TAX: Harbours of resentment
Monday, December 1st, 2008
Harbours of resentment
By Vanessa Houlder
Published: November 30 2008 19:55 | Last updated: November 30 2008 19:55
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| Some tax havens have tried to diversify: Monaco has more jobs in manufacturing than in finance |
EDITOR’S CHOICE
Andorra open to foreign takeovers - Nov-07
Berlin calls for Swiss to be on tax blacklist - Oct-21
The pressure is still on in debate over tax rules - Sep-18
Liechtenstein to act on banking secrecy - Aug-15
Money heads for offshore havens - Aug-15
Liechtenstein lays plans for more transparency - Aug-15
In the Victorian seaside town of Douglas, a new mood of uncertainty has punctured the customary ebullience of the Isle of Man’s senior legal and financial officials as they fret about the loyalty of their most powerful neighbour. “If jettisoned by the UK, we will have to fight tooth and nail for our survival,” says William Corlett, the island’s attorney general.
In the 1960s, young Manx people began to leave the windswept island until politicians started creating jobs for them by scrapping taxes and luring financial institutions to do business in the self-governing Crown dependency. Finance, says Mr Corlett, is what has saved the Isle of Man, 60 miles off the western coast of Britain, from the fate suffered by other isolated outposts such as Scotland’s Western Isles, which are plagued by depopulation.
Hence the sense of vulnerability as the island’s close relationship with the City of London is called into question. Alistair Darling, the UK chancellor of the exchequer, launched a review last week into London’s financial ties with what he has described as “a tax haven sitting in the Irish Sea”. From next month, the White House will be occupied by an avowed enemy of tax havens who backed a bill targeting “offshore secrecy jurisdictions”, including the Isle of Man.
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| Cayman Islands Home to most of the world’s hedge funds Bermuda Leading insurance centre. Finance employs one in 16 of the population Panama Operates strict bank secrecy British Virgin Islands World capital for incorporating offshore companies Turks and Caicos Islands Hosting trusts is a feature |
This icy blast is a sign of the growing hostility to the tiny states and islands around the world that harbour an estimated $6,000bn (£3,895bn, €4,725bn) of offshore assets. After months of financial crisis and banking scandals that rocked Liechtenstein and Switzerland, the world’s most powerful countries have lost patience.
In Washington last month, finance ministers from the Group of 20 leading industrial and developing nations concluded that tax secrecy “should be vigorously addressed”. This weekend, it was the turn of the developing countries. At a United Nations meeting on development in Doha, tax havens came under fire for fuelling capital flight.
Tax havens are used to threatening language. Ever since they came into vogue after the second world war as places for individuals to shelter money and savvy international corporations to manage their tax affairs, havens have faced pressure from bigger countries. Will it be different this time? If it is, what future is there for the small island and mountain countries that turned the dusty notions of privacy and opaque corporate architecture into lucrative national industries?
“The political climate on the issue of tax havens has changed dramatically over the past three months,” says Jeffrey Owens of the Paris-based Organisation for Economic Co-operation and Development. As the official who has driven the international crackdown on secrecy for more than a decade, he says the new climate could turn the reform promises extracted from many offshore centres into a reality. The financial crisis has intensified the attack on havens. The near-collapse of the west’s banking industry has drastically increased governments’ need to raise funds, brutally exposed the risks inherent in small countries with large financial sectors, and raised questions about the role of offshore centres in destabilising the system.
Some European finance ministers claim that the “opaque environment” of offshore finance – particularly hedge funds – contributed to reckless behaviour and, ultimately, the current crisis. President Nicolas Sarkozy of France is among those questioning whether, at a time of taxpayer-funded bail-outs, banks should even be allowed to operate in tax havens.
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| Switzerland Foreign assets make up 35 per cent of bank balance sheets Liechtenstein Rocked by an evasion scandal at LGT, its biggest bank. Had announced concessions over secrecy Monaco Dubbed unco-operative by the OECD. Residents are mostly tax exiles Guernsey Europe’s leading captive insurance domicile Jersey Fund management grown rapidly |
Onshore businesses in London and New York exploit the offshore benefits offered by the likes of Jersey and the Cayman Islands to optimise the tax efficiency of certain deals, such as the repackaging of debt and cross-border lending. The havens themselves reject claims that they fuelled the crisis. “It is like blaming a car manufacturer for road crashes,” says an official in one of Britain’s overseas territories.
The arrival of Barack Obama in the White House provokes even more anxiety for the havens. As well as launching last year’s Stop Tax Haven Abuse Act, the president-elect helped this year to launch the Incorporation Transparency and Law Enforcement Assistance Act. This aims to make it easier for investigators to “see through” opaque corporate ownership structures and stop the flow of offshore funds to the US from hedge funds and private equity that are “of unknown origin” but do not have to pass money-laundering checks.
On the campaign trail, Mr Obama also laid bare his hostility to the corporate use of offshore jurisdictions for international tax planning, which analysts estimate accounts for between one third and a half of the revenues that Washington loses through offshore evasion and avoidance. “There’s a building in the Cayman Islands that houses supposedly 12,000 US-based corporations,” he said. “That’s either the biggest building in the world or the biggest tax scam in the world, and we know which one it is.”
Turning tough talk into real action will require considerable political will. Any reform of US tax to stop offshore fiscal planning is sure to face fierce opposition from US multinationals worried about being put at a disadvantage to foreign competitors. Martin Sullivan of Tax Analysts, a non-profit US publication, says: “Nothing will sail through. It will be much diluted.”
Havens hope the likely differences between the Obama administration and that of President George W. Bush have been exaggerated. “The Democrats are never as bad as their rhetoric; the Republicans never as good,” says an official at a centre bruised by concessions on transparency that were extracted after the 2001 terror attacks.
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| Singapore Leading world financial centre, employing 127,000. Foreign law enforcement authorities say it is unco-operative and slow in answering requests for help Anjouan Politically unstable part of the Comoros islands located in the Mozambique Channel. Launched an offshore centre in 2005 – one of a rash of newcomers |
But the prospect of a renewed crackdown on secrecy is jangling nerves. The more reputable offshore centres are fearful that the difference between co-operative and unco-operative jurisdictions will be lost. “Politicians like scapegoats. In a crusade, the details get swept away,” says Allan Bell, the Isle of Man’s treasury minister. He complains that the nuances of the debate – including offshore-style tax dodging in many large “onshore” countries – are being overlooked. In October, he won support from Angel Gurría, OECD secretary-general, who called for “clear political recognition” of the half-dozen jurisdictions, such as the Isle of Man, that had taken “high political risk” in their move to greater transparency.
But even the most co-operative havens are only partially transparent. Information about private companies or trusts is not on public record. At best they will surrender information only to foreign tax inspectors who already have a “smoking gun” demonstrating evidence of wrongdoing. In practice, information exchange is rare.
Yet moving too far, too fast, might put the more co-operative tax havens at a competitive disadvantage. Wealthy individuals can be highly sensitive about financial privacy. Advisers at leading banks report that clients are already moving their money to Singapore and Switzerland – widely perceived as the last hold-outs against the international drive for transparency.
The danger of focusing solely on small players while ignoring similar shortcomings in some industrialised countries was one lesson of an OECD crackdown on secrecy launched in 1996. Tax havens have exploited this evident hypocrisy to stall reforms pending the introduction of a “level playing field”. The success of the latest crackdown is likely to depend on the attitude of relatively powerful countries such as Switzerland and Singapore.
Even if secrecy is eliminated, the leading offshore jurisdictions will survive, reckons Tax Analysts’ Mr Sullivan. “Will there still be Switzerland, Jersey, the Cayman Islands and the Isle of Man in a world where there was no tax evasion? Absolutely.” But for dozens of others, the outlook is bleak. “There is so much competition. Some would go out of business.”
That message has yet to reach the many eager wannabes. Last month, Tax Justice Network, one of several campaign groups that have vigorously lobbied against havens, proclaimed the Indian Ocean island of Anjouan to be the “new kid on the block”. But such newcomers may not have reckoned with the ever-mounting costs of new regulations designed to tackle terrorist financing and money laundering.
Smaller, less successful tax havens are caught in a pincer as competition and regulatory costs mount. As recession arrives, their fragile economies are also feeling the pain from declines in tourism and other industries. Construction companies are pulling out across the Caribbean. In the Turks and Caicos, a UK dependency in the region, unpaid workers stranded by the Lehman Brothers collapse prevented managers from leaving the premises.
Some locations have tried to diversify. Liechtenstein is the world’s largest false-teeth exporter. Monaco has more jobs in manufacturing than in finance. The Isle of Man has a foothold in the space industry and a lively manufacturing sector. Bermuda wants to break into the gambling business.
Despite such efforts, the tax havens still fear a bleak future if the international firms of accountants, lawyers and bankers pull out. “They are birds of passage. If they up sticks and go somewhere else, unemployment would be dramatic,” says one official.
The tiny states and protectorates that thrived in the free-wheeling second half of the 20th century are left struggling to shore up their defences against the coming storm. But as big countries try to block the leakage of much-needed tax revenues and stanch the flow of dirty money, sympathy for the tax havens is in short supply.
Additional reporting by Rachel Keeler
DELAWARE: AMERICA’S OWN HOME TO CORPORATE ANONYMITY
Joe Biden, the US vice-president-elect, has a distinction that went all but unnoticed during the election campaign: he is senior senator for a state prominent in the world of tax havens, writes Michael Peel.
Delaware, represented by Mr Biden since 1972, is infamous for allowing corporate financial secrecy of the kind that president-elect Barack Obama and many others are seeking to shatter in offshore financial centres.
Arguments over Delaware – whose more than 600,000 registered companies compare with an estimated 865,000 inhabitants – are part of a broader fight over what many havens see as rich-country double standards in international action to tackle money laundering and tax evasion. “The reality of Delaware is not lost on anybody,” says one official involved in efforts to improve financial transparency.
Delaware corporations are under no obligation to file names of shareholders or beneficial owners, according to a 2006 report by the intergovernmental Financial Action Task Force on money laundering. The state offers a structure known as a limited liability company, which can be registered with not much more than a name and address.
The report says Delaware company agents advertise the state as allowing even greater secrecy than offshore tax havens. “The Delaware LLC provides the anonymity that most international jurisdictions do not offer,” claims one agent website quoted by the task force.
Carl Levin, the senator with whom Mr Obama has campaigned on tax haven reform, is critical of the US failure to heed the task force’s calls to lift the confidentiality surrounding companies in Delaware and states such as Nevada and Wyoming. Before the election, a Levin aide told the FT the senator believed that the US “ought to meet its international commitments, especially when it is urging other countries to strengthen their anti-money-laundering controls”.
The debate highlights the vulnerability of the global campaign on tax havens to accusations that leading economies fail to practise what they preach.
Copyright The Financial Times Limited 2008
http://www.ft.com/cms/s/0/bd051b0c-bf13-11dd-ae63-0000779fd18c.html
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Declaration: Summit on financial markets and the world economy
Published: November 16 2008 02:14 | Last updated: November 16 2008 02:14
November 15, 2008, The White House, Office of the Press Secretary
1. We, the Leaders of the Group of Twenty, held an initial meeting in Washington on November 15, 2008, amid serious challenges to the world economy and financial markets. We are determined to enhance our cooperation and work together to restore global growth and achieve needed reforms in the world’s financial systems.
2. Over the past months our countries have taken urgent and exceptional measures to support the global economy and stabilize financial markets. These efforts must continue. At the same time, we must lay the foundation for reform to help to ensure that a global crisis, such as this one, does not happen again. Our work will be guided by a shared belief that market principles, open trade and investment regimes, and effectively regulated financial markets foster the dynamism, innovation, and entrepreneurship that are essential for economic growth, employment, and poverty reduction.
Root Causes of the Current Crisis
3. During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence. At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in the system. Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions.
4. Major underlying factors to the current situation were, among others, inconsistent and insufficiently coordinated macroeconomic policies, inadequate structural reforms, which led to unsustainable global macroeconomic outcomes. These developments, together, contributed to excesses and ultimately resulted in severe market disruption.
Actions Taken and to Be Taken
5. We have taken strong and significant actions to date to stimulate our economies, provide liquidity, strengthen the capital of financial institutions, protect savings and deposits, address regulatory deficiencies, unfreeze credit markets, and are working to ensure that international financial institutions (IFIs) can provide critical support for the global economy.
6. But more needs to be done to stabilize financial markets and support economic growth. Economic momentum is slowing substantially in major economies and the global outlook has weakened. Many emerging market economies, which helped sustain
the world economy this decade, are still experiencing good growth but increasingly are being adversely impacted by the worldwide slowdown.
7. Against this background of deteriorating economic conditions worldwide, we agreed that a broader policy response is needed, based on closer macroeconomic cooperation, to restore growth, avoid negative spillovers and support emerging market economies and developing countries. As immediate steps to achieve these objectives, as well as to address longer-term challenges, we will:
· Continue our vigorous efforts and take whatever further actions are necessary to stabilize the financial system.
· Recognize the importance of monetary policy support, as deemed appropriate to domestic conditions.
· Use fiscal measures to stimulate domestic demand to rapid effect, as appropriate, while maintaining a policy framework conducive to fiscal sustainability.
· Help emerging and developing economies gain access to finance in current difficult financial conditions, including through liquidity facilities and program support. We stress the International Monetary Fund’s (IMF) important role in crisis response, welcome its new short-term liquidity facility, and urge the ongoing review of its instruments and facilities to ensure flexibility.
· Encourage the World Bank and other multilateral development banks (MDBs) to use their full capacity in support of their development agenda, and we welcome the recent introduction of new facilities by the World Bank in the areas of infrastructure and trade finance.
· Ensure that the IMF, World Bank and other MDBs have sufficient resources to continue playing their role in overcoming the crisis.
Common Principles for Reform of Financial Markets
8. In addition to the actions taken above, we will implement reforms that will strengthen financial markets and regulatory regimes so as to avoid future crises. Regulation is first and foremost the responsibility of national regulators who constitute the first line of defense against market instability. However, our financial markets are global in scope, therefore, intensified international cooperation among regulators and strengthening of international standards, where necessary, and their consistent implementation is necessary to protect against adverse cross-border, regional and global developments affecting international financial stability. Regulators must ensure that their actions support market discipline, avoid potentially adverse impacts on other countries, including regulatory arbitrage, and support competition, dynamism and innovation in the marketplace. Financial institutions must also bear their responsibility for the turmoil and should do their part to overcome it including by recognizing losses, improving disclosure and strengthening their governance and risk management practices.
9. We commit to implementing policies consistent with the following common principles for reform.
· Strengthening Transparency and Accountability: We will strengthen financial market transparency, including by enhancing required disclosure on complex financial products and ensuring complete and accurate disclosure by firms of their financial conditions. Incentives should be aligned to avoid excessive risk-taking.
· Enhancing Sound Regulation: We pledge to strengthen our regulatory regimes, prudential oversight, and risk management, and ensure that all financial markets, products and participants are regulated or subject to oversight, as appropriate to their circumstances. We will exercise strong oversight over credit rating agencies, consistent with the agreed and strengthened international code of conduct. We will also make regulatory regimes more effective over the economic cycle, while ensuring that regulation is efficient, does not stifle innovation, and encourages expanded trade in financial products and services. We commit to transparent assessments of our national regulatory systems.
· Promoting Integrity in Financial Markets: We commit to protect the integrity of the world’s financial markets by bolstering investor and consumer protection, avoiding conflicts of interest, preventing illegal market manipulation, fraudulent activities and abuse, and protecting against illicit finance risks arising from non-cooperative jurisdictions. We will also promote information sharing, including with respect to jurisdictions that have yet to commit to international standards with respect to bank secrecy and transparency.
· Reinforcing International Cooperation: We call upon our national and regional regulators to formulate their regulations and other measures in a consistent manner. Regulators should enhance their coordination and cooperation across all segments of financial markets, including with respect to cross-border capital flows. Regulators and other relevant authorities as a matter of priority should strengthen cooperation on crisis prevention, management, and resolution.
· Reforming International Financial Institutions: We are committed to advancing the reform of the Bretton Woods Institutions so that they can more adequately reflect changing economic weights in the world economy in order to increase their legitimacy and effectiveness. In this respect, emerging and developing economies, including the poorest countries, should have greater voice and representation. The Financial Stability Forum (FSF) must expand urgently to a broader membership of emerging economies, and other major standard setting bodies should promptly review their membership. The IMF, in collaboration with the expanded FSF and other bodies, should work to better identify vulnerabilities, anticipate potential stresses, and act swiftly to play a key role in crisis response.
Tasking of Ministers and Experts
10. We are committed to taking rapid action to implement these principles. We instruct our Finance Ministers, as coordinated by their 2009 G-20 leadership (Brazil, UK, Republic of Korea), to initiate processes and a timeline to do so. An initial list of specific measures is set forth in the attached Action Plan, including high priority actions to be completed prior to March 31, 2009.
In consultation with other economies and existing bodies, drawing upon the recommendations of such eminent independent experts as they may appoint, we request our Finance Ministers to formulate additional recommendations, including in the following specific areas:
· Mitigating against pro-cyclicality in regulatory policy;
· Reviewing and aligning global accounting standards, particularly for complex securities in times of stress;
· Strengthening the resilience and transparency of credit derivatives markets and reducing their systemic risks, including by improving the infrastructure of over-the-counter markets;
· Reviewing compensation practices as they relate to incentives for risk taking and innovation;
· Reviewing the mandates, governance, and resource requirements of the IFIs; and
· Defining the scope of systemically important institutions and determining their appropriate regulation or oversight.
11. In view of the role of the G-20 in financial systems reform, we will meet again by April 30, 2009, to review the implementation of the principles and decisions agreed today.
Commitment to an Open Global Economy
12. We recognize that these reforms will only be successful if grounded in a commitment to free market principles, including the rule of law, respect for private property, open trade and investment, competitive markets, and efficient, effectively regulated financial systems. These principles are essential to economic growth and prosperity and have lifted millions out of poverty, and have significantly raised the global standard of living. Recognizing the necessity to improve financial sector regulation, we must avoid over-regulation that would hamper economic growth and exacerbate the contraction of capital flows, including to developing countries.
13. We underscore the critical importance of rejecting protectionism and not turning inward in times of financial uncertainty. In this regard, within the next 12 months, we will refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organization (WTO) inconsistent measures to stimulate exports. Further, we shall strive to reach agreement this year on modalities that leads to a successful conclusion to the WTO’s Doha Development Agenda with an ambitious and balanced outcome. We instruct our Trade Ministers to achieve this objective and stand ready to assist directly, as necessary. We also agree that our countries have the largest stake in the global trading system and therefore each must make the positive contributions necessary to achieve such an outcome.
14. We are mindful of the impact of the current crisis on developing countries, particularly the most vulnerable. We reaffirm the importance of the Millennium Development Goals, the development assistance commitments we have made, and urge both developed and emerging economies to undertake commitments consistent with their capacities and roles in the global economy. In this regard, we reaffirm the development principles agreed at the 2002 United Nations Conference on Financing for Development in Monterrey, Mexico, which emphasized country ownership and mobilizing all sources of financing for development.
15. We remain committed to addressing other critical challenges such as energy security and climate change, food security, the rule of law, and the fight against terrorism, poverty and disease.
16. As we move forward, we are confident that through continued partnership, cooperation, and multilateralism, we will overcome the challenges before us and restore stability and prosperity to the world economy.
Action Plan to Implement Principles for Reform
This Action Plan sets forth a comprehensive work plan to implement the five agreed principles for reform. Our finance ministers will work to ensure that the taskings set forth in this Action Plan are fully and vigorously implemented. They are responsible for the development and implementation of these recommendations drawing on the ongoing work of relevant bodies, including the International Monetary Fund (IMF), an expanded Financial Stability Forum (FSF), and standard setting bodies.
Strengthening Transparency and Accountability
Immediate Actions by March 31, 2009
· The key global accounting standards bodies should work to enhance guidance for valuation of securities, also taking into account the valuation of complex, illiquid products, especially during times of stress.
· Accounting standard setters should significantly advance their work to address weaknesses in accounting and disclosure standards for off-balance sheet vehicles.
· Regulators and accounting standard setters should enhance the required disclosure of complex financial instruments by firms to market participants.
· With a view toward promoting financial stability, the governance of the international accounting standard setting body should be further enhanced, including by undertaking a review of its membership, in particular in order to ensure transparency, accountability, and an appropriate relationship between this independent body and the relevant authorities.
· Private sector bodies that have already developed best practices for private pools of capital and/or hedge funds should bring forward proposals for a set of unified best practices. Finance Ministers should assess the adequacy of these proposals, drawing upon the analysis of regulators, the expanded FSF, and other relevant bodies.
Medium-term actions
· The key global accounting standards bodies should work intensively toward the objective of creating a single high-quality global standard.
· Regulators, supervisors, and accounting standard setters, as appropriate, should work with each other and the private sector on an ongoing basis to ensure consistent application and enforcement of high-quality accounting standards.
· Financial institutions should provide enhanced risk disclosures in their reporting and disclose all losses on an ongoing basis, consistent with international best practice, as appropriate. Regulators should work to ensure that a financial institution’ financial statements include a complete, accurate, and timely picture of the firm’s activities (including off-balance sheet activities) and are reported on a consistent and regular basis.
Enhancing Sound Regulation
Regulatory Regimes
Immediate Actions by March 31, 2009
· The IMF, expanded FSF, and other regulators and bodies should develop recommendations to mitigate pro-cyclicality, including the review of how valuation and leverage, bank capital, executive compensation, and provisioning practices may exacerbate cyclical trends.
Medium-term actions
· To the extent countries or regions have not already done so, each country or region pledges to review and report on the structure and principles of its regulatory system to ensure it is compatible with a modern and increasingly globalized financial system. To this end, all G-20 members commit to undertake a Financial Sector Assessment Program (FSAP) report and support the transparent assessments of countries’ national regulatory systems.
· The appropriate bodies should review the differentiated nature of regulation in the banking, securities, and insurance sectors and provide a report outlining the issue and making recommendations on needed improvements. A review of the scope of financial regulation, with a special emphasis on institutions, instruments, and markets that are currently unregulated, along with ensuring that all systemically-important institutions are appropriately regulated, should also be undertaken.
· National and regional authorities should review resolution regimes and bankruptcy laws in light of recent experience to ensure that they permit an orderly wind-down of large complex cross-border financial institutions.
· Definitions of capital should be harmonized in order to achieve consistent measures of capital and capital adequacy.
Prudential Oversight
Immediate Actions by March 31, 2009
· Regulators should take steps to ensure that credit rating agencies meet the highest standards of the international organization of securities regulators and that they avoid conflicts of interest, provide greater disclosure to investors and to issuers, and differentiate ratings for complex products. This will help ensure that credit rating agencies have the right incentives and appropriate oversight to enable them to perform their important role in providing unbiased information and assessments to markets.
· The international organization of securities regulators should review credit rating agencies’ adoption of the standards and mechanisms for monitoring compliance.
· Authorities should ensure that financial institutions maintain adequate capital in amounts necessary to sustain confidence. International standard setters should set out strengthened capital requirements for banks’ structured credit and securitization activities.
· Supervisors and regulators, building on the imminent launch of central counterparty services for credit default swaps (CDS) in some countries, should: speed efforts to reduce the systemic risks of CDS and over-the-counter (OTC) derivatives transactions; insist that market participants support exchange traded or electronic trading platforms for CDS contracts; expand OTC derivatives market transparency; and ensure that the infrastructure for OTC derivatives can support growing volumes.
Medium-term actions
· Credit Ratings Agencies that provide public ratings should be registered.
· Supervisors and central banks should develop robust and internationally consistent approaches for liquidity supervision of, and central bank liquidity operations for, cross-border banks.
Risk Management
Immediate Actions by March 31, 2009
· Regulators should develop enhanced guidance to strengthen banks’ risk management practices, in line with international best practices, and should encourage financial firms to reexamine their internal controls and implement strengthened policies for sound risk management.
· Regulators should develop and implement procedures to ensure that financial firms implement policies to better manage liquidity risk, including by creating strong liquidity cushions.
· Supervisors should ensure that financial firms develop processes that provide for timely and comprehensive measurement of risk concentrations and large counterparty risk positions across products and geographies.
· Firms should reassess their risk management models to guard against stress and report to supervisors on their efforts.
· The Basel Committee should study the need for and help develop firms’ new stress testing models, as appropriate.
· Financial institutions should have clear internal incentives to promote stability, and action needs to be taken, through voluntary effort or regulatory action, to avoid compensation schemes which reward excessive short-term returns or risk taking.
· Banks should exercise effective risk management and due diligence over structured products and securitization.
Medium -term actions
· International standard setting bodies, working with a broad range of economies and other appropriate bodies, should ensure that regulatory policy makers are aware and able to respond rapidly to evolution and innovation in financial markets and products.
· Authorities should monitor substantial changes in asset prices and their implications for the macroeconomy and the financial system.
Promoting Integrity in Financial Markets
Immediate Actions by March 31, 2009
· Our national and regional authorities should work together to enhance regulatory cooperation between jurisdictions on a regional and international level.
· National and regional authorities should work to promote information sharing about domestic and cross-border threats to market stability and ensure that national (or regional, where applicable) legal provisions are adequate to address these threats.
· National and regional authorities should also review business conduct rules to protect markets and investors, especially against market manipulation and fraud and strengthen their cross-border cooperation to protect the international financial system from illicit actors. In case of misconduct, there should be an appropriate sanctions regime.
Medium -term actions
· National and regional authorities should implement national and international measures that protect the global financial system from uncooperative and non-transparent jurisdictions that pose risks of illicit financial activity.
· The Financial Action Task Force should continue its important work against money laundering and terrorist financing, and we support the efforts of the World Bank - UN Stolen Asset Recovery (StAR) Initiative.
· Tax authorities, drawing upon the work of relevant bodies such as the Organization for Economic Cooperation and Development (OECD), should continue efforts to promote tax information exchange. Lack of transparency and a failure to exchange tax information should be vigorously addressed.
Reinforcing International Cooperation
Immediate Actions by March 31, 2009
· Supervisors should collaborate to establish supervisory colleges for all major cross-border financial institutions, as part of efforts to strengthen the surveillance of cross-border firms. Major global banks should meet regularly with their supervisory college for comprehensive discussions of the firm’s activities and assessment of the risks it faces.
· Regulators should take all steps necessary to strengthen cross-border crisis management arrangements, including on cooperation and communication with each other and with appropriate authorities, and develop comprehensive contact lists and conduct simulation exercises, as appropriate.
Medium -term actions
· Authorities, drawing especially on the work of regulators, should collect information on areas where convergence in regulatory practices such as accounting standards, auditing, and deposit insurance is making progress, is in need of accelerated progress, or where there may be potential for progress.
· Authorities should ensure that temporary measures to restore stability and confidence have minimal distortions and are unwound in a timely, well-sequenced and coordinated manner.
Reforming International Financial Institutions
Immediate Actions by March 31, 2009
· The FSF should expand to a broader membership of emerging economies.
· The IMF, with its focus on surveillance, and the expanded FSF, with its focus on standard setting, should strengthen their collaboration, enhancing efforts to better integrate regulatory and supervisory responses into the macro-prudential policy framework and conduct early warning exercises.
· The IMF, given its universal membership and core macro-financial expertise, should, in close coordination with the FSF and others, take a leading role in drawing lessons from the current crisis, consistent with its mandate.
· We should review the adequacy of the resources of the IMF, the World Bank Group and other multilateral development banks and stand ready to increase them where necessary. The IFIs should also continue to review and adapt their lending instruments to adequately meet their members’ needs and revise their lending role in the light of the ongoing financial crisis.
· We should explore ways to restore emerging and developing countries’ access to credit and resume private capital flows which are critical for sustainable growth and development, including ongoing infrastructure investment.
· In cases where severe market disruptions have limited access to the necessary financing for counter-cyclical fiscal policies, multilateral development banks must ensure arrangements are in place to support, as needed, those countries with a good track record and sound policies.
Medium -term actions
· We underscored that the Bretton Woods Institutions must be comprehensively reformed so that they can more adequately reflect changing economic weights in the world economy and be more responsive to future challenges. Emerging and developing economies should have greater voice and representation in these institutions.
· The IMF should conduct vigorous and even-handed surveillance reviews of all countries, as well as giving greater attention to their financial sectors and better integrating the reviews with the joint IMF/World Bank financial sector assessment programs. On this basis, the role of the IMF in providing macro-financial policy advice would be strengthened.
· Advanced economies, the IMF, and other international organizations should provide capacity-building programs for emerging market economies and developing countries on the formulation and the implementation of new major regulations, consistent with international standards.
Copyright The Financial Times Limited 2008
http://www.ft.com/cms/s/0/984c4ee8-b383-11dd-bbc9-0000779fd18c.html
Regulators looked the other way while credit default swaps grew into a $60 trillion threat to the world’s financial system. Now the CDS market is getting plenty of attention, and brawling has broken out over how to regulate it and who should oversee the job.
1.
February 20th,
2008
3:25 pm
This part of the tax code is truly disgusting. Basically guys earning a hundred million a year in private equity get a 15% special tax bracket for themselves (like the guy wouldn’t get out of bed in the morning if he had to pay a third of his $500K/day salary in taxes???!!!). And Schumer, the hedge fund whore, protects this ridiculous inequity in the tax code. Hell, I’m all for cutting taxes people, but shouldn’t a guy making $100 million/year pay the same tax rate as the old lady washing toilets??? Come on!
— Posted by The Sword
2.
February 20th,
2008
4:04 pm
This is precisely why Hillary is not winning in America. Hillary is a corporate controlled republican disguised as a democrat. She accepts money from corporate lobbyists, special interests groups and wall-street executives. The general public perception regarding this is that Hillary will always give preference to the interests of lobbyists, special interest groups, wall-street and those whom those lobbyists represent over the interests of common American people. Also when her husband passed NAFTA she went all over America to praise NAFTA promising that NAFTA will create millions of new jobs for American people and business opportunities worldwide for American goods and services. Entire America knows what happened next. Hillary who got wall-street executives’ campaign contributions is now talking about implementing fair tax system in which the very same wall-street executives will have to pay more taxes, is just height of hypocrisy.
— Posted by Tom Weisman
3.
February 20th,
2008
4:05 pm
with so many hedge funds operating today the time has come to better regulate the way they work and make them keep the same standards as other investment companys…hedge funds operating on thier own have up until recently made large amounts of money but have also damaged and in cases ruined entire companys and cost 10’s of thousands of people jobs…….
— Posted by plang
4.
February 20th,
2008
4:39 pm
Percentage of income paid as tax is a fool’s measure.
Smart politics should be about encouraging the creation of value, not pandering and redistributing wealth.
I bet Hillary could learn a lot about that from her daughter.
Anyway, enjoying watching Hillary’s campaign go up in smoke. She could always cry again. Because that’s leadership.
By the way, a democrat congress passed the amt that is now strangling the middle class, to pay for the Vietnam War.
And Bill Clinton raised it.
— Posted by john d
5.
February 20th,
2008
4:52 pm
“Under the tax code, they [hedge fund executives and investment managers] can pay a lower percentage of their income in taxes on $50 million than a teacher or a nurse or a truck driver in Parma pays on $50,000.”
Why do they get to keep more of their income?? Clearly they can afford to lose a higher percentage than someone making $50,000.
— Posted by Sara
6.
February 20th,
2008
8:03 pm
As an analyst that has previously worked at Blackrock in New York (not a hedge fund, but pretty close) I find it interesting to see politicians and the general population criticize the hedge fund/PE/Investment banking industry. If the issue is income inequality and the historical disadvantages that certain segments, and geographies of the population have, then certainly that is a valid point which I am completely for. However, the complete vilification of the investment community in NYC, while politically expedient, really does nothing to address the real reason that people are losing lower skilled jobs: globalization.
A little about me: I am asian, grew up in Michigan, went to an Ivy League School, and now live in NYC. I see firsthand what the decline of the auto industry is doing to the towns around where I grew up in Michigan. But lets start addressing real solutions instead of just vilifying people that work in finance in new york.
— Posted by alf
7.
February 20th,
2008
8:39 pm
rather than focus on the tax implications, can someone please define “hedge fund dealer”? Do they have lots like Chevy and Ford? And here I thought intelligence was the only thing the Clinton’s had going for them.
— Posted by matt
8.
February 21st,
2008
6:39 am
As you rightly point out, most hedge fund managers enjoy this 15% tax rate. They pay full ordinary tax just like everyone else.
It is the private equity folks who get the 15% tax rate on their carried interest. But that is the same tax rate the George Bush and his freinds pay on their oil well drilling, or many NY real estate families pay when they trade their real estate. It is called the partnership tax code.
The benefit many hedge fund managers do avail themselves of is deferred compensation. They don’t realize their income, but leave the profits in their fund and continue to manage it and (usually grow the capital substantially) over time. When they do decide to ‘earn’ that money, they pay the full ordinary income tax rate on it. Deferred Comp is a benefit which millions of americans use. Every major corporation offers it to senior employees.
You can think that either of these ‘loopholes’ are wrong, but if so, they have to be wrong for all participants, not just for ‘hedge fund’ people.
— Posted by john trader
9.
February 21st,
2008
6:49 am
I agree with John above. You tax the people who are paying a lower percentage yet paying a large portion of the total bill and they are just going to go elsewhere. Hedge funds could easily set themselves up in Canada, London or the Caribbean instead of the US If the tax rules drastically change.
Here is an article on hedge fund taxes that I wrote about 2 months ago explaining my point in more detail with an example you might have already read somewhere: http://richard-wilson.blogspot.com/2008/01/hedge-fund-t axation.html
- Richard
— Posted by Richard Wilson
10.
February 21st,
2008
10:36 am
I completely agree with john and Richard. It is unbelievable to me that people can form such strong opionions by reading one article or listening to one speech. Educate yourself on the matter and do not buy into the rhetoric.
Further, if you are unhappy with your salary then get a different job. Go back to school. If it is too late then maybe you should have worked harder. The “American Dream” is not living a life of medicority so that the ones who work their asses off and in turn have to make many sacrifices have to take care of them.
— Posted by PB
11.
February 21st,
2008
11:28 am
Alf, couldn’t agree with you more. While certain high profile PE and HF managers have been vilified and pointed to as symbols of greed and excess and all the income inequality between Wall Street and Main Street, the real issue should not be that PE and Hedge funds know how to minimize their tax burdens through crafty interpretation of the tax code. The real issue should be that many labor and employee unions throughout this country have remained painfully slow to adapt to a globalized economy as they’ve watched jobs move overseas by the thousands to more skilled laborers.
— Posted by Gretz
12.
February 21st,
2008
1:24 pm
Now now, according to the supreme beings at the W.S.J., and that esteemed snake oil salesmen one wee laffer, cutting taxes for the wealthy is always, always, in the best interest of everyone! So, lets stop this pathetic whining, and get on with it all.
mxvigil@aol.com Bring em on!
— Posted by Mitchele Vigil
13.
February 21st,
2008
1:56 pm
The vast majority of Americans have not seen an increase in pay in at least a decade, out internal numbers reveal 15 years. Yet the wealthy class has seen a huge increase in retained income, and a decrease in their tax liability. And the fact is, many wealthy pay zero in taxes, not even the vaunted 15%, because only the wealthy can afford the tax avoidance structures.
And what of that schlub from flat lands, has he gifted the government the additional millions as he claims everyone should pay their fair share? Has he made his guilt retroactive for the many years where his tax liability was zero due to the complex strategies he employs in order to negate his tax exposure? Goebbels is a piker compared to these masters of P.R.
— Posted by Steve Raznick
14.
February 21st,
2008
2:44 pm
Anyone with the amount of wealth being spoken about pays Zero in income taxes, so any talk of them paying 15% is a joke. Guernsey anyone? Anyone?
As well, the wealthy own policy and policy creation, you do not need to graduate from an ivy to discern how the game is played,
— Posted by Mitchele Vigil
15.
February 21st,
2008
4:17 pm
Richard,
I read your link, and I’m not sure what you’re implying with either your blog entry or your post here. Are you saying that hedge fund managers will move overseas, drop their US citizenship, and establish their funds in other jurisdictions? The partnerships that manage the funds are generally US-based for a number of reasons. The funds that make actual investments, that is the legal entities, are already based in tax shelters such as the Cayman Islands (for the most part). I agree that there should be no special treatment of investment managers that are set up as partnerships so long as every other partnership arrangement gets favorable tax treatment, but your statement doesn’t make any sense. The only way that your “restaurant” scenario works is if all the wealthiest people in the US move out of the country. Do you really see this as possible? US citizens are taxed no matter where they live in the world.
I am not saying that I’m OK with an across-the-board increase in taxes, but I don’t think uninformed comments like yours add much to this discussion.
— Posted by JF
16.
February 21st,
2008
4:25 pm
Agree w/ Alf.
Also, regardless of the tax issues w/ hedge funds, HRC is a panderer extraordinaire, and if she had voter support from a wealthier and better-educated segment of the public (which appears to be going for Obama), she would not bring up this subject. HRC and BC benefitted from the wealthy elite in their prior campaigns, and basically, with their Ivy league lawyer degrees, live among that group; they now find it expedient to hide that leaning and pretend to be ‘for the common person’. No such thing. Let’s discuss the taxation issues w/ hedge funds, and fix things that should be fixed, but forget about HRC and whatever she says… when all is said and done (when she loses the nomination), she and her husband and Chelsea will continue their work and life among the hedge fund moguls.
— Posted by as
17.
February 22nd,
2008
2:23 am
Hedge funds could easily set themselves up in Canada, London or the Caribbean instead of the US If the tax rules drastically change.
Hehee…Do you know what the taxes are in Britain?
— Posted by Steve J.
18.
February 22nd,
2008
9:36 am
It is interesting to see the real HRC coming out as she begins to lose ground. While I agree that we need a fairer tax code where the folks at the top pay their fair share, I really hate the politics of vilification. It is not a black and white situation. Making money is not evil!
Isn’t the ‘you’re either with us or against us’ attitude what got us here in the first place?
— Posted by jms
19.
February 22nd,
2008
9:59 am
I have no sympathy for these hedge fun managers, especially reading these articles:
http://www.nytimes.com/2007/07/29/business/yourmoney/29 deal.html
http://www.nytimes.com/2007/12/04/business/04tobias.htm l
http://www.nytimes.com/2007/09/02/business/02jabba.html
At least Hillary brought it up, whereas I really haven’t heard specifically what Obama is going to do, but “raise taxes” (yada-yada-yada). She at least addressed the healthcare issue, college loan preys, prime-rate loans, admitted that we’re in a recession, Iraq war, had a strong opinion about the assassination of Bhuto, and more, more, more.
The only thing about Obama I’ve seen are these two MTV-party videos, and his shirking away from debates:
“I got a crush on Obama” sung by a girl who didn’t even show up at the polls to vote– http://www.youtube.com/watch?v=wKsoXHYICqU
Black-Eyed Peas:
http://www.youtube.com/watch?v=BHEO_fG3mm4
I’m really tired of these popular icons (i.e. Ronald Reagan and Arnold Schwarzenegger) as politicians. The media really puts a slant on things, and currently the slant is “Obama.” All of this is turning me into a Republican, as I would rather vote for Ron Paul. Anyway, I think the hedge fund industry needs to be vilified, so I disagree with Alf above.
— Posted by ahong
20.
February 22nd,
2008
10:30 am
C’mon people. What’s fair is fair. When Hillary Clinton has received donations from hedge fund managers, you seem to assume that her soul has been bought and paid for. However, when she comes out with a plan that proposes that all people, including those who support her, must be subject to fair and equitable taxation (including getting rid of special perqs received by those same hedge fund managers who have supported her), you still suggest that she has sold out. Where are your critical thinking skills. Sounds like there are some who are so prejudiced against her that their comments have nothing to do with the reality of Hillary Clinton’s stance. Rather they say, “Don’t confuse me with the facts. My mind is already made up.” Shame, shame.
— Posted by John Cowl
21.
February 22nd,
2008
11:48 am
The real question isn’t how much private equity partners make. The real question is whether “carried interest” is properly taxed as ordinary income or as capital gain.
As I understand it, “carried interest” is a share of the profits in the private equity investments which is allocated to general partners, for managing the investments. The general partners usually do not have their own funds at risk, and giving them a share of the profits is supposed to get them to make maximum effort for investment profitability.
To me, this is no more than performance-based compensation which is common to partnerships and many corporations and should be taxed as ordinary income. Nevertheless, under the current tax code, it is classified as a capital gain, even though the general partner has no capital involved. I don’t care how much the PE people make, but I do think that their income should be called what it is - ordinary income - and taxed accordingly.
— Posted by Fourier
22.
February 22nd,
2008
12:22 pm
Indeed Hedge fund managers should not be able to shirk the taxman. The surest way to get a better tax system is to stop letting the most fortunate manipulate it to their advantage. A flat tax approach is most equitable. For the Ahong listened above who states this is turning him into a republican, he misses the issue. Both sides of the isle have taken advantage of the less fortunate. We need a far and equitable tax system where we all share in its burden. This will also a better way to see to it that we do not waste tax dollars on dumb foreign forays!
— Posted by Glenn
23.
February 22nd,
2008
1:58 pm
Fourier notes that: ‘“carried interest” is a share of the profits in the private equity investments which is allocated to general partners, for managing the investments. The general partners usually do not have their own funds at risk,’
If they can get away with this, why not provide all employees with “Carried Interest” instead of salary or wages. Just pretend that the payments are for interest earned on money not provided, just like private equity partners. If this would be illegal tax evasion for an ordinary employee then it should also be illegal tax evasion when claimed by a private equity partner. I think that the IRS and the justice department should investigate and prosecute anyone who falsely claims ordinary income as a capital gain.
— Posted by Bob
24.
February 22nd,
2008
2:09 pm
Geez Hillary; talk about biting the hands that feed you! I am so sick and tired of HRC’s and BC’s populist rhetoric and their plans to transform the US into the next socialist republic. We should lower tax rates and institute a flat tax that can be sent in on a postcard, thereby getting rid of all the parasites that prey on US citizens i.e. tax lawyers, accountants, among others. Such an initiative would also help rid Washington of many other scoundrels like lobbyists and similar special interest promoters who probably would be out of business without tax based schemes to market to Congress. Now that HRC seems to be destined to the dust bin of political history, she should move to the “Left Coast” with the rest of the fruits and nuts that bankrolled her and her husband’s political careers. Better yet, she should move to Canada, become a citizen and reinvigorate Quebec’s campaign to secede. That (and learning French) should keep her and Bill busy for at least another 10 years and off our airwaves. If that doesn’t work for them, there’s always Africa.
— Posted by gd
25.
February 22nd,
2008
7:19 pm
Why is she the senator for New York? She certainly isn’t saying anything pro-NY and doesn’t realize that the financial professionals of NYC contribute a large amount of tax dollars to NY State. This is significant, because as senator she has been ineffective at getting pork for NY State. That being said, she’s always complaining about the “vast right wing conspiracy” so I question how she will be able to function as president, especially if the congress flips to Republican control. She’s basically saying everyone will have lower taxes if we go after these big bad financiers, who by the way employ her daughter.
— Posted by YH
26.
February 22nd,
2008
8:16 pm
One guy loves Hillary’s going up in smoke. Another is sure a campaign contribution insures special interest treatment. (It surely has, but why slam Hillary’s accepting contributions from hedge fund managers when she has not, as of today, shown them special interest?)
Like the Romans in decline, seeing people stripped of their dignity and thrown to the lions is pure enjoyment to us. Television’s biggest money maker.
So thrill at the Hillary bonfire. And ignore her at your own peril.
— Posted by Michael L Aldridge
27.
February 25th,
2008
8:28 am
‘No need to go to the fairness card on this one: The lower 15% rate on capital gains and dividends was meant to serve as an incentive for investors to put their own capital at risk. To the extent carried interest is not a return on “own-risk” capital, it should be taxed at the normal rates. To do otherwise is a subversion of the intent of the 15% on capital gains/dividends legislation and is simply bad tax policy. Frankly, it’s surprising that treasury can’t fix this with regulations.
— Posted by pete from rochester
28.
February 25th,
2008
11:17 am
I would like to point out that not all people in finance, including hedge funds, come from blue blood families. Some finance folks (including myself) come from very modest beginnings and have had to work extremely hard (all nighters anyone?) to get to the position we are at today. Yes, I never have had to clean toilets, but the toilet cleaners probably have never had to work 2 days straight looking at spreadsheets. So bite me if you think I make too much money or get to keep too much of my income due to a tax code which favors not only hedge funds, but a number of other kinds of partnerships. And yes, most of us in NYC finance are motivated by money. And this desire to achieve more financially contributes to America’s position as the leader in the capital makets.
— Posted by Modest Beginnings
29.
February 25th,
2008
11:27 am
Carried interest taxation is an interesting little issue, even within the financial community. A friend of mine is a very successful mutual fund portfolio manager. He is adamant that PE pro’s should not be taxed at a cap gains rate on carried interest. When I pressed him why — after all it sure seems like capital gains — he didn’t have a reasonable reply. Makes me wonder if envy isn’t at the heart of this issue, even among those very close to the industry.
— Posted by ST
30.
February 25th,
2008
11:34 am
So Pete, should an entrepreneur who only contributes sweat equity to a new venture (and no “own capital” as you say) not be entitled to cap gains rates when he eventually cashes out his common shares? Because I could make a pretty good argument that PE pro’s are also putting in their own sweat equity to generate their 3-5 year carried interest returns. Setting cynicism about PE value-add aside… From a tax policy perspective, what’s the difference?
— Posted by ST - not a PE
31.
February 25th,
2008
12:02 pm
@Fourier: You state, “The general partners usually do not have their own funds at risk.”
First, that’s typically not true. Most reinvest their profits in their own funds automatically. These guys aren’t idiots. They know what they’re doing and know they can out-do the market most of the time. So would you then tax their own capital gains differently? What a cluster that would become. There was never a debate until people started talking about how much money they were making. If a decision is made to recharacterize, at the least it should come from a non-partisan group like the AICPA, certainly not greedy politicians.
This whole debate is simply another case of DC seeing successful people making money and then trying to get their grubby little hands all over it, all in the name of the little guy.
Oh, and Hillary’s mythical laborer earning $50K….with all the deductions available, if that guy pays a dime in taxes it’s because he’s a flipping idiot or has a flipping idiot as an accountant. Poor and increasingly the middle class only pay taxes by choice or ignorance. People whine about all tax cuts going to the wealthy - well, if you define wealthy as people earning $100K+ per year (which seems to be pretty standard DC-speak) then of course all the cuts go the wealthy…no one else pays anything.
— Posted by Keith