Caribbean Haven Plans New Bank to Keep China Billions' Flow

(Bloomberg) -- The global campaign against money laundering combined with the Panama Papers made the Caribbean islands of sun, sand and offshore banking a near no-go zone for the world’s biggest banks.

So the British Virgin Islands has a solution: a bank to service offshore companies, many of them from China, locked out of the global banking system by HSBC Holdings Plc, Standard Chartered Plc and others. The new Bank of Asia (BVI) Ltd. is to begin operating online later this year.

“We have a captive client market of all these offshore companies that have had difficulties opening bank accounts, not for their own fault but because the legacy banks have stopped wanting them,” said Carson Wen, 64, a former acquisitions lawyer at Jones Day in Hong Kong and now founder and chairman of the bank. He plans to target the 200,000 out of 400,000-plus BVI companies that can’t get bank accounts.

The new bank aims to be a landing place for the massive flows of money leaving China and help restore a dwindling source of revenue for the BVI, which depends on incorporations for half its budget. Caribbean havens have long been used by Chinese companies seeking tax-friendly jurisdictions for overseas acquisitions, and by the wealthy looking for discreet places to park cash. 

Yet making banking transfers easier for Chinese shell companies comes with transparency issues. While there’s nothing illegal about companies that shield owners’ identities, they can be used for laundering funds, evading taxes or hiding assets.

More than $900 billion is estimated to have left China last year following a record of nearly $1 trillion in 2015, according to Bloomberg Intelligence. Chinese government crackdowns stemmed flows earlier this year, but they started picking up again in March.

The number of new BVI-incorporated companies dropped by nearly a third last year, to about 32,000, after falling since 2012. Ministries and departments were forced to reduce spending in 2017 and identify further cuts, according to government budget estimates.

The idea for Bank of Asia was cooked up over dinner in Hong Kong in 2014, when Wen met with visiting BVI Prime Minister Orlando Smith. Wen knew about offshore companies from his M&A work. Smith asked for his help, according to Wen.

Restrictive Practices

In a speech in January, Smith expressed hope that Bank of Asia “will mitigate against the restrictive banking practices that have impacted our incorporation numbers,” citing the effect of the Panama Papers’ revelations. Elise Donovan, director of the government’s BVI House Asia in Hong Kong, said in an emailed statement that the bank’s license was approved and that BVI officials were delighted.

"Three-fifths of BVI company incorporations are from Asia, and the bank’s opening means we can continue to support our endeavors in the region," she said.

The money behind the Bank of Asia comes from a Beijing-based Internet video producer and mobile-phone lottery company, V1 Group Ltd., and Wen’s Sancus Financial Holdings, according to Hong Kong exchange filings. Wen said he met V1’s chairman when structuring an acquisition more than a decade ago. The BVI government had required $100 million in paid-in capital, which Wen said he negotiated to reduce to $38 million because Bank of Asia will be online-only.

Shares of V1 fell 12 percent in Hong Kong on Monday, compared with an almost 1 percent gain of the benchmark Hang Seng Index. The fall, the biggest in two years, brings the decline to 36 percent since the announcement of V1’s investment late last year.

Bank of Asia is the first to get a BVI license in more than 20 years, Wen said. It joins six institutions with general banking licenses, including Canada’s Bank of Nova Scotia, which mostly does BVI domestic banking, according to the Financial Services Commission.

The bank’s launch has been delayed by BVI regulatory approval of its digital technology, Wen said. Bank of Asia’s know-your-customer and anti-money-laundering systems will require a customer to pass at least four layers of identity and compliance checks, said Wen. 

Global Initiative

The BVI has signed a global initiative obliging it to exchange tax and account information with other countries.

“You have seen laws being passed or updated and paper commitments being made," said Maximilian Heywood, advocacy coordinator at Transparency International in Berlin. "But what actually counts is how well they are implemented and whether the companies are properly supervised and inspected.”

China has been strictly enforcing rules for citizens converting the maximum allowable $50,000 per person a year for moving money out of the country. Wen said any transaction from China above $50,000 will attract a thorough review, including on-the-ground checks by Chinese law firms. 

“If this bank opens one wrong bank account for one wrong customer, not only will it destroy the bank, it will affect the reputation of the BVI,” Wen said.

China and Hong Kong accounted for almost a third of the offshore companies created by Mossack Fonseca, the law firm at the center of the Panama Papers leaks, including shell companies of family members of powerful Chinese officials, according to a report by the International Consortium of Investigative Journalists last year. HSBC and its affiliates were involved in setting up 15 percent of the 15,600 companies, the report found.

Boosting Compliance

HSBC has been boosting compliance after a $1.9 billion fine linked to money laundering allegations in 2012. HSBC is “quite a difficult bank now for people to open a bank account,” Chief Executive Officer Stuart Gulliver recently told shareholders in Hong Kong. An HSBC spokeswoman reiterated that the bank allows offshore accounts if clients have been thoroughly vetted or at the request of authorities. A spokeswoman for Standard Chartered declined to comment on offshore account policies.

The new bank could help return BVI registrations to five-years-ago levels, said Jonathan Clifton, group managing director of company formation services at Vistra Group in Hong Kong. Some Chinese firms have been incorporating in Hong Kong or Singapore instead, even without the tax and other advantages of the BVI, Clifton said. 

The BVI dropped from first to third in Vistra’s ranking of incorporation jurisdictions, behind the U.K. and Hong Kong, in part because of negative publicity for offshore havens, according to Clifton. Wen hopes to change that.

"We are helping China solve the problem that Chinese companies want their ability to remit money and do offshore banking," said Wen. "That’s our captive market, meaning that people have nowhere else to go. They have to come to us."

--With assistance from Paul Panckhurst

To contact the reporter on this story: Alfred Liu in Hong Kong at aliu226@bloomberg.net.

To contact the editors responsible for this story: Marcus Wright at mwright115@bloomberg.net, Sheridan Prasso