In 2009, Jasmine Li (李紫丹), whose grandfather was the fourth-most powerful politician in China at the time, donned a floral Carolina Herrera gown and debuted at a ball in Paris. That same year, a British Virgin Islands company she would later come to own for US$1 was born in an aging building in a red-light district of Hong Kong, just one example of the territory’s key role in helping the world’s elite shuttle their wealth offshore.
The information about Li, who has not been accused of wrongdoing, comes from a tremendous cache of documents leaked from the Panamanian law firm Mossack Fonseca and published by the International Consortium of Investigative Journalists (ICIJ). Those records highlight the central role Hong Kong has come to play in designing offshore financial vehicles.
Hong Kong brims with people expert at packaging and protecting wealth. The back pages of newspapers teem with advertisements for corporate formation companies, one-stop shops promising fast bank account opening, corporate compliance, tax and accountancy services. Offshore vehicles are used to minimize tax, mitigate political risk and circumvent onerous regulations in China. And they are completely legal.
Photo: Bloomberg
However, Hong Kong’s offshore financial machinery works so well, and so discreetly, that it can be abused by those seeking to hide illicit assets or evade taxes. As traditional havens, like Switzerland, cave to years of grinding pressure from European and US tax authorities, unsavory money is drawn to Hong Kong, which despite reforms, retains its reputation for secrecy, non-cooperation and a light regulatory touch, watchdog groups and lawyers say.
“Hong Kong attracts this type of hot money from across the region and globally, partly because of its perceived stability,” said Iain Willis, a partner at Latymer Partners, a corporate intelligence advisory firm in London. “‘Light-touch’ financial regulation, easy rules on company incorporation and limited transparency” add to its appeal, he said.
Hong Kong was Mossack Fonseca’s go-to spot for financial intermediaries like P&P Secretarial Management Ltd (培邦秘書服務), home to 2,212 accountants, banks and other middlemen Mossack Fonseca used to set up 37,675 offshore companies for its global clients between 1977 and last year — more than any other place in the world, according to ICIJ’s analysis.
China’s Ministry of Foreign Affairs dismissed ICIJ’s reports as “groundless,” and the government has aggressively censored discussion of them.
Hong Kong tax authorities said in an e-mail on Friday that they would “take necessary actions” based on the offshore leaks and work to “enhance the efficiency and effectiveness” of enforcement as required.
Mossack Fonseca tapped P&P Secretarial Management — which is run by an accountant named Chiu Wai-hon (趙維漢), according to corporate filings — to register Harvest Sun Trading in the British Virgin Islands.
P&P Secretarial is not listed in the telephone directory, and its contact details are not easy to find on the Internet. Its name is not among the three businesses listed at the entrance to the second-floor office it now occupies in Hong Kong’s Wan Chai district. The front door opens onto a lone ivy plant stuck in a corner of two blank white walls. There is no receptionist, and unannounced visitors are not welcome.
“The boss is away. He will be back next week,” said a woman in a dark dress, who confirmed that P&P Secretarial did indeed have a presence in the office which did not bear its name. She refused to give her name.
Great fortunes run through small offices like this, and not just from clients of Mossack Fonseca, which derived nearly a third of its business from Hong Kong and China, according to ICIJ.
“It is quite natural that Hong Kong would grow to play a significant role in the plumbing infrastructure of globalization,” said Martin Kenney, an asset recovery lawyer in the British Virgin Islands. “They are the architects, designers and engineers of the structures.”
In part, the prominence of offshore vehicles in Hong Kong has to do with its special relationship with China. Many investors set up offshore vehicles so they can sell mainland assets without being subjected to layers of government approval. Others have used, and sometimes abused, offshore structures to take advantage of China’s tax breaks for foreign companies. More foreign direct investment to China between 1979 and 2014 ostensibly came from the British Virgin Islands than from anywhere else, aside from Hong Kong, according to the US Congressional Research Service.
Hong Kong does not tax income that originates abroad, a policy that supports the proliferation of foreign-registered companies. Hong Kong’s independent legal system and effective escape route from China’s currency controls — it is easier to move money between China and Hong Kong than elsewhere — also add to its appeal, lawyers say.
The kind of political uncertainty that drove investors offshore before Hong Kong’s 1997 handover persists today. The Basic Law, a mini-constitution that enshrines China’s “one country, two systems” policy toward Hong Kong, expires in 2047.
“We are on borrowed time,” said David Webb, a former investment banker and Hong Kong shareholder activist.
Offshore vehicles have become so commonplace that 75 percent of Hong Kong-listed companies are actually domiciled in Bermuda or the Cayman Islands, according to an analysis by Webb.
However, there are other, more controversial uses of Hong Kong’s offshore machinery.
The so-called “Panama Papers,” together with past leaks published by ICIJ, show how China’s own political and economic elite use Hong Kong intermediaries to get their money out of China.
While the leaks contain no allegations of wrongdoing, they are a sore spot for China’s top leadership, which has been trumpeting nationalism and moral virtue as it tries to slow capital flight and fight corruption. Much of the wealth that runs through Hong Kong comes from China, which is widely seen as a growth market in the offshore industry.
The top source of funds that Mossack Fonseca helped move offshore was China, according to an analysis of ICIJ data by the Guardian newspaper.
In 2009, when Chinese President Xi Jinping’s (習近平) brother-in-law Deng Jiagui (鄧家貴) wanted to register two companies in the British Virgin Islands, his advisers at Mossack Fonseca turned to a Hong Kong firm called Wong Brothers & Co (民信會計師事務所), according to ICIJ’s documents.
The firm’s lead partner is an accountant named Charles Chan-lum Chow (鄒燦林). Chow was a member of the Chinese People’s Political Consultative Conference, a government advisory body, in southern Guangdong Province from at least 2003 to 2013, according to state media reports and government Web sites. He spent 12 years on the board of China Aerospace International Holdings Ltd (中國航天國際), the listed subsidiary of the main contractor for China’s space program.
Chow did not respond to requests for comment.
Deng’s companies went dormant before Xi took power, according to ICIJ, and no allegations of wrongdoing have been made. It is not clear what happened to whatever Xi family assets those companies once held.
“Everybody in the elite needs Hong Kong,” said Hung Ho-fung (孔誥烽), an associate professor at Johns Hopkins University. “Everybody. Even Xi Jinping’s family needs it. They do not have an incentive to shut this channel to move money out.”
It is not just Chinese running money through Hong Kong. When a company linked to France's far-right National Front party wanted to move money out of the country, associates of party leader Marine Le Pen used shell companies in Hong Kong, according to a report in >>>Le Monde>>> newspaper based on the Panama Papers. The French daily has also linked a separate Hong Kong firm with family members of Algeria's governing elite.
Large-scale counterfeiters from Germany, Austria and Japan, as well as China, run offshore structures out of Hong Kong to launder their money, said Douglas Clark, a lawyer at Hong Kong's Gilt Chambers.
"That is part of Hong Kong being a trading city and entrepot," he said. "It welcomes everyone."
Despite a recent crackdown on secrecy, Hong Kong is still ranked as the second most secretive jurisdiction in the world, after Switzerland, by the Tax Justice Network, a UK advocacy group.
Tax Justice Network director John Christensen said that rules are only as good as their enforcement, and "Hong Kong has never had a strong supervisory culture."
In 2014, Hong Kong began requiring companies to have at least one real person serving as a director. This effectively barred the practice of creating impenetrable daisy chains of corporate ownership, in which one mysterious company was controlled by another mysterious company.
However, clients can easily register companies under other people's names.
"They can always find their relative as the nominee," said the director of a small incorporation firm also based in Wan Chai district, who would only give his surname, Lee (李), for fear of compromising client privacy.
He said most clients do not mind using their real names in filings. The big secrecy business runs out of the gleaming skyscrapers of Hong Kong's central business district, where elite firms charge 10 times his rates, he said.
“Wealthy people, they won't come here," he said. "They'll go to central. They do not mind paying a few thousand more for more secured, private service.”
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