Data probe links Chinese elite to offshore tax havens

FAMILY SECRETS::The International Consortium of Investigative Journalists found links to many ‘princelings’ while analyzing documents leaked from two BVI firms

The Guardian, NEW YORK

Thu, Jan 23, 2014 - Page 1

More than a dozen relatives of China’s top political and military leaders are making use of offshore companies based in the British Virgin Islands, leaked financial documents revealed.

The brother-in-law of Chinese President Xi Jinping (習近平), as well as the son and son-in-law of former Chinese premier Wen Jiabao (溫家寶) are among the political relations taking advantage of the offshore havens, financial records show.

The documents also disclosed the central role of Western banks and accountancy firms, including PricewaterhouseCoopers (PwC), Credit Suisse and UBS, acting as middlemen in the establishing of companies.

For example, the Hong Kong office of Credit Suisse established the British Virgin Islands (BVI) firm Trend Gold Consultants for Wen Yunsong (溫雲松), the son of Wen Jiabao, during his father’s premiership — while PwC and UBS performed similar services for hundreds of other wealthy Chinese individuals.

The disclosure of China’s use of secretive financial structures is the latest revelation from Offshore Secrets, a two-year project by the International Consortium of Investigative Journalists (ICIJ), which obtained more than 200GB of leaked financial data from two firms in the BVI, and shared the information with the Guardian and other global news outlets.

In all, the consortium’s data reveals more than 21,000 clients from China and Hong Kong have made use of offshore havens in the Caribbean, adding to mounting scrutiny of the wealth amassed by family members of the country’s inner circle.

As neither Chinese officials nor their families are required to issue public financial disclosures, citizens in the country and abroad have been left largely in the dark about the elite’s use of offshore structures which can facilitate the avoidance of tax, or moving of money overseas. It is estimated that between US$1 trillion and US$4 trillion in untraced assets have left China since 2000.

China’s rapid economic growth is leading to a degree of internal tension within the nation as the proceeds of the country’s newfound prosperity are not evenly divided: The 100 richest men are collectively worth more than US$300 billion, while an estimated 300 million people still live on less than US$2 a day.

The Chinese government has made efforts to crack down on citizens’ movements aimed at promoting transparency or accountability among the country’s elite.

The confidential records obtained by the ICIJ relate to the incorporation and ownership of offshore companies, which is legal, and give little if any information as to what activities the businesses were used for once established. Offshore companies can be an important tool for legitimate Chinese businesses, especially when operating overseas, due to restrictions and legislation in the country.

One Chinese political family whose financial affairs have not escaped scrutiny — at least in the West — is that of Wen Jiabao. In November last year, the New York Times reported that a consultancy firm operated by Wen’s daughter, Wen Ruchun (溫如春), who often goes by the name Lily Chang, had been paid US$1.8 million by the US financial services giant JPMorgan.

The payment has become one of the targets of an inquiry by US authorities into the activities of JPMorgan in China, including an examination of the firm’s hiring practices, which are alleged to have included the deliberate targeting of relatives of influential officials.

However, the ICIJ files reveal the role of the BVI’s offshore secrecy in obscuring Lily Chang’s links with her consulting firm, Fullmark Consultants.

The company was set up in the BVI by her husband, Liu Chunhang (劉春航), in 2004, and he remained as sole director and shareholder until 2006, when he took a job in China’s banking regulation agency.

Nominal ownership of the firm was transferred at that time to Zhang Yuhong (劉春航), a Wen family friend, who the New York Times reported had connections with the Wen family’s business interests.

The company established for Wen Jiabao’s only son, Wen Yunsong (溫雲松), with the aid of Credit Suisse, was dissolved in 2008, with little hint as to its purpose or activities in the two years it was operational. One purpose for such firms is to allow for the establishment of bank accounts in the firm’s name, a legal measure that nonetheless makes tracing of assets a more complicated task.

No members of the Wen family, or Zhang, responded to approaches for comment made by ICIJ reporters.

However, in a letter dated Dec. 27 last year apparently sent to Hong Kong columnist Ng Hong-mun (吳康民) amid public anti-corruption inquiries into other former officials, Wen Jiabao is reported to have denied any wrongdoing during his premiership, or in how his family obtained their reported wealth (“China’s Wen pleads his innocence over hidden riches claim”, Jan. 20, page 1).

“I have never been involved and would not get involved in one single deal of abusing my power for personal gain because no such gains whatsoever could shake my convictions,” he is reported to have written.

A spokesman for Credit Suisse refused to comment on specific cases or clients, but said it had “detailed procedures for dealing with politically exposed persons,” which comply with money laundering regulations in Switzerland and elsewhere.

“Credit Suisse is required by Swiss law to uphold bank client confidentiality and is therefore unable to comment on this matter,” he said. “In the absence of any further information, the media cannot be certain that they have a full understanding of the matter. As a result, they will not be able to portray it accurately or objectively.”

The ICIJ records also detail a firm connected to Deng Jiagui (鄧家貴), the husband of the elder sister of President Xi, who has cultivated a public image as an anti-corruption campaigner. According to the BVI records, Deng, a real-estate developer and investor, owns a 50 percent stake in the BVI-incorporated Excellence Effort Property Development. Ownership of the remainder of the company traces back to two Chinese property tycoons, who last year won a US$2 billion real-estate bid.

Other “princelings” with offshore ties include: Li Xiaolin (李小琳), a senior executive in one of China’s state-owned power firms and the daughter of the former premier Li Peng (李鵬); Wu Jianchang (吳建常), the son-in-law of former “paramount leader” Deng Xiaoping (鄧小平); and Hu Yishi (胡翼時), a cousin of the former president Hu Jintao (胡錦濤).

China’s political elite were not the only individuals taking advantage of the BVI’s offshore anonymity. At least 16 of China’s richest people, with a combined estimated net worth in excess of US$45 billion, were found to have connections with companies based in the jurisdiction.

Among those was Huang Guangyu (黃光裕), the founder of China’s largest electronics retailer and once the country’s richest man. Huang and his wife had a network of more than 30 companies in the BVI, according to the ICIJ records. Huang subsequently fell from grace and was in 2010 sentenced to 14 years in prison for insider trading and bribery.

Despite his imprisonment, Huang’s offshore network is not standing idle. In 2011, one of his BVI firms made an unsuccessful bid for the Ark Royal, the retired aircraft carrier that was once the flagship of the British Navy. According to press reports, Huang planned to turn the carrier into a shopping mall, but British officials decided instead to scrap the ship.

In total, the ICIJ database — which covers just two of the BVI’s numerous incorporation agencies — lists more than 21,000 addresses in China or Hong Kong as directors or shareholders of offshore companies, demonstrating the country’s status as one of the premier buyers of offshore services. In recent years, offshore jurisdictions have aggressively courted the Chinese market, with many opening offices and promotional sites in Hong Kong.

The BVI’s courtship of China’s rich and powerful may prove an embarrassment for the UK. The BVI remains a British overseas territory, and while largely independent in practice, UK authorities retain a degree of responsibility and connection with the islands.

British Prime Minister David Cameron has publicly pledged to take action against offshore secrecy and offshore tax avoidance, including in crown protectorates and overseas territoryent.

The role of Western financial institutions in establishing offshore structures has also attracted scrutiny, despite being a routine and entirely legal function for many of them.

The ICIJ records show both PwC and UBS had extensive contacts with incorporation agents in the BVI and other territories in the region. In total, UBS helped incorporate more than 325 offshore institutions for clients from China, Hong Kong or Taiwan, while PwC had a role in establishing at least 274.

PwC and UBS declined to comment on specifics regarding their activities in the BVI, or with China’s rich. However, spokesmen for both companies said their activities complied with appropriate law and ethical codes.

“As a matter of policy, PwC member firms do not comment about clients or their business,” a spokesman for PwC China said. “PwC’s tax advisory practice helps our clients make informed business decisions, balance their responsibilities to do the right thing for multiple stakeholders, often across many countries, and meet their tax requirements.”

A UBS spokesman said: “We operate to the highest standards in our business operations to meet all our legal and regulatory requirements.”

Additional reporting by staff writer