Tuesday, August 02, 2011

Tax Haven USA: China’s shortcut to Wall Street

From the Treasure Islands site:

Another superb article from Reuters, which has made some high-profile tax hires recently, in its Shell Games series. It follows an article in the same series about murky goings-on in a house in Cheyenne, Wyoming, which I blogged recently.

The article is entitled Special Report: China's shortcut to Wall Street, and looks at how Chinese companies have got themselves listed on U.S. stock exchanges, avoiding the regulatory scrutiny that normally comes with having to go through all the kerfuffle of Initial Public Offerings of shares (IPOs,) by instead buying dormant shell companies already listed on the exchanges.

The secrecy network that readers of Treasure Islands will be so familiar with, is key to the transactions - and the result, of course (of course!) has been an ocean of fraud, with some $18 billion gulled out of investors, according to one way of looking at the data.

The fiasco has sparked multiple investigations. Accusations are swirling in Washington and Beijing.

There is the U.S. hypocrisy on tax haven secrecy, again:

"The U.S. in recent years has called for much greater transparency in global business transactions. But on American shores, opaque shell companies are rife.

Now here, in a nutshell, is the basic idea of what they are trying to do:

"A so-called shell broker, anyone from a small shop to a larger firm such as Halter's [a U.S.-based key player.] Brokers acquire shells, often domiciled in a secrecy-friendly state such as Delaware, Utah or Nevada. The broker then sells the U.S. shell to an operating company seeking to trade on a U.S. exchange-a transaction . . . the acquiring firm thus becomes a publicly-traded company, with access to U.S. investors - but without the time, expense and scrutiny of a traditional initial public offering."

A crucial point, as readers of Treasure Islands (and particularly of the chapter "Ratchet") will agree, is that while IPOs are overseen by federal regulators, companies are incorporated by the individual U.S. states. And with the states, of course, there is that classic race-to-the-bottom dynamic: relax rules, turn a blind eye to crime, and the (often dirty) money will come from elsewhere.

Secrecy, of course, is crucial:

"In Chinese deals, the buyer is often a holding company based in Delaware, the British Virgin Islands or other tax haven, which in turn controls the actual operations on mainland China. This structure complicates the ability of U.S. regulators to dig into the accounts of the resulting firms."

It's a really well told story, involving a series of colourful characters, "Miami Glam" parties and featured speakers who included President George W. Bush and former Bush Treasury secretary John Snow, along with big four auditors such as KPMG, Goldman Sachs, the Carlyle Group, Hong Kong, and much more.

There are the usual audit problems:

"It became common for small audit firms far from China, often with no affiliates in the country, to sign off on books and records kept halfway around the world."

As the fall-out spreads, one of the firms involved has finally said it will de-list and take itself private.

"The method? A series of mergers--with shell companies registered in Delaware and the British Virgin Islands."

The rot in the global economy goes very, very deep. (For more on this particular aspect of the murk, see our earlier blog on Chinese companies and BVI.) Reuters has, until recently, not focused much attention on tax haven secrecy. It is heartening to see this changing.


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