How Wall Street Loopholes Funnel US Capital to Chinese Communist Party

American investors are unwittingly funding Chinese Communist Party activities through Wall Street loopholes, according to a securities expert who recently testified before Congress.

Chris Iacovella, CEO of the American Securities Association, told The Daily Signal these activities include “the internment of Uyghurs, funding [People’s Liberation Army] weapons systems, a cyber army that relentlessly attacks this country, our businesses, and our people, as well as numerous other atrocities from a human rights perspective, including genocide.”

Iacovella testified in April at a joint House-Senate hearing on the CCP about loopholes that allow Chinese companies to access U.S. capital markets despite a Chinese prohibition on foreign ownership.

“What we tried to do was let the American people know that their money is going to fund Chinese Communist Party activities,” he said.

Iacovella identified two primary loopholes exploited by Wall Street firms. The first is the “variable interest entity” structure that creates an illusion of ownership for American investors.

“This is a company that’s listed on a U.S. stock exchange that U.S. people buy, like Alibaba. But you don’t actually own the company—what you own is rights to a contract of a Cayman Islands company that contracts with the mainland Alibaba company,” Iacovella said. “If they steal from you, if they don’t disclose things as a shareholder, your rights are limited and they stop in the Cayman Islands.”

The second, which Iacovella calls the “passive index loophole,” allows asset managers to include mainland Chinese companies in index funds sold to American investors.

“Those companies don’t comply with any U.S. laws and regulations. Nothing,” he said. “It’s basically anti-competitive to American small businesses because they have to pay compliance costs. They’re subject to litigation, and they have to follow our rules. These mainland Chinese companies don’t, but they get access to our capital.”

Iacovella said U.S. firms claim they would stop the practice if made illegal, “but yet, on the flip side of that coin, they’re out there lobbying Congress every single day to try to poke loopholes into existing legislation or to try to stop it in its entirety.”

Bipartisan legislation from Rep. Andy Barr, R-Ky., and Sen. John Cornyn, R-Texas, aims to identify Chinese companies with military ties or involvement in sensitive technologies.

Iacovella emphasized that China’s economic advantages stem from unethical practices.

“When you have slave labor, no environmental laws, no OSHA laws, and no labor laws, of course it’s going to be cheaper,” he said.

The American Securities Association represents about 100 non-Wall Street firms working to “promote investor trust and confidence and to facilitate the flow of capital to small businesses across America.”

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