How clean can Hong Kong be after flood of mainland China money passes through it?
A full 30 per cent of Mossack Fonseca’s companies had Chinese beneficiaries, and Hong Kong was its busiest office
In my first class at Harvard Business School, you could cut the air with a knife. This was the boot camp of capitalism and the Professor fired the tension up another notch.
“If you want to get rich; really, really rich…,” in this atmosphere, every ear burnt with anticipation, “you need to be a deal maker, or an entrepreneur.”
The flurry of activity over the rich mentioned in the Panama Papers – the most high-profile leak since Wikileaks revealed what global leaders really thought about each other – has led to “squeaky bum time” for those who have acquired their wealth in other ways.
It is not illegal to be really, really rich. Tax avoidance is as proper now as when Lord Justice Clyde said in 1929: “No man in this country is under the smallest obligation, moral or other, so to arrange his legal relations … as to enable the Inland Revenue to put the largest possible shovel into his stores.”
We all avoid tax merely by accepting our salaries tax allowances or by buying an investment fund; even our pension funds and insurance policies benefit by being based in a low-tax area, like Jersey or Bermuda.
The really, really big money is clean – we don’t need to play at the bottom of the pond
It is also acceptable to be reasonably secret about one’s financials, to protect family members from kidnappers, or to simplify inheritances. These requirements can be handled with discretion.
The dirty secret when it comes to hiding money is that the assets would otherwise be taxable; that they are legally due to someone else (such as a husband hiding wealth from the ex-wife); that they were obtained by criminal means; or obtained by individuals abusing an entrusted position; or a combination. In other words, stealing.
Lord Clyde continued: The taxpayer is in like manner entitled to be astute to prevent, so far as he honestly can, the depletion of his means…”
In 1991, I had a meeting with other fund managers in the grand office of an admiral of the Baltic fleet in St Petersburg. The local business boss trailed everywhere in an overly familiar manner. As capitalism took hold in communist states, it was easy for those in power to nationalise the costs and privatise the profits, for instance by using the military to move coal for businessmen. Eventually these profits have to bubble up, even if they are held under the radar by low-profile, unfussy banks in opaque countries.
Those who are dishonest have found that regulation and technology have tightened the noose over the past decade. The major global banks are massively fined if they deal with (as Noel Coward beautifully put it) shady people in sunny places. Twenty years ago, I had clients who were politically exposed, or who were involved with a suspect industry, like gambling. My employer merely had to warn clients not to do anything illegal.
Today, the banker is personally liable for the actions of his clients, so they go overboard. Only last week, after 43 years of good standing, I received a threatening computer-written letter from my bank for allegedly not completing my “know your client” questions (last completed in November). With systems like that, its not surprising that hackers lifted the 11.5 million Mossack Fonseca files – although the source of the leak has not been confirmed perhaps for fear of an appointment with a polonium milkshake.
The International Consortium of Investigative Journalists found evidence that 12 current and former heads of state with connections to offshore accounts are among the 140 politically connected persons identified so far. A full 30 per cent of Mossack Fonseca’s companies had Chinese beneficiaries – and the Hong Kong office was their busiest. (Memo: Chinese Communist Party rules forbid the ownership of offshore companies).
It is believed that about US$1 trillion left mainland China last year, which along with other shady cash is driving up property prices in London and New York – implicating those jurisdictions by association. In Hong Kong, our independent judiciary and tight banking and securities regulation gives us the sense that we are a clean financial centre – but there are still too many gaps.
Much of that money flow must have been organised through Hong Kong for we have the brains, knowledge and organisational efficiency to be an ideal administrative centre for global commercial crime. We need to tighten the loopholes and clean up our act before our reputation gets besmirched. The really, really big money is clean – we don’t need to play at the bottom of the pond.
