Hong Kong emerges as hub for creating offshore companies

Staff Writer
Columbus CEO

HONG KONG (AP) — 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 Sun Trading Ltd. was born in an aging building at the edge of Hong Kong's red light district. The next year Li bought the company for $1.

The revelations come 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's go-to spot for financial intermediaries like P&P Secretarial Management, 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 2015 — more than any other place in the world, according to ICIJ's analysis.

Hong Kong has emerged as a major design center for offshore vehicles, a place 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 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.

But 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 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, easy rules on company incorporation and limited transparency" add to its appeal, he said.

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

Hong Kong tax authorities said in an email 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 Wai-hon Chiu, 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's 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 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 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 U.S. 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 mainland China's currency controls — it's 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 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.

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

The 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 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 2009, when president Xi Jinping's 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's lead partner is an accountant named Charles Chan-lum Chow. 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 websites. He spent 12 years on the board of China Aerospace International Holdings, 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's 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 professor at Johns Hopkins University. "Everybody. Even Xi Jinping's family needs it. They don't have an incentive to shut this channel to move money out."

It's 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.

The company that helps run 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, run off-shore structures out of Hong Kong to launder their money, said Douglas Clark, a lawyer at Hong Kong's Gilt Chambers.

"That's 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 U.K. advocacy group.

Rules are only as good as their enforcement, said John Christensen, Tax Justice Network's director, 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.

But 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, for fear of compromising client privacy.

He said most clients don't 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 ten times his rates, he said.

"Wealthy people, they won't come 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.


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