March 5 (Bloomberg) -- Late last year, staff at a shuttered Hong Kong beauty salon turned to company filings to track down the boss they say vanished owing them HK$900,000 ($116,000).
Man Lee, 32, said she and five colleagues got some money back after protesting at another office they linked to their former employer.
Now, Hong Kong’s government wants to restrict public access to records of corporate directors. The move may make it harder for workers like Man to track down runaway bosses -- and erode the city’s reputation by making it easier to launder money and cheat on taxes, according to lawyers, corporate transparency advocates and the former head of the Companies Registry.
“The less transparent a corporate entity is, then the greater the scope for criminal malpractice,” said Gordon Jones, Hong Kong’s registrar of companies from 1993 to 2007. “The free flow of information is Hong Kong’s big competitive advantage.”
Hong Kong, a part of China with its own legal system and currency, has Asia's second-largest stock market by value, data compiled by Bloomberg show. It’s also the top destination for cash outflows from the mainland, totaling $525.6 billion by the end of 2011, according to official trade data. Greater secrecy increases the temptation for companies to launder assets through the former British colony, according to Jones.
Small businesses, due diligence firms and journalists are among those opposing the legal change to be put before lawmakers in May. The proposal will prevent the public accessing directors’ full identification numbers and home addresses.
The new rules try to weigh public access to information against the privacy of directors, Shirley Wong, a spokeswoman for the Financial Services and the Treasury Bureau, said in a written response to questions. The change won’t hinder efforts to thwart criminal activities because law enforcement agencies will be exempt from the provision, she said.
Hong Kong’s anti-money laundering agency, the Joint Financial Intelligence Unit, last year received 23,282 reports of suspicious transactions from banks, accounting firms and others, double the number in 2003. At the same time, the city’s fight against money laundering is being hampered by a drain of law enforcement officers to higher paying jobs strengthening internal controls and compliance at banks and big companies, according to a Feb. 17 report by the South China Morning Post.
Reducing transparency will only make Hong Kong more attractive to the wrong kind of investor, said Fred McMahon, who runs the Fraser Institute’s global economic freedom project, which has ranked Hong Kong No.1 every year since the study began in 1996.
“There’s already considerable lack of transparency in many Asian markets, which is why Hong Kong has succeeded,” McMahon said by telephone from Toronto. “If it just becomes another Cayman Islands or Lichtenstein, then real investors are going to shy away, shady investors are going to come in, and Hong Kong’s status as a financial center will decline.”
There were 3.5 million company searches done in 2012, up from 3.25 million in 2011 and 3.1 million in 2010, according to the registry. The database has details for more than 1 million directors, many connected to business in mainland China where corporate disclosure is more limited.
The proposed rules are pitting workers like Man against some of the city’s most powerful tycoons, including Li Ka-shing. Hong Kong’s richest man, with a fortune of $28.8 billion according to the Bloomberg Billionaires Index, is among business leaders who back increased secrecy in the name of safeguarding privacy.
Six companies controlled by Li, with a combined market value of more than $65 billion, supported restricted access when the government held public consultations in 2009 and 2010. They also asked for old records to be expunged. Jeremy Lau, a spokesman for Li’s Hutchison Whampoa Ltd., said the company had no comment to add to its submissions.
Directors risk identity theft and harassment because their ID numbers and residential addresses can be found, and the information spread quickly through the Internet, said Angelina Kwan, former director of enforcement at Hong Kong’s market regulator, the Securities & Futures Commission.
“The benefits of the changes outweigh the costs,” said Kwan, now chief operating officer of ReOrient Group Ltd., a Hong Kong-based boutique investment bank. “Regulators and shareholders can still get access to this information.”
Jones, the former registrar, said there were no complaints about invasion of privacy during his 14-year tenure.
The register “is a very useful tool for members of the public to check quickly and cheaply on the bona fides of the people who are directors of Hong Kong companies,” he said.
It costs HK$22 ($1.42) to make an Internet search for a director by name, and HK$11 to retrieve their information, according to the Companies Registry’s website. Searching for names of companies and for directors who have been disqualified is free of charge.
Restricting disclosure would raise the cost of doing business, said Violet Ho, senior managing director in Hong Kong for Kroll Inc., a New York-based risk consultancy that routinely mines Hong Kong filings in background checks for clients.
“If you’re entering into a business dealing with an individual who has a very common name, and you want to know he has not been involved in any wrongdoings, you want to know whether his other businesses have a clean record,” she said.
Price to Pay
A higher degree of public scrutiny is part of the price directors pay to enjoy limited liability status that protects them from creditors in a bankruptcy, Jamie Allen, secretary general of the Asia Corporate Governance Association, said in a telephone interview. Identity numbers are needed to untangle different people who share the same name, he said.
Take Li Ka-shing. An online search of the register using his name spelled with Romanized letters returned seven results with a total of 49 separate companies. Five of the results were for people using different Chinese characters to those in the billionaire’s name, or who didn’t include their name in characters. Searching by the characters used by Li -- 李 嘉誠 -- returns eight results and 47 companies.
There are 39 records associated with the same ID number as the Li Ka-shing in filings for Cheung Kong Holdings Ltd., the billionaire’s flagship company. Two other records for Li could only be verified by his residential address, including a 1982 filing of Yen Fai Development Co. That document shows Li as a director along with Lee Shau-kee, Fung King-hey and Kwok Tak-seng, the founders of Sun Hung Kai Properties Ltd., the world’s biggest property developer by market value.
David Webb, a Hong Kong-based former investment banker who is an advocate for greater corporate transparency, said he’d been the victim of mistaken identity.
A local newspaper alleged Webb made a HK$12 million profit on a home sale. The seller was a different David Webb, he said.
“It’s important to identify people and an ID number is nothing more than that,” Webb said. “It’s an identifier, a more accurate version of your name. You might have quite an unusual name, you might be the only one in Hong Kong, or even the world, but many of us share names with other people.”
Webb on Feb. 15 withdrew from his website an index with the identity numbers of more than 1,000 public figures and tycoons, including Li Ka-shing’s two sons, after the city’s privacy watchdog warned he might be breaking the law.
Small Business Worries
Hong Kong’s filings are used by the media to trace business connections and wealth.
Bloomberg News last year relied on Hong Kong and Chinese ID card numbers found in filings to chart the business ties and assets of the families of China’s incoming president, Xi Jinping, ousted Politburo member Bo Xilai, and the descendants of veteran revolutionaries, known as the Eight Immortals, who ran China after the death of Mao Zedong in 1976. The New York Times traced assets owned by the family of outgoing Premier Wen Jiabao also with the help of Hong Kong records, according to an October article.
Small businesses also say they’re worried by the legislation. A poll of 1,300 members of the Hong Kong Small and Medium Enterprises Association found that 68 percent oppose the changes and only 6 percent back them, according to Danny Lau, the association’s chairman. Small firms run background checks on counterparties before closing deals, he said.
Lau, a shareholder in 10 companies including an aluminum plate factory in China, said he used the company registry to chase down a client who owed him HK$2 million a decade ago.
More than 1,000 workers like Man, the beautician, used the registry over the past two years to find employers who had skipped out on wages or other payments, said Mung Siu-tat, head of the Hong Kong Confederation of Trade Unions.
After seven years at the downtown branch of the a3 Medical Anti-Aging Center, Man said she considered Tse Chim-chim, her boss, a friend and had no idea she planned to shut the salon.
One night in November, Tse’s brother and company accountant told staff the shop would shut for renovations. The next day, they were told it had closed for good.
“We rang up our boss many times but couldn’t reach her,” Man said. “We just didn’t know what happened.”
Working with unions, Man and her co-workers searched the company register and found another office address linked to someone called Tse Chim-chim with the same ID number as their boss. They organized an all-day protest and invited the local newspapers to highlight their case.
Tse didn’t respond to requests by Bloomberg News for comment made by phone, fax and a visit to the other company she is listed as owning.
“The company registration records are important because they protect employees like us,” Man said. “We usually won’t go searching the records unless we’re forced to. At least we had a trace to follow when needed.”
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