New ‘Panama Papers’ Report Hits China’s Red Elite
David Werteim
Foreign Policy, April 6, 2015
The global image of Capitalism with Chinese characteristics took yet another hit on April 6, when the International Consortium of Investigative Journalists (ICIJ), in conjunction with German outlet Süddeutsche Zeitung, published a China-focused report that peels back further the curtain that usually shields the financial machinations of China’s elite and well-connected from public view. The report, authored by former Foreign Policy reporter Alexa Olesen, reflects the author’s access to the trove of 11.5 million underlying documents leaked from Panama-based law firm Mossack Fonseca, which has specialized in the formation of offshore entities in jurisdictions like the Cayman Islands and the British Virgin Islands (BVI), a leak first exposed on April 3 and dubbed the “Panama Papers.”
While the latest findings are unlikely to surprise Chinese palace-watchers, they cement the country’s reputation as a place whose leadership, despite its Communist provenance, is both willing and able to use the levers of international finance to obfuscate asset ownership and to utilize positions of power to benefit friends and family. The results include a dizzying array of shell companies with meaningless monikers like Glory Top, Ultra Time, Keen Best, Dragon Stream, and Purple Mystery.
For the first time, the April 6 report names each of the eight current and former members of China’s elite, Politburo Standing Committee (PSC) with a family member implicated in the leaked papers. The list reaches surprisingly far back into China’s history, touching even Mao Zedong, the founder of the People’s Republic of China. It includes:
Mao Zedong (deceased), who led the country with an iron fist from 1949 to his death in 1976: Mao’s grandson-in-law incorporated a BVI company in 2011.
Hu Yaobang (deceased), who headed the Communist Party from 1982 to 1987: Hu’s son, Hu Dehua, was shareholder, director, and beneficial owner of a BVI company incorporated in 2003.
Li Peng, former Premier: Li’s daughter, Li Xiaolin, owns a BVI company incorporated in 1994. She and her husband previously owned the entity via bearer shares, which obfuscate ownership.
Zeng Qinghong, former Vice President: Zeng’s brother, Zeng Qinghuai, was director of a company incorporated in Niue, later shifted to Samoa.
Jia Qinglin, former PSC member: Jia’s granddaughter Jasmine Li Zidan (no relation to Li Xiaolin) became the owner of an offshore company in 2010 and later came to own two BVI shell companies with total registered capital of $300,000.
Xi Jinping, current President: Xi’s brother-in-law, Deng Jiagui, acquired three offshore firms over several years.
Zhang Gaoli, current PSC member: Zhang’s son-in law, Lee Shing Put, owned shares in three BVI companies.
Liu Yunshan, current PSC member: Liu’s daughter-in-law, Jia Liqing, was director and shareholder of a BVI company in 2009.
Other notable Chinese clients of Mossack Fonseca who have not held high office include Shen Guojun, founder of a Chinese shopping mall chain, and Jackie Chan, the kung-fu star notable for his worldwide appeal and his full-throated expressions of fealty to the ruling party, including a 2009 statement that the people of China “need to be managed.” Shen and Chan, together with others, owned a BVI company incorporated in 2008. The report states neither Shen nor Chan responded to repeated ICIJ requests for comment.
The report states, correctly, that setting up offshore entities is not itself illegal. Neither are Chinese leaders necessarily in a position to control their family members’ behavior. But the report nevertheless shows that those close to China’s leaders abided by something other than the highest standards of transparency. It undermines the leadership’s frequent, if self-serving, invocations of patriotism. And it appears to confirm the belief, widely held among average Chinese, that those close to influential officials trade on their connections and live by a set of rules different from that of ordinary citizens. Citizen activists have long called for stricter asset disclosure laws in China, but to no avail; some have even been jailed for their efforts.
It’s vanishingly unlikely the report will make major waves in China. The country’s censors have apparently been working overtime to scrub social media of damning mentions of the Panama Papers, which have already named Deng Jiagui, Li Xiaolin, and Jasmine Li, among others, as having been involved in, or having benefited from, the establishment of offshore entities. While Chinese media has reported on the Panama Papers’ existence, it has collectively said nothing about their nexus with Chinese leaders, instead focusing on how leaked documents implicate soccer star Lionel Messi.
Censors have good cause to be afraid of the backlash that would otherwise ensure; the new report includes several details likely to infuriate even a jaded citizenry.
Censors have good cause to be afraid of the backlash that would otherwise ensure; the new report includes several details likely to infuriate even a jaded citizenry. Jasmine Li, granddaughter of Jia Qinglin, somehow became owner of offshore entity Harvest Sun Trading Ltd. while still enrolled as a freshman at Stanford University. Li Xiaolin, daughter of Li Peng and a middle-aged oil executive, averred to state media in 2014 that that she had no offshore companies — in fact, by then, she had controlled a BVI entity for about ten years. She held (but no longer holds) ownership via bearer shares, which are technically owned by whoever has physical possession of them, making it impossible to establish a registered owner. It was a neat trick — too neat even for BVI authorities, who outlawed the practice in 2009. The report states Li Xiaolin did not respond to repeated ICIJ request for comment.
Perhaps most sordid is the story of the infamous Gu Kailai, the imprisoned wife of (also jailed) former politician Bo Xilai. Gu became famous in China and abroad after poisoning erstwhile British friend-cum-“white glove” Neil Heywood in 2011. (Businesspeople who act as proxies for the wealth of leaders’ families are colloquially called bai shoutao, meaning “white gloves.”) Heywood had threatened to expose Gu’s ownership of an expensive villa in southern France, which she hid using a BVI entity. Gu, desperate not to allow a disclosure that might imperil her husband’s political ascent, murdered Heywood in a hotel room. Two weeks later, the new ICIJ report reveals, she transferred ownership of the entity to an associate.
The enterprise of finding China-related transactions and entities in the trove of available documents took nine months and was akin to finding “a needle in a haystack,” Olesen, the report’s author, told Foreign Policy via e-mail. ICIJ’s China team had access to the leaked files in successive batches, and only in December 2015 did their database become fully searchable. The team’s research methods, Olesen wrote, were simple: “we searched long shareholder lists for familiar names. When we found one, we’d dig into the specific company folders which included emails, registers of directors, and registers of members.” The biggest challenge to researchers was “trying to find out what the princelings,” i.e. well-connected Chines elites, “used their offshore companies for once they had them, whether it was setting up a subsidiary mainland company, buying a villa, or stashing profits from an export business. But in many cases,” Olesen added, “the purpose of these companies remains a tantalizing mystery.”
And where exactly were the lawyers during all of this shady business?
The report repeatedly notes Mossack Fonseca’s evident failure to conduct rigorous “know your customer” checks prior to papering deals for members of China’s de facto aristocracy.
The report repeatedly notes Mossack Fonseca’s evident failure to conduct rigorous “know your customer” checks prior to papering deals for members of China’s de facto aristocracy. The process, known in the profession as “KYC,” is standard procedure that respected firms follow before entering into formal lawyer-client relationships and helps ensure a firm is in compliance with international laws, including those against money laundering. The report implies such practices, if more strictly followed, would likely have flagged power players like Deng Jiagui and Li Xiaolin. Meanwhile, Jasmine Li, granddaughter of Jia Qinglin, bought a shell company for $1 from another firm client and apparent “white glove,” Zhang Yuping, who founded a Chinese luxury watch concern, yet there is no evidence the firm asked Li for her photo ID, a standard practice.
It’s possible that Mossack Fonseca found itself bewildered by the various Chinese names employed — after all, surnames like Li, Zhang, Hu, and Liu are widely used in China, and their bearers very rarely possess any nexus with leaders of the same name. But the firm, the ICIJ report notes, set up shop in Hong Kong in 1989, then established a foothold in the mainland in 2000 — it now boasts offices in eight mainland Chinese cities, including several, like Ningbo and Jinan, not considered conventional destinations even for globe-trotting foreign lawyers.
Mossack Fonseca, in other words, had been an early and deep operator in China. The report states that Mossack Fonseca’s China offices handled the formation of 29 percent of all active companies set up by the firm, and its busiest office was in Hong Kong. In what now resembles a bit of foreshadowing, in a Bloomberg interview conducted before the ICIJ revelations, founding partner Ramón Fonseca declared his intention to make the sprawling firm “the right size — smaller.”
David Werteim
Foreign Policy, April 6, 2015
The global image of Capitalism with Chinese characteristics took yet another hit on April 6, when the International Consortium of Investigative Journalists (ICIJ), in conjunction with German outlet Süddeutsche Zeitung, published a China-focused report that peels back further the curtain that usually shields the financial machinations of China’s elite and well-connected from public view. The report, authored by former Foreign Policy reporter Alexa Olesen, reflects the author’s access to the trove of 11.5 million underlying documents leaked from Panama-based law firm Mossack Fonseca, which has specialized in the formation of offshore entities in jurisdictions like the Cayman Islands and the British Virgin Islands (BVI), a leak first exposed on April 3 and dubbed the “Panama Papers.”
While the latest findings are unlikely to surprise Chinese palace-watchers, they cement the country’s reputation as a place whose leadership, despite its Communist provenance, is both willing and able to use the levers of international finance to obfuscate asset ownership and to utilize positions of power to benefit friends and family. The results include a dizzying array of shell companies with meaningless monikers like Glory Top, Ultra Time, Keen Best, Dragon Stream, and Purple Mystery.
For the first time, the April 6 report names each of the eight current and former members of China’s elite, Politburo Standing Committee (PSC) with a family member implicated in the leaked papers. The list reaches surprisingly far back into China’s history, touching even Mao Zedong, the founder of the People’s Republic of China. It includes:
Mao Zedong (deceased), who led the country with an iron fist from 1949 to his death in 1976: Mao’s grandson-in-law incorporated a BVI company in 2011.
Hu Yaobang (deceased), who headed the Communist Party from 1982 to 1987: Hu’s son, Hu Dehua, was shareholder, director, and beneficial owner of a BVI company incorporated in 2003.
Li Peng, former Premier: Li’s daughter, Li Xiaolin, owns a BVI company incorporated in 1994. She and her husband previously owned the entity via bearer shares, which obfuscate ownership.
Zeng Qinghong, former Vice President: Zeng’s brother, Zeng Qinghuai, was director of a company incorporated in Niue, later shifted to Samoa.
Jia Qinglin, former PSC member: Jia’s granddaughter Jasmine Li Zidan (no relation to Li Xiaolin) became the owner of an offshore company in 2010 and later came to own two BVI shell companies with total registered capital of $300,000.
Xi Jinping, current President: Xi’s brother-in-law, Deng Jiagui, acquired three offshore firms over several years.
Zhang Gaoli, current PSC member: Zhang’s son-in law, Lee Shing Put, owned shares in three BVI companies.
Liu Yunshan, current PSC member: Liu’s daughter-in-law, Jia Liqing, was director and shareholder of a BVI company in 2009.
Other notable Chinese clients of Mossack Fonseca who have not held high office include Shen Guojun, founder of a Chinese shopping mall chain, and Jackie Chan, the kung-fu star notable for his worldwide appeal and his full-throated expressions of fealty to the ruling party, including a 2009 statement that the people of China “need to be managed.” Shen and Chan, together with others, owned a BVI company incorporated in 2008. The report states neither Shen nor Chan responded to repeated ICIJ requests for comment.
The report states, correctly, that setting up offshore entities is not itself illegal. Neither are Chinese leaders necessarily in a position to control their family members’ behavior. But the report nevertheless shows that those close to China’s leaders abided by something other than the highest standards of transparency. It undermines the leadership’s frequent, if self-serving, invocations of patriotism. And it appears to confirm the belief, widely held among average Chinese, that those close to influential officials trade on their connections and live by a set of rules different from that of ordinary citizens. Citizen activists have long called for stricter asset disclosure laws in China, but to no avail; some have even been jailed for their efforts.
It’s vanishingly unlikely the report will make major waves in China. The country’s censors have apparently been working overtime to scrub social media of damning mentions of the Panama Papers, which have already named Deng Jiagui, Li Xiaolin, and Jasmine Li, among others, as having been involved in, or having benefited from, the establishment of offshore entities. While Chinese media has reported on the Panama Papers’ existence, it has collectively said nothing about their nexus with Chinese leaders, instead focusing on how leaked documents implicate soccer star Lionel Messi.
Censors have good cause to be afraid of the backlash that would otherwise ensure; the new report includes several details likely to infuriate even a jaded citizenry.
Censors have good cause to be afraid of the backlash that would otherwise ensure; the new report includes several details likely to infuriate even a jaded citizenry. Jasmine Li, granddaughter of Jia Qinglin, somehow became owner of offshore entity Harvest Sun Trading Ltd. while still enrolled as a freshman at Stanford University. Li Xiaolin, daughter of Li Peng and a middle-aged oil executive, averred to state media in 2014 that that she had no offshore companies — in fact, by then, she had controlled a BVI entity for about ten years. She held (but no longer holds) ownership via bearer shares, which are technically owned by whoever has physical possession of them, making it impossible to establish a registered owner. It was a neat trick — too neat even for BVI authorities, who outlawed the practice in 2009. The report states Li Xiaolin did not respond to repeated ICIJ request for comment.
Perhaps most sordid is the story of the infamous Gu Kailai, the imprisoned wife of (also jailed) former politician Bo Xilai. Gu became famous in China and abroad after poisoning erstwhile British friend-cum-“white glove” Neil Heywood in 2011. (Businesspeople who act as proxies for the wealth of leaders’ families are colloquially called bai shoutao, meaning “white gloves.”) Heywood had threatened to expose Gu’s ownership of an expensive villa in southern France, which she hid using a BVI entity. Gu, desperate not to allow a disclosure that might imperil her husband’s political ascent, murdered Heywood in a hotel room. Two weeks later, the new ICIJ report reveals, she transferred ownership of the entity to an associate.
The enterprise of finding China-related transactions and entities in the trove of available documents took nine months and was akin to finding “a needle in a haystack,” Olesen, the report’s author, told Foreign Policy via e-mail. ICIJ’s China team had access to the leaked files in successive batches, and only in December 2015 did their database become fully searchable. The team’s research methods, Olesen wrote, were simple: “we searched long shareholder lists for familiar names. When we found one, we’d dig into the specific company folders which included emails, registers of directors, and registers of members.” The biggest challenge to researchers was “trying to find out what the princelings,” i.e. well-connected Chines elites, “used their offshore companies for once they had them, whether it was setting up a subsidiary mainland company, buying a villa, or stashing profits from an export business. But in many cases,” Olesen added, “the purpose of these companies remains a tantalizing mystery.”
And where exactly were the lawyers during all of this shady business?
The report repeatedly notes Mossack Fonseca’s evident failure to conduct rigorous “know your customer” checks prior to papering deals for members of China’s de facto aristocracy.
The report repeatedly notes Mossack Fonseca’s evident failure to conduct rigorous “know your customer” checks prior to papering deals for members of China’s de facto aristocracy. The process, known in the profession as “KYC,” is standard procedure that respected firms follow before entering into formal lawyer-client relationships and helps ensure a firm is in compliance with international laws, including those against money laundering. The report implies such practices, if more strictly followed, would likely have flagged power players like Deng Jiagui and Li Xiaolin. Meanwhile, Jasmine Li, granddaughter of Jia Qinglin, bought a shell company for $1 from another firm client and apparent “white glove,” Zhang Yuping, who founded a Chinese luxury watch concern, yet there is no evidence the firm asked Li for her photo ID, a standard practice.
It’s possible that Mossack Fonseca found itself bewildered by the various Chinese names employed — after all, surnames like Li, Zhang, Hu, and Liu are widely used in China, and their bearers very rarely possess any nexus with leaders of the same name. But the firm, the ICIJ report notes, set up shop in Hong Kong in 1989, then established a foothold in the mainland in 2000 — it now boasts offices in eight mainland Chinese cities, including several, like Ningbo and Jinan, not considered conventional destinations even for globe-trotting foreign lawyers.
Mossack Fonseca, in other words, had been an early and deep operator in China. The report states that Mossack Fonseca’s China offices handled the formation of 29 percent of all active companies set up by the firm, and its busiest office was in Hong Kong. In what now resembles a bit of foreshadowing, in a Bloomberg interview conducted before the ICIJ revelations, founding partner Ramón Fonseca declared his intention to make the sprawling firm “the right size — smaller.”
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