I spoke to two U.S. senators on opposite sides of the aisle Chris Van Hollen, a Maryland Democrat, and Rick Scott, a Florida Republican who in September announced they were sponsoring a bill to protect American investors from risky investments in variable interest entities.

On 99 percent of issues, Im not aligned at all with Scott, Van Hollen said. He said the two share an interest in consumer protection. When I told him about the new findings about Chinas increased use of tax havens, he said, That makes it even more important that we move with urgency.

Scott said hes concerned about not only consumer protection but also avoiding financial support for the Chinese government through investment in Chinese companies. It all just keeps adding up, he said. The balloons, Uyghurs, Hong Kong, Taiwan. Four years ago, I said nobody should buy anything made in China. When I say that now, people applaud.

The authors of the latest paper, aside from Maggiori, are Christopher Clayton of the Yale School of Management, Antonio Coppola of the Stanford Graduate School of Business and Amanda Dos Santos and Jesse Schreger of the Columbia Business School. (They are also all part of the Global Capital Allocation Project, a research lab thats directed by Maggiori and Schreger.)

As they explain in the paper, when you buy a share in a company such as Alibaba, Tencent or Baidu using a variable interest entity structure, you dont own shares in the operating Chinese company. You own shares in a shell. Even the shell doesnt own shares in the operating company. Instead, the shell owns a unit in China called a wholly foreign-owned enterprise, or WFOE (pronounced woofy). The woofy oops, WFOE has contracts with the operating company and its owners. These contracts entitle the WFOE to a share of the companys profits and a voice in its operations. The WFOE can funnel dividends to the tax haven shell, which passes them through to investors in New York, London and elsewhere (though most dont pay dividends).

The beauty of this Rube Goldberg arrangement is that the variable interest entity structure counts as equity for foreigners by international accounting standards, while the companies operating in China can report to local regulators that they are fully owned by residents of China.

The risk is that this is too clever by half. For now, the Chinese government seems to tolerate variable interest entities because its companies need to raise money abroad. But if the Chinese government doesnt recognize the foreign holders as true owners, it might not respect their interests if push comes to shove. The authors note that when Jianzhi Education used a variable interest entity to list on Nasdaq in October, Jianzhi warned that the Chinese government could find these contractual arrangements noncompliant with the restrictions on direct foreign investment in the relevant industries.

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Opinion | Chinese Companies Are Doing Risky Business in the Caribbean - The New York Times