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Panama Papers

Hong Kong, a hub for corporate offshore schemes, must ensure disclosure rules are truly effective

Jane Moir says the authorities’ plan to require companies to reveal their controlling owners, in the wake of the Panama Papers scandal, does not go far enough

PUBLISHED : Friday, 24 February, 2017, 12:07pm
UPDATED : Friday, 24 February, 2017, 6:47pm

Last year’s Panama Papers revelations put Hong Kong in the crosshairs of global anti-money laundering bodies. The dump of 11.5 million documents from a Central American law firm incriminated senior political leaders from Vladimir Putin to David Cameron, and fingered Hong Kong as a key middle man in a web of offshore jurisdictions that allows the wealthy to conceal transactions and dodge tax.

Hong Kong’s desire not to be branded a rogue jurisdiction saw the government last month propose an overhaul to corporate disclosure rules that would potentially unmask beneficial owners. The measure, however, runs the risk of being a box-ticking exercise, as the suggested procedure for getting the information from companies could not be more unfriendly for users.

Hong Kong was busiest office of Panama Papers law firm

In the aftermath of the 2008-09 financial crisis, a political backlash developed against aggressive tax avoidance schemes. Cash-strapped governments, led by the US, moved to force offshore centres into greater transparency. Whistle-blower revelations have added to the sense of urgency and raised the risk of a centre being blacklisted for non-compliance.

Forcing companies to be upfront about people with significant control would bring Hong Kong into line with countries such as the UK

In January, the Hong Kong government floated changes that would force private firms to reveal the individuals who ultimately control them. Companies would have to reveal any offshore shareholders with 25 per cent of shares or more.

Forcing companies to be upfront about people with significant control would bring Hong Kong into line with countries such as the United Kingdom. However, the proposal mooted last month has a major drawback.

Joe Public will need to go directly to a company to find out who is ultimately in control. Such an admission frustrates meaningful scrutiny by the media, businesses and institutions conducting anti-money-laundering procedures.

In Britain, a central register has been set up for an anonymous public search – free of charge – of a company’s ultimate owners. From June, a full year’s worth of open data will be available to search via the government’s Companies House website.

Hong Kong loses out to Singapore in corporate governance survey

Open scrutiny goes some way to addressing concerns that ownership registers are difficult to police. Hong Kong is not intending to force companies to disclose the information in its annual return, or lodge it with the Companies Registry. Thus, the only real test of the quality of information will come when a member of the public or law enforcement decides to access the data from a company.

The proposal may look good on paper for Hong Kong, but as a workable tool for laying corporate owners bare, the exercise should be free of impediments

The consultation is also mute on any exemptions from disclosure. In Britain, if you can show a real threat of intimidation or violence, ultimate ownership does not have to be divulged to the public.

Hong Kong already has a capricious history when it comes to protecting directors’ interests. A move to conceal the ID numbers and residential addresses from disclosure is on the statute books, but not yet in operation following a fracas with journalists.

This underlying concern of policymakers to protect business privacy may suggest generous exemptions from divulging ultimate corporate ownership is on the cards.

The ongoing consultation is short – ending in early March – and, at this stage, the purported aim is to devise a “conceptual framework and broad parameters”, which hints at generous wiggle room to dilute the more controversial elements. The tight timing reflects a need for Hong Kong to get its ducks in a row before an evaluation by the global anti-money-laundering agency, the Financial Action Task Force, next year.

Hong Kong has long been a centre for processing questionable money flows and facilitating transfer pricing that allow for tax minimisation strategies. As a major financial player, it is also under pressure to be truly compliant with global governance norms.

Hong Kong must work towards a ‘Panama Papers Ordinance’ to end automatic recognition of offshore firms

Corporate anonymity came to the forefront of regulatory dialogue following the Panama Papers scandal, stoking the need for middleman Hong Kong to be able to pinpoint the real owners of entities in its own backyard.

The proposal unveiled last month may look good on paper for Hong Kong and keep global watchdogs happy, but as a workable tool for laying corporate owners bare, the exercise should be free of impediments.

Jane Moir is a director of corporate intelligence firm Princedale Advisory