Official Charter to Hide Sleaze
February 3, 2013
The government's attempt to shield the identity of company directors under the guise of protecting privacy is not merely an invitation to fraud and corruption; it reveals a basic misunderstanding of the purpose of a company.
Quite why the privacy commissioner supports this denial of information is not clear. Is it because he has been leaned on by officials and mainland interests or because, as a lifetime bureaucrat, he has little concept of what distinguishes a company from an individual? In that connection, one must also ask why so many positions of this sort are handed out to lifetime civil servants rather than to respected individuals from the private sector, academia or the judiciary.
Let us get one thing absolutely straight, Mr Commissioner. All limited liability companies are businesses, whether or not they are engaged in trade, manufacturing, services, or simply exist to hold assets. Nor are they just businesses. They are ones accorded special privileges unavailable to private individuals. First, they almost all have limited liability, unlike either a person or a partnership. If they fail and are liquidated, their shareholders' liability is limited to their subscribed capital.
Secondly, in the case of Hong Kong and many other jurisdictions, they enjoy tax advantages over individuals. Thus, a company that is simply a vehicle for owning, for example, a building or just one apartment can be sold to another company without payment of the stamp duty on property transactions that applies to people. Other advantages also accrue, unavailable to salaried individuals.
In return for these privileges, it is essential that the directors and management of these entities be subject to a minimum level of scrutiny, at the very least their real identity and a real place where they can be located. This has no connection with personal issues such as their sex lives, private e-mails or eating habits. It is part of a bargain with the community at large whereby limited liability exists to encourage entrepreneurship, business formation, and risk-taking both by the shareholders and those who lend to them or trade with them.
That the changes in the Companies Ordinance to limit access to this information have got this far is a major indictment not just of the government and the privacy commission but of the politician-lawyers in the Legislative Council. Where were the many barristers and solicitor legislators from the Democratic and Civic parties? Too busy with meaningless gestures of protest than addressing real threats to freedom of information?
Nor is it sufficient for the government to be shifting its ground, reportedly to allow select people - possibly including journalists, in addition to official entities such as the Securities and Futures Commission and Monetary Authority - access to real identities. Important though access is for these groups, it is far from sufficient. Leaving government officials in control over access is also dangerous. Government agencies are seldom prone to ask questions.
I recollect that two of the biggest fraud cases ever seen in Hong Kong went on under the noses of the banking and securities authorities and numerous bankers and auditors, only to be uncovered by journalists. One was the dubious links between Overseas Trust Bank and Ka Wah Bank with similar outfits in Malaysia and Thailand, revealed by the Far Eastern Economic Review . Then there was the mid-1980s Carrian affair, a giant Ponzi scheme supported by well- known bankers and auditors, which only collapsed when the Asian Wall Street Journal did some digging.
Nor are publications alone in uncovering frauds. So do individuals, insider whistle-blowers and others, who would have no access rights if these are to be at the whim of bureaucrats eager to keep embarrassing facts under wraps.
Now banks are being leaned on to stop the laundering of money. But how can they track it without armies of investigators if companies in Hong Kong, let alone other jurisdictions, can hide directors' real identities? Laundering is already so simple. Last week, it was revealed that a young man laundered HK$13 billion through Chiyu Banking Corp before he was caught; the fall guy for a mega rich mainland "Uncle". Imagine how much easier laundering will now get.
If Hong Kong wants to be seen as an offshore island that exists primarily for laundering money and hiding corporate identities, this is the way to go. It will be approved of by suspiciously rich mainlanders, not a few Hong Kong officials and US passport holders trying to avoid taxes. But it would represent a giant step backwards for a Hong Kong that can succeed as a financial centre for China, Asia and the world only if it offers standards and freedoms unavailable elsewhere.
The corollary of low taxes, freedom of movement of money, high-quality stock exchange listings, transparent markets for financial products, trusted auditors, honest judges and the like is freedom of information on those who direct its companies.
Of course, individuals can always hide in the Cayman Islands or Nauru, but those companies that use the anonymity available in such places are rightly viewed with disdain. Is that Hong Kong's future?