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YELLOW FEVER: THE SAGA OF E-BULLION
James Fayed was a smart, early player in the digital gold currency business. Today he is in jail, indicted for murder – and likely to be charged with laundering $1 billion or so.
E-Bullion was once a major runner-up to e-gold in the niche e-currency business. Unlike e-gold (see below), e-Bullion is not going to survive its encounter with the powers that be in any form -- for reasons which go well beyond the business itself, as will soon be clear. Another viable and useful business done in by management that could not just sit still with a good thing.
We are sympathetic to the nominal philosophy behind the e-currency business: A hard-asset based, "honest," more private transactional medium and all that. In practice the most visible practitioners have not operated with the prudence and decorum that is called for. Any financial intermediary -- whether the transaction medium is currency, precious metals, online e-currencies of various sorts (see story below), or gift cards to the local Ma & Pa newspaper stand -- who claims exemption from all the anti-money laundering rules out there based on technicalities will sooner or later be relieved of their illusion. It will be sooner if significant money laundering actually takes place within the business -- charges of which are among the many that are facing or faced e-gold and e-Bullion's principals. Crimes they allegedly helped facilitate or cover up include fraud of the HYIP Ponzi scheme variety.
E-bullion went a little further. It reinvented old-style fractional reserve banking in its own image by issuing more credits against bullion in its vaults than there was bullion. When a Federal Reserve system bank does this and the scheme collapses, it is called doing business and gets rewarded with a bailout. When anyone else does this and the fraud is discovered it is designated a crime. A truly independent audit was called for in e-Bullion's case.
Alternative digital currency businesses which continue to operate include Pecunix and e-dinar. So far they have avoided problems. Recent communications from Pecunix indicate they are doing something to avoid drawing the wrong kind of attention or clients. We would not use any of the industry participants as a place to "store" your gold. Businesses such as BullionVault which explicitly target secure storage are better alternatives to your physical bullion holdings. In partial defense of Pecunix and e-dinar, neither they nor their gold is located within the U.S. -- obviously a good idea for reasons which go well beyond the avoidance of attacks by the feds. Pecunix claims it has an agent, the Anglo Far-East Bullion Company, which oversees the company gold holdings in Zurich.
Even the nastiest divorces do not play out this badly: starting with investigations by the FBI, the IRS and the Justice Department -- and ending with the murder of the wife, slashed to death in a parking lot, and the seizure of $24 million in gold and cash. At the heart of the ugly dispute between James Fayed, 45, and his wife, Pamela, 44 at the time of her death, was the gold brokerage business they had founded and run, Goldfinger Coin & Bullion, from their ranch in Camarillo, California. James is being held in a Los Angeles jail, facing murder and conspiracy charges -- and an imminent indictment for money laundering.
Goldfinger began in 2001 as a legitimate business to buy and store precious metals on behalf of clients. The timing was good: The price of gold was just about to take off after years in the doldrums. Soon Pamela, a onetime jeweler, and James, who had worked as an electrical contractor, realized they could make bigger fees by getting in on the burgeoning digital currency end. James formed a unit called e-Bullion to process trades and warehouse gold. Logging on to a PC anywhere in the world, a Goldfinger customer could use a protected password to clear a transaction instantly, for a 2% fee. To send someone $400 from the U.S. to Germany and convert it to euros, for example, would cost $42 using Western Union and $16 with PayPal. With a Goldfinger account, it would cost you $8. Fayed stressed security and convenience. He offered customers a "Crypto card" (cost: $100) containing coded information to thwart hackers. He issued $35 debit cards that let clients draw down cash on their gold holdings at ATMs and Maestro terminals.
Thanks to goldbugs and traders, transaction fees piled up nicely. But around 2002, say authorities, Goldfinger decided to boost its volume by taking on a very different kind of customer: peddlers of high-yield ploys to investors. Often these are online Ponzi schemes that pose as investments in commodity trades or oil operations. They have become "the dirty little secret" of companies like e-Bullion, says Mark Herpel, editor of Digital Gold Currency Magazine.
One new Fayed client was a flamboyant convert to Islam called Abdul Tawala Ibn Ali Alishtari, who described himself to potential investors as a sheikh who had been appointed by the Supreme Ijima Council of the United Arab Emirates to create a virtual stock exchange called Fedi (Flat Electronic Data Interchange). He claimed the venture had a "physical presence" in the UAE, was backed by $125 billion in gold from some of the wealthiest royal families in the Middle East and was built on Islamic precepts. The idea: a commodities exchange in which Arabs invested $125,000 to buy a "desk" equivalent to a seat on the Chicago Mercantile Exchange and earn monthly returns of 30% -- based, supposedly, on fees from commodity traders processing a minimum of $50 million a month in transactions.
[E-Bullion] became a vital conduit for Fedi. Investors had to sign confidentiality agreements and open accounts through e-Bullion. In a Fedi pitch to investors an Alishtari partner praises the Fayeds as a "wonderful couple who have their roots in Egypt and, therefore, are Arab in descent."
No one knows how much business Alishtari brought Fayed. But at one point two dozen high-yield investment operators signed up with e-Bullion, among them, True Ventures, Kum and Solid Investments (none has been charged with criminal wrongdoing). Based on public documents and statements from investigators, Goldfinger processed an estimated $1 billion over its seven years of operation, generating $20 million or more in fees for Fayed's enterprises. On a single day in 2007 e-Bullion moved $112 million worth of transactions. James and Pamela bought 244 acres and built a $2 million home on Happy Camp Road in rural Ventura County, California.
But by 2003 they had a falling out with Alishtari. After receiving subpoenas from the Ontario Securities & Exchange Commission requesting e-Bullion records linked to Fedi accounts, James Fayed froze Alishtari's Goldfinger deposits. Alishtari sued, and a settlement was reached.
That did not end their troubles. In February 2007 Alishtari, who claimed in an online résumé to have been an adviser to four U.S. Presidents, was indicted by the Justice Department for money laundering, wire fraud and financing terrorism. The feds accused Fedi of being a "massive fraud." They also charged Alishtari with approving $177,000 in payments to Pakistan and Afghanistan to train jihadists and buy equipment like night-vision goggles. It turns out Alishtari is a resident of Ardsley, New York. His given name is Michael Mixon. No trial date has been set.
Meantime, the Fayeds were feuding. James Davidson -- a longtime friend of the couple, a fellow gold entrepreneur and an e-Bullion account holder -- says Pamela confided to him she was increasingly disturbed about her husband's business practices. Fayed had turned Goldfinger into something like a 19th-century bank, issuing currency well in excess of the hard assets in its vault. In early 2005 Fayed stopped publishing inventory figures for the gold and silver he held, saying members of e-Bullion had been polled and voted to take down the figures to protect their privacy.
That was "utter nonsense," says Davidson, who says he asked 50 or so fellow e-Bullionaires to see if this was true. "None of them had been polled." Fayed's wife, he says, was particularly irked by the association with high-yield operators: "Pam was trying to extricate herself from the fraudulent aspects of the business."
Davidson says that Pamela did not like some of the people James hired, either. One of them was Jose Moya, a former gang member, who has been charged in her murder. Fayed added to the payroll his brother Anthony, an ex-con with a bad temper who claimed membership in the Aryan Brotherhood prison gang. In 2003 Pamela tried to obtain a restraining order against him after he allegedly threatened another employee.
Investor complaints about e-Bullion led the FBI and IRS to Fayed's gold businesses. James filed for divorce from Pamela in October 2007. She went to court demanding sensitive documents from Goldfinger and e-Bullion. She argued the companies should be joined to the divorce. Neither knew Goldfinger had been hit with a sealed grand jury indictment in February 2008, alleging Fayed had transmitted money without a license. The single charge was part of a larger probe into Goldfinger's link to high-yield players.
On July 28 James, Pamela and their lawyers met in Century City, a tony neighborhood next to Beverly Hills. On the way to her car afterward Pamela was attacked by a man, one of three assailants, who jumped out of a red SUV and slashed her breast, neck and face. Her screams were heard by witnesses throughout the garage and across the street. According to authorities, the driver of the getaway car tried to exit the parking garage, but could not lift the lane barrier, so he put the car in reverse, pulled into a 3-point turn and went out the entrance--in full view of cameras, which recorded the car's plates. Investigators traced the auto to an Avis near the Fayed ranch; the car had been rented with James's corporate credit card. Fayed and Jose Moya were arrested and charged with arranging Pamela's murder. The suspected stabber is still at large.
As James Fayed awaits his murder trial, he will (a source tells us) soon face a new, multicount grand jury indictment accusing him of fraud and money laundering -- helping scamsters move roughly $1 billion around the world. Fayed's lawyer says his client ran his company lawfully and denies he had any involvement in his wife's murder.
With the seizure of documents and assets by authorities, Goldfinger and e-Bullion have virtually ceased to exist. Pamela's daughter, 19-year-old Desiree Goudie, is sorting out her mother's estate.
Judge Spares e-gold Directors Jail Time
Three principals involved with e-gold and its parent company, Gold & Silver Reserve, were indicted last year on a typical rote recitation of federal crimes, including money laudering. Gold & Silver CEO Douglas Jackson and then company supporters such as Mark Nestmann initially claimed the feds were targeting them with the idea of putting them out of business rather than due to any real evidence of crime. The privacy offered by e-gold and, more deeply, e-gold's potential as a viable alternative to the federal government-enabling Federal Reserve system, allegedly made the company a threat beyond its size. Further revelations led to strong suspicions that its customer list had included plenty of crooks and other unsavory characters.
Which is not to say the company and its supporters were just blowing smoke. Prosecutors implied that the company being incorporated in Bermuda and its articulated anti-government philosophy were inherently sinister.
Last month at the conclusion of their trial the e-gold principals were spared jail time. E-gold gets to remain open for business, although a November announcement said that the company was still figuring out how to comply with the registration process for new accounts now that it is subject to regulation as a "financial institution." Pending that resolution new account creation is "temporarily suspended." And assuming that gets resolved, the company business model will be hamstrung by extensive regulatory compliance costs. Their lower cost non-U.S. competitors will be able to undercut e-gold's prices. Perhaps they expect their brand name to help them.
WASHINGTON, D.C. — A federal judge decided on Thursday (November 17) not to impose a prison sentence on the senior directors of e-gold, an internet-based digital currency firm, who had previously pleaded guilty to violations of money laundering and running an unlicensed money transmitting business.
The three directors of e-gold, in addition to its Gold & Silver Reserve parent company, were indicted in April 2007 after federal prosecutors accused the online payment site of being a haven for criminal activity like processing investment scams and payments for child pornography. They said its loose verification standards for users' identity attracted criminals. The three men and the companies pleaded guilty to the charges in July 2008.
U.S. District Judge Rosemary Collyer said the men deserved lenient sentences because they did not intend to engage in illegal activity. Even though, Collyer said, the U.S. Justice Department wanted to use the cases to show "this new day of internet crime is going to be ... vigorously prosecuted," that alone was not enough reason to incarcerate the defendants.
Gold & Silver Reserve CEO Douglas Jackson was sentenced to 300 hours of community service, a $200 fine, and three years of supervision, including six months of electronically monitored home detention. He had faced a maximum sentence of 20 years in prison and a $500,000 fine. Jackson was spared a heavier fine because, according to his attorney, he is deeply in debt. "Dr. Jackson has suffered, will continue to suffer, and may never be successful with e-gold," the judge said.
Reid Jackson, Douglas Jackson's brother, and e-gold director Barry Downey were each sentenced to three years of probation, 300 hours of community service. They also were ordered to pay a $2,500 fine and a $100 assessment fee each.
The defendants were also ordered to obtain licenses to do business in the states in which a license is required, something the company had already begun doing. In September, e-gold hired KPMG to aid its development of an anti-money laundering program. It has already contacted every state to determine whether a license is needed.
E-gold and Gold & Silver Reserve faced a maximum fine of $3.7 million, but because neither company could pay that much, they were fined $300,000 with the condition that $10,000 be paid on Monday, with further monthly payments to start in May 2009.
Many of e-gold's users turned to it as an alternative to a bank account denominated in U.S. dollars, which lose money due to inflation especially when interest rates are low. By contrast, gold has zoomed upward from roughly $300 an ounce in 2002 to around $750 an ounce today.
Supporters of e-gold and gold-denominated accounts have suggested that enabling nearly anonymous transfers of money in and out of the banking system is what led the feds to target the company. For his part, Jackson initially blasted the feds, saying the Secret Service "deceived" a judge with "bogus testimony" so they could conduct a raid on e-gold designed to put it out of business.
Federal prosecutors claimed there was no doubt the directors knew e-gold facilitates criminal activity. An analysis in January 2008 of the 65 most valuable e-gold accounts showed that more than 70% were involved in criminal activity, according to Laurel Rimon, a Justice Department prosecutor.
Furthermore, prosecutors said, the funds that flow through e-gold, which launched in 1996, are significant. At its height, the site had more than 4 million accounts and facilitated more than $5 million fund transfers a day.
Though illegal activity continued on e-gold well after Douglas Jackson acknowledged the company was under investigation in 2004, the defendants claimed that they received bad legal counsel, which convinced them the site did not have to be licensed as a money transmitting business.
"If he had thought it needed to be licensed, he would have done everything in his power to make that happen," Federal Public Defender Michelle Peterson said about Reid Jackson.
The court also accepted the argument that Downey was unaware of the company's need for a license, even though he is a practicing lawyer.
The defendants also argued they have worked to the best of their abilities to cooperate with investigators, but the prosecutors provided evidence that the directors may have been trying to circumspect [sic?] government interference.
The company was incorporated in Bermuda, for instance, even though its operations are based out of Melbourne, Florida. Barry Pollack, Downey's defense attorney, said the site's offshore registry did not impede the directors from responding to subpoenas. (If the site had been entirely overseas, as GoldMoney.com is, it would not have had to worry about the feds. On the other hand, GoldMoney does demand proof of identity.)
Douglas Jackson founded the site on a philosophy opposed to government regulation, prosecutors said. "Dr. Jackson was very candid about his vision to create a version of a financial institution that did not have regulations," prosecutor Jonathan Haray said.
Intentions and philosophies notwithstanding, the defense said, the defendants should remain out of jail so they could keep the site up and running and continue to help investigators track criminals. E-gold's records of IP addresses and timestamps provide a trail to criminals–and proof the company had no intention of inviting criminal activity, the defense said.
The prosecution questioned how useful e-gold's cooperation really was. "The vast majority (of IP addresses from e-gold) do not have good identifying information," said Rimon. "If an IP address leads to a P.O. box on a street corner in Estonia, that does not do us much good, and that is what we found in many cases."
E-gold remains open for business today, though Jackson said in an announcement on November 14 that it was still figuring out how to comply with the registration process for new accounts now that it is subject to regulation as a "financial institution." New account creation is "temporarily suspended."
EXPATS FIND IT EASIER TO INTEGRATE IN GERMANY, CANADA AND SPAIN
So finds the largest ever independent survey of expatriates.
While factors such as cost of living and climate are key to any expatriation decision, the fact is that the quality of life is fundamentally effected by the friends one makes and one's fit in the adopted country's culture and community. HSBC surveyed 2,155 exats, a number which they claim makes it the largest independent survey of expats ever, regarding four major integration factors -- friends, community, language and buying property.
In overall winner Canada people found it easy to make friends. This was also the case in famously friendly Australia, but because in Australia is was difficult to find a community group to join its overall ranking was impaired. Germany ranked high because people found it easy to join a community group and because 3/4 learned the language. Not surprisingly given the difficulty Westerners have learning Chinese, only 20% of Hong Kong and Singapore expats learned the native language. Asian expats in general were the least likely to purchase homes in the new country, whereas France came in first in that category with 64% taking the plunge.
Clearly different people and families will have different social preferences and fall on different spots on the introversion-extroversion scale. But one cannot override human nature, which is that we are social animals. An isolated existence in a tropical paradise will wear thin for most people pretty quickly, whereas having in a vibrant social and community life will compensate for a lot of negative factors elsewhere.
HSBC Bank International revealed ... that Germany, Canada and Spain are perceived to be the easiest countries to settle in, according to the findings of the bank's "Expat Experience" report.
HSBC Bank International said that its report, the third and final study in its "Expat Explorer" survey, is the largest ever independent survey of expatriates, questioning 2,155 expats across four continents. The report examines the integration challenges faced by expats relocating to a new country by looking at the cultural and social differences experienced.
Expats were asked to rate their host country in four areas: (1) whether they made friends with people from the local population; (2) if they joined a local community group, such as a religious or sports group; (3) whether or not they learned the local language; and (4) if they bought property in their host country.
Among the most difficult countries in which to integrate were Australia, the United Arab Emirates and China. Australia ranked poorly on the number of expats who joined community groups. Expats in the UAE found it difficult to make friends. And China scored relatively low for the number of expats who bought property.
Martin Spurling, Chief Executive Officer for HSBC Bank International and Head of HSBC Global Offshore, said: "We commissioned this independent survey to take a look into the lives and experiences of our customers who live across the globe and the transitional challenges they encounter from country to country."
He added: "This final report in our 'Expat Explorer' series focuses on something that is incredibly important to all expats -- their ability to fit in to their new home. This is often the aspect that is most daunting, with many concerned about whether or not they will be able to make friends or feel like they belong in their adopted country. Through this survey we have been provided with a fascinating insight into our customers' lives which will help us also to best adapt to their offshore finance needs."
According to the survey, Canada is the most welcoming country to expats, with almost all (95%) of respondents claiming that they found it easy to make friends with the locals. This was followed by Germany (92%) and Australia (91%).
The United Arab Emirates was revealed to be the hardest country in which to make friends with the local population, with only half of expats living there (54% -- the lowest score in the survey) advising that they found it easy to make local friends. Singapore also ranked lower, with 68% of respondents indicating that they found it possible to make local friends.
HSBC's survey found that almost half (45%) of all respondents said that they had joined a local community group as expatriates. Expats living in Germany were most likely to join a community group (65% of respondents), followed by around half of expats living in Hong Kong (53%), Singapore (50%), Canada (50%) and the U.S. (50%). Australia, despite scoring highly for making friends with local people, came last in the category, with just 38% of expats saying that they had joined one of these groups.
Expats living in Europe were most likely to learn the local language, the survey revealed. Germany came top in this category with 3/4 of expats learning the German language, followed by expats in Spain (70%) and Belgium (70%) who were also likely to adopt the language of their country of residence. Conversely, only 1/5 of expats in Singapore and Hong Kong (20%) learned the language of their new homeland.
France came out as a property hotspot, ranking highest in the category of expats buying property, with almost two-thirds (64%) of respondents stating that they had purchased a property in the country. Expats in Asia are the least likely to buy a home with India (6%), China (12%) and Singapore (24%) ranking lowest for purchasing a property.
NEITHER EAST NOR WEST
This is the new face of globalism: PC vendor Lenovo is headquartered everywhere and nowhere.
Pundits have characterized the internet as being "everywhere and nowhere." Online-only businesses certainly have that aura about them. Sales, order fulfillment, accounting, etc. can all be performed from separate locations. Official headquarters location is irrelevant. Chinese PC manufacturer Lenovo, which is best known in the West for having bought out IBM's personal and notebook computer lines, is applying the concept to a much larger company that the average internet storefront.
"You can't just be clinging to outdated Western-centric views of the world," says Lenovo CEO William Amelio, an American. "You have to shift your thinking."
When William J. Amelio was being vetted for the top job at computer maker Lenovo three years ago, his first interview was with founder Liu Chuanzhi. Liu, who started Lenovo as one of China's first quasi-private enterprises in 1984, quizzed the American on PC trends ... [I]n December 2005 [Amelio] was named chief executive. Now Amelio, 51, is showing his own revolutionary streak as he and Liu's protégé and current chairman, Yang Yuanqing, 44, try to carve out a new global business model for Lenovo, the world's 4th-largest PC company. Their partnership is unorthodox, operating in tandem thousands of miles apart, and their management styles could not be more different. But the duo have got off to a quick start transforming a provincial Chinese computer maker into a global technology supplier with the power to withstand the economic slump.
Certainly Lenovo has struggled recently. While Hewlett-Packard reported a 19% revenue gain and a 4% earnings increase for its October 31 quarter, Lenovo saw no sales growth and suffered a 78% drop in profit for its quarter ended September 30. Lenovo is getting hammered because PC sales were particularly slow in China, still the source of 40% of sales, and among its biggest customers. ...
The blunt-talking chief executive continues to slash expenses and tighten Lenovo's already efficient supply chain. Meantime, he and Yang, who in China draws big crowds at tech-industry conferences, are moving into new markets and launching new products such as servers and workstations, hoping to turn Lenovo into a polymorphous tech brand for consumers and business types alike.
The company proudly notes that its shiny red IdeaPad U110 laptop won awards for best notebook PC at the big Consumer Electronics Show in Las Vegas earlier this year. The 11-inch machine comes equipped with a Web camera and facial-recognition technology to help people log in without typing a password. Lenovo also earned kudos for its sleek ThinkPad X300, an ultrathin competitor to Apple's MacBook Air released earlier this year.
Lenovo's overall strategy is to sell both budget and premium-priced PCs. But in a novel move for a top-tier computer maker, it wants to avoid spending gobs of marketing money in rich countries such as the U.S. and focus on faster-growing, poorer markets such as India, Russia, Brazil and Turkey. Lenovo's plan is to replicate the highly efficient PC sales operation it built in China, already the world's 2nd-biggest PC market. There it remains #1, ahead of foreign rivals like HP and Dell and domestic names Founder and Tongfang. Revenue for the company's last fiscal year, ended in March, was $16.4 billion, up 29% from two years prior, shortly after Amelio joined the company.
Few companies live as globally as Lenovo. The company has no fixed headquarters. Its monthly leadership meeting might be in Paris one month and Cambodia the next. Marketing is run out of Bangalore, India. Design work is done in Beijing, Raleigh, North Carolina and Yamato, Japan. Amelio lives in Singapore, although he is on the road most of the time. Yang recently moved from Beijing to Raleigh, the home of IBM's PC business, partly to better understand U.S. culture and management practices. The two catch up via e-mail about every other day and speak frequently on issues such as executive pay and how best to soothe cultural tensions between U.S. and Chinese managers.
"You want to be able to tap into innovation anywhere and everywhere in the world," Amelio says in an office in his modern three-story home. Amelio has lived in Singapore ever since he ran Dell's Asia-Pacific operations before joining Lenovo in late 2005. The first 18 years of his career, fittingly enough, were at IBM. Amelio still has not learned Mandarin, but he has taken ping-pong lessons with a private coach at home and plays with Yang on a doubles team in cutthroat company tournaments. "You can't just be clinging to outdated Western-centric views of the world," Amelio says. "You have to shift your thinking."
BARBADOS PM CALLS ON OBAMA TO RETHINK POSITION ON OFFSHORE FINANCE CENTERS
Barbados Prime Minister David Thompson would like President-elect Obama to rein in the anti-offshore rhetoric, on the basis that the Carribean nations are economically dependent on the their offshore financial centers and are just trying to make an honest buck. Good luck. By the time they have acceded sufficiently to U.S. demands to satisfy the incoming administration, Caribbean OFC would-be customers will probably figure they may as well just go to Delaware.
While PM Thompson is at it he might ask the pope to go easy with his anti-OFC rhetoric as well, on the good grounds that the pontiff is ignorant of the subject on which he is pontificating.
BRIDGETOWN, Barbados — Barbados Prime Minister David Thompson has issued a call to President-elect Barack Obama to take another look at the proposals made against the use of offshore financial centers and to recognize that the pursuit of financial services business in the Caribbean is a legitimate activity, which is mutually beneficial to both the Caribbean and the USA.
The Barbados Advocate reported that Thompson made the call when he spoke at the 32nd Miami Conference on the Caribbean and Central America on Wednesday (December 3), no doubt because the President-elect is on record as being opposed to "tax havens." In February 2008 Obama co-sponsored a bill in the U.S. Senate with Carl Levin, the Senator from Michigan, which named 13 Caribbean jurisdictions among those that could be listed by the Treasury Secretary as uncooperative.
At least four Caribbean countries, British Virgin Islands, Cayman Islands, Bahamas, and Bermuda depend heavily on financial services. In fact 60% of BVI's financial resources are generated from International Business Companies.
There are other Caribbean countries that also depend to a certain extent on offshore companies and they include Anguilla, Antigua and Barbuda, Barbados, Belize, Dominica, Grenada, St Lucia, St Kitts and Nevis and St. Vincent and the Grenadines.
The governments of Trinidad, Jamaica and Guyana have recently indicated their willingness to move into the financial services enterprise, which would mean that virtually the entire Caribbean would be involved.
Thompson told the participants at the Miami conference that Caribbean governments "have taken decisive measures to guard against money laundering, terrorist financing and transmittal crime. ... We cooperate fully with the Financial Action Task Force (FATF) and are committed to maintaining jurisdictions of quality and integrity. Our efforts merit recognition and support, not misrepresentation in the legislatures of this country."
However, it seems as if the Obama administration will not favor offshore companies, since Lawrence Summers, who has been appointed Director of White House National Economic Council, is an advocate against "tax havens" from the time he was in full support of the OECD while he served as Secretary Treasury under the Clinton administration.
Sir Ronald Sanders, business executive, former Antigua and Barbados High Commissioner, a top notch journalist who served as Head of the Caribbean Broadcasting Union, and author of a weekly column in Caribbean Net News on small states in the global community, expressed the view that Caribbean countries should "bolster their regulatory and supervisory systems so that they are beyond reproach."
The distinguished commentator and analyst said that the Caribbean countries should gear themselves for a downpour of new demands, and it was extremely important that they work together.
"I fully agree with the former General Manager of the Guyana Broadcasting Corporation for the Caribbean to speak with one voice and it is crucial also for them to be transparent and exchange tax information," Sanders said.
Moreover, he suggested that the CARICOM Secretariat should take the initiative to convene a group to start prepare a pan-Caribbean response and that this should be done "as quickly as possible."
See previous coverage of Sir Ronald Sauders's commentary on this subject here.
OECD TARGETING OFFSHORE FINANCIAL CENTERS, NOTES BAHAMAS FINANCE MINISTER
OFCs unjustifiably tied to international financial crisis, he says.
Bahamas State Minister for Finance Zhivargo Laing notes, as has every other small offshore finance center, that the country seems to be getting a lot of attention from the big boys lately. Some of it is just flat ridiculous. Regarding the accusation that the OFCs have had something to do with the international financial crisis, Laing said: "There was no nexus between the two."
Quite so. Those wounds, we feel safe in saying, were entirely self-inflicted. No help from anyone else was required.
State Minister for Finance Zhivargo Laing on Wednesday night (December 10) warned that there is a sentiment among developed countries, given the crisis in the world financial system, that there must be increased focus on reform of offshore financial centers.
The House of Assembly on Wednesday passed amendments to the Financial Transactions Reporting Act, the Securities Industry Act, the Financial Service and Corporate Providers Act and the Financial Intelligence Unit Act. These amendments sought to strengthen The Bahamas' regulatory regime vis-à-vis the recommendations of the Caribbean Financial Action Task Force, particularly in regards to anti-money laundering and anti-terrorism financing capabilities.
The House also passed an amendment to the International Business Companies Act, which the government said was not driven by CFATF recommendations, but by the local private sector.
While contributing to debate on the bills, Mr. Laing reported that he had been at a recent ACP meeting in Brussels, that the European community presented a statement outlining what they saw as eight priority focus points for reform of the international financial system.
"Remember, this is happening in the heart of the financial crisis, and their first priority was addressing offshore finance jurisdictions," Mr. Laing said. "The eighth [last] item was addressing reform in the international financial system."
"I said to them at the meeting that The Bahamas could not support a document where offshore financial centers -- in the context of this international financial crisis -- was the number one priority in terms of addressing that crisis, because there was no nexus between the two."
"There was no nexus between this current international financial crisis and any offshore financial center and its regulation," he said. "And there was no support for [the document] after we had made the case."
"The point," the minister said, "is that this sentiment, this mood exists out there, and that is being pushed out there, and so we have to continue being vigilant, and continue to be in dialogue with the industry."
"[We have to] continue to be active and careful in our observation of developments as they take place around the world so that we can at all times -- as has may not have been the case always -- be ahead of the curve where we can, in both protecting our jurisdiction's competitiveness while at the same time ensuring that its regulatory regime remains sound as to its integrity."
Mr. Laing classified the amendments to the financial services legislation in two categories. Some, he said, were meant to clarify areas in existing law that may be compliant with the CFATF regulations, but could be more clearly so. Others, he explained, were driven by requests or recommendations by the private sector.
"Some of the recommendations relate to industry recommendations as to how we might amend our laws to make our jurisdiction more 'user-friendly,' more business-friendly," he said. "So these are not just purely CFATF responses."
Mr. Laing explained that the first thing the amendments would do is clarify and strengthen The Bahamas' legislative framework in terms of the enforceability of the guidelines issued by regulators other than the Central Bank. ...
"It is good for the client, in terms of the jurisdiction being a business-friendly jurisdiction, but it is also good for the regulators in that they don't have to replicate work that has already been done satisfactorily by their own sister regulator in the jurisdiction," Mr. Laing asserted.
"The amendments [also] seek to clarify and enhance the supervisory powers of the Compliance Commission and the Inspector of Financial and Corporate Service Providers."
While the House passed the amendments, Prime Minister Hubert Ingraham foreshadowed the introduction of more amendments, before March 2009, to the Domestic Insurance Act and the introduction of regulations under the Securities Industry Act as well.
SWISS BANK SECRECY IN TOUGHEST TEST SINCE NAZI GOLD CONTROVERSY
While the Swiss have been able defenders of a person's right to privacy, they of course have done well while doing good. This is fine, as long as they are actually doing good. In the 1990s it was revealed that while Nazi-era Swiss bankers withheld details of Jewish financial accounts from their oppressors and murderers, the bankers' successors were also withholding account details from their late Jewish clients' descendants -- under the technicality that the original nondisclosure agreement still held. The banks got to keep the "unclaimed" assets. How convenient, and profitable.
Pressure on the Swiss eventually forced the banks to make some settlement with the descendants for what amounted to pennies on the dollar. The episode did not add to the cushion of legitimacy that the Swiss need to fall back at times to bolster the case for continuing their secrecy practices. They could use that cushion now.
Pressure from the high-tax OECD countries, spearheaded by the U.S. and Germany, may yet force additional concessions from the Swiss. The discoveries that Swiss bank UBS had helped U.S. persons evade taxes while Liechtenstein bank LGT similarly aided German taxpayers have provided convenient catalysts for the anti-secrecy forays. In the longer run the battle will turn critically on how successful the tax grabbers are at characterizing evaders as "criminals" whose nefarious activities are being aided by Switzerland, Liechtenstein et al. Here the OECD's successes appear to be mounting, thanks to cumulative propaganda. The egregious excesses of the credit bubble-addled rich in the last decade also makes them a convenient accessory punching bag in the war of words against financial secrecy. Who wants to defend them? And, we are all told, anyone who uses offshore accounts must be rich. Neat.
More than a decade after holocaust survivors won compensation from Swiss banks for emptying Jewish accounts that had lain dormant since the war, the pressure is on again to dismantle Swiss banking secrecy. This time, the tax collector is leading the charge.
With Washington joining Germany to press for an end to a code they believe helps tax dodgers, many see it as only a matter of time before the Swiss lift the cloak guarding the secrets of the world's wealthy.
"The challenge to bank secrecy is a thunderstorm which has been brewing since the holocaust money," said Sebastian Dovey of consultancy Scorpio Partnership. "It is a hot potato and I don't think the heat is going to be turned down."
Nearly one-third of wealth kept abroad globally is in Swiss banks: the Swiss Bankers Association and consultants estimate this at $2.2 trillion, making the Alpine state the globe's biggest offshore center ahead of Britain and Luxembourg.
But its code of secrecy -- which local myth inaccurately claims was introduced to protect fleeing Jews -- is as controversial as it is protective. Laid down in a 1934 law, it has spawned plots for bestselling thrillers, but also real-life intrigues such as that of Gizella Weisshaus.
Shortly before her father was murdered by the Nazis during the war, he told his children about gold coins and jewelry he had stowed away as Germany's army marched toward their home in Romania. "I found the money and his gold watch hidden in the roof of my house," she told Reuters by telephone from New York. "And there were some pieces of paper. It did not mean anything to me."
Decades later, the Auschwitz survivor was still trying to unravel the riddle of those long-discarded papers which likely contained the numbers of Swiss bank accounts. But like many others who traveled to Zurich to trace her father's money, she was turned away repeatedly. She later became central to a series of legal actions taken against the banks and in the mid-1990s under pressure from Washington and Jewish community group the World Jewish Congress, they finally paid $1.2 billion for accounts they had sucked dry.
Now Switzerland faces its toughest assault since. In an escalation of a U.S. investigation into its biggest bank, Raoul Weil, head of UBS's wealth management business, was recently charged with helping Americans hide billions.
"With the UBS case, Switzerland is under huge international pressure and pretty much back in the situation it was then," said Swiss Social Democrat party official and historian Peter Hug. "Holding onto bank secrecy is not going to work in the long term. Switzerland is small and it cannot afford to help tax evasion in its neighboring countries."
Germany, which at the start of the year paid an informant for the names of tax dodgers who parked money at LGT bank in smaller hideout Liechtenstein, is also pushing for change. "In the end, Switzerland will have no way around declaring who its foreign bank account holders are," said Hans Eichel, who as German Finance Minister between 1999 and 2005 tried to tackle offshore havens. "This is a business based on a criminal activity -- dodging tax in a neighboring country."
The Swiss have already made some concessions: introducing, for example, a tax on income earned by European Union citizens in Swiss accounts.
Stuart Eizenstat, U.S. Deputy Secretary of the Treasury under Bill Clinton, said the dormant accounts case he helped negotiate prompted the Swiss to cooperate on other fronts. "I do think it had a catalytic effect of making the banks more open," he said. "They became strong supporters, for example, of the anti-terrorist financing measures. It did spur them to become more open on money-laundering."
But with demands from Germany that Switzerland be blacklisted by the OECDt, pressure is rising for more.
"The Americans said that if you do not cooperate, then we will make sure you cannot do business here," said Eichel. "European neighbors of Switzerland such as Germany have to consider similar measures."
Many believe an agreement between Liechtenstein and the United States this week to drop bank secrecy in cases of tax evasion could force Switzerland into similar concessions.
Prince Nikolaus, the brother of Liechtenstein's ruling monarch and the country's ambassador to Brussels, said UBS's problems and Germany's probe of his family's bank, LGT, sent a clear message to offshore havens. "It was these two banks -- the biggest in their respective countries -- which were turned into a big case," he told Reuters by telephone from Brussels. "It has symbolic value. It shows the political priority."
The pressure from Washington is unlikely to let up. As a senator, U.S. president-elect Barack Obama introduced legislation early last year to make it easier to probe and prosecute tax dodging in offshore locations. As president, he will need to fund an economic stimulus plan that analysts estimate could cost at least $500 billion.
Hug believes Liechtenstein's move shows the air is also getting thinner for the Swiss elite. And he sees the first cracks appearing in the country's usually unshakeable facade. "There is a conflict of interest between Swiss industry and the banks," he said. "Industry wants compromise on bank secrecy so that the country's image is not spoilt."
Switzerland's banks -- the liabilities of its two largest are more than seven times the country's GDP -- have been talking up the services they offer beyond hiding customer identity. "This is not all we have," said Urs Roth, Chief Executive of the Swiss Bankers Association. "We do have a number of traditional advantages, like the economic, monetary and social stability."
Ultimately, however, it may not be the industry but Swiss pride that is the biggest hurdle to dropping bank secrecy. A nationwide vote would likely be needed to change the rules.
Few speak out publicly on the subject. No major Swiss bank wanted to discuss it with Reuters.
"The Swiss are so brainwashed, that the bank there is untouchable," said Maram Stern, who as Deputy Secretary General of the World Jewish Congress oversaw negotiations with the Swiss banks about dormant accounts. "This was what the normal person on the street was not capable of understanding. There were people asking me: how can you question the bank?"
The Swiss are "brainwashed" about their banks. Other nations' citizens are brainwashed about other institutions. Which leads to more mischief?
BRITISH GOVERNMENT PREPARES OFFSHORE BANK ACCOUNT TAX
Depositors who expect protection against losses can expect costs, and scrutiny.
A substantial number of British expats lost some or all of their deposits when their banks collapsed this year. Many professed surprise that the UK depositor compensation scheme, which protects depositors from up to £50,000 in losses, did not cover them. This seems somewhat ignorant and naïve, although one should bear in mind that U.K.'s permanent expats apparently do not have the option of keeping a domestic bank account. Many of the expats who were stung by losses were told they could not open a UK bank account without a UK address.
The U.K. Treasury is taking steps to offer such formerly missing protection -- for a price. They are considering levying a direct tax on offshore account interest earned. Of course this means, ipso facto, that the interest will have to be reported, a la the EU Savings Tax Directive. The Treasury estimates that 50,000 people do not declare presumably taxable offshore interest income on their tax returns.
Given how the bank collapses were the direct effect of government policies, this deal strikes us a reminiscent of the "insurance" offered by the protagonists in The Sopranos, as in: "You need this insurance or an accident could happen."
Savers with money in tax havens such as Guernsey and the Isle of Man could be forced to pay tax on their offshore bank accounts to fund a deposit protection scheme. Industry experts believe that the measure may be announced as part of a government-backed review into offshore financial centers.
Andrew Jupp, head of tax at Tenon, the accountant, said: "I would not be surprised if we saw a tax levy on income from offshore bank accounts as the quid pro quo for granting some level of protection, such as guaranteeing a certain level of cash deposits. The Treasury could try to strike a deal with overseas banks to ensure a certain amount of interest is withheld at source."
The review, which was announced by the Chancellor in last month's Pre-Budget Report, will examine the regulation and transparency of offshore havens, as well as their tax arrangements. It comes as confidence in offshore banking has plummeted after thousands of British savers lost money in offshore accounts owned by Icelandic banks this year. Depositors with Landsbanki Guernsey have recovered only 30% of their money, while customers of Kaupthing Singer & Friedlander Isle of Man (KSFIOM) still cannot access any of their money. Their situation will become clearer when the liquidation of KSFIOM is completed.
The banks were offering returns of up to 7% on cash deposits, but many savers did not realise that the Financial Services Compensation Scheme, which guarantees up to £50,000 of savings, does not protect them.
Action groups set up by savers have accused the Government of ignoring their plight after the Treasury refused to bail out those with offshore accounts, as it had done for Icesave customers in the U.K. Alistair Darling has stood firm against the compensation calls, but has hinted that change may be afoot. He said: "The recent financial turbulence has highlighted potential problems with overseas territories and crown dependencies, such as the Isle of Man and Channel Islands. They attract banking customers with lower taxes, without contributing to the UK Exchequer. The British taxpayer cannot be expected to be the guarantor of last resort. But at times of stress, depositors need to know who will compensate them."
The offshore review got under way last week and is being lead by Michael Foot, previously managing director of the Financial Services Authority. It will cover Jersey, Guernsey, the Isle of Man, Bermuda, the Cayman Islands, Gibraltar, the Turks and Caicos Islands, the British Virgin Islands and Anguilla, but not Luxembourg.
A key issue for the review is that specific tax arrangements and deposit protection schemes vary amongst the different offshore territories. Anna Sofat, of Addidi Wealth, an independent financial adviser, said: "Many of our clients have savings or investments offshore and some more clarity on what protection is available would certainly be welcomed, as would a common approach within the EU."
The review is also likely to examine ways that offshore investors and savers evade UK tax. Offshore accounts are widely used by non-domiciled people living and working in the UK, who do not pay income tax, capital gains tax or inheritance tax on any assets outside the UK. After a previous crackdown, non-doms now must pay HM Revenue & Customs (HMRC) £30,000 a year to continue that arrangement after seven years of residence.
Tens of thousands of British citizens living and working abroad also use offshore facilities. Many of the people who lost money in Icelandic offshore banks were expatriates who had retired abroad and were told that they could not open a UK bank account without a UK address.
Interest on offshore savings is paid gross without income tax being deducted. The Treasury estimates that 50,000 people do not declare this income on their tax returns. Even if tax is declared, offshore accounts can still benefit big savers because interest is earned on the gross amount, which produces bigger returns.
Offshore investments also have beneficial tax arrangements. Normally investors do not pay UK income tax until offshore bonds are cashed in, or withdrawals of more than 5 per cent a year are taken. If the investments are contained within an offshore trust, it can also protect the assets from UK inheritance tax.
HMRC has already begun a fresh crackdown on offshore savers by sending letters to 55,000 individuals suspected of failing to disclose income on which UK tax should be paid.
Mr. Foot will produce his review's interim conclusions in time for the 2009 Budget.
The article concludes with a list of compensation schemes in place for major offshore centers used by British expats.
Not so safe havens.
- Jersey: No scheme in place. The Jersey Treasury announced on October 3 that all residents' deposits were fully protected, but this does not cover those living outside Jersey. The Government and the finance industry are currently devising a deposit compensation scheme.
- Guernsey: Up to £50,000 is guaranteed. This was announced on November 26, which was too late to help savers with Landsbanki Guernsey. However, the scheme has access to only £100 million, which is significantly less than would probably be required to compensate savers of a collapsed bank. It cost the UK Treasury £800 million to fund the compensation of 240,000 British depositors with Icesave.
- Isle of Man: Up to £50,000 is guaranteed. The Isle of Man Treasury has £150 million for the scheme, in addition to payments from the banking sector. The 8,000 depositors in KSFIOM have more than £820 million at risk.
- Luxembourg: Up to €20,000 is guaranteed. Savers with Landsbanki Luxembourg, which also went into administration on October 8, have started to make claims on the scheme. A Bill is going through the Luxemburg parliament to increase the limit to E100,000, but this will not help those with Landsbanki Luxembourg.
This article was published in the London Times, which makes provision for reader comments. A couple usefully clarify just what depositors are being "protected" against.
Either the UK government has jurisdiction over these "tax havens" or it does not. It cannot have it both ways.
Gordon Hickley, London, UK
No one, in particular Alistair Darling, seems to understand that KSFIOM victims are not looking to get in on a UK depositors compensation scheme. Fact is that the UK Government seized £550 million of the £800 million held by KSFIOM, and has refused to distribute this money to the rightful owners.
Dan, Isle of Man
I will enjoy paying my tax bill with a cheque from my KSFIOM account. As an UK expats who has every right to have an offshore account, I am decribed by Alistair Darling as a tax dodger, thus my tax contributions seem to be irrelevant. I assume he won't mind getting mine from our now defunct bank.
Dr. George Fishwick, Dhahran, Saudi Arabia
The second commenter above in particular has our sympathies. We cannot count the number of times a government has seized assets under allegations of fraud, yet none of the assets ever find their way back to the victims. The idea seems to be to get a conviction, keep the money, and move on. Not quite the same here, but the effect is pretty similar.
STATE OF KENTUCKY ATTEMPTING TO SEIZE DOMAIN NAMES OF GAMBLING SITES
An ongoing court case in Kentucky is attracting much attention. Internet gambling is illegal in Kentucky. The state wants internet gambling sites to block Kentucky surfers from viewing the sites. The sites have refused on the basis of expense and broad legal issues such as the Commerce Clause of the U.S. Constitution. Kentucky has countered by trying to expropriate the domain names of the sites, e.g., UltimateBet.com -- quite an innovative and potentially disruptive legal initiative.
Arrayed against the state are a diverse set of interest groups. The domain owners themselves and gambling (online or not) trade groups we expect. Joining them are internet and civil liberties advocacy groups the Electronic Frontier Foundation, the Center for Democracy and Technology and the Kentucky ACLU, as well as Network Solutions LLC, the controller of the .com internet domain suffix. Oral arguments before the Kentucky Court of Appeals were made last Friday.
Arbitrarily pushing the boundaries of the atrocious U.S. and state forfeiture laws are old hat by now. We have always wondered where they will all end short of a Caligula-style "We need it. You have it. We’re taking it." This case explores strange, new legal worlds. The federal government has, we recall, summarily expropriated what were deemed sites offering illegal information or services. Subsequent visitors to the site would find a warning from the FBI instead. Here, as is standard with forfeiture cases, the state is trying to grab the domains without the formality of a prior finding of illegal behavior (on the part of the gambling site owners).
Not mentioned here is where the companies which did the actual domain registration were domiciled. Network Solutions is a U.S. company, and perhaps represents the ultimate "owner" of .com domains. But is GoDaddy or some other U.S. company the domain name registrar, and will that matter -- now or in future cases of this sort? Network Solutions has been criticized for its powerful hold over the internet exercized via its control of .com. If its domains become subject to being arbitrarily expropriated and suddenly non-.com domains will look more attractive than they have been until now.
LOUISVILLE — Lawyers representing online gambling interests told the Kentucky Court of Appeals on Friday that Gov. Steve Beshear's effort to seize domain names is blatantly unconstitutional. A three-judge panel is weighing Beshear's unprecedented move to seize the domain names of 141 gambling Web sites.
Franklin Circuit Judge Thomas Wingate allowed the Cabinet for Justice and Public Safety to seize the domain names last month. The seizure, at this point, is meaningless because the state cannot control the content of the Web sites until a judge orders the domain names forfeited to the state.
A forfeiture hearing has been stayed pending a ruling from the Court of Apeals.
In oral arguments Friday, lawyers representing six domain names, two online gambling trade groups and The Poker Players Alliance said the cabinet's move is littered with legal and constitutional flaws. They focused on four arguments:
"We have Kentucky exercising worldwide jurisdiction," said Frankfort lawyer William E. Johnson, who represents five domain names. Friend-of-the-court briefs supporting the online gambling interests were filed by the Electronic Frontier Foundation, Center for Democracy and Technology and the American Civil Liberties Union of Kentucky; Network Solutions LLC; and The Poker Players Alliance.
- Wingate does not have jurisdiction to allow the state to seize domains registered in other countries where gambling is legal.
- Domain names are not gambling devices.
- Domain names can only be seized after a criminal conviction. The state has not attempted to criminally prosecute the Web site operators.
- Kentucky is prohibited by the commerce clause of the U.S Constitution from regulating interstate and international commerce, which the trade groups argue Wingate's order affectively allows.
The owners of gambling sites did not appear in court Friday and have not directly participated in the lawsuit. Instead, proxy owners of six domain names and two trade groups have sought to represent their interests.
The cabinet has argued that the proxy owners and trade groups do not have standing to challenge the seizure since they are not revealing their client's identities, and hence cannot prove they own the gambling sites. The cabinet's lawyers called it a "heads I win, tails you can't find me" legal strategy.
Trade groups and the ACLU of Kentucky retorted that government is attempting to coerce the gambling sites into self-incrimination -- which is prohibited by the Fifth Amendment -- or risk losing their domain names.
The domain name owners note that it was the state that chose to sue them rather than the gambling businesses that operate the Web sites, likely because they are overseas and cannot be located.
A private lawyer representing the state, Erik Lycan, said the gambling sites are engaging "in a massive offshore criminal conspiracy" that is masquerading "as a legitimate business." ... "They can't bring that masquerade into Kentucky," Lycan said.
Beshear campaigned last year on a promise to open casinos in Kentucky, but says some of the most popular gambling sites in the world are bad for the state. The governor has said the sites create ways for children to gamble; undermine horse racing by creating untaxed competition [emphasis added]; make it easier to launder money; and lack consumer protections to ensure people actually receive their winnings.
While Wingate's ruling would allow the state to commandeer domain names, Internet users in Kentucky could still access the Web sites by typing their IP addresses -- unique numbers assigned to every computer or Web server connected to the Internet -- into their browsers, lawyers notes.
Louisville lawyer Jon L. Fleischaker, who represents the Interactive Media Entertainment and Gaming Association, a trade group, argued that domain names are no more than billboards. He noted that the Horseshoe Casino in Southern Indiana can advertise in Kentucky, even though gambling is illegal here, because of the First Amendment.
Seizing a domain name is no different than the state seizing a casino billboard, Fleischaker said. "That is classic prior restraint," he said.
The state wants gambling sites to block Kentucky Internet users from viewing the sites. But such technology is prohibitively expensive and faulty, gambling trade groups argued in briefs. Furthermore, Kentucky is constitutionally prohibited from imposing such a requirement for Web sites located in other states and other countries, where the Web sites may be perfectly legal, the lawyers argued.
In briefs, the lawyers likened it to China attempting to seize a domain name registered in the United States because the Web site promotes religion. "If we can do it to them, they can do it to us," said lawyer John L. Tate, who represents vicsbingo.com and the Interactive Gaming Council, a trade group.
Another key issue is whether domain names are gambling devices. Johnson said domain names do not meet the legal definition of a gambling device because domain names are not electronic devices that are manufactured. He noted that Kentucky's gaming statutes were written in 1974, long before the Internet was commercially available.
Two of the three judges expressed skepticism about the government's case. Judge Jeff Taylor asked how the government could seize the domain names when the Web site operators have not been prosecuted. Justice and Public Safety Cabinet Secretary J. Michael Brown "taught a law school class 27 years ago and he taught that there is a presumption of innocence until proven guilty," Taylor said.
REAL TAXES FOR REAL MONEY MADE BY ONLINE GAME PLAYERS
Online virtual world players have shown a willingness to exchange real world currency for virtual currency that can in turn be used to buy enhanced powers and toys. To us this looks on the face of it to be missing the point. In practice as in the real world, a division of labor has arisen and those with time produce virtual goods that those with money are willing to buy. If people value the thrill of participation over the joy of learning, so be it.
Now the Chinese government wants a cut of the virtual currency sellers' revenues. The tax also applies to a variety of other businesses where virtual currencies are used. China's virtual currency market is said to be growing 15-20% annually.
That some government wants to get its hand in a growing and profitable business is so unsurprising as to not warrant notice. What makes this instance interesting is the domain. Virtual worlds and e-currencies are evolving, as with the internet itself, in ways unexpected and confounding. Real world problems such as fraud and identity theft have started routinely appearing. Of course now some want the government to come in and provide "protection" against that. Been there, done that. Expect the tax battle between e-currency users and governments to be protracted.
Successful online video game players and Internet surfers in China have found ways to make real money from virtual assets. Now China's taxman wants a piece of the action.
The State Administration of Taxation said ... that China will impose a personal income tax of 20% on profit from virtual money. The announcement, which was distributed to local tax bureaus, specifically takes aim at those who buy virtual currency from gamers and surfers and sell it to others at a mark-up. Taxation officials are granted the right to determine the original price of online virtual currency if the individual fails to provide proof of an original price, it says.
The policy would cover China's legions of online gamers, who can use online virtual currency to buy better equipment and new powers for their online warriors. But it also affects millions of others who use virtual currencies on instant-messaging services and Web portals. For example, users of Tencent Holding's popular QQ chat service can earn Q-coins they can use to purchase online game equipments and buy e-gifts. Statistics from research firm iResearch show that China's virtual currency market is growing at a yearly rate of 15% to 20%, and several billion yuan worth of virtual money is traded in the market.
The fast growth already has raised fears among China's policymakers, who last year restricted the conversion of virtual currency into yuan. Among other reasons cited in this Chinese language Xinhua report, they feared the practice could lead to inflation as well as money-laundering.
This week's move has become a hot topic among Chinese Web users nationwide. Over 6,000 comments were left by netizens on Netease.com one day after the news appeared on the portal site (in Chinese here).
Many said it is unfair to tax on individuals while internet companies are exempt. "Tax everything and no refund at all. This time, it even charges 20 percent. No wonder the country is the world's No. 1 tax bearer," wrote one netizen on Netease.com.
In an online poll by the Sina.com, over 70% out of about 3,000 people who voted were against the new taxation decision. The biggest doubt is how the actual sum of property will be evaluated. Blogger Ruan Zhanjiang wrote that, "Many game players are classmates or friends in real life, thus most of them will not have credentials when trading virtual money. It is difficult to prove the original value of virtual currency, though." ...
Still, some believe the government's move can help better protect the property rights of online gamers. Identity theft has long been a fast-growing problem for online gamers in the high-profit virtual currency trading market.
U.S. AUTO BAIL-OUT PLAN WOULD REWARD TAX EVASION, GRASSLEY FUMES
The sum and substance of the proliferating bail-out bills is that they constitute one gigantic piece of pork barrel spending legislation. Few questions are being asked about and little discretion is being exercised with regard to beneficiaries. So no surprise that some odd parties turn up on the receiving side of the benefits line. Blowhard Senator Chuck Grassley actually came up with a pretty good nomination for odd fellow beneficiary of last week: foreign corporations who facilitated tax shelters which lacked economic substance ... tax shelters which have been specifically shut down by acts of Congress in the last few years. You can't make this stuff up.
United States Senator Chuck Grassley believes that proposed legislation to help American automakers "would put tax dollars on the line" to assist participants in controversial tax shelters which have been shut down by both the IRS and Congress.
According to Grassley, the ranking member of the Senate Finance Committee, the proposed Auto Industry Financing and Restructuring Act (AIFRA) currently being considered by Congress also contains a "tax shelter bailout" related to abusive leasing transactions called SILOs (sale-in lease-out) and LILOs (lease-in lease-out).
LILOs and SILOs involve complex arrangements in which some of the nation's largest corporations have leased or purchased large assets, such as rail systems or sewer systems, both domestically and overseas, and immediately leased them back to their original owners. Under these arrangements, corporate taxpayers put off recognition of current income for tax purposes for many years.
While he was Chairman of the Senate Finance Committee in 2004 and 2006, Grassley won passage of reform legislation to shut down these kinds of tax shelters. The Iowa Senator has expressed dismay however, that under the provisions of the AIFRA, certain state departments of transportation and public transportation agencies which took part in SILO transactions will receive bail-out funding. ...
"As Chairman, and now Ranking Member, of the Finance Committee, I have worked with Senator Baucus to lead the charge in combating abusive tax avoidance transactions," Grassley wrote in the letter to Democratic Majority Leader Harry Reid and House Speaker Nancy Pelosi.
"Since our actions, along with the IRS's actions, clearly indicate these transactions are tax shelters for all intents and purposes, I do not support the Transit Agencies' request for a guarantee. I appreciate that denying their request could result in technical defaults by the Transit Agencies and that such defaults may result in the Transit Agencies paying parties to the LILO/SILO transactions the economic equivalent of the tax benefits that were the reason for entering into these transactions in the first place," the letter went on to state.
Grassley argued, however, that allowing parties to these transactions to reap these benefits with taxpayer dollars would be "a perverse result."
"It is even more offensive that many of the corporations that would benefit from the guarantee proposed in AIFRA are foreign corporations. Taxpayer dollars certainly should not be used to bail out foreign corporations who knowingly entered in questionable transactions for the sole purpose of tax evasion," Grassley wrote.
HONG KONG ECONOMY EXPOSED TO GLOBAL FINANCIAL RISKS, SAYS IMF
We’re from the IMF, and we are here to help you.
Hong Kong's economic performance since starting from with close to nothing after World War II has been a showcase for the rule of law, low taxation and regulation, hard work and a high savings rate. Over the decades the economy has evolved from labor intensive manufacturing, to more capital intensive manufacturing, to "knowledge-based" services. Included in the later has been financial services, spurred on by Hong Kong's role as a gateway into the rapidly growing and opening mainland China. This means Hong Kong too has been hurt by the worldwide financial crisis. The sages at the IMF continued to show their facility at forecasting by explaining all that to Hong Kong after the fact.
Hong Kong's economy was showing clear signs of a slow down, the IMF said. As one of the most open economies in the world and with its focus on financial and trade services, Hong Kong was highly exposed to the unfolding crisis in international financial markets and to the slowdown in the global economy, the IMF observed.
Over the past decades Hong Kong's economy had changed from a manufacturing economy into a global financial center. Leveraging on its dynamic, knowledge-based service economy, Hong Kong had posted 7% growth in the last four years. Unemployment had fallen to the lowest level in a decade and increasing disposable incomes had fuelled increased private consumption.
However, the current account surplus had decreased in the first half as net exports of goods and services had declined. The consolidated fiscal surplus in 2007/08 was 7.75% of the GDP, beating the budget targets by 6%. In contrast, the combined budget and supplement now target a fiscal deficit of 0.75% of GDP for the fiscal year 2008/09.
The IMF Executive Directors praised Hong Kong's sound economic policies and its steady strengthening of financial sector regulations and supervision. The IMF also welcomed a range of measures undertaken to bolster domestic demand. The banking system was also in good shape according to the IMF, but cautioned that credit growth could slow sharply, while credit quality also deteriorated, in step with the economic downturn. The IMF was appreciative of Hong Kong's initiative in introducing a time-bound blanket deposit guarantee and a contingent facility to provide capital to the region's banks.
The IMF said that fiscal policy was the best way to fight slower growth, highlighting the region's focus on well-targeted infrastructure investments. Though consumer price inflation had decreased, underlying inflation appears to have just peaked, the IMF said.
Going forward, a possible worsening of international financial market turbulence was the key risk for growth for the Special Administrative Region, the IMF said.
LIKE A BAD NEIGHBOR
Insurance agents who steal from clients can go undetected for years.
Insurance agent fraud is probably rare on average. This article makes us think it is surprising that it is not more common. Given the informality of how the funds flow is handled, it does not look that hard to pull off. One pretty strong defense is to call up the purported policy issuer annually and double-check your policy's ongoing validity for yourself. Or you could just end around the agency system and purchase your policy from a company which uses the direct sales channel.
Jeanne and Anthony Trotta were in their 80s when they bought $150,000 worth of annuities in 1998 from Michael Minnehan, an insurance agent in their hometown of Milford, Massachusetts. Minnehan told them the annuities would do better than a savings account. They might have, if the money had not been stolen.
A few years after the annuities were issued by Jackson National Life, the state Department of Insurance revoked Minnehan's insurance license following fraud allegations. He nonetheless continued to represent himself as an agent, the policies were surrendered, and he pocketed a big chunk of the proceeds.
There are several ways for agents to cheat. In some cases they fail to pass along premiums to insurers. In others, they pilfer funds from the cash value of a policy or surrender a policy and keep the proceeds.
"Premium scams are a constant and widespread problem that likely will grow worse in this nightmarish economy," says James Quiggle of the Coalition Against Insurance Fraud. "Most [agents] are honest, but bilking vulnerable clients can mean easy money some just can't pass up."
Who eats the loss? That depends on the agent and the specifics of the crime. If the misbehavior is by a captive agent (one representing only one insurer), the insurer generally has to make victims whole. If it is by an independent agent (one, like the Trottas's, selling policies from several insurers), clients can get stuck. A state guarantee fund will protect policyholders (up to certain limits) if their insurer goes under. Victims of fraud are left on the hook unless an insurer chooses to or is legally responsible for compensating them, or if the agent is able to pay restitution.
Six years after the Trottas bought their annuities, Anthony died. Jeanne was told by Minnehan the funds from her husband's annuity would transfer to hers. In 2006 she decided to surrender her annuity and tried to contact Minnehan.
She received a letter signed by his son that said Minnehan was ill with cancer and his affairs on hold. "Please bear with the situation," the letter pleaded. Several apologetic letters followed, along with financial statements from a New Jersey agency to which the Trottas' account supposedly had transferred. The Trottas' daughter, Kathy Jeanne D'Alessandro, reviewed statements her mother had received between 2004 and 2006. She realized they were frauds and Minnehan had never sold or transferred accounts from his agency to the New Jersey firm.
According to D'Alessandro, Minnehan had written the letters himself, faked the statements and spent the Trottases money. All told, he defrauded clients, mostly seniors, of $500,000. He was sentenced to five to seven years in state prison. To date he has been unable to make restitution. Jackson National Life has recently agreed to take a second look at Jeanne Trotta's case but has declined to discuss it, citing federal privacy regulations.
Earlier this year GMAC notified the North Carolina Department of Insurance it suspected agent Michael Arthur Howell of failing to remit premiums paid by his clients. The Department of Insurance dispatched auditor Sallie Rohrbach in May to Howell's Charlotte, North Carolina agency. Her body was found five days later. Howell is awaiting trial for Rohrbach's murder.
Dale E. Schlichting of Hayfield, Minnesota operated an agency for many years and was a Chamber of Commerce member and church treasurer. He also sold bogus insurance policies and securities he claimed would return up to 12% annually. His $2 million Ponzi scheme ensnared 92 victims. Schlichting pulled it off by having customers write checks to an account at a bank. Then, rather than invest or forward the money to insurers, he used some to pay off other investors and pocketed the rest, the Minnesota Department of Commerce says.
Some of Schlichting's victims paid income taxes for years on their phantom earnings and were unable to get much refunded because too much time had passed. Indeed tax returns can, in most cases, only be amended within three years of the date of the original return. Says Sterling Johnson, an 84-year-old retired farmer who gave Schlichting $300,000: "I wish I was half my age and could meet him in my yard. He'd remember it a long time."
Schlichting got 97 months for mail fraud and money laundering last year and was ordered to pay $3 million in restitution. His clients will get back only a small fraction of what they lost.
Curtis Wayne Knecht, a captive agent for insurer Indiana Farm Bureau Insurance, was a Little League coach and the brother of a police chief. He sold annuities and life, auto and home insurance across kitchen tables to farmers around Veedersburg, Indiana Between 1992 and 2005 Knecht embezzled premium checks and took out unauthorized loans from clients' life policies. He managed to keep the scam under wraps for 13 years by faking receipts and statements. Knecht even sent clients bogus annuity payments from a personal account. When clients received conflicting statements from Indiana Farm Bureau, he told them they were inaccurate. "He said the company was making mistakes, and people believed him," says Lynn Jongleux, general counsel for Indiana Farm Bureau.
Knecht stole $1.2 million from the accounts of 30 customers. All were made whole by Indiana Farm Bureau, a smallish, privately owned stock life insurance company ... Knecht, 48, is serving a 10-year prison term at the federal prison in Marion, Illinois. His lawyer declines to comment.
Does agent embezzlement occur frequently? As best as we can determine (there are no national statistics), no. But do not take chances.
SIC TRANSIT BERNIE MADOFF
Last week saw the exposure of likely the biggest Ponzi investment scam of all time, run by one Bernard Madoff. There will be much more to come on this, but the fact that it was exposed only after the collapse of the worldwide credit bubble is no accident. When "sure I trust you" transmogrifies to "show me the money," as happens when bull changes to bear, these schemes get revealed. Robert F. Bruner, dean of the University of Virginia business school and co-author of The Panic of 1907: Lessons Learned from the Market's Perfect Storm, supplies some basic background..
Please allow me to introduce myself
I'm a man of wealth and taste
I've been around for a long, long year, stole many a man's soul and faith
... But what's puzzling you is the nature of my game. ~~ Mick Jagger, "Sympathy for the Devil"
Bernie Madoff confessed on December 11 to running the biggest Ponzi scheme ever. Named for a prominent practitioner, Charles Ponzi (1882-1949), the con artist in this game builds a pyramid of investors by paying very high returns from the cash inflows from new investors. There is no source of real value creation; early investors profit from the gullibility of later investors. As word spreads of the high returns, an investment bubble is created: Investors throw their money into the scheme.
But no bubbles inflate forever. Eventually it becomes impossible for the con artist to keep paying the high returns. Just before that tipping point, the skillful con artist will abscond with the cash. But Madoff would not or could not run off. This is one for the record books featuring a spectacular fall of one of the pillars of the New York financial community and possibly the biggest loss ever (up to $50 billion, by some reports).
History tells us we should not be surprised. Ponzi or pyramid schemes reappear regularly. Charles Ponzi's bubble, founded on a hypothetical arbitrage in postal stamps, burst in 1920. A pyramid constructed by Bernard Cornfeld, on mutual fund investing, failed in 1970. Reed Slatkin's scheme, premised on investing in equities, burst in 2000. I have argued that corporations can practice a variation of this under the guise of momentum growth strategies -- such firms are Enron and Tyco International, under its former CEO, Dennis Kozlowski.
(For more detail on corporate momentum growth strategies, Enron and Tyco International, see my book, Deals from Hell. For more detail on Ponzi and Cornfeld respectively, see these fine biographies: Mitchell Zuckoff, Ponzi's Scheme: The True Story of a Financial Legend. Charles Raw with Godfrey Hodgson and Bruce Page, Do You Sincerely Want To Be Rich?.)
Ponzi schemes have at least three historical regularities:
A final observation is that Ponzi schemes tend to burst when markets turn down. At such moments the scrutiny of investors naturally grows and investment inflows slacken. With investors asking detailed questions and the cash balance insufficient to meet investors' expectations, the Ponzi artist quits. Sic transit Bernie Madoff.
- They arise and grow in "hot market" moments. These are times of rising asset prices, optimism, decreased risk aversion, aggressive use of debt financing, prominent deals and deal-makers, and when naïve and unsophisticated investors tend to pile into the market. Mania causes investors to suspend disbelief.
- They are premised on some plausible new arbitrage. Charles Ponzi based his investment proposition on a supposed arbitrage between postage stamps and international reply coupons. The con artist argues that there is a market inefficiency to be exploited and typically refuses to discuss the investment in detail since it might draw the notice of other investors and ruin the arbitrage.
- They exploit complexity and the resulting information asymmetry that makes it hard to really figure out what is going on. "Trust me" is the con artist's mantra.
Mumbai Will Rise Again
The carnage is horrible. But India is already staging a comeback.
The mass terror attacks in Mumbai, India in late November were aimed at the vibrant Indian economy as much as Americans, Jews and other targeted groups. Forbes says the economy will take the blows and recover quickly.
Among the intended victims [of the November bombing attack] were Americans and Britons, Jews, ordinary Mumbaikars -- and the $626 billion Indian economy. Like massacres in Luxor, Egypt, Bali and, recently, Islamabad's Marriott Hotel, the attacks were aimed at tourists -- and the heart of India's financial capital.
India had already been rocked by aftershocks of the global financial earthquake. Its growth slowed to 7.6% in the quarter ended September 30. The stock market has suffered most: The Bombay Sensex is down 56% this year. India's 40 richest are poorer by $212 billion.
Already lacerated by several attacks since 1993, Mumbai has always recovered quickly -- and will likely do so again. Akhil Gupta, chairman of the private equity firm Blackstone India (with $800 million in investments), left a meeting at the Oberoi Hotel less than an hour before the shooting started. He notes that 90% of the 10,000 people employed at the outsourcing firm Intelenet, a Blackstone investment, were back at work the morning after the attacks began. "There is no question about Mumbai's ability to make a fast comeback," he says. All but 2 of 40 branches of Kotak Mahindra Bank in Mumbai stayed open. Remarkably, the Sensex, while dipping, was holding above its October low.
The broader economy should hold its own, too.
Central American Leaders Agree on Common Currency, Passport
A new initiative from the Central American counties, which may or may not come to any more than past nods of the head towards cooperation.
SAN PEDRO SULA, Honduras (AFP) — The eight leaders vowed to promote "a regional conscience that instills people with a sense of identity and belonging to a united Central American region," including "perfecting the issue of a Central American passport and the adoption of a single Central American currency."
They also resolved to "standardize laws" in the immigration, education and security sectors "that will give greater cohesion to Central American integration and that ensure citizens the benefits of that integration."
A report on progress made on all those issues will be presented at the next Central American summit, the statement added. The presidents of Honduras, Guatemala, El Salvador and Nicaragua, and representatives from Costa Rica, Panama, Dominican Republic and Belize also agreed ... on a 41-point economic blueprint to help the region weather the current global financial storm. ...
The summit was held at the Arab-Honduran Club in San Pedro Sula, Honduras' next largest city after its capital San Salvador, 240 kilometers (150 miles) south of here.
Memorandum of Understanding with Russia strengthens Cyprus as a Financial Center.
Further cooperation between Russia and Cyprus, through which a lot of international Russian business is routed, has been formalized. Still no word about Cyprus's getting off of Russia's tax blacklist, although the President of Cyprus is optimistic.
Cyprus's bid to be established as a financial services center has gained new momentum after the signing of an MoU between the Cyprus Securities and Exchange Commission (CySec) and the Federal Financial Markets Service of Russia, CySec Chairman Giorgos Charalambous has said. ...
In an interview with CNA, Charalambous said that this MoU upgrades the credibility of the Cypriot Commission. ... According to Charalambous, the MoU was considered necessary because the CySec is responsible not only for the supervision of Cypriot Licensed Investment Services Companies but also for many international investment companies based on the island and many of them are of Russian interest, which operate internationally and not in Cyprus, with turnovers amounting to trillions of dollars.
Dutch Court Rules Against Offshore Account Holders
Those who have lived under the English system of law will have at least a vague awareness about the right to not be compelled to incriminate yourself -- "Taking the Fifth" is how it is colloquially called in America. This right has been substantially gutted over time (What right has not?), but its long tradition and public cognizance means it still offers some protection. Not so in the Netherlands, this news makes abundantly clear.
In the U.S. one is required to disclose the existence of all foreign jurisdiction financial accounts once their aggregate sum exceeds $10,000. This is not quite the same thing as turning over photocopies of bank statements. Dutch courts have ruled for the third time, with heavy penalties for refuseniks, that if the government asks you to provide information on a possible offshore bank account you have to fork over the information. And if the information does not exist perhaps you should make some up, otherwise they will get really mad.
As an ancillary but consistently appearing issue, note that the courts -- in the Netherlands and everywhere -- are another branch of the government. Their job is not to defend citizen/marks against the other branches' depredations.
The Netherlands Ministry of Finance has revealed that taxpayers who refused to disclose information regarding offshore accounts have recently been subject to judicial proceedings. In the last few weeks, the Dutch tax and customs administration won their 3rd case, with a taxpayer who had refused to provide information about a possible foreign bank account.
The various district courts not only judged that taxpayers have to provide the tax authorities with information about, among other things, bank account numbers and copies of bank statements, but also that the tax authorities may impose penalty payments if this does not take place. The court currently imposes penalty payments ranging from €2,000 to €5,000 per day up to a maximum of €50,000 to €500,000, depending on the offense.
It was also ruled that the bank account holders had to comply within seven days to provide the requested information, after which the information could be forcibly obtained. Two of the three taxpayers have already complied.
These actions are part of an investigation into foreign bank accounts which has seen the Tax and Customs Administration attempt to map non-reported foreign assets.
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