Hong Kong Emerges as Hub for Creating Offshore Companies

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Source:   —  April 10, 2016, at 5:10 AM

was born in an aging building at the edge of Hong Kong'south ruddy light district. The following year Li bought the company for $1. The revelations arrive from a tremendous cache of documents leaked from the Panamanian law firm Mossack Fonseca and published by the International Consortium of Investigative Journalists.

The same year Jasmine Li, whose grandfather was the fourth-ranked politician in China at the time, donned a floral Carolina Herrera gown and debuted at a ball in Paris, a company called Harvest Sunday Trading Ltd. was born in an aging building at the edge of Hong Kong'south ruddy light district. The following year Li bought the company for $1.

The revelations arrive from a tremendous cache of documents leaked from the Panamanian law firm Mossack Fonseca and published by the International Consortium of Investigative Journalists.

Hong Kong was Mossack Fonseca'south go-to spot for financial intermediaries love P&P Secretarial Management, residence to 2.212 accountants, banks and other middlemen Mossack Fonseca used to set up 37.675 offshore companies for its global clients between one thousand nine hundred seventy-seven and two thousand fifteen — more than any other space in the world, according to ICIJ'south analysis.

Hong Kong has emerged as a major design middle for offshore vehicles, a space brimming with people expert at packaging and protecting wealth. The back pages of newspapers here teem with advertisements for corporate formation companies, one-stop shops promising quick bank account opening, corporate compliance, tax and accountancy services. Offshore vehicles are used to minimize tax, mitigate political risk, and get round onerous regulations in China. And they're completely legal.

But Hong Kong'south offshore financial machinery works so well, and so discreetly, that it can be abused by those seeking to cover unlawful assets or evade taxes. As traditional havens, love Switzerland, cave to years of grinding pressure from European and American 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, simple rules on company incorporation and Ltd transparency" add to its appeal, he said.

China'south Foreign Ministry dismissed ICIJ'south reports as "groundless," and the government has aggressively censored discussion of them.

Hong Kong tax authorities said in an email Friday that they'd "get required 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 running by an accountant named Wai-hon Chiu, according to corporate filings — to register Harvest Sunday Trading in the British Virgin Islands. P&P Secretarial isn't listed in the telephone directory, and its contact details aren't simple to discover on the Internet. Its name isn't among the three businesses listed at the entrance to the second-floor office it presently occupies in Hong Kong'south Wan Chai district. The front door opens onto a lone ivy plant stuck in a corner of two empty white walls. There is number receptionist, and unannounced visitors are not welcome.

"The boss is away. He'll be back following week," said a woman in a shadowy dress, who confirmed that P&P Secretarial did indeed have a presence in the office which didn't bear its name. She refused to give her name.

Grand fortunes running through tiny offices love 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'south 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're 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 mainland 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 get advantage of China'south tax breaks for foreign companies. More foreign direct investment to China between one thousand nine hundred seventy-nine and two thousand fourteen ostensibly came from the British Virgin Islands than from anywhere else, aside from Hong Kong, according to the U. S. Congressional Research Service .

Hong Kong doesn't tax income that originates abroad, a policy that supports the proliferation of foreign-registered companies. Hong Kong'south independent valid system and effective escape route from mainland China'south currency controls — it'south easier to move money between mainland 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 one thousand nine hundred ninety-seven handover persists today. The Basic Law, a mini-constitution that enshrines China'south "one country, two systems" policy toward Hong Kong, expires in 2047.

"We're on borrowed time," said David Webb, a former investment banker and Hong Kong shareholder activist.

Offshore vehicles have become so commonplace that seventy-five % of Hong Kong-listed companies are actually domiciled in Bermuda or the Cayman Islands, according to an analysis by Webb.

But there are other, more controversial uses of Hong Kong'south offshore machinery.

The Panama Papers, together with past leaks published by ICIJ, indicate how China'south own political and economic elite utilize Hong Kong intermediaries to obtain their money out of China. While the leaks contain number allegations of wrongdoing, they're a sore spot for China'south top leadership, which has been trumpeting nationalism and ethical virtue as it tries to unhurried capital flight and fight corruption. Much of the wealth that runs through Hong Kong comes from mainland 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 two thousand-ninth, when president Xi Jinping'south brother-in-law Deng Jiagui 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., according to ICIJ's documents.

The firm'south lead partner is an accountant named Charles Chan-lum Chow. Chow was a member of the Chinese People'south Political Consultative Conference, a government advisory body, in southern Guangdong province from at least two thousand three to two thousand thirteen, according to state media reports and government websites. He spent twelve years on the board of China Aerospace International Holdings, the listed subsidiary of the main contractor for China'south space program.

Chow didn't reply to requests for comment.

Deng'south companies went dormant before Xi took power, according to ICIJ, and number allegations of wrongdoing have been made. It'south not clear what happened to whatever Xi family assets those companies once held.

"Everybody in the elite needs Hong Kong," said Ho-fung Hung, an associate Prof at Johns Hopkins University. "Everybody. Even Xi Jinping'south family needs it. They don't have an incentive to close this channel to move money out."

It'south not just Chinese running money through Hong Kong. When a company linked to France'south far-right National Front party wanted to move money out of the country, associates of party boss 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'south governing elite.

The company that helps running two of those firms, P&B Management Services, is housed in a dimly-lit office in Wan Chai district, according to Hong Kong corporate filings. Staff there declined to speak with a reporter.

Large-scale counterfeiters from Germany, Austria and Japan, as well as China, running off-shore structures out of Hong Kong to launder their money, said Douglas Clark, a lawyer at Hong Kong'south Gilt Chambers.

"That'south portion 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 U. K. advocacy group.

Rules are only as excellent as their enforcement, said John Christensen, Tax Justice Network'south director, and "Hong Kong has never had a powerful supervisory culture."

In two thousand-fourteenth, Hong Kong began requiring companies to have at minimum one genuine 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.

But clients can easily register companies below other people'south names. "They can always discover their relative as the nominee," said the director of a tiny incorporation firm also based in Wan Chai district, who'd only give his surname, Lee, for fear of compromising client privacy.

He said most clients don't mind using their genuine names in filings. The huge secrecy business runs out of the gleaming skyscrapers of Hong Kong'south Central business district, where elite firms charge ten times his rates, he said.

"Wealthy people, they won't arrive here," he said. "They'll go to Central. They don't mind paying a few thousand more for more secured, private service."

———

Associated Press reporter Raphael Satter in Paris and researcher Fu Ting in Shanghai contributed to this report.

———

Chase Kinetz on Twitter: http://twitter. com/ekinetz

Chase Chan on Twitter: http://twitter. com/chanman

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