiable in its own right, what this approach however misses in its overarching focus on national security, is perhaps the more pressing need to address public health and safety domestically. Which in essence is what national security is premised on defending in the first place – an effective Civil Defense of sorts.

For instance, a widely cited comparison of the ‘Western’ response to the Coronavirus with that of certain East Asian countries such as Taiwan, Singapore, South Korea and Japan shows how these latter countries’ more recent experiences in dealing with the SARS and MERS outbreaks had contributed immensely to their relatively better responses to this pandemic. By already having in place certain contingency and policy directives grounded more in a domestic public health and safety perspective – as opposed to an outward looking national security one –each of these states was able to mount a more coordinated, timely and socially aware response to this crisis. Most importantly their responses had public support and sympathy directly built in to their policies which saw the overall public perception of their governments’ measures as wholly necessary and compulsory; as opposed to being forced and reactionary. This latter aspect for instance is manifest in how several countries have witnessed severe public and political backlash towards the social distancing and lockdown policies that were enacted the world over. This includes backlash witnessed in countries ranging from the US to Pakistan, where the economic costs of such policies – which once again are tied directly to externally inspired national security concerns – were given unassailing primacy over domestic public health and safety.

Talking specifically of Pakistan and its long history of being portrayed as a security state, such threats to national security from a potential biochem attack, are already prioritized along the lines of a potential WMD attack considering the primacy such threats hold for a Nuclear Weapon State. However, even within such military dominated approaches to bio-security, there is a still a public safety and awareness component from a Civil Defense perspective, that even in the case of any WMD attack remains already lacking.Thus, belying the prioritization afforded to deterring external threats, rather than on eliminating such shortcomings within, just like the US.

The current global pandemic has provided a rare chance to have this conversation regarding the very premises and priority this concept of Bio-security has been accorded within government policy circles.It has afforded a previously unfound impetus and political capital to enact and fund such measures. Instead of being squandered however, such impetus should be used to mitigate such lapses that have now been brought to the forefront of governance and policy discourse the world over. Unless these realities are adapted to, life is likely to become even harder in a world that has changed dramatically in just the last few months.

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