This does not appear to be an urban legend. The Guardian reports:
A Chinese cosmetics company is using skin harvested from the corpses of executed convicts to develop beauty products for sale in Europe, an investigation by the Guardian has discovered.
Agents for the firm have told would-be customers it is developing collagen for lip and wrinkle treatments from skin taken from prisoners after they have been shot. The agents say some of the company's products have been exported to the UK, and that the use of skin from condemned convicts is "traditional" and nothing to "make such a big fuss about". With European regulations to control cosmetic treatments such as collagen not expected for several years, doctors and politicians say the discovery highlights the dangers faced by the increasing number of Britons seeking to improve their looks. Apart from the ethical concerns, there is also the potential risk of infection.
MPs on the Commons select health committee are to examine the regulatory system and may launch an investigation and question ministers about the need for immediate new controls. "I am sure that the committee will want to look at this," said Kevin Barron, its Labour chairman. "This is something everyone in society will be very concerned about."