Update: Guardian Liberty Voice was recently made aware of the correct title that Charles M. Elson holds at the University of Delaware. Guardian Liberty Voice has updated this article accordingly and apologizes for the error.
Alibaba Group, the e-commerce giant based in China, tantalizes the U.S. financial market with one of the largest Independent Public Offerings ever made, yet research suggests the billions sold result from billions stolen. If completed, this IPO would be the largest ever financial transaction of its kind—larger than Facebook, Amazon or Ebay.
Estimated internally at $200 billion, Alibaba was founded in 1999 by the eccentric entrepreneur Jack Ma. The present-day billionaire began as a self-taught English teacher with a $60,000 loan and a single mission: to compete with Silicon Valley. As Ma described to Bloomberg Magazine’s Charlie Rose, if his company could not rise above Microsoft or Wal-Mart, he would regret it for the rest of his life.
Alibaba was one of China’s first internet companies. It specialized initially in horizontal e-commerce from retailers to consumers, but also has functioned vertically from business to business. Through the commanding power of Ma’s passion for innovation, his online company now competes in cloud computing, banking, TV production, and online music services.
To process the volume of financial transactions, the e-commerce giant developed its own mechanism for payment. The resultant Alipay is quite similar to PayPal, and rates competitively with Chinese banks. Alipay transferred almost $150 billion in 2013, which was more than PayPal and Square combined.
Chinese citizens are legally allowed to transfer $50,000 out of the country each year. This allows the funds accrued domestically to remain domestic and contribute to the public welfare, such as through taxation.
With Alipay, however, Chinese nationals can use Alibaba to transfer vast amounts of funds out of the country without state intervention. According to an internal source, those with the means could always transfer money out of the country through particular avenues in Macau or Hong Kong. Alipay now provides the ordinary “Zhou Blow” a very convenient method of international transference.
Customers translate their money into huge amounts of goods which they ship to the U.S. or Canada for sale, and then open overseas accounts with the cash earned. Expats living in China, for example those teaching English, can also send money out of China using Alipay. According to the Wall Street Journal, roughly $225 billion left China between September 2012 and 2013.
Because Alipay is not officially a bank as such, it has less regulation than a traditional financial institution; in this way it’s similar to any US payment processor, says Sylvia Pacher, managing director at Corvinus Consulting Group. At surface level, Alibaba Group tantalizes with the promise of billions to be sold; in actuality it presents the resultant calculation of billions stolen.
Alibaba is moving to the U.S. specifically because it will encounter less governmental restrictions, that is, fewer obstacles to money laundering. Charles M. Elson, the Edgar S. Woolard, Jr., Chair in Corporate Governance, Professor of Finance, and Director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, laments the status quo saying “we should have higher standards here.”
Furthermore, any U.S. investors who accept the risk will not have a great degree of control over their purchase into Alibaba because of stringent Chinese restrictions regarding foreign ownership. Most of the company’s revenue is derived through non-Chinese assets, but ownership of those assets will remain squarely in the hands of Alibaba throughout the upcoming IPO. Jack Ma, Simon Xie and others will retain a majority holding of the Chinese assets, for example Taobao Marketplace and Alibaba.com.
To evade the Chinese government restrictions, U.S. investors will buy into a Cayman Islands institution called Alibaba Group Holding Limited.
The legality of this sale, and the variable interest estimate structure making it possible, is still highly suspect. Chinese Supreme Courts and watchdog groups have blocked similar attempts in the past, like the 2012 Minsheng Bank, the 2011 Walmart purchase of majority shares in Yihaodian, and the 1994 China Unicom initiative.
The U.S. Security Exchange Commission does not have the authority to ban IPO or other market offerings on the potentiality of their being illegal. It does have the authority to demand communication of said risks. The Chinese e-commerce giant has replied if their VIE structure is determined illegal, the company’s transactions may be greatly damaged and hefty fines imposed. Alibaba Group, in parallel to the financial giants it once sought to supersede, lures with the promise of billions to be sold as a likely result of billions stolen.
By Emily Graves Webber