Category Archives: power elite

Leave No Oil Under-Ground: OPEC against US Frackers

In 2014-16, the OPEC waged a failed price war to wipe out American frackers. Since then the cartel and its partners, led by Russia, have propped up oil prices enough to sustain shale, but not enough to support many members’ domestic budgets. In March 2020 Saudi Arabia urged Russia to slash output; Russia refused, loth to let Americans free-ride on OPEC-supported prices. The ensuing price war was spectacularly ill-timed, as it coincided with the biggest drop in oil demand on record.  The desire to chasten American frackers remains, though. OPEC controls about 70% of the world’s oil reserves, more than its 40% market share would suggest… If the world’s appetite for oil shrinks due to changing habits, cleaner technology or greener regulations, countries with vast reserves risk having to leave oil below ground. 

Excerpts from Crude Oil: After the Fall, Economist, June, 13, 2020

Facebook Mobs and Facebook Profits

A Facebook team had a blunt message for senior executives. The company’s algorithms weren’t bringing people together. They were driving people apart. “Our algorithms exploit the human brain’s attraction to divisiveness,” read a slide from a 2018 presentation. “If left unchecked,” it warned, Facebook would feed users “more and more divisive content in an effort to gain user attention & increase time on the platform.”

That presentation went to the heart of a question dogging Facebook almost since its founding: Does its platform aggravate polarization and tribal behavior?  The answer it found, in some cases, was yes.  Facebook had kicked off an internal effort to understand how its platform shaped user behavior and how the company might address potential harms… 

But in the end, Facebook’s interest was fleeting. Mr. Zuckerberg and other senior executives largely shelved the basic research, according to previously unreported internal documents and people familiar with the effort, and weakened or blocked efforts to apply its conclusions to Facebook products…

An idea [proposed by those who wanted to reduce polarization at Facebook] was to tweak recommendation algorithms to suggest a wider range of Facebook groups than people would ordinarily encounter.  Building these features and combating polarization could have come, though, at the cost of lower engagement and it was “antigrowth” [meaning less profits for Facebook].

Excerpt from Jeff Horwitz and Deepa Seetharaman, Facebook Executives Shut Down Efforts to Make the Site Less Divisive, WSJ, May 26, 2020

Out-of-Fashion: Aggressive Tax Planning

In December 2019, Royal Dutch Shell voluntarily published its revenue, profit, taxes and other business details in each of 98 countries. The disclosure aligns with a drive by the energy company, which often attracts criticism from environmental activists, to present itself as forward-thinking, transparent and socially-minded.  That didn’t stop the information feeding a predictable host of headlines in the U.K., where the company is partly based, that it didn’t pay taxes in the country (because of losses carried forward and tax refunds). In the U.S., Shell accrued $137 million of tax—a rate of 8%.  This kind of detailed reporting is required by tax authorities in about 100 countries including the U.S. since 2017, based on rules agreed by the Organisation for Economic Cooperation and Development, but it is rarely made public.

Companies that don’t jump may soon be pushed. Economy ministers from European Union countries are considering a proposal that would require all large companies with total revenue of more than €750 million ($834 million) operating in the bloc to publish the information annually. The Global Reporting Initiative, an organization that establishes sustainability standards, recently agreed to include a similar requirement. Greater transparency could also spur reform efforts and reduce incentives for complex tax arrangements. Companies, investors and states all agree that it is best to find a global solution to the problem of aggressive tax planning.

Excerpts from Rochelle Toplensky, Beginning of the End of Tax Secrecy, WSJ, Dec. 20, 2019

Why a Dumb Internet is Best

Functional splintering [of the internet] is already happening. When tech companies build “walled gardens”, they decide the rules for what happens inside the walls, and users outside the network are excluded…

Governments are playing catch-up but they will eventually reclaim the regulatory power that has slipped from their grasp. Dictatorships such as China retained control from the start; others, including Russia, are following Beijing. With democracies, too, asserting their jurisdiction over the digital economy, a fragmentation of the internet along national lines is more likely. …The prospect of a “splinternet” has not been lost on governments. To avoid it, Japan’s G20 presidency has pushed for a shared approach to internet governance. In January 2019, prime minister Shinzo Abe called for “data free flow with trust”. The 2019 Osaka summit pledged international co-operation to “encourage the interoperability of different frameworks”.

But Europe is most in the crosshairs of those who warn against fragmentation…US tech giants have not appreciated EU authorities challenging their business model through privacy laws or competition rulings. But more objective commentators, too, fear the EU may cut itself off from the global digital economy. The critics fail to recognise that fragmentation can be the best outcome if values and tastes fundamentally differ…

If Europeans collectively do not want micro-targeted advertising, or artificial intelligence-powered behaviour manipulation, or excessive data collection, then the absence on a European internet of services using such techniques is a gain, not a loss. The price could be to miss out on some services available elsewhere… More probably, non-EU providers will eventually find a way to charge EU users in lieu of monetising their data…Some fear EU rules make it hard to collect the big data sets needed for AI training. But the same point applies. EU consumers may not want AI trained to do intrusive things. In any case, Europe is a big enough market to generate stripped, non-personal data needed for dumber but more tolerable AI, though this may require more harmonised within-EU digital governance. Indeed, even if stricter EU rules splinter the global internet, they also create incentives for more investment into EU-tailored digital products. In the absence of global regulatory agreements, that is a good second best for Europe to aim for.

Excerpts from Martin Sandbu,  Europe Should Not be Afraid of Splinternet,  FT, July 2, 2019

How Companies Buy Social License: the ExxonMobil Example

The Mobil Foundation sought to use its tax-exempt grants to shape American laws and regulations on issues ranging from the climate crisis to toxic chemicals – with the explicit goal of benefiting Mobil, documents obtained by the Guardian newspaper show.  Recipients of Mobil Foundation grants included Ivy League universities, branches of the National Academies and well-known civic organizations and environmental researchers.  Benefits for Mobil included – in the foundation’s words – funding “a counterpoint to so-called ‘public interest’ groups”, helping Mobil obtain “early access” to scientific research, and offering the oil giant’s executives a forum to “challenge the US Environmental Protection Agency (EPA) behind-the-scenes”….

A third page reveals Mobil Foundation’s efforts to expand its audience inside environmental circles via a grant for the Environmental Law Institute, a half-century-old organization offering environmental law research and education to lawyers and judges.  “Institute publications are widely read in the environmental community and are helpful in communicating industry’s concerns to such organizations,” the entry says. “Mobil Foundation grants will enhance environmental organizations’ views of Mobil, enable us to reach through ELI activities many groups that we do not communicate with, and enable Mobil to participate in their dialogue groups.”

The documents also show Mobil Foundation closely examining the work of individual researchers at dozens of colleges and universities as they made their funding decisions, listing ways that foundation grants would help shape research interests to benefit Mobil, help the company recruit future employees, or help combat environmental and safety regulations that Mobil considered costly.  “It should be a wake-up call for university leaders, because what it says is that fossil fuel funding is not free,” said Geoffrey Supran, a postdoctoral researcher at Harvard and MIT.  “When you take it, you pay with your university’s social license,” Supran said. “You pay by helping facilitate these companies’ political and public relations tactics.”

In some cases, the foundation described how volunteer-staffed not-for-profits had saved Mobil money by doing work that would have otherwise been performed by Mobil’s paid staff, like cleaning birds coated in oil following a Mobil spill.  In 1987, the International Bird Rescue Research Center’s “rapid response and assistance to Mobil’s West Coast pipeline at a spill in Lebec, CA not only defused a potential public relations problem”, Mobil Foundation said, “but saved substantial costs by not requiring our department to fly cross country to respond”.d of trustees at the Woods Hole Oceanographic Institution (recipient of listed donations totalling over $200,000 from Mobil) and a part of UN efforts to study climate change.

Wise ultimately co-authored two UN Intergovernmental Panel on Climate Change reports, serving as a lead author on one. One report chapter Wise co-authored prominently recommended, among other things, burning natural gas (an ExxonMobil product) instead of coal as a way to combat climate change.

Excerpts from How Mobil pushed its oil agenda through ‘charitable giving’, Guardian, June 12, 2019

Who Has the Right to Free Speech? Let Credit Cards Decide The Wikileaks Saga from 2010 to 2019

Visa and Mastercard’s partner company in Iceland, Valitor was found guilty by the Reykjavik District Court for illegally blocking payments to the controversial international nonprofit WikiLeaks – a media outlet that publishes classified documents provided by anonymous sources The case against Valitor began sometime in 2010 when a data hosting company named DataCell was given the responsibility to handle donations sent to WikiLeaks.The year 2010 was a particularly important one for the publishing company as its famous Chelsea Manning leaks made rounds in media houses across the world. However, soon after the leaks, Valitor blocked transactions from Visa card holders in Iceland to WikiLeaks, thus starting a legal tug-of-war that would last for years.

Fast forward to 2019, DataCell has finally won the legal battle against Valitor which has now been ordered to pay approximately $9.85 million to both DataCell and Wikileaks’ publishing firm, Sunshine Press Productions.

Excerpts from Iceland: Debit Card Company Fined $9.85 Million for Blocking WikiLeaks Payment, April 30, 2019

Facebook Denizens Unite! the right to privacy and big tech

The European Union’s (EU) approach to regulating the big tech companies draws on its members’ cultures tend to protect individual privacy. The other uses the eu’s legal powers to boost competition.  The first leads to the assertion that you have sovereignty over data about you: you should have the right to access them, amend them and determine who can use them. This is the essence of the General Data Protection Regulation (GDPR), whose principles are already being copied by many countries across the world. The next step is to allow interoperability between services, so that users can easily switch between providers, shifting to firms that offer better financial terms or treat customers more ethically. (Imagine if you could move all your friends and posts to Acebook, a firm with higher privacy standards than Facebook and which gave you a cut of its advertising revenues.)

Europe’s second principle is that firms cannot lock out competition. That means equal treatment for rivals who use their platforms. The EU has blocked Google from competing unfairly with shopping sites that appear in its search results or with rival browsers that use its Android operating system. A German proposal says that a dominant firm must share bulk, anonymised data with competitors, so that the economy can function properly instead of being ruled by a few data-hoarding giants. (For example, all transport firms should have access to Uber’s information about traffic patterns.) Germany has changed its laws to stop tech giants buying up scores of startups that might one day pose a threat.

Ms Vestager has explained, popular services like Facebook use their customers as part of the “production machinery”. …The logical step beyond limiting the accrual of data is demanding their disbursement. If tech companies are dominant by virtue of their data troves, competition authorities working with privacy regulators may feel justified in demanding they share those data, either with the people who generate them or with other companies in the market. That could whittle away a big chunk of what makes big tech so valuable, both because Europe is a large market, and because regulators elsewhere may see Europe’s actions as a model to copy. It could also open up new paths to innovation.

In recent decades, American antitrust policy has been dominated by free-marketeers of the so-called Chicago School, deeply sceptical of the government’s role in any but the most egregious cases. Dominant firms are frequently left unmolested in the belief they will soon lose their perch anyway…By contrast, “Europe is philosophically more sceptical of firms that have market power.” ..

Tech lobbyists in Brussels worry that Ms Vestager agrees with those who believe that their data empires make Google and its like natural monopolies, in that no one else can replicate Google’s knowledge of what users have searched for, or Amazon’s of what they have bought. She sent shivers through the business in January when she compared such companies to water and electricity utilities, which because of their irreproducible networks of pipes and power lines are stringently regulated….

The idea is for consumers to be able to move data about their Google searches, Amazon purchasing history or Uber rides to a rival service. So, for example, social-media users could post messages to Facebook from other platforms with approaches to privacy that they prefer…

Excerpts from Why Big Tech Should Fear Europe, Economist, Mar. 3, 2019; The Power of Privacy, Economist, Mar. 3, 2019

How the Shipping Industry Gets its Way: pollution from ships

Do not give the regulated power over the regulators, unless you want consumers to lose out and producers to game the system. ..That lesson has been learned in many places around the world. National regulators are increasingly independent of the firms they regulate. But international ones still have further to go—and none further than the specialised agencies of the United Nations, such as the International Maritime Organisation (IMO) for shipping where the interests of the shipping industry are upheld d in several ways. The first is the distribution of voting rights between countries. At the IMO, for example, Panama and Liberia, with populations of just 4m and 4.8m respectively, can automatically get seats on its decision-making body as they have the world’s biggest merchant fleets.

The second is the assignment of those voting rights by individual countries. Remarkably, many governments have handed voting rights to private-sector firms… At the IMO least 17 countries have assigned their voting rights to flag registries operated by private firms, reckons Transparency International, an anti-corruption group; that adds up to about a tenth of delegates. At an IMO environmental-committee meeting in 2017, almost a third of countries were represented, at least in part, by business interests.

The third way in which producer interests are protected is through a spectacular lack of transparency. The agenda of the IMO’s council in November 2018 in London is available only to those with a password. Journalists are forbidden to report what delegates say or how they vote. There are no rules on the suitability or conflict of interests of delegates. In 2014 St Lucia appointed a Saudi billionaire without previous shipping experience as its IMO representative; a court in London judged in 2016 that the appointment was obtained in order to gain diplomatic immunity against divorce proceedings. There are no limits on the amount of gifts that can be showered on representatives. Goodies put on top of desks at an IMO assembly meeting last year were so heavy that they broke 137 sets of headphones underneath.

Such swampiness matters. The IMO is responsible for limiting emissions from ships, which were excluded from the Paris climate deal.   Some countries are interested in reform. At the imo council meeting this week Australia proposed allowing journalists to report on its meetings as a first step. The Marshall Islands has taken back some of its votes from the private firm that runs its flag registry. But more radical change is needed. Countries should send civil servants, not private actors, as their representatives. The un’s rules on conflicts of interest should be imposed. And voting rights should be allocated with the interests of consumers in mind. These lessons have been widely absorbed within borders. They ought to cross them, too

Excerpts from UN Regulatory Bodies: Agency Problems, Economist, Nov. 24, 2018, at 15

The Internet Was Never Open

Rarely has a manifesto been so wrong. “A Declaration of the Independence of Cyberspace”, written 20 years ago by John Perry Barlow, a digital civil-libertarian, begins thus: “Governments of the Industrial World, you weary giants of flesh and steel, I come from Cyberspace, the new home of Mind. On behalf of the future, I ask you of the past to leave us alone. You are not welcome among us. You have no sovereignty where we gather.”

At the turn of the century, it seemed as though this techno-Utopian vision of the world could indeed be a reality. It didn’t last… Autocratic governments around the world…have invested in online-surveillance gear. Filtering systems restrict access: to porn in Britain, to Facebook and Google in China, to dissent in Russia.

Competing operating systems and networks offer inducements to keep their users within the fold, consolidating their power. Their algorithms personalise the web so that no two people get the same search results or social media feeds, betraying the idea of a digital commons. Five companies account for nearly two-thirds of revenue from advertising, the dominant business model of the web.

The open internet accounts for barely 20% of the entire web. The rest of it is hidden away in unsearchable “walled gardens” such as Facebook, whose algorithms are opaque, or on the “dark web”, a shady parallel world wide web. Data gathered from the activities of internet users are being concentrated in fewer hands. And big hands they are too. BCG, a consultancy, reckons that the internet will account for 5.3% of GDP of the world’s 20 big economies this year, or $4.2 trillion.

How did this come to pass? The simple reply is that the free, open, democratic internet dreamed up by the optimists of Silicon Valley was never more than a brief interlude. The more nuanced answer is that the open internet never really existed.

[T]e internet, it was developed “by the US military to serve US military purposes”… The decentralised, packet-based system of communication that forms the basis of the internet originated in America’s need to withstand a massive attack on its soil. Even the much-ballyhooed Silicon Valley model of venture capital as a way to place bets on risky new businesses has military origins.

In the 1980s the American military began to lose interest in the internet…. The time had come for the hackers and geeks who had been experimenting with early computers and phone lines.  Today they are the giants. Google, Apple, Facebook, Amazon and Microsoft—together with some telecoms operators—help set policy in Europe and America on everything from privacy rights and copyright law to child protection and national security. As these companies grow more powerful, the state is pushing back…

The other big risk is that the tension between states and companies resolves into a symbiotic relationship. A leaked e-mail shows a Google executive communicating with Hillary Clinton’s state department about an online tool that would be “important in encouraging more [Syrians] to defect and giving confidence to the opposition.”+++ If technology firms with global reach quietly promote the foreign-policy interests of one country, that can only increase suspicion and accelerate the fracturing of the web into regional internets….

Mr Malcomson describes the internet as a “global private marketplace built on a government platform, not unlike the global airport system”.

Excerpts from Evolution of the internet: Growing up, Economist, Mar. 26, 2016

+++The email said Google would be “partnering with Al Jazeera” who would take “primary ownership” of the tool, maintaining it and publicizing it in Syria.  It was eventually published by Al Jazeera in English and Arabic.

American Oligarchs

Warren Buffett, the 21st century’s best-known investor, extols firms that have a “moat” around them—a barrier that offers stability and pricing power.One way American firms have improved their moats in recent times is through creeping consolidation. The Economist has divided the economy into 900-odd sectors covered by America’s five-yearly economic census. Two-thirds of them became more concentrated between 1997 and 2012 (see charts 2 and 3). The weighted average share of the top four firms in each sector has risen from 26% to 32%…

These data make it possible to distinguish between sectors of the economy that are fragmented, concentrated or oligopolistic, and to look at how revenues have fared in each case. Revenues in fragmented industries—those in which the biggest four firms together control less than a third of the market—dropped from 72% of the total in 1997 to 58% in 2012. Concentrated industries, in which the top four firms control between a third and two-thirds of the market, have seen their share of revenues rise from 24% to 33%. And just under a tenth of the activity takes place in industries in which the top four firms control two-thirds or more of sales. This oligopolistic corner of the economy includes niche concerns—dog food, batteries and coffins—but also telecoms, pharmacies and credit cards.

The ability of big firms to influence and navigate an ever-expanding rule book may explain why the rate of small-company creation in America is close to its lowest mark since the 1970s … Small firms normally lack both the working capital needed to deal with red tape and long court cases, and the lobbying power that would bend rules to their purposes….

Another factor that may have made profits stickier is the growing clout of giant institutional shareholders such as BlackRock, State Street and Capital Group. Together they own 10-20% of most American companies, including ones that compete with each other. Claims that they rig things seem far-fetched, particularly since many of these funds are index trackers; their decisions as to what to buy and sell are made for them. But they may well set the tone, for example by demanding that chief executives remain disciplined about pricing and restraining investment in new capacity. The overall effect could mute competition.

The cable television industry has become more tightly controlled, and many Americans rely on a monopoly provider; prices have risen at twice the rate of inflation over the past five years. Consolidation in one of Mr Buffett’s favourite industries, railroads, has seen freight prices rise by 40% in real terms and returns on capital almost double since 2004. The proposed merger of Dow Chemical and DuPont, announced last December, illustrates the trend to concentration. //

Roughly another quarter of abnormal profits comes from the health-care industry, where a cohort of pharmaceutical and medical-equipment firms make aggregate returns on capital of 20-50%. The industry is riddled with special interests and is governed by patent rules that allow firms temporary monopolies on innovative new drugs and inventions. Much of health-care purchasing in America is ultimately controlled by insurance firms. Four of the largest, Anthem, Cigna, Aetna and Humana, are planning to merge into two larger firms.

The rest of the abnormal profits are to be found in the technology sector, where firms such as Google and Facebook enjoy market shares of 40% or more

But many of these arguments can be spun the other way. Alphabet, Facebook and Amazon are not being valued by investors as if they are high risk, but as if their market shares are sustainable and their network effects and accumulation of data will eventually allow them to reap monopoly-style profits. (Alphabet is now among the biggest lobbyists of any firm, spending $17m last year.)…

Perhaps antitrust regulators will act, forcing profits down. The relevant responsibilities are mostly divided between the Department of Justice (DoJ) and the Federal Trade Commission (FTC), although some …[But]Lots of important subjects are beyond their purview. They cannot consider whether the length and security of patents is excessive in an age when intellectual property is so important. They may not dwell deeply on whether the business model of large technology platforms such as Google has a long-term dependence on the monopoly rents that could come from its vast and irreproducible stash of data. They can only touch upon whether outlandishly large institutional shareholders with positions in almost all firms can implicitly guide them not to compete head on; or on why small firms seem to be struggling. Their purpose is to police illegal conduct, not reimagine the world. They lack scope.

Nowhere has the alternative approach been articulated. It would aim to unleash a burst of competition to shake up the comfortable incumbents of America Inc. It would involve a serious effort to remove the red tape and occupational-licensing schemes that strangle small businesses and deter new entrants. It would examine a loosening of the rules that give too much protection to some intellectual-property rights. It would involve more active, albeit cruder, antitrust actions. It would start a more serious conversation about whether it makes sense to have most of the country’s data in the hands of a few very large firms. It would revisit the entire issue of corporate lobbying, which has become a key mechanism by which incumbent firms protect themselves.

Excerpts from Too Much of a Good Thing, Economist, Mar. 26, 2016, at 23

Military Bunkers for the Rich

Deep in the Swiss Alps, next to an old airstrip suitable for landing Gulfstream and Falcon jets, is a vast bunker that holds what may be one of the world’s largest stashes of gold. The entrance, protected by a guard in a bulletproof vest, is a small metal door set into a granite mountain face at the end of a narrow country lane. Behind two farther doors sits a 3.5-ton metal portal that opens only after a code is entered and an iris scan and a facial-recognition screen are performed. A maze of tunnels once used by Swiss armed forces lies within.

The owner of this gold vault wants to remain anonymous for fear of compromising security, and he worries that even disclosing the name of his company might lead thieves his way…

Demand for gold storage has risen since the 2008 financial crisis. Many of the wealthy see owning gold as a hedge against the insecurity of banks and a reasonable investment at a time when markets are volatile and bank accounts and low-risk bonds pay almost no yield. It may also be a way to avoid the increasing scrutiny of tax authorities. In high-profile cases, U.S., French, and German prosecutors have gone after citizens of those countries with undeclared Swiss bank accounts.

Swiss storage operations such as these don’t have the same obligation that Swiss banks do to report suspicious transactions to federal regulators. Americans aren’t required under the U.S. Foreign Account Tax Compliance Act to declare gold stored outside financial institutions.
Of the roughly 1,000 former military bunkers still in existence across Switzerland, a few hundred have been sold in recent years, and about 10 are now storage sites holding gold as well as computer data, according to the Swiss defense department.

Few match the opulence of the airstrip setup, whose owner claims to run the largest store of gold for private clients—and the seventh-largest gold vault in the world. Near the runway sits the VIP lounge and a pair of luxurious apartments for clients. The walls of the apartments are lined with aged wood from Polish barns. South African quartzite was chosen for the floors to match the faded gray timber, and the amenities—bathroom mirror, TV screens—can retract into the ceiling, counter, or wall. The owner offers a place for clients to sleep and eat, because “many do not want to leave a paper trail of credit card receipts and passports” at hotels and restaurants…

Some miles away, Dolf Wipfli, the founder and chief executive officer of a different company, Swiss Data Safe, is one of the few operators willing to be interviewed about his business. The gold Swiss Data Safe stores for clients is kept in a mountainside bunker outside the hamlet of Amsteg.

Excerpts from Secret Alpine Gold Vaults Are the New Swiss Bank Accounts, Bloomberg, Sept. 30, 2016

Fleas in the Barn: a Joseph Kabila et al. story

Inongo is the provincial capital of the Mai-Ndombe Province, a 13-million-hectare area located some 650 km northeast of Kinshasa, Demoractic Republic of Conglo, DRC.

The forests of Mai-Ndombe… are rich in rare and precious woods (red wood, black wood, blue wood, tola, kambala, lifake, among others). It is also home to about 7,500 bonobos, an endangered primate…The forests constitute a vital platform providing livelihoods for some 73,000 indigenous individuals, mostly Batwa (Pygmies), who live here alongside the province’s 1.8 million population, many of whom with no secure land rights.  Recent studies also have revealed that the province – and indeed the forests – boasts significant reserves of diamond of precious metals nickel, copper, oil and coal, and vast quantities of uranium lying deep inside the Lake Mai-Ndombe.

In an effort to save these precious forests, the World Bank in 2016 approved DRC’s REDD+ programmes aimed at reducing greenhouse gas emissions and fight forest’s deforestation and degradation, which it would fund to the tune of 90 million dollars annually.  The projects, which are currently estimated at 20, have since transformed the Mai-Ndombe Province into a testing ground for international climate schemes. And as part of the projects, indigenous and other local people caring for the forests and depending on them for their livelihoods were supposed to be rewarded for their efforts.

However, Marine Gauthier, a Paris-based expert who authored a report on the sorry state of the Mai-Ndombe forest, seems to have found serious flaws in these ambitious programmes.  The report, released a few days before the International Day of Forests on March 21, 2018 by the Rights and Resources’ Initiative (RRI), cited weak recognition of communities’ land rights, and recommended that key prerequisites should be addressed before any other REDD+ funds are invested.  In the interim, it said, REDD+ investments should be put on hold…..

Under the DRC’s 2014 Forest Code, indigenous people and local communities have the legal right to own forest covering an area of up to 50,000 hectares.Thirteen communities in the territories of Mushie and Bolobo in the Mai-Ndombe province have since asked for formal title of a total of 65,308 hectares of land, reports said, adding that only 300 hectares have been legally recognised for each community – a total of only 3,900 hectares.

Pretoria-based Donnenfeld added: “My guess is that the government is more interested in selling these resources to multinationals than it in seeing it benefit the community….Gauthier pointed out that…“REDD+ opens the door to more land-grabbing by external stakeholders appealed…. Local communities’ land rights should be recognised through existing legal possibilities such as local community forest concessions so that they can keep protecting the forest, hence achieving REDD+ objectives.”

Excerpts from DR Congo’s Mai-Ndombe Forest ‘Savaged’ As Landless Communities Struggle,  IPS, Apr. 17, 2018

Returning Stolen Money: the Nigerian Saga (2002-2018)

Nigeria and Switzerland signed a memorandum of understanding on March 26, 2018 to pave the way for the return of illegally acquired assets…Switzerland said in December 2017 that it would return to Nigeria around $321 million in assets seized from the family of former military ruler Sani Abacha via a deal signed with the World Bank…[T]he memorandum of understanding was ratified between Nigeria, Switzerland and the International Development Association, (IDA), the World Bank’s fund for the world’s poorest countries.

Excerpt from Nigeria and Switzerland sign agreement to return stolen assets, Reuters, Mar. 26, 2018

Secret Trade Deals – Role of Wikileaks

On August 11, 2015 WikiLeaks has launched a campaign to crowd-source a €100,000 reward for Europe’s most wanted secret: the Transatlantic Trade and Investment Partnership (TTIP).

Starting pledges have already been made by a number of high profile activists and luminaries from Europe and the United States….Since it began to face opposition from BRICS countries at the World Trade Organisation, US policy has been to push through a triad of international “trade agreements” outside of the WTO framework, aimed at radically restructuring the economies of negotiating countries, and cutting out the rising economies of Brazil, Russia, India, China and South Africa (BRICS).

The three treaties, the “Three Big T’s”, aim to create a new international legal regime that will allow transnational corporations to bypass domestic courts, evade environmental protections, police the internet on behalf of the content industry, limit the availability of affordable generic medicines, and drastically curtail each country’s legislative sovereignty.  Two of these super-secret trade deals have already been published in large part by WikiLeaks – the Transpacific Partnership Agreement (TPP) and the Trade in Services Agreement (TISA) – defeating unprecedented efforts by negotiating governments to keep them under wraps.

But for Europeans the most significant of these agreements remains shrouded in almost complete secrecy. The Transatlantic Trade and Investment Partnership (TTIP), which is currently under negotiation between the US and the European Union, remains closely guarded by negotiators and big corporations have been given privileged access. The public cannot read it.

Today WikiLeaks is taking steps to ensure that Europeans can finally read the monster trade deal, which has been dubbed an “economic NATO” by former US Secretary of State Hillary Clinton.  Using the new WikiLeaks pledge system everyone can help raise the bounty for Europe’s most wanted leak. The system was deployed in June to raise a $100,000 bounty for the TTIP’s sister-treaty for the Pacific Rim, the TPP.

The pledge system has been hailed by the New York Times as “a great disrupter”, which gives “millions of citizens… the ability to debate a major piece of public policy,” and which “may be the best shot we have at transforming the [treaty negotiation] process from a back-room deal to an open debate.”

WikiLeaks founder Julian Assange said,

“The secrecy of the TTIP casts a shadow on the future of European democracy. Under this cover, special interests are running wild, much as we saw with the recent financial siege against the people of Greece. The TTIP affects the life of every European and draws Europe into long term conflict with Asia. The time for its secrecy to end is now.”

Excerpts from WikiLeaks goes after hyper-secret Euro-American trade pact

SpaceX Falcon

A SpaceX Falcon rocket lifted off from the Kennedy Space Center in Florida on May , 2017 to boost a classified spy satellite into orbit for the U.S. military, then turned around and touched down at a nearby landing pad.

It was the 34th mission for SpaceX, but its first flight for the Department of Defense, a customer long-pursued by company founder Elon Musk. The privately owned SpaceX once sued the Air Force over its exclusive launch services contract with United Launch Alliance (ULA), a partnership of Lockheed-Martin and Boeing.)  The liftoff of a classified satellite for the National Reconnaissance Office (NRO) officially broke ULA’s 10-year monopoly on launching U.S. military and national security satellites.

In addition to the NRO’s business, SpaceX has won two Air Force contracts to launch Global Positioning System satellites in 2018 and 2019.  For now, the military’s business is a fraction of more than 70 missions, worth more than $10 billion, slated to fly on SpaceX rockets. But with up to 13 more military satellite launches open for competitive bidding in the next few years and ULA’s lucrative sole-source contract due to end in 2019, SpaceX is angling to become a majo launch service provider to the Department of Defense.

A month ago, SpaceX for the first time launched one of its previously flown rockets to send an SES communications satellite into orbit, a key step in Musk’s quest to demonstrate reusability and slash launch costs.

Excertps, SpaceX Launches US Spy Satellite on Secret Mission, Nails Rocket Landing, Space.com, May 1, 2017

Internet Cables and US Security

A real-estate magnate is financing Google’s and Facebook Inc.’s new trans-Pacific internet cable, the first such project that will be majority-owned by a single Chinese company.  Wei Junkang, 56, is the main financier of the cable between Los Angeles and Hong Kong, a reflection of growing interest from China’s investors in high-tech industries.   It will be the world’s highest-capacity internet link between Asia and the U.S.

For Alphabet Inc.’s Google and Facebook, the undersea cable provides a new data highway to the booming market in Southeast Asia. Google and Facebook, which are blocked in China but seeking ways back in, declined to comment on market possibilities in China. Google said the project, called the Pacific Light Cable Network, will be its sixth cable investment and will help it provide faster service to Asian customers…

Backers hope to have Pacific Light operating in late 2018. The elder Mr. Wei’s company, Pacific Light Data Communication Co., will own 60%, Eric Wei said, and Google and Facebook will each own 20%. The project cost is estimated at $500 million, and the Chinese company hired U.S. contractor TE SubCom to manufacture and lay the 17-millimeter wide, 7,954-mile long cable…

The cable project requires U.S. government approval, including a landing license from the Federal Communications Commission and a review by Team Telecom, a committee of officials from the departments of defense, homeland security and justice….

Pacific Light will likely face higher scrutiny from Team Telecom due to the controlling interest by a foreign investor, said Bruce McConnell, global vice president of the EastWest Institute and a former senior cybersecurity official with the Department of Homeland Security.

Team Telecom rarely rejects a landing license application, Mr. McConnell said, but cable operators must agree to security terms.“The agreement is usually heavily conditioned to ensure that (U.S.) security concerns are met,” he said.

The terms often require an American operator of the cable to assist U.S. authorities in legal electronic surveillance, including alerting regulators if foreign governments are believed to have accessed domestic data, according to copies of agreements filed with the FCC. The U.S. landing party usually must also be able to cut off U.S. data from the international network if asked…

More than 99% of the world’s internet and phone communications rely on fiber-optic cables crisscrossing continents and ocean floors. That makes these cables critical infrastructure to governments and a target for espionage.

One of the Eric Wei’s businesses is a Chinese alternative to the QR code called a D9 code, which the company promotes as a “safe” alternative to foreign technology.

Excerpts from  China Firm Backs Asia-US Cable, Wall Street Journal, Mar. 16, 2017

Disputes between States and Foreign Investors

Investor-state dispute settlement (ISDS)cases*are decided by extrajudicial tribunals composed of three corporate lawyers. Although ISDS has existed for decades, its scope and impact has grown sharply in the last decade. As ISDS has been written into over 3,000 Bilateral Investment Treaties (BITs) and numerous Free Trade Agreements (FTAs), the opportunities for ISDS claims are huge and growing.

Originally justified as necessary to protect foreign corporate investments abroad from nationalization or expropriation by governments controlling national judiciaries, [it is claimed that] foreign corporations have used ISDS to change sovereign laws and undermine national regulations...Already, India, Indonesia and Ecuador have advised their treaty partners that they are considering ending their BITs because of ISDS. To reduce abuses, investors could be required to first prove discrimination in national courts before being allowed to proceed to ISDS arbitration. Alternatively, national courts could exercise judicial review over ISDS awards. Also, arbitrators could be required to be independent of the ISDS process, with set salaries, security of tenure and no financial ties to litigants while investor status for ISDS claims could be defined more strictly.

Excerpts from Jomo Kwame Sundaram ISDS Corporate Rule of Law, IPS, Dec. 1, 2016

*While ISDS is often associated with international arbitration under the rules of ICSID (the International Centre for Settlement of Investment Disputes of the World Bank), it often takes place under the auspices of international arbitral tribunals governed by different rules or institutions, such as the London Court of International Arbitration, the International Chamber of Commerce, the Hong Kong International Arbitration Centre or the UNCITRAL Arbitration Rules. ISDS has been criticized because the United States has never lost any of its ISDS cases. Some say the system is biased to favor American companies and American trade over other Western countries, and Western countries over the rest of the world (wikipedia)

The Niger Delta Avengers

Leaders from Nigeria’s Niger Delta called on President Muhammadu Buhari to pull the army out from the oil hub, order oil firms to move headquarters there and spend more on development to end militancy in the region.  Buhari met leaders from the southern swampland for the first time since militants started a wave of attacks on oil pipelines in January 2016 to push for a greater share of oil revenues.

At the meeting in the presidential villa in Abuja, Niger Delta leaders, joined by representatives of militant groups, gave Buhari a list of 16 demands to pacify the impoverished region where many say they do not benefit from the oil wealth…

The delegation leader said oil firms should move headquarters to the region so unemployed youths – who often work for militants – could get more jobs. Foreign firms active in Nigeria are often based in the commercial capital Lagos.  The Niger Delta leaders also asked for more funds for the development and an amnesty plan for former fighters which Buhari had planned to cut.

The attacks, which put four key export streams under force majeure, had led production to plunge to 1.37 million barrels per day in May, the lowest level since July 1988, according to the International Energy Agency (IEA), from 2.2 million barrels in January 2016.

Nigeria agreed on a ceasefire with major militant groups in 2009 to end an earlier insurgency. But previously unknown groups have since taken up arms after authorities tried to arrest a former militant leader on corruption charges.  Under a 2009 amnesty, fighters who lay down arms receive training and employment. However, of the $300 million annual funding set aside for this, much ends up in the pockets of “generals” or officials, analysts say – an endemic problem in a country famous for graft.

Any ceasefire would be difficult to enforce as militants are splintered into small groups of angry, young unemployed men even their leaders struggle to control.

A major group, the Niger Delta Avengers, had initially declared a ceasefire in August 2016 but then claimed another attack in October 2016 .

Excerpts from Niger Delta leaders want army out, Reuters, Nov. 2, 2016

Predators: Tax Avoidance in Luxembourg

Antoine Deltour and Raphaël Halet, two ex-employees of PwC, an accounting firm, and Edouard Perrin, a French journalist, had been tried in Luxembourg for their role in leaking documents that revealed sweetheart tax deals the Grand Duchy had offered to dozens of multinationals. ..The whistle-blowers faced up to ten years behind bars. However, the prosecutor—perhaps sensitive to the strong public and, in some places, political support for them abroad—called for suspended sentences of 18 months. In the end the judge handed Messrs Deltour and Halet suspended sentences of 12 months and nine months, respectively. But a conviction is a conviction; Transparency International, an anti-corruption group, called it “appalling”. Mr Perrin, who had published an article that drew on the leaked documents, was acquitted.

The “LuxLeaks” affair has highlighted the role played by certain European Union countries, including Ireland and the Netherlands as well as Luxembourg, in facilitating tax avoidance. Luxembourg is not a typical tax haven levying no or minimal income tax; its statutory rate is 29%. Instead, it is a haven “by administrative practice”, argues Omri Marian of the University of California, Irvine, who has studied LuxLeaks in detail. Luxembourg’s tax authority in effect sold tax-avoidance services to large firms by rubber-stamping opaque arrangements that helped them to cut their tax bills dramatically in both their countries of residence and their countries of operation.]

Excerpt from Tax avoidance: Grand dodgy, Economist, July 2, 2016

Who Controls dot.Africa?

Now a virtual version of this scramble for Africa is taking place in a court in California, over ownership of the continent’s internet address, or technically its “generic top-level domain” (gTLD).The .africa name, which would grace the end of web and e-mail addresses, was meant to have joined existing ones such as .com about two years ago…But a dispute over who should control the .africa address has dragged on for years and been further delayed by a recent ruling.

At issue was a decision by the Internet Corporation for Assigned Names and Numbers (ICANN), a non-profit organisation that manages the web’s address book, to give control of the name to ZA Central Registry (ZACR), a South African non-profit that was one of two applicants for the name. ZACR’s ace was not just that it had the support of almost three-quarters of African countries (it needed 60%) but that it had been chosen by the African Union to look after the address book for the continent.The other applicant, DotConnectAfrica (DCA), a Mauritius-registered non-profit, was turned down because, among other things, it could not prove that it had enough support and because several African governments objected to it. Although it was clearly the weaker of the two applicants, DCA was thrown a legal lifeline when ICANN blundered, failing to halt its selection process when DCA appealed against the decision. Instead it went ahead and gave the rights to ZACR, opening the way to a further string of appeals and reconsiderations that have finally landed before a court in America. Judges there ordered ICANN not to hand out the name to anyone while the case drags tortuously on.

At stake is more than the money that would flow to whoever gets the right to sell .africa website addresses, but also an important principle over who should control regional names that are, in a sense, a virtual commons. African states have every right to feel aggrieved that, having decided who should control the web address of the continent, they are as powerless to enforce their wishes as they were in Berlin in 1884.

Excerpts from A virtual turf war: The scramble for .africa, Economist, June 10, 2016

Banking in Afghanistan

One bank with 114 branches in war-torn country; defrauded out of almost all its money; occasional target of terrorists. Ready to bid? That’s what Ashraf Ghani, president of Afghanistan, is hoping. He’s seeking a buyer for Kabul Bank, once the country’s largest. The government took it over in 2010 after its owners were accused of embezzling $825 million using fake loans and spending it on, among other things, 11 villas in Dubai and an airline they used to smuggle cash there. The privatization is a test for Ghani, who wants to show the foreign donors who provide most of his budget that he’s committed to fighting corruption.

New Kabul Bank, as it’s now called, isn’t exactly thriving. The bank has been barred from making loans since the scandal. .. On a recent morning, a branch in Kabul’s Baharistan neighborhood was guarded by five men in military uniforms armed with AK-47 assault rifles. Some of the dust-covered computers weren’t working. A customer trying to make a withdrawal waited for an hour and then was turned away.  “I keep hearing about their system failures,” said the customer, Atiqullah Wali. “It’s better to keep our cash inside our pillows like before.”

When the Taliban was driven out of Kabul in 2001, they left the financial system in disarray, fleeing with all but $30,000 of the central bank’s cash. Into the void stepped Sherkhan Farnood, who was wanted by Russian authorities for allegedly running an illegal money-transfer business. He founded Kabul Bank in 2004 and hired Khalil Ferozi as chief executive officer.

The banking industry boomed as foreign aid poured into Afghanistan, with assets expanding by more than 50 percent a year….Farnood amassed property in Dubai and competed in high-stakes poker tournaments in Europe.

The scheme unraveled in 2010, when the central bank learned of the fraud, ordered Farnood and Ferozi to resign and guaranteed the bank’s deposits to stop a run. An investigation by an independent anti-corruption committee commissioned by the Afghan government found that the executives had stolen an amount equivalent to about one-twelfth of the country’s GDP, mainly by giving loans to themselves and their friends that didn’t have to be repaid. One of the alleged beneficiaries was Mahmood Karzai, brother of then-President Hamid Karzai, who wasn’t charged and said he did nothing wrong.

Excerpt from Looted Lender for Sale as Afghanistan Seeks Buyer for Kabul Bank, Bloomberg BusinessWeek, Mar. 4, 2016

How to Make a Buck like Goldman Sachs

Three years ago, your can of Coke suddenly cost a few pennies more. The culprits? The clever bankers at Goldman Sachs. According to a Senate panel, they gamed the global aluminum market, warehousing tens of thousands of tons of the metal in Detroit and delaying delivery to customers like Coca-Cola. The bank was able to ratchet up the price on its supply, netting several billion dollars in the process. The best part: Goldman didn’t do it as a hedge against other investments. The bank did it to make money for itself, at the expense of everyone else.Maneuvers like this are legal, but they’ve become more distasteful in the wake of the 2008 collapse, giving birth to the coinage of a term financialization…

Excerpts from David Sax  How Finance Ruined Business, Makers and Takers adds up the ill effects of Wall Street’s zero-sum game, Bloomberg BusinessWeek, May 19, 2016

Micro-States as Sacrificial Lambs

On March 2015 Financial Crimes Enforcement Network (FinCEN), part of America’s Treasury branded Banca Privada d’Andorra (BPA) as a “primary money-laundering concern”, saying its top managers had moved cash for criminal groups. This so-called “311” measure (after the relevant section of the Patriot Act of 2001) is usually crippling for the bank concerned, because in effect it cuts it off from the American financial system and any banks that participate in it. BPA was no exception: the government of Andorra, a mountainous financial haven nestled between France and Spain, ended up taking over the bank despite objections from its majority shareholders, the Cierco family; its Madrid-based wealth-management arm was liquidated. The Ciercos, insisting there was no legal basis for FinCEN’s move, sued in the American courts.

On February 19, 2016, the FinCEN withdrew its designation of BPA as a money-laundering concern….FinCEN’s explanation for its reversal was that Andorra had taken steps to protect BPA from money-laundering risks, and the bank therefore no longer poses a threat. The Ciercos are having none of this. They argue that it was instead a “blatant effort to avoid judicial scrutiny” of the 311 measure. They point to the timing: the court was to hear a motion to dismiss the case next month. That would have required much more detailed evidence to be aired in support of the 311 action.

The Americans wanted to avoid this because their case was flimsy, critics say. The Ciercos have argued from the start that it was based on cases of suspected money-laundering which the bank itself had reported to Andorran regulators and had brought in KPMG, an accounting firm, to investigate.

If BPA was already cleaning up its act, why go after it at all? Some suspect the bank was a pawn in a tussle between governments: miffed that Andorra was slow to adopt American-style anti-money-laundering rules, including limits on cash transactions, America decided to show who was boss by selecting a bank to pick on. There is some evidence to support this sacrificial-lamb theory. In unscripted comments last year, for instance, an American diplomat suggested that America chose to “use the hammer” on BPA as a way of resolving wider concerns about Andorra.

The Treasury has been challenged in another 311-designation case. FBME Bank of Tanzania sued it after being accused of servicing all manner of bad guys. In the fall of 2015  an American court issued an injunction blocking the government’s action until the bank received more information about why it was deemed a threat to the financial system. The case continues. Meanwhile, FBME’s operations have been severely disrupted: it has sought an injunction to stop the authorities closing an important subsidiary in Cyprus.

These cases highlight two problems with FinCEN’s money-laundering cudgel. The first is double-standards. It tends to go after only small banks in strategically unimportant countries; its use of 311 has been likened to using a sledgehammer to crack nuts. The second is its lack of openness. It faces no requirement to make detailed evidence public, or even available to a court, at the time of action. By the time any challenge is heard, it may be too late for the bank in question.

Whoops Apocalypse, Banks and Money Laundering, Economist, Feb. 27, 2016, at 60

The Illusion of Transparent Markets

Investors worry that, in many cases, competition has brought down the visible price of trading by adding hidden costs. Two anxieties stand out. One is the worry that the current set-up of the markets allows high-speed traders to anticipate big orders and “front-run” them, moving prices in an unfavourable direction before an order can be executed. The other is the question of how robust the system is, with regulators still unable fully to explain events like the “flash crash” of 2010, when the Dow Jones Industrial Average plunged by 9% in minutes before rebounding.

Start with fears of front-running. Many institutional investors complain that ultra-fast traders spot big orders entering the market, and race ahead of them to adjust their prices accordingly. Attempts to hide from the speedsters can go awry. In January Credit Suisse and Barclays, two big banks, agreed to pay $154m in fines for misleading clients about the workings of their “dark pools”, where offers to sell and bids to buy are not published. In theory, that protects investors from front-running; in practice, several of the firms running such venues had concealed the central role that high-frequency traders played on them. (Credit Suisse didn’t admit or deny wrongdoing in the settlement.)

There is another, less-often-told side to the story. Speed is necessary to knit together a dispersed set of exchanges, so that investors are immediately routed towards the best price available and so that their orders are the first to get filled. And plenty of high-frequency traders are market-makers; it is their job to adjust prices in response to new information. Nonetheless, the idea that markets are rigged is widespread, not least thanks to the publication of “Flash Boys”, a book by Michael Lewis on the evils of high-speed trading.

One proferred solution is to level the field by slowing things down deliberately. IEX, whose founder is the hero of Mr Lewis’s book, is a trading platform that has applied to the SEC to become an exchange. It uses miles of coiled cable to create a “speed bump” that delays trades to the advantage of institutional investors. The SEC has received more than 400 letters in support of its application, but there is a vigorous debate about whether IEX’s system complies with the requirements of Regulation National Market System (Reg NMS). Some think that the better solution would be to get rid of Rule 611, which in effect requires orders to be sent to the exchange showing the best price, even though such quotes can sometimes be unobtainable in practice. The SEC will vote on IEX’s application by March 21st.

Share Trading, Complicate, then Prevaricate, Economist, Feb. 27, 2016

Tax Havens in the USA

After years of lambasting other countries for helping rich Americans hide their money offshore, the U.S. is emerging as a leading tax and secrecy haven for rich foreigners. By resisting new global disclosure standards, the U.S. is creating a hot new market, becoming the go-to place to stash foreign wealth. Everyone from London lawyers to Swiss trust companies is getting in on the act, helping the world’s rich move accounts from places like the Bahamas and the British Virgin Islands to Nevada, Wyoming, and South Dakota.

Rothschild, the centuries-old European financial institution, has opened a trust company in Reno, Nevada a few blocks from the Harrah’s and Eldorado casinos. It is now moving the fortunes of wealthy foreign clients out of offshore havens such as Bermuda, subject to the new international disclosure requirements, and into Rothschild-run trusts in Nevada, which are exempt.  Others are also jumping in: Geneva-based Cisa Trust Co. SA, which advises wealthy Latin Americans, is applying to open in Pierre, S.D., to “serve the needs of our foreign clients,” said John J. Ryan Jr., Cisa’s president.  Trident Trust Co., one of the world’s biggest providers of offshore trusts, moved dozens of accounts out of Switzerland, Grand Cayman, and other locales and into Sioux Falls, S.D., in December, ahead of a Jan. 1 disclosure deadline….

No one expects offshore havens to disappear anytime soon. Swiss banks still hold about $1.9 trillion in assets not reported by account holders in their home countries, … Still, the U.S. is one of the few places left where advisers are actively promoting accounts that will remain secret from overseas authorities….The offices of Rothschild Trust North America LLC aren’t easy to find. They’re on the 12th floor of Porsche’s former North American headquarters building, a few blocks from the casinos. (The U.S. attorney’s office is on the sixth floor.) Yet the lobby directory does not list Rothschild. Instead, visitors must go to the 10th floor, the offices of McDonald Carano Wilson LLP, a politically connected law firm. Several former high-ranking Nevada state officials work there, as well as the owner of some of Reno’s biggest casinos and numerous registered lobbyists. One of the firm’s tax lobbyists is Robert Armstrong, viewed as the state’s top trusts and estates attorney, and a manager of Rothschild Trust North America.

“There’s a lot of people that are going to do it,” said Cripps. “This added layer of privacy is kicking them over the hurdle” to move their assets into the U.S. For wealthy overseas clients, “privacy is huge, especially in countries where there is corruption.”….

Rothschild’s Penney wrote that the U.S. “is effectively the biggest tax haven in the world.” The U.S., he added in language later excised from his prepared remarks, lacks “the resources to enforce foreign tax laws and has little appetite to do so.”….The U.S. failure to sign onto the OECD information-sharing standard is “proving to be a strong driver of growth for our business” …

In a section originally titled “U.S. Trusts to Preserve Privacy,” he included the hypothetical example of an Internet investor named “Wang, a Hong Kong resident,” originally from the People’s Republic of China, concerned that information about his wealth could be shared with Chinese authorities.  Putting his assets into a Nevada LLC, in turn owned by a Nevada trust, would generate no U.S. tax returns, Penney wrote. Any forms the IRS would receive would result in “no meaningful information to exchange under” agreements between Hong Kong and the U.S., according to Penney’s PowerPoint presentation reviewed by Bloomberg.  Penney offered a disclaimer: At least one government, the U.K., intends to make it a criminal offense for any U.K. firm to facilitate tax evasion.

Excerpt from Jesse Drucker, The World’s Favorite New Tax Haven Is the United States, Bloombert, Jan. 27, 2016

Currency Wars: the Yuan

A handful of mainly U.S.-based macro hedge funds have led bets against China’s yuan since late last year (2015) and the coming weeks should tell how right they are in predicting a devaluation of between 20 and 50 percent. Texas-based Corriente Partners… [bets against the yuan].The firm reckons rush by domestic savers and businesses to withdraw money from China will prove too strong for authorities to resist and control, even with $3.3 trillion in FX reserves, the biggest ever accumulated.  London-based Omni Macro Fund has been betting against the yuan since the start of 2014. Several London-based traders said U.S. funds, including the $4.6 billion Moore Capital Macro Fund, have also swung behind the move.  Data from Citi, meanwhile, shows leveraged funds have taken money off the table since offshore rates hit 6.76 yuan per dollar three weeks ago…

That has prompted comparisons with the victories of George Soros-led funds over European governments in the early 1990s. Chinese state media on Tuesday warned Soros and other “vicious” speculators against betting on yuan falls.

“China has an opportunity now to allow a very sharp devaluation. The wise move would be to do it quickly,” Corriente chief Mark Hart said on Real Vision TV this month.”If they wait to see if things change, they will be doing it increasingly from a position of weakness. That’s how you invite the speculators. Every month that they hemorrhage cash, people look at it and say, ‘well now if they weren’t able to defend the currency last month, now they’re even weaker’.”

“It’s a popular trade. I can’t imagine a single western hedge fund has got short dollar-(yuan),” Omni’s Chris Morrison said.Derivatives traders say large bets have been placed in the options market on the yuan reaching 8.0 per dollar and data shows a raft of strikes between 7.20 and 7.60. The big division is over pace and scale.  Corriente and Omni both say if China continues to resist, it may be forced this year into a large one-off devaluation as reserves dwindle….

China’s response to yuan pressure has underlined a difference with earlier currency crises: Beijing has an offshore market separate from “onshore” China into which it can pump up interest rates at minimal harm to the mainland economy.  Earlier this month, it raised offshore interest rates, making it prohibitively expensive for funds to leverage overnight positions against the yuan. That sent many reaching for China proxies, including for the first time in years, the Hong Kong dollar.“We have a direct position in the (yuan) but it’s much easier to trade second-round effects of China,” said Mark Farrington, portfolio manager with Macro Currency Group in London. “The Korean won, Malaysia, Taiwan, are all easier plays.” … [Hedge funds] say Beijing may have spent another $200 billion of its reserves in January 2015; at that rate, most of its war chest would evaporate this year and the yuan weaken by a further 18-20 percent. Omni’s Morrison states “That is a fundamental misconception [to believe that Chinese authorities control the yuan]. They’re not making the tide, they’re just desperately holding it back.”

Excerpts from PATRICK GRAHAM, Hedge funds betting against China eye ‘Soros moment, Reuters, Jan. 26, 2016

Tax Havens Europe Love Stolen Cash

Authorities in Switzerland are in talks to arrange the return to Nigeria of $300 million confiscated from the family of its former military ruler, Sani Abacha, Nigeria’s foreign minister said.  The corruption watchdog Transparency International has accused Abacha of stealing up to $5 billion of public money during his five years running the oil-rich nation, from 1993 until his death in 1998.  Foreign Minister Geoffrey Onyeama said $700 million had already been repatriated from Switzerland, adding that he met Swiss representatives last week for further talks.  “They have also now recovered, in the same context, another $300 million of which there is ongoing discussion to have that repatriated as well,” he told journalists on Monday.

In 2014, Nigeria and the Abacha family reached an agreement for the West African country to get back the funds, which had been frozen, in return for dropping a complaint against Abba Abacha, the son of the former military ruler.  He was charged by a Swiss court with money-laundering, fraud and forgery in April 2005, after being extradited from Germany, and subsequently spent 561 days in custody. In 2006, Luxembourg ordered that funds held by the younger Abacha be frozen….He has asked the Britain and the United States for help recovering money stolen from Africa’s biggest economy by some of the country’s elite over several years.

Switzerland and Nigeria discuss return of $300 million stolen by Abacha, Reuters, Jan. 13, 2016

Platform Capitalism: FANG

Hardly a day goes by without some tech company proclaiming that it wants to reinvent itself as a platform. …Some prominent critics even speak of “platform capitalism” – a broader transformation of how goods and services are produced, shared and delivered.   Such is the transformation we are witnessing across many sectors of the economy: taxi companies used to transport passengers, but Uber just connects drivers with passengers. Hotels used to offer hospitality services; Airbnb just connects hosts with guests. And this list goes on: even Amazon connects booksellers with buyers of used books.d innovation, the latter invariably wins….

But Uber’s offer to drivers in Seoul does raise some genuinely interesting questions. What is it that Uber’s platform offers that traditional cabs can’t get elsewhere? It’s mostly three things: payment infrastructure to make transactions smoother; identity infrastructure to screen out any unwanted passengers; and sensor infrastructure, present on our smartphones, which traces the location of the car and the customer in real time. This list has hardly anything to do with transport; they are the kind of peripheral activity that traditional taxi companies have always ignored.

However, with the transition to knowledge-based economy, these peripherals are no longer really peripherals – they are at the very centre of service provision.There’s a good reason why so many platforms are based in Silicon Valley: the main peripherals today are data, algorithms and server power. And this explains why so many renowned publishers would team up with Facebook to have their stories published there in a new feature called Instant Articles. Most of them simply do not have the know-how and the infrastructure to be as nimble, resourceful and impressive as Facebook when it comes to presenting the right articles to the right people at the right time – and doing it faster than any other platform.

Few industries could remain unaffected by the platform fever. The unspoken truth, though, is that most of the current big-name platforms are monopolies, riding on the network effects of operating a service that becomes more valuable as more people join it. This is why they can muster so much power; Amazon is in constant power struggles with publishers – but there is no second Amazon they can turn to.

Venture capitalists such as Peter Thiel want us to believe that this monopoly status is a feature, not a bug: if these companies weren’t monopolies, they would never have so much cash to spend on innovation.  This, however, still doesn’t address the question of just how much power we should surrender to these companies.

Making sure that we can move our reputation – as well as our browsing history and a map of our social connections – between platforms would be a good start. It’s also important to treat other, more technical parts of the emerging platform landscape – from services that can verify our identity to new payment systems to geolocational sensors – as actual infrastructure (and thus ensuring that everybody can access it on the same, nondiscriminatory terms) is also badly needed.

Most platforms are parasitic: feeding off existing social and economic relations. They don’t produce anything on their own – they only rearrange bits and pieces developed by someone else. Given the enormous – and mostly untaxed – profits made by such corporations, the world of “platform capitalism”, for all its heady rhetoric, is not so different from its predecessor. The only thing that’s changed is who pockets the money.

Excerpt from Evgeny Morozov, Where Uber and Amazon rule: welcome to the world of the platform, Guardian, Nov. 15, 2015

Organized Corruption: Moldova

During the country’s previous general-election campaign November 2014, Moldova was hit by a bombshell. A leaked report revealed that up to $1 billion, equivalent to more than one-eighth of the country’s GDP, had been stolen from three banks. It named the 28-year-old Mr Shor, an Israeli-born financier who is one of Moldova’s richest men, as being at the centre of a web of companies connected to the heist. Mr Shor denies any involvement. The government, trying and failing to stave off the banks’ collapse, pumped in money, leaving Moldovans, whose average salary is $200 a month, to foot the bill. According to the Organised Crime and Corruption Reporting Project, a watchdog, the banks were part of a scheme which, in the seven years up to 2014, laundered $20 billion of Russian money using a British shell company and a Latvian bank account.

Although nobody has been convicted of any crime, Moldovans are seething with rage that their political leaders did not see fit to police the banking system better….Under the leadership of the purportedly pro-European parties, Moldova has inched forward on some fronts. It secured visa-free entry to Europe’s passportless Schengen zone and signed a key integration deal with the European Union in 2013. Now the banking scandal has discredited both the politicians and their cause. Igor Botan, an analyst, says they are “blackmailing” Moldovans. “They say, ‘We are pro-European thieves, but if you don’t like us the pro-Russians will come’.”

Excerpt from Moldova on the edge: Small enough to fail, Economist,  Nov. 21, 2015, at 50

Corruption Begets Corruption: Nigeria Oil

Dead fish wash up on the once-fertile shores of creeks around Bodo, a town in the Niger delta, that are covered with crude oil more than six years after two massive spills. Locals have only now received compensation from Shell, the oil firm responsible for the leaks. For the first time in half a decade, fishermen have cash to start businesses, repair their houses and send children to school… “Look,” says the chief of a tiny town called B-Dere, just a few miles from Bodo. He gestures to the deathly-black banks still bearing the marks of the slicks. “There is nothing to drink, nowhere to fish. What good has come from it?”

The cash that the oil industry provides has greased Nigerian politics for decades. Gross mismanagement and corruption in the industry are the causes of much of the inequality and discontent with the ruling party in an economy that is not just Africa’s largest but that ought to also be one of its wealthiest…

Nigeria pumps something like 2m barrels of oil a day. These account for most of its exports and about 70% of government revenues. But official figures are as murky as its polluted creeks. Volumes are recorded only at export terminals rather than at the wellhead, says Celestine AkpoBari of the Port Harcourt-based advocacy group, Social Action. Were a proper tally kept, he says, corruption would be exposed on a scale that would shock even the most cynical Nigerian.

It seems likely that more than 100,000 barrels of crude are stolen (or “bunkered” in the local parlance) every day, at a cost to the state and investors of billions of dollars a year. Politicians, oil workers and security forces are said to be behind the complex cartels that steal, illegally refine and sell crude oil. They have amassed almost unimaginable wealth in a country where poverty is still rife.

Oil’s taint has seeped into almost all levels of government and business. Yet the central problem is found in the petroleum ministry, which wields vast unaccountable power. The Nigerian National Petroleum Corporation (NNPC), a state-owned behemoth, is responsible for all aspects of the industry, from exploration to production and regulation. It is among the most secretive oil groups in the world, and is “accountable to no one”, says Inemo Samiama, country head of the Stakeholder Democracy Network, a non-profit group.

In 2013 the former governor of the central bank, Lamido Sanusi, alleged that $20 billion in oil revenues was missing from state coffers. He was fired for his troubles soon after. …

Even where cash has not been nicked, it has often been squandered. Take the Excess Crude Account (ECA), a sovereign-wealth fund intended to cushion Nigeria’s budget against falling oil prices. Most of it was spent over the past two years, despite oil prices being relatively high for most of that period.

The industry itself is in as sorry a state as the government’s finances. Although oil practically gushes from the ground in parts of the delta, oil output has been stagnant for years and billions of dollars of investment are stalled because of uncertainty over a new law for the industry.  This is holding back Nigeria’s economy almost across the board. Because the industry has failed to build the infrastructure to pipe gas to domestic consumers such as power plants, much of it is simply flared and burned: Britain reckons that some $800m worth of Nigeria’s gas a year goes up in smoke. The country is also chronically short of fuel even though it has four state-owned oil refineries. Because of poor maintenance and ageing equipment they operate at well below capacity, forcing Nigeria to import about 70% of the fuel it needs. There is little incentive for reform since the government pays hefty subsidies to NNPC to keep on importing…

But a starting point should be to halt subsidies for fuel imports. At a stroke that would undercut a major source of corruption and crime (both on land and at sea) that spills into neighbouring countries, the destination for smuggled consignments of cheap Nigerian fuel. It should also take a close look at NNPC, which should not be allowed both to participate in the market and regulate it. Some of its assets could be privatised. The ruling party and opposition are considering both….

For communities in Ogoniland, the most pressing problem is cleaning up. Shell has promised to mop up the mess around Bodo, though the process has yet to start. Compensation is one thing, Bodo residents say, but what they really want is their livelihood back.

Nigeria’s oil: Crude politics, Economist,  Mar. 28, 2015, at 54

From Switzerland: Stolen Money Trickles Back to Nigeria

Geneva’s public prosecutor will send $380 million confiscated from the family of Nigeria’s former military ruler Sani Abacha to Nigeria and closed a 16-year investigation into his funds, the prosecutor’s office said.   Abacha stole as much as $5 billion of public money during his five years running Africa’s top oil producing country from 1993 until his death in 1998, according to the corruption watchdog Transparency International.

The return of the $380 million follows an agreement between Nigeria and the Abacha family in July 2014, the prosecutor’s statement said. The agreement provides for Nigeria to receive the frozen funds in return for dropping a complaint against Abba Abacha, Sani’s son.He was charged by a Swiss court with money-laundering, fraud and forgery in April 2005, after being extradited from Germany, and subsequently spent 561 days in custody. In 2006 Switzerland ordered funds held by him in Luxembourg to be confiscated.  The return of the funds is conditional on effective monitoring by the World Bank of how the funds are used.

Switzerland to return $380 million of Abacha’s loot to Nigeria, Reuters, Mar. 19, 2015

Only One Protester was Killed: Kenya

One person was killed and several injured in January 26, 2015 when Kenyan police clashed with Maasais protesting against a local governor they accuse of misappropriating tourism funds from the Maasai Mara game reserve, an official said.  Police fired shots and teargas as thousands of people from the Maasai ethnic group, clad in traditional red cloaks, marched to the governor’s office in Narok town, the administrative centre of the sprawling Maasai Mara park, witnesses said.

Narok County Commissioner Kassim Farah, an official appointed by the president, said: “Only one protestor was killed by a bullet.  “We regret it but the organisers of the demonstration should be held responsible, not the police.” Kenya Red Cross said seven people injured in the clashes were taken to a nearby hospital.

Demonstrators marched to the gates of Governor Samuel Tunai’s office, shouting: “Tunai must go.” Some hurled rocks. The dispute began when Tunai’s administration contracted a company to collect Maasai Mara park entry fees, a deal the locals say was suspect.

Visitors to the Maasai Mara, one of Africa’s biggest tourist draws, pay $80 per day to roam an area full of wildlife such as lions, rhinos and giraffes. Upmarket lodges and luxury tented camps can charge hundreds of dollars per person per day for the experience, although a spate of militant attacks in Kenya as well as the Ebola epidemic on the other side of Africa have scared off many tourists….

Local government finance has come under increased scrutiny from Kenyans since a newly devolved system was introduced in 2013 under which local governments receive about 43 percent of the national budget directly and are responsible for raising their own additional revenues.  Devolution was designed to spread wealth and help local communities benefit from revenue earned in their areas but analysts say corruption and other issues that have blighted national politics have now also spread to local bodies

Corruption protest in Kenya’s Maasai Mara region turns deadly, Reuters, Jan. 27, 2015

The Flow of Dirty Money through Trade

A few years ago American customs investigators uncovered a scheme in which a Colombian cartel used proceeds from drug sales to buy stuffed animals in Los Angeles. By exporting them to Colombia, it was able to bring its ill-gotten gains home, convert them to pesos and get them into the banking system.This is an example of “trade-based money laundering”, the misuse of commerce to get money across borders. Sometimes the aim is to evade taxes, duties or capital controls; often it is to get dirty money into the banking system. International efforts to stamp out money laundering have targeted banks and money-transmitters, and the smuggling of bulk cash.

But as the front door closes, the back door has been left open. Trade is “the next frontier in international money-laundering enforcement,” says John Cassara, who used to work for America’s Treasury department. Adepts include traffickers, terrorists and the tax-evading rich. Some “transfer pricing”—multinationals’ shuffling of revenues to cut their tax bills—probably counts, too. Firms insist that tax arbitrage is legal, and that the fault, if any, lies with disjointed international tax rules. Campaigners counter that many ruses would be banned if governments were less afraid of scaring off mobile capital. Trade is “a ready-made vehicle” for dirty money, says Balesh Kumar of the Enforcement Directorate, an Indian agency that fights economic crime. A 2012 report he helped write for the Asia/Pacific Group on Money Laundering, a regional crime-fighting body, is packed with examples of criminals combining the mispricing of goods with the misuse of trade-finance techniques. Using trade data, Global Financial Integrity (GFI), an NGO, estimates that $950 billion flowed illicitly out of poor countries in 2011, excluding trade in services and fraudulent transfer pricing. Four-fifths was trade-based laundering linked to arms smuggling, drug trafficking, terrorism or public corruption.

The basic technique is misinvoicing. To slip money into a country, undervalue imports or overvalue exports; do the reverse to get it out. A front company for a Mexican cartel might sell $1m-worth of oranges to an American importer while creating paperwork for $3m-worth, giving it cover to send a dirty $2m back home. One group of launderers was reportedly caught exporting plastic buckets that cost $970 each from the Czech Republic to America. To lessen the risk of discovery the deal may be sent via a shell company in a tax haven with strict secrecy rules. This may mean using a specialist “re-invoicing” firm to “buy” the oranges at an inflated price with an invoice to match and charge the importer the true price. The point is to get paperwork to justify an inflated transfer to the seller. Re-invoicers are used by multinationals to shift profits around, which gives them a veneer of respectability, says Brian LeBlanc of GFI—but they also “feed a giant black market in the offshore manipulation of paperwork”…

American authorities have ratcheted up penalties for banks that assist money-launderers, knowingly or not. In 2012 they reached a $1.9 billion settlement with HSBC after concluding that Latin American drug gangs had taken advantage of lax controls at its Mexican subsidiary. And last year they imposed a $102m forfeiture order on a Lebanese bank implicated in a complex scheme involving the export of used cars to West Africa with the proceeds funnelled to Hizbullah, an Islamist group. Alternative remittance systems and currency exchanges, such as the trust-based hawala networks in Asia and the Middle East, and Latin America’s Black Market Peso Exchange (BMPE), offer another route to launder money through trade. ..A recently leaked Turkish prosecutor’s report describes an alleged conspiracy involving Turkish front companies and banks, an Iranian bank and money-exchangers in Dubai. By marking up invoices for food and medicine allowed into Iran—to as much as $240 for a pound of sugar—the scheme gave Iranian banks access to hard currency from Iran’s oil sales that was locked in escrow accounts overseas, to be transferred only for approved transactions…

In the meantime, launderers who curb their greed and invoice goods worth $10 for $9, or $11, will probably continue to get away with it. A dodgy deal is almost impossible to spot if the pricing is only slightly out and you see just one end, says one American investigator. “You can study the slips all day long, and all you see is stuff being imported and exported.”

Excerpts from Trade and money laundering: Uncontained, Economist, May 3, 2014, at 54

Organized Crime: the Invisibles

From modest beginnings as the local mafia of Calabria, at the toe of the Italian boot, the ’Ndrangheta has spread far and wide. It has penetrated Italy’s financial and industrial heartlands, Lombardy and Piedmont, more than any other organised-crime group. It has a dominant position in the transatlantic cocaine trade, building on alliances with Colombian and then Mexican mobsters. One study put its turnover in 2013 at over €50 billion ($69 billion).

But who controls the ’Ndrangheta? The question is central to one of Italy’s longest-running mafia trials, which is expected to end shortly after almost three years. The trial arose from an investigation code-named “Operation Goal” that led in 2010 to more than 40 arrests. Among the accused are members of the most notorious families in Reggio di Calabria. One, Pasquale Condello, is known as Il supremo.

The prosecutor, Giuseppe Lombardo, argues that neither Mr Condello nor any other known or alleged mobster is truly supreme; they take their cues from an “invisible” ’Ndrangheta from the outwardly respectable middle class. In February Mr Lombardo altered the charges to reflect this, inviting the judges to express their view of his case in their written judgment.

The earliest hint of a hidden ’Ndrangheta emerged in 2007, during an investigation overseen by Mr Lombardo into how the group tried to profit from the construction of a new motorway. Eavesdropping on a trade unionist, Sebastiano Altomonte, police heard him describe his contacts with ’Ndrangheta leaders and explain to his wife that they were split between “the visible and the invisible, which was born a couple of years ago”. He was among the “invisibles”, he said. It was previously believed that a co-ordinating body, the Provincia, was the ’Ndrangheta’s high command; it also has an assembly called the Crimine (“Crime”), believed to meet once a year during the pilgrimage to a sanctuary in the Aspromonte uplands.

He argues that in recent years the police in Calabria have had excellent results against the ’Ndrangheta. “But the organisation does not get any weaker. So we know that we are hitting it at a level below that which really counts

Organised crime in Italy: From toe to top, Economist, Apr. 26, 2014, at 52

The Kazakh Dream

A few protesters brandishing lacy underwear may not look like a threat to the stability of the state. But the authorities of oil-rich Kazakhstan took no chances on February 16th when a group of demonstrators waving their knickers appeared on the streets of the financial capital, Almaty. The “pantie protesters” were rounded up and led away.  Their demonstration was ostensibly prompted by a rule regulating synthetic underwear due to come into force this summer under a new customs union between Kazakhstan, Russia and Belarus…  [But the real] source of anger was the devaluation of the Kazakh currency, the tenge, on February 11th. It plunged by 19%, causing fears of a spike in inflation and a dip in living standards in a country that imports many consumer goods….

The protests are small but they hint that Mr Nazarbayev’s unspoken social contract—in which citizens trade political freedoms for relative prosperity and social stability—is becoming fragile. Tensions surfaced in 2011, when 15 people were shot dead as striking oil workers clashed with police in Zhanaozhen in the west of the country. Now the devaluation has reminded many ordinary people—maxed out on credit and exasperated by the growing rich-poor divide—that they are not living the “Kazakh dream”.

Kazakhstan’s economy: Tenge fever, Economist,  Feb. 22, 2014, at 35

 

Food Security Strategies: the Gulf

Feliance on food imports is problematic when countries such as Argentina suddenly restrict their exports in response to rising prices. Buying farmland in countries such as Sudan, Tanzania and Pakistan is another Gulf ploy. The UAE and Saudi Arabia are among the top ten investors in land abroad, according to Land Matrix, a body that tracks such deals. But this has drawbacks, too. Getting big projects off the ground in places that lack infrastructure is tricky. And Gulf states who fund them have sometimes been accused of being neocolonial.

Many of the region’s rulers are now considering investing in food companies abroad, often in more developed countries. The UAE’s Al Dahra Agriculture, which works closely with the government and owns land abroad, recently bought eight farm companies in Serbia for $400m. It has also invested in an Indian rice producer. In addition, countries like Saudi Arabia are looking at ways of keeping strategic food reserves.

Gulf rulers may end up following a mixture of such strategies to fill their peoples’ stomachs. They should at least be commended for grappling with the problem, says a regional food expert. Poorer and hungrier Arab countries, like Egypt and Yemen, are far less willing to address it.

Food security in the Gulf: How to keep stomachs full, Economist,  Feb. 22, 2014

A Global Criminal Court Only for Africa

The International Criminal Court is to decide whether to suspend its trial of Kenyan President Uhuru Kenyatta because of a lack of cooperation by Kenyan authorities.  Judges said they would hold a hearing in the coming weeks on a possible reprimand for Kenya after prosecutors told the court on Wednesday that “pure obstructionism” was wrecking any chance of pursuing Kenyatta on charges that he orchestrated post-election violence six years ago.

The case is a test of the authority and credibility of the Western-backed court, which has seen several cases collapse, secured just one conviction in 11 years, and prompted bitter complaints from Africa that it is being singled out as a soft target.  The case against Kenyatta has been undermined by the withdrawal of a string of witnesses who prosecutors say have been intimidated or blackmailed, as well as other failures to secure documentary evidence.

In a January 31 court filing, prosecutors said a “climate of fear” had weakened their case and that judges should rule that Kenya was in breach of its obligation to help investigators.  They told the court they needed access to Kenyatta’s financial records, among other things, to see whether he had indirectly paid large sums of money to the perpetrators of the violence, in which 1,200 people died and thousands were driven from their homes.

Kenyatta, who is head of both state and government, denies the charge of crimes against humanity. His lawyers say the prosecution is now merely trying to blame Kenya for its own failure to build a case…

While Western powers led the push to establish the court and are keen to support it, they are also anxious to maintain relations with Kenya, seen as a key ally in the battle against militant Islamism in neighboring Somalia.The case grew more controversial throughout Africa after Kenyatta, the son of his country’s founder, won last year’s presidential election on a joint ticket with William Ruto, his deputy, who is on trial on similar but separate charges.  Kenya says the court risks destabilizing east Africa if it presses on with the charges.

Excerpt, BY THOMAS ESCRITT, Court to decide whether to suspend Kenyatta trial over “obstructionism”, Reuters, Feb. 6, 2014

Watering Down Banking Regulations

“It was always the French and the Germans,” grumbles a senior financial regulator, blaming counterparts from those two countries for undermining international efforts to increase capital ratios for banks. Every time the Basel committee, a grouping of the world’s bank supervisors, neared agreement on a higher standard, he says, a phone call from the Chancellery in Berlin or the Trésor in Paris would send everyone back to the table.

Similar phone calls almost certainly inspired the committee’s decision on January 12th to water down a proposed new “leverage ratio” for banks. It had originally suggested obliging banks to hold equity (the loss-absorbing capital put up by investors) of at least 3% of assets. In theory, that standard will still apply. But the committee came up with various revisions to how the ratio is to be calculated, in effect making it less exacting.

The new rule will allow banks to offset some derivatives against one another and to exclude some assets from the calculation altogether, thus making their exposure seem smaller. Analysts at Barclays characterised it as a “substantial loosening”. Citibank called it “significant regulatory forbearance”. Shares in big European banks such as Barclays and Deutsche Bank surged to their highest level in nearly three years on the news.

Leverage ratios have their critics—even outside overleveraged banks. They contend that leverage is a crude and antiquated measure of risk compared with the practice of weighting assets by the likelihood of making losses on them, and calculating the required cushion of equity accordingly. The chances of losing money on a German government bond, the argument runs, are much smaller than they are on a car loan; but a simple leverage ratio makes no distinction between the two. As a result, leverage ratios might actually encourage banks to buy riskier assets, in the hope of increasing returns to shareholders. Officials at Germany’s central bank, for instance, have argued that a binding leverage ratio “punishes low-risk business models, and it favours high-risk businesses.

”Bankers also claim that tough leverage requirements risk stemming the flow of credit to the economy, as banks shrink their balance-sheets to comply. BNP Paribas, a French bank, says this would particularly disadvantage European banks because they do not tend to sell on as many of their home loans as American ones. The full extent of the new change is difficult to gauge, partly because there is still some uncertainty surrounding the rules. Yet a rough calculation suggests that they have been loosened just enough to allow most big European banks to pass the 3% test. Without the committee’s help as many as three-quarters of Europe’s big banks might have failed the test (see chart).

A detailed analysis by Kian Abouhossein of J.P. Morgan Cazenove, an investment bank, suggests that under the old rules big European banks may have had to raise as much as €70 billion ($95 billion) to get their leverage ratios to 3.5%, which is far enough above the minimum for comfort. Yet the new rules alone may improve big European banks’ leverage ratios by 0.2-0.5 percentage points compared with the previous ones, he reckons—enough for most to avoid raising new capital.

That does not mean banks will be able to shrug off the new leverage ratio entirely. Simon Samuels, an analyst at Barclays, expects it will prompt some European investment banks to reconsider their strategies. Some may have to cut lines of business and reduce their assets. That hints at the potency the measure could have had, if the regulators had allowed it.

Leverage ratios: Leavened, Economist,  Jan 18, 2014, t 72

How to Evade Capital Controls: China

Is capital fleeing China? The recent crackdown on official corruption might suggest that fat cats are busy whisking their money out of the country to avoid scrutiny. That impression is strengthened by the apparently endless flow of Chinese money into luxury goods, penthouses and other trophies in London, New York and Paris.  Lots of money is undoubtedly leaving China, despite the country’s strict currency controls. However, a close look at the official figures suggests that, on balance, more hot money… has been flowing in.

A new study by Global Financial Integrity (GFI), a research firm, highlights one popular way illicit flows enter the mainland.   It claims that well over $400 billion has poured into China since 2006 outside the official channels, with inflows in the first quarter of 2013 alone topping $50 billion. GFI believes exporters on the mainland exaggerate the prices of goods sent to Hong Kong in order to evade China’s strict currency controls and bring back pots of cash.  Why would they bring money into China? One reason is to take advantage of a steadily appreciating yuan. Once punters sneak money into China, eye-catching if risky investments beckon in the overheated property market and poorly regulated shadow-banking sector.

Another explanation relates to the prolonged period of low interest rates in America. GFI notes that flows of hot money into China surged when the Federal Reserve began trying to suppress rates by buying up government bonds and other securities. Now that the Fed is “tapering” its asset purchases, it is reasonable to ask if the flow of hot money will slow or even reverse.  Chinese regulators have noisily complained about the illicit inflows. In December they promised a crackdown on over-invoicing and other such scams.

Chinese capital flows: Hot and hidden, Economist, Jan 18, 2014, at  73

BlackRock Owns Almost Everything

BlackRock, an investment manager, owns a stake in almost every listed company not just in America but globally. (Indeed, it is the biggest shareholder in Pearson, in turn the biggest shareholder in The Economist magazine.) Its reach extends further: to corporate bonds, sovereign debt, commodities, hedge funds and beyond. It is easily the biggest investor in the world, with $4.1 trillion of directly controlled assets (almost as much as all private-equity and hedge funds put together) and another $11 trillion it oversees through its trading platform, Aladdin.

Established in 1988 by a group of Wall Streeters led by Larry Fink, BlackRock succeeded in part by offering “passive” investment products, such as exchange-traded funds, which aim to track indices such as the S&P 500. These are cheap alternatives to traditional mutual funds, which often do more to enrich money managers than clients (though BlackRock offers plenty of those, too). The sector continues to grow fast, and BlackRock, partly through its iShares brand, is the largest competitor in an industry where scale brings benefits. Its clients, ranging from Arab sovereign-wealth funds to mom-and-pop investors, save billions in fees as a result.

The other reason for its success is its management of risk in its actively managed portfolio. Early on, for instance, it was a leader in mortgage-backed securities. But because it analysed their riskiness zipcode by zipcode, it not only avoided a bail-out in the chaos that followed the collapse of Lehman, but also advised the American government and others on how to keep the financial system ticking in the darkest days of 2008, and picked up profitable money-management units from struggling financial institutions in the aftermath of the crisis.

Compared with the many banks which are flourishing only thanks to state largesse, BlackRock’s success—based on providing value to customers and paying attention to detail—is well-deserved. Yet when taxpayers have spent billions rescuing financial institutions deemed too big to fail, a 25-year-old company that has grown so vast so quickly sets nerves jangling. American regulators are therefore thinking about designating BlackRock and some of its rivals as “systemically important”. The tag might land them with hefty regulatory requirements.

If the regulators’ concern is to avoid a repeat of the last crisis, they are barking up the wrong tree. Unlike banks, whose loans and deposits go on their balance-sheets as assets and liabilities, BlackRock is a mere manager of other people’s money. It has control over investments it holds on behalf of others—which gives it great influence—but it neither keeps the profits nor suffers the losses on them. Whereas banks tumble if their assets lose even a fraction of their value, BlackRock can pass on any shortfalls to its clients, and withstand far greater shocks. In fact, by being on hand to pick up assets cheaply from distressed sellers, an unleveraged asset manager arguably stabilises markets rather than disrupting them.

But for regulators that want not merely to prevent a repeat of the last blow-up but also to identify the sources of future systemic perils, BlackRock raises another, subtler issue, concerning not the ownership of assets but the way buying and selling decisions are made. The $15 trillion of assets managed on its Aladdin platform amount to around 7% of all the shares, bonds and loans in the world. As a result, those who oversee many of the world’s biggest pools of money are looking at the financial world, at least in part, through a lens crafted by BlackRock. Some 17,000 traders in banks, insurance companies, sovereign-wealth funds and others rely in part on BlackRock’s analytical models to guide their investing.

That is a tribute to BlackRock’s elaborate risk-management models, but it is also discomfiting. A principle of healthy markets is that a cacophony of diverse actors come to different conclusions on the price of things, based on their own idiosyncratic analyses. The value of any asset is discovered by melding all these different opinions into a single price. An ecosystem which is dominated by a single line of thinking is not healthy,

The rise of BlackRock, Ecomomist, Dec. 7, 2013, at 13

Mining in Africa: who gets the money?

Most west African governments have signed—or pledged to sign—the Extractive Industries Transparency Initiative (EITI). The EITI tries to ensure that contracts and accounts of taxes and revenue generated by concessions are open to public scrutiny. But that is easier said than done. Last year Liberia’s government asked a British accounting firm, Moore Stephens, to carry out an audit of Liberian mining contracts signed between the middle of 2009 and the end of 2011. The audit, published in May 2013, found that 62 of the 68 concessions ratified by Liberia’s parliament had not complied with laws and regulations. The government has yet to take action after a string of recommendations emerged from an EITI retreat in July 2013.

Regional governments also fret over a practice known as “concession flipping”, whereby foreign mining companies that do not have the capacity to exploit sites sell their concessions to larger companies for windfall profits. “Every flip is essentially a heist on the government exchequer, with anonymous offshore firms as the getaway car,” says Leigh Baldwin of Global Witness, a London-based lobby that fights for fairer deals for local people and their governments from mining and other resources. Concession flipping, he adds, is widespread in Africa. The Africa Progress Panel, headed by Kofi Annan, a Ghanaian who once led the UN, has put out a report called “Equity in Extractives”. This, too, stresses a need for more openness in mining contracts. As people in the region demand more democracy, better deals from mining are a new priority.

Mining in west Africa: Where’s our cut?, Economist, Dec. 7, 2013, at 51

How to Make Money in Frontier Markets

A desperate search for bonds that pay a decent rate of interest and a keen desire for exposure to economies that are still growing quickly have taken rich-world investors to some exotic places. The raciest bets are made in so-called frontier markets, poorer places with even less mature financial sectors than emerging markets. Africa is full of them. Rwanda and Tanzania, for example, have found willing buyers this year for their debut issues of dollar-denominated bonds. The farthest edge of the investing frontier has now reached Mozambique.

In September Credit Suisse and BNP Paribas raised $500m on behalf of EMATUM, a state-owned company in Mozambique. Credit Suisse advanced the $500m; slices of the debt were then sold as loan-participation notes, maturing in 2020, at a yield of 8.5%. VTB, a Russian bank, raised a further $350m for EMATUM shortly afterwards. Such a deal can be done more quickly and with less fuss than a typical bond issue. VTB had already raised $1 billion for Angola in a similar fashion. Those notes are included in J.P. Morgan’s emerging-market bond index, an industry benchmark.

The concern is less about the way the money was raised than how it will be used. Mozambique is poor. Its budget is part-funded by grants and low-interest loans from rich countries. Its public finances were solid in part because it has been granted extensive debt relief. When such countries borrow in private markets, it is usually to fund projects, such as toll roads, airports or power stations, which might have broad enough benefits to justify the expense. But EMATUM is a tuna-fishing venture that came into being just a few weeks before the $850m was raised in its name.

It is not obvious that a state-run fishing startup is a compelling business proposition. But investors know there are huge gas reserves off the shores of Mozambique that will eventually bring in lots of foreign exchange, even if tuna does not. The bonds come with a guarantee from the finance ministry. And the handsome yield (far higher than the rate on comparable Treasury bonds) is some reward for the risks.

A French shipyard has received orders worth about $300m for two dozen fishing vessels and a handful of patrol boats. It is not yet clear what the rest of the money, which is accruing hefty interest, will be used for. What is clear is that the temptation to grab at easy money offered by yield-hungry investors is proving too great to resist for some countries. As usual, the role of party-pooper has fallen to the IMF. It has called for the cost of the guarantee and for “possible non-commercial activities” related to the EMATUM bond to be clarified in the next budget.

Investing in frontier markets: Fishy tale, Economist, Nov. 23, 2013, at 73

Why the Rich Love Dubai

But Dubai…has an asset that counts as much as location, infrastructure, an eager multinational workforce, business-friendly rules and an absence of politics. With much of the region in distress, skilled workers and capital are pouring in faster than ever. Recent arrivals include rich Syrian and Egyptian exiles, and if Western sanctions on Iran are eased, Dubai is poised to cash in mightily, too. “The Arab spring has been great for us,” says Mishaal Gargawi, a young Emirati from a notable merchant family who is launching a private think-tank. “Everyone comes here, from Colonel Qaddafi’s lieutenants to Saudis getting a government payrise and blowing it on iPads in the Dubai Mall.”

Dubai:It’s bouncing back, Economist, Nov. 23, 2013, at  52

The Airport as a Tax Haven

The world’s rich are increasingly investing in expensive stuff, and “freeports” such as Luxembourg’s are becoming their repositories of choice. Their attractions are similar to those offered by offshore financial centres: security and confidentiality, not much scrutiny, the ability for owners to hide behind nominees, and an array of tax advantages. This special treatment is possible because goods in freeports are technically in transit, even if in reality the ports are used more and more as permanent homes for accumulated wealth. If anyone knows how to game the rules, it is the super-rich and their advisers.

Because of the confidentiality, the value of goods stashed in freeports is unknowable. It is thought to be in the hundreds of billions of dollars, and rising. Though much of what lies within is perfectly legitimate, the protection offered from prying eyes ensures that they appeal to kleptocrats and tax-dodgers as well as plutocrats. Freeports have been among the beneficiaries as undeclared money has fled offshore bank accounts as a result of tax-evasion crackdowns in America and Europe.

Several factors have fuelled this buying binge. One is growing distrust of financial assets. Collectibles have outperformed stocks over the past decade, with some, like rare coins, doing a lot better, according to The Economist’s valuables index. Another factor is the steady growth of the world’s ultra-wealthy population. According to Wealth-X, a provider of data on the very rich, and UBS, a financial-services firm, a record 199,235 individuals have assets of $30m or more, a 6% increase over 2012.

The goods they stash in the freeports range from paintings, fine wine and precious metals to tapestries and even classic cars. (Data storage is offered, too.) Clients include museums, galleries and art investment funds as well as private collectors. Storage fees vary, but are typically around $1,000 a year for a medium-sized painting and $5,000-12,000 to fill a small room.

These giant treasure chests were pioneered by the Swiss, who have half a dozen freeports, among them sites in Chiasso, Geneva and Zurich. Geneva’s, which was a grain store in the 19th century, houses luxury goods in two sites with floor space equivalent to 22 football pitches.  Luxembourg is not alone in trying to replicate this success. A freeport that opened at Changi airport in Singapore in 2010 is already close to full. Monaco has one, too. A planned “freeport of culture” in Beijing would be the world’s largest art-storage facility.

The early freeports were drab warehouses. But as the contents have grown glitzier, so have the premises themselves. A giant twisting metal sculpture, “Cage sans Frontières”, spans the lobby in Singapore, which looks more like the interior of a modernist museum or hotel than a storehouse. Luxembourg’s will be equally fancy, displaying concrete sculptures by Vhils, a Portuguese artist. Like Singapore and the Swiss it will offer state-of-the-art conservation, including temperature and humidity control, and an array of on-site services, including renovation and valuation.

The idea is to turn freeports into “places the end-customer wants to be seen in, the best alternative to owning your own museum,” says David Arendt, managing director of the Luxembourg freeport. The newest facilities are dotted with private showrooms, where art can be shown to potential buyers….Iron-clad security goes along with style. The Luxembourg compound will sport more than 300 cameras. Access to strong-rooms will be by biometric reading. Singapore has vibration-detection technology and seven-tonne doors on some vaults. “You expect Tom Cruise to abseil from the ceiling at any moment,” says Mark Smallwood of Deutsche Bank, which leases space for clients to store up to 200 tonnes of gold at the Singapore freeport.

Gold storage is part of Singapore’s strategy to become the Switzerland of the East. The city-state’s moneymen want to take its share of global gold storage and trading to 10-15% within a decade, from 2% in 2012. To spur this growth, it has removed a 7% sales tax on precious metals. (The Economist understands that the Luxembourg freeport’s gold-storage ambitions will get a fillip from the Grand Duchy’s central bank, which plans to move its reserves—now sitting in the Bank of England—to the facility once it opens. The bank declined to comment.)

Switzerland remains the world’s leading gold repository. Its imports of the yellow metal have exceeded exports by some 13,000 tonnes—worth $650 billion at today’s price—since the late 1960s, says the customs agency. The gap has widened sharply since the mid-2000s. But trade statistics do not tell the whole story, since they fail to capture the quantities of gold that go straight from runways to the freeports.

Wealth piled up in freeports is a headache for insurers. The main building in Geneva holds art worth perhaps $100 billion. The Nahmad art-dealing dynasty alone is said to have dozens of Picassos there. More art is stored in Geneva than insurers are comfortable covering, says Robert Read of Hiscox, an art insurer. Coverage for new items is hard to come by at any price….In a bid to soothe worries about concentrated storage, the private firm that operates Geneva’s freeport (which leases it from the majority owner, the local canton) is building a new warehouse a short distance from its existing structures. Most of the art is now stored in vaults under the main building. These were built in the 1970s as a way for banks to avoid a planned tax on gold held in their own vaults. The levy was repealed, the banks took back their gold, and paintings and sculptures soon began to fill the void. Luxembourg’s freeport, which is scheduled to open next summer, recently conducted a roadshow for insurers that highlighted the facility’s state-of-the-art safety features, including fire-fighting systems that suck oxygen from the air while releasing inert gas instead of water, so as not to damage art.

Insurance is cheaper for those willing to park assets in remote places. Switzerland is dotted with disused military bunkers, blasted into the Alpine rock during the second world war and cold war. The government has been selling these, and some have been bought by firms hoping to convert them into high-altitude treasure chests. One is Swiss Data Safe, which sells storage for valuables and digital archives at several undisclosed sites deep in the Gotthard granite. It claims to offer protection from “the forces of nature, civil unrest, disasters and terrorist attack”. Such places have a low risk of fire or being hit by a plane. But they cannot offer the tax advantages that freeports can.

Freeports are something of a fiscal no-man’s-land. The “free” refers to the suspension of customs duties and taxes…. this is all legal—though some countries have had to alter their statute books to accommodate the concept. Luxembourg amended its laws in 2011 to codify its freeport’s tax perks. That, plus the offer of land by the airport, helped persuade the project’s backers to put it there rather than in London or Amsterdam….Luxembourg’s government views the freeport as a useful adjunct to its burgeoning financial centre, which has been built on tax-friendliness. Deloitte, which helps firms and rich individuals minimise taxes, brokered the deal. Mr Arendt believes the freeport could help Luxembourg compete with London and New York in art finance, which includes structuring loans with paintings as collateral… As Swiss banks come under pressure to shop tax-dodgers, for instance, some are said to have been recommending clients to move money from bank accounts to vaults, in the form of either cash or bought objects, since these are not covered by information-exchange pacts with other countries. A sign that this practice may be on the increase is the voracious demand for SFr1,000 ($1,100) notes—the largest denomination—which now account for 60% of the value of Swiss-issued paper cash in circulation. Andreas Hensch of Swiss Data Safe says demand for its mountain vaults has been accelerating over the past year. The firm is not required to investigate the provenance of stuff stored there.

Western countries have started to clamp down on those who try to use such repositories to keep undeclared assets in the shadows. America has led the way. Under a bilateral accord, Swiss banks will have to deliver information on the transfer of funds from accounts, including cash withdrawals. Tax authorities are growing more interested in the contents of vaults. Americans with untaxed offshore wealth who sign on to an IRS voluntary-disclosure programme are required to list foreign holdings of art, says Bruce Zagaris of Berliner, Corcoran & Rowe, a law firm.

Tax-evaders are one thing, drug traffickers and kleptocrats another. In many ways the art market is custom-made for money laundering: it is unregulated, opaque (buyers and sellers are often listed as “private collection”) and many transactions are settled in cash or in kind. Investigators say it has become more widely used as a vehicle for ill-gotten gains since the 1980s, when it proved a hit with Latin American drug cartels. It is “one of the last wild-West businesses”, sighs an insurer.  This makes freeports a “very interesting” part of the dirty-money landscape, though also “a black hole”, says the head of one European country’s financial-intelligence agency. In a report in 2010 the Financial Action Task Force, which sets global anti-money-laundering standards, fretted that free-trade zones (of which freeports are a subset) were “a unique money-laundering and terrorist-financing threat” because they were “areas where certain administrative and oversight procedures are reduced or eliminated”.

Numerous investigations into tainted treasures have led to freeports. In the 1990s hundreds of objects plundered from tombs in Italy and elsewhere were tracked down to Geneva’s warehouse (along with papers showing that some had been laundered by being sold at auction to straw buyers, then handed straight back with the legitimate purchase documents). In 2003 a cache of stolen Egyptian treasures, including two mummies, was discovered in Geneva; in 2010 a Roman sarcophagus turned up there, perhaps pinched from Turkey.

Under pressure to respond, the Swiss have tightened up their laws on money-laundering and the transfer of cultural property. A law that took effect in 2009 brought Switzerland’s freeports into its customs territory for the first time. They must now keep a register of handling agents and end-customers using their space. Handlers must keep inventories, which customs can request to see.

In practice, however, clients can still be sure of a high degree of secrecy. Swiss customs agents still care more about drugs, arms or explosives than about the provenance of a Pollock. They do not have to share information with foreign authorities. Much of it is of limited value anyway, since items can be registered in the name of any person “entitled” to dispose of them—not necessarily the real owner.

Even greater secrecy is on offer in Singapore. Goods coming in to the freeport must be declared to customs, but only in a vague way: there is no requirement to disclose owners, their stand-ins or the value or precise nature of the goods (“wine” or “antiques” is enough). “We offer more confidentiality than Geneva,” Mr Vandeborre declared when the facility opened.  However, it is not quite true to say that Singapore and other new sites are in arm’s-length competition with the more established facilities. In fact, they share the same tight-knit group of mostly Swiss owners, managers, advisers and contractors. Yves Bouvier, the largest private shareholder in the Geneva freeport, is also the main owner and promoter of the Luxembourg freeport, a key shareholder in Singapore and a consultant to Beijing. His Geneva-based art-handling firm, Natural Le Coultre, is closely involved in running or setting up all these operations. Singapore’s architects and engineers were Swiss, as are its security consultants.

This has fuelled speculation that Swiss interests have deliberately developed a strategy to globalise the high-end freeport concept as a way to continue to benefit, even as the crackdown on undeclared money in Zurich and Geneva drives some of it to other countries. Franco Momente of Natural Le Coultre rejects this interpretation. “It’s nothing more than supply and demand,” he says. “Today many countries see the advantages of freeports for the local economy and to have a place in the global art market. They’re looking for solutions with experienced operators, and [the Swiss] have long experience.”

Barring dramatic regulatory intervention or moves to end their tax benefits, freeports are likely to grow, driven primarily by clients in emerging markets. At current growth rates the collective wealth of Asia’s rich will overtake Europe’s by 2017, reckon UBS and Wealth-X (see chart 2). As this population grows, so too could wealth taxes in the region, which are now low or non-existent. That could drive yet more Indians, Chinese and Indonesians towards the discreet duty-free depots which—if they aren’t already there—may soon be coming to an airport near you.

Freeports: Über-warehouses for the ultra-rich, Economist, Nov. 23, 2013, at 27

Dark Money and the Power of 501(c)(4)

The $180m raised last year by Crossroads Grassroots Policy Strategies included 50 donations of at least $1m. No one knows who those generous people were. Crossroads, co-founded in 2010 by Karl Rove, a Republican strategist, does not have to reveal its donors because it is registered as a non-profit “social welfare organisation” under section 501(c)(4) of America’s tax code. Chief among the groups receiving grants from Crossroads was Americans for Tax Reform, a group founded by Grover Norquist, which during last year’s elections extracted pledges on tax and spending from Republican politicians.

To its critics, this made Crossroads the most egregious example of “dark money”: anonymous donors financing political campaigns under the guise of traditional social-welfare charity. The volume of dark money has soared in recent years. Last year some $256m was spent on political ads, phone calls and mailings by around 150 501(c)(4) non-profits. Most of this was by conservative groups; only 15% was from the left and centre, such as Organising for America, which raises funds for Barack Obama…  The proposed rules are a response to social-welfare charities being used for a purpose they never previously had, as money denied its traditional voice sought new ways to influence politics…

The proposed new rules would apply only to 501(c)(4) organisations, not to (c)(5) or (c)(6), notes Kim Barker of ProPublica, a news outfit that has done pioneering research into dark money. Because most money going to (c)(5) groups is from trade unions, anonymous wealthy donors may be tempted to switch to (c)(6) groups, which are mostly trade associations, such as the US Chamber of Commerce and Freedom Partners, a group set up by Charles and David Koch, two conservative billionaire brothers. But Marc Owens, a lawyer who works to tackle dark money, says the proposed rules are sufficiently ambiguous not to shut down the big partisan players. They could, however, restrict non-partisan organisations such as the League of Women Voters, which provides information on elections to its members.

The consultation process is likely to be fierce, but it is still uncertain whether the new rules that emerge will be enforced. Since 2010 only one small non-profit has been denied tax-exempt status by the IRS on political grounds. Unless the IRS makes this a higher priority, it may be some time before the days of dark money are over.

Regulating political spending: Lighten our darkness, Economist, Nov. 30, 2013, at 30

The China-Laos Train: Debt and Collateral

On the ground in the northern province of Oudomxay (Laos), most jeeps roaming the deforested valley bear Chinese and Vietnamese number plates…Investment is flowing into agriculture, typically rubber plantations, market gardening and other cash crops, much of it destined for the huge Chinese population to the north. The side-effects include a loss of forests and biodiversity, serious soil erosion and growing numbers of people in this multi-ethnic province being pushed off their land.

Chinese firms have secured rubber concessions in the province covering 30,000 hectares (74,000 acres). The idea is that tens of thousands of Chinese workers will eventually be needed to tap the rubber. In the past decade the government has granted land concessions across the country for up to 100 years, often at knock-down prices, to Chinese, Vietnamese and, to a lesser extent, Thai operators. More land is now in the hands of foreigners than is used to grow rice. The fear of one expert in Laos is the emergence of a landless poor.

Not all Chinese influence is welcomed by the government. Recently a deputy prime minister, Somsavat Lengsavad, announced the closure of a Chinese-run casino near the border that had attracted drugs and prostitutes along with gamblers. Yet Mr Lengsavad, ethnically Chinese himself, has his own patronage network built on granting concessions for Chinese-run special economic zones. And he is the point man for one of Asia’s most ambitious projects: a proposed 262-mile (421-km) passenger and freight railway connecting Kunming, in the south-western Chinese province of Yunnan, with Vientiane, the Laotian capital. The $7.2 billion price tag (including interest) is nearly as big as Laos’s entire formal economy. It will take 50,000 workers five years just to lay the tracks. Two-thirds of the route will run through 76 planned tunnels or over bridges.

The collateral for such a huge project lies in the mines of Laos. In other words, the extraction of natural resources in this undeveloped country is about to accelerate. Economic rents already accrue to an oligarchy, for which the railway, one way or another, will prove a bonanza… The capital of Laos is on the mighty Mekong river, which forms the border with Thailand. Though it still has a torpid air, Vientiane is growing fast in the hands of a Communist kleptocracy whose members queue up on Saturdays in their big cars to cross the Mekong for a dose of shopping across the border. For many of the remaining 6.6m Laotians, unease and sometimes fear are the predominant emotions.

Last December a well-known democratic activist and advocate of sustainable development, Sombath Somphone, disappeared. At the same time, the government clamped down on foreign NGOs, especially those advocating land rights. Two months ago the American embassy hung a banner from its water tower calling for the return of Mr Somphone. In September the head of the American-based Asia Foundation in Laos was told to pack her bags….The trauma of its long civil war and of American carpet-bombing during the Vietnam war is never far away. One-third of the country is still contaminated by unexploded American ordnance. Hundreds of people lose limbs every year to cluster bombs.In few countries do development agencies have to operate in thinner air than in Laos. In e-mails, foreign residents drop syllables from the names of Politburo members in attempts to outsmart new Chinese surveillance technology. The regime is constantly on guard against foreigners who might be seeking to “change our country through peaceful means”.

The future of Laos: A bleak landscape, Economist, Oct. 26, 2013, at 50

The Economics of Piracy: who benefits

[T]he pirate economy is poorly understood. A report released on November 4, 2013 by the World Bank, the UN and Interpol sheds new light.  The authors interviewed current and former pirates, their financial backers, government officials, middlemen and others. They estimate that between $339m and $413m was paid in ransoms off the Somali coast between 2005 and 2012. The average haul was $2.7m. Ordinary pirates usually get $30,000-75,000 each, with a bonus of up to $10,000 for the first man to board a ship and for those bringing their own weapon or ladder.

Qat, a narcotic plant that is chewed by many, is often provided to pirates on credit during an operation. Their consumption is recorded and, when the ransom is paid, each pirate gets his share, minus what he consumed.  Other deductions include food and fines for bad behaviour, such as mistreating the crew, which often carries a $5,000 fine and dismissal…Some pirates find it difficult to retire because they end up in debt at the end of a hijack. Part of the ransom money flows to local communities that provide services to pirates.  Payments go to cooks, pimps and lawyers, who are increasingly sought after, as well as banknote-checkers with machines that can detect fakes. Money is also paid to militias that control ports. Under one agreement in Haradheere, a port north of Mogadishu, Somalia’s capital, pirates paid a “development tax” of 20% to the Shabab, an Islamist rebel group tied to al-Qaeda.

During operations, pirates spend with abandon. Interest rates on loaned goods and services are high: $10 of mobile-phone airtime is charged generally at around $20. The men on the anchored ships also pay up to three times the market price for qat, driving up prices on the coast. “With piracy everything became more and more expensive,” complains a fisherman-turned-pirate. Some locals (including former pirates) offer services to potential and actual victims of piracy, for instance as consultants, negotiators or proof-of-life interviewers. Some of these “companies” openly advertise their services, sometimes contacting victims directly.

Financing pirate expeditions can be quite cheap by comparison. The most basic ones cost a few hundred dollars, which may be covered by those taking part. Bigger expeditions, involving several vessels, may cost $30,000 and require professional financing, This comes from former police and military officers or civil servants, qat dealers, fishermen and former pirates. They take anywhere between 30% and 75% of the ransom.  A typical operation has three to five investors. Some provide loans or investment advice to other financiers. Some financiers, especially those in the Somali diaspora who have little cash inside Somalia but large deposits abroad, employ what the report describes as “trade-based money-laundering” to send funds to Somalia. This involves finding legitimate Somali importers willing to use a financier’s foreign money to pay for their shipments and reimburse him at home in cash once the goods are sold.

The same technique is sometimes used to transfer ransom money out of Somalia. Cash is also smuggled across the region’s porous borders or transferred through intermediaries. One pirate took $12,000 in $50 and $100 bills to an office that transmits money and wired it abroad, bought a car and shipped it back to Somalia. The Somali financial sector is surprisingly dynamic and growing more quickly than state institutions. Various internet-payment services have popped up, even in the roughest parts of the country.

The report identifies Djibouti, Kenya and the United Arab Emirates (UAE) as the main transit points and final destinations for much of the loot. The financial institutions in Dubai, part of the UAE, are a particular worry. Investigators concluded that the ransom from the hijacking of the MV Pompei in 2012 was moved to Djibouti, then wired to banks in Dubai.  A third of pirate financiers invest profits in setting up militias or gaining political influence. Some also finance religious extremists.

Excerpts from Somali piracy: More sophisticated than you thought, Economist, Nov. 2, 2013, at 53

Tax Evaders and Whistleblowers

What  Edward Snowden is to mass surveillance, Hervé Falciani is becoming to private banking. In 2008 the now 41-year-old native of Monaco walked out of the Geneva branch of HSBC, where he had worked for three years, clutching five CD-ROMs containing data on thousands of account holders. The theft lobbed a bomb into Europe’s private-banking market, spawning raids and tax-evasion investigations continentwide. In the latest, this week, Belgian agents swooped on the homes of 20 HSBC clients, including some with ties to Antwerp diamond dealers.

Mr Falciani went on the run when the Swiss charged him with data theft. After moving to Spain he was imprisoned, but freed when a judge denied a Swiss extradition request. At one point, he claims, he was kidnapped by Mossad agents who wanted a peek at the clients’ names. He has now taken refuge in France, where the government has offered him protection in return for helping it hunt for tax dodgers.

Several countries have used the data to bring cases against suspected evaders. Revelations that dozens of Greek public figures hid money offshore have magnified the tumult in that country’s politics. Spain and France have fingered hundreds of high-level cheats and retrieved €350m ($610m) in back taxes. Mr Falciani maintains that his CDs provided support for an American probe into weak money-laundering controls at HSBC, which led to a $1.9 billion settlement. HSBC disputes this.

Mr Falciani has said he still fears for his safety, despite round-the-clock protection from three armed guards provided by the French. At least he is not short of work. He has been helping France’s tax authorities develop long-term anti-tax-evasion measures. And he recently became an adviser to a new Spanish political party, Partido X (which, ironically, tries to keep its members anonymous).

He insists his motives have always been pure: to repel Switzerland’s “attack” on other countries’ tax laws and exchequers. HSBC says he is no high-minded whistle-blower. He tried to sell the data at first, the bank contends, and started to work with prosecutors only when he was jailed in Spain. It claims he has data on only 15,000 clients (Mr Falciani says it is eight times that) and that the stolen files contain errors.

Either way, many more tax-shy Europeans have reason to sleep fitfully. Other countries are said to want a look at the data, some of which are yet to be decrypted. When Mr Falciani first made the rounds with his discs, there was little interest. The fiscal strains produced by the euro crisis have changed all that.

Banks and tax evasion: Hervé lifting, Economist, Oct. 19, 2013, at 79

Rivers as Fiefs: Dams in China

Though the Chinese authorities have made much progress in evaluating the social and environmental impact of dams, the emphasis is still on building them, even when mitigating the damage would be hard. Critics have called it the “hydro-industrial complex”: China has armies of water engineers (including Hu Jintao, the former president) and at least 300 gigawatts of untapped hydroelectric potential. China’s total generating capacity in 2012 was 1,145GW, of which 758GW came from coal-burning plants.

An important motive for China to pursue hydropower is, ironically, the environment. China desperately needs to expand its energy supply while reducing its dependence on carbon-based fuels, especially coal. The government wants 15% of power consumption to come from clean or renewable sources by 2020, up from 9% now. Hydropower is essential for achieving that goal, as is nuclear power. “Hydro, including large hydro in China, is seen as green,” says Darrin Magee, an expert on Chinese dams at Hobart and William Smith Colleges in New York state.

There is also a political reason why large hydro schemes continue to go ahead. Dambuilders and local governments have almost unlimited power to plan and approve projects, whereas environmental officials have almost no power to stop them.

The problems begin with the planning for China’s rivers, which are divided into fiefs by the state-owned power companies that build dams in much the same way as the Corps of Engineers and the Bureau of Reclamation divided up American rivers in the early 20th century. Though the staff of the water-resources ministry in Beijing know a lot about the environment, they have no say. “Big hydro projects are designed and approved by everybody but the ministry of water resources,” says Mr Magee.

Local governments, meanwhile, view dams as enticing economic development projects. The dambuilders, which have special privileges to borrow, put up the financing. The extra electricity supports industrial expansion and brings in revenues. Local officials are promoted for meeting economic performance targets and some collude for personal gain with the dambuilders. Because of the decentralised nature of the industry, local officials try to include dams in their plans. Once they have done so, they can expect the environmental impact assessments that follow to be a formality—if only because the consultants who undertake them are paid by the hydropower companies.

Environmental officials who have not been financially captured by the dambuilding economy find themselves as scarce as some of the fish they are charged to protect. Environmental activists, meanwhile, can request access to public records and demand public hearings, both required by law. But they say that these avenues are barred when they are most needed—on controversial projects that face vocal opposition. For example, the authorities have rejected requests for public records on Xiaonanhai and they have not granted a public hearing.

If environmental regulators and activists want any hope of halting a project, they must go outside normal bureaucratic channels to lobby powerful Politburo members or the national media. Although that may not always work, it did in 2004, when Wen Jiabao, then prime minister, halted construction of a cascade of 13 dams on the Nu River in south-west China in order to protect the environment. Even then some work on the projects still proceeded. Meanwhile, smaller schemes race ahead unchecked. Promoted by dambuilders and local governments, nearly 100 smaller hydroelectric projects in the Nu river region went forward without needing permission from higher up. Some began before they had even received the final approval.

China’s new leaders in recent months have signalled that they want yet more dams, approving several ambitious new projects, including what would be the highest dam in the world, on the Dadu river. After Mr Wen stepped down from his posts in the party and the government, the dams on the Nu river that he blocked received the go-ahead again.

Chinese leaders have for millennia sought to tame the country’s great rivers, which have sustained and destroyed countless lives with cycles of abundance, famine and floods. Indeed their legitimacy as rulers has long been linked to their ability to do so. The Communist Party has built thousands of large dams since 1949. China is also the world’s leading builder of big dams abroad; International Rivers, a pressure group, says that Chinese companies and financiers are involved in about 300 dam projects in 66 countries.

The politics of dam-building: Opening the floodgates, Economist, Sept. 21, 2013, at 47

Offshore Tax Evasion: US v. Switzerland

Fearful that other banks could suffer the same fate as Wegelin, a venerable private bank that was indicted in New York in 2012 and put out of business, the Swiss government has been seeking an agreement with America that would allow the industry to pay its way out of trouble in one go. Instead, it has had to make do with one covering banks that are not already under investigation, which excludes some of the country’s biggest institutions.

The deal is cleverly structured. Of Switzerland’s 300 banks, 285 will be able to avoid prosecution if they provide certain information about American clients and their advisers, and pay penalties of 20-50% of the clients’ undeclared account balances, depending on when the account was opened and other factors. Banks that persuade clients to make disclosures before the programme starts will get reduced fines. Banks will not have to take part but the legal risks are daunting for those that don’t, even if they hold little undeclared American money. Those with no foreign clients will have to produce independent reports proving they have nothing to hide if they want a clean bill of health.

One Swiss newspaper likened the deal to “swallowing toads”. Another called it “the start of an organised surrender”. The bankers’ association sees it as a necessary evil: the only way to end legal uncertainty, albeit at a cost that will strain some institutions. Small and medium-sized Swiss private banks are already struggling. In 2012 their average return on equity was 3%; the number of private banks fell by 13, to 148, mostly because of voluntary liquidations. KPMG, a consultancy, expects this to fall by a further 25-30% by 2016 as receding legal threats encourage the return of mergers.

Some of the prospective buyers in any future M&A wave still have to make their peace with the Americans. Excluded from the deal are 14 mostly large banks that have been under investigation for some time, including Credit Suisse and Julius Bär. They will have to settle individually, with fines expected to be steep, some perhaps comparable to the $780m paid by UBS in 2009. These banks are also under pressure from European countries that have suffered tax leakage, including Germany, whose parliament has rejected a deal that would have allowed the Swiss to make regular payments of tax withheld from clients while avoiding having to name names.

Swiss bankers gamely argue that bank secrecy remains intact, pointing out that privacy laws have not been dismantled. But banks are being bullied into providing enough information, short of actual client names, to allow the Americans to make robust “mutual legal assistance” requests that leave Swiss courts with no option but to order banks to provide clients’ personal details. The courts still have some flexibility because America has yet to ratify an amended tax treaty with Switzerland, thanks to blocking tactics by Rand Paul, a senator who argues it would violate Americans’ right to privacy. But this obstacle will eventually be cleared or circumvented.

All of which fuels speculation that Switzerland could lose its crown as the leading offshore financial centre, even though it is still well ahead of fast-growing rivals in Asia. It may find comfort in the fact that the Americans plan to use information harvested from the Swiss— including “leaver lists”, which contain data on account closures and transfers to banks abroad—to go after other jurisdictions. This is part of a “domino effect” strategy, says Jeffrey Neiman, a former federal prosecutor, aimed at forcing tax evaders “so far off the beaten path that they can’t be sure if the pirate waiting to take their money will be there when they return.”

Offshore tax evasion: Swiss finished?, Economist, Sept. 7, 2013, at 72

Economic Choking: US in Somalia

For Mohamed Abdulle, sending money to his family in Somalia means a trip to a high street in Stratford, East London, home to a large expatriate community. Once there he hands over cash, a telephone number and a name, usually that of his grandmother who lives in Somalia’s capital, Mogadishu, to an agent. A few minutes later Mr Abdulle, who works as a shop assistant, gets a text message letting him know the cash has arrived on the other side. This fast and reliable system, developed during decades of war in Somalia, is used by hundreds of thousands in the global diaspora, as well as by some UN offices and aid agencies to pay staff.

Perhaps not for much longer. Barclays, a big retail bank, has served notice that it will close the accounts of some 250 money-transfer businesses. The bank said the decision followed a routine legal review. Some money remitters “don’t have the proper checks in place to spot criminal activity,” the bank says, or could “unwittingly” be financing terrorists.

Barclays was among the last British banks willing to deal with agents who cheaply transfer money to poor countries. Many European banks have become nervous about such cash transfers after the American government last year forced HSBC, another big British bank, into a $1.9 billion settlement over allegedly shoddy money-laundering controls…..

Meanwhile, a group of 100 academics and other notables [petition] written to the British government asking it to avert a humanitarian crisis in the Horn of Africa. An estimated 40% of Somalia’s population depends on money sent from abroad. A recent study showed that three-quarters of recipients need the money to buy essentials, such as food and medicine.

“This will mean children being pulled out of school, people going hungry or not getting medicines they need,” said Laura Hammond, a lecturer at the University of London. The Somali Money Services Association, another British trade body, warned that the consequences of the closure of the accounts would be “worse than the drought” that ravaged Somalia two years ago and killed tens of thousands.

So far attention has focused on Somalia, where years of conflict have destroyed the banks and left no real alternatives to cheap money transfers. But the 250 firms put on notice by Barclays also include some serving Ghana and Nigeria, as well as India and Bangladesh. More sophisticated and expensive competitors such as Western Union may now benefit. A reduction in competition in the African remittance market will drive up prices.  Africans already pay more than any other migrant group to send money home. The cost of remitting to sub-Saharan Africa, typically around 12%, is three percentage points higher than the global average…

Some observers are calling for the creation of new institutions that could replace private banks. One suggestion is a “remittance bank” hosted by the UN or a multilateral agency. Another is a code of conduct worked out by remitters, banks and regulators. “This needs to be driven by government,” says Leon Isaacs of the International Association of Money Transfer Networks. “Or the banks won’t get the comfort they want.”

African money transfers: Let them remit, Economist, July 20, 2013, at 43

See also Family Ties: Remittances and Livelihoods Support in Puntland and Somaliland Study Report (pdf)

The Rape of Europe by Internet Giants: tax avoiding, data mining

The raid by the European Commission’s antitrust gumshoes this month on Orange (formerly France Telecom), Deutsche Telekom and Telefónica of Spain seemed to come out of the blue. The companies professed a surprise verging on stupefaction. Even some Brussels insiders were caught on the hop.  Naming no names, the commission said the inquiry involved internet connectivity. The question is whether entrenched telecoms firms are abusing their strength in the market for internet traffic to deny video-streaming websites and other content providers full access to their networks to reach consumers. Besides the content providers themselves, the other potential plaintiffs are the “wholesalers” that the content providers use to ship their data across borders (and usually the Atlantic). These rely on incumbent internet-service providers (ISPs) such as Orange to take the data the last bit of the way to subscribers’ screens and mobiles.

All eyes turned to Cogent Communications, an American wholesaler which handles data for the likes of YouTube. Cogent has complained, fruitlessly, to French and German regulators that their former monopolies were asking too much to handle data, and throttling the flow to consumers when bigger fees were not forthcoming. It is appealing against the French decision.  In theory Orange and the other network providers might simply pass on to their customers the cost of all their streaming and downloading… But Europe’s market is fiercely competitive; and regulators place all sorts of constraints on how networks can charge for their services, while haranguing them to invest in new technology and new capacity to keep up with rising traffic. Though there are similar spats in America (for instance between Cogent and Verizon, a big network operator), it looks to some Europeans like another example of the rape of the old continent by America’s data-mining, tax-avoiding internet giants.

The broader issue—and the reason, perhaps, why the antitrust watchdogs chose to weigh in—is that Europe is on the brink of big regulatory change. A draft law to be published in September will subtly alter the principle of “net neutrality”, the idea that companies which own the infrastructure cannot give priority to some traffic (eg, from their own websites) over that of others.;”

Internet access: Congestion on the line, Economist, July 20, 2013

Shadow Oil Deals and Safe-Sex Transactions: Nigeria

Deals for oilfields can be as opaque as the stuff that is pumped from them. But when partners fall out and go to court, light is sometimes shed on the bargaining process—and what it exposes is not always pretty. That is certainly true in the tangled case of OPL245, a massive Nigerian offshore block with as much as 9 billion barrels of oil—enough to keep all of Africa supplied for seven years.

After years of legal tussles, in 2011 Shell, in partnership with ENI of Italy, paid a total of $1.3 billion for the block. The Nigerian government acted as a conduit for directing most of that money to the block’s original owner, a shadowy local company called Malabu Oil and Gas. Two middlemen hired by Malabu, one Nigerian, one Azerbaijani, then sued the firm separately in London—in the High Court and in an arbitration tribunal, respectively—claiming unpaid fees for brokering the deal.

The resulting testimony and filings make fascinating reading for anyone interested in the uses and abuses of anonymous shell companies, the dilemmas that oil firms face when operating in ill-governed countries and the tactics they feel compelled to employ to obfuscate their dealings with corrupt bigwigs. They also demonstrate the importance of the efforts the G8 countries will pledge to make, at their summit next week, to put a stop to hidden company ownership and to make energy and mining companies disclose more about the payments they make to win concessions. On June 12th the European Parliament voted to make EU-based resources companies disclose all payments of at least €100,000 ($130,000) on any project.

The saga of block OPL245 began in 1998 when Nigeria’s then petroleum minister, Dan Etete, awarded it to Malabu, which had been established just days before and had no employees or assets. The price was a “signature bonus” of $20m (of which Malabu only ever paid $2m).

The firm intended to bring in Shell as a 40% partner, but in 1999 a new government took power and two years later it cried foul and cancelled the deal. The block was put out to bid and Shell won the right to operate it, in a production-sharing contract with the national petroleum company, subject to payment of an enlarged signature bonus of $210m. Shell did not immediately pay this, for reasons it declines to explain, but began spending heavily on exploration in the block.

Malabu then sued the government. After much legal wrangling, they reached a deal in 2006 that reinstated the firm as the block’s owner. This caught Shell unawares, even though it had conducted extensive due diligence and had a keen understanding of the Nigerian operating climate thanks to its long and often bumpy history in the country. It responded by launching various legal actions, including taking the government to the World Bank’s International Centre for the Settlement of Investment Disputes.

Malabu ploughed on, hiring Ednan Agaev, a former Soviet diplomat, to find other investors. Rosneft of Russia and Total of France, among others, showed interest but were put off by Malabu’s disputes with Shell and the government. Things moved forward again when Emeka Obi, a Nigerian subcontracted by Mr Agaev, brought in ENI (which already owned a nearby oil block). After further toing and froing—and no end of meetings in swanky European hotels—ENI and Shell agreed in 2011 to pay $1.3 billion for the block. Malabu gave up its rights to OPL245 and Shell dropped its legal actions (see timeline).

The deal was apparently split into two transactions. Shell and ENI paid $1.3 billion to the Nigerian government. Then, once Malabu had signed away its rights to the block, the government clipped off its $210m unpaid signature bonus and transferred just under $1.1 billion to Malabu.  Tom Mayne of Global Witness, an NGO, has followed the case closely; he believes things were structured this way so that Shell and ENI could obscure their deal with Malabu by inserting a layer between them. Mr Agaev, Malabu’s former fixer, lends weight to this interpretation. It was, he says, structured to be a “safe-sex transaction”, with the government acting as a “condom” between the buyers and seller.

Oil companies in emerging markets: Safe sex in Nigeria, Economist, June 15, 2013, at 63

Multinationals and their Stateless Income

Cross-border corporate taxation is fiendishly complex, the lobbying around it furious. Several recent academic studies show just how pervasive tax avoidance is.  The ability to shift profits to low-tax countries by locating intellectual property in them, which is then licensed to related businesses in high-tax countries, is often assumed to be the preserve of high-tech companies. Yet in “Through a Latte, Darkly”, a new study of how Starbucks has largely avoided paying tax in Britain, Edward Kleinbard of the University of Southern California shows that current tax rules make it easy for all sorts of firms to generate what he calls “stateless income”: profit subject to tax in a jurisdiction that is neither the location of the factors of production that generate the income nor where the parent firm is domiciled. In Starbucks’s case, the firm has in effect turned the process of making an expensive cup of coffee into intellectual property.

In another new paper Harry Grubert of America’s Treasury and Rosanne Altshuler of Rutgers University delve into tax returns by American multinationals in 2006. They examine all the foreign profits held abroad by these firms (because bringing the money home would incur tax). A remarkable 36.8% of these profits were recorded in countries taxing them at a rate of 0-5%, and a further 9.1% were in countries taxing at 5-10%. Given how much more aggressive their tax-avoidance strategies are believed to have become since, it seems likely that the proportion of foreign profits held by American firms in low-tax countries is now well over half. It will take more than fine words in a communiqué to change behaviour when so much is at stake,

Excerpt, The G8 summit: T time, Economist, June 22, 2013, at 72

Deforestation: Rubber Barons and their Bankers

Along Route 7 in Cambodia’s remote north, dozens of small tractors known as “iron buffaloes” are plying a dilapidated piece of highway. Under cover of darkness, they transport freshly cut timber into nearby sawmills. The drivers wear masks, their tractors fitted with just one dim lamp at the front. Each carries between three and six logs which locals say were felled illegally on or near the Dong Nai rubber plantation, owned by Vietnam Rubber Group (VRG).

Illegal logging and land-grabbing have long been problems in Cambodia. A new report entitled “Rubber Barons” by Global Witness, a London-based environmental watchdog, has highlighted the issue once again. Dong Nai features prominently in the report, which claims that luxury timbers like rosewood, much in demand for furniture in China and guitars in the West, were culled as a 3,000-hectare (7,400-acre) section of forest was illegally cleared.

Global Witness says that local and foreign companies have amassed more than 3.7m hectares of land in Cambodia and Laos since 2000, as governments have handed out huge land concessions, many in opaque circumstances. Two-fifths of this was for rubber plantations, dominated by state companies from Vietnam, the world’s third-largest rubber producer.

The report claims that VRG and another Vietnamese company, HAGL, are among the biggest land-grabbers, and have been logging illegally in both Cambodia and Laos. It says that, through Vietnam-based funds, the two companies have received money from Deutsche Bank, while HAGL also has investment from the IFC, the private-sector arm of the World Bank. The two Vietnamese companies have denied any wrongdoing. Deutsche Bank and the IFC say they are studying the findings.

The report says that the two companies have failed to consult local communities or pay them compensation for land they formerly used. The companies routinely use armed security forces to guard plantations. Large areas of supposedly protected intact forest have been cleared, in violation of forest-protection laws and “apparently in collusion with Cambodia’s corrupt elite”.

Global Witness is urging authorities in Cambodia and Laos to revoke the two companies’ land concessions, which cover 200,000 hectares and are held through a network of subsidiaries. It thinks both companies should be prosecuted.

Logging in South-East Asia: Rubber barons, Economist, May 18, 2013

See also Bankers with Chainsaws

 

US Government Lobbying for Biotechnology Industry

American diplomats lobbied aggressively overseas to promote genetically modified (GM) food crops such as soy beans, an analysis of official cable traffic revealed on Tuesday.  The review of more than 900 diplomatic cables by the campaign group Food and Water Watch showed a carefully crafted campaign to break down resistance to GM products in Europe and other countries, and so help promote the bottom line of big American agricultural businesses.

The cables, which first surfaced with the Wikileaks disclosures two years ago, described a series of separate public relations strategies, unrolled at dozens of press junkets and biotech conferences, aimed at convincing scientists, media, industry, farmers, elected officials and others of the safety and benefits of GM producs…The public relations effort unrolled by the State Department also ventured into legal terrain, accotrding to the report. US officials stationed overseas opposed GM food labelling laws as well as rules blocking the import of GM foods. The report notes that some of the lobbying effort had direct benefits. About 7% of the cables mentioned specific companies, and 6% mentioned Monsanto. “This corporate diplomacy was nearly twice as common as diplomatic efforts on food aid,” the report said….

In some instances, there was little pretence at hiding that resort to pressure – at least within US government circles. In a 2007 cable, released during the earlier Wikileaks disclosures, Craig Stapleton, a friend and former business partner of George Bush, advised Washington to draw up a target list in Europe in response to a move by France to ban a variety of GM Monsanto corn.  “Country team Paris recommends that we calibrate a target retaliation list that causes some pain across the EU since this is a collective responsibility, but that also focuses in part on the worst culprits,” Stapleton wrote at the time.”The list should be measured rather than vicious and must be sustainable over the long term, since we should not expect an early victory. Moving to retaliation will make clear that the current path has real costs to EU interests and could help strengthen European pro-biotech voices,” he wrote.

Excerpts, Suzanne Goldenberg,Diplomatic cables reveal aggressive GM lobbying by US officials, Guardian, May 15, 2013

Tax Havens: Micro-States in Europe

Armed with a cache of more than 2m documents, leaked from two offshore service providers, a group of investigative journalists has spent the past week publishing articles that lift the lid on thousands of companies and trusts set up in the British Virgin Islands and Cook Islands. The vast client list ranges from Asian politicians to Canadian lawyers—and no fewer than 4,000 Americans. For an industry that peddles secrecy and likes to operate in the shadows it is all rather embarrassing.

Opinions vary on the impact of the leaks. Tax campaigners have cheered it as a “game changer”. Offshore operators counter that most of the activity uncovered is legal. So what if President François Hollande’s former campaign treasurer has a Cayman Islands company? So do thousands of banks and hedge funds. Nevertheless, the affair will add to international scrutiny of tax havens. The pressure on them has grown as governments scramble to plug fiscal holes and push for the systematic exchange of tax information across borders. Germany’s finance minister welcomed the leak, hopeful that it would provide leverage to force more co-operation from “those who have been more reticent” to rein in the havens.

Faced with an end to the days of easy money, offshore jurisdictions are being forced to rethink their strategies. One of the more proactive has been Liechtenstein, nestled between Switzerland and Austria. The principality has long been popular with European tax dodgers, but growth accelerated when Swiss banks hawked Liechtenstein foundations to clients worldwide. This lucrative niche was damaged in 2008 when the former head of Germany’s postal service and many others were caught hiding money in the principality.

Under pressure from Germany and America, Liechtenstein buckled, agreeing to dilute bank secrecy and to exchange tax information. It has since signed many bilateral tax agreements and clamped down on money-laundering. The local financial industry has paid a high price for this. Liechtenstein banks’ client assets declined by almost 30% in the five years to 2011, to SFr110 billion ($118 billion)…

Other offshore centres must also attempt to square this circle. Next may be Luxembourg, a leader in offshore banking and tax avoidance. Bowing to greatly intensified pressure from its neighbours since the Cyprus debacle, the Grand Duchy has dropped its long-held opposition to swapping information about non-resident depositors with other EU countries. Jean-Claude Juncker, the prime minister, said the policy shift was about “following a global movement”, not caving in to German demands. Whether automatic information exchange can be introduced “without great damage”, as he confidently declared, remains to be seen.

Offshore finance: Leaky devils, Economist, April 13, 2013, at 71

S&P: Unfair Umpire Misleading the Public

Attorney General Eric Holder announced on Feb. 5, 2013 that the Department of Justice has filed a civil lawsuit against the credit rating agency Standard & Poor’s Ratings Services  (pdf) alleging that S&P engaged in a scheme to defraud investors in structured financial products known as Residential Mortgage-Backed Securities (RMBS) and Collateralized Debt Obligations (CDOs). The lawsuit alleges that investors, many of them federally insured financial institutions, lost billions of dollars on CDOs for which S&P issued inflated ratings that misrepresented the securities’ true credit risks. The complaint also alleges that S&P falsely represented that its ratings were objective, independent, and uninfluenced by S&P’s relationships with investment banks when, in actuality, S&P’s desire for increased revenue and market share led it to favor the interests of these banks over investors.

“Put simply, this alleged conduct is egregious – and it goes to the very heart of the recent financial crisis,” said Attorney General Holder. “Today’s action is an important step forward in our ongoing efforts to investigate – and – punish the conduct that is believed to have contributed to the worst economic crisis in recent history. It is just the latest example of the critical work that the President’s Financial Fraud Enforcement Task Force is making possible.”

Attorney General Eric Holder was joined in announcing the filing of the civil complaint by Acting Associate Attorney General Tony West, Principal Deputy Assistant Attorney General for the Civil Division Stuart F. Delery, and U.S. Attorney for the Central District of California André Birotte Jr. Also joining the Department of Justice in making this announcement were the attorneys general from California, Connecticut, Delaware, the District of Columbia, Illinois, Iowa and Mississippi, who have filed or will file civil fraud lawsuits against S&P alleging similar misconduct in the rating of structured financial products. Additional state attorneys general are expected to make similar filings today.

“Many investors, financial analysts and the general public expected S&P to be a fair and impartial umpire in issuing credit ratings, but the evidence we have uncovered tells a different story,” said Acting Associate Attorney General West. “Our investigation revealed that, despite their representations to the contrary, S&P’s concerns about market share, revenues and profits drove them to issue inflated ratings, thereby misleading the public and defrauding investors. In so doing, we believe that S&P played an important role in helping to bring our economy to the brink of collapse.”

Today’s action was filed in the Central District of California, home to the now defunct Western Federal Corporate Credit Union (WesCorp), which was the largest corporate credit union in the country. Following the 2008 financial crisis, WesCorp collapsed after suffering massive losses on RMBS and CDOs rated by S&P.  “Significant harm was caused by S&P’s alleged conduct in the Central District of California,” said U.S. Attorney for the Central District of California Birotte. “Across the seven counties in my district, we had huge numbers of homeowners who took out subprime mortgage loans, many of which were made by some of the country’s most aggressive lenders only because they later could be securitized into debt instruments that were given flawed ‘AAA’ ratings by S&P. This led to an untold number of foreclosures in my district. In addition, institutional investors located in my district, such as WesCorp, suffered massive losses after putting billions of dollars into RMBS and CDOs that received flawed and inflated ratings from S&P.”

The complaint, which names McGraw-Hill Companies, Inc. and its subsidiary, Standard & Poor’s Financial Services LLC (collectively S&P) as defendants, seeks civil penalties under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) based on three forms of alleged fraud by S&P: (1) mail fraud affecting federally insured financial institutions in violation of 18 U.S.C. § 1341; (2) wire fraud affecting federally insured financial institutions in violation of 18 U.S.C. § 1343; and (3) financial institution fraud in violation of 18 U.S.C. § 1344. FIRREA authorizes the Attorney General to seek civil penalties up to the amount of the losses suffered as a result of the alleged violations. To date, the government has identified more than $5 billion in losses suffered by federally insured financial institutions in connection with the failure of CDOs rated by S&P from March to October 2007.  “The fraud underpinning the crisis took many different forms, and for that reason, so must our response,” said Stuart F. Delery, Principal Deputy Assistant Attorney General for the Department’s Civil Division. “As today’s filing demonstrates, the Department of Justice is committed to using every available legal tool to bring to justice those responsible for the financial crisis.”

According to the complaint, S&P publicly represented that its ratings of RMBS and CDOs were objective, independent and uninfluenced by the potential conflict of interest posed by S&P being selected to rate securities by the investment banks that sold those securities. Contrary to these representations, from 2004 to 2007, the government alleges, S&P was so concerned with the possibility of losing market share and profits that it limited, adjusted and delayed updates to the ratings criteria and analytical models it used to assess the credit risks posed by RMBS and CDOs. According to the complaint, S&P weakened those criteria and models from what S&P’s own analysts believed was necessary to make them more accurate. The complaint also alleges that, from at least March to October 2007, and because of this same desire to increase market share and profits, S&P issued inflated ratings on hundreds of billions of dollars’ worth of CDOs. At the time, according to the allegations in the complaint, S&P knew that the quality of non-prime RMBS was severely impaired, and that the ratings on those mortgage bonds would not hold. The government alleges that S&P failed to account for this impairment in the CDO ratings it was assigning on a daily basis. As a result, nearly every CDO rated by S&P during this time period failed, causing investors to lose billions of dollars.

The underlying federal investigation, code-named “Alchemy,” that led to the filing of this complaint was initiated in November 2009 in connection with the President’s Financial Fraud Enforcement Task Force.

Department of Justice Sues Standard & Poor’s for Fraud in Rating Mortgage-Backed Securities in the Years Leading Up to the Financial Crisis, Department of Justice Press Release, Feb. 5, 2013

Bank Secrecy: Wegelin

Wegelin & Co, the oldest Swiss private bank, said on Thursday it would shut its doors permanently after more than 2 1/2 centuries, following its guilty plea to charges of helping wealthy Americans evade taxes through secret accounts.  The plea, in U.S. District Court in Manhattan, marks the death knell for one of Switzerland’s most storied banks, whose original European clients pre-date the American Revolution. It is also potentially a major turning point in a battle by U.S. authorities against Swiss bank secrecy.  A major question was left hanging by the plea: Has the bank turned over, or does it plan to disclose, names of American clients to U.S. authorities?.. Wegelin admitted to charges of conspiracy in helping Americans evade taxes on at least $1.2 billion for nearly a decade. Wegelin agreed to pay $57.8 million to the United States in restitution and fines. Otto Bruderer, a managing partner at the bank, said in court that “Wegelin was aware that this conduct was wrong.”  He said that “from about 2002 through about 2010, Wegelin agreed with certain U.S. taxpayers to evade the U.S. tax obligations of these U.S. taxpayer clients, who filed false tax returns with the IRS.”..

The surprise plea effectively ended the U.S. case against Wegelin, one of the most aggressive bank crackdowns in U.S. history.  “Once the matter is finally concluded, Wegelin will cease to operate as a bank,” Wegelin said in a statement on Thursday from its headquarters in the remote, small town of St. Gallen next to the Appenzell Alps near the German-Austrian border.  But the fate of three Wegelin bankers, indicted in January 2012 on charges later modified to include the bank, remains up in the air. Under criminal procedural rules, the cases of the three bankers – Michael Berlinka, Urs Frei and Roger Keller – are still pending.,

Although Wegelin had about a dozen branches, all in Switzerland, at the time of its indictment, it moved quickly to wind down its business, partly through a sale of its non-U.S. assets to regional Swiss bank Raiffeisen Gruppe.….Wegelin, a partnership of Swiss private bankers, was already a shadow of its former self – it effectively broke itself up following the indictment last year by selling the non-U.S. portion of its business.

Dozens of Swiss bankers and their clients have been indicted in recent years, following a 2009 agreement by UBS AG (UBSN.VX), the largest Swiss bank, to enter into a deferred-prosecution agreement, turn over 4,450 client names and pay a $780 million fine after admitting to criminal wrongdoing in selling tax-evasion services to wealthy Americans…Banks under U.S. criminal investigation in the wider probe include Credit Suisse, which disclosed last July it had received a target letter saying it was under a grand jury investigation…Zurich-based Julius Baer and some cantonal, or regional, banks are also under scrutiny, sources familiar with the probes previously told Reuters. So are UK-based HSBC Holdings (HSBA.L) and three Israeli banks, Hapoalim, Mizrahi-Tefahot Bank Ltd and Bank Leumi (LUMI.TA), sources also said previously.

Under its plea, Wegelin agreed to pay the $20 million in restitution to the IRS as well a civil forfeiture of $15.8 million, the Justice Department said.  Wegelin also agreed to pay an additional $22.05 million fine, the Justice Department said. U.S. District Judge Jed Rakoff, who must approve the monetary penalties, set a hearing in the case for March 4 for sentencing.  Last year, the U.S. government separately seized more than $16 million of Wegelin funds in a UBS AG account in Stamford, Connecticut, via a civil forfeiture complaint.  Since Wegelin has no branches outside Switzerland, it used UBS for correspondent banking services, a standard industry practice, to handle money for U.S.-based clients.  n court papers, Bruderer said that Wegelin “believed it would not be prosecuted in the United States for this conduct because it had no branches or offices in the United States and because of its understanding that it acted in accordance with, and not in violation of, Swiss law and that such conduct was common in the Swiss banking industry.”

The case is U.S. v. Wegelin & Co et al, U.S. District Court, Southern District of New York, No. 12-cr-00002.

Excerpts, Nate Raymond and Lynnley Browning, Swiss bank Wegelin to close after guilty plea, Reuters, Jan. 4, 2013

Who is the Master of Mastercard? credit card blockades

A blockade on WikiLeaks payments processor DataCell by Visa, MasterCard and American Express is unlikely to violate EU competition rules.  MasterCard, Visa and American Express, among others, stopped processing payments for WikiLeaks when it started releasing about 250,000 secret US diplomatic cables in 2010. This made it hard to raise funds, and WikiLeaks has said the blockade resulted in a 95 percent donations reduction, which cost the organisation more than US$50 million.

DataCell, the company that processed WikiLeaks donations until the blockade started, last year filed a complaint with the European Commission, suggesting the blockade is a violation of European competition rules.  The Commission, however, does not think that is the case. “On the basis of the information available, the Commission considers that the complaint does not merit further investigation because it is unlikely that any infringement of EU competition rules could be established,” an official of the European Commission said in an email on Tuesday.

he Commission said it looked at the impact of the blockade on DataCell and at the impact on the markets in which it operates. “It appears that DataCell is not prevented from accepting card payments for its own services or for the benefit of other parties; it is only payments for the benefit of WikiLeaks that DataCell cannot process. It seems unlikely that this would lead to harmful effects to competition and to consumers on the payment services markets concerned,” the official said.  It is unclear when the Commission will issue a final decision. “We never announce that in advance,” the official said.

WikiLeaks’ founder, Julian Assange, was displeased with the news. “These companies should not have the power to impose an economic death penalty,” he said during a news conference that was available via a live video link in Brussels. Assange is in self-imposed political asylum in the Ecuadorian embassy in London to avoid being extradited to Sweden, where he is wanted for questioning related to accusations of committing sexual offenses…

While the European Commission is unlikely to decide the payment blockade against WikiLeaks violates competition laws, the European Parliament last week called for legislation to regulate credit card companies’ ability to refuse service to organizations such as WikiLeaks. The Parliament voted in favor of a text that “considers it to be in the public interest to define objective rules describing the circumstances and procedures under which card payment schemes may unilaterally refuse acceptance.” [see European Parliament resolution of 20 November 2012 on ‘Towards an integrated European market for card, internet and mobile payments’ (2012/2040(INI))

“Visa can set the rules of the market”  The Commission will be asked to consider the text for laws limiting the rights of credit card companies to refuse service.  “The Commission’s assessment to not even investigate is in total opposite direction of the political will,” said Andreas Fink, CEO of DataCell, in an email. Fink read the preliminary report send to him by the Commission.

“It basically sounds like they were hunting for an excuse to not have to investigate it,” he said. The Commission essentially reasoned that one less small player in the market doesn’t change the market mechanics, while the intention of competition rules is to avoid powerful, monopoly-like players like Visa dictating to the market, Fink said…. adding that when Visa ordered service providers to stop DataCell payments to WikiLeaks in Iceland, MasterCard and American Express transactions were automatically canceled as well.  “So Visa can set the rules of the market,” dictating to other credit card companies, Fink said. “This is competition control at its finest,” he said, calling the situation “absurd.”

Credit card blockade of WikiLeaks donations likely to be legal, EU says, Computerworld, UK, Nov. 28, 2012

Wall Street Manipulation of Energy Markets

The U.S. Federal Energy Regulatory Commission (FERC) is taking on big banks for their questionable energy trade.  The Federal Energy Regulatory Commission has slammed Barclays (pdf) with a demand to pay $470 million in fines for allegedly manipulating electricity markets in the western US to benefit the bank’s financial swap positions from 2006 to 2008.  Messages and email exchanges between Barclays energy traders released earlier this month reflect their efforts to manipulate and cheat their way to profits. What’s more disturbing is the glee the Barclay’s traders took in manipulating the energy markets with a total disregard for the costs to consumers.

The Barclays traders’ own words are damning:

“I totally f**kked with the Palo mrkt today. . . . Was fun. Need to do that more often.”

The attitude expressed doesn’t get much clearer than that.

In another instant message, the same Barclays trader wrote, “I’m gonna try to crap on the NP light and it should drive the SP light lower.”

The response from his colleague: “That is fine.”

Enron’s energy traders could have written the Barclays’ traders’ scripts. Remember Enron traders gloating, “He just f—s California,” and “He steals money from California to the tune of about a million” a day?  Only the traders’ attitudes are more obscene than their language. So saturated in arrogance, the traders had no concern they might get caught — which makes it even better that they did.

Though FERC hasn’t historically had much to do with regulating Wall Street, that is changing. FERC now also is going after JPMorgan Chase (pdf) and Deutsche Bank  (pdf) on similar charges.  The Los Angeles Times reports that JP Morgan’s questionable trades in the power market in 2010 and 2011 may have cost California residents and businesses more than $200 million. The no-holds-barred pursuit of profiteering no matter what laws and regulations are violated or what the cost is to the public has become a hallmark of Wall Street from Enron to Barclays.

While Wall Street may not have gotten the message that Enron-esque conduct is wrong, it’s gratifying to see FERC step up to hold banks accountable using the power from a post-Enron law. The 2005 Energy Policy Act gave FERC the authority to prevent market manipulation in the energy markets.  Not only does FERC have the power to fine companies as much as $1 million a day per violation, but it also has the ultimate weapon: the ability to suspend authorization to sell. JP Morgan knows that FERC is not afraid to flex this muscle.

Just last week, FERC suspended the authorization for a JPMorgan unit, J.P. Morgan Ventures Energy Corp., to sell electricity at market-based rates for six months beginning next April. FERC took this step because it found that JPMorgan had filed “factual misrepresentations” and omitted material information in filing with FERC and in communications with the California Independent System Operator. JPMorgan will be able to offer electricity for sale only at prices based on specified factors, so that utilities can continue to be able to meet demand.  FERC is relatively new to dealing with Wall Street, but it is quickly learning that a strong jolt is necessary to get banks to comply.

The Commodity Futures Trading Commission, which often works side-by-side with FERC, is expected to see similar cases of energy market manipulation as a result of whistleblower information provided to the CFTC’s new whistleblower reward program created under Dodd-Frank. The outcome of the FERC cases against Wall Street could provide a useful roadmap for future whistleblowers.

Excerpt from, Erika Kelton, Barclays’ Traders Show How Much Fun Wall Street Has Manipulating Markets, Forbes, Nov. 20, 2012