HONG KONG – The Panama Papers leak has put the spotlight on Hong Kong as a hub for setting up offshore firms, with much of the money flowing through the city coming from mainland China.
Revelations Thursday, April 7, that more than 16,300 of Panamanian law firm Mossack Fonseca's active shell companies were incorporated through its Hong Kong and China offices– 29% of the worldwide total – show the lengths to which wealthy Chinese people will go to safeguard their money and flout domestic currency controls. (READ: Panama Papers: What's been revealed so far)
Hong Kong is a key cog in the process due to its proximity and financial freedoms.
"Chinese are moving the money offshore because the economy is slowing," says Andrew Collier, managing director of Hong Kong-based Orient Capital Research.
"The property market in many parts of the country is collapsing... and there's concern about the anti-corruption campaign and the impact that may have on the safety of capital in China," he adds.
Here are some of the ways that Hong Kong plays a role in shipping that money out:
Trade accounts
One way to generate income outside the mainland is to falsify trade and service invoicing, analysts say.
By underpricing goods exported through Hong Kong or overpricing those they import through the city they can generate extra cash to be syphoned off into offshore accounts set up in the city.
"A lot of people say there's huge false invoicing of trade goods between China and Hong Kong, and Hong Kong is being used as a way-station to get capital out of the country," says Collier.
Chinese companies will also apply for foreign exchange at domestic banks for a purchase, but overstate the amount they need, he adds.
The extra can then be moved into offshore account.
"It's very hard for a bank to work out which invoices are correct and which are not," says Collier.
Lack of transparency
The amount of capital moved out of China is limited to $50,000 per person a year, but funnelling more into secretive offshore accounts is made easy through Hong Kong, says shareholder activist David Webb.
He says the city lacks full transparency in both its companies registry and stock exchange, partly because it does not want to lose Chinese business.
"They've adopted this 'don't ask don't tell' policy, knowing there's a huge amount of corruption in mainland China where a lot of the business comes from," says Webb of the exchange.
"They're worried (more controls) would reduce the amount of business and the attraction of listing in Hong Kong."
Money mules and underground banking
China caps the amount of cash tourists can take abroad to 20,000 yuan ($3,090) in local currency and the equivalent of $5,000 in foreign currencies.
Earning a commission for taking money across the border from China to Hong Kong, "money mules" strap bundles of notes to their bodies to try to duck customs, or hide it in luggage.
Cheques are easier to get in, and underground banks in China can issue them in a foreign currency in exchange for yuan.
Currency exchange shops in Hong Kong also facilitate transferring money from wealthy Chinese overseas.
"The more that the state in any country imposes restrictions on movement of capital, the larger the underground financial sector will be," says Webb.
Luxury goods, insurance and property
Cash and cheques moved out of China are often sunk into Hong Kong property, forcing up prices in recent years.
Wealthy Chinese have also been buying up insurance policies in the city using credit cards in order to cash them out in the future, although a new limit has recently been set on how much they can spend.
In another money-moving method, expensive credit card purchases such as jewellery and cameras are sometimes refunded in cash immediately at shops, which earn a commission in the process. – Rappler.com