I can think of 4 places where it might leak when the flow is diverted. Is there an access panel behind the shower? If so, use a light and a mirror to inspect everything back there to see exactly where the leak is. If not, consider making an access panel...
To answer your question, the odds are almost 1.0 that the shower arm is threaded on the end in the wall, into a threaded elbow attached to the framing. If you take off the escutcheon around the arm, there may be enough room to see the joint, and determine whether that's where the leak is. If the escutcheon is large enough, you could enlarge the hole enough to see the joint, but small enough to cover up with the escutcheon when you're all finished.





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