Tuesday 5 April 2016

"The Panama Route", the Panama Papers, and China's diplomatic relations

Right now the big item making waves in the news is the Panama Papers - a massive leak of documents from Mossack Fonseca which provides "rare insight into an operation which offers shady operators plenty of room to manoeuvre". Mossack Fonseca appears to be particularly active in Mainland China and Hong Kong, where 8 out of its 31 offices world-wide are located, and is rumoured to have some very well-connected Chinese clients - even Xi Jinping's brother-in-law has been implicated in the Panama Papers.

Obviously Mossack Fonseca are yet to be accused of any actual illegality as a result of this leak and they and their staff should of course be presumed innocent until any evidence is produced proving the opposite. However, speaking in very general terms, Chinese interest in Panama over the past decade or so has centred around two things: the canal that facilitates much of China's trade, and what is known as the "Panama Route" for moving money out of Mainland China, especially where the money has been earned in a way that might not be entirely legal.

Chinese interest in building a new canal across the Cantral American isthmus appears to have flagged somewhat, especially as the expansion of the Panama canal, which was well in hand when I visited that country, appears to render any new canal entirely redundant. The "Panama Route" on the other hand, is quite different: supposedly it works by smuggling money out of Mainland China to another country (South Korea is the one I've heard about, but others may work as well) and then wiring it from there to Panama. Once the money is safely in Panama, so legend has it, since Panama does not have diplomatic relations with the PRC but instead recognises the Republic of China, it is almost impossible for Mainland Chinese authorities to touch it.

Interestingly, the Panamanian government even sought to switch recognition to the PRC as recently as 2009, only to be rebuffed by the PRC government out of an apparent desire not to breach the diplomatic truce between the two sides of the Taiwan strait. Funnily enough, despite the end of the "truce" with the recent establishment of diplomatic relations between the Gambia and the PRC after their 2013 breach with Taipei, there has not been any sign, yet, of movement in the Panamanian case despite the long-expressed desire to switch recognition.

The suspiciously-minded might suspect that the PRC leadership are purposefully delaying the switch as the "Panama Route" is rumoured to have proved useful for them and their families. However, there is not nearly enough evidence at the moment to draw this conclusion - but if Panama's diplomatic switch from Taipei to Beijing is significantly delayed, you might be forgiven for thinking that their motive in doing so may have something to do with keeping the "Panama Route" open.

[Picture: a view through the fortress wall at San Lorenzo, Panama, which I visited with my wife whilst on honeymoon last year]


Ji Xiang said...

Truly an interesting point about Panama not recognizing the PRC.

Gilman Grundy said...

Hi Jixiang, yeah, it's not something I've seen picked up on in reports on this story either even though it is a fairly obvious driver behind Chinese interest in off-shoring to Panama. The rebuffing of the recognition-switch is the thing that raises suspicions but there isn't enough evidence to say anything for sure at this point.

Of course, Mossack Fonseca are still yet to be accused of any illegality so nothing said here should be taken as implying any wrong-doing on their part.

justrecently said...

Panama appears to be trying to switch relations, having invited Xi Jinping for the opening ceremony of the opening ceremony at the expanded canal, the SCMP quotes a Taiwanese think-tank director. However, his explanation would be different, suggesting that Beijing might allow the switch if angered by Tsai's inauguration speech.

That may or be not the case, but I don't think that the Chinese upper classes will depend on Panama's status as Taiwan's "diplomatic ally". A political regime that can easily obliterate inconvenient news from practically the entire population is far from a rule-of-law status. It isn't even nearing such a status.

Even in Germany, a prosecutor, however keen he may be on discovering illegal activities, can be switched off by his superiors pretty easily, because he depends on orders from his superiors. The party-financing scandal of the 1980s to the 1990s was a case where this became pretty evident.

And that was in a rule-of-law country. Want to try to conduct an investigation with real teeth in China? Good luck with that, no matter where Panama's ambassador is.

Gilman Grundy said...

Hi JR,

First off, apologies that I'm now moderating all comments.

Second - I mention the Panama thing not because I really believe it, but just because it has a least a degree of plausibility to it. It at least makes as much sense as holding off on recognition until Tsai has made her acceptance speech.

China may be able to obliterate news from the public's view, but it is not the general public whose opinion matters here, but that of the high-level leaders and their families.

Ji Xiang said...


I think you might be missing the point. The argument here is that it is preferred that Panama should have no diplomatic relations with China because China's upper class like to have a place where they can stow away their money out of China's reach, in case one day they become the victim of an "anti-corruption investigation", or in any case lose favour with the government. It's a guarantee for everyone. I too think it's implausible, but you never know.

justrecently said...

I think you might be missing the point.

That may be so. But my argument is that with or without diplomatic relations alike, the CCP leaders can stave any anti-corruption investigation against themselves off, as long as they are in power. And if they are not, and new kids in power launch an investigation, there'll be access to information from Panama, provided that Panama cooperates.

That can be the case either with or without diplomatic relations. The Taiwanese government does have diplomatic relations with Panama - at least for now -, but they do not have cooperation treaties with Panama that would allow for efficient investigations in cases of alleged tax evasion, according to the outgoing minister of finance.

These are two different fields of cooperation, and either of them can exist without the other.