Top Chinese Banker Criticizes Extra-Territorial Effect of FATCA and Dodd Frank

Liu Xiangmin, deputy director general of legal affairs at People's Bank of China, has roundly criticised the FATCA regulations introduced by the U.S., on the basis that they impose unfair costs on foreign banks and cause difficulties with conflicts with local laws.  According to a report first published by Reuters, he said that the U.S. should find a better way to tackle tax evasion than FATCA.

The comments were made during the Thomson Reuters Pan-Asia Regulatory Summit, where Liu was giving a speech on the foreign impact of financial regulation. He also noted the challenges posed to foreign banks by some of the regulation contained in the Dodd-Frank Act, such as the Volcker Rule, which bans banks from engaging in proprietary trading and will apply to many foreign banks if they have a branch in the U.S.

"The Volcker Rule seems to be intentionally designed to apply to a broad range of foreign institutions in order to level the playing field for U.S. entities subject to the rule."

Liu said governments should find a more effective way to regulate international finance.

He added "While it is understandable to address the cross-border externalities or spill-over effects with national legislation, a more effective and acceptable regime would call for better co-ordination between home and host-country regulators ..... An extra-territorial effect should be carefully evaluated and limited, so as to minimise the undue burden on foreign financial institutions" .

Liu's comments echo the sentiments expressed by many finance industry participants in other jurisdictions, who are angry at the costs being pressed upon them by the U.S.

Investors in Axiom Legal Financing Fund urged to boycott EGM and sack directors

Taylor Moor, the main distributor of embattled Axiom Legal Financing fund is reported by IFA online to have urged investors to sack the fund's directors and boycott the EGM to be held on 11^th December.

Axiom, a Cayman fund which provides financing for no-win, no-fee legal cases in the UK, was suspended in October following serious allegations of fraud made by OffshoreAlert.  The allegations have been strenuously denied by those involved, and KPMG has been engaged to investigate the situation.

However, having apparently grown impatient with the lack of sufficient explanation from the directors on how this situation has arisen, the fund’s main distributor, Taylor Moor, has written to investors saying "it is time for investors to take control of the situation" and to replace the current directors with new, impartial individuals.

According to IFA Online, Taylor Moor has urged investors to boycott the emergency EGM to discuss the future of the fund on 11^th December, because KPMG have not been given enough time to investigate.  Concerns are being expressed that because the investors have so little information available, they will be in no position to vote on the important matters to be discussed at the EGM.

Bank deposits continue to decline in Channel Islands

Guernsey has seen the value of deposits held with banks in the Island dip to a 6 year low.

Deposits declined 6% in Q3 to £96.9bn, more than 15% down on a year ago.

The drop was said to be due to the ongoing economic crisis.

Jersey has not yet released its Q3 statistics, but it too has experienced a steady decline in bank deposits since the 2007 peak of £212 million.  As at the end of Q2 2012, Jersey bank deposits stood at £150 million.

Guernsey fund manager acquisition - MitonOptimal to buy Argyll

MitonOptimal, the Guernsey head-quartered multi asset management business founded in 2002, is to acquire a majority stake in Argyll Investment Services in Guernsey for an undisclosed consideration.

Following the acquisition Argyll will be re-named MitonOptimal Portfolio Management (CI) Limited.  The group will have operations in Guernsey, South Africa and Singapore, and $600 million of funds under management.

Argyll was established in 2000 as an independent discretionary portfolio manager. It offers investment portfolio management services, a niche discretionary fund management service, bespoke pension services and the Fortress Pension Plan.  Like MitonOptimal, Argyll is an owner-managed company.

The deal is subject to final approval by the Guernsey Financial Services Commission.

Blackstone reported to be in exclusive talks to acquire Intertrust

According to Reuters, Blackstone have been granted exclusivity in talks to buy the Intertrust Group, which is being sold by private equity house Waterland.  They report that banks are now being lined up to finance around Euros 400-500 million to back the deal.

Intertrust is a trust and company administration specialist with over 1,000 employees in 20 locations.

Huge threat to Crown Dependencies and Overseas Territories from UK

According to International Tax Review, a leaked government document shows that the UK is planning to impose its own version FATCA on its Crown Dependencies and Overseas Territories, such as the Channel Islands, the Cayman Islands and the Isle of Man.  This is something which could be a huge blow for those territories – although not for the reasons that many might expect.

The offshore centres are already facing a huge workload in preparing for compliance with FATCA which requires foreign financial intermediaries to report all activity with “US persons”.

During the summer, Britain’s International Development Committee recommended that the UK should introduce equivalent legislation to FATCA, requiring the automatic reporting of information relating to UK citizens or corporations. The proposals were controversial for many of the same reasons as the US equivalent has been controversial – including claims that the costs of compliance by the FFIs will outstrip any taxation benefits gained through the reporting, and that nationals of the countries who have FATCA-type legislation will face higher costs and less choice of service provider.  In the case of the UK, the cost/benefit analysis is likely to be even more skewed, because HMRC does not currently track the affairs of all UK citizens – only those who are resident in the UK.  The imposition of a citizenship based reporting would therefore require a huge change in HMRC infrastructure and reporting systems.  For those reasons, there were many who doubted that FATCA equivalent legislation would really get off the ground in the UK, at least unless and until its EU colleagues all agreed to do the same. 

However, in a development which will be seen as very worrying for the British offshore centres, it seems that the government may be determined to go down a route which, so far as the British offshore centres are concerned, is the worst of all worlds.  It is being claimed that the government has already drafted FATCA equivalent legislation which will be imposed on its Crown Dependencies and Overseas Territories. The draft agreement, seen by International Tax Review, will require the automatic exchange of information for each reportable account of each reporting financial institution. That will include full details of all beneficial owners of the account, including those whose identities might otherwise be hidden by trusts or companies.  However, by making the legislation apply only to the Crown Dependencies and the Overseas Territories, the government is putting them at a huge disadvantage to other offshore centres.  The costs of compliance will rise significantly, and therefore the clients are likely to move their financial arrangements to other centres which will not be affected by the legislation, such as Singapore or Switzerland. 

The Tax Justice Network is cock-a-hoop at the situation, saying that it shows that the UK government for the first time is really getting to grips with tax evasion and that it is the start of the end of tax haven secrecy.  I have never believed for one second the statistics put out by TJN on the scale of tax abuse in the tax havens and therefore do not think that FATCA-type legislation would have the hugely positive impact that they expect – as someone who worked in the offshore financial centres for almost 25 years, I think the days where people put their assets offshore and simply did not report them to the UK revenue are for the most part long gone.  However, even if the TJN was right and there are huge numbers of tax evaders in the Crown Dependencies and the Overseas Territories, this action by the UK government, if it does come to fruition, will not stop those who are determined to evade taxes – it will simply move them elsewhere.

And there is a real and much more damaging danger for the UK in that.  Numerous studies over the years (including the UK government sponsored Edwards Report) have shown that the funds which are routed through the Channel Islands in particular end up being invested in the City of London, and HMRC gets the benefit of that.  If those funds are moved to Asia or Switzerland, then chances are the assets will not be invested and managed through London, but through New York or Hong Kong.  The UK would therefore lose out rather than gain.

If the UK wants to introduce FATCA-type legislation then in my mind it can only make sense if it is done in a way similar to the US – ie impose it on a worldwide basis, not singling out a small handful of jurisdictions.  Doing the latter will mean it is doomed to be ineffective.  Personally, I am very far from convinced that it makes sense for the UK to have FATCA equivalent legislation at all (at least, until we have had a few years to understand the impact that is has on the US economy), but imposing it in relation to the Crown Dependencies and Overseas Territories alone would, in my view, be a massive own goal for the UK.

Unless there is a change of tack, the UK government is expected to announce the new rules this autumn, with the legislation coming into effect on 1 January 2014.

Axiom Legal Financing Fund - Time for Regulatory Investigation

The situation regarding the Axiom Legal Financing Fund has become increasingly farcical.

As previously reported in this blog, US-based OffshoreAlert has made a series of very serious allegations, claiming publicly that the Fund appears to be a Ponzi scheme and warning investors that they have been victims of a massive fraud.  The Fund directors have denied any wrong-doing and brought KPMG in to investigate, although the publication of their findings has been delayed. In the meantime, redemptions and subscriptions from the Fund have been suspended, Tim Schools, the founder of the Fund and former boss of its investment manager, Tangerine, has been replaced as its head as a consequence of the allegations, and Tangerine itself has been sacked as investment manager of the Fund.  And to ramp up the pressure a notch further, Tim Schools has now commenced legal proceedings in the UK to sue OffshoreAlert for defamation.  The whole sorry scenario is being played out in public, through blog posts, social media and published correspondence between the protagonists.  

Spare a thought in all this for the investors who have invested in good faith in the award-winning Fund and who have no idea who to believe as the pressure increases.  I have been contacted by one such individual, who has asked whether there is any likelihood of him getting his money back.  The truth is that I have no idea.  The specifics of the allegations being made by OffshoreAlert are fairly detailed and on the face of them certainly merit a thorough and independent review, but they are being robustly denied by all involved and it would be dangerous simply to accept them at face value.  If they are true, then the investors and those involved in advising the Fund could potentially lose very significant sums of money.  If they are false, then doubtless huge damage will have been done to a Fund which may struggle ever fully to recover.  

Whilst the whole sorry saga is being played out, there has been a striking lack of comment from the Cayman Islands authorities.  Surely now it is time for them to launch their own investigation?  Given the size of the Fund (over £100 million), the very public and serious nature of the allegations, I do not think it is sufficient comfort for the investors to have the directors organising an investigation (albeit by a third party) into what, if anything, has happened.  Whilst the directors were absolutely right to launch their own investigation, they cannot be seen as entirely impartial as there may be implications for them if the allegations are substantiated. Investors may, therefore, not be entirely satisfied with the outcome of a review where the terms of reference are set by the Fund's directors, and they are the recipients of the report.  

In my view, it is time for CIMA or the Cayman Islands police to be seen to take control of an investigation into whether there is any truth in the allegations, as a matter of urgency. This is not because I believe that a fraud has been committed - as I have said earlier, I simply do not have sufficient facts available to know - but because the current very unsatisfactory situation should not be permitted to persist.  The reputation of the Fund, its advisers, and the Cayman Islands regulator are all at stake.