In the weeks after Russia’s invasion of Ukraine, British lawmakers revived and rushed through a long-delayed economic crime bill to target Russian assets, President Joe Biden said the United States was “coming for your ill-begotten gains,” and authorities in France and Italy seized yachts linked to Kremlin allies.
As Western governments crack down on dirty money – or at least make a show of doing so – the world’s kleptocrats and oligarchs are looking for new places to store their wealth.
“In the last few months, there’s been an incredible re-routing of capital to new places where people can stash their money,” said Tom Mayne, an expert in corruption studies at the London-based think tank Chatham House. “Hong Kong is a great destination for these oligarchs.”
While the former British colony – and pioneer of offshore finance – is not the only place the suddenly displaced Russian rich are eyeing, it has an edge over rivals such as Dubai and Caribbean tax havens.
“Oligarchs have historically loved London because of what it brings to the table not just in terms of financial services, but also luxury properties and private schools for their children,” Mr. Mayne said. Hong Kong has these things in abundance.
The city has long been attractive for Chinese oligarchs, and while that has changed somewhat in recent years because of President Xi Jinping’s anticorruption crackdown and Beijing’s growing control, for those with less to fear from the Chinese government, it may be the ideal bolt-hole.
Beijing’s influence over Hong Kong could even be a plus for those seeking to shield their assets. The Chinese and Hong Kong governments – targets and critics of Western sanctions themselves – are disinclined to help foreign countries punish those responsible for the war in Ukraine, just as they have allegedly turned a blind eye to sanctioned North Korean entities operating here.
A spokesperson for the Hong Kong government said the city implements sanctions of the United Nations Security Council to fulfill its international obligations.
The sanctions of other jurisdictions are outside the scope of the government’s international legal duties, the spokesperson added.
David Asher, a former U.S. State Department official and sanctions expert, said there is another reason Hong Kong is an “obvious alternative” to London as a hub for oligarchs: the Clearing House Automated Transfer System (CHATS).
Set up in 2000, the part-government-owned CHATS processes billions of U.S. dollars, without the transactions necessarily touching the U.S. banking system. During extradition proceedings in Vancouver against Huawei executive Meng Wanzhou, who was accused of breaching U.S. sanctions against Iran, two experts testified that had the transactions been processed through CHATS, the entire case might have been avoided.
“[Hong Kong bankers] quite flagrantly announce they can take your dollars and clear them in pristine bank dollars and it’ll settle without having to go through New York,” Mr. Asher said. “It’s being done by a large number of interesting and frankly disturbing individuals around the world.”
And if you need a local company to help handle some of those transactions, or to process the purchase of a luxury property, Hong Kong happens to be one of the easiest places to register a company and keep its true owners and purpose secret.
Opening a company in Hong Kong costs less than C$250 and requires just a director and a company secretary, with only the latter needing to be based in the city. Thousands of firms offer secretarial services, and can also provide a Hong Kong address for the new company, with some offices registered to hundreds of different businesses, something the U.S. Treasury regards as a “red flag for shell corporation activity.”
While not necessarily an indication of criminality, “we know that the majority of shell companies aren’t legitimate businesses and aren’t involved in any business activities, they’re simply used to move money around,” Mr. Mayne said.
Some Russian oligarchs have already seen the advantages of operating in Hong Kong. The United States has sanctioned entities in the city linked to Oleg Deripaska, a billionaire close to Russian President Vladimir Putin, and Yevgeny Prigozhin, an oligarch accused of funding the Internet Research Agency troll farm accused of interfering in the 2016 U.S. election, and the mercenary Wagner Group.
According to the U.S. State Department, between 2018 and 2019, three Hong Kong companies controlled by Mr. Prigozhin “facilitated more than 100 transactions exceeding $7.5-million.” Corporate records list another sanctioned individual, Igor Lavrenkov, as director of those companies, while administrative services were provided by Hong Kong Easy Secretarial Ltd., which did not respond to a request for comment. All the companies appear to have ceased operations since being sanctioned.
Mr. Deripaska is a former director of the Hong Kong-listed aluminum giant Rusal. When the company was sanctioned by the U.S. along with other Russian entities in 2018, he was forced to step down, although he remains a major shareholder. Rusal was removed from a sanctions list the next year, but the Financial Times has reported that U.S. bankers have avoided trading in the stock, which has lost billions in value since the war in Ukraine began.
Having a company based in Hong Kong can be advantageous, because like London – and unlike tax havens such as the British Virgin Islands – its position as a global financial centre can provide a certain veneer of respectability. On its website, Hong Kong Easy Secretarial Ltd. notes that customers “use Hong Kong’s international image and status to enhance the company’s own competitiveness.”
After the Panama Papers were published in 2016 – exposing Hong Kong as a global hub for shell companies – the city moved to beef up measures against money laundering and corporate disclosure laws. This included introducing a Significant Controllers Register, which requires companies to maintain a list of beneficial owners that must “be open for inspection by law enforcement officers upon demand,” although not the public.
A company secretary who has worked in the industry for eight years and represented hundreds of companies described the new register as a “box ticking exercise by the government.”
The Globe and Mail is not identifying the person so they can speak about sensitive matters.
“It’s good for us because we charge a fee for it, but from a regulatory perspective it’s pretty useless,” they said, pointing out that even banks can’t request to see the register, and its accuracy largely depends on the honesty of the person maintaining it.
The company secretary said that while it has got considerably tougher to open a bank account in recent years due to financial institutions’ own internal checks, people can still set up a company or buy property without much government oversight.
Under Hong Kong law, there is a statutory obligation to report any suspicion that property involved in a deal represents proceeds of an indictable offence. But statistics from Hong Kong’s Joint Financial Intelligence Unit (JFIU) show some sectors are more stringent than others in actually doing so: Of the nearly 57,000 suspicious transaction reports JFIU received last year, the vast majority – more than 80 per cent – were submitted by banks.
Just 860 reports, 1.5 per cent of the total, were filed by real estate agencies, lawyers, accountants, and trust and company service providers combined.
Even if those sectors were filing more reports, it isn’t clear they would result in convictions. The JFIU employs about 100 people, compared to the thousands working for the police National Security Department, meaning it is difficult to make a dent in such activities. In 2021, fewer than 90 people were convicted of money laundering.
That isn’t to say such charges are unheard of. The far better resourced national security police have recently pursued a number of money laundering cases – against government critics.
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