In the current political climate it has become essential for HNW Chinese to have an effective and thought through back up plan. Read on to discover the consequences of ignoring this need and effective steps you can take to protect yourself.
Yesterday the global public was able to catch a glimpse of the reality facing HNW Chinese businesspeople when a video of US citizen Cynthia Liu was smuggled out of China and released to the media.
Ms. Liu, a 28 year old Harvard Business School grad who works in NYC for McKinsey & Company, and her 19 year old brother Victor, a Georgetown undergrad, are both naturalized Americans who have spent most of their lives in the United States.
Almost a year ago Ms. Liu, her brother and her mother went to China to visit a dying grandparent. When they attempted to fly home to the US they were stopped by Chinese officials and advised that there was an exit ban preventing them from departing. They were also separated from their mother, whose whereabouts remain unknown.
There has never been any claim by the Chinese authorities that the Liu siblings or their mother have done anything wrong. Instead, this is a clear example of China attempting to use the leverage by holding the family members hostage for other purposes. In this case the Chinese government is trying to get the Liu children’s long-estranged father, Liu Changming, to return to China.
This case is one of many where the Chinese government is clearly demonstrating that it will not hesitate to use methods which every country that believes in the “Rule of Law” views as outrageous. The fact that all three family members are US citizens has not helped them at all. Indeed, this technique of using innocent family members as “leverage” has been happening increasingly in China over the past few years without hesitation if it will help the authorities readily put their hands on an accused.
In the last few years most people outside of China blithely ignored China’s historical record of “show trials” and swallowed the Chinese government’s statements that they were simply “rooting out corruption”. Overwhelming they accepted that those accused “must be guilty”. Or they assumed that the “Rule of Law” procedures they took for granted…such as “Innocent Until Proven Guilty”…existed in China.
Westerners mistakenly assumed that China’s legal system would also provide safeguards against false allegations that might be motivated by political animus or greed in order to seize assets or eliminate business competitors. Such naiveté is quickly dissipating as stories such as the Liu siblings and similar cases and the arbitrary arrest of two Canadian businesspeople in retribution for a possible extradition of a favoured Chinese businesswoman come to light. But the risks remain!
Most people are familiar with the Chinese curse “May you live in Interesting times” . However, most outside of China are NOT familiar with another Chinese curse “May you come to the attention of the Emperor”. Chinese businesspeople are well aware that the biggest danger to themselves and their family’s safety and prosperity is represented by this second curse. This is especially true since Xi Jinping was made China’s “President for Life” in 2018 and ramped up his so-called “Anti-Corruption Campaign” .
In fact, in recent years HNW Chinese businesspeople have started to worry about the “Forbes Curse” whereby, after being mentioned in Forbes magazine, several high-profile Chinese were snatched, disappeared, show-trialed and sentenced. In addition to long-term incarceration or even death, the state (or others) seized the individual’s assets.
As a result of these new realities at home, for a growing number of wealthy Chinese over the last two decades, there is an increasing desire and urgency to have a some form of a Plan B or ‘Back Up Plan’. The goal was to have this Back-Up Plan protect them, their families and their wealth from arbitrary or politically-motivated actions of the Chinese government (or others using government as a tool for personal gain).
The surging desire for wealthy Chinese to secure a comfortable and secure haven has manifested itself in the tremendous increase in the purchase of Citizenships by Investment and overseas Residences by Investment. Recently it has been reported that in 2018 over 100,000 millionaires had acquired Citizenships by Investment or Residences by Investment…otherwise known as “Golden Visas”. And by far most of the buyers were from China.
While I was reading this report the thought kept going through my mind about how many of these buyers had probably committed one or several fatal errors when devising and executing their plans.
Based on my thirty years experience in this field, I know that many – if not most – had assumed that all they had to do was buy a second passport and/or a foreign home. This approach was easy as there has been a multitude of salespeople flaunting their Citizenship by Investment and Residence by Investment “products” at busy foreign investment conferences. Sadly, the Chinese purchasers were either unaware or ignoring the dangers of two storm clouds of risk that rise out of such an approach to Back-Up Planning.
The First Storm Cloud of Risk – in China
The first storm cloud of risk that many Citizenship by Investment and Residence by HNW Chinese Investment purchasers have placed themselves under by their poor planning is that they have underestimated the ingenuity and ruthlessness of the government. The most spectacular failure on this front was the case of Xiao Jianhua.
Despite having acquired Canadian citizenship and passport….as well as a Diplomatic Passport from Antigua and Barbuda…Mr. Xiao did not understand that these pillars of a Back-up Plan by themselves were not sufficient to fully protect him. Without the other essential elements of an effective Back-Up Plan, Mr. Xiao was powerless to prevent Chinese officials from snatching him from the Four Seasons Hotel in Hong Kong. I was interviewed at the time by the South China Morning Post and gave my thoughts as to his plan’s shortcomings.
The Second Storm Cloud of Risk – in Your New Country
The second oft-ignored storm cloud originates from the countries where these individuals have purchased Residence by Investment or Citizenship by Investment. Unfortunately – and in more cases than I care to count – real estate and second passport “consultants” did not properly or fully inform their customers about the important tax ramifications of such “products”. In many cases, they did not even raise these issues with the buyers…probably for fear of losing the sale!
A perfect example is the US EB-5 program. In a prior blog post entitled “EB-5: First of Four Steps to Certain Economic Devastation for Wealthy Chinese” I outlined how a hastily purchased US EB-5 Visa could wreak havoc by the failure to plan for the US tax ramifications of this Residence by Investment product. Increasingly the US government is actively pursuing individuals who may have laundered money to purchase their EB-5 Visas, fund their American lifestyle, and then engaged in tax evasion by under-reporting their worldwide income after arrival. Proper planning with the help of a qualified professional could have prevented this outcome.
In a similar way a large number of wealthy Chinese purchased Residence by Investment in Canada under the Quebec Immigrant Investor Program. They then purchased properties in booming cities such as Vancouver and Toronto. But instead of doing legal pre-immigration tax planning, many followed the common “wisdom” that they could easily evade paying income tax. They did this by simply failing to declare their non-Canadian source income. Another method was to have the main breadwinner relinquish his/her Canadian permanent residence status. They then left the remaining spouse and children occupying their expensive Canadian homes. They would happily consume Canada’s “free” education and medical facilities and cover their living expenses by tax-free “overseas gifts”. They thought that this would not be noticed!
Rampant application of such “wisdom” caused a historic increase in property prices in Toronto and Vancouver. This priced local residents out of the real estate markets. Some individuals not only failed to declare any world-wide income, but also went so far as to file for and receive government benefits designated for impoverished Canadians.
Inevitably, such blatant abuse of Canada’s hospitality resulted in media attention and public backlash. The first manifestation of this backlash was the imposition of a speculation tax on non-residents. However, that was just the beginning of the tidal wave of retribution against those who did not properly design and execute Back-Up Plans that included Canada. In March 2019 Canadian authorities formed a task force to identify such abusers. Once identified, the offending parties will inevitably face severe financial and potentially criminal repercussions. And there is more to come. As this is an election year pressure is on local, provincial and federal politicians to promise to do everything necessary to stamp out this problem.
It is worth noting that these second storm clouds are not limited to the US or Canada. The most popular destination for Millionaire Migration – Australia – is experiencing the same impact and legislative backlash.
Two Storm Clouds of Risk
The reality is that many HNW Chinese and their families will soon find themselves caught up in either a Chinese or foreign thunderstorm. They must immediately recognize the hovering dangers…and then correct and strengthen their current inadequate Back-Up Plans.
The irony is that the financial and personal price they and their families will be forced to pay for having a poor or incomplete Back-Up Plan is a fraction of the cost to create and execute an effective long-term back-up plan from the beginning. But it’s not too late to fix it!
If you’d like to connect and find out how we may be able to help get in touch.