Since October 2017, Taiwan has seen a media frenzy over a scandal involving domestic Ching Fu Shipbuilding Company (慶富造船), which won a defense contract in 2014 to build minesweepers for Taiwan’s Navy. This case has raised numerous concerns that involve: US and European security interests (including Lockheed Martin); President Tsai Ing-wen’s policy of “self-sufficient national defense;” Taiwan’s military and its arms procurement; predictable partisan finger-pointing between politicians; defaulted loans from local banks; and blame laid on bankers and senior officers in Taiwan’s armed forces. On November 22, President Tsai even personally publicized her statement specifically on this criminal case. However, what seems lost in the numerous remarks and media frenzy is that the crux of this case concerns Ching Fu’s suspected compromises in the People’s Republic of China (PRC).
From Contract to Criminal Case
In 2014, Taiwan’s Ching Fu Shipbuilding Company won a contract to supply six minesweepers to Taiwan’s Navy. The contract, reportedly valued at about NT$35 billion (US$1.2 billion) until 2024, entailed a consortium that also included US defense contractor Lockheed Martin and Italian shipbuilder Intermarine SPA. The minesweepers were to incorporate an Italian ship design and hull, US combat systems and integration, and Taiwanese weapons and shipbuilding. The worthy program is part of a bolder plan of numerous domestic acquisitions to modernize Taiwan’s Navy for defense against the PRC threat. In late 2015, the Obama Administration notified Congress of a Direct Commercial Sale worth $108 million by Lockheed Martin.
In August 2017, however, the already-brewing controversy at Ching Fu became public when prosecutors in the southern city of Kaohsiung raided the company’s offices and questioned Chairman Chen Ching-nan (陳慶男), his son, and other executives. The case involved alleged abuse of the naval contract to obtain additional funds through fraudulent applications for loans from a consortium of nine domestic banks. Taiwan’s Navy declared that it would cancel the contract if the charges were proven, potentially delaying the procurement of the needed minesweepers.
In October, a media frenzy ensued along with attention by top politicians and officials to Ching Fu’s criminal case. Allegations appeared about activities that might have involved the Presidential Office under then-President Ma Ying-jeou (2008-2016) or President Tsai. Premier William Lai (賴清德) testified to the Legislative Yuan (LY) that Taiwan’s Executive Yuan (EY, Taiwan’s cabinet) would investigate the contract and “cut its wrists” by ending it if necessary to prevent more losses.
The LY also formed a group to investigate Ching Fu. The LY’s Foreign Affairs and National Defense Committee requested reports from the Ministries of Finance and National Defense, and Financial Supervisory Commission. A Vice Minister of Defense, Admiral Pu Tze-chun (蒲澤春), testified that options included canceling the contract (delaying delivery of the first minesweeper to 2023), contracting with another company, re-starting the procurement process, or ending the program.
Ching Fu’s scandal also affected the Ministry of Foreign Affairs, which denied any involvement in the company’s contract and loan to build a ship for Tuvalu, a country in the South Pacific.
Investigations and Discipline
In November, Taiwan’s Executive Yuan reported its investigation of Ching Fu’s case. The report blamed Ching Fu’s funneling of funds through five shell companies in Hong Kong, Macau, and Singapore; problems in the Ministry of National Defense (MND)’s procurement process; and flaws in the approval of loans by state-run banks led by First Commercial Bank. Deputy Premier Shih Jun-ji (施俊吉) asked for “accountability,” including removal of First Commercial Bank’s Chairman Tsai Ching-nain (蔡慶年). In mid-November, the director of Kaohsiung’s Marine Bureau, Wang Tuan-jen (王端仁), resigned over a reported meeting in October 2016 with Ching Fu’s vice president about building a shipyard. Then, the Finance Ministry replaced the heads of three state-run financial companies.
After Defense Minister Feng Shih-kuan (馮世寬) reported on the scandal, the military was under pressure to name officers for alleged flaws in awarding the contract to Ching Fu, despite its reportedly inadequate financial and technical resources, and for alleged inaccuracies in a status report to the LY last November. On November 22, the MND issued a list of 24 senior military officers for discipline, including Navy admirals and captains. They included: Vice Minister of Defense Admiral Pu Tze-chun; Chief of General Staff Admiral Lee Hsi-ming (李喜明); Chief of the Navy Admiral Huang Shu-kuang (黃曙光); Director of the Procurement Office, Army Lieutenant General Huang Hsi-ju (黃希儒); Director of the Armaments Bureau, retired Vice Admiral Mei Chia-shu (梅家樹); and former Vice Minister of Defense, retired Admiral Chen Yeong-kang (陳永康).
On the same day that MND issued its list of senior officers, President Tsai personally publicized her video and statement devoted to Ching Fu’s criminal case. Tsai focused on her responsibility to share the military’s “burden” in this controversy, saying that “as commander-in-chief, I expect the armed forces to meet the problem head-on, and rectify errors. That’s the significance of military reform. Anything less is unworthy of the armed forces of the Republic of China.”
President Tsai promised a rigorous investigation of “clear irregularities.” She also promised correction of mistakes and resolution of problems, including MND’s review of naval procurement and reforms to exclude unqualified defense contractors. Third, Tsai insisted on indigenous shipbuilding as part of a continued policy of “self-sufficient national defense.”
Concern about compromises with China
However, President Tsai’s statement did not mention the PRC. What seems lost in the numerous remarks, demands for accountability, and media frenzy is the crux of the public’s concerns. Ching Fu’s alleged intentional misconduct not only raised a criminal case about defaulted loans but also risked compromises in Taiwan’s security through that defense company’s suspected diversion of funds to invest in the PRC.
Questioning Premier Lai at the LY in October, the Executive Chairman of the New Power Party, Huang Kuo-chang (黃國昌), commented that Ching Fu, as a Taiwanese defense contractor, invested in a deal with a PRC local government. Huang expressed a concern that “the shipbuilding technology we learn from the Italian manufacturers will end up in the hands of a contractor that has signed an investment agreement with a Chinese local government.”
Did Ching Fu extend dangerous leverage to Taiwan’s adversary instead of helping Taiwan’s defense? Did the company suffer suspected bad investments and large losses in the PRC so that the company desperately needed to raise funds even from fraudulent financing? Did Ching Fu potentially jeopardize not only Italian technology but US and Taiwanese technology as well?
The Tsai Administration and the LY need to reassure Taiwan’s people and partners of protection of defense information and more—not less—support for Taiwan’s armed forces against the PRC.
The main point: The crux of the concerns about Ching Fu’s criminal case is compromises that it made in China.