Blog 4: Influence of Panama Papers in Hong Kong

Panama Papers were the leaked huge stack of confidential documents which were revealed by International Consortium of Investigative Journalists (ICIJ) in 2016. It contains detailed information on 214,000 offshore companies in a total of 11.5 million leaked documents processed in the law firm since 1970s. It exposed the hidden overseas assets of politicians and elites all over the world. After a comprehensive analysis by ICIJ, the company has nearly one third of the business from its offices in Hong Kong and China. It means China was the company's largest market while the office in Hong Kong was the busiest business of the company.

1. Hong Kong Was Mossack Fonseca's Busiest Office

Over a nearly four-decade span, Mossack Fonseca worked with more intermediaries – banks, law firms and others– in Hong Kong than in any other jurisdiction. As of the end of 2015, 29 percent of the companies the law firm was collecting fees for had been incorporated through offices in Hong Kong and China. Hong Kong’s tax authority did not immediately respond to a request for comment; A person answering the phone number for media at China’s tax authority hung up when asked for comment.

2. A Number of Chinese Nationals Figure in the Reports

Chinese individuals and companies alarmed by a falling Yuan and a crackdown on corruption have been on an increased push to move more of their money outside of the country. A number of prominent Chinese – including the brother-in-law of President Xi Jinping — were named in the leaked documents as directors or shareholders of offshore companies, according to reports. Chinese law doesn’t bar citizens from investing in offshore firms, but the reports could increase cynicism about anti-corruption efforts.

3. Asia’s Biggest Property Developer Is Also in the Leaks

In 2012, Hong Kong-listed Sun Hung Kai Properties Ltd. allegedly asked Mossack Fonseca to dissolve a British Virgin Islands shell company controlled by an executive who had recently been arrested as part of a bribery investigation, according to a report in the British newspaper The Guardian. Sun Hung Kai allegedly told Mossack Fonseca that the shell company had no purpose, according to The Guardian.

The executive, Thomas Chan, was sentenced to six years in prison in 2014 for acting as a bribery middleman between one of the property developer’s top leaders, Thomas Kwok, and a senior Hong Kong official.  In that trial, Mr. Kwok was also found guilty of conspiracy connected with bribery and sentenced to five years.

4. China Laws Help Drive Hong Kong Offshore Activity

One of the reasons there are so many firms in Hong Kong involved in setting up offshore trusts and companies is because of Chinese citizens’ lack of trust in the country’s laws and courts, said Jason Sharman, an offshore tax jurisdiction expert and professor at Australia’s Griffith University.

Wealthy individuals who own property via an offshore company could be doing so for legitimate reasons of privacy and security, or to skirt China’s notoriously stiff restrictions on capital leaving the country, for example.

Meanwhile, businesses may establish offshore holding companies due to Chinese rules restricting foreign ownership in certain industries. Chinese technology giant Alibaba Group Holding Ltd., which went public in New York in 2014 in a record-beating $25 billion offering, is incorporated in the Cayman Islands, for instance.

5. The Impact in Hong Kong Is Still Unclear

Although, Hong Kong is not an offshore tax haven and does not allow anonymously held companies, the city has an independent legal system, loose regulations and free capital flows, which makes it a key base for firms and individuals that register companies in offshore tax havens.

Hong Kong has a large number of firms offering professional services that help clients open and manage their offshore companies. Professional and commercial support services is one of the four pillars of Hong Kong’s economy, depends greatly on these offshore tax havens.

That is why a decline in the business of offshore tax havens may have a serious impact on Hong Kong.

While the reports have had reverberations in some other countries, such as Iceland, the impact in Hong Kong, if any, remains to be seen.

Some Hong Kong officials have emphasized that Hong Kong is a well-regulated financial center and dismissed concerns about money laundering, according to local press reports.

As far as the risk of reputational harm, academics and consultants stress there are many legitimate reasons to establish offshore entities, and that Hong Kong doesn’t appear to have a bigger problem with potential corruption than other major global financial centers.