Thursday, September 18, 2014

Scotland, Independence and Global Impact

International Link magazine, Hong Kong

The Scottish capital Edinburgh seen from Arthur's Seat

The United Kingdom of Great Britain and Northern Ireland, to use its full title, is facing its biggest internal threat as a geographical and political entity since the Republic of Ireland was formed in 1922. On Thursday, 18 September, Scotland will vote on independence.
If the outcome is 'yes' – the independence campaign's upbeat slogan – then it will end 300 years of political union – the United Kingdom (UK) – and Scotland will stand alone as a new nation as of March 2016. If the 'no' vote wins – London's slogans are “No Thanks” and “Better Together” - then the union will remain, although the issues raised by the referendum will mean it will not be totally 'back-to-business as usual'.
The independence vote has been four years in coming since the Scottish National Party (SNP) formed a majority government in the Scottish Parliament (created in 1999 with certain powers devolved from London) and announced plans for the referendum, which, as the party's name suggests, has long been a policy objective.
The battle for hearts and minds only really started playing out over the past year, and heated up in recent months as Alex Salmond, the Scottish Premier, set out his arguments for Scotland as a “Northern Light” with progressive social policies and a thriving economy, while London pushed their position. Prime Minister David Cameron told Scottish voters this past week: “Let's stick together...There's no going back from this. No re-run. If Scotland votes 'yes' the UK will split and we will go our separate ways forever.”
Until last week, the 'No' campaign was winning in the polls. But the latest YouGov poll shows that the vote will be on a knife's edge, with the 'Yes' vote getting 51 percent for the first time in the campaign. It is certainly proving to be an issue that the Scottish public is keen to vote on, with 97 percent of eligible voters enrolled, the highest ever, and indicating a higher voter turnout than for the British general election in 2010 (65 percent), the Scottish Parliamentary elections in 2011 (45 percent) or the voter turnout for the European elections in the UK in May (36 percent).
Such high political engagement by the Scots reflects the seriousness the possibility of independence is being taken. As the quote from Cameron shows, this is a major decision that cannot be easily reversed, if at all.

The For's and Against's

London argues that Scotland will stand to lose significantly by not being in the union, primarily losing out economically but also on the global stage. This is what London has focused on its “Better Together” campaign, stating that Scotland would not be able to retain the Pound Sterling as a currency if there is independence, that financial institutions and capital would flee the capital Edinburgh for London, and implying that the new country would not be economically viable.
The 'Yes' campaigners of course argue otherwise, that Scotland would be a viable country with a highly educated population of 5.3 million people – England has 59 million – and a USD$211 billion economy which includes a sizeable financial sector, cutting-edge technology and research, oil revenues from the North Sea, tourism and whisky (USD$7 bn).
It is not just economics that has raised questions and been a cause for argument. Foreign policy and military defence have been major points of discussion, particularly as such decisions are made in London and not Edinburgh. While the Scottish parliament acquired more local powers since 1999, it is London making crucial decisions that is a driving force for the Yes voters.
Of the 650 members of parliament (MPs) currently in the Westminster Parliament, 59 represent Scottish seats. With the Conservative (Tory) party in power, Scots feels even more sidelined as the Tory party is popular in England but not at all in Scotland (just one seat). This is accompanied by nationalistic sentiment and the troubled, bloody history of England and Scotland for hundreds of years that ended in the union of 1707. In short, there is the view that Scotland is dominated by its more populous Southern neighbour and does not have control over its own affairs. However, such a sentiment is shared by yes and no voters alike. Nationalists are voting no, and the vote should not be considered as a purely knee-jerk nationalist one.
What may happen if there is independence is in many ways uncertain, particularly economically, and as polls suggest, around half of Scots are not willing to make that gamble. People are weighing up whether more local and immediate power making decisions will improve their standard of living or not, and if independence is needed for that to happen.

The outcomes

If Scotland votes 'No Thanks,' then London will be forced to address many of the issues raised during the referendum, notably to give up more powers and for Britain to become more decentralised. London has already implied greater devolution for Scotland following a No vote, such as giving the Scottish Parliament more power over taxation, spending and welfare.
London will also have to face the spectre of the independence movement not going away, and if Westminster does not follow through with its pledges, this may give further impetus for a successful Yes vote in the future.
If Scotland gets independence, there will be 18 months of negotiations between Edinburgh and London to discuss the logistics of separation. Key topics will be North Sea oil revenues, the pound, divisions of national assets, and military defence. The Queen however will remain as head of state, unless a vote is later called for.
The aforementioned will be difficult topics to hammer out as Scotland comes to grips with being a sovereign state. Other issues are just as thorny, particularly foreign affairs, which Scotland would be running by itself for the first time. Whether Scotland can remain a part of the European Union is a major issue, as no EU country has split apart and then sought to re-enter as a separate member state. Scotland is committed to the EU, but that is not a decision for Edinburgh to decide upon, and becoming a member will be key for the country's economy if there is independence.
The SNP is also opposed to nuclear weapons and has called for the Trident nuclear submarines based in Scotland – the location of Britain's nuclear fleet - to be removed. While the SNP voted in 2012 to support the North Atlantic Treaty Organization (NATO) - with the precondition that Trident would be removed following independence - it has not been a popular decision within the party, while membership of the body of 28 European and North American nations could be in doubt as nuclear weapons are a key means of NATO's overall military deterrence policy.

Global impact?

The EU will be eyeing the results of the elections carefully. The body is not keen on admitting more members, or for the union to break up into smaller states. A yes vote could galvanise the Catalonians' drive for independence in Spain, along with other separatists movements such as the island of Corsica from France, and the Basque from France and Spain. There are also murmurings in some countries about the advantages of breaking up, such as more economically rich regions like Northern Italy not wanting to fund the poorer South.
Indeed, questions are being raised as to whether a yes vote in Scotland could unleash the end of the multi-ethnic state, repeating the post-colonial period when numerous countries gained independence and the 1990s following the break-up of the Soviet Union and its satellite states, leading for instance to the creation of the Czech and Slovak republics and the Balkan states. For while the world is more interconnected than ever via financial globalisation, there are more nation states than ever, with some 194 countries, the most recent being South Sudan as of 2011.
Such further devolution is not overly probable, but a concern nonetheless, and it is not just in Europe that states are fearing devolution. The breakup of a European state, particularly a former global power like Britain, is viewed with perhaps more concern elsewhere in the world, especially in states with minorities and separatist groups that are battling central powers.
The concern, like in the EU, is that there will be a call for a referendum by separatists, especially if an independent Scotland proves to be successful, with the current economic fears not realised or overcome. It would show breaking off from a bigger country is possible and achievable in the 21st century, which could be a precedent for others to follow.
Scotland's case is different from others however, and comparisons, from the economic to the historical, hard to draw with other aspiring separatists. A major factor is that Scotland has not been under any military occupation for hundreds of years. That in fact has enabled the vote to happen, as there was no need to resort to armed struggle to achieve independence, as Ireland did from 1919-1921. London however was aware that a Yes vote in Scotland is not a certainty, which cannot be discounted as a factor in letting the vote go ahead, but the vote is going ahead in what is expected to be an open and transparent manner.
Ultimately, a No vote will be welcomed in London and Brussels, as well as in many other capitals around the world. Such a result is not likely to dent separatists aspirations, but would take some wind out of their sails. A Yes vote will have much broader ramifications for the United Kingdom, the EU and further afield. Either way, the outcome of this election will be worth following.

Photo by Typhanie Cochrane

Wednesday, September 17, 2014

Compliance is the big question as FACTA law enters force

Commercial Crime International, July 2014

The United States' Foreign Account Tax Compliance Act (FATCA) is to go into force on July 1. Aimed at curbing tax evasion by US citizens around the world, foreign financial institutions (FFIs) are required to report on US account holders, but over 200,000 FFIs and 123 countries have not yet signed up. This has raised issues about implementation, as certain non-compliant jurisdictions may try to attract US tax evaders, Paul Cochrane reports from Beirut.

Financial institutions around the world have been scrambling to get ready to comply with FATCA. Under the law, FFIs have to provide information on American customers to the US Internal Revenue Service (IRS). FFIs that are not compliant will be subject to a 30% withholding tax on US sourced income, and risk being locked out of the US financial system.
It is a strong incentive to comply, while compliance is also being driven by financial institutions wanting to only deal with FATCA compliant FFIs. “Very simply, any country that is not involved (with FATCA) gets cut off from the US financial markets,” said Camille Barkho, Chief Compliance Officer at the Lebanon & Gulf Bank, in Beirut.

Long haul

FATCA was introduced in 2010, but the IRS had an uphill battle to get jurisdictions on-board due to the complexities of reporting – the law is over 1,000 pages long – and because some jurisdictions have needed to amend their domestic laws to report to a foreign regulator.
Overriding banking secrecy in certain jurisdictions, for instance, has required letters of non-recourse to be signed by clients, while banks have had to improve compliance systems.
Such requirements by foreign regulators have delayed FATCA's roll out until this year. But with a firm date now in place, there has been a flurry of jurisdictions signing inter- governmental agreements (IGAs) with the IRS. Currently 34 countries have signed IGAs and 36 countries have, in the words of the IRS, “reached agreements in substance” to comply (while no IGA has been ratified, the US will treat such jurisdictions as being compliant).
But as of June, 123 countries – out of a total of 193 jurisdictions recognised by the US - have not signed an IGA or reached an agreement in substance. And while some 77,000 FFIs have signed up, according to the IRS, an estimated 200,000 FFIs have not. The number of recalcitrant FFIs could in fact be even higher as many institutions have registered subsidiaries and other entities as well. “If you look at the list it is not 77,000 FFIs, as this includes branches or affiliates. Some banks for instance are listed eight times, so in fact there are not that many,” said Barkho.

Momentum expected

Analysts expect that more jurisdictions and FFIs will sign up to FATCA once it goes live, driven in part by peer compliance and wanting to access the US market, but with so many FFIs not compliant this could present opportunities for circumventing FATCA.
“Ultimately any smart money launderer could place funds across multiple FFIs in a range of accounts, financial and non- financial, and as long as the deposited funds fall below US thresholds (of $50,000) could launder a fair bit of money that way and FATCA does little to reduce the potential for money laundering,” said Anthony Quinn, Founder of Financial Crimes Consulting in Australia.
Such risks will be greater in the initial years of FATCA until understanding of the law increases and the IRS expands its databases. For instance, a customer may not declare to an FFI that they have US citizenship. The bank has done its due diligence by asking a customer about US indicia, although the customer has effectively broken US law.
“FATCA is a long term project, and the US doesn't expect fast results, so if a taxpayer has evaded FATCA for a while, the IRS now has the ability to ask FFIs about non- reported individuals. I think that catching US tax evaders by the IRS will be only a matter of time,” said Barkho.

Recalcitrant jurisdictions

A bigger issue where the outcome is less certain is the number of recalcitrant jurisdictions, including Russia and China (note: both countries signed up at the last minute, prior to publishing). By not being compliant, this could play into a jurisdiction's hands: “I think that what may occur is certain jurisdictions will hold out, looking for an opportunity to be the destination of funds from jurisdictions that have signed with the IRS,” said Joe Bognanno, Principal, AML Solutions – Americas, at NICE Actimize, a financial crime, compliance and risk management solutions provider in the US. “It is interesting to look at the parallels between jurisdictions that are a risk for money laundering that are also recalcitrant in signing IGAs,” he added.
Indeed, out of the 65 countries of “primary concern” in the US State Department's ‘International Narcotics Strategy Report: Money Laundering and Financial Crimes Volume 2’, March 2014, there are 30 jurisdictions that do not have an IGA in effect or in substance. Other countries that are on the OECD's Financial Action Task Force's (FATF) list of high-risk and non-cooperative jurisdictions are also not in compliance, notably Myanmar, Nigeria, Pakistan, Iran, Syria and North Korea.


What may hinder the effectiveness of FACTA is that it is unilateral. If the multilateral tax enforcement initiatives that are being mulled by the OECD and G20 go into effect, this would bolster FACTA while also leading to greater transparency and a reduction in tax crimes. “One of two things may happen (because of FATCA): account holders will either move to another FFI or some FFIs may say get me out of the US market to where we get 100 percent returns. But that will be a short term thing unless the OECD initiative doesn't happen,” said Bruce Zagaris, a partner at law firm Berliner, Corcoran & Rowe in Washington DC. “With the automatic exchange of tax information it is going to be more difficult for people to conceal their income and assets from the tax authorities, especially as tax authorities are going to be comparing notes and facilitating information, so I think there will be less not more financial crime.”
FATCA's success will depend on greater global adoption, while the IRS has indicated it will provide FFIs with a degree of flexibility in the first 18 months, such as the requirement for banks to carry out know your customer (KYC) on all clients to check for US citizen indicia. Only then will the financial sector and regulators really be able to gauge whether FATCA is open to abuse or not.
“With new regulations and controls there is always the initial execution and then a period to see how effective it is and what gaps there are, which is what we have seen in anti-money laundering laws, that people find new ways around regulations. I am sure FATCA will be the same,” said Bognanno.

Thursday, September 04, 2014

Charities and Terrorism Financing Compliance – Approaches and Challenges in 2014

White paper - Thomson Reuters
Regulatory oversight is key to protecting the charitable sector and the financial institutions that deal with them from abuse by terrorist organizations. While compliance with anti-money laundering (AML) and countering the financing of terrorism (CFT) rules has increased globally, particularly by financial institutions wary of falling foul of regulators, the non-profit sector has been given less attention and compliance at the global level is weak.
Only now, over a decade after CTF and AML regimes were established, are the regulations being re-assessed and are non-profit organizations (NPOs) being brought into reviews of typologies. The sector is also under greater scrutiny due to a rise in terrorism in the Middle East, especially due to the conflict in Syria.
At such a juncture, lessons can be learned from more regulated jurisdictions, such as the UK, which have been struggling to get the balance right between over-regulating the NPO sector, addressing the risks, and ensuring that donations reach their intended target.
This paper also discusses ways to improve compliance and enforcement, such as implementing FATF’s risk-based approach that brings together NPOs, regulators and the financial sector at the local, regional and global level.

Charities and Terrorism Financing Compliance – Approaches and Challenges in 2014 - See more at:
Charities and Terrorism Financing Compliance – Approaches and Challenges in 2014 - See more at:
This paper examines charities and Countering the Financing of Terrorism (CFT) regimes, looking into the perceived threats of non-profit organizations (NPOs) being used as front companies and conduits for terrorist or threat financing. The paper provides a global overview of regulations and enforcement related to NPOs and CFT, the current challenges and the approaches being taken to reduce sectoral risk.
- See more at:
This paper examines charities and Countering the Financing of Terrorism (CFT) regimes, looking into the perceived threats of non-profit organizations (NPOs) being used as front companies and conduits for terrorist or threat financing. The paper provides a global overview of regulations and enforcement related to NPOs and CFT, the current challenges and the approaches being taken to reduce sectoral risk.
- See more at:

Tuesday, July 08, 2014

Another month, another year, another crisis: eleven years in Beirut

The White Review

Rumours of war and impending conflict have an incredibly destabilising effect, and can wreak a particular type of havoc. This is not as physically manifest as the brutality of war, but less tangible, less spectacular. There are no destroyed buildings, injured or the dead bodies; rather the spectre of war casts its shadow over economic statistics and mental health reports.


To read more, go to:

Tuesday, July 01, 2014

FATCA, China and the World 美國《外國帳戶稅務遵守法案》與中國及世界

International Link - Hong Kong

A US-enacted law that is to go into force in July appears set to have a major impact on the global financial sector as well as potentially usher in a new era of tax sharing initiatives. China, so far, is standing on the sidelines of the Foreign Account Tax Compliance Act (FATCA), but it will be dragged into the regulation's net one way or another.
According to some commentators, the Act will have an adverse effects on the US economy – the dumping of Treasury Bonds (TBs), the weakening of the dollar, lower foreign direct investment (FDI) – and will be a contributing factor in hastening indebted America's decline as a financial superpower.
To others, FATCA will lead to greater global tax enforcement by curbing banking secrecy and offshore tax havens - where an estimated $32 trillion is stashed away from the tax man - with “sons of FATCA” laws being mulled by the OECD and the G20 countries to share tax information and go after tax evaders.
So what is this new law that has such global reach, yet few outside of financial circles are aware of, that is slated to go live on 1 July? Enacted in 2010, FATCA is aimed at curbing tax evasion by American citizens with accounts above $50,000. Under the law foreign financial institutions (FFIs) around the world will have to screen all their account holders to verify whether clients are US citizens or not. Such an extra territorial law puts the onus on FFIs to act, essentially, as unpaid agents of the US' Internal Revenue System (IRS), or face a 30 percent withholding tax on US account holders. Further motivation to comply is the possibility of being cut-off from the US financial system and not being able to deal with FATCA compliant institutions.
“The withholding of 30 percent is the big stick the US is using to try and force any recalcitrant banks or countries to sign up to FATCA. That is a hefty fine, and it is going to make FFIs reconsider doing business with US, but can they really leave the US market? The bet is that no one will and if so, will only cause a small ripple, but we'll just have to see it how plays out,” said Andrew Salzman, Senior Associate at law firm Dezan Shira & Associates, which has offices throughout China and South East Asia.
Given such an ultimatum, FFIs – primarily banks – are getting ready to report by 1 July to central banks or directly to the IRS, depending on what governments have decided – a Model 1 intergovernmental agreement (IGA) whereby the FFI reports directly to their central bank/regulator, which then reports to the IRS, or the FFIs report directly to the IRS themselves, known as Model 2, which only seven jurisdictions have opted for, including Hong Kong.

Slow uptake

The uptake of FATCA can be best described as lacklustre in the first years since being enacted. Britain was the first to sign up, in 2012, followed by Denmark, Switzerland and Japan; by the end of 2013, only 13 jurisdictions had signed IGAs. As a result, along with the complexities of wading through 500 pages of legislation, later expanded by a further 500 pages – that was not translated from the English – the FATCA go-live date was delayed multiple times and the US Treasury went on a global offensive to get more countries on-board.
Only this year as the go-live date looms have more countries signed up to FATCA, bringing the total to 34 countries with Model 1 and Model 2 IGAs, while 36 countries have, in the words of the IRS, “reached agreements in substance” to comply – that means that while no IGA has been ratified, the US will treat such jurisdictions as being compliant. Nonetheless, as of June, 123 countries (out of a total of 193 jurisdictions the US recognises worldwide) including China and Russia, have not signed an IGA or reached an agreement in substance. Furthermore, while some 77,000 FFIs have signed up, an estimated 200,000 FFIs have not.
The lack of agreements is raising question marks about how effective the law will be once in force. “I don't know how they will be able to go live on 1 July with so few IGAs signed. I am not saying they should delay again, but is the market ready? Where's Russia? China?” said Camille Barkho, Chief Compliance Officer at the Lebanon and Gulf Bank in Beirut.
The reluctance to sign IGAs has not been, in most cases, due to overtly political reasons but more so to do with issues of sovereignty and the regulatory changes required for FFIs to report to a foreign jurisdiction. Under Chinese banking and tax laws for instance institutions are not allowed to comply with a law such as FATCA. In other jurisdictions privacy laws have had to be overhauled, and in some cases, even changes to the constitution required.
The costs attached to being compliant with FATCA is another factor, with FFIs having to spend anywhere from $25,000, at smaller institutions, up to $1 million for large banks. Indeed, in the IRS’ 2013 Annual Report to Congress, it notes that the Congressional Joint Committee on Taxation estimates that while FATCA “will generate additional tax revenue of approximately $8.7 billion over the next 10 years,” private sector implementation costs could “equal or exceed” the amount FATCA may raise.
Jurisdictions have also taken issue with the law being unilaterally imposed by the US, as have investors. “I am on the record as saying that this is the most arrogant legislation ever penned, as the US is effectively trying to regulate other banks and jurisdictions. It only has teeth as the US is at the centre of the global financial system,” said Simon Black, founder of, one of the most popular asset protection websites in the world.
The issue is that while global tax sharing agreements are being mulled, FATCA is essentially a one-way street, of FFIs providing information to the US but getting nothing in return. The US has indicated it is willing to be reciprocal, but whether Washington can in fact do this is a legal gray area. “Are these IGAs even legal? They are not mentioned in the law, they are not passed by Congress, or going through the proper treaty method. And can the US Treasury bind US institutions to be reciprocal when no one has said where the information will come from?” said Salzman.


The threat of the withholding tax and not being able to do business with FATCA-compliant FFIs has spurred countries to sign up to FATCA this year as well as for FFIs to optionally report directly to the IRS. Even Syria, which is under US and EU sanctions, is requiring its banks to be compliant.
But certain jurisdictions clearly will not be playing ball. Iran, which is under the heaviest financial sanctions in modern history, and international pariah North Korea are obvious cases. It is Russia that has taken the strongest stance against FATCA, but only following the Ukraine face-off between Moscow and the West. Within weeks of sanctions being imposed on Russia, Moscow came out to say that Russian banks complying with FATCA would be subject to penalties from the domestic regulator. Indeed, Deputy Finance Minister Alexei Moiseyev told the press in May that Russia will not become “tax agents for the Americans, that will not happen under any circumstances.”
As for China, while Beijing has not signed up, Hong Kong has (Model 2, “in substance”), with commentators speculating it is to see how FATCA plays out in the SAR, and so that FFIs in China do at least have a door to the US market and correspondent banks. A further factor was to retain Hong Kong's financial hub status. “I think a big issue was that Singapore signed up, and there is rivalry between the two as Eastern Asia financial centres. If Hong Kong had not signed US business would use Singapore instead and Hong Kong would get squeezed,” said Salzman.
Beijing has made it clear that while it supports tax sharing initiatives - and is reportedly mulling its own form of FATCA – it wants this done multilaterally not unilaterally. As Liu Xiangmin, deputy director general of legal affairs at the People’s Bank of China, told the press in 2013, “I agree that countering tax evasion is an important policy bill but an uncoordinated extraterritorial measure such as FATCA is unlikely to generate broadly accepted solutions with full consideration of the effects on global financial systems and the conflicts involved...A more co-ordinated multilateral approach should eventually replace the unilateral approach of FATCA.”
While China will not face the issues of some banking centres that have a lot of US citizens on their books, Chinese FFIs will encounter issues dealing with the US and other counterparts as they will not be FATCA compliant. According to the Association of Certified Financial Crime Specialists, only 210 institutions from China and 513 from Russia have registered – compared to 14,835 FFIs in the Cayman Islands and 4,000 in Switzerland.
“Signing the FATCA agreement provides almost all downside and no upside, quid bono FATCA, and China doesn't benefit. Beijing realises that. So they may wait, which is tantamount to financial warfare if China holds out as after July all FFIs will have to gang up on China as not compliant. Would it force the Chinese to sell treasury bills and so on? This is a possibility,” said Black.

The unknown unknowns
This is the unknown factor about what will happen when FATCA goes live. Will there be a slump in business transactions as some 200,000 recalcitrant FFIs will not be able to deal with compliant FFIs? “What happens July 1? There is no line in the sand. There are huge direct costs (of implementing FATCA). As for indirect costs, there will be a loss of business, and it will close the doors on swathes of customers for years or even decades to come,” said Black.
Analysts expect a two-tier financial system to possibly develop: compliant and non-compliant FFIs, with institutions effectively policing one another for compliance. Non-compliant FFIs will clearly deal with one another; compliant FFIs will not, or charge an extra fee.
“Let's assume small and medium sized FIs are not ready, this could have a cascading effect on larger ones, creating a ripple effect,” said Ranjith Kumar, Director at Keypoint, a financial services consulting firm in Bahrain. “But what I believe may happen is that the cost attached to not participating may result in a higher cost of service for financial services, or costs for maintaining the relationship with an FFI. It is unlikely that an FFI will totally stop dealing with them, although there will be a lot of pressure to participate. Some FFIs not critical (to a compliant FFI) for business may be asked to stop doing business.”
A further factor is what may happen with US Treasuries, with overseas institutions holding $5.9 trillion, or 48.5 percent of TBs, more than double the amount held in January 2008, according to the US Federal Reserve.
“What happens when we start shorting payments on our TBs by 30 percent? A sovereign holder is not subject to withholding, but for a private institution, what if the interest payment is done through SWIFT to a commercial bank that has not signed an IGA? Treasury will take the interest,” said Jim Jatras, Manager of, which is lobbying against the law in Washington. “This is the kind of thing that could promote dumping TBs, and affect interest rates and the dollar as a global currency, which are issues nobody has thought out.”
FATCA has arguably already had an effect on US Treasury bills. In March, Russia sold $26 billion, or 20 percent, of its holdings in Treasuries. To offset the sale of TBs by Moscow, Belgium stepped in, becoming the third largest foreign holder of treasuries, although it is not clear if it was Brussels acting independently or through coercion.
“Russia is selling off treasuries – why? Two things came together at once, one FATCA and the other the new advance in Ukraine, as the Russians couldn't anticipate the US response, so sold TBs to be insulated from sanctions,” said Jim Rickards, a veteran Wall Street investor and author of current New York Times bestseller The Death of Money. “Look at the enormous surge in buying TBs through Belgium, it could be (clearinghouse) Euroclear or a third party, or the European Central Bank (ECB) using dollar proceeds from Fed Swaps. Or is it holders in places like the Cayman Islands moving accounts to Belgium to avoid FATCA? It is a good question, and I speculate that FATCA has something to do with it. Russia is dumping, China is not, but they are not buying more and Belgium is, so put all together and we are shuffling deck chairs around on the Titanic.”
It would be ironic if FATCA backfires on the US, as a primary motivation for the Act, and the OECD and G20 mulling multilateral legislation, is that governments are scrambling for tax revenues following the 2008 bailouts of banks due to the financial crisis. Indeed, governments are in debt to the tune of $100 trillion worldwide, with that figure having surged 30 percent since the 2008, according to Bloomberg. What is clear is that FATCA's go live date is bad timing, given the Russia-West standoff, Russia and China strengthening financial ties, and fears in the market of another financial crisis.
“I think we are heading for another financial collapse, and the next one will be bigger than central banks can keep a lid on. Central banks could barely subdue the last crisis and used trillions of dollars to do that, but at this point there's not much left to deal with another crisis, which would be bigger. The only clean balance sheet is the International Monetary Fund's, so it would have to bail out the EU and US,” said Rickards.
Whether another financial crisis is on the cards requires a crystal ball, albeit the fundamentals are pointing in that direction. In any case, there seems to be a global rebalancing in financial power, as the West is in debt and the Asian markets are in much better fiscal health.
“I think we are rapidly seeing more signs of Asian banks becoming increasingly powerful and developing their own financial infrastructure, and places like Hong Kong, Singapore and Shanghai will become more powerful financial centres and the US a secondary system,” said Black. “This creates the conditions for rebalancing as capital goes where it is treated best, and the West goes out of its way to treat savers as poorly as possible. If all the savings are in Asia, and debt and consumption in West, where will power reside?”

China's stance

Beijing has not made its official position on FATCA crystal clear, other than in not signing an IGA. What is clear is that Beijing is in favour of a multilateral approach to tax sharing initiatives. Furthermore, in January, Beijing introduced new legislation that requires wealthy Chinese citizens to declare their overseas assets – the “Foreign Asset Reporting Requirements” (FARRs). It is similar to the US forerunner of FATCA, Foreign Bank Account Reports (FBAR) – which has a lower reporting threshold of $10,000 – in that the FARR has no requirements for FFIs to file on Chinese account-holders.
The US providing information on Chinese account holders would be of clear benefit to Beijing for tax enforcement purposes, but the US is highly unlikely to do so, even if China signed an IGA. As noted earlier, the legality of reciprocity is a gray area and has essentially been used as a fig leaf by the IRS to coerce jurisdictions into signing up. Additionally, reciprocity on the US side could lead to the loss of significant funds that are parked in US banks, especially in tax havens, which is a reason why US financial institutions are opposed to multilateral tax sharing initiatives (see below).
For China to comply with FATCA, domestic regulations will need to be changed – such as bankruptcy protection rules - which will be onerous and with minimal benefit to the state or Chinese financial institutions. A further factor is that FATCA could affect Beijing's financial dealings with countries under US sanctions, such as Iran and Sudan, with which China has significant trade relations, especially for hydrocarbons, while US dollar transactions for these countries are often transferred via China.
In international politics, China not playing ball with the US over FATCA would have far reaching affects by being a major global player that will not bend to US diktats, and on the flip side could potentially benefit from inflows of cash from investors avoiding the American market and resultantly aiding further in China's financial rise.
China is in a position to help derail FATCA altogether by not complying. In Beijing not doing so, it would set a strong precedent that could be followed by other countries pulling out, especially if they had minimal business with the US. Indicative is that few of the countries in China's immediate sphere of influence in South East Asia have signed up with the US – Thailand, Malaysia, Cambodia, Vietnam, Myanmar and Laos, as well as US allies the Philippines and Taiwan. Neither has Macau.
Further afield, a region where China has made significant economic inroads is Africa, where only a handful of countries have signed up to FATCA. China could benefit from this in having African funds that had previously gone to the US destined instead for Chinese financial institutions, as well as making amenable African states stay out of FATCA and join the “not FATCA compliant club”.
In other words, China certainly has international leverage, as if it signs, others would too, and by not doing so it will put the breaks on FATCA's global effectiveness, regardless of the fact that Hong Kong has signed an IGA “in substance”. China should press this advantage with the US in its discussions over taxation, fiscal and other economic issues.
However, a financial war is not necessarily in either sides interest, but in the case of FATCA, it was initiated on the US side, and how Washington will respond to China being recalcitrant is not overly clear.
In any case, China has time to see how effective global FATCA-compliance will be before having to make a firm decision either way, as the IRS has deemed 2014 and 2015 a period of transition, with jurisdictions that have to adapt domestic laws to comply with FATCA not to be issued penalties for delays.

Tax Haven Hypocrisy

Overall the roll out and implementation of FATCA has not been well handled by the US. The IRS has implied that it will only gradually enforce FATCA, and will provide FFIs with a degree of flexibility in the first year and a half, with for instance the onerous requirement for banks to sift through all their clients to check for US citizen indicia part of the second phase.
While FATCA is expected to generate $800 million a year for the IRS in tax revenues, commentators suggest the US should look closer to home. “The US is the number one tax haven in the world, yet goes around and terrorizes all these places (through FATCA); the biggest culprit in this charade is the US. If they want to solve the problem, why not make the tax code more attractive?” said Black. “And the funny thing is that most of the money sitting offshore is from the big companies, the Fortune 500, and offshore is permissible under the US tax code.”
Indeed, there is a degree of hypocrisy by the US on clamping down on US tax evaders globally, and requiring FFIs to do so, while still letting it happen within the US and for anyone globally to do so on US territory, such as in Delaware, the top tax haven on the planet. This is preventing the US from being reciprocal when it comes to tax sharing with other countries and, moreover, undermines initiatives for a global move to tackle tax evasion.
“Delaware is highly protected by political lobbies in the US. A huge number of Fortune 500 companies use Delaware, and that is why it will be so hard to push through reciprocity in Congress,” said John Christensen, director of the Tax Justice Network in London. “Perhaps some of the most extraordinary discussions I've had have been in (the state of) Wyoming, where service companies and trust companies seem to compete with one another on being devastatingly secret and illegal. It is real Wild West territory and beyond the federal government. In terms of scale it is not like Delaware but tends to be attracting low life activities, not the Fortune 500, so a bottom feeder.”
To Christensen, FATCA is a good move, and if handled right will push forward initiatives at the G20 and OECD for greater tax sharing initiatives. Indeed, the days of tax havens are limited it seems, although the loopholes need to be stopped. “There is definitely a movement by the OECD for a global tax system and the impediment has been tax havens, Swiss banks and so on, but one by one those dissenters have been knocked out,” said Rickards.
China is for such a global tax sharing initiative, as the People’s Bank of China has stated, while at the 18th Party Congress there was agreement for giving priority to greater political transparency and the rule of law.
For a global tax initiative to work, major economies need to be on-board and especially emerging economies, which have more often than not been the victims of capital flight and tax evasion by the political and economic elites. Done well, a global tax initiative would circumvent concerns about sovereignty, which Christensen regards as “a great rhetorical device.”
“My view is that any country that is unable to tax its own citizens as they are using offshore accounts and tax havens have long since lost sovereignty in tax matters, and need tax measures, including FATCA. For me the sovereignty argument is bogus,” he said.
Some analysts have suggested that FATCA should be delayed to take into account G20 and OECD initiatives. “If FATCA was delayed a final time and its launch coincides with OECD tax initiatives it would make sense, as a tax exchange system would be more powerful and global. I bet China would join, and no one would say this is just from the USA, it would be a worldwide trend to be ethical,” said Barkho.
What the OECD tax regime looks like has been kept under wraps, but there appears to be a move towards a new era that will not tolerate tax evasion. “On the positive side, the OECD is going ahead with proposals. I don't know what they will look like, and I've had long discussions with OECD officials, so we can certainly see a window for moving forward. That is progress,” said Christensen. “Will it achieve political support? It's very hard to say. What is clear is that the fiscal crisis facing many countries is not receding, and governments are under pressure on tax policies because they are increasingly seen as regressive.”
As for the impact of FATCA on the global financial system, the US markets and non-compliant institutions, as well as on future tax sharing initiatives, we will have to wait and see. “There are certainly some people opposed to FATCA and want it to fail – US overreach, impact on the dollar, and predicting doom and gloom. With this being so open-ended and not knowing how it will go, people choose their own narrative,” said Salzman.

Photo from

Monday, June 23, 2014

US has left region wracked by sectarian splits 

Illustration: Liu Rui/GT

Earlier in the year, I was a guest on an Iraqi TV channel to discuss the advances that the Islamic State in Iraq and Syria (ISIS) has made in Iraq.

In January, the group of hard-line Sunni Islamists had taken the city of Fallujah and were gaining in strength in Anbar province. The weakness of the Iraqi army was apparent, as was the leadership of Prime Minister Nouri al-Maliki in its failure to stop the advance of this Al Qaeda-esque group.

While the ISIS advance made news in the Arab world, the world's media lens was focused elsewhere, on the conflict in neighboring Syria, but it was obvious that ISIS posed a clear and present danger to Iraq's stability.

This was all discussed on the program, but the channel's Shia Muslim leanings and Iranian backing made it hard to address the malign role of Maliki and the US backing of Shia groups. The region's media is now just as sectarian as its politics.

The world started to take notice recently that the conflict in Iraq did not end when the US left, and that the Pandora's box the US had opened when it invaded in 2003 has not been firmly closed.

Some 1,000 ISIS fighters overran two Iraqi army divisions of 30,000 soldiers in Mosul, the country's second largest city, and have made further territorial gains.

This mess falls squarely in the court of the US and Britain, which beat the drums for war against the Saddam Hussein regime, ostensibly over weapons of mass destruction but also touting the spurious claim that Iraq was connected to Al Qaeda and therefore linked to the September 11 attacks.

There was no Al Qaeda or militant Islamic extremism in Iraq prior to 2003, but the overthrow of Hussein, the deliberate disintegration of the Iraqi army by the US, the use of sectarian death squads to further divide and rule, and a new constitution drafted under US auspices that shifted the sectarian balance away from the Sunnis, provided the fuel for a fire that is still burning.

Under a resurgent Shia government, which has led the country since 2005, the Sunnis felt marginalized and unrepresented, resulting in resentment.

This explains why ISIS has support in areas it occupies, not overly because people support the group's aims of an Islamic state, but to counter Shiite dominance and the failure of imposed federalism.

The US war on terror has created more terror, and in the broken and destroyed Iraq that Washington left behind, has created fertile territory for extremism and violence to flourish.

Counter-terrorism can only work if it addresses core grievances and issues, both political and economic.

But while the US war on Iraq cost anywhere from $800 billion to $3 trillion, depending on the estimates, just $60 billion was spent on reconstruction and aid.

Iraq is struggling to get back on its feet economically, with the second National Development Plan for 2013-17 requiring $357 billion to improve critical infrastructure.

ISIS' advance will scupper such plans, and the Maliki government is under tremendous pressure. There are only hard choices left.

Maliki will have to create alliances with nationalist Sunnis to regain the north. The Iraqi army did not retake Fallujah earlier in the year, as tribal leaders convinced Maliki to not destroy the city.

While critics opposed this move, it could have further sidelined already disgruntled Sunnis. They face the same quandary now, if the Iraqi army brutally retakes Mosul and other ISIS-held areas.

Only through addressing core sectarian gripes and through a collaborative military made up of different sects can Baghdad avoid being seen as overly pro-Shia and ready to crush the Sunnis.

If that does not happen, fuel will be added to the fire of a sectarian war in the Middle East that is bubbling dangerously close to boiling point.

Friday, June 13, 2014

Flawed narratives cloud truth of Syrian vote

Illustration: Liu Rui/GT
By Paul Cochrane
Global Times Published: 2014-6-12

There were huge traffic jams in and around Beirut recently as tens of thousands of Syrians went to their embassy to vote in the presidential elections.

Such a turnout, with the elections extended for an extra day, confounded many observers, particularly in the anti-Syrian regime camp. How could people vote for a president, Bashar al-Assad, during a conflict that has killed over 160,000 people, and a man that has ruled Syria since 2000, and his father before him since 1971?

People must have been intimidated and forced to do so, fearing for their lives if they did not vote, went some accusations in the press. Others stated that people were paid to turn up.

That an estimated 10 million Syrians voted in Lebanon, Jordan and Syria appeared antithetical to the anti-Assad narrative in the mainstream media since the uprising started in 2011; the narrative that Syrians were overwhelmingly against dictatorship and were fighting for freedom and democracy.

As is so often the case, such observation and analysis overlooks the fact that the price of achieving such goals comes at a high cost for people and the country. Stability and security are preferable to chaos.

Indeed, Syrians had looked on with horror at what happened in Iraq following the US-led invasion in 2003, and how the country splintered apart amid brutal sectarian warfare and terrorist attacks.

Syrians also looked at neighboring Lebanon, from which Syria withdrew in 2005 after a 29-year military presence, and did not want the Lebanese-style "democracy" of corrupt political dynasties and sectarian parties either.

The Assad government naturally capitalized on such sentiments and made it part of their narrative of the conflict, that terrorist insurgents, primarily Sunni extremists, were bent on destroying the country and were aided externally by the Persian Gulf states of Saudi Arabia, Qatar and Kuwait, alongside the West. It is a narrative that has clearly worked, with 88.7 percent of people voting for Assad and a 73.4 percent voter turnout.

That the election was not overly transparent, that millions were not able to vote in or outside of the country - such as in opposition-held areas - and that no members of the opposition itself were on the ballot naturally raises questions about its credibility. Yet at the same time, those criticizing the Syrian elections as a farce were not as quick to say the same about Egypt's presidential elections that happened at the same time, with Abdel Fattah al-Sisi getting 96.7 percent of the vote while only 47.5 percent reportedly voted.

Indeed, in Egypt, voting was extended for an extra day not because of overwhelming turnout, but because not enough people had voted. But Egypt is pro-West and pro-Gulf whereas Syria is not, so the narrative has to be different.

Yet this is not to imply that there is no strong opposition to Assad. There is, whether from Islamic groups or others, while many Syrians do not feel represented by the divided opposition itself.

Syrians did protest against the "blood elections." A recent poll by the Arab Center for Research and Policy Studies found that 78 percent of Syrian respondents inside and outside of refugee camps viewed the presidential elections as illegitimate, and 64 percent held the opinion that the ideal solution to the crisis would be through a change in the current regime.

So what next, now that Assad is in for a third term as president? The regime has clearly been given a popularity boost from the public, and will go on to try to cement that position. Damascus has political and military support from Iran, and at the international level from Russia and China.

Getting to that stage will be the big challenge. In the meantime, the conflict is set to get even more polarized. Government forces will try to retake opposition controlled areas, primarily in the north and east.

Conversely, there is a renewed push by the rebels from the southern front in Jordan with the backing of US, British and Gulf intelligence agencies, and also from the Turkish border, with the aforementioned agencies along with the Turks meeting in late May to shift the balance of power in favor of the rebels. US President Barack Obama has called on Congress for a $5 billion Counterterrorism Partnership Fund "to train, build capacity, and facilitate partner countries on the front lines," which includes the Syria conflict.

The US and Europe have made it clear that Assad has to go, and have denounced the election. The scene is set for the three-year-old conflict to rage on, eerily reminiscent of the situation in Iraq a decade after the overthrow of Saddam Hussein.