The first big China investigative story of the year has come from the International Consortium of Investigative Journalists, which on Tuesday published, in tandem with several Western news organizations, a detailed look at the widespread use of offshore companies and tax havens by Chinese businesspeople and relatives of Communist Party leaders.
The investigation into Chinese activity primarily in the British Virgin Islands originated with a trove of financial documents leaked to the consortium, a non-profit group based in Washington. On Wednesday, the group published in both English and Chinese its second big story on China, a case study of a former Chinese oil industry executive who set up dozens of shell companies in the Cayman Islands, Bermuda and the British Virgin Islands. The report also said that the leaked documents show China’s three large state-owned oil companies — the biggest players in an industry rife with corruption — and executives at those enterprises set up dozens of offshore shell companies between 1995 and 2008.
The case study lays out how Sun Tiangang, the former executive, made a fortune as an entrepreneur in the oil industry before having his main company and its assets seized by former employees allied with powerful state interests. The reporters, Alexa Olesen and Michael Hudson, based their narrative on interviews with Mr. Sun and on a lawsuit he filed last year in a United States district court in Los Angeles against Sinopec, one of the three giant Chinese state-owned oil enterprises and the fourth-biggest company in the world.
In the lawsuit, Mr. Sun accused Sinopec of working with police officials to illegally imprison him for five years, starting in 2005, and strip him of a company in the British Virgin Islands he had set up in connection to a profitable oil pipeline contract in the western Chinese region of Xinjiang. Even after Mr. Sun was released from jail in 2010, the lawsuit said, he was kept under a form of house arrest for two more years.
In the lawsuit, Mr. Sun accused Sinopec of working with police officials to illegally imprison him for five years, starting in 2005, and strip him of a company in the British Virgin Islands he had set up in connection to a profitable oil pipeline contract in the western Chinese region of Xinjiang. Even after Mr. Sun was released from jail in 2010, the lawsuit said, he was kept under a form of house arrest for two more years.
The lawsuit said Sinopec did not want to honor the 20-year contract and had built its own pipeline to move oil from the Tahe field in Xinjiang. Sinopec did not respond to repeated requests for comment from the reporters. Lawyers for the defendant have asked the U.S. court to dismiss the lawsuit because it is “a quintessentially foreign dispute,” according to a court filing.
Mr. Sun’s colorful tale brings into the spotlight many questionable practices common to business in China. One is the use of so-called reverse mergers to get Chinese companies listed on stock exchanges, but in a way that masks their identity and core business. This practice of backdoor listings has come under growing scrutiny by American officials. Mr. Sun got his oil pipeline joint venture onto the Hong Kong Stock Exchange by folding the British Virgin Islands company he had started, which was the majority shareholder in the oil pipeline business, into a food company that was listed on the exchange in 2001. Mr. Sun then changed the listed company’s name to GeoMaxima Holdings and spun off the food business.
The article explained that this was a way around what Mr. Sun regarded as onerous restrictions. At the time, companies registered in the British Virgin Islands could not list in Hong Kong, nor could a mainland-registered company unless it had approval from officials in Beijing, which was difficult to secure.
The overview published on Tuesday of Chinese use of offshore shell companies said that there are legitimate reasons to set up such companies. The practice started becoming popular among Chinese businesspeople in the 1990s because the executives wanted, among other things, to get around strict capital controls and investment laws that favored foreign companies over domestic ones.
But there are more shadowy motivations too. The companies are tax shelters, and they can also hide the identities of important stakeholders. Mr. Sun said that setting up a company in the British Virgin Islands costs just a few hundred dollars and “gives very strong cover” by allowing the real owner to stay off stage.
Forty percent of offshore business in the British Virgin Islands comes from China and other Asian nations, the report said, citing officials in the islands. Among the clients are executives at the three Chinese oil giants: the China Petroleum and Chemical Corporation, or Sinopec; the China National Petroleum Corporation, or PetroChina; and the China National Offshore Oil Company, or Cnooc. The report said there were no signs of illegal activity by these executives or the oil enterprises, but the secretive nature of the offshore companies makes it difficult to pinpoint why the companies were set up.
Executives at PetroChina have been detained as part of a wide-ranging corruption investigation by Communist Party officials. Party insiders say the main target of the investigation is Zhou Yongkang, the former member of the ruling Politburo Standing Committee who worked in the oil industry and, later, oversaw the domestic security agencies.
Two smaller companies implicated in the PetroChina investigation have ties to offshore shell companies that show up in the leaked documents.
Hua Bangsong, the founder of one of the two implicated companies, Wison Engineering Services, listed in Hong Kong, incorporated three Wison-related companies in the British Virgin Islands in 2003. Wison suspended its public trading in September and announced that Chinese officials had seized some books and records and had frozen some of its bank accounts as part of the investigation. It has said Mr. Hua is cooperating with officials.
The other company implicated in the investigation that has links to a British Virgin Islands company is Zhongxu Investment Co. Ltd., which manages gas stations for PetroChina and runs hydropower plants. Caixin, a respected Chinese news magazine, reported that Wu Bing, the head of Zhongxu, was taken away from the Beijing West Railway Station on Aug. 1 and has not been seen since.
Source: Sinosphere
