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Secrecy for Sale: Inside the Global Offshore Money Maze
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China’s Scandal-Torn Oil Industry Embraces Tax Havens
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ICIJ's records show extensive links between offshore centers and China's big national oil companies including Sinopec. Photo: AP
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January 22, 2014, 4:00 pm
Key Findings
Government officials and their families and associates in China, Azerbaijan, Russia, Canada, Pakistan, the Philippines, Thailand, Mongolia and other countries have embraced the use of covert companies and bank accounts.
The mega-rich use complex offshore structures to own mansions, yachts, art masterpieces and other assets, gaining tax advantages and anonymity not available to average people.
Many of the world’s top’s banks – including UBS, Credit Suisse and Deutsche Bank – have aggressively worked to provide their customers with secrecy-cloaked companies in the British Virgin Islands and other offshore hideaways.
A well-paid industry of accountants, middlemen and other operatives has helped offshore patrons shroud their identities and business interests, providing shelter in many cases to money laundering or other misconduct.
Ponzi schemers and other large-scale fraudsters routinely use offshore havens to pull off their shell games and move their ill-gotten gains.
Leaked Records Reveal Offshore Holdings of China’s Elite
China: Who Uses Offshore Tax Havens
机密文件披露中国精英的海外资产
How we did Offshore Leaks China
Secret Files Expose Offshore’s Global Impact
Video: Tax Havens 101
Map: The Offshore Leaks Revelations
The goals, team members, and media partners of this multi-year project.
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One man’s legal battle against oil giant highlights role that offshore murk plays in China’s economy.
Note: A Chinese version of this story is available here.
As China’s go-go economy rose, Sun Tiangang played the offshore game like a master.
He set up dozens of companies, he says, in the Cayman Islands, Bermuda and the British Virgin Islands as he made a fortune in hotels, electronics, food packaging and, eventually, as an oil baron.
He liked the ease of doing business – and the tax savings and secrecy – that working through offshore refuges provided. A BVI company, Sun said, costs just a few hundred dollars to set up and “gives very strong cover” – allowing the real owner to stay behind scenes while front men and women serve as the official face of the company.
“If there’s a problem you can just close the company, walk away and deny you ever had anything to do with it,” Sun said in an interview. “Many people on the mainland do this sort of thing.”
But there came a time when Sun’s embrace of Caribbean havens and offshore secrecy backfired.
His offshore holdings, he claims, became one of the tools his enemies used to steal much of his business empire, erasing his stake in a multi-billion-dollar oil pipeline in Xinjiang in far western China and forcing him to turn to U.S. courts to seek justice.
Sun claims in a lawsuit in U.S. District Court in Los Angeles that the Chinese oil giant Sinopec colluded with Chinese police to illegally detain him for five years and, while he was in prison, connived with his employees to wrest away an offshore firm that controlled much of his oil empire.
Sinopec – the fourth-largest company in the world behind Royal Dutch Shell, Wal-Mart and Exxon Mobil— has filed a motion to dismiss the suit, scheduled to be heard in March. It argues that the proper jurisdiction for the case is China rather than the U.S. and that, even if events had happened as Sun alleged, they would not amount to the extortion, kidnapping and torture that he claims.
Sinopec did not respond to repeated requests for comment on the case.
The merits of Sun’s claims are still being fought over in court. But the story of his adventures and misadventures in the offshore world shines new light on the murky role that tax havens such as the British Virgin Islands play in China’s marketplace. It also illustrates the offshore world’s links to the proliferation of corruption cases in the oil business and other industries inside the world’s second-largest economic superpower.
Doing business through offshore centers has become standard procedure among Chinese companies and entrepreneurs. Offshore havens in turn also come up frequently in corruption cases involving Chinese businesses.
An internal government report released by the Bank of China revealed that employees of state-owned companies and other public officials had spirited more than $120 billion away from China since the mid-1990s. A sizeable portion of the money went through the British Virgin Islands and other offshore hideaways, the report said.
Secret records uncovered by the International Consortium of Investigative Journalists show that China’s oil industry, which has been shaken by a series of corruption scandals, is no stranger to tax havens.
The records, obtained by ICIJ as part its “Offshore Leaks” investigation, show extensive links between offshore centers and China’s three big national oil companies: China Petroleum and Chemical Corp., or Sinopec; China National Petroleum Corporation, or PetroChina; and China National Offshore Oil Company, or CNOOC. The oil companies and their executives set up dozens of companies in the British Virgin Islands, Cook Islands and other offshore jurisdictions between 1995 and 2008, the records show.
Some of the offshore companies have been disclosed in the annual reports of the listed arms of the three oil giants. But many do not appear to have been publicly reported. It’s not clear whether they were reported internally to the Chinese government, a requirement for state-owned firms.
There is no evidence that the oil companies or their executives were engaged in illegal conduct, but the secrecy of the offshore world makes it unclear what the offshore firms were used for. It is also unclear in some cases whether the overseas entities controlled by oil executives were established on behalf of their employers or as personal holdings.
The companies did not respond to questions from ICIJ.
The offshore records obtained by ICIJ also include offshore holdings linked to Sun Tiangang’s legal claims against Sinopec. The records indicate that while Sun was in jail, the wife of one of his employees changed the name of a key offshore company involved in the oil pipeline deal.
Sun’s lawsuit alleges that the employee and his wife, top Sinopec officials, and several Chinese law enforcement officials, “devised a scheme to effectively crush Mr. Sun’s business empire.”
Border crossing
It was August 2005 and Sun Tiangang had no idea his life was about to be derailed. He was making a routine dash across from Hong Kong, where he lived, to his company’s office in nearby Shenzhen.
Oil executive Sun Tiangang is suing Sinopec. Photo: Michal Czerwonka
Police stopped him just past the border. He claims that all the items in his possession that day – a cream-colored Mercedes-Benz, about $40,000 in cash earmarked for employee salaries, two mobile phones, a leather belt, shoes and clothes – were confiscated by uniformed Chinese police, never to be seen again.
Two days later, still in the dark about the allegations against him, Sun says he was escorted by six officers on a commercial flight to Changchun in China’s far northeast. He sat in the back row, his legs shackled as other passengers craned their necks to look at him.
Sun remained in a provincial jail for the next five years as prosecutors tried and failed twice to convict him of bribery and embezzlement, according to his lawsuit.
Although Sun’s lawsuit claims that his employees sold off and divvied up a large portion of his assets, including the pipeline company and his home in Hong Kong, Sun appears to have salvaged some of his fortune. He arrived for a recent interview at the office of his lawyer in Pasadena, Calif., in a white Mercedes-Benz. Public records show that he spent $250,000 in the first nine months of 2013 lobbying the U.S. government to press China on human rights.
An energetic businessman with a soft handshake and an infectious laugh, Sun’s first job was as a tap water tester in northeast China’s frigid Shenyang, where he grew up, his salary maxing out at around $5 a month. Hungry for profit and challenge, he went to work as a liaison for a Japanese company, then quickly scaled up again, investing in the Luohu Hotel in Shenzhen.
“I did whatever came along. I was ‘crossing the river by feeling for stones,’” said Sun, citing a phrase that describes finding one’s way by trial and error.
It was natural for Sun to use offshore companies as his empire grew. China was booming but the mainland’s corporate tax structure, strict capital controls and other factors made incorporating offshore appealing to many up-and-coming millionaires. The offshore business route came with more flexible ownership structures, ease of international capital exchange and the ability to list on an overseas stock exchange.
For Sun, using offshore companies also gave him room to wheel and deal. When he engineered what is known as a “reverse merger” to list his oil pipeline joint venture in 2001, he didn’t have to worry about too much regulatory scrutiny.
He simply folded the Xinjiang pipeline’s controlling shareholder, a company set up in the BVI, into PNF Food Holdings Limited, which was listed on the Hong Kong stock exchange. Sun had recently taken a 60 percent stake in PNF. Then he changed PNF’s name to GeoMaxima (HK) Holdings Limited and spun off the food business.
“This way is very easy, very convenient,” Sun says. “On the other hand, if you want to list a Hong Kong-registered company, you’ll end up with a very, very thorough audit.”
At the time, BVI companies couldn’t list directly in Hong Kong. Neither could mainland-registered companies unless they had Beijing’s approval, which was extremely difficult to get.
Sun said GeoMaxima’s lawyers and accountants “devised this maneuver so we could get around the legal hurdles.”
The Xinjiang venture was Sun’s biggest gamble and his biggest win. But maintaining success as an independent player in China’s state-dominated oil and gas industry was about to prove impossible.
Secret Power
The oil industry in China is an exclusive and secretive world where money and politics are closely entwined.
Both Sinopec and PetroChina ranked in the top five on the Fortune 2013 list of biggest companies in the world. CNOOC, which focuses on undersea drilling, is China’s third largest national oil company.
Their monopoly hold over billions in assets has given oil and gas a reputation as one of the most corrupt of China’s state-dominated sectors.
In 2009 Chen Tonghai, the chairman of Sinopec when Sun was first trying to sue the company over the pipeline dispute, was given a suspended death sentence for taking more than $28 million in bribes.
Many senior government leaders have come up through the oil business and maintain close ties to it. Former national security czar Zhou Yongkang spent 30 years in the oil industry before becoming one of the nine members of the Politburo Standing Committee, the top policy-making body in China, in 2007.
Retired since last year from the Politburo, Zhou is often referred to as the “Dick Cheney” of China due to his influence in the domestic oil industry. A widening corruption crackdown launched last year has targeted many of Zhou’s colleagues and protégés from his days at CNPC, the parent of Hong Kong-listed PetroChina Co.
At least five executives from PetroChina have been dismissed, including former vice president Li Hualin, who once served as Zhou’s private secretary. The company’s former chairman, Jiang Jiemin, who last year took a post overseeing the agency in charge of state assets, has also been removed from his government position. The heads of at least two PetroChina affiliates have been detained for questioning.
The investigation of PetroChina still appears to be in its early stages, and no information has come out yet about whether offshore entities are involved in the alleged corruption.
However, havens such as the British Virgin Islands have played a role in previously-documented corruption in state-owned sectors. The report the Bank of China released in 2011 said top executives at publicly-traded companies and state-owned enterprises were moving into the British Virgin Islands and other havens by, for example, creating fake invoices for goods that were never purchased.
The report said corrupt executives were getting increasingly sophisticated in their use of offshore financial centers.
“Previously, these type of offshore companies were generally set up by corporate management together with a foreign partner, but now many mainland enterprises or managers already have their own ‘handbag companies,’ ” or shell companies, the report said.
The BVI Connection
The British Virgin Islands – a thinly populated archipelago 8,400 miles from Beijing – are a favorite destination for Chinese who want to set up offshore companies. Forty percent of the BVI’s offshore business comes from China and other Asian nations, according to BVI authorities.The British Virgin Islands are a top offshore destination for the Chinese. Photo: Alex Shprintsen
“When a businessman in China needs an offshore company, he just says ‘I want a BVI,’ ” says Martin Kenney, a BVI lawyer who specializes in untangling bankruptcy and fraud cases involving offshore entities.
Among the Chinese oil executives with British Virgin Islands companies listed among ICIJ’s data is Zhang Bowen, who took over as chairman of CNPC subsidiary Kunlun Energy Limited in December. Zhang was the only director and shareholder of Adept Act Enterprises Limited, which was active between 2006 and 2008.
Yang Hua, chief executive of CNOOC, owned Garland International Trading Company Limited, a BVI entity that similarly listed only him as director and shareholder. Yang’s colleague Fang Zhi, vice president of CNOOC International, was the director and shareholder of Xin Yue Lianping Company Limited and Xin Yue (BVI) Company Limited.
Kunlun Energy and PetroChina did not respond to a request for comment about Zhang’s records in the ICIJ database. CNOOC did not reply to queries about Yang and Fang.
Meanwhile, two of the smaller affiliated companies linked to the PetroChina corruption investigation have offshore companies that show up in the secret records ICIJ obtained. Hong Kong-listed Wison Engineering Services, a PetroChina supplier, suspended its share trading in September and announced that Chinese authorities had seized some of its books and records and frozen some of its bank accounts as part of the probe. The company said its chairman and founder Hua Bangsong was cooperating with authorities. ICIJ records show Hua incorporated three Wison-related companies in the BVI in 2003 with help from Commonwealth Trust Limited, a BVI-based offshore services provider.
One of the those BVI companies, Wison Group Holding Limited, is identified in annual reports as the ultimate holding company of Hua’s Hong Kong-listed Wison Engineering Services. The purpose of the other two was not immediately clear.
In a statement emailed to ICIJ this month, Wison Engineering said it had nothing to add beyond what was already in its annual reports and other disclosure documents.
Also implicated is Zhongxu Investment Co. Ltd, a firm that manages gas stations for CNPC. Zhongxu head Wu Bing was detained in August as part of the investigation. The Chinese magazine Caixinreported that the shareholders of Zhongxu’s Beijing arm included retired military officer Zhao Ming. Zhao appears in the ICIJ records, having incorporated Eagle Energy (International) Limited in the BVI in 2007 though it’s not clear what the company was used for.
A letter delivered to Zhao’s last-known address was returned unopened.
Sun’s Battle
On the Xinjiang project, Sun was partnering with a new state-owned oil venture, China National Star Petroleum Corporation. National Star had secured government permission to drill for oil in Xinjiang’s Tahe Oilfield. Sun was brought in to build and run the pipeline, a risky venture as the field was then considered a dud. Competitor CNPC had given up on it after six years with no success.
“That place was tough, nothing but desert all around,” says Sun. “The only reason I got the opportunity was because you had to gnaw the bone to get anything out of it.”
Still, in its first year of operation, the pipeline made some $7 million in profit, according to the lawsuit Sun filed in U.S. federal court in Los Angeles.
In 2001, Sun set up the BVI company to help structure the pipeline listing he hoped would make him an even bigger player in the oil business. Sun wanted GeoMaxima to eventually acquire the BVI company but Hong Kong stock exchange rules prevented him from owning both, so he says he put the BVI company in the name of an associate.
Meanwhile, Sinopec took over National Star and became his new business partner in the Xinjiang project. Trouble soon followed. Though Sun’s company had a 20-year contract to serve as the exclusive pipeline for the Tahe field, Sinopec wouldn’t honor the deal, his lawsuit says. It says Sinopec built its own pipeline and began diverting oil away from Sun’s.
Sun filed a lawsuit, first in Hong Kong and then in Beijing. During negotiations at Sinopec headquarters, Sun says, a lawyer for the oil giant pointed at Sun’s nose and said: “You better think this through clearly. You’re going to take a Chinese Communist Party enterprise to a Chinese Communist Party court.… Can you possibly win?”
A few months later, in August 2005, Sun was detained at the Shenzhen border, the lawsuit says.
Within months of his detention, the GeoMaxima board announced that it was withdrawing the lawsuit filed in Beijing against Sinopec. Over the next few years, he says, his assets were divvied up by his former employees. His Los Angeles lawsuit claims they forged documents to sell his real estate and auction off other assets.
The offshore company that held a majority stake in Sun’s listed pipeline firm was relatively easy to raid. It was held by an associate – though Sun recently claimed that he couldn’t remember who the proxy was. He said he was certain, however, that prior to his detention, it wasn’t Xing Xiaojing, the wife of one of Sun’s employee Zhang Yuping. Records obtained by ICIJ show Xing did at some point become director and shareholder of the company though the paperwork provides two conflicting dates for the appointments: February 26, 2001 and August 31, 2005. The files also show that Xing changed the BVI company’s name to Hong Chang China Limited in 2007.
Though records show Hong Chang China Limited is still active, Sun has no access to it.
The charges eventually lodged against Sun in a 2007 indictment were contract fraud, false capital contributions, embezzlement and bribery, but the indictment was later withdrawn.
A second indictment accusing him of embezzlement and bribery went to trial in 2009 but was adjourned without an immediate verdict. Such back-to-back failed cases are unusual in the Chinese justice system but it’s not clear why prosecutors were unable to secure a conviction.
Sun was released from the detention center in late 2010 while his case was still in limbo – six weeks after his company’s vice manager for China, Shi Linhua, died of a cerebral hemorrhage in a detention center near to where Sun was being held.
Sun spent another two years in “soft detention” – round-the-clock surveillance in a rented Beijing apartment with no phone, restricted visits from his wife and only occasional outings allowed, always with authorities escorting him. The second indictment was formally dropped and Sun became a free man in March 2012.
Meanwhile, Sun’s efforts to track down the woman who took over what he says was his BVI company, Xing, have failed. Records show that she owns a $1.8 million apartment on the 20th floor of a luxury high rise in Hong Kong with views of the ferries crisscrossing Belcher Bay.
No one was home when a reporter recently came to visit and neighbors said they weren’t sure who lived there. A letter left in the mailbox did not get a reply.
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