The US yesterday expressed concern that ever more sophisticated drug-trafficking cartels were using China's inadequately controlled financial system to launder their proceeds, possibly even getting tax breaks in the process.

Releasing its annual report on drug-trafficking worldwide, the State Department's bureau for international narcotics and law enforcement affairs pointed to significant progress in Latin America in 2005, as well as positive US efforts to reduce drug abuse domestically that accounts for some 20,000 deaths a year.

Overall in the western hemisphere, security forces seized 329 tonnes of cocaine in 2005, of which 228 tonnes were intercepted in Colombia, with a total street value in the US of $33bn (€27.7bn, £18.8bn). An estimated 300 tonnes of cocaine still reached the US, however.

The 900-page report depicts an increasingly complex global picture. For example, precursor chemicals used to produce cheap synthetic drugs flow from China and India to laboratories in the Netherlands, Canada and Poland, from where they take circuitous routes to penetrate the US.

Demand for stimulants, such as "ecstasy", is increasing in developed and developing nations even as heroin and cocaine abuse falls in some countries.

China was developing into a big concern, the report said. "A more sophisticated and globally connected financial system in one of the world's fastest growing economies will offer significantly more opportunities for money laundering activities." It noted a draft "Anti-Money Laundering Law" was submitted to China's National People's Congress last year and was expected to be passed in 2006. A Financial Intelligence Unit was set up in 2004.

But in spite of these efforts, the report said "institutional obstacles and rivalries between financial and law enforcement authorities continue to hamper Chinese anti-money laundering work and other financial law enforcement".

It cited a recent estimate by the International Monetary Fund that money-laundering in China may total $24bn each year. "Proceeds of tax evasion, recycled through offshore companies, often return [to China] disguised as foreign investment, and, as such, receive tax benefits," the report stated. It accused Hong Kong-registered companies of playing a key role in transferring corruption proceeds and tax evasion recycling schemes.