China snares NGOs with foreign funding

With little help at home, nonprofits often rely on outside aid. But the government may be using tax, licensing laws to shut them down.

It began with a tax notice for $200,000. Three days later, on July 17, officials raided the group's Beijing office and seized its computers. Then, just before dawn on July 29, police detained its founder, Xu Zhiyong at his home

On the same day, government officials went to the office of Yi Ren Ping, another nongovernmental organization, and confiscated copies of its newsletter on the grounds that it didn't have a publishing license.

Taken together, the raids appear part of a tightening of controls on critical voices in the run-up to Oct. 1, the 60th anniversary of the founding of the People's Republic of China. The two NGOs are among a growing number here using the law to hold authorities to account on issues such as food safety, patient rights, and illegal detention.

But they share another common thread: Both received grants from American and other foreign donors. The tax fine for Open Constitution Initiative, the group headed by Mr. Xu, was assessed largely on a donation from Yale Law School. Xu, a lawyer and elected legislator, is being detained on suspicion of tax evasion, according to an OCI official.

The harassment of these and other foreign-funded NGOs in Beijing has raised fears of a Russian-style squeeze on civil society. Since 2006, Russia has stripped the tax-free status of many foreign foundations and forced NGOs to report their activities in exhaustive detail, while accusing foreign-funded human rights groups of being Trojan horses for Western powers. It recently amended its NGO law, easing some of these controls.

An alternate view in Beijing is that the groups targeted had pushed too aggressively into forbidden political zones, setting off a reaction. NGO workers and experts on civil society say the investigations into taxes and licenses are a smokescreen for a clampdown on legal activism, including the recent disbarring of 20 civil rights lawyers in Beijing.

"It's what you do with the money that matters," says a researcher on Chinese NGOs, who declined to be named. He says investigations into foreign funding provide a "post hoc excuse" for authorities.

Foreign funds become a liability

Because of the difficulty of registering as nonprofits, many Chinese NGOs are listed as businesses. That makes them liable for potentially crippling tax demands, says Wan Yanhai, who runs an HIV/AIDS advocacy group in Beijing.

"This is a big issue. If there is a similar action [as OCI's tax case] against us, we could be fined tens of millions of yuan," he says.

Mr. Wan and other activists say that soliciting foreign funds is routine for many NGOs in China. Some government officials are supportive as they also benefit from funding for public programs from the same foreign donors. And they tend to overlook the fact that foreign-funded NGOs were registered as businesses, say activists.

A crackdown on this practice – and the risk of a backdated tax bill – would be chilling, says Sara Davis, executive director of Asia Catalyst, a New York-based nonprofit that provides technical support to civil society groups in China.

"It's a tough situation. For most grass-roots groups working on humanitarian and civil rights issues in China, there's no domestic funding. They're also not allowed to register as NGOs. That leaves very little option except to go to foreign donors," she says.

Another dilemma for activists is that foreign donors often want to fund projects that rub against the grain in China, such as research into last year's riots in Tibet, which inflamed foreign opinion. In a recent report, OCI said the official explanation that the Dalai Lama had fomented the unrest ignored the government's own repressive actions in Tibet.

It also took up the cause of families suing companies that sold contaminated milk powder last year, until the practice was exposed. China's government has tried to draw a line under the scandal by paying compensation to those that agree not to bring lawsuits against manufacturers.

An official at an overseas grant-making organization, who requested anonymity, says informal agreements with tax authorities on giving money to Chinese recipients may now be in doubt. But he and others in the NGO field say it's too soon to say if a broader crackdown is underway and, if so, whether foreign funding would be squeezed.

State projects get outside aid, too

On the day of his arrest, Xu was due to prepare his defense in the tax case. The next day, a municipal tax bureau found against OCI, which had argued that the money from Yale and another private donor had already been declared.

Jeffrey Prescott, deputy director of Yale's China Law Center, says he was disturbed by the detention of Xu, a former visiting scholar at Yale, and its implications for lawyers working with marginalized groups. He says Yale also supported government-run programs in China, including research on legal reform with state universities.

"Obviously these issues can be sensitive in China. But if you look at what [OCI] is doing, it's pretty mainstream public interest law," he says.