-Caveat Lector- from: http://www.aci.net/kalliste/ <A HREF="http://www.aci.net/kalliste/">The Home Page of J. Orlin Grabbe</A> ----- Money Laundering We'll Set You Free: But No Competition Keeping the Laundry in London In return for citizenship, Britain�s offshore dependencies are being asked to clean up their banks. But will that merely drive hot money elsewhere? THE British government�s plans for the country�s dependent territories have all the hallmarks of its much-touted �ethical� foreign policy. Unveiled by Robin Cook, the foreign secretary, on March 17th, they give the dependencies� 160,000-odd people full British citizenship. This was capriciously taken from them in 1981, in order, it was suspected, to avoid having to grant it to millions of Hong Kong Chinese. In keeping with the government�s sensitivity to language, the plans also drop the �dependent� tag, renaming them UK Overseas Territories. But there is a price for this post-imperial largesse: they have to ditch old-fashioned laws, such as bans on homosexuality or those allowing corporal punishment. And they have to clean up financial systems that have often earned them�and by association Britain�a bad name. There are 13 dependent territories, three of them uninhabited. Many require subsidy and defence�the Falkland Islands being the most expensive example�and their occasional disasters, such as the volcano that recently rendered two-thirds of Montserrat uninhabitable, are a distraction for busy ministers. But most annoying for an image-conscious administration is that several have been accused of condoning money-laundering�helping to disguise the origin of ill-gotten funds. Four Caribbean territories�Anguilla, the Cayman Islands, the Turks and Caicos and the British Virgin Islands (BVI)�plus Bermuda and Gibraltar depend in part on financial services and so are vulnerable to this charge. The Americans, in particular, are irritated by what they consider to be tax havens, some just off their coast, perfectly placed to launder the earnings of Latin American drug barons. (Drugs are thought to be the primary source of dirty money). Despite some inevitable muttering about British interference, the dependent territories are likely to accept the deal. After a few scandals, such as the arrest in Miami in 1986 of the chief minister of the Turks and Caicos islands for drug smuggling, the territories have long since succumbed to international pressure to resist money laundering. Britain forced Montserrat to close down most of its 300-odd �brass-plate� banks after a fraud scare in 1989. Now it and four other Caribbean territories, along with Bermuda, are members of a wider Caribbean Financial Action Task Force (CFATF), set up in 1992 to combat money laundering. It has promised that by the end of this year it will have implemented the anti-money-laundering scheme devised by the UN�s Drug Control Programme. Most members have already passed anti-laundering legislation. Even the Cayman Islands, after long infuriating America by refusing to pursue tax evaders (having no direct taxes itself, it does not consider tax evasion illegal), has agreed to do so, so long as some other crime is involved. Washing whiter The international pressure is mounting. The OECD, the United Nations, the EU and the G7 group of leading industrial economies all have plans to fight money-laundering. Britain wants its dependent territories to go further. Banking-style supervision is to be extended to other institutions, such as investment trusts, insurers and stock exchanges. The territories will also be required to co-operate more readily with outside law enforcement agencies. Rather than simply provide a �gateway�, by passing on information, they will have to conduct investigations on behalf of overseas regulators, and compel citizens to produce evidence for them. There is much chummy chat about �partnership� between the territories and Britain. But there remains a certain suspicion on both sides. The British, and other big countries trying to crack down on money laundering, fear that it may prove impossible. After all, as the OECD-sponsored Financial Action Task Force (FATF) noted in a report last month, no sooner has one loophole been closed than another opens. Illicit cash can be laundered through a whole variety of frauds using property, construction, insurance, stockbroking, foreign exchange, gold or jewellery. Moreover, while banking-secrecy laws have been dented in many jurisdictions�such as Switzerland�the FATF has noted the growing involvement of professionals such as lawyers and accountants, who are, unlike bankers, not obliged to report suspicious transactions. Indeed some experts think that the professionals are the real villains of the piece. Prem Sikka, professor of accounting at Essex University, believes that accountants and auditors should have a statutory duty to report money laundering within 48 hours of detecting it. But even that could be defeated by the well-honed practice of �smurfing��breaking transactions into smaller volumes to slip them under reporting thresholds. For their part, some offshore centres feel that they are being picked on unfairly. Some argue that interfering too much in their affairs will drive money�including legitimate funds�to much dodgier places. Not so far from the British dependencies lies Antigua, named in a report this month by the American State Department as �one of the most attractive centres in the Caribbean for money launderers�. The FATF records that Russian crooks have recently favoured Pacific centres such as Western Samoa, Nauru, Vanuatu and the Cook Islands. And the offshore centres argue that it is not only they who are vulnerable to criminals. So much money passes through the City of London, the world�s biggest foreign-exchange market, that the State Department ranks Britain ahead of many offshore centres as being �of primary concern.� Others claim, sotto voce, that they are taking the blame for America�s failed war on drugs. The loss of privacy demanded by all these regulators and policemen comes at a price. Edmund Bendelow, president of the Offshore Institute, a body representing professionals such as accountants and lawyers, says �the big issue is being lost. Under UN and EU human rights conventions you have a right to privacy.� Individuals may have legitimate reasons for holding money offshore and for keeping it to themselves. Corporations, he argues, often use offshore centres for reasons that have little to do with tax or secrecy, and a lot to do with innovation�witness Bermuda�s or Guernsey�s insurance-law regimes. The offshore centres are also upset about the OECD�s recent musings on �harmful tax competition��an oxymoron in their book. George McCarthy, the Caymans� financial secretary and CFATF chairman, recently accused G7 countries of �trying to impose their political will on the less strong.� Such noble concerns for human rights and for the weak might resonate more widely were it not that some offshore centres still enforce repressive social legislation, while thriving, in part, on the proceeds of crime. The Economist, March 20, 1999 U.S. Stocks The Bulls Last Charge? White House outlaws down days The Dow keeps setting new highs. But the number of shares whose prices are still going up is dwindling fast TRADERS cheered on the floor of the New York Stock Exchange as the Dow Jones Industrial Average edged past the 10,000 mark for the first time on March 16th. By the time the cameras ceased clicking, the Dow was back in four figures again. The bull market in American shares is still under way�but the Dow�s hesitant creep past its latest milestone reflected growing unease. The stockmarket indices are increasingly dependent on only a handful of shares to lift them higher, raising questions about whether this dwindling band can take the strain. Wall Street�s best-known bulls are still rampant, however. Ralph Acampora, of Prudential Securities, now has his sights on a Dow at 11,500 some time this year. Abby Joseph Cohen, of Goldman Sachs, is more bullish than ever�even spotting signs of improvements in some of the world�s most troubled economies, which would bode well for American corporate profits. Many bearish commentators (a category that has included The Economist), are loth to cry wolf again, having been embarrassed too often during the past few years. Why not 11,500, they shrug? For that matter, why not 36,000, as suggested by James Glassman of the American Enterprise Institute? After all, share prices now owe more to faith in the miraculous power of Mammon than to any prudent analysis of economic fundamentals. True, the profitability of American companies has increased impressively during the past few years, partly justifying higher share prices. But Ned Riley, a strategist at Bank Boston, calculates that only 20% of the rise in the broad S&P 500 index since 1990 was linked to increased profits. Fully 80% stems from rises in the average p/e ratio�of share prices to profits�which has now reached its highest ever. And there is no sure way of predicting what will cause investors to lower their expectations. Disappointing profits have not yet done so; according to First Call, a research firm, the earnings of the S&P 500 rose by only 3.7% in 1998 compared with 1997, far below expectations a year ago. But recently the bears have found fresh justification for their gloom in signs that America�s new popular religion has become narrower. Belief in the virtues of shares in general is giving way to faith in a few talismanic shares. Whereas on March 16th the Dow was 12% higher than it was on June 1st 1998, and the S&P 500 20% higher, the Russell 2000 index, which contains a much broader spectrum of shares, was down by 11% (see chart). The ten best-performing Dow shares are up by 48% since last June. According to Philip Roth, an analyst at Morgan Stanley, two-thirds of the shares in the Russell 2000 are now more than 20% below their 1998 highs. Individual investors have not escaped this. Morningstar, a research firm, says that the average stockmarket mutual-fund is up by only 0.5% so far this year, compared with more than 5% for the S&P 500. The growing gap between a few leading shares and the rest makes some sense. Last year, most of the 50 biggest S&P 500 shares delivered higher profits, whereas the earnings of nearly two-thirds of the remaining 450 fell. The average p/e of the 100 biggest S&P 500 companies�around 32 times forecast 1999 profits�is well above the 19 times for the smallest 100. In other words, investors expect continued faster earnings-growth from giant firms like Microsoft and General Electric. Demanding times If, as seems quite likely, these firms fail to maintain this expected breakneck growth, disillusioned investors may punish them severely�as they recently did one wonder-share, Dell, when its revenues (not even profits) disappointed them. In general, only a few Wall Street analysts, led by Abby Joseph Cohen, are optimistic about profits this year. Most macroeconomists predict another tough year. And there is concern about the quality of company reporting. In his latest letter to shareholders, a much-followed investor, Warren Buffett, observed that �a growing number of otherwise high-grade managers have come to the view that it�s okay to manipulate earnings to satisfy what they believe are Wall Street�s desires�. Yet, for all this, it is possible that big shares will continue to rise. One reason is that American baby-boomers are pumping money into retirement funds, and a growing share of this money is going into funds that track big stockmarket indices. One recent study* tackles economists� traditional argument that mismatches of supply and demand should not move share prices because the market is �efficient��meaning that prices reflect all available information. It found evidence that surges of money into index mutual-funds led to permanent increases in share prices, and may explain up to 30% of the recent increase in the S&P 500. Some 29% of money invested in American equity mutual-funds in 1998 went into index funds�six times the proportion in 1994. Many big mutual funds that claim to be actively managed also, in practice, track indices. Pension funds, too, are indexing more than ever. Two other sources of demand also favour big stocks. Foreign investors are pouring money into American shares�with net purchases of $64 billion in 1997, and $43 billion in 1998�and they typically choose well-known companies. Firms have also been buying their own shares�last year alone they bought $263 billion more than they issued (presumably not, perish the thought, because this keeps the prices of managers� share options up). Much of this is done by bigger companies, which have spare cash or can borrow cheaply. How long demand remains so strong will depend, in part, on America�s macro-economic policymakers. The Federal Reserve, which cut interest rates three times late last year, seems unlikely to put them up again until there are clear signs of consumer-price inflation. Nobody expects that soon. New data from the Fed shows that America�s financial sector borrowed a record $1.1 trillion last year (up from $653 billion in 1997). Much of this can be attributed to Freddie Mac and Fannie Mae, two federal-government-sponsored mortgage agencies. David Tice, of the Prudent Bear Fund, says that, for no obvious reason, they went on a lending binge just as the rest of the market dried up in the panic of last autumn. Will the authorities reduce this flow of money any time soon? Maybe. But next year both the Clinton administration and Alan Greenspan, the Fed�s chairman, come to the end of their terms in office. Both may feel tempted to keep inflating the stockmarket bubble and leave the aftermath to their successors. The Economist, March 20, 1999 ----- Aloha, He'Ping, Om, Shalom, Salaam. Em Hotep, Peace Be, Omnia Bona Bonis, All My Relations. Adieu, Adios, Aloha. Amen. Roads End Kris DECLARATION & DISCLAIMER ========== CTRL is a discussion and informational exchange list. Proselyzting propagandic screeds are not allowed. Substance�not soapboxing! These are sordid matters and 'conspiracy theory', with its many half-truths, misdirections and outright frauds is used politically by different groups with major and minor effects spread throughout the spectrum of time and thought. That being said, CTRL gives no endorsement to the validity of posts, and always suggests to readers; be wary of what you read. CTRL gives no credeence to Holocaust denial and nazi's need not apply. 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