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Money and power: China government's link to Panama Papers firm

  Updated: Apr 8, 2016 11:04 IST

#China   #Mossack Fonseca   #NewsTracker   #Offshore accounts   #Panama Papers  

Beijing: Long before the Panama Papers leaks put law firm Mossack Fonseca on front pages around the world, the company was already well known among a certain class of Chinese investor — and to the government.

The tight-lipped firm says it has cooperated with authorities in Beijing and state-backed banks to help Chinese companies take their business international, according to information gleaned from transcripts of speeches by the company's representatives and archived versions of its Chinese website.

On several occasions, it has recommended Chinese companies cloak themselves in offshore disguises to avoid foreign restrictions on and opposition to acquisitions.

Since setting up its mainland China operation in 2000, Mossack Fonseca has had at least 11 offices in the country. It currently has eight, including one in Hong Kong.

The International Consortium of Investigative Journalists (ICIJ), which coordinated the Panama Papers reports, said that in 2015 Mossack Fonseca collected fees for more than 16,300 offshore companies incorporated in offices in China and Hong Kong, accounting for 29 percent of its "active companies worldwide".

Representational image. AFP

Representational image. AFP

According to ICIJ, the semi-autonomous Chinese territory of Hong Kong housed the greatest number of intermediaries, banks and law firms that set up offshore corporations on behalf of clients.

The group said the data includes the names of relatives of at least eight current or former members of China's Communist Party's Politburo Standing Committee, the country's most powerful body.

Despite that, until the leaks began last weekend, Mossack Fonseca appears to have been largely unknown among international corporate lawyers in China.

The number of offices the company had was "staggering", China-based attorney Edward Lehman told AFP, adding that in almost 29 years of doing business in the country, he had "never used them once, never been solicited by them once".

But Mossack Fonseca was known in Beijing. It has arranged investment conferences with the commerce ministry and its official think tank, the Chinese Academy of International Trade and Economic Cooperation (CAITEC), past versions of its website show.

As recently as 2014, Chinese government agencies invited Mossack Fonseca representatives to address companies on how offshoring could be used by Chinese firms as part of the country's strategy for domestic enterprises to seek markets and acquisitions abroad.

"We are actively assisting Chinese private and state-owned firms' march into the international market," the company said.

Convoluted structures

When it first entered the mainland, Mossack Fonseca offered free consulting services to law and accounting firms, government offices and others to educate them about the benefits of offshoring, Zhang Xiaodong told the China Economic Weekly in 2007.

Zhang was described as a partner in the company's Asia office by the magazine, which is owned by the People's Daily group, whose flagship is the official newspaper of the Communist Party.

He suggested that offshoring could be used by Chinese companies to evade restrictions imposed by foreign authorities on investment from the country.

Zhang cited Chinese state-owned oil company CNOOC's takeover bid for US energy firm UNOCAL, which was withdrawn in the face of opposition from a US committee tasked with investigating proposed investments for national security implications.

"These types of risks can actually all be avoided through the use of offshore companies," he said.

"It's very hard for the other party to determine whether the investors only came from China or the investments only represent Chinese interests."

In other talks, company representatives discussed using offshoring to disguise Chinese investment in Africa and Europe.

Without naming names, it said it had helped a client hide its acquisition of a European firm through a corporate structure that included an offshore company, a foundation, a company in Luxembourg, and another company in the target nation.

Mossack Fonseca also said it had close ties with at least two prominent state-backed banks: Chinese Merchants Bank and Shanghai Pudong Development Bank.

"For many years, our firm has maintained a good relationship with these two," the company said in a November 2008 letter posted on its website, adding that it had helped the banks conduct annual reviews of accounts held by their offshore clients.

Between January 2007 and September 2009, on at least five occasions, the company's representatives trained bank staff on offshoring or appeared at conferences sponsored by the banks on international trade and investment, the newsletters said.

British Virgin Islands

Offshore companies are not illegal in themselves and can be used for many legitimate purposes, and Mossack Fonseca has denied any wrongdoing.

ICIJ said most of Mossack Fonseca's offshore companies were set up in the British Virgin Islands (BVI), a Caribbean jurisdiction renowned for the purpose.

Chinese foreign investment flows to BVI have multiplied since Mossack Fonseca opened on the mainland, going from $1.88 billion in 2007 — the earliest figure available from the National Bureau of Statistics (NBS) — to $4.57 billion in 2014, the most recent.

At least some of that money is likely to have been moved out of China by corrupt officials, who have sent more than $120 billion overseas, according to a 2011 report by the People's Bank of China.

Mossack Fonseca is not the only purveyor of offshore companies to Chinese clients, with other major players including OIL, Sovereign Trust and OCRA.

But unlike those better-known firms, its dealings remain hazy.

"This is not a law firm I've ever seen associated with real deals," said Paul Gillis, an expert on Chinese accounting practices at Peking University.

That may have been the point.

For Chinese clients, he said, the purposes of the offshore companies was probably "to get money out of China, and not in a form where it can be traced back to them".

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