China’s Offshore Leaks: So What?

The release of leaked documents linking thousands of Chinese citizens to offshore companies formed in tax havens is a gift to Chinese President Xi Jinping. A hallmark of President Xi’s early presidency has been a crackdown on corruption among Chinese officials. While release of the database containing names of 37,000 people from China, Hong Kong and Taiwan who have used offshore companies violates the Chinese idiom that warns against airing a family’s dirty laundry in public (jiāchǒu bùkě wàiyáng—家丑不可外扬), another idiom reminds us that a loss can be turned into a gain (sàiwēngshīmǎ, yān zhī fēi fú—塞翁失马，焉知非福).

The next step for President Xi is clear. He needs to form a Red Army of accountants and send them off to talk to every Chinese person whose name is found in the database. The questions are straightforward. Why did you set up the company? What assets did you transfer into it? Where did you get the money? How did you get the money out of China? Did you pay all of the taxes that you owe? Who helped you?

There are legitimate reasons for offshore companies. Offshore companies commonly are used as holding companies for international operations. Properly used, they can assist in international tax planning. Those who have legitimate reasons to use these companies should be able to easily explain them.

But many offshore companies are used for illegitimate reasons. They are used to hide funds that have been stolen or keep to them from creditors or spouses. Offshore accounts may be used to hide money from the tax collector. Xi’s accountant army may well find that trusted officials have stolen from the Chinese people, either by taking funds illegally or by circumventing China’s currency controls, or by evading taxes. If funds have been stolen from the people, the criminals should be punished and their ill-gotten gains should be confiscated.

It was disappointing to learn that reputable Western accounting firms and banks helped Chinese elites to set up these companies. If they are found to be accomplices in stealing from the Chinese people they should be severely held to account.

Paul Gillis, as usual, is right on all points, and his reaction pretty well encapsulates what needs to be said about this ICIJ revelation at this early point. I have only a few general observations to add, given that I’m largely illiterate on the complex legal and financial issues involved in this case.

Let me start with a little bit of gentle pushback.

1. Let’s not get too breathless here. The ICIJ story, as told by ICIJ itself and covered by many others, runs the risk of a rush to excited judgments. There is a certain quality of “everything but the kitchen sink” in this melange of established facts and simmering implications. As a general rule, I am allergic to use of the terms “links to” and “ties to” in investigative journalism, and think we need to be careful here.
2. The ICIJ acknowledges, way down in their January 22 oil industry piece, that “There is no evidence that the oil companies or their executives were engaged in illegal conduct, but the secrecy of the offshore world makes it unclear what the offshore firms were used for. It is also unclear in some cases whether the overseas entities controlled by oil executives were established on behalf of their employers or as personal holdings.” We can be sure that somebody will cite that first clause “There is no evidence...,” at least as a short-term delaying action, but in fact it behooves us all to avoid leaping to conclusions of legal guilt (whether under Chinese law or somebody else’s) without definitive evidence.
3. The Chinese, of course, are not the first or only people to play fast and loose with their wealth, whether through manipulation of easily used offshore incorporations as alleged here or otherwise. We should not be surprised that many Chinese are suspected of doing so (face it: the ashes of once-legendary Mao-era financial probity are cold, on the dustbin of history). For the rest, the American people are treated almost daily to the spectacle of high-flying American financiers either being brought down, years after they committed their abuses, or not brought down, in spite of the financial debacles they have overseen. So Schadenfreude might be in order, but “Ain’t It Awful” is not.
4. Gillis is amusingly right in suggesting that Xi Jinping organize an “army of accountants” to bore into the finances of the of thousands of figures, some of them members of the most politically-connected elite families in China, named in their revelations, to ascertain whether illicit acts were committed and by whom. But there’s a problem.
5. Every country has a problem of “policing the policemen,” but in no country does that problem have a longer pedigree than in China. Aside from the beguiling turn of phrase, I wonder if Paul really thinks that an “army of accountants” in China could carry out the task he recommends they perform, with impeccable honesty and freedom from outside interference. I doubt it myself, and suspect that most people in China would view that enforcement campaign, like so many others, as politically motivated and selective in its findings. The later imperial Chinese dynasties established an institution called (in English) the Censorate, whose purpose was to investigate the conduct of imperial officials, reveal their misdeeds, and thus try to ensure the honesty of the imperial bureaucracy and courtiers. The only way to try to ensure that members of the Censorate themselves stayed incorruptible was to guarantee them immunity from imperial retribution, no matter how hard-hitting their accusations or how highly placed their targets.
6. Today, the Party has its Central Discipline Commission, currently chaired by the highly-regarded Wang Qishan, and the Senior Leader of the Party, Xi Jinping, has thrown his personal energy and prestige into a highly publicized anti-corruption campaign whose scope remains, to date, unclear. Paul Gillis writes that the ICIJ trove of leaked data is a heaven-sent gift to Xi, a body of information bound to aid in the anti-corruption effort that is one of the ineradicable symbolic commitments of the Xi regime. We’ll see. But I remain cautious as to whether a) there could even be an “army of accountants” ready to be launched into the ICIJ data in search of illicit wealth transfers, tax evasion, etc. by the thousands of named individuals “tied to” these offshore companies; b) any investigations will be impartial in their selection of targets, as opposed to partial and politically-motivated; and c) in the end, something as massive as this can and will be addressed, in any visible cause-and-effect way, by the regime. I can imagine some “kill the chicken to scare the monkey” cases arising from this gigantic body of implication, but it’s hard to imagine an effort to sweep the boards clean.
7. Where Gillis is even more right on the mark, though, is in his focus on the possibility that foreign firms, including the major accounting firms, played the enabling role in all this, recognizing that China was awash in new-found personal and corporate wealth, that Chinese laws and regulations conduced to the desire to move money out of the country, and that opportunities for big, easy profit might be found in that environment.
8. Many Americans, in the aftermath of the economic collapse of 2008, still yearn to see their own plentiful list of financial miscreants brought to justice for misusing or destroying Americans’ assets. I believe there is a real danger as well that Americans will come to see China's advance on the world stage as a kind of unstoppable tidal wave of corruption, lawlessness, and “money talks” manipulation that, in the long term, could constitute a major threat to the United States. I have long called this perception of onrushing threat from China the “China Tide;” it has taken many forms in the past. The more that the economic behavior of Chinese citizens and companies operating in the world economy can be brought into line with established legal requirements, whether under PRC domestic law or applicable US, UK, or other international law, the better China’s continuing march onto the global stage will be embraced by the global community, very much including the people of the United States. The task is primarily China’s to perform, but American lawmakers and regulators have a vitally important role to play in this as well, as the recent U.S. regulatory and judicial actions relating to auditing of US-listed Chinese companies by the Chinese affiliates of US Big Four accounting firms have reaffirmed. Paul Gillis's blog is doing great work covering that ongoing and extremely significant issue.