Dud stock trade by senator’s daughter exposes Cambodian tax loophole

A Cambodian senator’s daughter gambled U.S. $8 million on the purchase of shares in an American medical technology company through a Singaporean broker – a transaction conveniently completed before the adoption of a double taxation treaty between Cambodia and Singapore – regulatory filings reviewed by RFA show.

Had the investment worked out as planned, Lau Sok Huy expected returns in the realm of $50-60 million, and could have avoided up to $12 million in Cambodian taxes.

But the investment flopped. Seven years after she became the second-largest shareholder in Tomi Environmental Solutions Inc, Sok Huy is down some $6.3 million and furious, according to the company’s founder and a fellow shareholder familiar with the deal who spoke with RFA.

The investment – equivalent to more than 3,000 years of the average Cambodian salary – is one Sok Huy will likely have to write off as a loss. Tomi’s share price has dipped so low that it currently risks losing its listing on the Nasdaq Capital Market.

But the structure and sequencing of the deal sheds a light on how well-to-do Cambodians stand to benefit from the double taxation agreement. Such agreements are viewed by advocates as a boon to trade and investment between nations, but they can also offer a way for wealthy investors to avoid taxes.

Regulatory disclosures filed during Sok Huy’s acquisition of the Tomi shares strongly suggest the deal – in which she loaned the money to her broker who had purchased the shares, and then took the shares as repayment for the loan – was tailored to benefit from the double taxation agreement. The loan behind the deal was signed in January 2016, but was amended in May of the same year, just three days after the tax treaty was signed.

Sok Huy’s politically connected background raises questions about whether it was appropriate for her to benefit from the agreement. Her father, Lau Ming Kan, is a longtime senator for the ruling Cambodian People’s Party, which has governed the country in one form or another for three decades. One of the final steps in any treaty becoming law in Cambodia – including the double-taxation agreement with Singapore – is ratification by the Senate where he sits.

Sok Huy’s parents are also no strangers to investing in Singapore, a regional financial hub viewed by some as a tax haven. Her mother Choeung Sopheap, a confidante of Cambodian Prime Minister Hun Sen, holds $36.5 million in shares in a Singapore-based company that owns a Cambodian corporation with an exclusive license to import liquid natural gas to Cambodia. Those assets are among the more than $230 million in assets that RFA has identified as being held in Singapore by politically connected Cambodians.

The DTA

Double-taxation agreements, often referred to by the acronym DTAs, are designed to ensure that companies or individuals do not get taxed on the same profits twice when doing business overseas. When two countries sign a DTA, the hope is that it will promote trade and investment between both nations.

This particular treaty appears to have paid off. By the end of last year, Singapore was Cambodia’s second-largest source of foreign investment, having barely figured in the rankings half a decade earlier.

A business consultant with more than a decade’s experience in Phnom Penh told RFA they viewed the agreement as a net positive for Cambodia.

“A DTA can help eliminate double taxation, and for investors coming into Cambodia, that’s fairly important. So, in that sense, they’re fairly useful, and also very widespread and standard around the world,” the consultant said, requesting anonymity due to the potential professional repercussions for speaking publicly on a sensitive topic.

“Can the wealthy take advantage of them to reduce their tax bill as well? Absolutely,” the consultant added. “But they already have other means of doing so. So, of all the ‘sins’ here [in Cambodia], I wouldn’t see that as being a meaningful one.”

That’s not an analysis everyone would agree with. In late 2016, the World Bank published a blog by two of its senior employees – Jim Brumby and Michael Keen – that asked whether tax treaties like DTAs are a “boost or bane for development” in lower-income countries, such as Cambodia. They were not convinced.

“Developing countries have used them with the intention of boosting economic development. The evidence for that is weak,” Brumby and Keen wrote. “The problem is that tax treaties – and the international system of taxation more generally – are highly complex and have unleashed unforeseen consequences.”

“Multinational companies, with much at stake, can use treaties to route income through third countries to exploit favorable tax treaties. Tax authorities, particularly in developing countries, are finding it hard to counter such ‘treaty shopping,’” Brumby and Keen added.

Despite having assets and businesses in multiple countries, Sok Huy does not fit the traditional definition of a multinational company. But her family often behaves like one, as do many other powerful clans in Cambodia – negotiating sweetheart deals with the government that are unavailable to smaller businesses with less political clout and cash in the bank. If the Lau family’s lawyers and accountants have clocked on to the Singapore loophole, it seems likely the financial professionals advising Phnom Penh’s other leading families will have too. So how does it work?

People pass by the Nasdaq Market Site in Times Square in New York City, U.S., Feb. 7, 2018. Credit: Reuters/Brendan McDermid
People pass by the Nasdaq Market Site in Times Square in New York City, U.S., Feb. 7, 2018. Credit: Reuters/Brendan McDermid

The deal

Between May and July 2015, Singaporean broker Boh Soon Lim snapped up $8 million of Tomi shares, then accounting for roughly 11% of the company, according to regulatory filings lodged with the Securities and Exchange Commission, the U.S. stock market regulator. He bought the shares in the name of Arise Asset Management Pte Ltd, a Singapore-registered company in which he is majority owner. In the SEC filings he described the money for the purchase as coming from Arise Asset Management’s working capital. The term refers to the total cash available to the firm minus any liabilities or debts it might have. Given that a subsequent filing lodged in January of the next year would retroactively describe the purchase as being financed by a loan from Sok Huy to Arise Asset Management, it would appear that the initial filing was misleading.

The loan agreement, signed in January 2016 but backdated to the previous summer, stipulated that the money was lent for a period of 18 months at 0% interest for the purpose of
financing the purchase of the Tomi shares. Once those 18 months were up, rather than Arise Asset Management returning the $8 million to Sok Huy, the loan agreement instead called for the Tomi shares to be transferred to her or her “designated nominee,” provided she had paid Boh’s company a $240,000 “premium” for the privilege of having lent it $8 million interest-free. In case there was any doubt that Sok Huy was in fact the beneficial owner of the shares from the moment Arise Asset Management bought them in 2015, the agreement also called for any dividends paid out on the shares by Tomi while the loan was in effect to be paid to Sok Huy.

It is not entirely clear why either Boh or Sok Huy felt that this elaborate and costly ruse was necessary, if Sok Huy was the real owner of the shares from day one. Neither responded to multiple invitations to comment for this story.

But when RFA asked financial crime expert Graham Barrow about the arrangement, he said it had the appearance of a scheme designed to avoid scrutiny.

“Why would someone give an interest-free loan to their broker? They’re a broker. It’s their job to buy and sell shares on behalf of other people. You give your broker [money] to buy shares for you,” Barrow wrote in an email.

“On the other hand, if you don’t want people to know it’s you, ‘lending’ your broker money with which they buy shares and, guess what, the shares are subsequently returned … looks like a handy way of avoiding the due diligence that would otherwise take place.”

That explanation rang true for a minor shareholder in Tomi who was familiar with the circumstances surrounding Sok Huy’s investment in the company. The investor asked not to be identified citing safety fears, given the Lau family’s power and influence.

“I think maybe she couldn’t buy the shares directly,” the investor said. “These are the patterns a lot of people do. If you can’t pass the KYC [Know-Your-Customer checks], you give a loan to your friend and they buy it for you.”

Tomi’s CEO and founder Halden Shane told RFA in an interview earlier this year that due diligence is a difficult enough affair for companies like his looking to take on new investors.

“Usually when a fund manager approaches you and says, ‘We have a client that we’ve had for a number of years and they’d like to make an investment in the company,’ a lot of times, these names, you don’t know really what their real name is,” Shane said. “You try to look them up and do due diligence and interview them the best we can and, I mean, it’s very hard to do due diligence in Asia.”

Whatever due diligence Tomi had been able to undertake on Sok Huy, Shane was shocked when seven years later, RFA informed him that her father is a Cambodian senator.

“Like we have senators here, they have senators there?” the Californian asked.

Nor was Shane aware that Sok Huy’s mother, Choeung Sopheap, was behind a real estate development so marred in human rights violations that it caused the World Bank to suspend funding to Cambodia.

It’s a risk profile that has proven too much for some, which has led the family to take evasive measures when moving their money around the world. RFA reported earlier this year that the Cypriot police claimed in an affidavit submitted to that country’s Supreme Court that they believe Sopheap completed a $3.5 million transaction by a series of credit card payments so as to avoid the scrutiny that would have come with a bank transfer.

The tax dodge

But even more than hiding from due diligence, the Tomi share purchase appears engineered to avoid future tax burdens.

For years now, the Cambodian government has been planning a capital gains tax of 20% on profits from the sale of investments and real estate, wherever in the world those assets are located. The law was slated to come into effect on July 1, 2020, but due to the COVID-19 pandemic has been pushed back to 2024. However, tax experts note that the country’s laws have included references to “capital gains” as a form of taxable profit since at least 2003.

The minor shareholder familiar with Sok Huy’s acquisition of the Tomi shares told RFA that the senator’s daughter had been led to expect profits between $50-60 million. Had those profits materialized, 20% would have been owed to the Cambodian government – some $10-12 million. Singapore, meanwhile, has no capital gains provision, something the share purchase appears tailor-made to exploit.

Sok Huy and Arise Asset Management signed the loan agreement for the share purchase on Jan. 30, 2016. On May 20 of the same year, Cambodia and Singapore signed the initial DTA. Three days later, the loan agreement was amended, according to a later SEC filing. The filing gives no details of the alterations made to the agreement.

The loan expired the following summer, on July 31, 2017, five months before the DTA would come into legal effect. However, precisely two weeks prior to the loan’s expiration, a Singaporean company called Environmental Solutions Holding Pte Ltd was registered with Sok Huy as the sole shareholder. When the loan ran out, the Tomi shares were passed to the new holding company, rather than Sok Huy herself.

When the DTA came into legal effect on Jan. 1, 2018, it took precisely three weeks for the Tomi shares to be transferred into the personal ownership of Sok Huy, who gave a Singaporean residential address.

Less than a year later, an application was lodged to have Environmental Solutions Holding struck off from the Singaporean register. The reason given – “Company has not commenced trading since the date of incorporation” – seems improbable, given that it had acquired and disposed of $8 million of assets in the past 12 months.

In the end though, Sok Huy must be wondering if it was all worth it. It certainly seems to have paid off for her broker, Boh, who was appointed to Tomi’s board in January 2018, for which he draws an annual salary of $40,000, according to SEC filings.

Sok Huy apparently doesn’t think things have worked out quite so well for her. She is no longer on speaking terms with Boh, according to Shane, Tomi’s CEO.

“I don’t think she was that happy with the investment,” Shane said.

Eventually, this arcane series of nesting transactions produced no profits to be taxed. But for every visible failure such as Sok Huy’s, how much wealth generated in Cambodia is being quietly put to work overseas and the profits booked tax-free in Singapore?

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