The Panama Papers show how rich, famous and powerful personalities hide their money offshore. By one account, they relate to 60 associates or family members linked to 12 'world leaders' past and present. HNW relatives of the Chinese cabinet (pictured) are prominent examples.

This article explores the connections that they reveal between Hong Kong – where the Panamanian law firm of Mossack Fonseca has its busiest office – and the offshore world in respect of wealth management.

The International Consortium of Investigative Journalists, which has just made the leaked data searchable on its website, does admit that there are many good reasons for wealthy persons to have offshore accounts, especially for estate planning, inheritance and the legitimate circumvention of hard currency restrictions. Many commentators (although not the ICIJ) are also perfectly comfortable with the idea of billionaires trying to hide their assets from their spouses by transferring money to offshore entities in anticipation of divorce. The senior figures in China's Communist Party, however, rarely divorce their wives, even after leaving office, so tax evasion and capital flight appear to be more crucial motivations for them.

Glitz and glamour

The Panama Papers reveal several showbusiness celebrities with offshore holdings. These include Pedro Almodóvar, the Spanish film director who set up Glen Valley Corporation in 1991 in the BVI but scrapped it in 1994 just as his films were becoming more and more lucrative. His stated reason for doing so was that it did not suit the way he did business. Bollywood star Amitabh Bachchan, who has appeared in 180 Indian films in a career spanning four decades, is or was the managing director of four shipping firms that were set up in the BVI and the Bahamas in 1993. Each one's authorised capital was lower than $51,000 but the worth of the ships they dealt in ran into millions. The Reserve Bank of India reportedly banned Indians from floating overseas companies until 2003.

Probably the most famous showbusiness figure in the papers, however, is Hong Kong's Jackie Chan, the martial-arts film star who was born there and who seems to have thrown in his lot with the rich and powerful unreservedly. Many Hong Kongers have criticised him for flattering the mainland Chinese Communist Party shamelessly, a controversial stance as the party seems to be trying to subvert the "one country, two systems" agreement by which the British handed Hong Kong over to China in 1997. Some are suggesting, rightly or wrongly, that the business network to which the Panama Papers reveal Chan to belong represents some sort of 'payback' for his support for the party. It includes seven mainland magnates who operate businesses in which Chan is involved.

For example, Chan owns the majority of shares in Dragon Stream Ltd, a BVI company set up in 2008 whose supporting shareholders are such captains of mainland industry as Shen Guojun, the chairman of the Intime Department Store Group; Chen Yihong, the chairman of China Dongxiang Group; Yu Mingfang, who set up and runs Belle International Holdings; and Qi Jianhong, the chairman of Sparkle Roll Holdings, along with a former director from that same group. There are only four other shareholders. Chan owns five other offshore companies, according to the leaks.

Austin Cheung, international man of mystery

Another illustrious Hong Konger has risen to greater prominence than ever since 'John Doe' donated the leaked documents to the press: Austin Cheung, sometimes known as Zhang Xiaodong, the man who runs the Hong Kong office of Mossack Fonseca. He began working for the firm in Panama but moved to Hong Kong in 1997 and became the head of the company's 'Asia HQ' there. He founded the China Academy of Wealth Planning and Management (whose website is no longer anywhere to be seen on the Internet) in 2006 and stages exhibitions of photography, having set up the China Photographic Publishing House.

In 2007 he famously told the China Economic Weekly that when Mossack Fonseca first started doing business on the mainland, it offered free consultancy services to law and accountancy firms, government departments and others to educate them about the advantages of doing business offshore. One of those advantages was to circumvent foreign governments' rules against investments from China.

Local politicians

The Chief Executive of Hong Kong, Leung Chun-ying, does not feature on the list personally. Members of his cabinet, however, are a different matter. Paul Chan Mo-po, the secretary for development, owns two offshore firms that the press already knew about. Bernard Chan, a member of the Executive Council, is a shareholder and director of two offshore companies and has told the press that that if the public thinks that people in his position should not own shares of offshore companies, he may have to resign from the council. He also says, however, that he has made the necessary disclosures of interest. Additionally, he has told reporters that he is a director of more than 40 overseas companies.

Michael Tien Puk-sun, the deputy chairman of the New People's Party and a member of the Tsuen Wan District Council, has had to eat humble pie for failing to declare his ownership of a BVI-incorporated company called the Glorious Pacific Company which he and his wife set up in 1997. Since this came to light, he has claimed in the press that it is merely a shell company that he formed, implausibly enough, to help himself join a golf club in Shenzhen. It is unlikely that the golfers who read this journal joined their clubs in the same way.

Kenneth Lau, the chairman of Heung Yee Kuk, a statutory advisory body representing establishment interests in the New Territories, has been shown in the leaked documents to be a British citizen as he and his father, former chairman Lau Wong-fat, are listed as such in documents that pertain to their directorships of three companies. In a former British colony such as Hong Kong one might expect this to be unlikely to be a controversial revelation but the press is treating it as such for some reason and Lau is denying it. Hong Kong Free Press reports that the jurisdiction's Basic Law stipulates that the chief executive, members of the executive council, principal officials and lawmakers (and it classifies Lau as a lawmaker) should be Chinese citizens who are Hong Kong permanent residents with no right of abode in any foreign country.

Henry Tang Ying-yen, who served as the Chief Secretary of Hong Kong between 2007 and 2011, held shares in Fair Alliance Investment, which was established in the British Virgin Islands in June 1997 just a few days before he became a member of the territory's first executive council. Press reports claim that he failed to report this when he should have done, although he denies it. Christopher Cheng Wai-chee, the chairman of Wing Tai Properties, was another shareholder.

Other members of the legislature who have been shown to own more than 1% of offshore companies have disclosed their interests in keeping with the rules. These are Andrew Leung Kwan-yuen, Ann Chiang Lai-wan, Paul Tse Wai-chun and Yiu Si-wing.

Local businessmen

Thomas Kwok, a property developer billionaire who in 2014 was found guilty of conspiracy linked to the bribery of a Hong Kong official and sent to prison for five years, is also revealed in the Panama Papers to have a relationship with a major Australian Government contractor, Wilson Security. He and his brother Raymond (who was also charged but not convicted) were once directors of that company's parent holding company which is registered in the BVI. They were replaced in 2012 as directors by two shadowy entities called Harmony Core and Winsome Sky which, according to the Australian Broadcasting Corporation, are Kwok companies. The object of the exercise therefore seems to have been the camouflage of ownership. Of the 800 Australians mentioned in the Panama Papers, incidentally, 120 used the same anonymous offshore services provider with Mossack Fonseca's help.

Meanwhile, the papers show that Mossack Fonseca spent 2012 grappling with the question of how much of its business with Thomas Kwok's partner in crime it should divulge to the BVI's Financial Services Commission and/or other authorities. In that year Hong Kong's business community was shaken by the arrest of Thomas Chan, the executive director of Sun Hung Kai Properties, which is 45% Kwok-owned, and his eventual sentencing to six years in prison for his part in the bribery scandal. At the time the law firm vacillated over the question of whether to report possible irregularities involving a shell company that Chan owned. Its Hong Kong office badly needed documents from SHKP to clarify the legal situation but were worried that the property firm would change law firms if it insisted on having them. The documents were eventually forthcoming and the crisis was resolved.

Hong Kong tycoon Li Ka-shing has also been mentioned in the papers. The jurisdiction's richest man, whose Cheung Kong Property recently posted a US$2.01 billion full-year profit, set up six Panamanian subsidiary firms through the organisational efforts of Mossack Fonseca's Hong Kong office and owned others through other law firms.

Mainland businessmen

Meanwhile, Ng Lap-seng, a businessman from mainland China who, legend has it, in his youth bribed a Chinese policeman to let him into Macao and became a famous tycoon there, is also mentioned. Ng is best remembered for channelling US$1 million through a 'strawman' (who, unlike him, subsequently went to prison) into the Clinton-Gore US presidential campaign in 1996, earning himself ten visits to the White House. On ten occasions in 2013-15 he visited America with suitcases containing hundreds of thousands of dollars and was eventually caught and charged with conspiracy to obstruct the function of (and to make false statements to) United States Customs and Border Protection. He was also charged with conspiracy to bribe a UN official, one John Ashe, an ex-president of the General Assembly who was at that time a permanent representative from Antigua and Barbuda.

The Federal Bureau of Investigation called it "a multi-year scheme to pay more than $1.3 million in bribes to Ashe in exchange for official actions in his capacity as UNGA President and Antiguan government official in support of Chinese business interests." The Panama Papers show that Ng owned a BVI firm that ran South-South News, which was allowed to set up shop in the UN building even though it lacked the requisite track-record as a journalistic enterprise.

Huang Guangyu and his wife Du Juan, according to the ICIJ, once headed up Mainland China’s richest family, earning billions with their company, Gome Group, the largest consumer electronic retailer in China. In November 2008 Huang was charged with stock market manipulation and was sentenced to 14 years in prison. Mossack Fonseca's notes show that Gome Holdings Ltd (estd 2003) is incorporated in the BVI, as are Grand Hope Investment Ltd (estd 2004) and Fame Base Investment Ltd (estd 2006).

Mainland PEPs

The leak exposes the fact – well-known already – that the people at the top of the Chinese mainland regime and their families are fabulously wealthy in a way that cannot be explained by their salaries in office or indeed by honest toil.

The hoard of e-mails and company records, which goes from the 1970s up until 2010, indicates that some top Chinese families of 'politically exposed persons' (but not, as far as Mossack Fonseca is concerned, the office-holders themselves) have or had shares in almost 35,000 offshore companies, most of them incorporated in the British Virgin Islands but registered primarily in Hong Kong. A smattering of others, especially recently, were registered on the mainland or Macau and occasionally in Taipei.

Among these people, which the ICIJ dubs 'the Red Nobility,' are Deng Jiagui, the brother-in-law of President Xi Jinping; Wen Yunsong, the son of former president Wen Jaibao, Liu Chunhang, the son-in-law of the same; Hu Yishi, first cousin once removed of former president Hu Jintao; Li Xiaolin, the glamorous daughter of former prime minister Li Peng; Wu Jianchang, the son-in-law of the great Deng Xiaoping, the man who modernised China more than any other; Che Feng, whose father-in-law used to be the governor of the central bank; Wang Zhi, whose father used to be vice president; Wang Jun, whose father used to be vice president; Fu Liang, a son of a party hierarch; Yeh Shuen-ji, the nephew of another; Wang Jingjing, whose grandfather used to be vice president; and Su Zhijun, whose grandfather used to be a famous military man.

Of all these relatives of the mighty, only Hu Dehua, the youngest son of Hu Yaobang who was once the Communist Party's general secretary, has broken his silence on the Panama Papers. He told reporters immediately after the story was broached that he did indeed own an offshore company but that he had observed all the necessary proprieties, adding: "I have nothing to hide."

Getting the message across

This comes at an embarrassing time for President Xi, who has spent the last three or so years spearheading a massive crusade against corruption. Wen Jaibao, his predecessor as president, was thought to have been weak in the face of vested interests in the Communist Party; now Xi's campaign to end the bad old days of corruption appears rather hypocritical.

The result has been a fresh campaign, this time to stop as many people in China as possible from knowing about the Panama Papers. This is strictly illegal in Hong Kong under the agreement of 1997, but the rule of law there is in decline. Booksellers have begun to disappear from Hong Kong, only to reappear months later in custody on the mainland. The jurisdiction's 'glory days' as an offshore centre could be over.

Panama's credibility in China

The hue and cry surrounding Mossack Fonseca has also had a direct effect on the firm and its home country. One press report, which the firm must have found embarrassing, concerns a letter that the firm allegedly sent to an unidentified Shanghai bank of middling importance after the story broke in early April. Reuters claims to have read this letter and says that it is full of apologies and deep regrets about 'misuse' of the law firm's services or the companies it helped to form. The letter was undated but Reuters seems in little doubt that it was a reaction to the leaks and indicates that at least one of Mossack Fonseca's clients is feeling deep disquiet about the Panama Papers. Mossack Fonseca also wrote to Reuters to say that it was 'routinely' speaking to its clients about the cache of documents, although a less routine exercise could scarcely be imagined.

The leaks have also added to the already-sizeable woes of Panama itself. As the Mossack Fonseca website itself explains, in February the small three-million-strong country was bracing itself for more trouble from the world's great powers. The law firm explained that its government did not want to sign up to the Common Reporting Standard and that, like the United States, it wanted to go its own way and have its own version of FATCA, the Foreign Accounts Tax Compliance Act which threatens foreign firms that do business with wealthy Americans with stiff withholding taxes if they do not tell the US Government the details of those taxpayers' bank accounts if they are above a certain amount. The US Government obtained co-operation from other states because it was a great power; the Panamanian government knew that it was in a weaker position and so, according to the Mossack Fonseca website, had written to the OECD to ask its permission to go down this route. It was presumably still waiting for a reply when the scandal broke; a few days later Panama signed up to the CRS.

Hong Kong residency

It is evident that Hong Kong residency is a good stepping-stone to the ownership of both offshore companies and local property. The property market there is stagnating but ownership is thought to be safer as the rule of law - and therefore the concept of ownership - is stronger there than on the mainland. This is why many 'princelings' plump for this option, and the Panama Papers has its own cache of examples. Ming Pao, a local newspaper, lists Li Xiaoping, the niece of the great Deng Xiaoping, and Wallace Yu Yiping, her husband, who own Tibet 5100 Water Resources Ltd and Water Enterprise Ltd, both incorporated in the BVI. Yu's Hong Kong identity card dates from 1994, making her an early starter. The daughter of politburo member Zhang Gaoli is also mentioned in the papers, owning both a Hong Kong ID card and a house in Hong Kong's Palm Springs with her husband, Lee Shing-put.

Hong Kong residency is, on paper, open to all Chinese people but only the elite tend to obtain it. To apply for it, one must reside there for seven years and most people are not given the requisite permission or jobs. The offspring of party power-brokers, however, find no difficulty obtaining jobs at the Hong Kong branches of mainland state-owned businesses.

Another route to residency, once again only open to the rich, has been closed recently. Hong Kong used to have a "citizenship by investment" programme, allowing people who invested HK$10 million in various financial instruments to obtain visas. Even when the People's Republic of China passed a law with the aim of making it impossible for its own residents to do this, the wealthy evaded it by establishing permanent residency in uninquisitive jurisdictions such as Ghana and then moving to Hong Kong. This particular 'gravy train' reportedly pulled out of the station last year when the programme was cut.

A prime market for offshore formations

China is the world's biggest exporter of dirty money, according to Global Financial Integrity. That body has estimated that the 'Red Empire' exported more than US$1 trillion illegally between 2002 and 2011. Some might be surprised to know that this exceeds the Russian figure. The ICIJ report backs this up: "China has become a leading market for offshore havens that peddle secrecy, tax shelters and streamlined international dealmaking. Every corner of China's economy, from oil to green energy and from mining to arms trading, appears in the ICIJ data."

More than 16,300 of Mossack Fonseca's active shell companies were incorporated through its Hong Kong office or its seven mainland offices. The latter were set up only recently, so most of the business went through Hong Kong. This came to 29% of the law firm's total. The papers reportedly contain information about 214,000 offshore entities connected to 370,000 people and corporations in more than 200 jurisdictions.

Hong Kong makes it easy for residents to set up companies in other offshore centres so as to have their holdings classified as foreign, which affords many tax advantages. (Hong Kong, for example, does not tax profits made elsewhere.) It is also a way of getting round mainland rules in certain industries that make it hard for foreigners to own businesses incorporated in China (or for Chinese HNWs to collaborate with foreigners). This, for example, is why Alibaba, the Chinese IT holding group that went public in New York with a record-breaking $25 billion offering two years ago, is incorporated in the Cayman Islands.

David Webb, a shareholder-activist, has calculated that three-quarters of companies listed in Hong Kong are domiciled in the Cayman Islands or Bermuda. It is, of course, not easy for the authorities or the public to divine their beneficial ownership, making it impossible to tell who is responsible for their transactions.

Small companies incorporated in the West Indies have apparently found it almost impossible to open bank accounts in Hong Kong since the scandal erupted. As most money that flows through such accounts seems to be Chinese or Hong Kong money finding its way back home in a different guise, it is possible that this will have a dampening effect on Hong Kong's incorporation industry because it will make this manoevre less profitable for HWN PEPs.

The American run

Some senior PEPs in the Communist Party often send their offspring off to the US ahead of them, often to college and always to places where they can help supervise transfers of illicit parental wealth into the American financial system. The aim is to build up many holdings before the parents move to the US and/or establish an overseas 'bolthole' for them if things become too dicey at home. These American adventures do not, however, seem to be a feature of the Panama Papers, in keeping with the absence of American PEPs' dealings from the leaks.

More stringent bans and reporting requirements for mainlanders

President Xi and his relatives may be imposing a virtual news blackout on the Panama Papers for another reason. In January 2014 this publication reported that the focus of Chinese PEP money seemed to be floating south from the opaque incorporations of Delaware, Wyoming and Nebraska towards the banks and international business companies (IBCs) of the BVI. This was because of a new Chinese law, passed quietly in 2013, which requires mainland high-net-worth individuals to declare the details of any offshore accounts they may hold, i.e. to report all their foreign financial assets and liabilities. Offshore banks that do not ask for evidence that their Chinese HNW customers have signed on the dotted line might find themselves on the receiving end of a FATCA-style enquiry from the Chinese government at some point in the future.

The new rules have forced the reporting requirements on a wider community of people as well. These now include people who reside in China for a calendar year or more and Chinese people who have been away for less than a year. If the Chinese public were to find out that the relatives of their rulers were disobeying this reporting rule, they might have something to say about it.

Also, according to one report, the Communist Party announced early last month that officials with close family relatives living abroad were to be barred from promotion. The announcement was almost certainly influenced by a desire to be seen to be doing something about the Panama Papers. Professor Zhu Lijia of the Chinese Academy of Governance has estimated that this will affect at least 1.2 million groups of people. It seems likely, however, that this is merely a temporary inconvenience, presaging a move towards the use of more distant relatives for the same purpose.

Lastly, according to David Webb, the amount of capital that can move out of China is limited to US$50,000 (HK$38,800) per person per annum. It might be even easier for the Chinese public to detect breaches of this rule by looking at the Panama Papers.

The age-old scams of old Hong Kong

All economic hubs - both ones of importance and ones of no importance - facilitate false invoicing for goods and services. This activity lies outside the realm of private client wealth management but HNWs do, nonetheless, ask Hong Kong banks to give them foreign exchange and exaggerate the amounts they need, possibly with false invoices that are hard to validate, thereafter pushing the monies into offshore accounts.

Hong Kong's property market is hardly sky-rocketing at present, but it is definitely buoyed up by money from Chinese HNWs being parked there. The age-old money-laundering technique of taking out insurance policies with ill-gotten (or at least control-evading) money or using credit cards and then cashing them out and paying penalties of 25% or more is also reportedly prevalent. This is a searing indictment of insurance regulation in Hong Kong. To help contain the problem, the Government has recently capped the amount that each individual can move in this way. HNWs also use credit cards to make extravagant purchases that they subsequently revoke, asking for cash back and paying penalties which they view as mere transaction costs.

Cash smuggling is another time-honoured method that is used all over Asia. In Hong Kong this helps HNWs get round the official Chinese limit of 20,000 renminbi (HK$24,000) in local currency and the equivalent of US$5,000 (HK$39,000) in foreign currencies that tourists are allowed to take abroad. Secret banks - i.e. secret branches belonging to Western (including Swiss) banks - also exist and are taking deposits quietly in Hong Kong. Cheque smuggling is therefore part of the process, especially because these 'underground banks' can issue cheques in foreign currencies in exchange for yuan. Bureaux de change are also transferring huge sums from HNWs' accounts on the mainland to their accounts in Hong Kong without the proper controls and are somehow going undetected. By all these methods, Chinese HNWs use Hong Kong to ship money out to the West Indies.

Reasons for capital flight

To conclude, Hong Kong is not a terrorist financing hub, nor is it a conduit for drug money to any great degree. It is, however, the jurisdiction of choice for HNW mainland Chinese PEPs. They favour it for four main reasons: to evade or avoid mainland taxes on their assets; to move the proceeds of corruption offshore; to buy property or other assets there because there is more of a rule of law to protect them from arbitrary confiscation; and to make their money look like foreign inward investment, the better to receive subsidies and tax-breaks with which China tries to attract foreign capital.

Chinese HNWs with the proceeds of corruption to invest find it easy to pose as businessmen and set up offshore shell companies to own their shadow-businesses in Beijing or Shanghai. They might even issue stock on the Hong Kong stock exchange, with the money going to the official headquarters in the BVI but eventually finding its way back to the mainland through Hong Kong under the guise of foreign investment to attract government tax-breaks. It is this circular movement of money that is thought to account for most of the company formations organised in Hong Kong.