Panama Papers leak could have serious impact on Hong Kong

April 07, 2016 09:12
The Panama Papers leaks from Mossack Fonseca could have a negative impact on Hong Kong's off-shore fund management sector. Photos: HKEJ, Reuters

Many people in Hong Kong would associate Panama with the 1989 blockbuster movie God of Gamblers (賭神).

One character in the movie said, “I have a friendship with the president of Panama.”

In fact, Hong Kong has developed various links with Panama since the tiny central American country transformed itself into one of the world’s major offshore tax havens.

So, the leak of the Panama Papers could result in serious fallout for Hong Kong.

The International Consortium of Investigative Journalists (ICIJ) shared an unprecedented leak of 11.5 million files with an international coalition of media outlets including the BBC.

The documents were leaked from the database of the world’s fourth-biggest offshore law firm, Mossack Fonseca & Co. The ICIJ published the documents, dubbed the Panama Papers, on Sunday.

The leaked documents reveal a series of activities involving the offshore tax haven, including the opening of shell companies, tax evasion, money laundering and bribery.

Panama, the Cayman Islands, the British Virgin Islands and Bermuda are considered the world’s top four offshore tax havens.

They enable individuals and companies to open shell companies and hide their identity or assets through stringent privacy regulation. They also offer a super-low tax rate and company-friendly policies.

In essence, the governments in these offshore tax havens have turned a blind eye to foreign companies incorporated there, as long as they pay an annual fee of several hundred US dollars.

That’s the biggest attraction for the world’s companies and rich people.

However, Europe and the United States have tightened financial and corporate supervision to crack down on terrorism and tax evasion.

They have strictly implemented a “know your client” policy, which is clearly frustrated by the policies of tax havens like Panama.

The leak may not destroy these offshore tax havens.

But it could hold billionaires and companies back, as it is a massive blow to secrecy, the biggest selling point of offshore companies.

Hong Kong a big player in offshore tax avoidance

The Panama Papers disclose that Hong Kong plays a key role in the offshore tax havens.

They show that Hong Kong was home to 2,212 intermediaries -- middlemen entities that set up companies, foundations and trusts to help clients hide their wealth -- compared with 1,924 in Britain, 1,223 in Switzerland and 617 in the United States.

These intermediaries include law firms, accountancy firms, consultancies and banks.

Also, Hong Kong has as many as 37,700 offshore companies registered in Panama through Mossack Fonseca, the most in the world, compared with 34,300 in Switzerland and 32,700 in Britain.

The revelations are not surprising.

Hong Kong is itself not an offshore tax haven and does not allow anonymously held companies.

However, 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.

Also, Hong Kong has a large number of firms offering professional services that help clients open and manage their offshore companies.

So, professional and commercial support services, one of the four pillars of Hong Kong’s economy, depends greatly on these offshore tax havens.

Once the owners' identity is hidden, much of the capital doesn't stay in these offshore tax havens but flows into various investments in Hong Kong.

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

This article appeared in the Hong Kong Economic Journal on April 6.

Translation by Julie Zhu

[Chinese version中文版]

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Hong Kong Economic Journal columnist