Handelsblatt Exclusive

The Chinese Prince

Picture for China piece
Frank Wan (left) with business partner Charles Rosier of BTG Pactual (second from left) and Florentino Pérez (background), meet French footballer Zinédine Zidane in 2012.
  • Why it matters

    Why it matters

    An exclusive Handelsblatt report raises questions about BTG Pactual Bank’s use of a Chinese intermediary with supposed family connections to the chairman of a powerful Chinese state-run investment fund.

  • Facts

    Facts

    • Wan Fang, a Chinese intermediary with supposed family connections to the chairman of the China Investment Corporation, a powerful a state-run investment bank, was hired as a consultant by BTG Pactual, a Brazilian bank.
    • Mr. Wan apparently helped BTG Pactual obtain a $300 million investment from CIC.
    • Mr. Wan reportedly belongs to a class of influential financial intermediaries in China called “princelings,” who exploit family connections to powerful government and state officials for foreign investors.
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    Audio

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It was a celebration of European soccer, and a night to remember. Things were as fans of Real Madrid wished they always would be. Their team had just finished off opponent Apoel Nikosia from Cyprus 5:2 in the quarter finals of the UEFA Champions League. Superstar Christiano Ronaldo scored one goal with his knee, one with a free kick. Now, on this night of April 4, 2012, the players were celebrating. Real’s sporting director, the French soccer legend Zinédine Zidane, and the club’s president, Florentino Pérez, took time for a victory lap of their own.

On their way through the Real’s Bernabéu Stadium, they met two men. A photographer captured the scene for posterity. Mr. Pérez, as he introduced his sporting director to investment banker Charles Rosier, and Mr. Zidane, as he shook the banker’s hand. The picture also shows a Chinese man right next to Rosier. Everyone in the room was smiling.

It is a picture worth a thousand words. But it raises inconvenient questions. Who is the Chinese man? And why did he accompany a top manager of Brazilian investment bank BTG Pactual to a football match in Madrid? These questions may produce big problems for both men.

The Chinese man is Wan Fang, a.k.a. Frank Wan. According to Handelsblatt research, Mr. Wan had been working as a consultant to BTG Pactual since 2010. This alone leads to a set of new questions, because as Mr. Wan himself confirmed to Handelsblatt, he had no experience in the world of banking. His use for BTG must have been of another nature.

In those days, the Brazilian investment bank tried to get into business with the China Investment Corporation (CIC). That was not an easy task by any measure. The huge Chinese state run fund with $400 billion under management was one of the most sought-after investors in the world. To arrange a mere meeting was next to impossible.

But BTG could count on Mr. Frank Wan. Their consultant was not only a grandson of Liu Shaoqi, the former president of the People’s Republic of China and nephew of mighty ex-General Liu Yuan. Mr. Wan was also related to Lou Jiwei – then chairman of CIC. In talks with BTG, Mr. Wan reportedly referred to Lou Jiwei as “my uncle.”

In China, there is a special word for men like Mr. Wan: Princeling. It is a term describing children, grandchildren and other family members of influential figures in China’s Communist Party and senior officials.

“If you do business in China, you do not just get to make an appointment with the people in the big driver seats,” explained an investment banker with substantial experience in the market. ‘’However, often one of the princelings appears and says: Talk to me.”

Frequently, the next step is a contract to consult. The princeling facilitates a meeting with a senior official and in return receives a fee. In the banking industry, this fee may be 0.25 percent of the amount eventually secured as an investment. It may also be a multiple of that, depending on the negotiation and size of the investment. In the case of investment bank BTG and CIC, that size was several hundred million dollars.

At this point, a consulting agreement may turn into a political affair. When a relative of a high-ranking Chinese official serves as a middle man and receives a six- or even seven-figure sum, it may trigger the interest of the Central Commission for Discipline Inspection of China’s Communist Party. On the orders of president Xi Jinping himself, it began a campaign against nepotism and abuse of office in 2012.

Last year alone, 282,000 party members were penalized. Ninety high ranking party officials were investigated.

After the publication of the Panama papers, anti-corruption measures have been widened to official’s families in cities such as Shanghai and Guangzhou. Spouses and children of senior officials are barred from serving as managers, registering individual businesses or holding partnerships in areas where a family member holds office.

In an effort dubbed “Operation Fox Hunt,” more than 50 teams of investigators have also been chasing corrupt officials abroad.

“If you do business in China, you do not just get to make an appointment with the people in the big driver seats. However, often one of the princelings appears and says: Talk to me.”

Unnamed investment bank source, with experience in China

The phenomenon of Chinese family ties in multibillion-dollar businesses has also attracted U.S. authorities. In 2014, J.P. Morgan bowed out of a potentially lucrative role in the IPO of the giant Tianhe Chemicals Corporation. The U.S. Securities and Exchange Commission questioned why the U.S. investment bank had hired the daughter of the company’s chairman. Surprisingly, she was soon hired by Swiss bank UBS, which later lead to suspensions there as well. In several probes since then, the SEC has found other top tier banks that have hired princelings.

It is a hot topic – and one that seems to make the people involved rather uneasy. When Handelsblatt reached Mr. Wan in early April, he denied having any business ties to BTG Pactual. Asked about his picture with BTG partner Charles Rosier in Madrid, Mr. Wan said: ‘’I know Charles personally through a mutual friend in Hong Kong. I do not know that Charles works for a bank.’’

BTG, however, confirmed that it paid Mr. Wan. “Mr. Wan served as a consultant to BTG Pactual, advising on China,” said a spokesperson.

BTG Pactual did not specify how much money Mr. Wan was paid. As Handelsblatt has learned, it was well over $1 million. Notably, that would be a multiple of what the man earned whom the BTG actually wanted to speak. As chairman of CIC, Lou Jiwei was compensated as a vice minister in China – collecting a salary of less than $20,000 per year. Even adding bonuses and non-cash benefits, that compensation would stay in five-figures – a fraction of what BTG paid for Mr. Wan’s services.

That said, a person close to BTG claims no one at the bank had been aware that Mr. Wan had a familial relationship with the CIC chairman, if, in fact, any such relationship exists.

That is a strange notion. It would mean that BTG did not believe Mr. Wan when he claimed he was related to Lou Jiwei. And yet, the bank was willing to pay him more than a $1 million.

And strange or not, Mr. Wan did deliver.

In December 2010, BTG announced that a group of investors had agreed to buy newly issued BTG shares worth $1.8 billion. The China Investment Corporation was the crown jewel in this circle of investors, and bought shares worth $300 million.

Those would be wishful numbers now. In November 2015, BTG boss André Esteves was arrested by Brazilian police in a sweeping investigation into corruption at state-owned oil company Petrobras. Mr. Esteves denied any wrongdoing, was released in December, but lost his post as CEO.

He was placed under house arrest for several months and charged with obstruction of justice. BTG has since been downgraded by rating agency Moody’s several times over. The company’s share price has dropped by more than 40 percent. According to BTG, the Chinese began selling off their shares in the Brazilian company in 2013 and “recently” sold their remaining interest.

All things considered, there are good reasons for CIC to rethink its investment in BTG. Who did the Chinese trust with their $300 million here? Had there not been a background check for these men? And how important were the family relations of BTG consultant Frank Wan?

These are questions touching the borders of legality. If you hire such a consultant, you need two written guarantees,’’ says an investment banker who does business in China. “Firstly, the consultant must have disclosed to his relative that he is being paid to arrange a meeting with his relative. And secondly, you have to be sure that none of the money you pay to the consultant later finds its way to the relative. For that would be bribery.”

Handelsblatt asked BTG if the bank had such guarantees in the case of Frank Wan. A BTG speaker answered: “It is the bank’s policy to complete due diligence and background checks and, as was the case here, all BTG Pactual consulting agreements contain provisions requiring full compliance with all laws.”

Mr. Wan himself did not respond to further questions.

A speaker for CIC said: “Personally, I am not familiar with this project. So I cannot comment on it. I am sorry.”

All said and done, the topic of BTG may have repercussions for Mr. Jiwei himself. Just a few days ago, the Communist Party’s leadership announced a plan to expand its program to weed out corruption via the families of senior officials. Again, President Xi Jinping was spearheading these efforts.

And while it is true that Lou Jiwei gave up his post at CIC in 2013, his profile has only become larger since. Currently, the 65-year-old is the Minister of Finance in China. The ministry did not respond to any questions regarding payments of BTG to Mr. Jiwei’s relative, Frank Wan.

 

Sönke Iwersen leads the Handelsblatt team of investigative reporters. To contact the author: iwersen@handelsblatt.com

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