Hong Kong is currently one of the fastest growing international financial centers in the world. Between 2008 and 2013, Hong Kong’s wealth management industry witnessed a growth rate of 146 per cent. There has also been estimation about Hong Kong’s offshore wealth sector growing by approximately 10 percent annually to 2020 – the fastest for any major center.

As an international financial center, Hong Kong offers the two most lucrative elements for attracting cross-border client assets – private banking strongly reliant on secrecy and a territorial approach towards taxation, implying that it only taxes on incomes arising in Hong Kong while profits from overseas trading operations accruing to Hong Kong wealth managers are usually not taxed.

The jurisdiction is thus widely used by corporations to shift profits to escape paying their fair share of taxes, an abusive tax practice termed “transfer mispricing.” Hong Kong is also a major round-tripping jurisdiction for Chinese capital that illicitly fled the country, to be reinvested as foreign direct investment back into mainland China through Hong Kong. The Tax Justice Network ranks Hong Kong in the second place on its Financial Secrecy Index, only behind Switzerland. A large part of these practices is possible because of the wonders of anonymous companies.

If you’ve ever had a Russian matryoshka doll, then you would probably understand the way the large doll on the outside conceals the others nesting within. Such is the murky world of anonymously owned companies. While most business owners would be happy to put their names on their doors, those wishing to conceal illicit funds and laundered money could easily use concentric circles of anonymous companies to mask their identity.

Anonymous companies are the perfect recipe for tax evaders, drug cartels, terrorist groups and corrupt politicians who don’t want to keep their stolen assets associated with their names. In such a case, they can create a company which can open a bank account, hold these illicit funds and assets, park them in luxury property or wire the money to any country across the world.

Anonymous companies grease the wheels for tax evasion, crime and corruption. It is one of the easiest things to create an anonymous company, and while one would associate palm-fringed Caribbean islands with such secrecy, it is perhaps as easy to create an anonymous company in Hong Kong.

The Panama Papers, an unprecedented leak of millions of documents, portrayed the myriad ways in which anonymous companies and corporate vehicles were used by multi-national corporations and rich individuals from paying their fair share of taxes. Developing countries lose between $1.4 and $2.5 trillion to illicit financial flows every year, a large part due to intricate networks of anonymous companies.

Hong Kong’s Financial Services and Treasury Bureau (FSTB) has recently concluded its public consultation on the enhancing transparency of beneficial owners (or the true human owners) of Hong Kong companies, in view of the upcoming review by the Financial Action Task Force (FATF), an intergovernmental body that sets international standards on money laundering and terrorist financing, of which Hong Kong is a member. Based on this conclusion, Hong Kong’s government will introduce an amendment bill in the Legislative Council this month.

The conclusions and positions adopted by FSTB are weak and dissatisfactory at best. The “balanced approach… to minimise regulatory burden and compliance costs on business” that is the premise of the conclusion is skewed in favor of businesses and does not go far to achieve what the government claims to be committed toward — institutionalizing meaningful beneficial ownership transparency. There are a number of things on which we would urge the government to take a much more stringent and progressive stand.

The conclusion does not propose a registry of beneficial owners. Companies are simply expected to maintain their own records of people with significant control (PSC), which would be accessible only to competent authorities through an authorized person who will serve as the contact point for information on a company’s PSC. Companies’ beneficial ownership information is therefore unavailable to the public for scrutiny.

Further, listed companies and foreign companies registered in Hong Kong are exempt from maintaining similar records. These provisions need to be reconsidered, and a publicly accessible, centralized registry containing beneficial ownership of all companies should be implemented. The United Kingdom, Ukraine, Denmark and Bulgaria have made their beneficial ownership registry public, while several other countries including Ghana, Nigeria and India have committed to doing so in the future. The right to privacy needs to be balanced with the need for society to prevent financial crime. Public disclosure is therefore necessary to prevent abuse of corporate vehicles.

The FSTB has also concluded that there is “broad support for (their) proposed threshold of more than 25 percent for determining beneficial ownership”, and maintain that it is in line with FATF’s recommendations. This position is severely flawed as FATF does not recommend a 25 percent shareholding or voting rights threshold for an individual to be identified as a beneficial owner, but only uses the figure as an example.

The European Parliament has proposed lowering the threshold to 10 percent. In the US, the Securities and Exchange Commission sets a threshold of 5 percent for American publicly traded companies. Furthermore, the proposed threshold of 25 percent ownership is vulnerable to abuse – an individual would need to nominate only three directors on paper, each with ownership above 25 percent, in order to continue to remain anonymous. We would therefore propose lowering the threshold for identifying PSC to 10 percent.

It is critical that the amendment to be proposed in the Legislative Council emphasize transparency above everything else. Enhanced beneficial transparency would greatly help Hong Kong address crime, corruption and tax avoidance. Companies must be held accountable for the taxes they owe to jurisdictions where they operate, for governments to be able to sustainably invest in public services and finance development.