Center for Modern China

October 3, 2011

Ms. Blanca E. Maldonado

Special Agent, DOS/OIG/INV

Dear Ms. Maldonado:

We received NED’s review on CMC in April and responded on July 29. Because we were told that NED sent its review to

your office as FYI only, we did not copy our response to your office. However, a September 2 email from NED’s Georges

Fauriol states that “We have also been informed by the Department of State's Inspector General’s Office of Investigations that it has accepted the NED report in its entirety, with no exceptions to the findings, recommendations or questioned costs”. We were surprised to learn of this action by your office, but decided to wait for NED’s follow-up, which Mr. Fauriol said we would get in late September. Since no such follow-up came about, we would like to hereby share with you our response to the NED review (please see attached).

The most serious flaw of the NED review, in our judgment, is that it was based on secret evidence. As our response describes in some detail, NED based its review on documents it acquired from Mr. Xiaonong Cheng, the former CMC officer whose many uses of  MC/NED funds we consider questionable. NED first directed Mr. Cheng (by an email from Louisa Greve) to not turn over documents to CMC. It then requested documents from Mr. Cheng directly, without asking CMC for permission. Finally, NED has consistently declined letting us have access to the documents it received from Mr. Cheng.

The NED review also chose to not question over $13,000 that Mr. Cheng used for car purchase and mutual fund investment, and to accept Mr. Cheng’s explanation that these personal uses of public funds were made good by his wife’s consulting work. As we pointed out to NED, Mr. Cheng did not treat these expenditures as his wife’s income when he filed tax data with IRS on behalf of CMC, even while he reported his wife’s honoraria to IRS as income.

We cannot understand NED’s conduct in relation to CMC except as an effort to cover up misuses of public funds and thus spare itself of embarrassment. We believe that NED’s conduct is indicative of a pattern of mismanagement of public funds and abuse of its semi-official power. We once again request that your office look into NED’s conduct. NED likes to

cite the fact that it makes over 1,000 grants a year. Our experience suggests that NED has neither the staffing nor the resolve to effectively monitor so many grants, and that the time is ripe for NED to undertake systematic reforms.

Sincerely yours,

David Yu

Corporate Secretary, Center for Modern China

Copy to: Assistant Secretary Posner