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Global Business Issues Many Complications 1. 2 What being global means You might operate a firm in another jurisdiction: build a factory in France. You.

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Presentation on theme: "Global Business Issues Many Complications 1. 2 What being global means You might operate a firm in another jurisdiction: build a factory in France. You."— Presentation transcript:

1 Global Business Issues Many Complications 1

2 2 What being global means You might operate a firm in another jurisdiction: build a factory in France. You might put money in another jurisdiction: most major banks hold cash in banks in the Cayman Islands to avoid U.S. financial regulations on short term deposits. You might put non-monetary assets in another jurisdictions: U2’s copyrights are “in” the Netherlands. 2

3 3 Reasons to operate globally Access to markets - 1,336,718,015 Chinese; U.S. public procurement market is $1.1 trillion, larger than GDP of all but 13 countries Different tax rules - why U2 moved its music publishing company from Ireland to the Netherlands. Different non-tax legal rules - you can have a trust in Britain but not in France. 3

4 4 Reasons governments worry about you operating globally Tax evasion (NOT tax avoidance) Money laundering Terror finance Fraud 4

5 5 Tax evasion Roger the Taxpayer takes in $100,000 per year in cash and $100,000 per year paid by credit cards from his car wash business. His expenses are $50,000. So he nets $150,000 from the business. If he reports income of $150,000 and is in a 35% tax bracket, he has after-tax income of $97,500. If he puts $100,000 cash in a suitcase and takes it a jurisdiction without a tax information exchange agreement with the US, pays the business expenses with some of the credit card receipts, and reports income of $50,000, he nets $32,500 + $100,000 illegally stashed overseas. 5

6 6 Money Laundering  Presenting dirty money through the banking system to “clean” it.  Dirty money: money obtained by illegal means (drugs, extortion, blackmail, tax evasion).  Most dirty money starts as / is converted to cash.  3 stages of money laundering Placement Layering Integration 6

7 7 7

8 8 Anti-Money Laundering (AML) Compliance officers –Expansion of AML compliance from banks to car dealers, jewelry stores, etc. Governments put burden on businesses to identify potentially dirty money –Must report suspicious transactions –Refuse suspicious transactions –Cooperate in tracking and seizing dirty money 8

9 9 Cayman AML laws  Proceeds of Crime Law (POCL) 2008  Allows actions based on “criminal lifestyle”  Civil proceedings  Asset freezing powers  “reasonable grounds” for suspected money laundering is enough to trigger additional reporting requirements  Terrorism Law  Misuse of Drugs law 9

10 10  Cayman AML regs require that Financial Service Providers have AML policies, procedures and practices as follows: Identification of clients procedures Record keeping procedures Internal reporting procedures Training procedures Recently revised to accommodate to comply with FATF Special recommendations.  Failure to comply = a criminal offense; Penalty is unlimited fine and imprisonment up to 2 years

11 11  New Business  Account Opening  Copy passports  Understanding of the relationship  Source of funds  Source of wealth  Risk assessment of customer  Transactions monitoring  review of transactions  periodic review of customers  Reporting procedures  Internal  External  Record keeping  Training procedures  Orientation  Annual refresher  Risk Based approach/Risk profiling  Risk rating for all customers  Monitoring of accounts  documentation of process  clear ownership of process (who owns it)  audit evidence of process (make records)  Large Transaction Reports 11 Typical Business AML Policy

12 12 Fraud: Madoff Scam Created infrastructure that appeared to have trades, but did not. Client losses of $65bn+ ($20bn) 150 year sentence Red flags –Acted as own broker –High, stable returns –Implausible returns given market and size of investments ($13 bn) –Accounting firm was 3 person firm with just 1 accountant –No independent custodian

13 Offshore Financial Centers Global Competition Focus on Cayman Islands 13

14 14 Offshore Financial Centers What do they do? Provide incorporation and back office services Why have they grown? Avoid some taxes Avoid some “excessive” regulations Provide financial services (accountants, lawyers, trustees, etc.) at lower cost Confidentiality 14

15 15 Quality jurisdictions Have adequate regulatory infrastructure –May not look like US Membership in international organizations –IOSCO (International Organization of Securities Commissions) Whitelists / blacklists Compliance with international best practices 15

16 16 Business trusts Company Beneficiary Protector Settlor Trustee Assets Control Income Control

17 17 Creating complex structures to facilitate finance IP Co. Real Estate Co. Equipment Co. Brazil Co. Operating Co. Trading Co. U.S. Co. China Co.

18 18 Example: Owning Hotels in China

19 Financing Primarily equity and debt Complex arrangements reflect laws, international currency issues, a desire to control organizations in various ways Many choices possible Voluntary agreements

20 20 Debt, equity & more complex things Stock – claim on share of future earnings and of assets Debt instruments – claim to be repaid principal and paid interest More complex: – Financing a particular asset (e.g. airplane) – Financing a particular project (e.g. opening a mine) – Financing to meet particular investors’ needs (e.g. Islamic finance)

21 21 Debt Create security interests with priority against particular assets Access to Eurodollar markets Allow investors to choose type of risks to which they are exposed Debt instruments typically contain detailed covenants; equity does not. Natural Resource Co. Ship 1 Refinery 2 Refinery 1 Drilling Equip. 2 Drilling Equip. 1 Ship 2

22 22 Foreign investors’ needs Capital flows around the world seeking best opportunities

23 23 Stock markets’ roles Aggregators of capital Trading Investment quality signaling

24 24 CSX – Listing Exchange

25 25 Taxes, 3 Transactions + 3 OFCs International tax issues 3 transactions that often involve OFCs –Hedge Funds –Captive Insurance –Asset Securitization 3 OFCs: The Good, The Bad, and the Ugly –Cayman Islands –Antigua –Netherlands Antilles 25

26 26 Income Taxation is Based on Residence Source or

27 27 Worldwide Taxation – a system that taxes foreign- source income to some extent. Resident individuals are taxed on worldwide income regardless of where income is from. Double taxation is reduced through a foreign tax credit. Deferral is a problem because of the separate entity status of corporations. Territorial Taxation – a system that exempts from tax most foreign-source income. Double taxation is not a problem because foreign- source income is tax-exempt. Deferral is not a problem for the same reason.

28 28 United States U.S. Persons Foreign Persons Question of residency Who Does the U.S. Tax?

29 29 U.S. Country X Shareholders USCo ForCo USCo is taxed by US on its US-Source income. USCo does not receive dividends from its subsidiary, ForCo, so ForCo’s earnings are not taxed by the US. ForCo is taxed on its Country X-source income by Country X.

30 30 Usually, double taxation occurs because residence overlaps source –Example: Foreign person buys stock of U.S. corporation that earns dividend Foreign person is liable for United States source tax on dividend Foreign person may be liable for residence tax in the foreign jurisdiction

31 31 Foreign Tax Credits – permits a credit against U.S. taxes for taxes paid to foreign taxing jurisdiction. Income Tax Treaties – allocate the right to tax as between the treaty countries and provide reduced rates of taxation for double-taxed income.

32 Punish companies by the highest corporate profits rate in the world—they keep cash out of the U.S.

33 33 Relational concept – implies existence of onshore jurisdiction Regulatory arbitrage opportunities Cigars vs. corporations Purchase of Cuban cigar outside US violates US law Import of Cuban cigar into US violates US law Creation of corporation outside US does not violate US law What is “offshore”?

34 34 Why do people want financial privacy? Tournier vs. The National and Provincial and Union Bank of England (1924) 1 K.B. 461 (Court of Appeal 1923). Foreign nationals often do not want to report assets / income to the U.S. government. Privacy issues

35 35 Forced Heirship A portion of a person’s estate MUST be given to specific relatives named in law. –France: an only child MUST get 50% of parent’s estate; 2 children share 66%, 3 or more share 75%. –Marital real estate MUST go to spouse for life; then to children.

36 36 Political oppression Fear that if government identifies opponents’ wealth, it may seek to confiscate it.

37 37 Crime Revealing assets may make your family vulnerable.

38 38 Corruption If investors are known to be wealthy, can attract “shake downs.”

39 39 Jurisdictional competition: Key economic ideas Competition among jurisdictions produces innovation, lower prices, better service, etc. just as competition among firms does. Governments compete for wealth-creating activities. Laws affect the economics of where a business locates. Rearranging bundles of legal rights can increase (or decrease) the value of the rights. Taxes play a large role in structuring global transactions. 39

40 40 Master-Feeder structure 40

41 41 Offshore vs. onshore Investors from different jurisdictions have different tax regimes in home countries. –Locating the fund in a no-tax jurisdiction for flexibility Costs of securities statutes significant; benefits vary across individuals. –Non-retail investor products “Master-feeder” groups of parallel funds in different jurisdictions, with same management, to provide different tax structures for investors.

42 42 Tale of 3 OFCs 42 Cayman Antigua Curaçao

43 43 OFCs’ role 43 Post WWII growth Clustering of corporate, accounting, and legal services + with a strong legal system Legal protections for privacy Competition to onshore jurisdictions – ‘Product’ innovation in law

44 44 Curaçao: failure to adapt 44

45 45 May 1940 – Germany invades the Netherlands –Netherlands’ companies move to Curacao Restructuring of the Kingdom after WW – 2 nd highest GDP per capita in Caribbean 1954 – US-Netherlands tax treaty extension “Antilles Sandwich” structures –“You just go down there and they have a package waiting for you – sign here and you are in business” –Expansion into real estate and other areas –1975 – most important OFC Pushback from Treasury, law enforcement – “treaty shopping” 1987: US cancels treaty End of the line

46 46 Antigua: poor quality institutions 46 90,000 population, “Land of Sea and Sun” Main export: bananas 18 international banks by 2008 Sir Allen Stanford's “Stanford International Bank” “a man who likes to throw his weight around” largest private sector employer in Antigua sponsor of Antigua Sailing Week (largest sailing regatta in the Caribbean), multimillion dollar investment in cricket through the Twenty20 Tournament Close ties to Antigua Labor Party

47 47 Stanford International Bank / Group : SIB assets grew from $1bn to $8bn 2006: Allen made “Knight Commander of the Most Distinguished Order of the Nation (Antigua and Barbuda)” 2008: SIB claims $50bn in assets “I have never in my eight years here seen a letter from a customer of the bank complaining they had not been paid,” he added. “We are not turning a blind eye, but at the same time we cannot allow the blogosphere and press articles to distract us. We have to make sure that when you have a good client that we have never found wanting, we have to stay the course.” –Leroy King, head of Financial Services Regulatory Commission in early 2009

48 48 Independent financial analyst report questioned use of CAS Hewlett for audit rather than a major firm After death of CAS Hewlett CEO in Jan. 2009: “the business has been in limbo. Employees of the firm say the day to day operations are being handled by Mr. Hewlett’s daughter, Celia Hewlett, who is based in Enfield in London, but the overarching impression is one of confusion over who is really in charge and what the future holds.” Financial Times

49 49 Unraveling : employment discrimination lawsuit in Texas by employees including many problematic allegations about unethical and illegal actions July 2008 SEC subpoenaed plaintiffs Discovers “fractal” nature of Stanford companies

50 50 Stanford Group Suisse Stanford Bolsa y Banca (Columbia) Stanford Group Ecuador Stanford Casa de Vaolores Stanford Trust Company Administradora de Fondos y Fideicomisos, SA Stanford Fondos (Mexico) Stanford Group Mexico Stanford Bank Panama Stanford Casa de Valores (Panama) Stanford Group Peru Stanford Bank Venezuela Stanford Group Venezuela Asesores de Inversion Stanford Trust Co. LTD (Antigua) Stanford Capital Management Stanford Group Company, Stanford Agency Co. (US) Stanford Trust Co, Baton Rouge, NZ, Columbia Stanford Fiduciary Investor Services, Houston, Miami, San Antonio Stanford Coin and Bullion, Houston Stanford International Consulting, Baltimore. Stanford International Bank (Antigua) Stanford Venture Capital Holdings, Houston Bank of Antigua Stanford Development Corporation Global Management Complex Stanford Caribbean Investments (St. Croix) Stanford Group Antigua Stanford Group Aruba

51 51 Fraud / Ponzi scheme 51 “[it is a fraud] of shocking magnitude that has spread its tentacles throughout the world.” –Rose Romero, SEC 2009: –some Stanford Antigua entities put into receivership by Antiguan regulators –Eastern Caribbean Central Bank took control of Bank of Antigua “Sir” Allen’s convicted and sentenced to prison in U.S.

52 52 Cayman 52 Avoiding the Curaçao problem – need to grow, need to be flexible Avoiding the Antigua problem – need to avoid frauds, need to provide effective governance / brand management Proving that the value added exceeds transactions costs of doing business offshore Fiscal stability issues – Miller Commission (James Miller, David Shaw, Kenneth Jefferson)

53 53 Cayman as a jurisdiction Institutional strength - CIMA, top banks and accounting firms, high quality law firms, CSX Strong reputation - membership in organizations such as IOSCO Up to date and efficient legislation: specialized insurance, banking, funds, companies laws Political stability and fiscal sustainability 53

54 54 Cayman Development Cayman Islands, 1960s 241 sq. miles, rooms for 229 tourists in 1962, mosquito infested Today More than 500 banks, including “nearly all the world’s top 50” banks Deposits > US$500 billion GDP per capita: US$32,300, higher than UK Cayman is #11 worldwide, 8 other offshore jurisdictions are ahead of Cayman, together with the U.S. and Norway. 54

55 55 Cayman issues Is Cayman fiscally sustainable? Is the Cayman-UK relationship stable? What will the US/UK/EU/OECD/China do? Can offshore jurisdictions survive? What’s the next key transaction for Cayman / OFCs? 55


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