Thursday, September 28, 2017

Local bankers, Chinese money laundering, and the growing risks

‘When confronted with the river of capital from a growing China, fund managers have to lose their innocence and accept that they are being used as a money laundering platform’
PUBLISHED : Thursday, 28 September, 2017, 5:47pm
UPDATED : Thursday, 28 September, 2017, 5:47pm
Players will always be playing. It’s most evident at the Four Seasons’ Lounge where almost all the diners speak only Mandarin. They are meeting with their private banking relationship managers, many of whom I recognise.
It is an appropriate setting for my coffee with a senior manager at a global asset firm, where I confirm how current strategies in mainland China’s money laundering, or capital flow, or portfolio diversification - whatever it is called in discreet banking circles - has inflated a financial bubble in Hong Kong that could be as catastrophic as the 2008 mini bond and accumulator crisis.
Chinese authorities have tightened up on the outflow of the yuan not only to combat high level corruption, but to prevent currency imbalances. Luckily, China still operates a relatively closed capital account and the movement and exchange of yuan is rigorously monitored and approved through authorities like SAFE (State Administration of Foreign Exchange) and the PBOC (People’s Bank of China).
Here is how the “turn” works. A mainland client has millions or billions in yuan sitting onshore in China. He needs to move it cleanly without resorting to “smurfing”- a series of small transfers that take too much time, or the unsavoury task of transporting cash.
His private banker instructs the Chinese client to deposit the yuan in a designated onshore account (in China) under the control or custody of the bank. At the same time, the bank lends them an equivalent US dollar amount, usually geared up, and deposits it in an offshore (outside of China, most likely in Hong Kong) account (minus a fee).
The transaction is based on the client agreeing that the US dollar funds will be used to buy third-party or in-house asset management products. So these proceeds are usually channelled to buy US dollar fixed income products (minus another fee).

You’d think that so far, the transaction would be profitable enough. But then, the private banker pitches the mainland client on highly leveraged, structured finance that is layered on top of his holding in the fund.
It involves reducing price volatility, locking in returns and hedging for a period. Huge fees are charged again. Bankers tell me that mainland clients are especially naive about the impact of these fees on total returns, and are more interested in stability and quietly transferring their yuan offshore without raising regulatory flags- regardless of cost.
And if you are laundering ill-gotten gains, the exorbitant fees are just a cost of doing business. After a period of time, the mainland client can convert his fund units into US dollars. The private banker walks away with lucrative fee streams.
Clients don’t realise they are bearing tremendous risks as the leverage can involve 10 to 15 times the nominal amount to gear up returns from low interest rates. But, any sharp shift in rates can produce huge losses, arrested hedges and counter party defaults.
Asset managers know that certain kinds of their funds are being bought in extremely high volume and being used as hosts for complex and risky derivative structures. And asset managers are not, to the best of their knowledge, being told by private banks about the derivatives being hooked up to their funds. Hence, regulators are not receiving complete reports and are largely unaware of the build-up of credit and systemic risk.
Just examine the top 10 US dollar, fixed-income funds of unit trusts whose assets under management have soared from US$10 billion to US$40 billion to US$50 billion over the last two years. Inexplicable high growth in such a short period is usually a compliance warning sign. Large and liquid funds are usually targeted for their liquidity.
Fund managers and their marketers are asked by their New York or London headquarters about the massive buying interest from Hong Kong, but the fee income overcomes any objections. While some asset managers may restrict frequent trading in their funds, most don’t care.
Such a rapid ballooning of assets under management in a fund creates its own distortions and ripples through the market. Fund returns come under pressure as its increased funding crowds out specific asset classes. It could even force it to take unnecessary risks such as buying non-agency rated debt or increase returns through derivatives.
The hidden problem is that the units of these funds are being misused for ulterior purposes.
Experienced fund managers lament the diminished purpose of asset management- capital preservation and retirement planning. But, when confronted with the river of capital from a growing China, fund managers have to lose their innocence and accept that they are being used as a money laundering platform.
Financial crisis are different each time they come around because regulators and risk takers are too focused on the previous crisis. And they fail to understand that it is called a crisis because it is an unexpected event based on malignant trends they overlooked. Or chose to ignore.
Peter Guy is a financial writer and former international banker

Overturned Convictions Loom Over Menendez’s Corruption Trial

United States Senator Robert Menendez, a Democrat from New Jersey, is on trial on federal corruption charges in Newark. Recent court rulings overturning the convictions of former New York legislative leaders Dean G. Skelos and Sheldon Silver could play a role in Mr. Menendez’s case. CreditBryan Anselm for The New York Times
NEWARK — They were two of the most notable corruption convictions in recent political history, two entrenched New York power brokers seemingly brought to justice, their cases reverberating well beyond the wood-paneled walls of the Statehouse in Albany.
And in a span of less than three months, both convictions were overturned.
The legal turn of events in the cases against Sheldon Silver and Dean G. Skelos, the two former New York State legislative leaders, is almost certain to resonate in another corruption case unfolding just across the Hudson River in the federal courthouse here where the defendant is United States Senator Robert Menendez, a Democrat from New Jersey.
What has given Mr. Silver and Mr. Skelos a reprieve was the ruling last year by the United States Supreme Court overturning the conviction of the former Virginia governor Bob McDonnell. In its unanimous decision, the court severely narrowed the definition of the kinds of official acts a politician must perform to be considered as having partaken in an illegal quid pro quo.
Making phone calls, arranging meetings or offering support on an issue no longer qualified as an “official act” as defined by the court. Instead, an act had to be more directly tied to an elected official’s office, such as offering a government contract or writing legislation.
In all three cases, the indictments were filed before the Supreme Court ruled in the McDonnell case and Mr. Skelos and Mr. Silver were convicted before the Supreme Court ruled.
But Mr. Menendez’s trial had not started when the ruling was issued and his defense team considered the decision as providing a legal cudgel to have the senator’s case dismissed. They filed a motion in July, after Mr. Silver’s case was overturned, arguing that the McDonnell ruling “changed the legal landscape for bribery prosecutions” and that the indictment, as it stood, could not “be reconciled with the Supreme Court’s guidance in McDonnell.”
However, the judge hearing Mr. Menendez’s trial, Judge William H. Walls, denied the motion.
“Whether the acts alleged in the Superseding Indictment satisfy the definition of an ‘official act” under McDonnell is a factual determination that cannot be resolved before the Government has the opportunity to present evidence at trial,” Mr. Walls wrote in his decision.
But, he added, the court reserved the right to revisit the possibility of dismissing the case after “the conclusion of the presentment of evidence at trial.”
Yet as a result of the ruling by a federal appeals panel overturning Mr. Skelos’s conviction on Tuesday — attributed in large part to faulty jury instruction — as well as the decision in Mr. Silver’s case, legal experts say prosecutors in Mr. Menendez’s case have a well-defined higher bar to clear. And that bar needs to be carefully explained by the judge in his instructions to jurors.
“To put it another way, if Menendez had been tried before McDonnell, it almost certainly would have had a flawed jury instruction, the type that would have gotten reversed,” said Ricardo Solano, a former federal prosecutor.
The McDonnell ruling has “made it much more difficult for the government and it made it much more difficult to define actual acts that were taken,” said Michael Weinstein, a former trial attorney for the Department of Justice. “Not a setup, not a meeting, but a real action that the representative took. That’s a higher burden and a higher standard than had existed previously.”
The Menendez defense argued along the same lines in its motion.
The charges against Mr. Menendez stem from three separate issues that the government is attempting to show were official acts taken by the senator on behalf of Dr. Salomon Melgen, a wealthy ophthalmologist and donor from Florida, in exchange for lavish gifts and political contributions.
In one case, prosecutors say that Mr. Menendez personally intervened in visa applications for three of Dr. Melgen’s friends. Mr. Menendez is also accused of pressuring the State Department and Commerce Department to help resolve a contract dispute involving Dr. Melgen in the Dominican Republic. And in the third case, prosecutors say that Mr. Menendez pressured the Department of Health and Human Services to resolve a billing dispute involving Dr. Melgen.
In its motion, the defense argued that, “The acts in this case are even farther removed from McDonnell, as none of the official acts that Senator Menendez allegedly sought to influence were acts that he could take or that even could be taken by anyone within the Legislative Branch,” and that they would not fall under “official acts” taken by a senator, such as introducing legislation.
Mr. Menendez’s lawyers specifically cited Mr. Silver’s case, saying the “official authority” theory offered by prosecutors in that case, which a federal appeals panel found to be “overbroad,’’ was “the same theory that animates” the indictment in Mr. Menendez’s case.
Some legal experts said the rulings in the Silver and Skelos cases were actually somewhat of a gift to prosecutors and Judge Walls because it offered more clarity about how higher courts are interpreting the McDonnell decision.
“If you think about Menendez now, it has the guidance of both the McDonnell decision and the Second Circuit in Silver and Skelos,” said Shira A. Scheindlin, a former federal judge, referring to the court that overturned both convictions. “The judge knows exactly what the charge has to be.”
The same, she said, goes for prosecutors.
“They can read this and if they haven’t put in some evidence and they now think they have to, or if they haven’t, they will,” she said, referring to the Skelos opinion. “The prosecution benefited from the timing, because they know exactly what they have to do to get a conviction and make it stick.”
Perhaps mindful of the legal landscape, the prosecution has been exceptionally explicit in detailing the timing of the reported gifts from Dr. Melgen and the actions said to have been taken by Mr. Menendez. “Pay close attention to the timing in this case,” Peter Koski, the lead prosector, said in his opening statement.
And the rulings overturning the convictions against Mr. Skelos and Mr. Silver, legal experts noted, were narrowly focused and do not mean that corruption cases against politicians cannot be won. In the Skelos ruling, the panel said that a properly instructed jury had enough evidence to render a guilty verdict.
“The court is not saying that politicians can do whatever they want, it’s just the instructions to the jury need to be really crisp as to what are official acts and what are not official acts,” said Jeff Cramer, a former federal prosecutor. “Skelos is going to be retried. Silver is going to be retried.”
Still, Mr. Cramer said, the McDonnell decision and the rulings that have followed have injected a level of uncertainty for prosecutors in all political corruption cases going forward, including Mr. Menendez’s.
“I don’t think any prosecutor who has been doing this for a period of time would have guessed that this would have been the outcome,” he said.
Correction: September 27, 2017 
An earlier version of this article misstated the surname of a former attorney for the Department of Justice. He is Michael Weinstein, not Wildstein.

Spain: Police Dismantle 2 Russian Criminal Gangs; Arrest 11 for Money Laundering

Spanish police said Wednesday they dismantled two Russian criminal organizations and arrested 11 in connection with laundering more than €30 million (US$35 million).
256px-Puerto Banús MarbellaMarbella, Spain (Photo: Lolo, CC BY-SA 2.0)The operation was conducted in the province of Malaga in cooperation with Europol, a statement by the Guardia Civil said.
Among the detained are Marbella Football Club’s President, Alexander Grinberg, and Arnold Tamm, a close associate of Semion Mogilevich, who has been on the FBI’s most wanted list since 2009 for a multi-million dollar fraud scam.
The statement claims that the criminals are members of two Russian gangs that established themselves in Spain and are suspected of having used Marbella FC, a water bottling company and a golf course in Malaga to launder over US$ 35 million.
Grinberg allegedly used the institutions as a “business card” to access political positions and entrepreneurs in the area to facilitate their activities.
After investigating the gangs for four years, police this week raided 18 properties in Malaga seizing large amounts of cash, 23 high-end vehicles, and various firearms among other items.
Those arrested will appear in court on Friday.
Costa Del Sol, in southern Spain which includes the city of Malaga has long been a hotspot of foreign capital and organized crime. Last month, Spanish police dismantled an international criminal network that used commercial flights to smuggle Iranian citizens into the UK arresting the majority of over 100 individuals in Malaga.

Business Leadership SA Dumps "Corrupt" Eskom And Transnet

"Corrupt behaviour and colossal failures... left BLSA with no choice but to suspend their memberships from the organisation".

28/09/2017 12:08 SAST | Updated 8 hours ago
PHOTO BY SEBNEM COSKUN/ANADOLU AGENCY/GETTY IMAGES
BUSINESS LEADERSHIP FULL STATEMENT 

Business Leadership South Africa (BLSA) announces that it has today suspended the membership of both Eskom and Transnet with immediate effect.
This follows BLSA's engagement with the two state-owned enterprises in connection with extensive allegations of corrupt behaviour over a long period.
BLSA CEO Bonang Mohale said, "South Africans have been rightly disturbed in recent times at the numerous allegations of corrupt behaviour and colossal failures of corporate governance and accountability at both Eskom and Transnet.
This behaviour is entirely at odds with the values of BLSA, captured in our Integrity pledge. Neither of the SOEs were able to give BLSA comfort that they appreciated the seriousness of the issues at hand, or that they had the requisite will and purpose to put their houses in order. This left BLSA with no choice but to suspend their memberships from the organisation. We have to live by our values and will take a zero-tolerance approach to any organisation found in breach.
With regard to Eskom in particular, as the country's national electricity is a strategic asset and due to multiple governance and operational failures, and a stretched balance sheet, now represents systemic risk to the economy as a whole. Until and unless a non conflicted, experienced and permanent Chairman and Board are appointed - who in turn appoint an experienced and honest executive team - Eskom will loom large over the economy as a threat to stability and economic growth.
There are thousands of honest Eskom employees doing honest and brave work in the face of a seemingly endless pattern of corruption at the top."
BLSA repeats its earlier appeal that government should proceed expeditiously to set up the judicial investigation into State Capture recommended nearly a year ago by the then Public Protector, Thuli Madonsela. Any employees found to have been in breach of the law should be prosecuted.

Anti Corruption Initiatives - The new register has already come into fruition

Slovakia has a new legislation tool to combat the murky businesses of shell companies
The Register of Public Sector Partners(Source: Jana Liptáková)
In mid-September the state-run rail operator Železnice Slovenskej Republiky (ŽSR) withdrew from a controversial contract with Transprojekt on renting out Bratislava’s main railway station to Transprojekt for 50 years. This was not because Transprojekt had not fulfilled its promise to refurbish the dilapidated station, but because Transprojekt failed to meet its new obligation. It did not register with the so-called anti-shell register and has not demonstrated who is its real owner. This enabled ŽSR to withdraw from the contract. Now there is a chance of the stalemated reconstruction of the Bratislava train station moving forward. This is one of new anti-shell law’s first fruits.
“Along with central register of contracts, this register is currently the best tool for checking who is doing business with public institutions,” writes Gabriel Šípoš, head of the ethics watchdog Transparency International Slovakia (TIS), in his analysis of the new legislation’s impacts and benefits.
The Justice Ministry has prepared the Act on the Register of Public Sector Partners, also called the anti-shell law, with the aim of increasing transparency in the relations between the state and its business partners. Now anybody can simply monitor and check with whom the state is doing business and who is really benefiting from it. Companies publish their ownership structure in the register, up to the end beneficial owners, said Peter Bubla, spokesperson of the Justice Ministry.
“We believe that the goals [of the law] are being fulfilled,” Bubla told The Slovak Spectator.
The new law became effective on February 1. The register replaced the Register of Beneficial Owners, which was limited only to public procurement. The new legislation obliges public sector partners to be registered in the Register of Public Sector Partners maintained by the District Court of Žilina. This obligation pertains to entities receiving one-time funding not exceeding €100,000 or in the aggregate not exceeding €250,000 per calendar year, in the case of repetitive performance. Companies obliged to enter the register had time until the end of July to re-register from the Register of Beneficial Owners.
Based on the new legislation, a public sector partner cannot register directly itself. The registration must be performed via an authorised person, i.e. a law attorney, notary or auditor. The authorised person is responsible and must verify, along with the public sector partner, the correctness and completeness of a public sector partner’s data registered in the register.
Currently there are 12,732 companies in the register.

Interesting revelations

Following the transition period the Slovak media started digging into available data and uncovering the intricate ownership structures of some companies. The Sme daily has disentangled the ownership structure of the business group belonging to Andrej Babiš, the Czech politician of Slovak origin. And the Trend daily looked at who actually owns the Hornonitrianske Bane Prievidza (HBP) private mine, which supplies brown coal to the dominant electricity producer Slovenské Eleketrárne, generating electricity under a governmental support scheme, Šípoš pointed out.
In some cases the new tool has confirmed rumours or “backstage” information about who really owns which company, while in some cases the register has provided new findings. In other cases the published information has raised doubts and questions, said Bubla.
“In the latter cases we expect the lodging of a qualified complaint with the District Court of Žilina in order to find out in a subsequent proceeding whether the information in the register is correct or not,” said Bubla.
On September 27 Transparency International lodged complaints pertaining to about 60 companies in which the public functionaries were not properly determined, Šípoš told The Slovak Spectator.
“Only the verdicts of the District Court of Žilina will reveal whether the register will contribute to the uncovering of big fish,” said Šípoš, asking whether, for example, the owner of the Medical Group involved in the Pieštany CT scandal is really the lawyer Juraj Koval and not somebody around Pavol Paška. The latter, of the ruling Smer party, resigned from the post of the speaker of parliament after the scandal broke out.
Šípoš points out the two main changes the new register has brought about: the extension of competence, since the original one was limited to public procurement, and external verification via authorised persons. So now it is possible to have a look at whether the improved register has created greater transparency.
“While the first one has been beneficial from the very beginning, the verification through an attorney raises questions instead,” said Šípoš.
The fees authorised persons are asking for the verification procedure are quite high, while companies will have to repeat the procedure next year in case they do business with the state. Šípoš believes that it may be worth thinking of changing the current scheme so that companies themselves enter data into the register under the threat of high fines. Then the control and checking of data would focus on questionable firms.

Technical imperfections

Experience has shown that the good intentions of the new legislation is being undermined by the shortcomings in the large and useless administrative burden, the system’s technical problems and the unpredictability of the registering court, according to the Ružička Csekes law firm.
Ján Azud, a partner at Ružička Csekes, also points out that entering the members of top management into the register, in cases where for objective reasons it is impossible to determine the end beneficial owner, does not offer any added value in terms of the law’s objective but a huge administrative burden for supranational corporations.
“In the case of such companies, dozens to hundreds of people commonly meet the definition of ‘top management’,” said Azud.
Azud further mentions the issue of personal data protection, since the register and verification documents must contain the permanent residence of registered people. But foreign companies and their management are worried about their privacy since in their countries such addresses are not available in publicly accessible registers.
The Justice Ministry points out that this is brand new legislation without an equivalent even in Europe and it is logical that it has raised some questions in practice. The Ministry admits to the need of analysing this legislation’s effects and maybe reassessing its impact so that it does not increase companies’ red tape and costs above a reasonable level.
“It’s coming out that there are transactions that don’t need to be followed,” said Bubla, adding that this may change in the future.
The ministry is collecting all the complaints and comments on the law, and if their analysis reveals that some legislative changes are necessary, the ministry will change the law.