The Swiss government reached out yesterday to the US delivering an encrypted list of data of bank employees who served American clients suspected of dodging taxes. Martin Naville, head of the Swiss-American Chamber of Commerce reiterated that it is a gesture to show Swiss willingness in negotiation.
The delivery of the list met the deadline of January 30th set by US authorities and the encryption covers personnel from Credit Suisse, Julius Baer and Basler Kantonalbank. According to Swiss authorities, non-encrypted data would only be delivered upon US request under the existing double-taxation treaty and if the person accused had also broken Swiss laws. As Switzerland defends the secrecy of its banking tradition, Swiss authorities are keen to retain some control in their negotiations with the US.
Just last week on January 27th, Swiss bank Wegelin, a 270 year-old bank to the super-rich, broke up in consideration of expanding US enforcement efforts. Most Wegelin employees, along with clients and assets of CHF21 billion have been moved to Notenstein Privatbank in hope of shielding healthy non-US assets from US investigations. US assets on the other hand have been left with Wegelin, which may have to face the consequences of US action on its own. The estimated worth of such US assets is at CHF1.5 billion.
The US is still keen to chase tax evaders and we may soon be seeing other cash-strapped countries to follow suit. Swiss banks may be able to encrypt client profiles for now but perhaps not for too much longer.
The Reuters article on the encrypted list, dated 31 Jan 2012, can be accessed here.
Reuters report on the breaking up of Wegelin can be accessed here.
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The FT published an interesting viewpoint recently concluding that Asia may be pioneering financial regulatory developments and can set example for its European counterpart. In fact some of the industry professionals quoted go as far to observe that elements of Basel III might have drawn inspirations from Asian precedents.
It did point out that there were still some problems with the framework of regulation in Asia and Asia’s regulators are less coordinated and have limited reach beyond their borders to chase the non-compliant.
In our view, the FT quote that acquiring a license in Hong Kong may take upwards of 12 months was off the mark and the processing time is much shorter than that. Likewise the Hong Kong versus Singapore story is old news and the new rules for licensing of fund management companies widely expected to be introduced in Singapore in the first half of this year will level the playing field between the 2 cities even further.
The Financial Times article can be accessed here.
]]>The Financial Regulators Gateway is a directory of financial regulators throughout the world, as well as a directory of the relevant statutes and regulations in each jurisdiction. According to the website, the University of Toledo College of Law originally developed it, but the website is now maintained independently by Prof. Emeritus Howard M. Friedman.
Searching through Google, or any other search engine, for a particular financial regulator can be onerous. If you are unsure whether a country’s securities regulator is an independent entity or part of a consolidated financial regulator, searching can be particularly frustrating.
This directory will point you in the right direction. It generally lists separate securities, banking, and insurance regulators. However, in some jurisdictions, the same body regulates one or more of these regulatory functions. The directory will help you to identify whether a particular regulator is in charge of all the financial activities, as in Singapore, or, whether individual agencies regulate each broad type of activity, as in Hong Kong.
The website address or URL is: http://financialregulatorsgateway.com
From the homepage, there are two possibilities. You can either select the geographic area you wish to investigate and gradually narrow your search to the appropriate jurisdiction, or you can browse for specific jurisdictions alphabetically. As an index with a finite number of jurisdictions, the designers have not included a search feature, so you must find a regulator by browsing for its jurisdiction.
For American and Canadian jurisdictions, you can also find the regulators for particular states or provinces. This feature reflects the type of federalism that exists in those jurisdictions, where the state or provincial governments have substantial authority in regulating financial activities.
As a directory of worldwide regulatory agencies and the legislative basis of their activities, this website is both ambitious and successful. For anyone researching the regulations of a particular jurisdiction, this website is a great starting point. The caveat is that it is incumbent upon users of the directory to help this initiative stay current by notifying the site’s administrator of any corrections. Additions and corrections should be sent to the e-mail address listed on the page entitled About This Web Site.
]]>CFTC first detected the missing client money managed by MF Global and issued subpoena for an investigation near the beginning of November. The agency then jointed hands with SEC and other exchanges such as the CME Group to see whether customer money was diverted at MF Global to meet its financial obligations. To date, MF Global has not accounted for the lost client money.
Upon joining in March 2010, Mr. Corzine was aspiring to turn MF Global into a full-fledged investment bank comparable to Goldman Sachs under his management. Anxious to realizing the vision, MF Global invested heavily in European debts under the Corzine’s directorship only to find itself entrenched in a downward spiral. Investors were alarmed about the health of the firm and its stock was in free fall by the last week of October.
WSJ report on rating firms’ role in the MF Global collapse can be accessed here.
Dealbook’s report on MF Global’s latest estimated shortfall can be accessed here.
The article from the New York Times Dealbook can be accessed here.
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Probes of eight offshore banks issued by the Justice Department in its Offshore Compliance Initiative stages the pursuit of offshore private accounts. This league of banks including Credit Suisse (along with seven offshore banks) have been targeted for allegedly helping Americans evade tax, after Swiss banks had reached a settlement with US authorities over offshore banking services. In July Credit Suisse received a target letter from the Justice Department and thereafter earlier this month prompted its own Clariden Leu to send certain US clients letters informing that their names and account details (dating back to 2002) will be disclosed to the Internal Revenue Services (IRS). Though offshore banks may not have significant presence in the US, authorities try to interpret them to having “US presence”, as long as an access point such as a representative office or a phone number is present.
Still recalled by many fresh and green, the UBS was charged with a fine of 780 million in 2009 to avert indictment charges that it sold banking services which enable Americans to evade tax. The UBS later turned over some 4000 client names to US authorities. As a most recent reminder, Robert E Greeley, resident of San Francisco, was charged for evading tax of interest income of his two offshore accounts, through the help of a UBS Swiss banker. For the present UBS in particular, regulatory forces happen to squeeze them on two fronts – private banking and trader loss. The investigation this time reminds us once again about the eagerness of US authorities to trace the whereabouts of offshore assets.
As of now, industry professionals have noted the complexity of US regulatory measures. An offshore business thought to have little relation to US rules may be subject to regulatory oversight by multiple agencies (SEC, CFTC, FINRA, Dept of Justice, etc). Fund managers should alert investors especially on the US tax and asset reporting issues, even though they may not have expertise in the area. That way funds can reduce compliance risks exposed and costs which may be entailed, such as the loss of a core client base.
Reuters Nov 9 report on Clariden Leu, Credit Suisse can be accessed here.
Department of Justice Nov 17 release on non-Swiss holdings can be accessed here.
The Reuters Sept 20 report on eight offshore banks can be accessed here.
Robert E Greeley’s case settlement can be accessed here.
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Previously, the disagreement between the Republicans and Democrats steals the limelight. In an attempt to bottle hatred against Wall Street (displaying in the form of the Occupy Wall Street movement), the Republicans were proposing seven new bills in attempt to limit, what in their view is, the uncapped expansion of CFTC jurisdictional reach in the $600 trillion OTC derivatives market.
The Republicans were concerned that the regulatory reforms introduced by the CFTC in recent months would significantly heighten the regulatory costs of funds which had relied on derivatives to merely hedge everyday risks. They contended that the CFTC reforms would further dampen the already depressed economy, with unemployment stubbornly fixed at a staggering 9 percent. One of the bills, for instance, will exempt commercial “end-users” such as utilities, manufacturers and airlines from posting cash reserves on swaps. Democrats continued to be skeptical if these bills would provide leeways for Wall Street to get around regulations. Gary Gensler at CFTC reiterates that the new regulations are not intended to harm business and merely are required for monitoring purposes; but in the eyes of the investment community, the toughened stance taken by Gensler is discomforting.
In spite of the most recent turn of tides, it is still difficult to deny that US regulatory reform has chartered into dangerous territory and can adversely affect the most routine operations of US financial institutions. For instance, the SEC has been bold enough to push through the Volcker Rule, which attempts to ban proprietary trading and investment of banks in hedge funds significantly if not altogether. If realized, the rule will kill off an important source of revenue for banks, potentially leading to an even more illiquid economy and recession. Indeed, some commentators think that US regulatory reforms have become retaliatory.
The Reuters article on Republicans taking aim at US derivatives reform can be accessed here.
Reuters report on SEC proposing Volcker Rule, swap dealer plan can be accessed here.
Financial Times report on swap execution facilities in November can be accessed here.
]]>The 2008 financial crisis was a watershed moment highlighting the potential dangers of money market funds. Reserve Primary Fund, once a major money market fund, had invested USD785 million in Lehman Brothers and was unable to maintain the formula of 1USD NAV per share. This led to widespread redemption by risk-averse investors, and the fund later required government help to get through the crisis.
The new measures which the SEC is proposing will eliminate the taken-for-granted expectation of stability in money market funds. The SEC is considering implementing a floating NAV that moves away from the pre-established 1USD mark which may reflect the risk level more realistically. The industry is opposed to the new measures saying they will eliminate the appeal of money market funds.
Reuters’ report on SEC money market reforms can be found here.
Financial Times report highlighting history and industry view of money market reforms can be found here.
]]>Prior to these ongoing developments, talks between US and China on streamlining audit procedures for US-listed Chinese companies have been stalled since Oct 24, as Chinese representatives have put off meetings on the matter. Citing past meetings with Chinese counterparts, Doty then expressed worries that any Chinese moves to restrict the flow of audit work papers would go beyond keeping inspectors of his agency out of China.
There have been renewed concerns lately about the audit practices of Chinese companies particularly about their opacity and some investors are losing confidence in the prospects of Chinese companies with questionable corporate governance, such as in the case of Longtop. Chinese regulators are asking the Chinese arms of the world’s largest audit firms to review their audit work on Chinese-listed companies and the information which they might have provided to overseas, including US, regulators.
Doty believes that “U.S. markets and investors have been unfairly taken advantage of by those who want the benefits of American markets but not American rules." The US seems likely to consider implementing rules to apply to the Chinese arms of audit firms in their conduct and the standards used in reviewing companies with US investors. This may limit the phenomenal growth enjoyed by these audit firms in their Chinese operations in the years to come.
The Reuters Nov 11 report can be accessed from here.
The Reuters Oct 24 report on the stalling of Sino-US talks on audit practices can be accessed from here.
]]>European regulators have given much more leeway to bank managers in determining the riskiness of their assets and what can be counted as capital under Basel II. For this reason, European banks have been classified as bearing lower risks than its American counterpart for an unjustifiably long time, even after the financial crisis. European banks reportedly have bent the definition to basket those assets with high leverage as low risk due to the potential to take equity returns. Ironically these assets have become “safer” since the onset of the financial crisis; sovereign debts previously seen as low risk but are now being held responsible for furthering the damage to the global economy. The US by contrast has tighter rule sand requires banks to place 5% capital against assets, regardless of the risk level of their assets.
Readers may access the full discussion on Eurozone crisis and banks here.
]]>Olympus was also acquiring companies with little to do with their own business. They include a facial cream maker named Humalabo and a plastic container manufacturer News Chef. Credit agency Tokyo Shoko Research reported that both had not made money before being acquired. The external panel investigating Olympus losses reported that these acquisitions may be used to mask entrenched investment failures originating from the 1990s.
The scale of the Olympus fraud could turn out to be of behemoth size in the end. The anticipation of such has already unnerved investor confidence in the company and the wider Japanese equities market. The poor corporate governance displayed within Olympus is closely entwined with the economic fate of Japan. Japan’s economic stagnancy today was partly caused by lax accounting standards in the private sector from the bubbly late 1980s. Accounting reports for many Japanese companies during the early 1990s still used outdated but better-looking figures from late 1980s which poorly reflected reality. It wasn’t until the mid-1990s when the government stepped in to rectify the practice and admitted that Japan was entering long-term economic stagnation. Two decades have been lost in Japan but issues of corporate governance have seen little improvement to date.
Olympus stock fell from 1300 to 600 Yen from 11/2 to 11/9. Intriguingly, Nomura stock also fell 15 percent on November 8 alone in Tokyo. Investors suspect that Nomura was somehow involved in the Olympus rout.
The Dealbook New York Times round-up can be found here.
Bloomberg's report on Olympus, Nomura and the Japanese market can be found here.
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