More than 11 million leaked files, known as the Panama Papers, were obtained securely from an anonymous source over a year ago by German newspaper Süddeutsche Zeitung. The data leak shows how the world’s rich and powerful hide their wealth. HKFP spoke to David Webb, shareholder activist and webmaster of the corporate governance portal webb-site.com, about the implications for Hong Kong and how transparency can be improved.
HKFP: Few in Asia are surprised about what the Panama Papers have uncovered. What is the significance of these leaks and are there legitimate reasons for using such offshore services?
Webb: There are numerous legitimate reasons for using offshore companies. If you look at the group structure of any Hong Kong listed company and start at the top, you’ll find that two-thirds of the listed companies here are incorporated in Bermuda or the Cayman Islands. And, in turn, they usually have a BVI [British Virgin Islands] subsidiary which holds all of their other subsidiaries. There are legitimate reasons for doing that, including tax planning.
Then, in the case of privately-held companies, there are reasons including minimising stamp duty on property transfers – once the property is owned by an offshore company you can transfer that company offshore without paying any stamp duty in Hong Kong.
These offshore entities are often held by friends, relatives and children in the case of the mainland politicians – how does one prove at all if there is any illegal activity?
Then it becomes, obviously, more interesting, if you’re looking at families of politicians. One needs to look at the laws in each country involved – and if not laws, in the case of China, the rules of the Communist Party – the internal rules that apply to their disclosures. Sometimes it’s a case of breaching a party’s rule on disclosure, and sometimes it’s a case of breaching a law on disclosure, or worse – laws on corruption, tax laws, and so on.
…Just as we’re seeing in Iceland. Do you see there being any government or public reaction in China? Thus far, all news has been censored.
I expect that the investigators in China will take a close interest in new information regarding the family assets of officials and I think you’ll find that there are very few, if any, examples of direct shareholdings by current officials. But it’s their close relatives that fall under scrutiny. That’s not the first time that this has happened and there’s been, as you know, very famous investigative journalism on the families and the previous leaders of China. Obviously, the more scrutiny that’s applied to these things, the better.
The papers revealed that Hong Kong is at the heart of the offshore industry – home to 2,212 intermediaries who have set up 37,675 offshore entities. Why is Hong Kong at the centre of this?[V]arious aspects of our economy incentivise people to use offshore companies. There are two things that spring to mind. One is stamp duty, because if you hold your property through an offshore company you can transfer the company – rather than the property – and legally avoid stamp duty.
And the other thing is that we have a tradition going back to 1984 – before the handover – of people taking steps to, as far as possible, insulate themselves from the future whims of the Hong Kong government. Jardine Matheson laid the way to Bermuda, and now they mention [that] two-thirds of Hong Kong listed companies are incorporated in Bermuda or Cayman Islands. This provides for the possibility that one day, Hong Kong, perhaps after the 2047 promise expires, might start imposing global taxation on its companies, and there is no point in holding companies via a Hong Kong entity if you can hold them through a Bermuda or Cayman or BVI entity.
In the nearer future, will the Hong Kong government take any action? Should it shoulder any responsibility or discourage this?
I don’t think there is any implied wrongdoing by the Hong Kong government in these revelations – if anything, one has to take a step back and look at the costs of the whole global infrastructure surrounding the AML – anti-money laundering requirements imposed on banks. Because ultimately those costs get reflected back in the fees paid by the customers [to] banks, and reduced interest rates on deposits and so on.
Banks like HSBC incur hundreds of millions of dollars of costs each year simply checking who their customers are. In a way, government has tried to privatise what should be social costs of law enforcement.
Can anything be done to improve transparency?
One of the sources of demand for offshore companies is that, without a leak, it is impossible to trace their ownership. The Hong Kong Stock Exchange incentivises usage of these front companies because it does not require listed companies, in their transaction announcements, to disclose who owns the companies they are dealing with (as vendor or purchaser) when the listed company buys or sells an asset. The Listing Rules should be amended to require full disclosure of beneficial owners of vendors and purchasers in such transactions. The Stock Exchange has not done this because it knows that this would reveal dealings by corrupt mainland officials and persons who are connected to the listed companies.
HSBC and its affiliates have created 2,300 offshore companies for its clients – but at the same time, regular people, political parties and small businesses are unable to set up bank accounts. What can be done?
In a way, the honest people are handling their private affairs, and it makes people mad. And what does it really achieve? I don’t think it’s stopped a single terrorist attack, and it doesn’t stop people from growing poppies in Afghanistan and making heroin, or coca plants in Bolivia and making cocaine. I think the expectations have been raised too high and too many demands have been placed on banks to act as policemen.
Are we long overdue an alternative like credit unions or a “people’s” bank?
As long as the regulatory approach globally remains the same, then these obligations to conduct all this policing will be imposed on any new entity which is established, including any Bitcoin bank. You could set up a bank but as we already know, if you set up an agency to convert cash into bitcoins, then you fall under the Customs and Excise Department’s regime. So there is a need for a global rethink on the whole AML approach and perhaps to relieve the banks of some of these obligations and make it easier for people to go about their daily lives.
One thing that would probably come out of this is that some Americans would be revealed to have been holding cash overseas… You might have heard of FATCA, which is the US imposition through the global FATF, basically requiring all the banks in the world to report and to ask their customers whether they’re Americans or not, to try to reveal Americans evading tax. And if every country does that, we’re just going to be bogged down with hundreds of disclosure requirements for every account that you open. The UK is doing the same.