Hong Kong’s low taxes should not make it vulnerable to money launderers
Kalina Tsang and Eryn Schornick say the city must set up a public central register of beneficial owners to make it less attractive as a tax haven, thereby making it harder to move dirty money
More than a year after the Panama Papers revelation, Hong Kong is again in the spotlight for being a money laundering haven. A recent in-depth study by economist Gabriel Zucman and his colleagues shows that Hong Kong remains a favoured tax haven for foreigners. The city has apparently failed to learn any lessons about how rampant tax avoidance practices can tar its reputation.
Before 2007, Hong Kong held less offshore wealth than Jersey, the Bahamas, or the Cayman Islands. But from 2007 to 2015, it was second only to Switzerland in terms of offshore wealth, which increased sixfold during that period. Zucman specifically notes that anonymous shell corporations make it extremely challenging to identify the real people behind the companies, making it an efficient tool for moving dirty money.
The EU is expected to announce its blacklist of tax havens this month, after screening 92 jurisdictions, including Hong Kong. If Hong Kong were included on the EU’s list, the city would be deemed an unsuitable business partner.
An integral part of the global effort to combat tax havens and money laundering is increased public information on company owners, or what are legally known as “beneficial owners” – the real people who control or benefit economically from a legal entity. Oxfam Hong Kong and the Financial Transparency Coalition call upon all governments worldwide, including the government of Hong Kong, to require the disclosure of beneficial ownership information and to make it publicly available. Such a measure would allow poor countries to access information necessary to identify tax dodgers and to recover the billions in lost tax revenue that could be used to substantially improve basic public services.
A public central registry of company owners would ensure such transparency. The UK, Denmark and Ukraine have such a registry, and many more are taking steps to set one up. The EU already requires its 28 member states to establish a register, and is likely to soon require them to make this information public.
Hong Kong is running against the global trend. Disappointingly, after two months of public consultation on the issue, the government concluded that it would not consider a public central register, but, rather, one only accessible to the authorities.
The primary reason was concerns about the privacy of company owners, whose identity would be disclosed under the proposal. However, the government appears to have overlooked an easy solution, which is to enact an accompanying data protection law, one that others have already undertaken.
In its current proposal for reform, Hong Kong authorities have loosely defined “beneficial owner”, requiring only those with more than 25 per cent of a company’s shares to declare their ownership.
Many other jurisdictions admittedly do the same, but Hong Kong should note that the intergovernmental body setting global norms to combat money laundering does not recommend a 25-per-cent threshold. In fact, a key EU proposal is to lower the threshold for ownership disclosures to 10 per cent. Most importantly, the American and Hong Kong stock exchange regulators have set this threshold at 5 per cent.
Hong Kong is undoubtedly one of the most egregious tax havens in the world. Even before Oxfam ranked it as the world’s ninth worst tax haven in its landmark report, Tax Battles , last December, the Tax Justice Network rated the city second in its Financial Secrecy Index, unveiled in 2015.
For decades, Hong Kong has prided itself on having a simple, low-tax regime. This may justify its poor efforts to advance tax transparency, but it does not excuse its role in the facilitation of global money laundering. The government has an opportunity to take meaningful steps to end illicit financial flows that deplete public coffers, by creating a public beneficial ownership registry. The rest of the world is watching.
Kalina Tsang is head of Oxfam’s Hong Kong, Macau, Taiwan Programme. Eryn Schornick is senior policy adviser of Global Witness, a founding member of the Financial Transparency Coalition