Hong Kong Being Used As Conduit For Chinese Money Laundering

by Mary Swire, Tax-news.com, Hong Kong

18 June 2001

Experts believe that Hong Kong is being used by the mainland to launder massive amounts of illegal flight capital from the Chinese mainland, it was revealed recently. Suspicions were aroused by the leap in foreign direct investment (FDI) which has flowed into the former British colony over the last three years. The torrent of funds, officially recorded as FDI in official statistics measured over $64.3 billion last year, which is far in excess of the $38 billion invested in the mainland over the same period. In 1998, FDI in Hong Kong stood at just $14.7 billion.

Unfortunately, no-one believes that Hong Kong has suddenly become a magnet for foreign investment to rival China, and the widespread suspicion is that the island is being used to launder money which is moved offshore by tax evaders on the mainland, effectively renationalised, and then reinvested in the country, often enjoying attractive tax breaks and other incentives intended for foreign investors.

'This is not classical foreign direct investment, ' observes Robert Broadfoot, a Hong Kong based economic and political risk analyst. 'What it is, I don't know. Is it money laundering? If you don't want to use that word, what word do you use? There are not a lot of other choices.' Analysts have also noted that the Hong Kong government has been unusually subdued about what would in fact be a great triumph, if things were as strightforward as they seemed on the surface.

Another factor which makes the FDI figures potentially suspect is that although $64.3 billion flowed in last year, approximately $62.9 billion of that flowed straight back out again. The chief economist at the Hong Kong General Chamber of Commerce, Ian Perkin describes the funds as 'in and out money', adding that effectively, such capital doesn't mean anything for the local economy.

However, there are those who disagree with the diagnosis of money laundering, among them Mike Rowse, the director-general of the government's investment arm, Invest Hong Kong. Mr Rowse believes that the figures simply show that Hong Kong is fulfilling its function as a financial centre. 'The fact that the mainland is using us as its main window to the international capital markets is fabulous,' he enthused.

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