In the wake of the Panama Papers leaks last month, questions are being asked about the adequacy of Hong Kong’s regulatory regime to prevent the abuse of offshore structures. Senior practitioners and corporate service providers give CSj their views about the way forward for Hong Kong.

The top global news story of last month was the revelations of the ‘Panama Papers’ – the leak of 2.6 terabytes of data from the Panamanian law firm Mossack Fonseca. The initial news stories focused on the revelations concerning high-profile political figures, their relatives, celebrities and business figures. Then, in the ensuing weeks, the spotlight shifted. The question became what are the standard modus operandi of firms involved in the offshore industry? Closer to home, there were also questions as to what were the roles of the intermediaries and practitioners who did business with the likes of Mossack Fonseca? It is estimated that nearly a third of the business of the firm came from its offices in Hong Kong and Mainland China. On a more general footing, and again, without going into specifics of Mossack Fonseca or any case, the Panama leak has raised questions about whether Hong Kong has an effective regulatory regime in place to prevent the abuse of offshore structures and about the implications of the leak for Hong Kong’s reputation as an international financial centre.

Mossack Fonseca had a mainly ‘wholesale’ business model – that is, selling a large number of relatively low-cost offshore companies to intermediaries. Christian Heinen, Managing Director, Intertrust Greater China, points out that a global service provider like Intertrust has a different business model. ‘We provide a wide range of corporate and trust services to our clients and apply strict client acceptance procedures. We know our clients and are comfortable with them. It is not a ‘wholesale’ business model,’ he says.

Martin Crawford, CEO, Vistra Group, points out that the global offshore industry has seen a number of these shocks in the past. ‘We had the ‘Lux leaks’ a couple of years ago and we had the ‘BVI leak’ five years ago. There have been various shocks to the industry over the years, but the industry continues to grow. What you see every time it happens is there’s a bit of a shake out and a flight to quality,’ he says.

This is one reason, quite apart from the need to protect themselves against regulatory risks, that it makes good business sense to ensure stringent compliance procedures, adds Crawford. And it’s not just corporate clients that are driving the flight to quality – intermediaries such as the banks have a list of corporate service providers (CSPs) that do the right thing. ‘It’s hard to get on those lists and if you don’t behave you will be struck off the list very quickly,’ he says.

Maintaining high compliance standards comes at a cost, of course, and this can result in a competitive cost disadvantage where CSPs are competing against firms that opt for a compliance ‘lite’ approach, or who flout the rules altogether. This is one reason that tougher regulations in this area is favoured by the global players in Hong Kong. Heinen says that the tightening of the rules for financial institutions in 2012 – with the introduction of the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (AMLO) – helped to create a ‘new normal’ in Hong Kong in terms of the expected level of anti-money laundering and counter financing of terrorism (AML/CFT) due diligence.

Natalia Seng, Chief Executive Officer – China and Hong Kong of Tricor Group and an Executive Director of Tricor Services Ltd, makes a similar point, ‘If a client who wants to set up a company complains about our requests for know your customer (KYC) information, we point out that the next step for them will be to open a bank account and the bank will require the same information,’ she says.

The AMLO applies primarily to financial institutions, but the Financial Action Task Force (FATF) – the global AML/CFT regulator – has since focused its attention on the regulation of what it calls ‘Designated Non-Financial Businesses and Professions (DNFBPs), which includes CSPs. In this area, Hong Kong has a gap since there is currently no specific regulations, let alone a regulator, for CSPs. Martin Crawford believes this will inevitably be an area of focus for the HKSAR since regulations have to capture all parts of the chain. He regrets that the focus of the debate after the Panama Papers has been at the jurisdiction level, rather than about the need to regulate at the ‘point of sale’.

‘It is really where the business is won and secured that needs regulating. Already we have seen Singapore moving to bring in the licencing of CSPs because they recognise that it will be the practitioners that are going to win the business and decide what rules to play by. I believe the industry can work with regulators on ensuring effective regulation in this area,’ Crawford says.

Heinen seconds this point. ‘We don’t have a regulator in Hong Kong and that is the big difference with most of the other key jurisdictions Intertrust is active in. A regulatory body for CSPs would be able to ensure that all industry members would adhere to the same rules and recommendations. This would level the playing field for CSPs. In Hong Kong, we apply the same internal processes and procedures for client acceptance as applicable in the regulated jurisdictions. That sometimes puts us at a disadvantage against players in the market using a more flexible approach. But it’s important to us, as we treasure our reputation,’ he says.

So is it just a matter of time before the regulation of CSPs catches up with the existing regulation for financial institutions in Hong Kong? Martin Crawford is certainly of that view. ‘Banking has gone far further than corporate services have, it is inevitable that CSPs will follow that track – it’s just a question at what speed and my view is ‘bring it on’. We take a higher standard than we need to legally because, as a global company, we take a highest common denominator approach. In China, for example, we will operate to European standards.’

Mohan Datwani FCIS FCS(PE), Senior Director and Head of Technical & Research, points out that FATF, of which Hong Kong is a member jurisdiction, allows for self-regulation by the CSP industry. Pending legislations, he believes this will be the way to go to enhance not just individual CSP business practices in critical areas of KYC for client onboarding, record-keeping, ongoing training in areas like sanctions compliance, but also to comply with Hong Kong’s international obligations. FATF is looking towards specific regulations for the DNFBPs, inclusive of the CSP sector, and banks are hoping for convergence towards their standards so that they can place more reliance on CSPs.

The move towards global standards

In fact, the Panama Papers leaks could be a positive development for CSPs and for the offshore industry – accelerating the existing trend towards global best practice standards. Natalia Seng points out that the British Virgin Islands (BVI), where about half of the offshore companies set up by Mossack Fonseca were incorporated, has actually been in the forefront of implementing tougher rules in this area. For example, BVI recently brought in a requirement for all BVI companies to file a register of directors with the Companies Registry. Companies now have to disclose, not only the names of their directors, but various other information such as their date and place of birth to ensure that these individuals can be accurately and easily identified.

Similarly, later this month the EU will bring in a directive mandating a central register identifying the ultimate beneficial owners (UBOs) of companies and trusts. The Fourth EU Anti-Money Laundering Directive, to be implemented on the 5 June this year, will give EU member states until 26 June 2017 to transpose the requirements of the directive into national law. The register will be accessible to:

  • competent authorities and EU Financial Intelligence Units, without any restriction
  • obliged entities (such as banks, notaries and lawyers conducting their customer due diligence duties), and
  • a member of the public that can demonstrate a ‘legitimate interest’ (that is, in respect of money laundering, terrorist financing and the associated predicate offenses – such as corruption, tax crimes and fraud).

EU member states are authorised to deny access to obliged entities or the public to part or all of the UBO information in exceptional circumstances on a case-by-case basis, for example when there is a high risk of fraud, kidnapping or blackmailing.

‘We have seen some very real examples of threats of kidnapping,’ says Martin Crawford adding that, while the centralised UBO register is a good idea, it should not be made available to the public. ‘Any competent authority should have access to the register but don’t assume that everyone would use this information virtuously – there are certainly some bad people out there who would exploit this information for no good at all,’ he says.

Another relevant development is the implementation of the OECD’s common reporting standard (CRS) – a new standard for the automatic exchange of information between tax authorities. The CRS will help prevent schemes which shift corporate profits across borders to take advantage of lower tax rates. This so-called ‘base erosion and profit shifting’ has been a common practice but, while legal, it has led to a public outcry where companies have been shown to have made substantial profits in jurisdictions without contributing anything to their tax revenues.

Natalia Seng points out that businesses can no longer afford to ignore the reputational risks of such practices. ‘The world has changed and the only way forward for businesses is to accept that you need to be doing the right thing and you need to be transparent about your practices. As standards of transparency rise, unethical practices are eventually made public – the beneficial owners will be identified and they will not be able to hide behind corporate shareholders or corporate directors.’

She adds that in this environment companies are taking compliance much more seriously and this has reinforced the importance of having well-qualified compliance professionals. ‘There is higher demand for people who are able to handle the compliance job,’ she says, ‘and there is a need to provide ongoing training and guidance to all staff, including less experienced ones. You need people with the knowledge, experience and good judgment to be effective in this role. Compliance professionals need to be able to think logically and know how to follow up when your suspicions are raised.’

Seng also believes that the importance of AML/CFT compliance needs to be promoted from the top of the organisation. ‘The top leader has to be seen by your team to be really serious about it. It is not just a matter of saying that KYC procedures are important and that getting the right client is important, you have to personally demonstrate that you take this seriously in your own practice. This increases our operational costs and creates more work for us but if we try to ignore these obligations at some point it will blow up.’

The public relations challenge

The use of offshore entities has been common in Hong Kong – the majority of companies currently listed on the Hong Kong stock exchange are incorporated in offshore jurisdictions. Natalia Seng hopes that the Panama Papers leaks do not lead to an assumption that the use of offshore structures, whether they be companies or trusts, must be for illicit purposes and that all offshore jurisdictions are facilitating illicit practices. She cites the recent statement by Orlando Smith, BVI Premier and Minister of Finance – ‘The value of the BVI to the global economy’ (available at: – pointing out that offshore jurisdictions play a key role in the global economy.

Similarly, Martin Crawford regrets that there are many misconceptions about the nature and role of the offshore industry. ‘Any objective observer would see that the way most offshore jurisdictions are regulated is actually better than many of their onshore counterparts – that has been validated by the OECD the world bank and others. You get these embarrassing headlines about the political figures who have been named and shamed, but that has nothing to do with the jurisdictions and everything to do with the fact that some have allegedly lied on their disclosure statements,’ he says.

He adds that observers in Hong Kong have a front seat view of the positive role that such jurisdictions can play in helping emerging economies to develop. ‘Look at the role Hong Kong, BVI and the Cayman Islands have played in the development of Mainland China,’ he says. The fact that China has been able to drag itself out of poverty over the last 30 years despite having capital controls on its currency and an antiquated legal system is in large part to do with these jurisdictions. If you are General Electric and you are considering putting a billion dollar plant in the West of China, you are probably not going to do that in a Chinese legal environment but you may be very happy to do that in a Cayman Island or a BVI legal environment, because you will have legal practitioners you trust and you will have US dollar bank accounts. So these jurisdictions have played a critical role in facilitating global investment in China.’

What then will be the implications of the Panama leak for Hong Kong’s reputation as an international financial centre? Questions about the adequacy of Hong Kong’s AML/CFT defences have been raised before. In particular at the time of the last evaluation of Hong Kong by FATF in 2006, there was some doubt over whether Hong Kong/China would make it into the white list, the black list or the grey list in terms of its compliance with global AML/CFT standards.

Crawford believes that this is one reason why Hong Kong needs to ensure its regulation of CSPs is up to global standards. ‘Hong Kong has been a bit unique. It has been very easy to set up businesses and provide services, but I think there’s growing recognition of the need to regulate CSPs because it only takes one bad apple to upset the whole industry. The lion’s share of the industry is doing the right thing.’


Lux leaks – in 2014 information about tax avoidance deals between multinational firms and the Luxembourg government was made public by the International Consortium of Investigative Journalists.

Base erosion and profit shifting (BEPS) – BEPS schemes shift profits across borders to take advantage of tax rates that are lower than in the country where the profit is made. The OECD recently launched an ‘Action Plan’ designed, among other things, to ensure that taxable profits can’t be artificially shifted away from countries where the value is created, and it will oblige taxpayers to report any aggressive tax planning arrangements.

Centralised UBO register – this is a register of ultimate beneficiary owners (UBOs) of legal entities such as companies and trusts. As mentioned in the main article, an EU directive to be implemented on 5 June this year will mandate such a register in the EU.

The OECD’s common reporting standard (CRS) – this is a new standard for the automatic exchange of information between tax authorities endorsed by some 50 countries including China. CRS adopters agree to share information on residents’ assets and incomes automatically in conformation with the standard. This agreement is informally referred to as GATCA (the global version of the US Foreign Account Tax Compliance Act which requires non-US financial institutions to report the assets and identities of US persons to the US Department of the Treasury). By the end of 2016, CRS adopters must have completed due diligence procedures for identifying high-value, pre-existing individual accounts.