China meets George Orwell on the British Virgin Islands, according to the International Consortium of Investigative Journalists: “All animals are equal, but some animals…”

Dear readers in China,

This could be the last time that you can read my blog. I noticed that some of you did indeed read this blog. There is a chance that after publishing this article, this account will remain closed for you. If it will be the last time indeed that you read this blog, I thank you in advance for doing so.

Yesterday, I learned from the International Consortium of Investigative Journalists (ICIJ) that many relatives of (former) Chinese leaders and Chinese ‘Noblemen’ are offshoring massive amounts of money to offshore companies on the British Virgin Islands (BVI) and Samoa.

I don’t know if this money is honorably earned, or stolen from their countrymen. And I don’t know if the Chinese leaders themselves are involved in it, but I guess they are.

However, one thought is haunting me: I always thought that communism/socialism meant sharing the pleasures AND the burdens together of living in a communist country. And that people would not try to get rich at the expense of others. And that people would be fair and square to each other.

And although I’m much more social-democrat than socialist, for me this basically didn’t sound like a bad idea. Maybe I’m a romantic fool, albeit a disappointed one. I already didn’t have many illusions about China or the Chinese leadership. Just like I didn’t have many illusions about the former Russian communist leaders.

The most important thing for the Chinese communist party and its leaders is protecting the communist party and its leaders… at all costs.

The Chinese communist party is like the dragon that destroys every man or woman it doesn’t like, in case of someone standing in its way. And its leaders are like the animals in George Orwell’s famous book Animal Farm: “some animals are more equal than other animals”.

I was born in a family where fairness, honesty and honour were important things. And although I didn’t live like a saint and made my share of mistakes, I can look most people in my life straight in the eye. I didn’t make me rich, but richness is not something that I pursue per sé.

This is the reason that I print a substantial part of this important report by the ICIJ, however, under the constraint that I can’t prove whether the contents of it are correct.

However, I have reasons to believe that the contents are indeed correct.

If you want to receive the integral version of it, please mail me or tweet me. You know where to find me…

Leaked Records Reveal Offshore Holdings of China’s Elite

By Marina Walker Guevara, Gerard Ryle, Alexa Olesen, Mar Cabra, Michael Hudson and Christoph Giesen January 21, 2014, 4:00 pm

Files shed light on nearly 22,000 tax haven clients from Hong Kong and mainland China.

Note: A Chinese version of this story is available here

Close relatives of China’s top leaders have held secretive offshore companies in tax havens that helped shroud the Communist elite’s wealth, a leaked cache of documents reveals.

The confidential files include details of a real estate company co-owned by current President Xi Jinping’s brother-in-law and British Virgin Islands companies set up by former Premier Wen Jiabao’s son and also by his son-in-law.

Nearly 22,000 offshore clients with addresses in mainland China and Hong Kong appear in the files obtained by the International Consortium of Investigative Journalists.  Among them are some of China’s most powerful men and women — including at least 15 of China’s richest, members of the National People’s Congress and executives from state-owned companies entangled in corruption scandals.

PricewaterhouseCoopers, UBS and other Western banks and accounting firms play a key role as middlemen in helping Chinese clients set up trusts and companies in the British Virgin Islands, Samoa and other offshore centers usually associated with hidden wealth, the records show. For instance, Swiss financial giant Credit Suisse helped Wen Jiabao’s son create his BVI company while his father was leading the country.

The files come from two offshore firms — Singapore-based Portcullis TrustNet and BVI-based Commonwealth Trust Limited — that help clients create offshore companies, trusts and bank accounts. They are part of a cache of 2.5 million leaked files that ICIJ has sifted through with help from more than 50 reporting partners in Europe, North America, Asia and other regions.

Since last April, ICIJ’s stories have triggered official inquiries, high-profile resignations and policy changes around the world.

Until now, the details on China and Hong Kong had not been disclosed.

The data illustrates the outsized dependency of the world’s second largest economy on tiny islands thousands of miles away.  As the country has moved from an insular communist system to a socialist/capitalist hybrid, China has become a leading market for offshore havens that peddle secrecy, tax shelters and streamlined international deal making.

Every corner of China’s economy, from oil to green energy and from mining to arms trading, appears in the ICIJ data.

Xi Jinping and Wen Jiabao: relatives appear in ICIJ's data.

Chinese officials aren’t required to disclose their assets publicly and until now citizens have remained largely in the dark about the parallel economy that can allow the powerful and well-connected to avoid taxes and keep their dealings secret. By some estimates, between $1 trillion and $4 trillion in untraced assets have left the country since 2000.

The growing onshore and offshore wealth of China’s elites “may not be strictly illegal,” but it is often tied to “conflict of interest and covert use of government power,” said Minxin Pei, a political scientist at Claremont McKenna College in California. “If there is real transparency, then the Chinese people will have a much better idea of how corrupt the system is [and] how much wealth has been amassed by government officials through illegal means.”

Top-level corruption is a politically sensitive issue in China as the country's economy cools and its wealth gap continues to widen.  The country’s leadership has cracked down on journalists who have exposed the hidden wealth of top officials and their families as well as citizens who have demanded that government officials disclose their personal assets. 

In November, a mainland Chinese news organization that was working with ICIJ to analyze the offshore data withdrew from the reporting partnership, explaining that authorities had warned it not to publish anything about the material.

Princelings go offshore

China's Politburo Standing Committee is the all-powerful group of seven (formerly nine) men who run the Communist Party and the country. The records obtained by ICIJ show that relatives of at least five current or former members of this small circle have incorporated companies in the Cook Islands or British Virgin Islands.

China’s “red nobility” — elites tied by blood or marriage to the current leadership or Party elders — are also popularly known as “princelings.” Ordinary Chinese have grown increasingly angry over their vast wealth and what many see as the hypocrisy of officials who tout “people-first” ideals but look the other way while their families peddle power and influence for personal gain.

The leaked offshore records include details of a BVI company 50 percent owned by President Xi’s brother-in-law Deng Jiagui. The husband of Xi’s older sister, Deng is a multimillionaire real estate developer and an investor in metals used in cell phones and other electronics. The records show the other half of Excellence Effort Property Development was owned by yet another BVI company belonging to Li Wa and Li Xiaoping, property tycoons who made news in July by winning a $2 billion bid to purchase commercial real estate in Shenzhen.

Since taking over as the Communist Party’s top official in 2012, Xi has sought to burnish his image with an aggressive anti-graft campaign, promising to go after official corruption involving both low-level “flies” and high-level “tigers.” Yet he has crushed a grassroots movement that called for government officials to publicly declare their assets. Wen Jiabao, who stepped down as premier in 2013 after a decade-long tenure, also styled himself as a reformer, cultivating an image of grandfatherly concern for China’s poor.

The ICIJ offshore files reveal that Wen’s son Wen Yunsong set up a BVI-registered company, Trend Gold Consultants, with help from the Hong Kong office of Credit Suisse in 2006. Wen Yunsong was the lone director and shareholder of the firm, which appears to have been dissolved in 2008.

Bare-bones company structures are often created to open bank accounts in the offshore firm’s name, helping obscure the relationship to the real account owner. It isn’t immediately clear from the documents what Trend Gold Consultants was used for. A U.S.-educated venture capitalist, Wen Yunsong co-founded a China-focused private equity firm and in 2012 became chairman of China’s Satellite Communications Co., a state-owned firm that aspires to be Asia’s largest satellite operator.

The ICIJ files also shed light on the BVI’s previously unreported role in a burgeoning scandal involving Wen Jiabao’s daughter, Wen Ruchun, also known as Lily Chang. The New York Times has reported that JPMorgan Chase & Co. paid a firm that she ran, Fullmark Consultants, $1.8 million in consulting fees. U.S. securities regulators are investigating the relationship as part of a probe into the bank’s alleged use of princelings to increase its influence in China.

Fullmark Consultants appears to have been set up in a manner that obscured Wen Ruchun’s relationship to the firm, the ICIJ files indicate. Her name does not show up in any of the incorporation documents in the ICIJ data, though a 'Lily Chang' is CC’d in one August, 2009 email correspondence about the company. Her husband Liu Chunhang, a former Morgan Stanley finance guru, created Fullmark Consultants in the BVI in 2004 and was the sole director and shareholder of the firm until 2006, the same year he took a government job at the agency that regulates China’s banking industry.

Liu transferred control of the company, the ICIJ files show, to a Wen family friend, Zhang Yuhong, a wealthy businesswoman and colleague of Wen Jiabao’s brother. The Times reported that Zhang also helped control other Wen family assets including diamond and jewelry ventures. 

The ICIJ files show that offshore provider Portcullis TrustNet billed UBS AG for a certificate of good standing for Fullmark Consultants in October 2005, indicating a business relationship between Fullmark and the Swiss bank. In response to ICIJ’s questions, UBS issued a statement saying its “know-your-client” policies as well as procedures to deal with politically-sensitive clients are among “the strictest in the industry.” Liu and Zhang did not respond to ICIJ's requests for comment.

A 2007 U.S. Department of State cable passed along a source’s tip that Premier Wen was “disgusted with his family’s activities,” and that “Wen’s wife and children all have a reputation as people who can ‘get things done’ for the right price.” The cable, part of the Wikileaks document dump, reported that Wen’s kin “did not necessarily take bribes, [but] they are amenable to receiving exorbitant ‘consulting fees.’ ”

The records also include incorporations by relatives of Deng Xiaoping, former Premier Li Peng, and former President Hu Jintao.

China experts say that the growing wealth and business interests of the princelings, including offshore holdings, are a dangerous liability for the ruling Communist Party but that people in leadership positions are too involved to stop it. 

Profits and corruption

Things have changed dramatically for China since it first dipped its toe into the offshore world. The country is wealthier and offshore centers serve increasingly as channels not only for capital that “round-trips” out of the country and back again, but also for overseas investment and accessing markets for metals, minerals and other resources.

Defenders of China’s offshore push say the offshore system has helped boost the country’s economy.

“I think we should face the reality, which is that Chinese capital is flowing out. I think it’s actually a beneficial thing,” said Mei Xinyu, a researcher at China’s Commerce Ministry. “Of course I support the idea that a company should incorporate in its host country. But if the host country can't provide the right environment, then incorporating the company in an offshore center is actually a practical choice.”

With markets in China often hamstrung by red tape and government intervention, incorporating offshore can smooth the way to do business, said William Vlcek, author of Offshore Finance and Small States: Sovereignty, Size and Money.

There’s also evidence, though, that many Chinese companies and individuals have used offshore entities to engage in illicit or illegal behavior.

In September Zhang Shuguang, a former high-level Chinese railway executive, pleaded guilty to criminal charges in the wake of allegations that he’d funneled $2.8 billion into offshore accounts. An internal government report released by the Bank of China revealed that public officials — including executives at state-owned companies — had embezzled more than $120 billion out of China since the mid-1980s, some of it funneled through the BVI.

Portcullis TrustNet helped state-run shipping giant Cosco incorporate a BVI company in 2000. Among the numerous directors of Cosco Information Technology Limited were current Cosco Group chairman Ma Zehua and Song Jun, an executive who would stand trial in 2011 for embezzlement and bribery. After Cosco sent Song to help oversee a Qingdao subsidiary in 2001, he set up a fake BVI joint venture partner and used it to siphon millions from the building of Qingdao’s gleaming Cosco Plaza, prosecutors said. State news service Xinhua said he embezzled $6 million, took $1 million in bribes from a Taiwanese business partner and purchased 37 apartments in Beijing, Tianjin and Qingdao with his ill-gotten earnings. His trial was adjourned but no verdict was publicly announced.

China’s corruption-plagued oil industry — which recently has been the target of criminal investigations that have led to the suspension of key oil executives — is a big player in the offshore world. China’s three big state-owned oil companies, which are counted among the largest companies in the world, are linked to dozens of BVI firms that show up in the ICIJ data.

Former PetroChina executive Li Hualin, who was dismissed in August after coming under investigation for alleged “serious violations of discipline”, often a party shorthand for corruption, was the director of two BVI companies, the ICIJ files reveal.

While some of these offshore firms are disclosed in corporate filings, several others linked to individual executives — including Zhang Bowen of PetroChina’s natural gas distribution arm Kunlun Energy and Yang Hua of China National Offshore Oil Corporation — appear to operate in the dark, and their purpose is not clear. PetroChina and CNOOC did not respond to ICIJ’s repeated requests for comment.

Other scandal-tainted Chinese who have used the BVI to do business include Huang Guangyu, once China’s richest man. The ICIJ records show that he and his wife Du Juan set up a maze of at least 31 BVI companies between 2001 and 2008 as they built the largest consumer electronics retail chain in China.

The husband, Huang, was sentenced to 14 years in prison in 2010 after Chinese courts convicted him of insider trading, bribery and stock price manipulation. Du Juan was convicted of related charges but was released from prison in 2010 after serving a brief time.

While Huang is in prison and many of his assets are frozen, his business empire survives through his offshore network of companies. In 2011, one of his BVI firms, Eagle Vantage Assets Management, made a bid for a retired British aircraft carrier that Huang wanted to turn into a luxury shopping mall (the Brits in the end decided to scrap the ship).

He still owns more than 30 percent of Gome, his electronics retailer, via two companies in the BVI, Shining Crown Holdings and Shine Group.

Offshore’s future

As concerns grow about the wealth of corporate oligarchs, government officials and their

families, some Chinese have braved the government’s anger by raising questions about corruption.

A grassroots group, the New Citizens Movement, uses the Internet and small demonstrations to press for greater transparency. “How can you fight corruption if you don’t even dare to disclose your personal assets?” the group’s founder, legal advocate and activist Xu Zhiyong, wrote last spring.

After years of inaction, the U.S., the U.K. and international organizations have begun pushing reforms that, they say, would reduce offshore abuses. China has been less aggressive in pressing for changes in the offshore system.

Big loopholes in tax laws have allowed Chinese individuals to operate with relative freedom offshore. They weren’t required to report their foreign holdings.

A 2013 industry-sponsored poll of 200-plus bankers and other offshore professionals found that “China-related demand” is the key driver in the offshore market’s growth. The chief of a BVI offshore services firm said in the survey: “China is the most important location for client origination for business in the next five years.”