Tag Archives: financial sanctions against tax havens

Strangling China with Hong Kong: the Politics of Fear

The U.S. determination  that Hong Kong is no longer autonomous from mainland China, under the Hong Kong Policy Act of 1992, will have significant implications for the city’s exporters and businesses.  Sensitive U.S. technologies could no longer be imported into Hong Kong, and the city’s exports might be hit with the same tariffs levied on Chinese trade.

But the act doesn’t cover the far more extensive role Hong Kong plays as China’s main point of access to global finance.  As of 2019, mainland Chinese banks held 8,816 trillion Hong Kong dollars ($1.137 trillion) in assets in the semiautonomous city, an amount that has risen 373% in the last decade…. China’s banks do much of their international business, mostly conducted in U.S. dollars, from Hong Kong. With Shanghai inside China’s walled garden of capital controls, there is no obvious replacement.

While the U.S. doesn’t directly control Hong Kong’s status as a financial center, Washington has demonstrated its extensive reach over the dollar system, with penalties against Korean, French and Lebanese financiers for dealing with sanctioned parties. The U.S. recently threatened Iraq’s access to the New York Federal Reserve, demonstrating a growing willingness to use financial infrastructure as a tool of foreign policy.  Even though the U.S. can’t legislate Hong Kong’s ability to support Chinese banks out of existence, the role of an international funding hub is greatly reduced if your counterparties are too fearful to do business with you.

Putting the ability of Chinese banks to conduct dollar-denominated activities at risk would be deleterious to China’s ability to operate financially overseas, posing a challenge for the largely dollar-denominated Belt and Road global infrastructure initiative. It would also put the more financially fragile parts of the country, like its debt-laden property developers, under strain.  China’s hope to develop yuan into an influential currency also centers on Hong Kong’s remaining a viable global financial center—more than 70% of international trade in the yuan is done in the city.

Excerpts from Mike Bird, How the US Could Really Hurt China, WSJ, May 290, 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

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