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Saturday, June 18, 2005

URGENT Offshore News Alert - LATVIA

Ladies and Gentlemen, we recently received the correspondence posted below from PT Shamrock, one of the few reputable suppliers in the IBC/Bank Account/etc game. If you hold funds in Latvia I would suggest in the strongest possible terms that you move your money out of the country within the next few days. Bush's recent visit has stirred up a lot of bureaurat trouble there, and their accession to the EU isn't helping things easier. It's no longer just the mobsters to watch out for in Latvian banks... Get your money out now before you find it 'frozen' !

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Offshore banking takes a turn for the worse!

Pardon this intrusion. As our long term subscribers know, we rarely
send out an advisory in between our regular newsletters. However
the current banking situation merits this advisory.

Recently President Bush visited Latvia. Anyone watching his visit
with the president of Latvia witnessed all the hugs, kisses, best
wishes, etc. This brought to mind, "Humm!!! What's going on here?
What are these two 'leaders' up to?"

Well not two weeks went by and surprise, surprise we received the
letter below from a Latvian bank. [See Note 1 below.]

Following that letter, many customers starting emailing us saying
their accounts were being closed with very short notice. In fact
our own Latvian account is being closed as well after nine years of
being a very good and loyal customer.

This banking problem is not limited to Latvia! A colleague had an
HSBC bank account in Asia for more many years. An HSBC bank
official (in the UK) saw one their google adsense adverts for
camouflage passports and instructed the Asian branch to shut down
their account in good standing for ten years, within 24 hours. No
recourse, no ifs, ands or buts, close the account. And of course,
HSBC Asia did.

Worse many European, North American, Latvian and other
banks just started restricting their customers ATM card withdrawals to
a maximum of USD 1,000 per day. In most cases, the maximum an ATM card
holder will be able to withdraw anywhere in the world will be US$1,000 or
LESS! Understand now, these are banks who have the customers notarized
passport copy with the customers name appearing on the ATM/credit card.
Formerly many of these cards offered unlimited or very large daily
withdrawals from source. Chalk up another win for Big Brother :-(

All of the above of course, is being brought to you from your
government who is hard at work for you, i.e. fighting terrorism in
order to protect you from yourself.

One customer just e-mailed us: "My mother had an interesting and
true insight on this (Latvian bank closing) matter. According to
her, Latvia is one of those nothing countries that nobody had ever
heard of and couldn't care less about until recently. Now that they
emerged from the Soviet Union and are a part of the 'new' EU, they
have an "attitude" some what akin to a complex that Russia and other
more established nations, do not have.

Also, they love Bush, the US plus the EU and are falling over
themselves to become their puppets and get their approval."

Whilst all of the above is regrettable, as always, there are legal
loopholes, albeit the doors of opportunity are closing rapidity.
More on the remaining opportunities in a moment.

Take Action!

First, in the event you have any money in a Latvian bank account and
you have been threaten with closure, or even if you haven't been
informed your account will be closed, we recommend that you
IMMEDIATELY and without delay check your email account/s that you
use to correspond with your bank. You need to see what your current
status is urgently. In addition, we urge you in the strongest
possible terms to WITHDRAW and in haste, any and all funds in your
Latvian accounts. This must be done prior to June 21st, 2005.
[Please read the very strict procedures in Note 1 bank letter below.]

In the event your account is not being closed, leave a minimum balance
in the account to keep it activate. However we'd be remiss if we
didn't advise that you severely limit funds in and out of Latvia for
the future. We can no longer recommend any serious money going into
any Latvian bank account henceforth. USD/Eur 25,000 would be the
maximum we can recommend you keep in a Latvian account at any one
time.

Further in the letter in Note 1 below, basically you'll be required
to send the bank an invoice, explanation and PROOF of each and every
wire transfer into and out of your bank account. If you fail to
'comply' with any of those requests, your account and all money is
frozen, probably never again to be seen by you. Thanks but no thanks!
Personally we replied to our bank and told them they can take their
account and stick it where the sun don't shine!

As PT Shamrock has been saying for years now, one can never have too
many bank accounts. Time is running out for the privacy minded person.
Loopholes are being closed and opportunities lost forever.

Good news!

For PT Shamrock's customers who purchased a Latvian bank account and
or ATM card from us (and can prove it;) in the event your ATM card
and or bank account is being closed, e-mail us immediately and we'll
give you're a large discount on replacing your lost bank account and
or ATM card products with one of our alternatives below.

For those of you still at the starting gate who haven't gotten
your offshore act together yet, hope springs eternal! We offer some
interesting alternatives for banking in today's Terrocratic climatic.

Alternative 1: A Western European bank account that can be opened
via the mail, with Internet banking and a personal or company bank
account. Minimum opening deposit required to open this account is
US$25,000 or the Euro, CHf equivalent. Our cost to you is Euro 1,000
for the bank account. Add Euro 1,450 for an off the shelf bearer
share company. This account could be your best long term account.

Alternative 2: Asian company bank account. This bank is located
within the former CIS countries, but is very kosher. Their USD
correspond bank is in CHINA, not the USA!

Comes with Internet banking, an ATM card with unlimited daily
withdrawals (from source,) and a bearer share company for Euro 2450.
Opening account deposit is only USD/Eur 500.

Alternative 3: Swiss bank account. This a particular goody because
it can be opened reasonably fast and the opening deposit is minimal.
Personal accounts only are available at this time. Includes brokerage
account and Internet banking. Notarized Passport copy required.
Cost is Euro 1500.

Alternative 4: Lithuanian bank account: Don't discount this account,
because the bank account is opened locally by the branch of a
prestigious European bank. Internet banking, ATM card and NO, repeat
NO notarizations required!!!

Cost for a bearer share company, company account as above, just Euro
2450.

Alternative 5: St. Kitts company and St. Kitts bank account. This could
be a real winner, albeit notarized passport copy and utility bill
required. Includes easy to use Internet banking and an ATM card with a
minimal opening deposit. Your cost, Euro 2995.

Alternative 6: Our USD/Eur 12,000 monthly withdrawal, no name no ID
ATM card. This ATM card is NOT from Latvia and is hard to find. See
http://www.ptshamrock.com/nonameatm.htm for details. Cost,
including courier charges is Euro 545.

Alternative 7: This no name ATM card is for the serious player only.
No name appears on the card and there is a whopping 150,000 USD
monthly withdrawal limit (US$5,000 daily limit.) Best of all the
card is from a very strong country and the card NEVER, repeat, NEVER
expires. See http://www.ptshamrock.com/auto/60katm.htm for details.
Cost is US$1,320 and there is a very limited supply available at this
time.

Set up times for the above varies. In most cases the no name no ID ATM
cards are sent to you by courier within a few working days after
we receive cleared funds. The bank account opening process varies widely.
Expect 4 weeks more or less to get an account opened in todays
business world.

Remember there is a nice discount on the above products to our
customers who, like ourselves, have been hurt by recent Latvian banking
laws and have had, or will have their bank accounts and or ATM cards
terminated.

See you with our next PTBuzz issue, July 2005.

Shamrock

PS Please note; there will most likely be a substantial price increase
for the bank products above, due to these recent government restrictions on
bank accounts and the extreme scarcity of same. Take action now to
avoid future price hikes.

To order at our secure on-line order form, proceed to
https://www.ptshamrock.com/order_bwe.html

Note 1:

June 13, 2005

Dear Customer!

Amendments to the Law On the Prevention of Laundering of Proceeds
Derived from Criminal Activity are published today entering into
force on 24 June 2005. New regulations impose additional
requirements towards relationship between Latvian banks and their
customers.

Banks must collect information, document and verify data regarding
business and personal activities of customers, origin of their
funds, organizational and ownership structure, financial position
and beneficial owners of corporate customers. In case any data is
missing on the customer's file or if information provided by the
customer is misleading the bank must immediately terminate any
relationship with the customer in question and close his accounts
along with the accounts of all other companies belonging to the same
beneficial owner.

Banks may not provide services to shell banks. Companies carrying
out money transfers on behalf of third parties are, among other
structures, classified as shell banks.

Customer information, including data of his beneficial owner, shall
be disclosed not only to a range of public authorities but also to
correspondent banks registered in the EU or OECD countries.

If the customer fails to provide the bank with the necessary data on
time and the bank decides to terminate relationship with the said
customer the accounts shall be closed. Any balance from the
accounts can only be transferred to an account of the same customer
in a bank registered in the EU or EEA country or in the bank where
the funds initially came from. From 27 June it will not be possible
to transfer such balance to any third parties or to withdraw it in
cash.

Further on, the new regulations introduce severe financial penalties
to the banks failing to comply with the new rules.

Currently our bank has temporarily stopped opening new non-resident
accounts in order to audit its existing customer base to make sure
that the information on files complies with the new requirements.

Within the next few weeks our officers will contact you to discuss
possibility of further servicing of your funds in our bank and,
possibly, to request some additional documents or information. We
should also ask you to consider what documents you can provide to
comply with the requirements described above and send them over to
your account manager at our bank.

Yours sincerely,
XXXXX
Head of the International Customers Service

Tuesday, June 14, 2005

Welcome to Londongrad

Armed with big wallets and bigger dreams, Russia's elite make the British capital their home away from home.

One morning this April, in a conference center near Westminster Abbey, London Mayor Ken Livingstone welcomed 1,200 Russian government and business guests. Large and powerful companies, including Sibneft, Norilsk Nickel and Alfa Bank, were represented. The mayor, known as Red Ken for his left-leaning ways, invoked the "warmth and sympathy" Britons feel for an old ally against Hitler. He encouraged business leaders to look upon the London Stock Exchange as the world's "most approachable" financial market. And he noted that Russian tourists now spend as much as Americans. "Russians," he concluded, "are welcome in this city, both as individuals and for the business that they bring."

Yet Russians need no invitation. After seven decades of communism and two of gangster capitalism, an estimated 250,000 of them and other Russian speakers from the former Soviet Union now live in London. Countless more have property or a financial presence there. It is a launching pad for personal or professional ambitions. Many are seeking Western partners for investment and are burnishing their image with a coterie of Western lawyers, investment advisers and public relations agents. They have injected hundreds of millions of pounds sterling into the U.K. economy, buying houses and luxury goods.

The best-known among them include the oligarchs, the cadre of men who walked off with Russia's valuable natural resources and state-owned enterprises, often amid murky, corrupt and even violent privatizations. While many of these wealthiest Russians have also bought homes in France, New York or Israel, London has clearly emerged as a destination of choice. Russians are lured by its four-hour proximity to Moscow, strong capital markets and favorable tax laws. "London is a metropolis," says Olga Sirenko, a Russian who moved there in 1997 and now edits a Web site for Russian expats. "It is fashionable. It has all the boutiques. It has all the culture. Moscow doesn't have that kind of chic."

Nor does Moscow have a judicial system like Britain's that protects them from unwelcome inquisitors. "I think they feel this is a country of law. They feel they are well protected here," says a notable among them, Boris Berezovsky, in England since 2001.

The ties between Russia and England date back centuries. In 1555 Czar Ivan the Terrible granted a group of English merchants a monopoly on the trade of furs, timber and cloth, thus establishing the Muscovy Company. Centuries later Lenin plotted from London. After the Bolsheviks took power, Russian aristocracy and intelligentsia also headed to London.

Many of these postrevolution Russians assimilated into British culture, and by the late 1980s it seemed to some expats there was no Russian community in London at all. But that began to change in the 1990s, a tumultuous decade for Russia and its lawless economy. The gap between the wealthiest and poorest Russians widened. By 2004, 40% of the nation's $546 billion economy was controlled by 22 business groups, according to Moscow investment firm Hermitage Capital Management, a concentration of power unheard of in developed capitalist nations.

Money flowed out as fast as the millionaires. Between 1998 and 2004, $102 billion in capital left Russia, according to Hermitage Capital. Much of it went to offshore accounts in Switzerland and elsewhere. From there it is impossible to trace, but tax lawyers say the U.K. offers unique tax advantages to people with assets offshore. Most countries require their residents, foreigners included, to pay taxes on worldwide income and capital gains. But U.K. residents can set up their offshore accounts in such a way as to legally avoid these taxes, says Joel McDonald, a lawyer at the law firm Salans in London. Thus a Russian billionaire can hold stock offshore, sell it and use the proceeds to buy a London mansion--all without paying taxes on the gain. The U.K. government has considered closing the loophole but pulled back. That would mean killing the property market, to say nothing of denting the pay of international lawyers and accountants. "It's quite a great industry for a U.K. tax adviser," says McDonald.

Wealth buys an �migr� not just a lifestyle but a day in court, something that may or may not be available in the Wild West legal system of Russia (see On My Mind, p. 42). England, with its legal establishment and highly trained public relations firms, affords some legal predictability. Among the first to take advantage was Berezovsky, once the wealthiest man in Russia. Dubbed "Godfather of the Kremlin" by FORBES for his strong ties to the Yeltsin government, he fell out with Russian President Vladimir Putin and fled Moscow in 2000, landing first in France.

But the Russian government pursued Berezovsky, accusing him of fraud and seeking extradition. In 2003 London police arrested him. Bond was set at $160,000. Half was posted by Lord Timothy (Tim) Bell, a powerful p.r. man who had orchestrated Conservative Party campaigns in the Margaret Thatcher era. The remainder was posted by Stephen Curtis, a once-obscure London lawyer who rose to prominence as managing director of Group Menatep, a holding company established by oligarch Mikhail Khodorkovsky for Yukos oil and other assets. (Curtis died a year later in a mysterious helicopter accident.)

Initially the U.K. government refused to grant Berezovsky asylum. But he says he felt certain he would get a fair hearing in his extradition proceedings. A bit of intrigue may have helped: A tale emerged about a Russian agent ostensibly sent to murder Berezovsky by stabbing him with a poison-filled pen while he attended the London hearings. The plot, if there was one, was thwarted, and Berezovsky's lawyers successfully argued he had a well-grounded fear of persecution in Russia.

Welcome to Londongrad - Forbes.com

Vietnam may allow individuals to borrow offshore funds

Vietnam may allow individuals to borrow money from foreign sources if a proposed banking ordinance gets the green light from the government, according to the State Bank of Vietnam.

The planned Foreign Exchange ordinance, being formulated by the country’s central State Bank, would allows individuals access to money from foreign sources.

Currently, a large number of Vietnamese living abroad want to invest directly into Vietnam, but if circumstances dictate they cannot, they want to lend money to their relatives to do business in the country, according to State Bank experts.

A legal document governing foreign exchange is needed to encourage and establish control over the source of foreign investment, experts say.

Some banking experts have expressed concern the ordinance may pave the way for property speculation or money laundering, or rising foreign investment into restricted economic areas in the country.

But others say it is essential to accommodate the huge number of expatriate Vietnamese sending money home to their relatives to do business.

“The country would attract several hundreds of million of US dollars each year in the form of foreign investment if we allow individuals to borrow foreign dollars,” says an expert.

The ordinance is to be submitted to the government in three weeks for approval, according to the State Bank.

Reported by Thanh Xuan – Translated by Hieu Trung.

Vietnam latest news - Thanh Nien Daily

BVI chief minister challenges bankers to meet global regulations, standards

By ANGELA BURNS-PIPER
Saturday, May 21st 2005


TORTOLA - BVI Chief Minister Orlando Smith has issued a strong challenge to banking supervisors from around the region, urging them to be diligent in complying with international regulations, guidelines and minimum standards.

He was speaking at the opening ceremony of the 23rd annual conference of the Caribbean Group of Banking Supervisors, which opened on Thursday at Long Bay Hotel.

"Permit me to challenge you, therefore, not only to revisit the regulatory processes and address the challenges we face as a region, but more important that you get them right," he told the participants.

The chief minister said the opening of borders and financial systems has exposed the region not only to greater business opportunities, but also to the risks associated with an integrated global financial market.

"Deeper integration of financial institutions across the region poses special problems for the control of the financial system against abuses such as money laundering, financing of criminal and terrorist activities and the circumvention of rules and standards," Smith said.

He said in order to remain competitive in the global financial market, jurisdictions that are considered major international finance centers cannot ignore the new round of international scrutiny.

The BVI leader said supervisors must be equipped with the necessary tools to ensure that the region is able to meet international requirements. "You are called to ensure that your regulatory modes are practical, pragmatic and proportionate."

The chief minister said financial abuses can threaten the credibility and undermine the integrity of the international financial system, adding that the consequences affect countries at every stage of development in both the onshore and offshore financial sectors.

The two-day conference had the theme "Revisiting Regulatory Processes in the Face of Regional Challenges and Risks."

The Caribbean Group of Banking Supervisors was formed in 1983. It is tasked with enhancing and coordinating bank supervisory practices in the region and bringing them in line with international practices.

Its 14 members include Aruba, the Bahamas, Barbados, British Virgin Islands, Cayman Islands, Guyana, Haiti, Jamaica, the Netherlands Antilles, Suriname, Trinidad & Tobago, Turks & Caicos and the Eastern Caribbean Central Bank.

Virgin Islands, Virgin Islands Newspaper, A Pulitzer Prize Winning Newspaper, Virgin Islands Guide, Virgin Islands Info

Dealers seek signs of Petchey on the prowl

Geoff Foster, Daily Mail
18 May 2005

SCRATCHING around for any situation to make their phones ring, dealers heard a jackanory that Jack Petchey could be on the prowl again. The veteran cockney property dealer and former car trader and taxi driver is a member of that elite band of private investors, which includes the likes of Nigel Wray, Bob Morton, David Williams, Julian Treger and Brian Myerson, who can move share prices simply because their names appear on the register.


Via his offshore investment vehicle Trefick, Petchey has made a fortune over the years buying stakes in asset-based companies trading at big discounts to their underlying value. He has invested in dozens of companies ranging from football clubs to motor traders and properties, a sector where his expertise really lies.

His most recent success has been workspace provider Bizspace. He first bought a 4.94% stake around the 29½p level in October 2003 and increased that to 17½%Yesterday's close was 51p, up ½p, on further consideration of its significant property revaluation.

Whispers now suggest he could be sniffing around Electronic Data Processing, unchanged at 73p and down from a February peak of 92p. He obviously has his beady eye on its property assets. The largest IT solutions provider to the UK independent builder and timber merchants market has sites in Sheffield, Glasgow, Milton Keynes and London.

Petchey could also have a big say in the next big Premiership takeover. With Manchester United now tucked safely away in Malcolm Glazer's kitbag, word is Aston Villa , unchanged at 370½p, will be the next Premiership club to fall into foreign hands.

After yet another disappointing mid-table season and failure to qualify for Europe, chairman 'Deadly' Doug Ellis is said to be ready to sell his 33%-plus stake in Villa to a Far Eastern consortium. Any bidder would have to get Petchey's approval - he sits in the dug-out with 20%

Brixton, the property group in which Petchey holds 5.4%, gained 4½p to 354½p ahead of its admission into Lehman's MSCI index later this month.

Buoyed by impressive trading statements from Schroders , 38½p better at 727p, Enterprise Inns , 18½p up at 741p, and news of an £829m US acquisition by Yell , 17¼p higher at 415p, the Footsie closed 14.3 points to the good at 4898.5. Wall Street lost 39 points initially following stronger-than-expected US inflation data.

As the world heard that pop queen Kylie Minogue has breast cancer, drugs giant AstraZeneca rose 25p to 2345p. A study in The Lancet oncology journal found that its ineffective lung cancer drug Iressa may help reduce the size of breast tumours.

Sporadic bouts of nervous selling ahead of today's full-year results left J Sainsbury 1¼p cheaper at 287¾p. Mail order giant Gussies softened 1p to 842p after the sale for £150m of its remaining 50% stake in Lewis Group, South Africa's third-largest furniture and appliance company.

Excellent second-quarter results, a return to the dividend list and news that its high-yield bond will be redeemed shortly yielding significant cost savings helped food service equipment group Enodis touch 111½p and close 10½p better at 108p on meaty turnover of 26m.

Beleaguered rail contractor Jarvis rallied 3¼p to 14p as hedge funds closed their short positions.

Actif, the clothes retailer and wholesale producer of the Elle brand, gained ¾p to 4¾p. Chairman David Brock bought 1.3m shares at 4p and now holds 4.5%

Despite a Canaccord recommendation and target price of 171p, Adastra Minerals eased ½p to 81½p. The normally conservative World Bank has taken a 7.5%investment in the company which owns 100% of the Kolwezi Cobalt and Copper Deposits in Central Africa. That's bullish for Adastra which is heavily involved in the Kolwezi copper project.

Greggs the baker closed a tasty 40p up at 4550p following the bullish tenor of chairman Derek Netherton's annual general meeting address. He said like-for-like sales in the 19 weeks to 14 May rose 5.8%

• BOMBED-out health care group Medical Solutions held at 5¼p but should climb out of intensive care on Friday. Word is Friday's annual meeting will be upbeat and shareholders will be told that all of its operations, both at home and abroad, are currently trading ahead of budget. Takeover discussions with an un-named company were terminated in January. If the worst is over, other interested parties are bound to be lurking.

Dealers seek signs of Petchey on the prowl | This is Money

Malaysia focuses on offshore services

KUALA LUMPUR - Malaysia has increased its focus on the service sector as it attempts to develop a second string to its export bow. Malaysia's long-time Minister for International Trade and Industry, Rafidah Aziz, said that while the manufacturing sector remains a main source of growth for Malaysia, it is imperative that Malaysia broadens its economic base. "Feedback from various sectors indicates that Malaysian service providers are expanding the export of their services overseas," she said.

Rafidah listed three key sectors - construction, healthcare and educational services - pointing out that international management firm AT Kearney in a recent report described Malaysia as a rising alternative to India and China for offshore services. Malaysia particularly wants to attract companies for shared services and business process outsourcing.

Last year, based on Construction Industry Board Development data, Malaysian companies secured eight infrastructure projects worth RM1.587 billion (US$417.7 million) in India, Cambodia, the United Arab Emirates, Singapore, Qatar and Sudan. These projects included highways, airport upgrading, waterworks and structural steel works.

Rafidah said Malaysian hospitals treated almost 130,000 foreign patients in the first nine months of last year, generating an estimated RM65.5 million in revenue. The figure was 103,000 in 2003. And Malaysia had almost 26,000 foreign students. Export revenue generated from the educational sector in 2004 was about RM778 million.

Malaysia hopes to target China for its services. Many Malaysian companies are keen to undertake construction and management of wastewater treatment plants, water supply work and city gas distribution projects on a Build-Operate-Transfer basis. She said that with the 2010 Asian Games being held in the southern Chinese province of Guangdong, Malaysian companies can find opportunities to help finance and construct facilities there. These projects could be undertaken in joint venture with Chinese companies. Other areas of possible business collaboration with China include infrastructure, especially projects related to the 2008 Beijing Olympics.

On education, Rafidah said twinning programs with foreign universities in the United Kingdom, the United States and Australia could enable Chinese students to obtain foreign degrees in Malaysia at a lower cost. And while Chinese may not be ready to travel overseas for medical care today, she sees China's large population as a strain on the healthcare budget. With improvement in standards of living, many Chinese will eventually demand better medical care in modern hospitals as they will be able to afford it.

China's rise as a global manufacturing base has siphoned off much foreign investment that in the last decade was originally destined for countries like Malaysia. Said Rafidah: "As Malaysia is no longer a cost-competitive location for labor-intensive operations, the government is encouraging labor-intensive manufacturing to relocate to cost-competitive countries like China. Malaysia sees China as a mutually beneficial business partner."

China has become a significant market for Malaysian products, especially edible oils, rubber products and electronic and electrical parts and components; and China's high rate of growth continues to create demand for consumer goods, industrial and infrastructure goods. Malaysia's exports to China rose 24.2%, reaching a new record of RM32 billion in 2004 - up sixfold since 1997.

Malaysia's exports to China grew 30.7% in the first nine months of 2004. Malaysia is seeking to expand trade with China, Japan and Korea through bilateral and regional initiatives. Trade between Malaysia and these three countries totaled $43 billion from January to September 2004.

The timetable for an ASEAN-China FTA is 2010. But China has concluded what is known as an "early harvest program" with ASEAN. This was implemented at the start of last year, and, in the first 11 months of 2004, Malaysia's total exports to China under the program amounted to RM2.1 billion.

Malaysian companies invested $3.1 billion for the period 1996-2003 in China, while cumulative Chinese investment in Malaysia totaled $1.2 billion. Rafidah said China is among the countries from which Malaysia hopes to attract more investment. She said Malaysia's investment rules have been liberalized to allow foreign companies to own 100% of a company, and that manufacturing companies no longer have to comply with equity or export conditions. Other relaxations include expatriate employment policies for manufacturing and related services sectors. "The Malaysian government continues to provide a conducive and cost-competitive environment for foreign investors."

Between 1996 and 2004 (January to November), total investment in Malaysia averaged around RM25.3 billion, of which 55% was foreign direct investment. Foreign investment mostly went into electronic, petroleum and base metal products. Rafidah said the government is promoting new growth areas to diversify its manufacturing base and to counter competition from China in traditional manufacturing activities. Growth areas include information and communications technology, biotechnology, optics, photonics, nanotechnology, medical devices and advanced materials. She said foreign investment remains crucial for Malaysia's industrial development, since foreign investors bring technology transfer, capital and access to international markets.

Despite increased competition, especially from China and India, Rafidah said Malaysia remains competitive. In 2000-2003, the main foreign investors were the US with $4.2 billion; Germany $2.5 billion; Japan $2.2 billion; Singapore $1.7 billion and the UK $1.3 billion. Together, they accounted for almost 70% of the total foreign investment in Malaysia.

Exports remain Malaysia's lifeblood. Rafidah says merchandise trade has grown an average by 8.8% annually since 1994. In the nine months to September last year, exports to almost all markets showed strong growth. West Asia was the fastest-growing market - up 40% over the previous period, but from a small base of RM9.6 billion. While key markets remain the US, Japan and the EU, Malaysia has experienced its best growth from intra-ASEAN trade, which grew 23% last year compared with a growth of 21.5% with the EU, 17.8% with the US and 15.3% with Japan. Malaysia has also started tapping new markets in Russia, West Asia, India and Hungary.

As a member of the ASEAN, Kuala Lumpur supports the trading bloc's negotiation for individual free trade areas (FTAs) with China, Japan, Korea, India, Australia and New Zealand. On a bilateral level, Malaysia is working on an economic partnership with Japan and a US trade and investment framework agreement with the US. As the minister sees it, Malaysia has a role as a gateway to the ASEAN market and is offering incentives, including pioneer status and investment tax allowances, to foreign companies that use Malaysia as a gateway to ASEAN. As a market itself of 20 million, Malaysia also offers economy of scale.

Rafidah expects trade with ASEAN to expand further now that the ASEAN Free Trade Agreement (AFTA) has been implemented. ASEAN has identified 11 sectors for accelerated tariff reduction - to be completed in 2007, instead of 2010. She said ASEAN is strengthening the dispute settlement mechanism and also cooperation in trade facilitation measures. Under the AFTA agreement, ASEAN will become a free trade bloc with a population of 530 million.

Malaysia's ASEAN neighbors absorbed a quarter of its total exports last year - a percentage that is set to grow with further liberalization of intra-ASEAN trade. Under what is known as the Common Effective Preferential Tariffs (CEPT) scheme, Malaysia's exports last year rose 58.2%. Thailand remained its major export destination under this scheme. Rafidah expects exports to Indonesia, the Philippines and Singapore, which have also increased under the CEPT scheme, to show further growth in future.

Growth in exports to ASEAN offset the decline of Malaysia's share in its key markets - the US, Singapore and Japan. The share of Malaysia's exports to these markets declined from 46% in 2003 to 43.9% in 2004. But Rafidah said this was due to significant expansion in exports to other markets. Malaysia's good export performance was buoyed by high global demand for electrical and electric products. Higher prices and volumes of commodities such as palm oil, crude petroleum and LNG also played a role.

With strong fundamentals, said Rafidah, the economy is expected to grow 6% this year, but its performance will be influenced by global events. The unemployment rate is low at 3.4%, and Malaysia's international reserves stood at $55.5 billion in September 15, 2004 - sufficient to finance 7.2 months of retail imports.

(Asia Pulse/Asia Today)

Asia Times Online :: Southeast Asia news and business from Indonesia, Philippines, Thailand, Malaysia and Vietnam

K&N Kenanga launches offshore investment bank

K&N Kenanga Holdings Bhd yesterday launched its offshore investment banking unit, Capital Investment Bank (Labuan) Ltd, to mark is first foray beyond the Malaysian shores.

Deputy chairman Abdul Aziz Hashim said the launch of Capital Investment Bank marked the group’s aspiration to become a recognised player in the financial services industry in the Asia Pacific region.

“Through Capital Investment Bank’s offshore investment banking activities, we may be able to meet and offer services in international investment banking, in addition to our present domestic services in stockbroking and fund management services,” he said after the launch in Labuan.

Meanwhile, Capital Investment Bank managing director Megat Mizan Nicholas Denney, said the company will eye lucrative mergers and acquisition projects in Hong Kong, financing arrangement for projects in Thailand and private equity financing.

“Labuan will be our base and we are keen to expand our marketing and project financing operations in Singapore as well,” Megat Mizan said.

He said Capital Investment currently had strategic partners in London and Singapore.

During the launch, Capital Investment Bank also signed its first financing investment project for Lereno Sdn Bhd, a bio-diesel plant, based in Lumut, Perak.

“We are providing equity financing of US$6mil (RM22.8mil) for Lereno,” Megat Mizan said.

Lereno executive director David Long said the plant, which would be commissioned soon, will mainly cater for exports.

“Malaysia as a major crude palm oil production has a lot of potential for bio-diesel production, especially with the current high fuel prices,” Long said.

Loreno is owned by four individuals: Long, who is Australian; Dr Franco Longhini and Giorgio Vanalli, both Italians; as well as Malaysians Jeffrey Fong and Daniel Ho.

Megat Mizan said Capital Investment Bank will be selective in providing financing for investment projects, based on projects that provide a return on Investment of at least 15%.

“We want to ensure a steady cash flow,” he said. – Bernama

K&N Kenanga launches offshore investment bank

New Zealand Budget 2005: Complete Transcript

Budget 2005 speech transcript - Michael Cullen
19 May 2005

Madam Speaker,

I move, that the Appropriation (2005/06 Estimates) Bill be now read a second time.

Budget 2005 is about securing the future. Securing the future for the nation as a whole and securing the future for New Zealand families and New Zealanders individually.

The major features are:

* the creation of KiwiSaver, a new work-based savings scheme
* major changes to taxation, in particular tax cuts to encourage investment and savings and to assist small business, in part paid for by the new carbon charge
* significant additional spending to promote increased opportunities, particularly through education
* large increases in spending to enhance security, through health spending, additional Police staff, a long-term defence spending plan, funding for Working for Families and the Rates Rebates scheme and
* further increases in spending to support economic growth.

The unifying theme connecting these elements is the fact that they are focussed on improving the long-term economic and social health of New Zealand.

Madam Speaker,

Over the last five years New Zealand has experienced a period of sustained economic growth. This has had major benefits.

The first has been significant employment and income growth. Between the March 2000 quarter and the March 2005 quarter some 260,000 more people have found employment in net terms. Of these 218,000 are full-time and 42,000 part-time. This predominance of full-time job growth within the total picture contrasts markedly with the experience of the previous ten years.

Income growth has also been strong. Real per capita incomes have risen 11 per cent since the March 2000 quarter. New Zealand’s relative slide in relation to the OECD average has ceased and begun to reverse. But there is still a long way to go before we can claim to be back in the top half of the OECD in that respect.

The second benefit has been that prudent fiscal management has led to a significant lowering of the debt to GDP ratios while enabling the rapid build up of assets in the New Zealand Superannuation Fund. As a nation, we are far better placed to deal with the fiscal challenges of the coming demographic transition than we were five years ago.

In this respect, we are not merely in the top half of the OECD but in the top handful of countries. Provided we remain prudent and sensible, and avoid unnecessary politically driven bidding wars, this will stand us in excellent stead over the next generation as many other rich nations struggle with high debt and unsustainable policies.

Gross sovereign-issued debt has fallen from 35 per cent of GDP in June 1999 to an estimated 22.6 per cent at the end of June this year. Alongside this, accumulated assets in the New Zealand Superannuation Fund will stand at around $6.5 billion.

The New Zealand Government will, for the first time ever, move into a net positive financial asset position in 2006/07.

Despite this, the third benefit has been to allow for significant increases in investment in health and education, providing for lower primary healthcare costs, more surgical procedures, more modest tertiary fees, and a less onerous student loans system. Along with this have gone rises in the level of New Zealand Superannuation after the cut of 1999 and the first stages of the Working for Families package, which is lifting substantially the incomes of hundreds of thousands of low to middle income families.

Madam Speaker,

It is the Labour-Progressive Government’s determination to maintain these gains into the long term while dealing with a new range of challenges and opportunities which have come to the fore over the last few years.

The expectation is that the economy will slow over the next two years to an annual growth rate of about 2? per cent. This will be due to a combination of the effects of capacity constraints, slowing net migration, the dampening impact of higher interest rates on spending and a difficult external trading environment created, in particular, by the strong New Zealand dollar.

The capacity constraints have led to the tightening of monetary policy as the Reserve Bank seeks to dampen inflationary pressures. This has had the effect of placing further pressure on an already strong New Zealand dollar, thus contributing to widening the current account deficit.

The primary reason for the strong Kiwi is, of course, the weak greenback. Large current account deficits in the United States in combination with large and seemingly uncontrolled fiscal deficits have caused that. For the second time in 25 years the United States has proved that tax cuts are not self-funding. If unaccompanied by expenditure cuts they simply lead to burgeoning deficits and debt. There is a lesson for all of us in this.

Certainly this experience, and the tight capacity constraints in New Zealand, militate against large scale fiscal expansion, whether by revenue reduction or larger expenditure increases than those planned in this budget. That is particularly so if such reductions or increases are structural in nature and therefore continue to resonate through the long-term fiscal forecasts. As always, too much jam now is likely to lead to only crumbs later.

These facts are emphasised by the fiscal and economic forecasts. The current account deficit is forecast to stay well above 6 per cent of GDP over the next four years, though starting to contract towards the end of the period.

The fiscal position remains strong and gross debt is forecast to move to about 20 per cent of GDP by the end of the forecast period. But then it remains around that figure over the ten year projection period beyond that.

The fiscal surpluses remain strong in the immediate term. The cash surplus for the current year is forecast to be $2.4 billion. This reduces to a cash surplus of $30 million for 2005/06, but changes to an average cash deficit for the following three years of about $1.9 billion a year.

In operating balance terms, this translates into an OBERAC of $7.4 billion or 4.9 per cent of GDP this year, $6.7 billion or 4.3 per cent of GDP next year, and an average of $4.8 billion or 2.9 per cent of GDP in the following three years.

While in nominal terms this still sounds large, it is just sufficient to fund the contributions to the New Zealand Superannuation Fund and other capital needs without a trend increase in the gross debt to GDP ratio.

Moreover, this is subject to the assumption that the growth in expenditure during both the forecast and projection periods will be significantly less than it has been in both Budget 2004 and Budget 2005.

The fully implemented effect of both budgets averages about $3.1 billion a year (GST exclusive). (Members should note that all figures in Budget 2005 are GST exclusive for the first time as a result of the new Public Finance Act provisions). Last year’s spend included over $1 billion alone on the Working for Families package. This year there are substantial one-off effects in terms of tax cuts for the business sector and for savings and investment, as well as new policies such as KiwiSaver.

The message of Budget 2005 is that such large one-off packages will be rare over the foreseeable future unless accompanied by expenditure cuts or efficiency gains elsewhere within the state sector.

Over the next three budgets the allowance for new spending has been set at $1.9 billion a year, thereafter growing by inflation.

The government is aware that to achieve these targets will require careful prioritisation. Already, I have warned Ministers and Departments, and the public, to moderate expectations in terms of expenditure increases next year.

Madam Speaker,

As I indicated earlier, we are forecasting substantial current account deficits over the next four years. While a more realistic level of the New Zealand dollar will eventually bring that deficit back to more comfortable levels, the fact remains we have run significant current account deficits for nearly all our history as a nation.

That, and a range of other indices, point to a low level of household savings in New Zealand. We are left highly dependent on foreign capital, which means a substantial proportion of our national income is reclaimed by foreigners as theirs. Hence the fact that our Gross National Product is significantly less than our Gross Domestic Product.

New Zealanders often bemoan the consequences of low saving, such as high levels of foreign ownership. But, if we are to own, literally, more of our future we must lift our level of savings.

Three areas are of particular interest: saving for retirement, saving for home ownership, and saving for the costs of one’s children’s tertiary education.

In approaching how best to lift, over time, our national performance with respect to these the Labour-Progressive Government is motivated by considerations of equity, simplicity, and practicality. In addition, the government wishes to maintain a voluntary approach. Finally, we are determined not to swap the current situation of government saving and private dissaving into one of government dissaving and private saving. In other words, the fiscal costs of any policy initiatives have to be moderate.

Consideration was given to whether an integrated savings scheme, combining all three elements, was possible. In the end, it is considered that, while it is possible to combine retirement saving and first home deposit saving, it is not desirable to integrate savings for tertiary education.

Expressions of interest have been sought for a tertiary education savings scheme with broad design parameters.

With respect to retirement and first home deposit savings, the government has decided to begin with a broadly based work-based savings scheme akin to that proposed by the group chaired by Peter Harris, which reported last year. While many of the recommendations of the Harris committee have been amended in some detail, the essential features of the proposal have survived intact.

The new KiwiSaver scheme is intended to begin operation on 1 April 2007.

KiwiSaver’s basic features are:

* automatic enrolment in a savings scheme at the workplace for new employees aged 18-65, with the ability to opt out
* an upfront contribution by the government on joining, plus low management fees
* a basic contribution rate of 4 per cent of income deducted through the tax system and
* minimum compliance costs for employee and employer.

Apart from automatic enrolment, employees may become KiwiSavers at any time.

The new employee can opt out by notifying IRD between weeks two and four after starting a new job. In this case IRD notifies the employer, otherwise deductions begin the next pay day after eight weeks with a new employer.

Contributions will be at one of two levels. The standard rate will be set at 4 per cent of income, but the employee can opt for a higher deduction rate of 8 per cent.

The government will support KiwiSavers in three ways.

Firstly, it will meet the costs of the administration through IRD.

Secondly, a $1,000 upfront contribution will be provided to each new KiwiSaver. This contribution will be available to a member of an existing registered superannuation scheme that fully converts to a KiwiSaver product.

Thirdly, the government will provide to savers in approved KiwiSaver products a fee subsidy at a capped level. This level has yet to be finalised and will depend on consultation and negotiation with providers.

Normally, a KiwiSaver will have full access to their funds at age 65 or after five years in KiwiSaver, whichever is the later. Hardship provisions allowing withdrawal are being developed and permanent emigration will also trigger the ability to withdraw.

A KiwiSaver can elect to take a contribution holiday for up to five years, with contributions resuming unless a further option to suspend is exercised.

The self-employed will be able to become KiwiSavers, selecting their own contribution rate and frequency of contributions.

Employers will be able to make contributions on behalf of their KiwiSaver employees via Inland Revenue. This means they can be made at the same time as employee contributions with minimum compliance costs. The actual rate of employer contribution will be a matter of negotiation between employer and employee.

Employers will also be able to apply to the Government Actuary for an exemption to the automatic enrolment provisions if they have a work-based superannuation scheme which meets a set of defined conditions.

There will be two types of KiwiSaver providers: default providers and other qualifying providers. All qualifying providers will need to meet a set of minimum criteria.

If an employee does not pick a provider, he or she will be randomly allocated to a default provider. In addition to having to meet the standard criteria, default providers will be selected through a competitive tender process designed in part to negotiate lower fees.

IRD will hold initial contributions for eight weeks to allow time for the contributors to choose a provider. Small balances will also be held until they accumulate to a minimum level to avoid costs to the providers. In both cases interest at the IRD’s use of money interest rate will be paid on the balances.

The operating costs of KiwiSaver, including an education campaign to improve financial literacy, are estimated at $90 million in 2006/07, $280 million in 2007/08, $143 million in 2008/09 and $154 million in 2009/10. This is based on an assumption that the number of KiwiSavers will be around 265,000 by 1 July 2008 and around 415,000 by 1 July 2010.

KiwiSaver will be linked to a new scheme to assist modest to middle-income families with the deposit for a first home. Those who are KiwiSavers for a minimum of three years will qualify for an additional subsidy of $1,000 a year up to a maximum of five years at the time of purchase of their first home. They will be able to draw down all of their accumulated savings as KiwiSavers except for the initial $1,000 upfront contribution. There will be conditions in relation to the total household income of the applicants and the value of the house being purchased.

The housing deposit subsidy will also be available to members of registered superannuation schemes if their employer is exempt from the automatic enrolment provisions or if their scheme converts to a KiwiSaver product. Preliminary estimates are that around 3,000 households a year will take advantage of this opportunity. The estimated annual cost is up to $35 million.

Other measures to support home ownership include expanding the Mortgage Insurance Scheme introduced in 2003. Lenders other than Kiwibank will be able to participate. The eligibility caps on income will be increased by $20,000 a year. By 2008/09 the Scheme is estimated to cost $22 million a year and the volume of loans covered is expected to rise from less than 1,000 a year at present to some 5,000 loans a year.

The government will also fund a new home ownership education programme.

The Minister of Housing will announce further details of these first home purchase initiatives today.

Madam Speaker,

The New Zealand Superannuation Fund, KiwiSaver, the encouragement for home ownership, and the proposed tertiary education savings scheme are all part of the effort to lift our national savings rate.

The nature of the taxation on savings and investment also has a role to play in this respect. The government does not support large-scale tax incentives to support savings. These are of dubious value and efficacy.

But the current tax regime for investments is very complex and can lead to perverse incentives. It overtaxes those on the lower statutory rate of tax, tends to advantage certain forms of offshore investment, and distinguishes between various destinations for that investment. Equally, any attempt at reform is likely to have controversial elements.

The changes I am foreshadowing this afternoon are designed to remove disincentives to save and invest, remove elements of overtaxation, and lead to an outcome where investment is guided more by the returns on the investment than by the tax opportunities presented.

With respect to the taxation of domestic investment two major changes will be legislated for. Under the first, New Zealand-based collective investment vehicles will no longer be required to be taxed as entities. Rather they will be able to elect to have the income earned by a fund regularly attributed to the individuals investing in it and taxed at their marginal statutory rates.

As with the current regime for taxation on interest-bearing accounts, the investor will advise the fund of their marginal rate. When income is earned, it will be credited to the account of the individual and the fund will withhold tax from it at that marginal rate. This will be a final withholding tax so no tax return will be required. Equivalence to the tax regime on interest and direct investment of shares will be achieved. And, as it is a final withholding tax, the investment income will have no impact on family assistance, child support or student loan repayments.

For those collective investment vehicles which elect into the new rules the overtaxation on those earning under $38,000 a year is removed.

The estimated cost of this tax cut is $25 million.

At this stage the new rules are not compulsory, recognising that some collective investment vehicles would find it hard to adopt the look-through rules. However, as the new elective rules bed in this issue will be kept under review.

Under the new elective rules some taxpayers on the 39 cent marginal rate could pay more, depending on how their financial affairs are arranged. But for many this will be more than offset by the second change to the taxation rules on New Zealand domestic investment.

This involves the removal of the taxation on the gains made on the sale of domestic shares by collective investment vehicles.

The estimated cost of this tax cut is about $100 million a year.

Reform of the taxation of offshore investment is more difficult. Under current rules, offshore share investment is taxed differently depending on the country in which the investment is made. If direct investment is in what is called a “grey list” country, it is excluded from the foreign investment fund rules. If it is not, then foreign investment fund rules which tax accrued capital gains apply. The rules contain four methods for calculating investment for a foreign investment fund.

Consideration was given for some time to the use of a version of the risk-free rate of return method with respect to overseas investment by New Zealanders.

In the end this has not been adopted. The main issue is the complexity involved in applying such a mechanism.

The method is conceptually simple but quickly becomes complex in application, particularly for individual investors where investments are made at different points in a year.

Moreover, the fundamental perception problem remains with respect to tax being applied even where losses had been incurred.

Instead, it is proposed to issue a discussion document within the next few weeks proposing to apply an income calculation method based on actual changes in value for investment funds, companies and individual investors.

Under the proposal, the grey list will be abolished for portfolio share investment. Collective investment vehicles will be taxed on the basis of the change in their accrued value. This would make for clearer rules, but in practical terms the results should be similar to the law as it currently applies for funds that are in the business of actively trading shares.

For individual and other investors it is even more difficult to find an approach that is reasonable without favouring direct offshore investment over investing in a fund. The approach being proposed is that individual and other investors will also be taxed on the change in value of their overseas shares, but with an annual cap so that tax is spread over a number of years to better reflect cash flow. The discussion document will propose a threshold so that those with small holdings of foreign shares continue to be taxed just on dividends received.

This will lead to accusations of extending the capital gains tax regime at present implicit in taxation on non-grey list investment. It is clear, however, that any reform of the current regime that does not penalise investment into New Zealand shares will lead to some such outcome.

The choice then is between a complex regime which tends to favour investment going offshore or a simpler regime which is more favourable to investment in New Zealand.

It is proposed that the new tax rules on investment come into force on 1 April 2007.

In Budget 2004, I announced that the government was reviewing the tax depreciation rules to see if there were ways of reducing tax biases within the rules and to resolve practical problems with their operation. The first series of changes resulting from that review have been introduced in a bill which is now before Parliament. I am announcing the second set of proposed changes today.

Tax depreciation rates will be changed to reflect better how assets decline in value. Current rates are likely to penalise investment in short-lived plant and equipment, which can create tax biases that distort the structure of capital investment away from the best investment opportunities. To deal with these biases, depreciation rates for short-lived plant and equipment will increase and depreciation rates on buildings will reduce.

The method for calculating tax depreciation rates has been revised. From the 2005/06 income year tax depreciation rates will be worked out in one of two ways. For buildings the straight-line basis will be applied over their economic lives to determine their depreciation rate, and a diminishing value equivalent of this straight line rate will also be available. For plant and equipment the double declining balance method will apply. This means, for example, an asset with a ten year economic life can be written off at a rate of 20 per cent diminishing value.

For equipment such as laptop computers the changes will result in a 25 per cent increase in the allowable annual depreciation deduction, from 48 per cent to 60 per cent a year.

More neutral tax depreciation rules will mean that businesses have incentives to invest in assets that provide the best commercial returns. The changes will help businesses make better decisions about capital investments.

Secondly, to reduce some of the compliance costs to business from having to maintain fixed asset registers, the low-value asset threshold will rise from $200 to $500. This change should reduce the number of assets that a business must annually account for and will reduce the number of tax adjustments that it must make when the asset is sold.

The new depreciation rules will apply to plant and equipment purchased on or after 1 April 2005 and to buildings purchased from today.

The increase to the low-value asset write-off threshold takes effect from purchases made after today.

Budget 2005 also contains a number of tax measures to improve New Zealand’s access to worldwide labour, skills, and capital.

The first of these will reduce tax costs related to international recruitment to New Zealand. A temporary tax exemption of five years on foreign income will be made available to people who come to work here, whether they are foreigners or New Zealanders who have been non-resident for tax purposes for ten years. People who are not in employment will receive the same exemption for three years.

Tax on offshore income is an important issue for highly skilled people who are in demand internationally and for the businesses that recruit them from overseas. The new exemption will thus remove a tax barrier to New Zealand gaining the skilled people it needs.

Updated tax rules for securities lending will make New Zealand more attractive for international investment. Existing rules have acted as a barrier to the development of a securities lending market here. Qualifying transactions will now be treated on their economic substance rather than legal form.

As I announced last week, Budget 2005 will also give companies that bring in new equity investors better access to tax deductions for R&D expenditure. This will cater for the growth cycle of technology companies by allowing R&D deductions to be matched with income from that expenditure.

Proposals are also being developed to change the tax treatment of employee share options. The aim is to remove some of the obstacles created by the tax system to businesses which offer share options to their employees. A paper setting out proposals will be released for public consultation later this year.

I have already announced other major changes with respect to taxation. These related in particular to tax simplification and reforms to Fringe Benefit Tax.

The simplification proposals involve the alignment of payment dates for provisional tax and GST, allowing businesses to elect to base provisional tax payments on GST turnover, and a subsidy to payroll agents for meeting PAYE–related compliance costs imposed on small employers.

These measures will lead to an ongoing cost of about $115 million a year.

With respect to Fringe Benefit Tax, the valuation rate for motor vehicles will be cut. Taxpayers will also be able to elect to calculate motor vehicle FBT on a vehicle’s tax book value as an alternative to using the cost price.

At the same time, the thresholds applying to unclassified fringe benefits will be raised. In the case of an employer the rise will be from $450 a quarter to $15,000 a year.

Similarly, the private use of employer owned or leased business tools will be exempted from FBT where provided primarily for business purposes and where they cost less than $5,000 each.

Other changes include resolving problems with foreign superannuation schemes, removing unintended tax consequences from unbundling payouts from cooperatives, and aligning the tax treatment of investments into foreign hybrid vehicles with the treatment of investment into other foreign companies.

Finally, a discussion document will be released later this year on the tax treatment of limited partnerships.

This tax package, with its focus on savings and investment, has an estimated cost of $466 million in its first full year. These are only part of the tax cuts incorporated into this year’s budget.

Consideration has also been given to changes in the personal tax system. As I have said many times, there is no evidence our rates are especially high by international standards once a comparison is made including all taxes and compulsory levies for social security and other purposes.

Moreover, even small changes in rates or thresholds have large revenue consequences. But in one area a strong case has been made for change, not least by the United Future Party.

That is in relation to the movement of the three main personal tax thresholds to match inflation as is done with excise duty on petrol, tobacco, and alcohol.

The Labour-Progressive Government, therefore, has decided to adjust the thresholds every three years. Because of the complexity of personal tax changes compared with excise duty, annual changes were rejected. The gain to most individuals would be very small in relation to the administrative costs.

Also, because tax threshold changes need to be announced well in advance of implementation there would be a very significant lag between the last available CPI figure and the commencement of changes on the subsequent 1 April.

Therefore, it has been decided to adjust each three years by using the mid-point of the Reserve Bank’s Policy Targets Agreement inflation band. This equates to a 6.12 per cent movement in the thresholds every three years.

This means that at the time of the first triennial adjustment, 1 April 2008, the $9,500 threshold will move to $10,081, the $38,000 threshold to $40,324 and the $60,000 threshold to $63,672.

Taken together, all the tax cuts I have announced today will cost $229 million in 2005/06, $319 million in 2006/07, $535 million in 2007/08, and $776 million in 2008/09, or about $1.86 billion over the forecast period. Additionally, in delaying provisional tax payment dates in 2007/08 to 2008/09 there is a delay of $760 million in tax revenues.

These revenue losses will be partially offset by the revenue from the new carbon charge which will come into effect on 1 April 2007. As already announced this will be set at $15 per tonne of CO2 equivalent. The gross revenue is estimated at $528 million in the first full year but this will be offset by rebates which will reduce the estimated net annual income to $322 million. Thus in the forecast period tax cuts of $1.86 billion will be offset by about $720 million of net carbon charge revenue.

Madam Speaker,

KiwiSaver and the very significant changes to business and investment taxation contained in this year’s budget are a key part of the government’s strategy to lift investment and make doing business easier.

Lifting our long-term rate of sustainable growth remains a key priority for action. Budget 2005 contributes further to this key objective in a number of ways.

Further investment in the budget builds on the Growth and Innovation Framework. Over the forecast period the following additional resources are being supplied:

* $31 million to increase the gains from international economic partnerships
* $49 million to implement the government’s digital strategy
* $72 million to increase support for business research and development
* $118 million to further increase capability in the public science system
* $24 million to strengthen the regulatory environment by providing additional funding to the Commerce Commission, Securities Commission and the Takeovers Panel
* $9 million to boost New Zealand as a tourist destination and
* $45 million to expand Modern Apprenticeships and Industry Training and provide foundation learning, specifically literacy and numeracy through the Industry Training Fund.

Infrastructure spending also receives a large boost in Budget 2005. All the increase in excise duty that came into force on 1 April is going into the Land Transport Fund.

This means that the resources available to the Fund will rise from $1.54 billion in 2004/05 to $1.75 billion in 2005/06.

In addition, I am announcing today that in the three years to 30 June 2009, a further $100 million a year will be provided to the National Land Transport Fund. This additional $300 million will enable planning to proceed for a higher rate of roading construction than would otherwise have occurred.

This means the total available to the Land Transport Fund over the coming four years is over $8.4 billion.

Madam Speaker,

The largest amount of support this or any New Zealand Government gives to the business sector is through Vote Education.

Budget 2005 is marked by two key features in that respect. The first is substantial further investment in both basic and high level skills. The second is determination to drive towards a higher level of quality and relevance in our post-compulsory sector.

In this year’s budget we build on our commitment to deliver an education system that is founded on quality and relevance, and aimed at lifting education standards across the board. Our investment reflects our determination to increase participation in quality education, and to reduce the underachievement that characterises some sectors of New Zealand.

We are increasing our investment in early childhood education by $152 million over four years, as we continue to deliver on our commitment to make early childhood education more affordable, more accessible and of the best quality possible for all New Zealand families.

Research shows intensive and regular quality early childhood education has long-term educational benefits, and our government is determined to ensure these benefits are available to every single young New Zealander.

New Zealand’s schooling system is internationally respected. On average New Zealand students do very well by world standards and our top students are amongst the best in the world.

The government is working with teachers to ensure good teachers are rewarded for their excellent work through higher salaries, better conditions, professional development and clear career paths.

Our commitment to more and better paid teachers in our schools continues with a total investment of $1.43 billion since Budget 2004. This includes $476 million in this year’s Budget for teacher pay settlements and $91.3 million to provide an estimated extra 421 teachers (FTTEs) for secondary, area and middle schools.

This brings a total of 3,040 extra teachers (FTTEs) over and above those required for roll growth, based on the recommendations of the School Staffing Review Group of 2001.

The government continues to adjust school operational funding each year.

Between 1999 and 2006 $241 million will have been added to schools’ operational funding. That is a nominal increase of 39.6 per cent over seven years, or almost 15 per cent over and above the level of inflation.

This budget also focuses on student outcomes and progress through the provision of high quality assessment tools and professional development to help teachers and schools monitor their students’ progress.

We are investing $30.2 million over four years in ICT. Specifically another 20 ICT professional development clusters will be added to the already 80 successful clusters throughout New Zealand. The rollout of laptops to every teacher in New Zealand in a state or integrated school will be completed.

Developing an internet version of the Assessment Tools for Teaching and Learning (asTTle) means teachers and parents can get more detailed and up-to-date information about children’s learning.

Special education funding has increased from $245 million in 1999 to $413 million in this budget.

Additional funding this year will provide for:

* increasing the numbers of students eligible for Supplementary Learning Support from 1,000 to 1,500
* increased funding for teacher aides and
* more support for assessing learning needs.

The tertiary package announced today provides additional funding of $296.7 million over the next four years to support the ongoing development of quality and relevant tertiary education.

In previous budgets, we have focused on putting in place the tertiary education system reforms. In Budget 2005 we are consolidating this work by investing in improvements to the quality and relevance of teaching, learning and research in New Zealand.

In addition to the industry training funding I have already referred to, the major areas of increase will be:

* an additional $75.5 million over four years to increase the Performance-Based Research Fund
* higher funding rates for technical and scientific subject areas including science, trades, technical subjects, agriculture and horticulture
* $57 million over four years for improved support for tertiary students, including increasing the medical trainee intern grant by $10,000 a year and establishing a Bonded Merit Scholarship programme.

Madam Speaker,

If education lies at the heart of the government’s aspirations for opportunity, spending on health represents both opportunity and security.

Budget 2005 commits additional resources to health which will total over $1.09 billion a year by 2008/09. A good part of this reflects meeting in full the costs of maintaining real, population-adjusted spending for the health and disability sector.

This year’s health package also provides for:

* funding for the establishment of the Cancer Control Council
* the roll out of the Primary Health Care Strategy to people aged 18-24, thus reducing first contact fees and pharmaceutical co-payments
* a standard national travel and accommodation policy for those who have high costs from travelling to treatment centres
* further funding for the National Immunisation Register
* the extension of free breast screening to women aged 45-49 and 65-69
* the changes that come into effect on 1 July as the first large step on the way to abolishing asset testing for those assessed as in need of older people’s long-term residential care
* contributing towards the cost of the nurses’ pay settlement
* increased funding for disability support and aged care services
* funding the increased uptake of the Primary Health Care Strategy
* continued progress on doubling the number of hip and major joint operations
* increasing cataract interventions by 50 per cent
* additional funding to continue the roll out of the Mental Health Blueprint and
* a range of Progressive Party initiatives which have already been announced.

Much of this increase in funding will be spent on New Zealand’s senior citizens. They will also be the largest beneficiaries from the changes to the Rates Rebates scheme already announced by the Prime Minister which will see over 150,000 superannuitant households benefit by up to $500 a year from 1 July 2006.

Madam Speaker,

Security has many aspects, from health to law and order to defence.

Since 1999, this government has placed great importance on making communities safer and helping people feel more secure in their homes. To that end it has made proper resourcing of Police a priority.

The Police operational budget has increased substantially every year since 1999, with a consequential rise in Police numbers and resources. This in turn has seen the crime rate reduce by 12.4 per cent between the calendar years 1999 and 2004, the Police resolution rate rise from 38.9 per cent to 44.6 per cent and the road toll fall to levels not seen since the 1960s.

We will maintain this successful strategy for making our communities safer. The Police Vote will increase by $73.6 million to a record high of $1.03 billion.

The budget will provide for another around 245 sworn and non-sworn Police staff. For the first time in our history, Police staff in New Zealand will number over 10,000.

The government will add $156.5 million in new baseline funding to the Ministry of Justice over the next four years. The additional budget will ensure the Ministry is well equipped to manage its growing workload and deliver more effective and efficient services to court users and the judiciary.

The increases follow a review of baseline funding which found the Ministry needed additional resources following several years of significant reform work and change within the justice area.

From the middle of 2006 we will, for the first time since 1987, lift the limits on income and capital which allow access to legal aid. Furthermore, the eligibility tests will be adjusted from time to time meaning that in future access to legal aid will be protected from inflation.

The final key areas of security are border security and defence.

Over the next four years (2005-2009) the government will spend an additional $13.3 million on enhanced border and security measures to improve the integrity of New Zealand’s borders and immigration systems, and protect New Zealand staff overseas.

This enhanced border security will help protect New Zealand’s access to classified information from peer countries; and contribute to fairer labour market conditions for New Zealand workers by ensuring wages and conditions are not undercut by illegal workers.

The Defence Sustainability Initiative will provide an additional $4.6 billion over the next 10 years to restore and develop the resources of the New Zealand Defence Force and the Ministry of Defence and will align long-term personnel recruitment, training, development and resources with the Defence capital acquisition programme.

This long-term strategic funding initiative follows a systematic approach by this government to restore the capability of our Defence Force, which was left to run down during the 1990s, resulting in ageing equipment and infrastructure and personnel shortages.

Budget 2005 reflects the aims of the government's housing strategy, which promotes the importance of quality, sustainable housing for all New Zealanders.

State housing is central to meeting the housing needs of those requiring direct assistance and will remain at the core of government assistance. An additional $134 million over the next four years will be invested as we continue to build our stock of state houses.

The Rural Housing, Healthy Housing and Community Renewal programmes will receive a further $33 million over the next three years to continue their work of providing better and healthier homes in areas of greatest need.

Madam Speaker,

This year sees the continued roll-out of the Working for Families package, with over 260,000 low to middle income families becoming eligible for targeted assistance. In addition we are seeing progress on a major reform of the benefit system, with a drive towards a single core benefit and a more tailored service for beneficiaries.

An investment of $149 million over four years in this year's budget complements the aims of these key platforms of the social development agenda.

To support the Working for Families package, programmes that give parents and children a better start will receive a $47 million boost.

To enhance the choices parents have to participate in the labour market, we will also invest $55 million over the next four years in Out of School Care and Recreation, childcare and related initiatives. These initiatives will help to meet the demands of a growing labour market, as well as boost the incomes of Kiwi families looking to build their stake in a growing economy.

Filling the jobs in a growing economy is also a key focus of our welfare reforms. The reforms take place in a context of record low unemployment and growing skill and labour shortages.

To provide opportunities for more people to enter the workforce an additional $47 million will be invested over the next four years in work-focussed programmes for beneficiaries. This includes a focus on long-term unemployed and a new service to support more sickness and invalids beneficiaries into work.

Madam Speaker,

New Zealanders responded magnificently to the needs of those affected by the Boxing Day tsunami. The government responded in like manner.

The result was to see a temporary lift in our overseas aid budget to 0.27 per cent of Gross National Income.

Budget 2005 provides for the overseas aid allocation to increase by $59.4 million this coming year compared with Budget 2004’s initial estimates.

This will maintain spending at the 0.27 per cent level. It will be maintained at that level in 2006/07 and increased to 0.28 per cent in 2007/08.

This adds up to the most significant increases in overseas development assistance in recent decades. The primary focus will be on our Pacific backyard where the developmental needs are very large. But bilateral programmes with Indonesia and Vietnam will also be significantly strengthened.

Madam Speaker,

Individual ministers will be making a range of statements on specific initiatives which include too much detail to be covered this afternoon.

As I said in introducing Budget 2005, its focus is on the long term, not the next four months or even the next four years. That is shown by the key initiatives which:

* lock in funding for New Zealand Superannuation
* begin to address the task of lifting our savings rate as both individuals and a nation
* introduce significant business tax cuts and structural changes to drive stronger investment
* look to enhance our capacity to perform as good and responsible international citizens
* accelerate further support for business development
* strengthen our public health system
* enhance the capacity and effectiveness of our education system and
* support families in practical and effective ways rather than by mere rhetorical flourishes.

Madam Speaker,

Budget 2005 completes a second cycle of budgets that I have had the honour to present on behalf of two Labour-led Governments. They have consciously been pragmatic documents designed to build a stronger fiscal position, lift economic growth and increase social cohesion. On a base of stability and security, typified by the New Zealand Superannuation Fund, we are building a nation we can be proud of.

We also seek to build a superstructure on that base of innovation and responsiveness to change which makes it exciting to be a New Zealander.

We look to the future, both short and long term, with that pride and sense of excitement. We have achieved much in terms of strong government finances, record low unemployment, and economic growth. But the building of a better future is by definition, a task which is never completed.

We look forward with relish to continuing that never ending task.

ALL NEWS : SECTIONS TO BE PURGED : BUDGET 2005 - STORY : New Zealand's leading news and information website

Dodgy Latvian banks now even worse

I've always been opposed to banking in Latvia but now there are even more reasons to avoid the place. As if random theft of your entire account balances wasn't enough already.

Amendments to the Law On the Prevention of Laundering of Proceeds
Derived from Criminal Activity are published today entering into force
on 24 June 2005. New regulations impose additional requirements towards
relationship between Latvian banks and their customers.

Banks must collect information, document and verify data regarding
business and personal activities of customers, origin of their funds,
organizational and ownership structure, financial position and
beneficial owners of corporate customers. In case any data is missing
on the customer’s file or if information provided by the customer is
misleading the bank must immediately terminate any relationship with the
customer in question and close his accounts along with the accounts of
all other companies belonging to the same beneficial owner.

Banks may not provide services to shell banks. Companies carrying out
money transfers on behalf of third parties are, among other structures,
classified as shell banks.

Customer information, including data of his beneficial owner, shall be
disclosed not only to a range of public authorities but also to
correspondent banks registered in the EU or OECD countries.

If the customer fails to provide the bank with the necessary data on
time and the bank decides to terminate relationship with the said
customer the accounts shall be closed. Any balance from the accounts
can only be transferred to an account of the same customer in a bank
registered in the EU or EEA country or in the bank where the funds
initially came from.
From 27 June it will not be possible to transfer such balance to any
third parties or to withdraw it in cash.

Further on, the new regulations introduce severe financial penalties to
the banks failing to comply with the new rules.

Currently our bank has temporarily stopped opening new non-resident
accounts in order to audit its existing customer base to make sure that
the information on files complies with the new requirements.

Within the next few weeks our officers will contact you to discuss
possibility of further servicing of your funds in our bank and,
possibly, to request some additional documents or information. We
should also ask you to consider what documents you can provide to comply
with the requirements described above and send them over to your account
manager.

Monday, June 13, 2005

Khodorkovsky was CIA target

2 June 2005

MIKHAIL Khodorkovsky, the former oil magnate jailed by a Moscow court for nine years for fraud and tax evasion, was the target of an undercover operation by America's Central Intelligence Agency (CIA) which believed he was involved in a huge money-laundering operation by the Russian mafia and ex-KGB officers.

America has condemned the prosecution of Khodorkovsky, accusing Russia of 'back-sliding' on democracy, but the undercover CIA operation against him suggests the US government is being hypocritical because it had also regarded him with great suspicion.

Finance and defence consultant Karon von Gerhke-Thompson has given a detailed account of the CIA operation to a congressional committee investigating Russian corruption. She says the investigation began after she was introduced to Alexandre Konanykhine, who was close to then Russian President Boris Yeltsin.

'He represented himself to be the US vice-president of Menatep Bank, a bank owned by Mikhail Khodorkovsky,' Gerhke-Thompson told the US House of Representatives banking and financial committee.

According to Gerhke-Thompson, Konanykhine needed her help to set up an offshore bank for Menatep and buy 100 passports for 'preferred clients'. He also wanted 15 diplomatic passports 'at any cost for very, very special clients of Menatep'.

'He wanted to establish the bank and obtain the naturalised passports from a Latin American or Caribbean country that offered unrestricted [transfers] of capital and stringent bank secrecy laws.' He wanted the passports to 'enable Menatep's clients to travel freely into eastern and western European countries to manage their assets and business investments'.

Gerhke-Thompson was suspicious and 'telephoned a senior official with the CIA', she refers to as 'Mr Z'. She was further contacted by another CIA official known as 'Mr V'. 'Without identifying Konanykhine or Khodorkovsky by name, Mr Z informed me that the CIA was very interested in obtaining intelligence on their activities,' she said. The CIA asked Gerhke-Thompson to work for Konanykhine from April 1993.

'I volunteered my services as an unpaid intelligence asset to the CIA on a CIA operation to penetrate what the CIA, FBI and Department of Justice knew was a KGB money-laundering operation with tentacles that reached in the Kremlin to Boris Yeltsin,' she said.

'The CIA believed that financial aid from the US and international lending institutions to support Russia's transition was being laundered through front firms into offshore banks. A substantial amount of the laundered money was believed to be in safe havens in offshore banks or was used to establish offshore businesses and joint venture partnerships with Western firms.'

'According to Mr V, Konanykhine and Khodorkovsky were key players to unravelling the ties between the KGB, senior government officials and Russian organised crime families.'

Gerhke-Thompson said her role for the CIA was eventually compromised by American double agent Aldrich Ames. She said a CIA officer told her that after Ames had blown her cover, she would be killed or arrested if she travelled to Russia. Congressional sources say Konanykhine denied the claims and was granted political asylum in America after saying the Russian mafia wanted to kill him.

Khodorkovsky reportedly sought a meeting in 2001 with Condoleezza Rice, but was rebuffed. The CIA operation may explain why. Yukos declined to comment on the CIA operation.

ThisisLondon

Doing Offshore Business in the Panama 2005

Research and Markets: Doing Offshore Business in the Panama 2005
Friday June 3, 11:00 am ET

DUBLIN, Ireland, June 3 /PRNewswire/ -- Research and Markets (http://www.researchandmarkets.com/reports/c18351) has announced the addition of Offshoring Special Report: Doing Business in the Panama, 2005 to their offering.

From small beginnings early in the 20th century, the offshore sector has grown ever faster in response to high tax rates in the developed countries, until it is estimated now that more than half of the world's money is offshore. Offshore has no precise dictionary meaning: the word simply reflects the fact that most low tax jurisdictions are islands. Loosely, it is used to mean outside the control of the highly-taxed Western nations, although those nations could have controlled the growth of offshore jurisdictions (International Offshore Financial Centres = IOFCs) much more tightly if they had wanted to. It is an interesting question, why they didn't -- maybe a combination of individual self-interest and muddle? Our "Offshoring Special Report, 2005" provides in-depth business, legal, political and economic perception as well as attractiveness of this location as offshore tax haven.

The contents of this report are as follows:

Summary
Geography
Population Language And Culture
Government
Economy And Currency
Entry And Residence
Business Environment
Foreign Investment Regime
Company Incorporation
Corporate
Trust
Partnership
Sole Proprietorship
Branch
Offshore Sectors
Offshore Activities
Banking
Holding Companies
Insurance
Trusts
Case Studies
Offshore Regulations
Table Of Statutes
Banking Law
Law & Taxation
Offshore
Forms Of Offshore Operation
Fees Payable By Financial Institutions
Taxation Of Foreign Employees Of Offshore Operations
Exchange Control
Employment And Residence
Domestic
Corporate
Business License Fees
Payroll Taxes
Property Taxes
Personal
Residence And Liability For Taxation
Payroll Taxes
Municipal Taxes
Labour Environment
Regulations
Work Permits
Foreign Relations
Geopolitical
Taxation Treaties
Trade Alliances
Conclusion

Appendix 1
Process Flow Charts

Appendix 2
Law Firms
Company Formation And Ship Registration
Trust Management
Accounting And Auditing
Tax Planning
Banking Services And Asset Management
Listing Agents And Stockbrokers
Isp/Hosting & E-Commerce Service Providers
Official Regulatory Bodies
Captive Insurance Management

For more information visit
Report Link

Research and Markets: Doing Offshore Business in the Panama 2005

Poker's New World Order

Inside the world of jackpots and crackpots
By IVAN SOLOTAROFF

It's 10 p.m. on a Tuesday evening in October 2004, and six kids with killer good looks and IQs north of 150 are scattered across America, living out the pipe dream of their generation. Known as "the Crew," they're taking money from people. Lots of it.

On his laptop in Fresno, California, Russell "Dutch" Boyd, the former child prodigy who stitched together this loosely knit crew of savants, is playing a few more hours of online No Limit Texas Hold 'em -- where you can bet your entire stack of chips on any card -- before getting behind the wheel for Las Vegas. At twenty-three, he's already been in "the life," the poker professionals' shorthand for the vagabond highs and lows of their existence, for five years, ever since he left Columbia, Missouri, behind, having already graduated from law school. Three thousand miles away, Dutch's twenty-two-year-old brother, Bobby, fresh from a day's sleep at an Atlantic City Super 8, has hit the sweet spot of the night. It's 1 a.m. in the Borgata Casino poker room's high-stakes pit, and the tourists trying their luck at a $2-$5 No Limit Texas Hold 'em game are starting to bleed red and green $5 and $25 chips. Back from the Philly bars an hour away, David "Dorf" Smyth, 27, is loading four games of $5-$10 Hold 'em on his father's home computer. He's a little tipsy -- Dorf can down three pints of beer in under six seconds on a bet -- but it doesn't matter. Dorf is a poker machine, and the odds and methods of playing every possible hand are second nature to him, though he's been competing seriously for less than two years.

At a $5-$10 No Limit table in the Bellagio Poker Room, Joe Bartholdi, 24, is at the tail end of a two-day binge that's netted a good week's pay -- for a mid-cap CEO. Next to the wad of $100s in his pocket is a voucher he won this afternoon for a free seat at the World Poker Tour's $10,000-entry Doyle Brunson North American Poker Championship. Its $1 million first prize is blood in the water to the top pros, and they're all in Vegas tonight.

Ten miles south of the Strip, in a cookie-cutter development on Rancho Drive, blood is in the air. That '70s Show is loud on a floor-to-ceiling entertainment center that fills half of the expensively furnished living room in Scott Fischman's corner condo, and someone has cranked AC/DC up to 11.

The power chords and canned TV laughter mix oddly with the study-center/ guerrilla-training-camp aura inside. The Crew is scattered these days, but in Vegas, this is their unofficial HQ. Upstairs, the beds are unmade and have been since the maid was here last week. The walls are bare but for a print of a pair of aces descending over an azure sea at twilight. Printed matter is limited to a few unopened magazines and a swimsuit calendar of Shana Hiatt, hostess of the Travel Channel's World Poker Tour.

The fridge completes the frat-house feel: nothing but twelve-packs, a jar of pickles, a bag of withered minicarrots. Pizza boxes, chips, beer and soda bottles line the kitchen counters and living-room table, where fellow Crew member Tony Lazar, 29, is playing four games of Hold 'em on his laptop. At the foot of the stairs, a half-packed suitcase awaits a final load of laundry for a month on "the circuit" that Fischman begins this weekend. It's a patchwork professional itinerary typical of Poker's New World Order: twenty-nine nights of casinos and card rooms; a TV studio, where he'll film an instructional Hold 'em video; a $600,000 tournament in Monte Carlo; an old factory office outside Orlando, where he and Lazar will fleece a bunch of cigar-smoking seniors in a midnight game -- "like, the five richest men in Florida," Fischman tells me later.

Fischman, Card Player magazine's number-seven-ranked player, sits at his L-shaped living-room desk like a man in a duck blind. Beneath a gray i got the nuts baseball cap and brown wraparound shades, his mouth half-open in a rapture of concentration, he fires off $5, $10 and $20 bets and raises at eight online Hold 'em games he's playing simultaneously. Raised in Vegas (his father was a casino executive), half-townie and half-prodigy, with the peach-fuzz goatee, center part and imperious smile of a math nerd finally having his day, the twenty-four-year-old Fischman has been at it for four hours, shuffling together two stacks of ten orange chips obsessively as he toggles silently between his pricey twenty-seven-inch dual flat-screens.

"Keyser Soze has a fuckin' four!" he suddenly yells. "I'm gonna puke myself."

Keyser Soze is one of thirty-six red "chairs," with players' screen names on the back, arranged around four green-felt "tables" on Fischman's right screen. Any lingering images one might have of Steve McQueen at a smoky film-set card table come to a screeching halt at Fischman's desk. Dollar totals in the tens of thousands are moving, constantly, mechanically, across Fischman's and Lazar's screens every five minutes. IMs from fellow players and lurkers hit Fischman's screens like paparazzi flashbulbs: "Scott F is God!!!" So do the flamers: "The Crew, all sevin of you can lick my hairy balls."

Dutch Boyd founded the Crew just after the 2003 World Series of Poker -- staking $25,000 of his winnings there to establish a communal bankroll and to cover the rent on the headquarters he set up in Culver City, California -- but Scott Fischman is the current superstar. He plays tournaments as a limited-liability corporation, his entry fees paid by a New York hedge-fund manager. He has a personal manager (his sister Beth) negotiating endorsement deals for poker clothes, watches and whiskey; book and video contracts; a column in Card Player; a network-TV show about the Crew; and his own online card room, thefishtank.com.

But right now, all he has is Keyser Soze, "who has no business whatsoever being in this hand with a fuckin' four." Keyser is in, though, and he does have a four, and it costs Fischman a $187 pot.

And a mouse, which Fischman slams down so hard it breaks. "Fuck," he says, looking guilty. "That's, like, my tenth little mousey this year."

On this night, across America and beyond, Keyser Soze and 149,344 others are logged into virtual card rooms, most of them playing Texas Hold 'em, a deceptively simple form of poker that was all but dead five years ago. Buoyed by massive television coverage (thirty-eight hours on five networks this particular week), it's driven a viral-marketed tap deep into the national psyche and created a dollar pool that seems almost bottomless: Tonight alone, according to pokerpulse.com, some $151,824,391 has been won and lost on Hold 'em "ring games."

All along the Strip, in Atlantic City, the California card rooms, the Indian casinos in Connecticut and the riverboat ones in Mississippi -- in every state where poker is legal, semilegal or still relegated to the backrooms -- waiting lists for tournaments and ring games can be hours long. The big hotels, which offered poker to get gamblers in the door, now can't train dealers fast enough. World Series of Poker entries doubled in 2003. The online card rooms, while offshore and hard to monitor, are widely said to pocket up to $50 million a year apiece.

"But it's not just a numbers game," says Steve Lipscomb, CEO of the World Poker Tour. "It's also a complete cultural change."

At Bellagio, the hottest casino on the Strip, the craps, twenty-one and roulette tables have been cleared out from the heart of a gaming pit to make way for the Doyle Brunson North American Poker Championship. Behind velvet ropes, hunched over five tables like they're awaiting biopsy results, sit forty-five highly skilled men and women, looking exhausted but vicious in their sunglasses, the rump end of the 312 people who each put up $10,000 for a shot at the $3 million pool. Lipscomb points to the tourists gaping behind the ropes at America's new celebrities: the former prodigies Daniel Negreanu and Phil Hellmuth; Howard "The Professor" Lederer; his sister Annie Duke; Gus Hansen, the thirty-one-year-old Dane named one of People's "50 Sexiest Men Alive"; Phil "Unabomber" Laak, the droll World Poker Tour champion famed for the hooded gray sweat shirts he vanishes inside to block opponents' stares. It's like Waiting for Godot meets Mafia sit-down, a tedious theater of concentration where the plot is rarely revealed and the actors seldom speak (and are usually lying when they do), but the fans will be six-deep until midnight.

"And it's all happened so fast," adds Lipscomb. "Two years ago, I was getting laughed out of network meetings. And when a poker pro went home for Christmas, it'd be hidden, like some family secret. Now, he's not just a household name, he's a hero to the nieces and nephews."

It's those nieces and nephews who are driving the cultural change. Hold 'em is the blood sport of choice now for any kid with a credit card. If they're good, very good, they may one day join the hundred or so who can make it in "the life." And then comes the hard part: learning to tolerate what the pros call "the variances" -- the runs of bad luck, or deviations above the norm, which can last for months. "The variances," says the Crew's Dorf, "can eat your whole family."

The day before, I watched the variances get the best of Scott Fischman as he flamed out at a tournament. Four hours in, he'd been sitting in his swivel chair like a kid at a soda fountain, cheeks flushed and yelling, "I'm in the zone!" or "I've got all the donkeys at my table!" As his stack dwindled from more than $23,000 to nothing -- in less than an hour -- his face turned ashen, his body sagged and his head vanished, inch by inch, into the neck of his please don't call me sweat shirt. Then he vanished. "I simply cannot bear my life when I bust out of a tournament," he says. "I go home and sleep as long as I can. I cannot tell you how stressful life is at this level of poker."

An inscrutable generation of right-brain warriors, today's poker kids are a community joined at the hippocampus by freak single-mindedness and equally freak abilities. To instantly compute odds. To remember distant hands. To find ways into opponents' psyches when a good mind-fucking is needed. To read an opponent -- if not his cards, then his emotional temperature. And to act, on a very selective basis, with inhuman patience and supreme aggression.

What's different with the Crew and their caste is that they learned it all largely online. "What took me decades to learn, these kids can get on the Internet," says Doyle Brunson, 71, who literally wrote the book on Texas Hold 'em (Super/System). "What I learned by brute force, dealing out hands, they learn on computers. It tends to make for fairly technical players, but they make up for it with aggression, the kind that comes when you learn things fast."

Very fast. At online sites generating instant random shuffles, they can play 10,000 hands a week. By contrast, a pro playing in a casino gets in about 30,000 hands a year. "Is it weird for people our age to be poker millionaires?" says Antonio "The Magician" Esfandiari, who became poker's first under-twenty-five millionaire in February 2004. "This story's just beginning, believe me."

The long, strange career of Dutch Boyd is the founding myth of that story. He's a genius to some in the poker world, a con man, lunatic or savior to others, and his tale of sound and fury has made him a celebrity in anyone's book. When he arrives at Bellagio on the second day of the Doyle Brunson tournament, he walks inside the velvet ropes to clicking cameras and stares, glares and greetings -- from players who don't look up from the table for anything.

A year older than Bobby, Dutch was the first of the brothers to catch poker fever after seeing the seminal Hold 'em movie, 1998's Rounders. Moved by Matt Damon's character, who ditches law school to return to a life of professional card-playing, Dutch took the plunge himself. All of eighteen, he already had his law degree but no desire to practice law. The lawyers he was interning for "were all kinda miserable," he says. After seeing the movie, he borrowed the one poker book at his suburban Missouri library and joined the forum at rec.gambling.poker. There, he learned his first lesson: Poker may seem glamorous, but it's really nothing but problem-solving and pattern recognition.

The Boyd brothers were born to do exactly that. Bobby had mastered flashcards literally in diapers, crawling across the living-room floor with his bottle in his teeth to pick out the duck and ship on his mother's command. At five, Dutch was promoted from kindergarten to the second grade after he began doing the other kids' work. Both skipped enough grades to start college at twelve.

By June 1999, Dutch followed his brother out to Silicon Valley. Bobby was working for a company that routed the Internet across vast swaths of the Midwest. While Bobby went to the office to supervise Ph.D.s twice his age, Dutch would spend his days playing poker at the Wagon Wheel, an old-timer's bar in Mountain View. He'd leave there at 6 p.m. and head over to Macy's, where he worked the evening shift selling belts and men's underwear. Afterward, he'd head to a nearby card room, flash a fake ID and play deep into the morning.

Or he'd go back home, open his laptop and play online. He was playing on Bobby's bed late one night when the software crashed on planetpoker.com, then the big site. "Man," he said to his brother. "Someone should figure out how to do this better."

"Why not us?" said Bobby.

They were in the condo hot tub with notebooks by 3 a.m. and had it figured out by sunrise. Dutch registered domain names (he still owns about 1,000 of them), and Bobby put an ad in the local paper for programmers to help with the software. Borrowing $50,000 from their stepfather, Dutch flew to the Caribbean to incorporate in Antigua and then headed to Costa Rica to put up servers. He went to gaming conferences in Canada to arrange logistics like cyber-payment-solutions. (Online poker was, and still is, technically illegal in the U.S.) Within nine months, Bobby had finished the software other sites would struggle almost another year to develop.

By year's end, their site, pokerspot.com, was up and running, and the boys were raking in $100,000 in profits a month, two and three dollars at a time, from the pots and tournament fees of their 6,000 subscribers. By January 2001, they were up to $160,000. In the online poker forums, Dutch was predicting $50 million yearly profits for the top Internet card rooms, though no one in that small world at the time took the excitable nineteen-year-old entrepreneur all that seriously.

The gray market of online gambling would become huge, quick. But it would first have to weather the dot-com crash, and in the Internet poker world, Dutch would become its most celebrated victim. Online gamblers play, by definition, on credit, and as newfound millions vanished overnight, so too did credit cards and card payments. Netpro, the offshore payment-solutions company Dutch had taken on to handle pokerspot.com's accounts, had its assets suddenly frozen in early 2001 by London-based Barclays Bank: Too many Netpro customers were issuing "charge backs," disputing or refusing to pay charges on their cards.

Dutch, who had just turned twenty, panicked. For a period of time (he says it was a month, others insist it was longer), he continued to solicit new accounts, hoping to pay creditors off with borrowed money. At best, Dutch was staving off disaster. At worst, he'd turned pokerspot.com into a Ponzi scheme. Then he went nuts. "The first episode came January 1st of 2002," he says. "Sitting in my room, New Year's Eve, watching Dick Clark and the ball drop. A car commercial came on, with some Louis Armstrong music. It was God telling me to go to New Orleans."

In the next two and a half years, Dutch's life became a nightmare of mental institutions, card rooms and casinos. At various times, he was living in fifteen-dollar-a-night Vegas flophouses or on Caribbean yachts. And along the way, he was venting his psychosis at rec.gambling.poker. His contributions to the site's threads, some hyperlogical, others rants, tell a weird picaresque of angel capitalists and shady characters, of lost weekends in Montreal, Boston, New Orleans and Antigua as Dutch tried to save his company and himself. His grandest dream was to launch a new kind of online casino, rakefree.com. Most online casinos take a small percentage of each pot -- the rake. On Dutch's new site, there would be no rake. He would charge only a flat fee of $30 a month. First, of course, he had to raise seed money.

But Dutch's psychotic episodes, mostly of the "let's take off our clothes and go naked" variety, had begun to get nastier, and backers were in short supply. Enemies weren't. "Dutch insulted some extremely fine and kind people," says Burton Ritchie, a Pensacola, Florida, cardplayer who says he spent months trying to arrange a deal between Dutch and a consortium of venture capitalists, Kansas City mobsters and NFL players. "Dutch signed a letter of intent and then went schizo. I'm sorry to hear he's bipolar, but he's also an asshole."

Dutch speaks of his psychosis with a strange, detached irony. He likens the episodes and their accompanying visions to airport murals. "The kind," he says, "where it's just colored dots as you walk by, until you hit the right place and they all come together to form the big image." He hit bottom in March 2003 in Antigua, where he and Bobby had gone for some online-casino consultancy work; despite their notoriety, the brothers' vision and technical knowledge were still sought by other gaming sites. Dutch went manic aboard a boat they were staying on, and Bobby had no choice but to commit him to an island medical hospital. His home for the next week was a six-by-nine-foot cell "with a metal door, a bed, a toilet and you sitting there with your direct line to God," he says. "My advice: Don't go crazy in a Third World country."

Dutch was a month out of that cell when he hit the national stage in the 2003 World Series of Poker's $10,000-entry No Limit Hold 'em Championship: a striking twenty-two-year-old wearing a bright-red bandanna on his head and working the tail end of a $3,500 bankroll he'd brought to Vegas a week earlier. Scott Fischman, also twenty-two and four years into "the life," was awe-struck the first time he met Dutch. "He was different," Fischman says. "He was a man of vision."

Dutch had put up $200 to enter a "satellite" tournament and outlasted others to earn his $10,000 World Series voucher. For three days, he beat legend after legend, emerging as the chip leader. By the Day Four dinner break, with only sixteen of the original 839 players left, Dutch had more than $1 million in front of him and a clear path ahead to the final table with its $2.5 million payday and certain immortality.

Then, inexplicably, Dutch waved his right hand, "all in," and bet $850,000 in chips on a middling king-high hand. The unknown Chris Moneymaker, a Tennessee accountant who was playing in his first tournament, had just made a $100,000 bet, and Dutch had smelled weakness. But Moneymaker, holding a lowly pair of threes, called Dutch's bluff and went on to take the $1.5 million hand and, twenty-one hours later, to win the $2.5 million and become the face of overnight poker riches.

In what should have been his most humiliating moment, Dutch had his next vision. Finishing twelfth in the tournament earned him an $80,000 prize and a disproportionately large share of the post-tournament limelight -- which he grabbed. He recruited four other "hip young players" at the tournament and told ESPN that he and his hastily assembled posse, soon to be known as the Crew, would "take over the poker world."

It seemed an odd claim. Two of them, his brother Bobby and "Dorf" Smyth, weren't even poker players. The other two, Joe Bartholdi and Brett "Gank" Jungblut, had a decade of spotty play between them: Bartholdi, a high school kick-out and sometime pool hustler, had run through a succession of five-figure bankrolls with little to show for it except a certain intermittent genius for playing hands full-throttle.

Jungblut, 25, a former model, seemed an even odder choice. Dutch had met Gank in Las Vegas a year earlier -- "the most beautiful male I'd ever seen," Dutch says -- and the two talked from time to time about putting a bankroll together, perhaps getting a few others involved. The son of a professional cardplayer (he was named for Brett Maverick, TV's poker-playing gunslinger), Gank was known less for his poker than for his massive intake of marijuana. By his own admission, he's stoned every minute of the day. "I'm major, major ADHD," he says. "If I'm not high, I can't even sit in a restaurant without wanting to throw a chair through a window."

The Crew left for Los Angeles the next day, found a five-bedroom house in Culver City and devoted six months of twelve- to eighteen-hour days online, honing their skills, teaching, playing, arguing with one another. At the end of 2003, they descended on casinos from L.A. to Tunica, Mississippi, where in January 2004 Dutch recruited Scott Fischman. Fischman's old running buddy Tony Lazar was added after he met Dutch at a tournament in Reno two months later. Lazar was older than the other Crew members, but he earned his way in after taking $120 from Dutch playing Rock, Paper, Scissors, which a number of poker pros use to warm up the intuitive muscles. As the 2004 World Series of Poker got into gear in Vegas in April, the Crew became the story: ESPN cameras were magnetized by their bravado and good looks as they won three of the tournament's thirty-four events between them, and close to $1 million.

They'd already begun to crack as a unit, however, largely because of Dutch's erratic behavior, which led to a huge falling-out with Gank. "In the beginning," Gank says, "if one of us found ten dollars on the street, it would've gone into the bankroll. It was like a commune or something. But I don't know why I didn't see that Dutch is basically a con artist. Maybe I was smoking too much weed." The rest of the crew doesn't see it that way. "If Gank's hair was on fire," says Dorf, "I'd piss on his leg."

It's a lifelong drip, the life of the so-called poker pro," Dutch tells me over clam chowder in Snacks, a fast-food bar off the Bellagio Poker Room. "I shudder to think how many kids have dropped out of college because of us. TV makes it look glamorous and like something anyone can do, but it's neither."

Dutch's voice is all Missouri, but his inflections are a strange mix of gentle warmth and "why aren't you getting this?" logic. Behind us, the World Poker Tour competition is in its last throes, down to eighteen players desperate to make the final table. He is talking about the Crew and how it may have been, in some ways, an outgrowth of his mental illness. "When you slip into the manic state, one of the first things to go is your sense of a separate self," Dutch says. "Part of the euphoria -- which makes it so addictive and so hard to admit that you need help -- is that you're part of one big organism. Just one of those dots, but you're the one who will be able to put them all together."

But heading into this year's World Series, the Crew has hardly been functioning as such. "are we still a crew?" Fischman asks rhetorically as he flops onto his Harrah's Atlantic City hotel-room bed in January. "No?" he muses, scanning the room-service menu before deciding on chicken fingers. Fischman has a strange habit of reading menus in their entirety, then ordering the same thing each time.

At the foot of the bed sits the suitcase I saw him packing in Vegas four months ago. His career has taken off -- Fischman recently won his first WPT title, a shootout called Young Guns of Poker, in which he beat five other under-twenty-fives -- and he's traveling across America these days with Doyle Brunson, playing tournaments and promoting the 2005 World Series. He not only personifies "the life" now, he's become something of a poster boy for Poker's New World Order, and he finds it a bit exhausting.

Fischman is a born poker player, and unlike Dutch he never speaks of the downside. Still, I wonder if he finds the pressure hard to take. Then he empties his pockets on the night table, and I stop wondering. Among the car keys and cigarette lighter are two wads of $100s, in industrial-strength red rubber bands. One wad is a good two inches thick. The other is three inches.

"Gank's gone off on some brain fart and left the Crew," Fischman says, yawning, "but, like, what does that even mean?"

"The end of the Crew?" I ask.

"Well, there's no more shared bankroll, and we don't live together. But how could you leave something that wasn't there to begin with? It's like poker. Have you played for no money? It's completely meaningless unless you're committed. The Crew definitely has that commitment to each other.

"So, yes?" he tries again. "I mean, we're still talking all the time, learning from each other. I don't know what I'd have won if not for Dutch and Gank. We're brothers, even if some of us happen to be, uh, vastly more successful than others at the present time."

Room service arrives. "I think the real answer is forever," he says. "I'd also add that it's more than the seven of us now, or the six of us. Whatever. You can call this a fad if you want and try to calculate its shelf life. But to me, to all the people I know, this is life."

Hong Kong racing scene

Downhill racing
Zach Coleman

Weekend: June 4-5, 2005
SIMON SONG

The Hong Kong Jockey Club's public image is a lot like church bingo. Only it is on a monumental scale.

A few who wager with the Jockey Club take home big prizes. The rest of the money goes to good causes. Those who run the club are generous, upstanding social benefactors, their motives and character beyond question, save the odd rumor or scandal.

Macau's Stanley Ho is known for his philanthropy too, but is tagged as a debonair devil. Having crossed paths with powerful gangsters during decades of operating casinos in Macau, many take his word that he beat off their attempts to muscle in on his business. His ways with women are such that his consorts are referred to by number and his children outnumber his casinos.

Behind these public images, Ho and the Jockey Club bear striking simi-larities.

Each has prospered from decades of dominating gambling on their respective turf. Ho's Macau franchise includes lotteries, sports betting, and horse and dog racing in addition to casinos. The Jockey Club's Hong Kong mandate encompasses the Mark Six lottery and soccer betting as well as horse racing.

The Hong Kong Jockey Club and Sociedade de Jogos de Macau (SJM), Ho's casino company, are the biggest single taxpayers in their cities and among the largest employers.

The Jockey Club paid HK$12.2 billion in taxes in the year ended last June 30; SJM's tax bill last year came to 12.3 billion patacas (HK$11.9 billion).

Their philanthropy, too, is similar. The Jockey Club contributed HK$1.1 billion to trusts to support education, health, sports and other community causes last year. SJM paid 1.1 billion patacas to support cultural, educational and other community needs.



Indeed, SJM's largesse presumably has a much greater impact on Macau than the Jockey Club's here given that Hong Kong's population is 15 times larger.

It is worth noting that SJM's community contribution is fixed at 3 percent of its gross revenue under its franchise agreement with the government. The government and foundations it designates allocate the funds.

Though the Jockey Club calls itself Hong Kong's premier charity, it has no legal obligation to donate any of its proceeds from horse and soccer betting. It donates to causes and groups of its own choosing, aside from 15 percent of gross lottery proceeds which are channeled by law through the government.

"Lots of people assume all the profits go to charity and that's not true,'' says John Bacon-Shone, director of the Social Sciences Research Center at the University of Hong Kong. "They could cut the charity amount by half and there's nothing anyone could do.''

Last year's charity allocation represented half of the club's total net profit and equaled a third of the commission the club took for itself on horse bets. In terms of gross revenue left after paying out winning bets, the Club put 7 percent toward charity.

Even the charitable nature of many club donations can be debated. Included in its biggest grants last year was HK$134 million for the construction of a third public golf course on an island off Sai Kung and HK$100 million for Hong Kong University of Science and Technology to construct a center for collaborative research with private business.

"I'm not saying they are not making a contribution [but] they should not exaggerate that they are doing a lot for social welfare,'' says Nelson Chow, chair professor of social work at the University of Hong Kong.

By the club's count, HK$232 million of its donations last year went to community services, nearly as much as went to the golf and industrial research center.

Says Chow: "The charity goes largely to capital works.''

Programs run by organizations with an established channel to members of the Board of Stewards, the club's governing body, also have an edge.

The club is nevertheless fundamentally different from Ho's empire.

As SJM is a private company, Ho and other shareholders were free to spend their share of its 4 billion pataca profit last year on private jets or anything else.

As a nonprofit organization, club income not allocated to the Hong Kong Jockey Club Charities Trust goes in the bank. Out of its HK$2.3 billion profit last year, the club put HK$64 million into a fund for membership facilities and HK$1.1 billion into general reserves.

Including its charities trust funds, the club had a net worth of HK$29.1 billion as of June 30.

Forbes magazine put Stanley Ho's net worth at US$3.6 billion (HK$28 billion) in its 2005 list of the world's richest people.

There are other key differences - Ho's core casino operations are monitored by full-time regulators. Since May 2004, his casinos have contended with licensed competitors. Gross revenue grew by a hefty 6.5 billion patacas last year.

The Jockey Club's core racing operations are self-regulated. The government controls the types of bets the club can introduce, but otherwise largely leaves gambling oversight to the club itself, though the Board of Stewards usually includes a number of former top civil servants.

``It's quite unusual not to have a proper regulator,'' says Bacon-Shone. The Home Affairs Bureau has jurisdiction over gambling policy, but pointing to its role in interceding on the club's behalf with District Councils to allow the opening of off-course betting centers, Bacon-Shone says, ``It's almost like they are serving the Jockey Club rather than the other way around.''

Gross revenue from its core racing business shrank by HK$1.1 billion last year though the club faced no licensed competitors. Indeed, the Hong Kong government expanded the scope of its monopoly to include soccer betting a year earlier.

The billion-dollar question is how much impact the difference in competition policy between the SARs is having.

Before Macau made its move in 2001, Ho warned that ending his monopoly would jeopardize charitable donations and tax revenues and might produce unemployment, chaos and crime. Yet he and Macau have both prospered from competition.

The Jockey Club relies on its record as a nonprofit charitable benefactor as a major justification for its monopoly. To date, the Hong Kong government has shown little interest in challenging that.

This deference dates back to 1952 when the Jockey Club shrewdly came to the rescue of a colonial government overwhelmed by the arrival of about a million refugees fleeing the Communist revolution and its aftermath on the mainland.

According to a historical study commissioned by the club, Sir Arthur Morse, then chairman of both the Board of Stewards and of Hongkong and Shanghai Banking Corp, proposed to then-governor Sir Alexander Grantham that the club dedicate a third of its profits to addressing the needs of the community for schools, hospitals, housing, parks and the like. Fund recipients would be chosen in consultation with the government.

``It happened verbally,'' writes author Austin Coates, a former civil servant. ``There is nothing about this in writing.''

The commitment has never been formalized, but the club's donations soared almost 14-fold in the first year afterward. Early fruits of the arrangement included Tsan Yuk Maternity Hospital and Victoria Park. The club has gone on to fund medical clinics, scholarships, battered women's shelters and suicide prevention hotlines as well as splashy projects like Ocean Park and Hong Kong University of Science and Technology.

``Historically, the Jockey Club has been very good for Hong Kong,'' says Bacon-Shone.

It's been good for the government too. By outsourcing the funding of much community work to the club, the government has kept the spending off its books and maintained low personal and corporate income tax rates, burnishing Hong Kong's image as a free-market bastion.

``It makes the government look smaller than it really is,'' says commentator David Webb.

Channeling social spending this way benefited the club too. The Board of Stewards has long counted corporate captains like David Eldon of HSBC and Larry Yung of CITIC Pacific among its number.

In the words of Michael DeGolyer, associate professor in the government and international studies department at Hong Kong Baptist University: ``They earned the thanks of the lowly for their generosity in returning some of the money lured from the economically desperate to good causes.''

The club's high-society status pre-dates its philanthropic role. Coates writes that in the 1920s and 30s, an annual five-day race program in February served as the de facto channel for young women of leading families to be presented to society.

``Everyone, of every hue and nationality, attended, even those not particularly interested in racing,'' he wrote. ``The ladies, de rigueur, had to have new dresses - five, because they wore a different one each day.''

Undoubtedly aware of the multiple faces of the club, in the 1950s the Home Office in London resisted allowing the club to add the appellation ``Royal'' to its name. Queen Elizabeth II had declared the title could only be attached to organizations fully devoted to charitable causes. The club eventually got the prefix in 1960.

Like much else in Hong Kong, the gambling arrangement came close to breaking point in the late 1960s. Rampant corruption allowed widespread illegal bookmaking and numbers rackets to flourish and led to doping scandals at the track. ``There was illegal gambling going on in the streets everywhere,'' says Bacon-Shone.

The club addressed racing integrity by making jockeys and trainers full-time employees of the club instead of associates of the horse owners. The government undercut the numbers rackets by turning over its own struggling lottery operations to the club to run. It took on the bookies by permitting the club to open off-course betting centers instead of requiring bettors to come to the track.

These moves set the club off on an explosive growth streak that saw Happy Valley become the world's top horse-racing money-spinner. Rocketing economic growth filled residents' pockets with cash to wager at the track. With no other professional sport competing for attention, the club held the media spotlight.

The Queen went to the races in Happy Valley in 1975 to take in the splendor. A second track opened in Sha Tin three years later. Club officials talked of a third and over the years kept adding new channels for bettors to place their wagers, including telephone hotlines, personal digital assistants, its own dedicated handheld devices and the Internet.

The club's good works included using hundreds of millions of dollars to prop up the stock market in the wake of the 1987 crash.

Soon after, the club's annual community donations climbed above the HK$1 billion mark.

The Jockey Club galloped along despite more scandals, including the exposure of a large race-fixing syndicate that included tycoon Sir Gordon Wu. Though the club had allowed in Chinese owners since the 1920s and had ethnic Chinese stewards for years, it stepped up its localization in the run-up to the 1997 handover, electing its first Chinese chairman, hiring its first Chinese chief executive and dropping the once-coveted ``Royal'' prefix.

Betting volume topped HK$92.4 billion in the season that ended with the handover. That was the peak for both Hong Kong and the Jockey Club. Bird flu, the Asian financial crisis and the crash of the property market saw the economy spiral downward and with it, racing revenue.

Though economic growth has had its ups and downs since 1997, betting volume has slid ever downward, hitting HK$65 billion last year. As the club states in its annual report, the drop is linked to the broader economy as well as a shift in consumer preferences towards spending on other items and activities.

Club officials, however, mostly put the blame on two related culprits - high betting tax rates and illegal bookmakers. The government repeatedly ratcheted up betting taxes during the 1980s and 90s despite warnings from club officials that this would help the bookies. Since they don't pay tax or underwrite track operations, bookies can afford to discount bettor losses at no risk to their profit. But the government paid little heed to club pleas since racing revenue kept rising each year regardless of higher rates.

The post-1997 downturn got the government's attention since slower racing revenue reduced the tax take. The property sector downturn had already deflated the biggest source of government revenue, raising the importance of betting duties.

At the top of the club's enemy list were overseas betting shops, including the Macau Jockey Club and Ladbrokes, which were threading a legal loophole to set up shop in Hong Kong. The club got them run out of town through a 2002 law that legal scholars say is among the broadest of its kind anywhere. The law makes it a crime for a person in Hong Kong to place a bet with anyone anywhere except the club, or for anyone anywhere except the club to receive bets from Hong Kong bettors.

The law cut off residents' ability to gamble online with Hong Kong-issued credit cards, but otherwise had little effect on arresting the surge in Internet betting or the decline in racing revenue.

A year later the government allowed the club to extend its reach into soccer betting. That proved a boon. Including HK$3.3 billion in pre-tax gross revenue from football, total revenue last year ticked upward for the first time since 1997. The figures also included the highest lottery receipts since the handover thanks to added draws. Club profits more than doubled from 2003.

Nevertheless, racing revenue dropped again last year. Club chairman Ronald Arculli warned in last year's annual report: ``Given the rate of turnover decline, we have real concerns over the long-term ability of the club to sustain operations.

``Support for charities and the community may be placed in jeopardy and the club's average allocation of HK$1 billion a year may well fall on the shoulders of the government.''

Despite the profit jump, donations by the Charities Trust last year sunk to HK$975 million.

Aside from race revenue, the club hasn't fallen far from its pre-1997 pedestal. A long campaign to raise prize money to attract higher quality horses means the club now offers the highest average stakes in the world by far, according to International Federation of Horseracing Authorities figures.

Socially, the club is still a winner. Sharie Tse, editor-in-chief of society bible Hong Kong Tatler, says club membership and events are as prestigious as ever, especially with the excitement generated by the record-breaking winning streak of Silent Witness. ``The chairman's box is still a very coveted invitation,'' she says.

Indeed, the club last year counted 23,310 members, 2,000 more than five years before and more than almost any other organization in the city. Many, such as Liberal Party legislator Howard Young, belong for social reasons and rarely go to the races.

The club is still pouring money into upgrading facilities and services for bettors and members. At the Sha Tin track, it last year installed the world's widest television display and a retractable roof to cover the area where horses are saddled. It also upgraded many of its off-course betting centers, adding more television screens to show soccer matches.

The addition of football has livened up the club's 117 betting centers. At noon on a recent non-racing day, two dozen patrons milled through a center in Wan Chai, placing bets at the window or using electronic terminals, watching game replays or checking a bulletin board displaying numbers pulled in recent lottery drawings.

Club races still set the agenda like little else in Hong Kong. On race days, trains and buses run on special routes. Twenty-odd newspapers survive just covering racing and 168 full-time racing writers are registered with the club, making for a press pack that dwarfs Donald Tsang's. For some years, the club has controlled television broadcasts and commentary, but radio stations and regular newspapers offer a deluge of race coverage too.

Last month, the government end-orsed the latest measure championed by the club as critical to its fight against illegal bookmakers.

The proposal would reform the betting tax system so that instead of paying a duty on every bet placed, the club would pay tax on the difference between bets taken and winning bets paid, as SJM does.

This would allow the club to raise its payouts, presumably leading bettors to place more or bigger bets.

By the club's estimate, the betting volume handled by illegal and offshore bookmakers matches that of the club. Since such betting is illegal, it's hard to know for sure and the police no longer try to measure it. The University of Hong Kong is processing survey results on gambling participation for the Home Affairs Bureau to get some handle on the issue.

Some believe the club's figures are far on the high side. Bacon-Shone says bookies were much more of a problem 30 years ago before off-course centers opened. He believes only professional gamblers choose to bet with bookies given the risks involved.

The club might be barking at a fading ghost.

``Horse-racing is experiencing a downturn in most countries,'' says Chung Kim-wah, assistant professor of applied social sciences at Hong Kong Polytechnic University. Many young adults are more interested in sports betting than horse-racing. ``Horse-racing may be becoming outdated,'' he says.



A 22-year-old man who gave his name as Fai says soccer betting is simpler than horse betting. ``You need a lot of knowledge about the horses and you have to pay attention to morning training,'' he says. ``I have more confidence to win in soccer.''

To sway the government on its reform proposal, the club agreed to a progressive tax rate structure starting at 72.5 percent and to guarantee payment of at least HK$8 billion a year for the next four years. The club paid HK$8.8 billion in race betting duty last year, but told the government it expects to owe less than HK$8 billion next year given the rate of revenue decline unless the tax structure is reformed.

Even most club critics say the proposal is a reasonable deal for the government and likely to stimulate an increase in horse betting with the club. Whether it will be enough to raise revenues to the lofty HK$137 billion a year level forecast by British con-sultants last year is another matter.

Club officials admit bookies will still have a valuable competitive edge in that they allow bettors to wager on credit rather than pay upfront as the club does. Some observers expect bookies to come up with new enticements too.

``Illegal bookmakers can always find opportunities and different ways to attract consumers,'' says Democratic Party legislator Andrew Cheng.

DeGolyer says officials should be aware that attacking the bookies could have unintended consequences. He believes that the extension of the club's mandate to football betting deprived triad gangs of a major source of income. In his view, this has led low-level members to take matters into their own hands and commit street crimes.

Getting the tax reform plan through the Legislative Council may require more concessions from the club. The government's proposal would extend the jurisdiction of the Football Betting and Lotteries Commission to include recommendations on horse betting regulation, but there are likely to be demands for tighter oversight.

That's particularly because the club expanded soccer betting operations more aggressively than expected when it won that franchise in 2003, Professor Chung says. He adds that the betting commission rarely meets and members don't seem well informed about betting.

Some community groups are particularly interested in having a greater voice in where the club's charity goes.

Li Cheuk-yan, executive director of the problem gambling counseling center, Zion Social Service, says club money now comes with heavy strings attached, particularly an insistence on attaching its name to programs it funds.

Gambling Watch director Wu Chi-wai says community groups are afraid to criticize the club's funding process for fear of retribution and he favors turning the funds over to an outside agency to distribute.

Li and Reverend Wu are particularly keen on requiring the club to make an annual commitment to education and treatment to address problem gambling.

At the time of the soccer franchise award, the club agreed to provide HK$60 million in funding for two treatment centers for five years. The two centers have been swamped with requests for help and Polytechnic University is now studying their performance for the Home Affairs Bureau. Chung expects researchers will recommend two or three more centers be set up.

Other critics may take advantage of the tax debate to call for more revolutionary reform, namely opening up the gambling market to competition.

Webb believes officials should call the club's bluff on dumping its social commitments on the government since the programs could benefit from centralized backing. Simon Lee, policy director for think-tank Lion Rock Institute, says shifting charitable oblig-ations back to residents would be best since community groups would then learn to better explain the value of donating to the public.

``[The current arrangement] stifles the development of a giving culture in Hong Kong,'' he says.

Competition, say the critics, would be as good for Hong Kong as it is for Macau. Even Wu agrees, saying that with multiple gambling operators, customers could choose who to bet with on the basis of the company's responsible gambling policies. Odds are that the tax reform package will pass largely intact. Should racing revenues fail to reach the heights the club forecasts, it has more targets. Reports emerged this week that the club wants to add basketball betting to its portfolio.

A bigger target lies across the Pearl River Delta. Top club officials have pointed the finger at Macau's multiplying casinos as another culprit in revenue decline.

Arculli claimed in February that Macau parlors take HK$10 billion-HK$15 billion in gambling receipts from Hong Kong a year. Race tracks in Canada, the United States and Macau have won permission to add slot machines to better compete with casinos. Noting that Howard Young and other Liberals are pushing for a tourist-only casino on Lantau island, Arculli says it should be the club's to run.

MONDAY NG CONTRIBUTED TO THIS REPORT

zach.coleman@singtaonewscorp.com

http://www.thestandard.com.hk/stdn/std/Weekend/GF04Jp01.html

New Offshore E-Commerce Diploma Program

After international success of the first online Diploma in Offshore E-Commerce Law, Internet Business Law Services (IBLS), a global online legal publisher, is announcing a new eight-week Intensive Program which will start on June 6, 2005, and will deliver a Diploma in Offshore E-Commerce Law II.

The Diploma Program has been designed and developed by international legal experts in e-commerce and Internet law, and present timely information that can be immediately used in e-business practice.

"During the first Diploma Program, participants from around the world were able to share their professional experiences and expand their knowledge of offshore e-commerce issues," commented Professor Alain Megias, Director of Diploma Programs.

These are a few words from some of the high-profile professionals who participated in the 2004 Program:



"I was conversant with most of this material in the discharge of my political duties while Vice President of the States of Guernsey Advisory and Finance Committee. The discipline of reading and thinking through the issues in a structured way has been invaluable, enjoyable and informative - plus I now have the advantage of the course notes and the listed Web links." - John E. Langlois, St. Peter Port, Guernsey, C.I.

"Despite having some experience in the areas of the programme, I nonetheless also learnt a great deal, which will benefit me in the work that I do." - Rowena Bethel, Ministry of Finance Government of The Bahamas, Nassau, Bahamas.

"I found legal information and interaction among students quite stimulating - the course itself was informative and would help to formulate useful strategies for my clients." Tej P. Thind, IFM International Network, Montreal, Canada.

Earning a Diploma in Offshore E-Commerce Law will advance a professional career by providing recognition and showcasing one's expertise in E-Commerce Law. This program is of interest to professionals around the world including, but not limited to, attorneys, accountants, financial advisors and other business executives.

Interest for the June Program is very high. Applications are available at http://www.ibls.com/edu/diploma_offshore_top.htm. About IBLS

IBLS is positioned as the world's leader on legal matters relative to the Internet and E-Commerce. By bringing the knowledge of Internet rules and regulations from experts around the world, IBLS empowers professionals to design successful business strategies.

Money Plans - IBLS Offers Offshore E-Business 'By the Book'; A New Offshore E-Commerce Law Program : home server-
 

How the City has become hooked on hot money

Sunday June 5, 2005
The Observer

London increasingly looks like an offshore centre serving many dubious financiers while at the same time claiming to have regulation that puts it among the world's top onshore jurisdictions.

Its offshore status is underlined by the large number of banks and branches of foreign banks in the City. More are based there than anywhere in the world. Its onshore claim rests on a long-held reputation for respectability - who after all would ever cast an aspersion on the Bank of England? - buttressed by a mass of anti-money laundering and anti-fraud regulation as severe as anywhere else in the world. But as each new scandal breaks, London's status looks increasingly ambiguous.

London's vulnerability to launderers is not in its laws but in their implementation. Government has failed to invest in sufficient skilled law enforcement officers or regulators to curb its sprawling financial system. But this is no accident. The UK's economy cannot afford to curb its income from the 'invisible' financial sector, while its industrial sector becomes anorexic.

As the United Kingdom feeds its growing addiction to finance and hot money, its regulators bluster ever less convincingly about the security of the UK's financial system and its antipathy to money-launderers. Anti-money laundering legislation has mushroomed in the Britain to keep this offshore haven in line with international standards.

The Financial Services and Markets Act of 2000 (FSMA) provides the legal basis for the Financial Services Authority, which acquired its money-laundering powers on 1 December, 2001. Supervision of UK banking had been subsumed into the FSA in 1997, an early initiative driven by the Chancellor of the Exchequer, Gordon Brown, and his assistant, Ed Balls, in response to the Bank of England's failure to act promptly on the BCCI money-laundering scandal.

Action against money laundering gained a new urgency when the FSA took charge, says one money laundering reporting officer. 'Prior to 2001, no one did a damned thing. It was another "tick in the box" exercise. You had a compliance department, you probably had an old bombed-out compliance officer who was the money laundering reporting officer, who had no resources and no respect. The banks saw no risks to themselves, no one was going to fine them and no one was going to give them any grief. They were never going to get caught by the law.'

Bankers' dissatisfaction with the UK's anti-money laundering system is fuelled by resentment at the police, who appear detached from the realities of the financial markets.

Carol Sergeant, the FSA's former managing director for markets and risk (she is now the head of compliance at Lloyds TSB), said: 'The information that the banks are providing may not actually meet the needs of law enforcement. But they are not getting any feedback on what law enforcement people want. One of the main areas that has been successful has been terrorist finance because it has been much clearer as to what the authorities want.'

The Financial Services and Markets Act has instilled a sense of fear and foreboding into UK banking. This law allows for banks to receive surprise dawn visits from the regulators to check that their procedures correspond with the bank's perceived risk as well as with the regulator's own principles and regulations. Bank training in money-laundering procedures has mushroomed, creating a demand for consultants and trainers.

The minutiae of the law and regulation are closely watched by the regulator, says one former FSA officer, but more complex problems of vulnerability to fraud or abuse are overlooked.

Bureaucratic competence is valued by the organisation, which answers to Her Majesty's Treasury, but lateral thinking into a bank's deeper weaknesses in knowing client affairs is harder to obtain.

One money laundering reporting officer (MLRO) of a foreign bank based in London said caustically: 'The people that have been fined so far have made pretty glaring errors in terms of basic identification of clients. The FSA would probably not feel capable of fining people who had the right documents on file, ticked in the right boxes, but failed to make the conceptual leap to understanding the client and the client's business.'

The officer continued: 'The FSA prefers to keep people back in the office, doing what it likes to call desk-based reviews of firms. It is less likely to find wrongdoing in its patch; it has far too many firms to look after for its complement. More staff would increase the cost to the industry, and that in turn would increase the pressure on government.'

Mike Adlem, the London-based managing director of the consultants Protiviti, commented: 'Have we lost the plot? The whole point about AML [anti-money laundering] legislation was to go after criminal money, freeze it and take it out of circulation. But we have now got to the point where it is only a compliance issue. The vast majority of the effort is now focused on making sure that the FSA are happy. The sums recovered are negligible and totally out of proportion with the amount that is being spent on compliance.'

Michael Foot, the FSA managing director with responsibility for deposit takers, confirmed in May 2003 that the United Kingdom had a considerable problem in maintaining and enforcing anti-money laundering procedures.

He said: 'Operation of procedures to combat the laundering of the proceeds of drugs and other crimes through banks and building societies is not satisfactory. There is a great deal of money-laundering going on throughout the UK.'

Policing the system is one arm of the government's anti-money laundering strategy. Another is the fight against those who hold the proceeds of crime. This was the context for the establishment of the Assets Recovery Agency. But observers say that the ARA compares poorly with its opposite number in Dublin. Felix McKenna, the chief bureau officer of the Dublin-based Criminal Assets Bureau, says criminal prosecutions against gang lords are often cumbersome and unreliable, as the wealthy gang leader is likely to be near-untouchable.

He said: 'You're not getting the big boys or the principals of the crime organisations. You won't get the godfathers or the man who's controlling everything. You won't get him into a criminal court and have him convicted of his crimes, and he will still be able to enjoy the benefits and profits that he has generated through his group or gang of the criminal activities they've been involved in. You'll catch his runners and his people lower down the gang.

'The big guy can avoid prosecution through the threat of intimidation, fear, and the reluctance of people to give evidence against him within his own organisation. They have no inhibition about hiring a contract killer to kill a witness and intimidate witnesses and intimidate their families. They intimidate juries. They go to, not extreme lengths, but they're just the normal run of what organised crime does - this fear factor that they instil in people.'

The Observer | Business | How the City has become hooked on hot money

Taking a hard line

Residents of the Chinese mainland, along with certain foreigners and residents of Hong Kong, Macao and Taiwan, face more scrutiny, procedures and restrictions on various cross-border investments and related transactions under a recent crackdown by the State Administration of Foreign Exchange (SAFE).

The targets of the crackdown are investments abroad by domestic residents, round-trip investments back into China by foreign companies controlled by domestic residents, and all cross-border swaps of company shares or other assets.

The indirect effects of the crackdown are being felt by foreigners who co-invest with domestic residents.

In a related move, tighter supervision of management buyouts (MBOs) of State-owned enterprises has been discussed by the State Assets Supervision and Administration Commission (SASAC).

Foreigners and residents of Hong Kong, Macao or Taiwan, who have settled in the Chinese mainland, or even those who have been physically present in the mainland, continuously, for more than one year, appear to fall within the definition of "domestic residents" whose investments are covered by the new requirements.

It is widely hoped SAFE will move quickly to clarify that these persons' transactions are not covered by the new requirements.

The key public document underlying the crackdown is SAFE' s "Notice on Questions Concerning Perfecting Foreign Exchange Management over Foreign Investment M&A",which took effect last January 24.

SAFE's notice also requires increased scrutiny of foreign investment enterprises (FIEs) established in the past through mergers or acquisitions by foreign companies owned by domestic residents, during and after their handling of foreign exchange registration procedures.

Each local SAFE office must prepare detailed name lists of these FIEs, to ensure continued scrutiny.

This indicates, in contrast to the usual "grandfathering" approach to changing laws in China, the change is also directed at transactions completed before the new requirements were announced.

Going beyond the text of the notice, SAFE personnel have made informal verbal comments that the new approval requirements will apply to investments abroad using funds already held outside the People's Republic of China (PRC).

It remains unclear whether it is legal for domestic residents to receive foreign currency loans, in accounts outside the PRC, from foreign lenders, or whether SAFE approval is also required for this.

Implementation of rules may eventually clarify these points. Such rules are expected to be implemented after consultations involving SAFE and the Ministry of Commerce.

While the notice tightens control over Chinese individuals' transactions, which previously were not clearly regulated, the trend is different for Chinese companies.

Investments and acquisitions abroad by Chinese companies have long been subject to SAFE regulations, but the related rules have been streamlined in recent years, and many provincial-level SAFE offices have been delegated authority to approve transactions worth up to US$ 3 million.

Informal estimates indicate round-trip investments account for 20 per cent to 30 per cent of total foreign direct investment to China.

The nation's long-planned tax reform will reduce one of the attractions of round-trip investment if it eliminates or reduces the difference in income tax rates between foreign investment enterprises and domestically owned enterprises.

But there are other attractions of offshore joint ventures between domestic residents and foreign investors. Foreign investors often prefer buyout rights and other relations among shareholders to be governed by a foreign legal system.

Many offshore jurisdictions do not tax the gain from a sale of company shares. Managers' incentives can be strengthened through shares or share options in offshore jurisdictions.

Offshore jurisdictions also permit a high level of flexibility on public offerings of shares and other securities, including on timing, profitability requirements, percentage of public float, cash-out opportunities and creation of different classes of shares and/or other securities.

All of this continues to be difficult, or impossible, in China due to less-flexible regulations.

The Chinese Government is aware deregulation would attract more of this activity to China's market, but progress is being slowed by the need to balance many conflicting issues.

Local SAFE offices have stopped processing M&A applications received from foreign companies owned by Chinese mainland residents until they receive more guidance on how to implement SAFE's notice.

One result of this has been the delay of numerous planned offerings of "red-chip" securities, by Chinese-controlled foreign companies, on stock exchanges in Hong Kong or abroad.

Such offerings have become increasingly popular as a way to enjoy offshore benefits and to complete a public offering without going through the difficult approval and other procedures that apply to Chinese companies.

The current crackdown is the latest in a long history of policy adjustments. After a period of tightening, we may again see selective loosening.

In the meantime, Chinese residents, foreign investors and other players in cross-border transactions will need to pay close attention to the new requirements.

(China Daily 05/09/2005 page7)

Taking a hard line

Merrill Lynch creates a hedge fund for the man in the street

A new scheme lets the public invest in a way that used to be the preserve of the very wealthy. By David Budworth


YOU still have to be seriously wealthy to invest in hedge funds, but firms are continuing to devise schemes that enable ordinary investors to benefit from hedge-fund techniques. Last week, Merrill Lynch launched the most radical to date.

Steve Marriott of Bestinvest, a financial adviser, said: “Merrill Lynch UK Absolute Alpha appears to be the nearest you can get to a hedge fund in a unit trust without breaking the rules. We are expecting a lot of similar schemes in the near future.”

Hedge funds deploy a range of complicated investment strategies aimed at making a profit even if the value of shares or other assets fall. They can be less risky than mainstream equity or bond funds, providing positive returns year in, year out. But, as the high-profile collapse of Long Term Capital Management in the US seven years ago showed, they can lose billions overnight.

Despite the potential advantages, advisers are wary of recommending hedge funds because they are unregulated in Britain: the Financial Services Authority regulates hedge-fund managers, but does not oversee the schemes themselves.

Gay Huey Evans, the FSA’s director of markets and exchanges, said: “Generally, the feedback we receive does not indicate a great desire on the part of hedge funds or investment advisers to provide or sell them as retail products. Nor is there evidence of significant demand from retail investors.”

Nevertheless, they keep popping up, often based offshore. Most won’t give you the time of day unless you have at least £100,000 to invest.

But the new funds, such as Merrill Lynch UK Absolute Alpha, are fully regulated, listed in the UK and investment starts at as little as £250 a month. This has become possible after more flexible investment rules were introduced last year.

Baring Directional Bond, Credit Suisse Target Return, UBS Absolute Return Bond and DWS Ratebuster have already seized on the rules to adopt similar techniques to those used by hedge funds.

The funds are being targeted at risk-averse investors, many of whom are looking for an alternative to out-of-favour with-profits funds. They have been dubbed “absolute return funds” because they aim to deliver positive returns in all conditions.

But therein lies the danger. To produce profits in a falling market they have to use complex financial instruments such as derivatives, so that they can buy “put” options or sell futures contracts for later delivery at a hopefully lower price.

Derivatives are instruments used to bet on the future movement of bonds, interest rates, currencies and stock markets. They can be used to make a profit, even when a share or bond falls in value — a technique known as shorting.

The results can be volatile and heavily loss-making without carefully constructed safety nets. Few individual investors are likely to understand them.

Ros Altmann, an independent hedge-fund expert, said: “It is vital that you are confident that the managers have adequate risk controls in place and expertise to manage the short or down side. Shorting can be very dangerous to your capital if it goes wrong.”

Some advisers would rather wait and see whether the managers prove up to the job before committing money. Paul Ilott of Bates Investment Services said: “We are concerned about the relative lack of experience of some managers using these sorts of strategies. I would like to see longer track records before we entrust them with clients’ money.”

Even so, advisers say that absolute-return funds should not be dismissed. Christine Ross of SG Hambros, a private bank, said: “We are interested in the Merrill Lynch fund. However, it is only suitable for investors who can grasp how it works.”

The fund will be able to invest in derivatives, go short and move fully into cash. However, unlike a hedge fund, it will not be allowed to borrow to invest. The minimum investment is a £10,000 lump sum, or £250 a month.

Merrill Lynch creates a hedge fund for the man in the street - Your Money - Times Online

Driving in Jakarta takes nerves of steel

Having good health or being physically fit is not enough to drive in Jakarta: one needs guts, and maybe a touch of insanity.

Feeling unable to meet this extra, frivolous requirement, some people have stopped sitting behind the wheel altogether.

"I stopped driving because I could no longer tolerate the chaos on the streets," said a colleague recently, sounding exasperated. "Now I depend on my son to take me to the office in the morning and pick me up again in the evening."

Luckily, this buddy of mine in his 50s, who lives in Pondok Pinang, South Jakarta, has two grown-up children, including a son in college who doubles as his personal driver.

The peak of this colleague's frustration came one day when he was stuck in a traffic jam on the way to our Central Jakarta office. A luxury SUV cut into their lane when he and around 20 other motorists were waiting patiently, queued in the traffic.

"This enraged my son, who was driving. He got out of the car and approached the middle-aged driver who cut in."

Fearing that situation could spin out of control, he quickly got out and followed his son, catching up to ask him to get back in the car.

"My instinct was right. Instead of apologizing, the guy who cut in challenged me to a fight. He cooled down only after he found out that I was journalist."

Was this colleague too demanding -- perhaps like many people of his generation, who advocate an orderly and ethical life?

Whether yes or no, another, younger colleague who lives in Bintaro, a suburb south of Jakarta, said he too had quit driving as a kind of protest against the disorderly traffic. Now, he takes a taxi or an express bus, which is cheaper, safe and quite comfortable. In addition, he is free from the mental stress of hitting or being hit by other vehicles.

"On a bus or in a taxi I can rest, although I must be careful with my laptop when I bring it with me," he said.

The 1997 financial crisis, which eventually turned into the political crisis that brought Soeharto down from his 32-year rule, has also changed the political, economic and social landscape of Indonesia, including transportation.

In Jakarta, road development came to a halt, the discipline of motorists declined and law enforcement weakened. The number of vehicles, however, showed an opposite trend.

The capital is home to around 4.7 million vehicles: 1.4 million private cars, 403,000 commercial vehicles -- trucks, public buses and minivans -- and 2.6 million motorcycles. The figure continues to rise, and around 130 new cars are sold in Greater Jakarta every day, most destined for the capital's streets.

Following in the footsteps of metropolises in the world, Jakarta has built new overpasses, underpasses, toll roads and special busway projects to alleviate its traffic congestion. Several major thoroughfares have also been designated time-restricted zones for vehicles with less than three passengers: during the rush hours of 7 a.m. to 10 a.m. and from 4:30 p.m. to 7 p.m.

Protests aside, the restricted zones met with some success, experiencing lighter traffic. But traffic became more congested in other areas, which pushed some motorists, especially middle-income earners, to switch from cars to motorcycles to cut costs and travel time -- even though motorcycles offer less security.

This influx of motorcycles has created even more problems for Jakarta's already excessive modes of transportation like buses, minivans, taxis and three-wheelers like bajaj, kancil and becak -- many of which ignore traffic regulations, but this is merely the tip of an iceberg.

Lately, traffic jams and on-road disorderliness, which has long been cause for concern among the capital's business community, has now become a common sight in towns outside Jakarta, including medium-sized towns like Pekanbaru.

A Californian who is working for an oil company in Pekanbaru, Riau, complained in an email, "Management doesn't let us drive ourselves outside camp because of how crazy traffic is. Even though California moves fast, at least traffic there is predictable and the traffic rules are enforced so driving is easier."

The American hit the nail on the head: Weak law enforcement is one source of the traffic problems in Indonesia, but which is aggravated by a corrupt system in charge of issuing licenses like vehicle registration documents and driver's licenses, as well as the opening of new routes.

"Traffic problems should have been worse than this," another friend said cynically. "It's incomprehensible why Depok, with a 1.3 million population that drive cars and motorcycles, is allowed a fleet of 14,000 minivans."

The municipality's authorities keep issuing new licenses for minivans -- worth tens of millions of rupiah each -- without taking into consideration either road capacity or market demand. The bottom line is, money for its coffers and officials.

The result is all-too predictable. Minivans stop in "no stopping" zones to pick up passengers and rush along at high speeds with a full "load", just so they can make enough money to pay the vehicle owners at the end of the day.

Traffic lights and stop signs have become toothless traffic enforcers -- and let's not get into the violations committed by drivers of private cars. Discipline has flown out the window along with civil engineering. Really, the difference is only in the value and quality of the vehicles.

So, for the time being, it seems that we Jakartans have no choice but to adapt to the everyday disorderliness -- or stop driving.

-- Ardimas Sasdi

The Jakarta Post - The Journal of Indonesia Today

Barclays Bank must be partner in devt - Kufuor

Accra, May 9, GNA - The Government wants Barclays Bank Plc to be a partner in its development efforts, President John Agyekum Kufuor said on Monday.

"It is encouraging that Barclays Bank is prepared to respond to suggestions made by the Government and we are ready to have such a discussion with you," he said.

President Kufuor made these observations before entering into closed-door discussions with a delegation from the Bank led by Mr Malcolm Hewitt, Managing Director of Barclays Bank responsible for Sub-Saharan Africa and the Indian Ocean, at the Castle, Osu. Mr Hewitt said the delegation was in Accra to respond to suggestions made by the Government to a previous delegation last March. President Kufuor at a meeting with a delegation of the Bank's Directors, who attended the first International Executive Committee Meeting outside Europe in Accra, appealed to the Bank to cooperate with the Government to establish an offshore banking.

Mr David Roberts, Executive Director of the Board of Directors of Barclays Plc and Barclays Bank Plc, who led the delegation, gave the assurance that the Bank would assist the Government to establish offshore banking in Ghana. Offshore Banking is banking operations transacted outside the country in question.

In a host country, this would refer to a foreign entity's ability to bank at a host country's financial institution without regard to the foreign nation's rules and regulations. Entities typically utilize offshore banking facilities to escape more restrictive domestic banking operations, rules, taxes and regulations in force. Barclays Bank has assisted Mauritius to establish a successful offshore banking company.

Business News of Monday, 9 May 2005

China Changes Offshore Investment Rules, Venture Capital Cools

(Bloomberg) -- Global venture capital funds slowed investment into Chinese companies in the first quarter after the country's foreign exchange regulator issued rules that may hinder international share sales and capital raising by China businesses.

Chinese residents must for the first time get approval from the State Administration of Foreign Exchange before starting or investing in an offshore company, according to notices from the regulator dated Jan. 24 and April 8. Venture capital into China slowed by one-third to $552.6 million in the first quarter from a year earlier, according to the Asian Venture Capital Journal.

Warburg Pincus LLC, Newbridge Capital LLC, the Carlyle Group and other private equity and venture capital firms have used international holding companies to exit their China investments through initial public offerings and stake sales. The new rules are designed to stop companies setting up overseas to strip state- owned assets and avoid paying domestic taxes.

``It's a big headache,'' said Andrew Qian, managing director for New Access Capital Co., a Shanghai-based corporate financial advisory that has postponed several deals this year, including a $3 million investment by a U.S. venture capital fund in a Shanghai-based industrial gas supplier. ``Every private equity fund is scrambling to figure out what the measures mean and how to comply with them.''

The changes led to the Beijing-based China Venture Capital Association to send a letter on April 30 to the regulator, calling for consultation and a revision of the rules.

Detrimental

``SAFE has valid concerns about people transferring assets offshore,'' said Chang Sun, chairman of the association and a Hong Kong-based managing director of Warburg Pincus in Asia. ``The rules as currently published are impractical, hard to implement, and detrimental to foreign investment in China.''

The number of announced private equity deals in China in the first quarter was 19, compared with 31 during the same period last year, according to the Asian Venture Capital Journal, that provides industry data.

The regulations will track cross-border capital flows and control the transfer of Chinese assets from domestic to offshore companies, including those in the Cayman Islands and British Virgin Islands, where many of the Chinese companies listed in Hong Kong and the United States have headquarters.

China Techfaith Wireless Communication Technology Ltd., which raised $142 million in a Nasdaq listing last week, included a clause in its sale documents advising investors about possible risks related to the new rules by the foreign exchange regulator. The company said it cannot predict how the notices will ``affect our business operations or future strategy.''

Dampening

The number of Chinese companies listed on Nasdaq is expected to double to 40 by the end of this year, Stuart Patterson, Asia Pacific senior managing director of Nasdaq Stock Market Inc., said last month.

``There is definitely a dampening affect on the number of deals getting done,'' said Sun of the venture capital association, a trade group of 100 members with $1.3 billion invested in Chinese companies. ``A number of pre-IPO deals have been affected.''

Chinese entrepreneurs and international venture capital funds have reorganized their businesses offshore because the local regulations do not recognize different classes of shares and restrict the sale and public trading of equity held by founding stockholders, according to Barbara Mok, a partner with Jones Day in Hong Kong.

Typically, an offshore reorganization involves Chinese entrepreneurs swapping equity between a local business and an offshore holding company, Mok said. That allows them to issue additional shares in offshore jurisdictions to international investors.

Less Flexible

``Chinese joint stock companies have more restrictions and less flexibility compared to companies registered under the British common law system,'' Mok said.

Semiconductor Manufacturing International Corp., a Shanghai- based chip producer incorporated in the Cayman Islands, raised $1.8 billion through an initial public offering last year on the Hong Kong stock exchange.

The top five Chinese companies listed on the Nasdaq last year, including Shanda Interactive Entertainment Ltd. -- which operates China's most popular online game Legend of Mir II -- raised about $547 million.

Foreign investors must now register and obtain foreign exchange approval before taking equity in a Chinese domestic enterprise prior to an offshore restructuring, according to the regulations.

Supervision

The government is strengthening its supervision of cross- border money flows in order to address fraud and tax evasion, said Xiaohu Ma, a Hong Kong-based partner with U.S. law firm Morrison & Foerster LLP.

``Offshore restructuring has allowed privatized Chinese state-owned enterprises to trade domestic assets inexpensively to offshore companies,'' said Ma. ``It also permitted Chinese citizens to avoid capital gains taxes by selling shares in the offshore company, rather than domestically.''

The new rules also require Chinese residents who restructure their companies prior to the January 24 notice to register their deals. That may create problems for international venture capital investors now preparing initial public offers or making additional private equity deployments, says David Lin, a lawyer with O'Melveny & Myers LLP in Hong Kong.

``People are nervous,'' said Lin. ``The law, itself, is retroactive and could reach transactions in the past.''

Companies completing their offshore reorganization prior to January 24 and which are contemplating initial public offerings overseas have increased risk as a result of the new rules, Lin said.

``If any of the Chinese resident shareholders failed to fulfill their SAFE obligations, for example, then there may be serious ramifications,'' Lin said. ``That includes a prohibition on distribution of profits to overseas foreign shareholders.''

Bloomberg.com: Asia

Yukos Kingpin on Trial

by Lucy Komisar, Special to CorpWatch

In mid-May a Moscow court will issue a verdict in the trial of Mikhail Khodorkovsky, the figure behind Yukos Oil, who was once known as Russia's richest man. Khodorkovsky, who a few years ago was worth more than $15 billion, is on trial for fraud and tax evasion, much of it made possible through the use of offshore shell companies.

Khodorkovsky has been in prison since 2003, when he was charged with embezzlement and for rigging a privatization auction of the petrochemical company, Apatit. Some critics argue that Khodorkovsky is being held up as a symbol of Russia's ruling class of exorbitantly wealthy businessmen, and that his trial is politically motivated. Senator John McCain - in a recent statement before the Senate - likened the charges against the young oligarch to the overthrow of a government saying, "a creeping coup against the forces of democracy and market capitalism in Russia is threatening the foundation of the U.S.-Russia relationship.”

But Western corporations and, by extension, the Western media may in fact be equally motivated to obscure the facts and make Khodorkovsky into a capitalist martyr.

Born in 1963, Khodorkovsky is an attractive man who favors aviator glasses. He went to university in Moscow and received an advanced degree in chemistry. Politically active at university, he was the deputy secretary for Young Communists League of Moscow’s Frunze district. He was named head of the local technology business center under perestroika and turned a profit by reselling computers. He then used the cash he made to provide financial services to the first Russian entrepreneurs -- organized crime groups. The service changed rubles into dollars and transferred them abroad via offshore accounts.

With accumulated profits, in 1988, he set up Bank Menatep (named after the Russian acronym for Frunze's “Inter-Branch Centre for Scientific and Technological Programs”), which prospered under the patronage of Russian entrepreneurs and politicians.

Khodorkovsky hit the big time with President Boris Yeltsin’s loans-for-shares program, through which, it turned out, state assets were looted at rigged auctions for knock-down prices in exchange for “loans” the government would never repay.

Essential to his frauds was the use of offshore shell companies, artificial fronts set up in tax havens that offer corporate and bank secrecy, no or low taxes, and protection from international law enforcement or minority shareholders seeking to trace the money. While there are about 70 tax havens around the world, Khodorkovsky’s favorites included Switzerland, Gibraltar, Panama, and the Isle of Man, a British crown colony.

Apatit and Avisma

For example, in 1994, Khodorkovsky and his friends bought a 20 percent stake of Apatit, a Russian state-owned company worth $1.4 billion at the time, for a mere $225,000 and a promise to invest $283 million. When the company was put on the auction block, Khodorkovsky arranged for four of his shell companies to be the only qualified bidders in position to buy it. But after winning the bid, the investors failed to inject any money into the company and ignored a subsequent court order to return the shares. Instead they sold the stake to Menatep, which transferred it to offshore shell companies.

Company managers set up a transfer pricing scheme, selling Apatit products at low prices to their shell companies, which sold them on the world market for much more. Meanwhile, taxes and dividends were paid on the low figure. At Khodorkovsky's trial, prosecutors said this defrauded the company and shareholders of more than $200 million and the country of millions in taxes.

In 1995, Khodorkovsky was responsible for a similar scheme involving Avisma, a titanium company. Again, Menatep Bank owned the winning offshore company. Menatep then set up a transfer pricing network, meaning they used an offshore company to “buy” Avisma’s output at below-market prices and then sold it for much more, while paying virtually no taxes and reaping hidden profits, which didn't go to minority shareholders.

Yukos

All this brings us to Yukos, the oil company that was sold in more auctions rigged by Menatep. But this time, the stakes were even higher. Khodorkovsky paid $309 million for a controlling 78 percent of Yukos. The new “owners” were his offshore shell companies. Months later, Yukos traded on the Russian stock exchange at a market capitalization of $6 billion.

Spinning Khodorkovsky

In order to win positive media internationally, Khodorkovsky brought in a savvy public relations executive to chair Group Menatep's advisory board: Margery Kraus, president and chief executive of APCO Worldwide, a Washington subsidiary of Grey Advertising, one of the biggest advertising agencies in the world.

With the advice of APCO, Yukos created the Open Russia Foundation in London in 2001 with a paltry $15 million "to build cooperation between Russia and the West." Henry Kissinger joined the board of the foundation and traveled to Moscow when the U.S. Agency for International Development signed on to a joint project with the foundation to promote "Russian democracy". (Also present at this event was George Bush Senior.)

Open Russia Foundation's grants seemed aimed more at cultivating powerful friends than promoting democracy. A book of photographs of Russia by Lord Snowdon, the official photographer of the British royal family, was commissioned. The foundation also gave $100,000 to the National Book Festival, a favorite charity of Laura Bush, the wife of President George Bush.

APCO also launched a series of advertisements in March 2005 on the international and editorial pages of the New York Times website. Designed to look like a newsletter named "Russia in Focus," with no indication of sponsor or ownership, it lists a "privacy policy" and welcomes reader "submissions" but no contact information.

One edition included an attack on the Khodorkovsky prosecution co-authored by Stuart Eizenstat (incidentally a member of APCO's international advisory board) and Jonathan Winer - both former Clinton State Department officials.

APCO claims that more than 98 percent of NYTimes.com's International section front readers have visited the website www.russiainfocus.com.

In addition to the media campaign, Khodorkovsky also pumped money into powerful and influential investment funds such as the Carlyle Group, run by Frank Carlucci, Secretary of Defense for President Ronald Reagan and a Deputy Director of the CIA during the Carter Administration.

These strategic investments have reinforced Khodorkovsky's support among U.S. government and political figures. During her recent trip to Moscow, for example, Secretary of State Condoleezza Rice framed the trial as a matter of "foreign investor's rights." Washington will be watching the Khodorkovsky closely, she said, "to see what [it] says about the rule of law in Russia."

Perhaps the "rule of law" and "democracy" do not include paying taxes?
At the top of the Yukos ownership structure is the holding company, Group Menatep, registered at a Gibraltar post office box. Khodorkovsky owned 28 percent of Menatep; Menatep owned Yukos Universal Limited, which owned 61 percent of Yukos. Menatep also owned the intricate web of shell companies in and outside Russia involved in the Yukos tax evasion scheme.

Yukos sold oil and petroleum products to tax haven shells which sold them on the world market. The transfer pricing cheated the government of a number of forms of taxes, totaling $1.7 billion.

Once again transfer pricing was central to Yukos marketing plans. A confidential June 1999 memo obtained by CorpWatch tells of a meeting conducted at the company’s upscale London offices by Stephen Curtis, managing director of Group Menatep, a secretive lawyer who represented a number of influential businessmen (such as Boris Berezovsky, who fled to London after Russian authorities accused him of using offshore shell companies to embezzle money from Aeroflot, the Russian airline, and to cheat on taxes owed by an auto factory).

At the meeting Curtis briefed four others, including Isle of Man shell company operator Peter Bond, about Yukos marketing. He explained that Yukos oil flowed through what they called the “Jurby Lake Structure,” (an offshore network they'd named after a lake in England) that was based on trading companies like Behles in Switzerland, South Petroleum in Liberia, and Baltic Petroleum in Ireland.

Although these companies had “stand alone” corporate structures and were thus legally separate, they often shared common offices. For example Behles, Menatep and Apatit all worked out of 46 rue du Rhone in Geneva, Switzerland.

But in early 2004 Curtis reportedly got nervous about the Yukos frauds and decided to provide information to the National Criminal Intelligence Service (NCIS), which collects information about organized crime in Britain. In March 2004, on his way to meet an MI6 British intelligence agent, Curtis's new Agusta 109E helicopter crashed, killing him.

Someone close to British intelligence told Financial Times reporter Thomas
Catan, “My sense was that he was fearful of being prosecuted by the Russian authorities for being party to assisting in the capital flight, and that he thought that going to the UK authorities would give him some sort of top cover.”

Meanwhile, Yukos stock had tanked following Khodorkovsky’s arrest in October 2003, wiping out the illusory dividends, and causing U.S. investors to lose $5.7 billion. All along, however, the company’s stolen profits remained hidden in secret bank accounts for shell companies (like Behles) controlled by Khodorkovsky and partners. The following year, Swiss authorities, at Russia’s request, froze $5 billion discovered in the shell company accounts. But even this falls far short of the total back taxes, interest, and penalties owed to the Russian government, which is now estimated at $25 billion.

APCO Worldwide, the Washington public relations firm that represents Khodorkovsky, declined to comment on the transfer pricing and tax evasion system or the charges described here.

Fooling the West

Like Enron, Yukos was a darling of the Western financial press until it collapsed. Also like Enron, Yukos had impressive profits because it used secret offshore shell companies to avoid paying taxes. That worked fine under the rule of President Yeltsin, but changed in 2000 when Vladimir Putin was elected and the new government started to crack down on tax-evasion.

The laws on accounting were also made much tougher in the United States, after the Enron scandal. For example, the Sarbanes-Oxley Act required auditors to certify a company’s internal controls using standards under a newly created Public Company Accounting Oversight Board. Hundreds of companies immediately rewrote their accounts, and auditors began to question company reports much more closely.

Menatep/Yukos worked with the "big-four" global audit firms, Deloitte & Touche, Ernst & Young, PricewaterhouseCoopers, and KPMG, which all routinely set up offshore transfer pricing and tax-evading networks for clients.

The only apparent complaint about the bookkeeping cover-up came from Ernst & Young, the auditors for Khodorkovsky’s holding company, Group Menatep. It wrote in a July 2002 audit that the financial information it was provided did "not constitute complete financial statements of the Company prepared in accordance with International Accounting Standards.”

Investment banks and brokerages such as Morgan Stanley, Credit Suisse First Boston, and UBS, which were making money from selling Yukos stocks, ignored the results of the Ernst & Young audit.

Khodorkovsky’s lawyers insist that the transfer pricing and other tax-evasion strategies were legal under Russian law. Peter Clateman, a lawyer with Moscow's Sputnik Group, an investment and development company, disagrees. He wrote on the internet news feed, Johnson's Russia List, that the Mentap/Yukos operation was “a clear transfer pricing scheme that was illegal in Russia, as it would be in just about any western country.”

According to Clateman, “Many press sources, however, state without further commentary that this scheme was legal in Russia during the period in which it was carried out. I do not know of any Russian lawyer who agrees with this conclusion.” As far back as 1998, the Russian government instituted statutes barring transfer pricing schemes, particularly those with the intent to minimize taxes.

The media in the West, on the other hand, seems bent on portraying Khodorkovsky as a victim of politics. Major U.S. media routinely obscure references to the man’s criminality, calling his past “murky” and the fraudulent privatizations “cut-price” and “controversial.”

In one example, a New York Times April 19 editorial called, "Justice on Trial in Russia," claimed that Khodorkovsky’s was "not a fair trial.” Meanwhile, the Times has provided no substantive detail about the actual charges or trial. Furthermore, the U.S. press has largely ignored Menatep companies’ transfer pricing, a scheme invented and popularized in the West that was the key to the Russian fraud.

Major American figures such as Condoleezza Rice (see box) and John McCain got on message.

Alexander Vershbow, the U.S. Ambassador to Moscow, said, "We are concerned about this escalation of legal pressure being exerted on Yukos. This move will send a very negative signal to companies investing in or considering investing in Russia." Even President Bush, in his recent state-of-the-Union address, called on Russia to "stop terrorizing big business."

Cracking down on tax fraud

But, contrary to U.S. press reports, Khodorkovsky and Yukos were not singled out by Putin. Clateman points out that over the last decade “Russian authorities have overturned other such structures and demanded back taxes and penalties.” Oil major Lukoil settled a $200-million back tax claim for 2000 and 2001 for use of a similar scheme.

Several major oligarchs accused of tax evasion or other financial crimes have chosen exile over prosecution. Boris Berezovsky (Aeroflot and Logovaz) and Roman Abramovitch (Sibneft) fled to London, Vladimir Gusinsky (MOST Bank) to Spain, and Mikhail Chernoy (Trans World Group Metals) to Israel.

Today, Russian authorities have continued the crackdown on tax-evading transfer pricing schemes by companies such as Vimpel Communications, Russia’s second largest cell phone carrier, owned by Alfa Group Consortium. Additional tax charges against Vimpel were estimated at $619 million for 2001-2003, though it has reached a lower settlement on part of the claim.

Alfa, which has also been accused of using offshore networks to cheat investors and business rivals in the past, has business interests in oil and gas, banking, insurance, retail trade, telecommunications and technology. The TNK-BP oil company, in which Alfa has a stake, has been hit with a tax claim for nearly $1 billion for 2001.

Lucy Komisar is an investigative journalist writing a book on the global impact of offshore banking and corporate secrecy.

CorpWatch: Yukos Kingpin on Trial

Navhind Times on the Web: Business

Navhind Times on the Web: Business

AP set to follow China in SEZs

UNI Hyderabad May 10: Taking a cue from China, the Andhra Pradesh government is planning to enact a legislation shortly to establish special economic zones (SEZ) in the state to provide a globally competitive and hassle-free environment for exports.

Informing this to UNI here yesterday, government advisor for economic affairs and policy implementation, Mr D A Somayajulu said initially SEZs, deemed to be foreign territory for the purposes of trade and tariff, would be set up in Vishakapatnam and Kakinada on an extent of 1000 hectares each.

One more SEZ near Tirupati with an inland container depot (ICD) was contemplated during the second phase, he informed.

Necessary approvals had been received from the Centre and as much as 25 per cent of the area would be earmarked for developing industrial area for setting up units.

On foreign direct investment (FDI), Mr Somayajulu said 100 per cent FDI under the automatic route was allowed in manufacturing sector in SEZ units except for those making, among other things, arms and ammunition, explosives and narcotics.

There was no ceiling on foreign investments in units making items reserved for SSIS.

Townships with residential, educational and recreational facilities and franchises for basic telephone services in SEZ were also allowed 100 per cent FDI.

Mr Somayajulu said the SEZ units could raise upto $ 500 million US a year. However, no exemption from labour laws was proposed to be given.

Powers under the Industrial Disputes Act and other related labour laws would be delegated to the development commissioner.

Besides, these units would be declared a public utility service under the Industrial Disputes Act.

A single window clearance mechanism would be put in place by delegating appropriate powers to development commissioners of SEZs.

There would no environmental restrictions in SEZs. The units would be provided with water, electricity and other services as sought by them.

The SEZ units would also enjoy full exemption from electricity duty and tax on sale of electricity for self-generated and purchased power, he explained. The units were free to generate, transmit and distribute power within the zone.

No sales tax, octroi, mandi tax, turnover tax and any other duty/cess or levies were payable on supply of goods from domestic tariff area (DTA) to SEZ units.

Turning to obligation of SEZ units, Mr Somayajulu said they had to be net foreign exchange positive. Any company set up with FDI had to be incorporated under the Indian Companies Act for undertaking operations within the country.

Referring to customs and excise duties, he said SEZ units were free to import or procure from domestic sources, duty free, all their requirements, including capital goods and raw materials.

Goods imported or procured locally, duty free, could be utilised over a period of five years.

On income tax, cent per cent exemption was given on exports during the first five years and 50 per cent for two years thereafter.

Reinvestment allowance to the extent of 50 per cent of ploughed back profits and carry forward of losses were also allowed.

Offshore banking units can be set up in these zones.

The units can enjoy the freedom of bringing in the export proceeds without any time limits. Besides, they could also ‘write-off’ unrealised export bills.

SEZ units might sub-contract part of production or production process through units in the domestic traiff area (DTA) or through other EOU/SEZ units.

They can also sub-contract part of their production process abroad, the official said adding that agriculture/horticulture processing units would be allowed to provide inputs and equipment to contract farmers in DTA to help production of goods as per the requirements of importing countries.

China curbs capital inflows by limiting offshore borrowing

China has moved to curb capital inflows by restricting the amount of money local and foreign banks can borrow overseas, the country's foreign exchange regulator said yesterday.

The State Administration of Foreign Exchange (SAFE) said it has set a ceiling of US$34.8 billion in short-term debt that can be taken on by foreign banks, the latest move by Beijing to ease pressure on the yuan.

Offshore borrowings by Chinese banks will be set at US$24.5 billion, according to a statement on the SAFE Web site.

The quota is "aimed at containing short-term debt ... and adjusting the short-term debt structure," it said.

The action had been taken in consideration of "China's economic situation, foreign banks' forex credit growth, the usage of overseas borrowing quotas and the increase in the nation's foreign debt," it said.

China imposed curbs on offshore borrowing early last year after a sharp increase in foreign funds flowing into the country.

Outstanding short-term debt jumped to US$104.31 billion at the end of last year, up US$27.27 billion from the end of 2003.

Since it is significantly cheaper to borrow money overseas, foreign concerns have been using the dollar to finance their China investment and operations.

China's export-driven economy has for more than a decade kept its currency fixed to the US dollar at around 8.28 yuan, a level that many of the country's foreign trade partners argue is artificially low and unfairly boosts exports.

Booming exports and the fixed-rate system forces China to absorb ever greater amounts of foreign currency, as seen by the astronomical jump in foreign reserves last year to a record US$609.9 billion from US$403.3 billion in 2003.

As the foreign funds flow in, the central bank takes them up under the fixed-rate system but in doing so is forced to issue yuan in return, thereby pumping money into the economy and adding to the danger of overheating.
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Taipei Times - archives

Eight arrested in alleged $80 million currency investment scheme

By: Associated Press

LOS ANGELES -- Eight people, including three Costa Rican residents, were arrested on suspicion of tax evasion and fraud after hundreds of people invested at least $80 million in a foreign-currency Ponzi scheme, authorities said.

The suspects were affiliated with the private and now defunct Genesis Fund, according to an 83-count indictment unsealed Friday. Police were searching for a ninth alleged co-conspirator.

All nine people were charged with conspiracy, obstruction, mail fraud, wire fraud, money laundering, tax evasion and failure to pay taxes.

The indictment states that the fund was set up in 1995, with backers promising money would be invested in foreign currency with a return of 3 to 4 percent a month.

In 1998, investors who had become frustrated over their inability to withdraw their money filed a lawsuit that led to a court order requiring Genesis to keep $5 million in reserve.

Fund managers then stopped investing in foreign currency and began using new money coming into the fund to benefit themselves and provide dividends to existing investors, according to the indictment.

Between May 1998 and June 2002, more than $80 million was deposited with the Genesis Fund, authorities said.

The defendants are also accused of telling investors Genesis did not have to report to the Internal Revenue Service and of creating offshore accounts to hide money and avoid paying U.S. taxes.

In April 2000, some of the defendants moved from Anaheim to Costa Rica, taking paper records with them and destroying electronic data, the indictment states.

The fund collapsed in June 2002, weeks after investors were allegedly told Genesis was worth $1.3 billion.

Fund managers John S. Lipton, 58, Richard Leonard, 71, and Victor Preston, 64, were arrested by Costa Rican and Interpol agents and were being held in San Jose, Costa Rica, according to the U.S. Attorney's Office in Los Angeles. The United States plans to seek their extradition.

Authorities were searching for Marlyn "Milt" Hinders, 65, an alleged manager for Genesis, who moved to Mexico from Colorado in 2004.

Others arrested and charged in the case were identified by authorities as:

# David L. Johnson, 66, of Walnut Grove.

# William H. Nurick, 69, of Camarillo.

# William Taylor-Fraser, 57, and wife Denise, 51, of Riverside.

# Teresa R. Vogt, 51, of Anaheim.

None of the suspects could be reached for comment.

North County Times - North San Diego and Southwest Riverside County columnists

What are special economic zones?

What are special economic zones?
After more than a year-long tussle between the commerce and finance ministries over various components of the proposed SEZ Bill, the legislation has finally got clearance from both the Union Cabinet and Parliament. Commerce minister Kamal Nath claims the legislation will help attract $2 billion in foreign direct investment (FDI) in the next two years. Given the important role the legislation will play in the coming years, FE takes a Closer Look at the various terms associated with the SEZ policy.


What are special economic zones (SEZs)?

SEZs are specially demarcated zones where units operate under a set of rules and regulations different from those applicable to other units in the country. The emphasis is on enhancing exports and creating an environment for attracting foreign direct investment (FDI) by offering tax sops.

While units in the zone have to be net foreign-exchange earners, they are not subjected to any pre-determined value addition or minimum export performance requirements.

How successful have SEZs been in other parts of the world?

While a number of Asian and Gulf countries have SEZs in place, China has been the most successful among them. In fact, former commerce minister, the late Murasoli Maran who initiated the process of converting export processing zones (EPZs) into SEZs, had once said he wanted to repeat the success story of China.

What took India so long to have a comprehensive SEZ legislation in place?

It took long (the policy for SEZs was introduced on April 1, 2000,) since the commerce and finance ministries weren’t able to reach an agreement on the tax sops to be given to SEZ developers and units.

However, earlier this month (May 2005), the two ministries finally reached a compromise and legislation was passed.

What are the features that distinguish SEZs in India from Chinese SEZs?

To begin with, India wants to go in for a large number of SEZs unlike China which restricted itself to just five. The legislation provides for setting up of SEZs in the public, private or joint sector, or by state governments. This is again different from China’s policy of all SEZs being set up by the government. Another important distinction introduced at the last minute, due to the intervention of the Left parties, is that labour laws have not been suspended for units in SEZs and they continue to remain under the domain of the states.

How many SEZs does India have at the moment?

India has eight working SEZs, all converted from EPZs. They are located in Kandla and Surat (Gujarat), Cochin (Kerala), Santa Cruz (Mumbai- Maharashtra), Falta (West Bengal), Chennai (Tamil Nadu), Visakhapatnam (Andhra Pradesh) and Noida (Uttar Pradesh). In addition, approval has been given for the setting up of another 39 SEZs in various parts of the country by the private/joint sectors, or by the state government.

What are the facilities available to SEZ developers following legislation?

Developers may import/procure goods without payment of duty for the development, operation and maintenance of SEZs. They will enjoy income tax exemption for 10 years, with a block period of 15 years. They will have the freedom to allocate developed plots to approved SEZ units on a purely commercial basis. They will also have the full authority to provide services like water, electricity, security, restaurants, recreation centers etc. on commercial lines. Moreover, they will be exempt from paying service tax.

What kind of status will SEZs enjoy in India?

They will have the status of a public utility service under the Industrial Disputes Act. The state government will appoint a development commissioner or an official of an equivalent rank to oversee the implementation of government regulations.

What exemptions are SEZ units eligible for?

As per the Bill, SEZ units will be eligible for 100% tax exemption for five years, 50% for the next five and 50% of the ploughed back export profits for the next five years.

What are the provision for banking in SEZs?

Offshore banking units (OBUs) will be permitted in the SEZs. These banks will virtually be the foreign branches of banks, but located in India. OBUs will be exempted from cash reserve ratio (CRR) and statutory liquidity ratio (SLR) and will make available finance to SEZ units and SEZ developers at international rates.

What about bureaucratic red-tape while setting up SEZs or units within them?

There need not be any worries on this front as the new legislation has provisions for a single-window mechanism to clear all investment proposals.

What are special economic zones?

Southern Californians Arrested For Offshore 'Ponzi Scheme'

Southern Californians Arrested For Offshore 'Ponzi Scheme'
Fraud, Money Laundering Charged In $80 Million Investment Fraud

LOS ANGELES -- An investigation into alleged federal fraud and tax evasion led to the arrest on Friday of nine people, five of them from Southern California.

Internal Revenue Service investigators said the group tricked hundreds of victims into investing "tens of millions of dollars in a fraudulent offshore fund that claimed to invest money in highly-profitable foreign currency trading," according to an IRS news release.

The indctment referred to the alleged fraud as a "Ponzi scheme."

The indictment alleges that between May 1998 and June 2002, Genesis Fund investors gave more than $80 million to the defendants after being told that their money would be pooled and invested in "foreign currency trading through a currency dealer in Hong Kong and Macau that had earned large profits for investors in the past."

Instead, the indictment alleges, most of the investor funds were used "to make Ponzi payments to investors and to personally enrich the defendants."

According to the indictment, the allegedly fraudulent Genesis fund collapsed weeks after telling investors it was worth $1.3 billion, and the defendants told investors a new investment plan would keep help them recover their money.

Investors were allegedly told that the Genesis Fund did not have to report to the IRS, and they were encouraged to create offshore corporations and bank accounts to receive the proceeds from the fund.

The indictment also alleges that, "in an effort to conceal the true nature of the Genesis Fund from investors and the government, the Fund's administrative operations were relocated from Anaheim, California, to Costa Rica in April 2000. At this time, paper records and electronic data on computers were hidden or destroyed."

A federal grand jury in Los Angeles returned the indictment on March 30, "charging conspiracy, multiple counts of mail fraud and wire fraud, money laundering, obstruction of justice, obstruction of a criminal investigation, tax evasion and several other tax-related charges."

The five defendants arrested in Southern California were identified as:

#
David L. Johnson, 66, alleged to be an early investor, and later manager and promoter of the Genesis Fund, who lives in Walnut;

#
William H. Nurick, 69, alleged to bea founder and manager of the Genesis Fund, who resides in Camarillo;

#
Denise Taylor-Fraser, 51, alleged to bea Genesis Fund investor who later became a manager, who resides with her husband in Riverside;

#
William Taylor-Fraser, 57, Denise's husband, alleged to bea Genesis Fund investor who became one of its managers during the summer of 2000;

#
Teresa R. Vogt, 51, alleged to bea primary administrator and later a manager of the Genesis Fund, who resides in Anaheim.

The IRS said three other Southern Californians living in Costa Rica were arrested in connection with the alleged scheme earlier in the week:

#
John S. Lipton, 58, alleged to be a founder and the principal manager of the GenesisFund, who resided in Mission Viejo and Laguna Hills, California, until about March 1998 when he relocated to Costa Rica;

#
Richard B. Leonard, 71, alleged to be another early investor, and later a promoter and manager of the Genesis Fund, who resided in Littleton, Colorado, until he relocated to Costa Rica in about June 2000; and

#
Victor H. Preston, 64, alleged to be a founder and manager of the Genesis Fund, who from about July 1994 to about June 2000 resided in Huntington Beach and Laguna Hills, California, after which he relocated to Costa Rica.

The agency said the three people arrested in Costa Rica were in Costa Rican custody, and the United States will ask for their extradition.

According to the release, investigators are still looking for Marlyn D. "Milt" Hinders, 65, alleged to be a leading promoter and manager of the Genesis Fund who resided in Colorado from about July 1994 until about May 2004, when he moved to Mexico.

NBC 4 - 4 Your Money - Southern Californians Arrested For Offshore 'Ponzi Scheme'

Head of tax evasion scheme convicted

Four others are also guilty of
conspiring to hide true income
By Debra Barayuga
dbarayuga@starbulletin.com

The head of a foundation that promoted and sold methods to avoid paying income taxes was convicted along with his wife in U.S. District Court yesterday of conspiring to defraud the Internal Revenue Service since 1985.

Royal LaMarr Hardy, executive director of the Cornerstones of Freedom Research Foundation, and Ursula A. Supnet, its executive administrator, were each found guilty of two counts of conspiring to promote tax evasion schemes and conspiring to hide their income.

Hardy was also convicted of three counts of failing to file income tax returns for tax years 1995, 1996 and 2001.

Michael L. Kailing of Honolulu, Fred M. Ortiz of the Big Island and Terry Cassidy of Yakima, Wash., also were convicted of conspiracy.

Lynn Panagakos, attorney for Hardy, said they are disappointed in the verdict and expect to appeal.

Assistant U.S. Attorney Clare Connors said the verdict is consistent with the evidence that the defendants intended not to file income tax returns or pay income taxes.

"That's the law. Courts have repeatedly found that's the law, and this verdict affirms that the law requires people to file income tax returns and pay their income taxes," Connors said.

Visiting U.S. District Judge Edward Rafeedie ordered each of the defendants to cease producing, marketing or selling any of the schemes, including fraudulent IRA rollovers and abuse of trusts, that they have continued to sell even after they were indicted in July 2002.

Hardy, who professes to not filing income taxes since 1977, has marketed the "reliance defense" since 1983 to at least 6,000 clients across the country and here as a legal way to avoid paying taxes. The foundation provided "reliance letters" from purported tax experts and attorneys willing to say, based on their expertise and their research of the IRS code, that there is no income tax and that filing taxes is voluntary.

Among those who prepared opinion letters were Kailing, a tax accountant, and Ortiz, who billed himself as a tax consultant. Cassidy marketed the programs in Washington state.

Of approximately 35 of the foundation's 6,000 clients, the calculated tax loss was $8.7 million based on testimony at trial.

According to prosecutors, Hardy received income of $491,000 in 1995; $397,000 in 1996 -- a conservative estimate that did not include the cash he received from the business -- and $257,000 in 2001 from an offshore investment and did not include income from the foundation.

Barry Edwards, attorney for Ortiz, declined comment. Richard Gronna, who represented Kailing, said his client had a deep-felt belief that there is no income tax and payment is voluntary.

Sentencing is scheduled for Aug. 29.

Hardy faces a maximum of 13 years in prison and fines totaling $800,000. Supnet faces 10 years in prison and $500,000 in fines. Kailing, Cassidy -- who represented himself at trial -- and Ortiz each face five years' imprisonment and $250,000 in fines.

Valtech opens global centre

To invest 2 m euros on sales and marketing

BANGALORE: Valtech India on Wednesday announced the inauguration of a world class $2.5 million global development centre here accommodating 450 software professionals.

According to Jean Yves Hardy, CEO and Chairman, the new centre will provide the needs of the IT and office infrastructure required for the agile offshore market in the U.S. and Europe.

The centre aims at delivering at least 50 per cent of the global workload. Valtech will achieve the critical mass in India with a delivery staff of over 1,000 engineers in 2006. They have plans to increase the operating profitability to a long term range of 15 per cent. And as for their long term plans, they will become a predominant player of the second generation offshore vendors in Europe. He said the India delivery centre would scale up to 600 employees and two million euros would be invested on sales and marketing on global sourcing.

Valtech India, the $100 million global constituting group, has offices in eight countries, including the U.S. and Europe and delivers quality services through its global delivery models. Its presence is dominant in travel and hospitality, retail, banking , healthcare and smartcard domains.

The Hindu : Business : Valtech opens global centre

New Zealand Tax needs bold change, not tinkering

With just over a week to go until the Budget is handed down next Thursday, the business community is eagerly waiting to see what a recently promised $1 billion package of tax breaks will mean for them.

At a recent speech to the International Fiscal Association, Michael Cullen unveiled a series of tax changes worth more than $230 million designed to simplify tax and reduce business compliance costs.

These changes, coupled with those expected on or by Budget day, will comprise a multitude of matters - ranging from what could be classed as long-overdue remedial matters to substantive policy decisions.

The more interesting ones foreshadowed include:

* Fringe Benefit Tax: The shelving of a plan to extend the rules to include car parks provided by employers in the CBDs of major cities; the use of book value of a car rather than cost to calculate the tax and, importantly, through various exemptions, excluding small fringe benefits and small businesses from the rules.

* Limited partnerships: A revamping of outdated special partnership rules, targeted at facilitating venture capital activities.

* Tax simplification: Aligning provisional tax and GST.

* Foreign investment vehicles: Changes that help to attract wealthy individuals into New Zealand.

The question now hanging over business is where the rest of the $1 billion comes from.

Final details are being kept under wraps until May 19, although Cullen has indicated that the bigger-ticket tax items to expect in the Budget relate to depreciation and changes to encourage more investment and saving.

Depreciation

One of the Government's concerns about the tax depreciation system is that present economic depreciation rates may not accurately reflect the reality of economic life in a time of rapidly advancing technology.

If they do not, they may have a disincentive effect on the level of capital investment and may be biased in favour of long-term investments such as rental housing and against short-term assets such as high-tech machinery.

What we can probably expect in the Budget are announcements of increased depreciation rates for shorter-lived assets, with companies investing in new technology potentially having the most to gain.

It is also hoped that the Government will lift the $200 threshold at which assets can be immediately written off rather than capitalised for tax purposes; a realistic threshold would be, say, $1000.

There has also been public discussion about tightening up and potentially reducing depreciation charges applicable on rental properties. Clearly, this move would not be welcomed by the many rental property investors out there if it proceeds.

Savings and investment

This Government has long expressed a commitment to developing policies that build the asset base and savings capacity of New Zealanders. As far as tax is concerned, areas that are expected to be addressed in the Budget include work-based savings and dealing with the problems inherent in the taxation of investments.

As far as work-based savings are concerned, any form of encouragement for employees to participate in superannuation schemes is a worthwhile change.

In relation to the taxation of investments, the Government is expected to announce some decisions addressing the issues raised last year in a report it commissioned from former BT Funds Management chief executive Craig Stobo.

The issues it raised include the different treatment of: investment gains in collective investment vehicles; income from offshore investments as opposed to income from New Zealand investments; and investments in shares from Australia, Britain, Canada, Norway, the United States, Germany and Japan.

Similarly, differences in an individual's marginal tax rate and the tax charged on income derived from collective investment vehicles.

It would also not be surprising if some related issues are kicked back into consultative touch, given what appears to be the inability to find a solution on which all interested parties can reach some form of consensus.

I would go as far as to be shocked if we achieved finality. The challenge in this area is coming up with a workable solution to deal with the many problems inherent in taxation of income from offshore investments.

The carbon tax

Last week, the Government said the carbon tax would be set at $15 per tonne and introduced in April 2007. This will add about 1c to the cost of a unit of electricity, about 4c to a litre of petrol, 46c to a 9kg bottle of LPG and 68c to a 20kg bag of coal. The changes will cost the typical Kiwi household about $4 a week.

A nice spin is that carbon tax is not expected to raise revenue but instead will be recycled by the changes in the tax system expected to be announced by Cullen in the Budget.

In short, but for the carbon tax the Government would not have been able to be so generous with business tax breaks.

I would have to say I am not moved.

The vast majority of positive business changes are remedial in nature and are good policy that should be made. Like it or lump it, the carbon tax will raise real revenue that goes to the Government, not back to business. I suspect linking the two is a recent phenomenon to take some heat off that issue.

So where is all this going? Is it just tinkering around the edges or setting a new direction for New Zealand's tax policy?

Despite the expected winners in the Budget, few people accept the level of tax charged in New Zealand is optimal and generally more than tinkering is required.

Cullen seems also to be ignoring the latest surveys indicating that two-thirds of people feel they are paying too much tax. The lack of any moves to adjust tax brackets for inflation has compounded the problems, with many middle New Zealanders (four out of every 10 policemen and one in every four secondary school teachers) now paying the top marginal tax rate.

Many business leaders still refuse to believe the tax levels benefit business growth and are increasingly concerned that New Zealand's corporate tax rate remains high while many other countries are reducing theirs.

Despite mounting pressure, Cullen has continued to stress that he will not be cutting tax rates as he considers he can get much more bang for his buck by reforming the tax system to try to stimulate investment; also the baby boom issue is weighing heavily on his mind.

Some indication of a move in tax rates is long overdue.

As an example, in a discussion paper sent by the Dutch Finance Minister to the Dutch Parliament on April 29, there are plans to introduce a raft of ground-breaking improvements to the Dutch tax rules with a view to making the Netherlands one of the top locations for investment.

Among the measures being proposed is a reduction in the corporate income tax rate to 20 per cent for profits up to 41,000 and to 26.9 per cent for amounts in excess of that; the tax rate for profits derived from intercompany financing and treasury activities will be reduced to 10 per cent; there will be cross-border relief for losses incurred by EU subsidiaries; and an abolition of capital gains tax.

These changes will make the Dutch tax rate the second lowest in Western Europe. It's simple tax changes such as these which make the real difference: transparent, easily understood and with an immediate impact on the bottom line.

* Thomas Pippos is the managing tax partner at accounting firm Deloitte

Going Dutch

* Proposed tax changes in the Netherlands will make its tax rate the second lowest in Western Europe.
* Company tax will be cut to 20 per cent or 26.9 per cent depending on profit.
* Tax rate for profits derived from intercompany financing and treasury activities will be reduced to 10 per cent.
* There will be cross-border relief for losses incurred by EU subsidiaries.
* Capital gains tax will be abolished.

The New Zealand Herald

China's Offshore IT Potential

New report predicts 52 percent year-over-year growth in Chinese offshore outsourcing; long-term potential to displace India
by Demir Barlas, Line56

Monday, May 09, 2005
In March, a report from Horasis and Going Global Ventures predicted that, in the near future, China would displace India as the world's top technology outsourcing destination.

Now a report from Markets and Research lends weight to that prediction by estimating a 52 percent year-over-year growth for Chinese software outsourcing in 2005. Click here to find out more!

Research and Markets cites "continued government support, investment from foreign companies, and strong demand from Japan" as three factors that will allow the Middle Kingdom's global IT outsourcing share to grow.

It will be interesting to observe whether China, already the world's workshop in many ways, departs from India in focusing on exporting software products as well as services. Research and Markets notes that China is already doing so, particularly to Japan, while in India even the largest IT companies focus more on custom development for global clients than on packaged applications.

Research and Markets believes that China will develop and export software more aggressively. As the company concludes, "2005 is a year worth watching in terms of the development in security software, management software, middleware, collaboration software, and software outsourcing."

Line56.com: China's Offshore IT Potential

Banks must allay customers' net banking fears

By TOM PULLAR-STRECKER
Consumers are becoming wary of internet banking. Concerns about phishing, pharming and keyloggers mean customers are now afraid someone might loot their bank account without them knowing it.

The Australian-owned banks have fronted up to the size of the problem of internet banking fraud in New Zealand. In March they indicated customers had been hit by about 200 frauds last year - mostly phishing and keylogging attacks - with the losses running to hundreds of thousands of dollars.

Most of the banks said they reimbursed all customers whose accounts were raided and all the banks said they reimbursed most customers.

From the banks' perspective, internet banking fraud is rare and the losses are small.

So small, in fact, that some privately admit it is hard for them to justify big investments in two-factor authentication systems or other additional security measures to mitigate the problem.

All two-factor authentication systems are, to some degree, messy and inconvenient. There is a trade-off between the ease of use and the cost and level of security they provide.

The two-factor authentication system just deployed by the Economic Development Ministry is a case in point. By using a plastic card, the system does away with the need to rely on expensive text messages or hardware tokens for authentication. It's very cheap and convenient, but if a card is photographed or copied without the knowledge of the owner, the mechanism is defeated.

The text message-based two-factor authentication system pioneered last year by ASB Bank is, to all intents and purposes, completely secure, but won't appeal to customers who aren't into texting.

Yet doing nothing isn't an option.

People aren't prepared to accept a lot of risk when it comes to safeguarding what, in many cases, will be their life savings. There is a genuine risk that without a real assurance of security a significant proportion of customers will turn away from internet banking and instead rely on branch and phone-based transactions.

Banks can't afford to let that happen. They have invested too much in their internet banking offerings. The recent proliferation of high-interest online and phone-based saving accounts on both sides of the Tasman, and the pretty impressive sums that some of them have attracted from investors, is further evidence of how significant the channel has become for the banks.

On the face of it, there might be a couple of quick fixes.

Should the "pay anyone" facility for customers to transfer funds online to private third-party accounts be switched off, for example?

Bankers say the "pay anyone" feature of internet banking services has become increasingly popular.

One speculates that a large proportion of such transactions are probably accounted for by people paying one another for goods purchased on Trade Me. The banks have no means of knowing for sure whether that is the case.

Another tempting quick fix might be to ban international money transfer service Western Union, which appears to be many crooks' favoured means of transferring money out of the country quickly and anonymously.

Some banks argue that if Western Union were booted out of New Zealand it would only slow down organised internet fraud for a while and that alternatives would emerge. Cash could simply be withdrawn from the New Zealand accounts of the "mules" that are commonly used to funnel stolen funds offshore, and posted overseas.

In the US, the current great hope is that banks will be effective in using software to detect and block suspicious transactions, based on customers' previous behaviour. In Britain, banks have begun delaying online transfers made for the first time between accounts by up to 24 hours to make it more likely they'll detect suspicious activity before it's too late.

It's tempting to argue that a combination of some or all of the measures above would be the best way to mitigate the problem caused by internet banking fraud.

But the problem is not just fraud itself, but the element of fear and uncertainty it creates.

A mix of two-factor authentication and sophisticated monitoring to detect fraudulent transactions won't completely remove that uncertainty and therefore won't ultimately fix the problem.

To do that, banks will have to provide a categoric assurance they will reimburse customers if funds are stolen by internet fraudsters and address whatever consequences that has for the services and security measures they provide.

That's easier said than done. BNZ tried to provide similar assurances in relation to online shopping in 2000 - NetPledge and NetPromise. They became so peppered with qualifications and caveats that were insisted on by the bank's lawyers that the final wording of the guarantees appeared to reduce rather than enhance customers' protection.

Insurance begets insurance fraud.

No one wants to assume risk.

But it's the banks - not consumers - that decide what security measures they are prepared to invest in and what trade-offs they are prepared to make when it comes to internet banking. They are, therefore, the right party to bear that risk.

This would be a good time for them to step up to the mark.

STUFF : TECHNOLOGY : DIGITAL LIVING - STORY : New Zealand's leading news and information website

Has internet betting got the upper hand? - [Sunday Herald]

Has internet betting got the upper hand? - [Sunday Herald]

By Julia Fields


IF the numbers weren’t mindblowing enough, the colourful past of PartyGaming founder Ruth Parasol was guaranteed to make people sit up and take notice.

The story of a former online porn entrepreneur having the presence of mind to invest her small fortune into building an internet gambling empire was tantalising media fodder.

But the planned £5 billion-plus flotation of PartyGaming on the London Stock Exchange has far bigger implications than merely making Parasol, her husband, Russ DeLeon, and India software designer Anurag Dikshit paper billionaires.

It marks a new phase in an industry which has traditionally kept its business dealings close to its chest. The potential size of PartyGaming’s valuation has shone a spotlight on the money-making ability of internet gambling. And if the Gibraltar-based company gets a favourable reception from investors, it is expected to kick off a wave of initial public offerings by other internet rivals.

Waiting in the wings is online casino and poker room 888.com, the next company tipped to take the stock market plunge. “We will be looking at it [the PartyGaming flotation] very carefully,” says John Anderson, chief executive of 888.com. “We’ll be making our decision on whether to float quite soon.”

Having access to the public markets could take the fortunes of online gambling to the next stratosphere, providing extra trust-factor to tempt customers and extra capital to expand into new territories and types of games.

Already, the internet jackpot has mushroomed to more than $9.2 billion a year. But with more and more consumers becoming switched onto broadband, that figure is expected to rise to as much as $22.7bn by 2009.

“The market potential is quite enormous. Of all the gambling taking place, online is growing the fastest,” says Warwick Bartlett, of UK-based Global Betting and Gaming Consultants.

To put things into context, the internet sector is still a minnow among gambling sharks. According to Bartlett, it only represents 3.9% of the $236bn gross win from all forms of gambling worldwide. It is essentially in its infancy and extremely fragmented.

Sportingbet, which is Britain’s only major quoted online gambling group and claims to be the second largest company in the world in terms of gross profit, believes it has just a 3.5% share of the online market.

But that doesn’t stop online operators from saying that the internet side of the business is now holding all of the cards to become a dominant betting force in the world, and sooner rather than later.

“Online gambling profits are already 10 times bigger than the betting shops,” claims Nigel Payne, chief executive of Sportingbet. “We’re not as big as the lotteries or all the casinos in the world put together. But within our industry, we have no doubt we will be in time. I think within five years, online gambling will be bigger than the casino industry.”

It’s a bold statement, but Payne believes the evidence is already stacking up. “During the Superbowl [one of the biggest US sporting events of the year[, my business took more bets than all of the Las Vegas casinos put together. My poker business [on the website Paradise Poker] each day has five times the number of tables playing poker than all of the Las Vegas casinos put together.”

It appears the betting shops have already read the writing on the wall with both William Hill and Ladbrokes running online businesses.

But Bartlett, whose consultancy has advised Dresdner Kleinwort Wasserstein on the PartyGaming float, believes that the internet has a “long road” to travel to seriously challenge the land-based casino industry.

He points out that these companies are also charting new territory in Asia and taking advantage of the Chinese government’s relaxation of gambling laws in Macau.

But Payne argues that no matter how fast they build, they can never have the same geographic reach of online gaming.

“There are about 220 countries around the world. Only five of those 220 actually have betting shops. Most of the rest of the world don’t have poker shops, casinos and betting shops. They still gamble but they do it with Luigi behind the bar or a guy with a blackboard around the corner,” says Payne.

Once internet penetration comes along, he says experience shows that punters can be easily converted to gamble online in a set up that is by comparison far more regulated than handing money over to a man on the street. And while a London-based online operation can instantly tap the bank accounts or credit cards of people all over the world, a casino based in Macau or Glasgow has to count on tourist traffic or consumers living in the region.

Payne believes a number of factors are also working together to make his job of converting the new generation of gamblers much easier. “There has been an increase in the televised nature of events that people gamble on, whether that be boxing or poker games,” Payne says.

“As people see more of these events on TV, and at the same time there is an increase of internet penetration and an increase in the use of broadband, the ease of doing this in their home is all going in one direction.”

It’s this potential that has eight-year-old online player Party Gaming expected to achieve a market valuation of £5bn-plus. The Gibraltar-based company will likely sail in to the FTSE-100 if it proceeds with a listing.

But it’s more than growth prospects that has potential investors excited. The industry benefits from an incredibly low-cost business model and as a result makes big profits.

The majority of operators are based in low-tax environments like the Isle of Man, Gibraltar, Malta, Alderney and Antigua. Their call centre staff can be based in countries with cheap wages; and they don’t have any of the expense – in terms of capital investment and legions of employees – associated with creating Las Vegas-style casinos.

As a result of such economies, Party Gaming made pre-tax profits of $371.1m on turnover of $601.6m last year, an incredibly high margin compared with most businesses. In the first three months of this year, it has racked up profits of $125.6m.

Some analysts believe that the valuation of PartyGaming could have been closer to £10bn, if there weren’t uncertainties over regulatory issues.

The valuation reflected the fact that 88% of sales are generated in the US. Greg Feehely of Altium Capital says: “A company with that sort of growth record and potential would float at more than 20 times earnings. It is only being valued at around 10-12 times earnings, because of the risk of the uncertain legal situation in the US.”

And that’s where the whole business of internet gambling gets really interesting. So far, the real sting of online gambling both in terms of its stock-market valuation potential and its ability to attract customers has been held back by the uncertainty of its legal position in certain geographical territories.

While the share price of Sportingbet has performed well, giving the AIM-listed company a market capitalisation of more than £923m, Payne believes it is still undervalued because of the “messy legal position” in the US. In a note to clients, broker Morgan Stanley recently said that the shares in Sportingbet could double again in the next two years, but cautioned that the risks were high because prohibition in the US could wipe out two-thirds of its earnings.

So far, Americans have been the most eager to log on and place their bets. They make up 80% of all online poker players and 55% of overall internet gamblers. It is legal to place an online wager on a horse race, but not on any other sports event.

The legality of online poker and casino games is open to interpretation, with the US government saying “illegal” and online operators arguing that no legislation really exists. Regardless, the American government has been manoeuvring to prevent internet companies based offshore and out of its legal jurisdiction from taking bets from its citizens.

The US Department of Justice has warned media outlets not to take advertising from online betting groups and has pressured banks to refuse to process credit card payments. While these tactics have made advertising difficult, companies have found a way around every obstacle hurled in their way.

“These online sites are quite novel at adopting guerilla marketing tactics,” says Bartlett. “Golden palace.com will tattoo its name on a man’s chest and have him streak across the field during a major football game. Last month, it paid $245,000 for a Volkswagen Golf. Why do that? Because it was formerly driven by the new Pope. It stands to get a lot of publicity from that.

“I think the US has done all it can possibly do to prevent online gambling and it hasn’t succeeded.”

Even if the US cemented its position by creating new legislation that outright banned all forms of internet gambling, views are mixed on how effective a prohibition would be. Anderson says he wouldn’t do anything illegal, implying that 888.com would have to stop taking bets from the US.

Payne believes it is more likely that the US will choose to properly regulate the industry rather than ban it. “There’s no internet product or service in the world that has successfully been prohibited by anybody,” he says.

The largest players in the industry hope that countries with unclear positions will follow the UK’s example. “What would help the situation is if, as in the UK, all the regulations were clarified and written down. There’s too many places where it’s grey, where there are too many questions,” says Anderson, who claims to have 18 million registered users.

The Labour government appears to want the UK to be the world’s hub for internet gambling. Hoping to entice offshore companies to move their operations to British soil, the government rolled out the welcome mat. It gave the green light to all forms of web betting in its new Gambling Act, as long as regulations on age restrictions and the monitoring of prospective collusion or addiction problems are followed.

At first, it tried to limit marketing rights to companies based in the EU, but it is expected to extend that to other properly regulated jurisdictions.

It’s a situation that must have infuriated traditional bricks and mortar casino operators. The world’s gambling impresarios from Las Vegas Sands to MGM Mirage and Kerzner International came to Britain two years ago with plans to build a new generation of entertainment palaces. But these dreams were shattered in April when the UK government reduced the number of available supercasino licences from an expected eight to just one. While casino operators still hold out hope that the number will be increased, the move was “deeply disappointing”.

Anderson says that the UK position has given the online industry more credibility: 888.com has already gone to great lengths to gain consumer confidence by helping to set up e-Cogra. The body uses independent audit firms to make sure that member companies use software that clearly identifies underage users and tracks every single transaction to make sure the games are fair.

But Anderson says that if all countries regulated properly, it would allow 888.com to market more openly in places like the US and at the same time discourage shadier operations. “The more regulated you are, the more people trust you and the more money you make,” he says.

Once a product reaches mainstream status, the growth potential just keeps on rising. All operators need to do is wait for more people to get connected to the internet.

With this in mind, Anderson agrees with his rival Payne that his industry could indeed overtake the land-based casino giants in the popularity stakes.

“There is room for both. Live casinos have a buzz, they’ve got bars and entertainment. They’re exciting holiday destinations. Internet is something you can do at home,” he says. “But land-based casinos aren’t in a growth period, certainly not to the same extent as online gambling. Their business is in a more mature phase.

“I believe we will overtake the casino industry. We’ve got at least five or six years of straight line growth potential.”

12 June 2005

UK - Investors await regulators line on hedge funds

Investors await regulator’s line on hedge funds
By Kate Burgess and Sundeep Tucker

Published: June 10 2005 21:23 | Last updated: June 10 2005 21:23

FSAPrivate investors looking for ways to earn double-digit returns will watch closely the Financial Services Authority's action to open up the hedge funds debate.

Once seen as dangerous, high-risk and exotic investments, hedge funds are becoming mainstream.

Increasing numbers of retail investors want to invest in these funds – unregulated investment schemes that have the freedom to switch between asset classes and are able to make money in falling markets.

This, and the fact that assets in hedge funds are increasing to more than $1,000bn worldwide, has changed perceptions. The FSA’s discussion paper, expected this month, marks this sea change.

In March 2003, the financial regulator concluded there was no need to relax its restrictions on hedge funds. These kept hedge funds offshore; hampered retail investors from buying them; and prevented on-shore funds from using hedge-fund investment strategies, such as high levels of debt or shorting.

If private investors wanted to put their money into hedge funds they could buy offshore, said the FSA. Or they could buy shares in several funds of hedge funds available as investment trusts listed on the London Stock Exchange. At the time, the FSA said, there was little evidence of demand from retail investors.

Within a year, however, the regulator was forced to reconsider as demand escalated. In early 2004 it signalled a more liberal stance when it rewrote the rule book on onshore unit trusts and open-ended investment schemes and launched “qualified investor schemes”. For the first time, professional investors and sophisticated retail clients were allowed access to funds that use hedge fund techniques – including gearing up, taking on high levels of debt, going short and using derivatives. The industry applauded.

But now the industry is urging the financial services regulator to go further, arguing that the relaxation of the UK's mutual fund regime should be extended. They say that while private investors have become more knowledgeable and are demanding more access to hedge funds, they remain wary of offshore products, which have tax disadvantages and suffer from poor consumer protection. Quoted investment trusts have not performed well, either.

“Investors prefer regulated onshore open-ended funds and managers are willing to deliver them,” said Timothy Spangler, partner in the investment funds group at Berwin Leighton Paisner.

The UK's fund management industry is also keen to protect its position as one of the leading international fund management centres. About 70 per cent of European single-manager hedge funds are managed from London, but this pre-
eminence is under threat.

Many other EU financial centres, including Germany and France, have changed their stance on hedge funds in an attempt to draw the lucrative and fast-growing hedge fund industry into the EU. This week Germany stepped back from imposing restrictions on hedge funds.

When the FSA first asked the industry in 2003 whether it should reform its rules on hedge funds, the response was muted. That has changed dramatically. Now it is clear that asset management firms will welcome any change that allows private investors easier access to them. But consumer groups will watch developments closely. They are wary of products that may put investors at risk.

http://news.ft.com/cms/s/4dab6126-d9ed-11d9-b071-00000e2511c8.html

The NZ dollar factor

The Dollar Factor
It's an oft-quoted excuse for not investing offshore: If you do, you take on foreign exchange risk. But is it really risky?

11 June 2005

In a recent column, I pointed out that if foot and mouth disease had been confirmed in New Zealand, those with some of their savings in overseas assets, such as shares, would have been considerably better off than most people, whose houses, jobs and savings are all in the local economy.

That prompted a letter from a reader, who suggested that I "may like to cover the exchange risk in a future article."

"If the New Zealand dollar increases or the US dollar continues to decline, the value of the offshore investment will reduce, as some of us have found over recent years," he wrote.

"On the other hand, if there was an actual foot and mouth disease outbreak, I guess the New Zealand dollar would crash and the offshore investments would increase in value, in New Zealand dollar terms - which just goes to prove the old proverb 'It's an ill wind...'etc." Quite.

A paper by the Reserve Bank and Treasury says the Kiwi dollar might drop about 20 per cent in the first quarter following a foot and mouth outbreak, and stay "below the baseline for around two and a half years."

That's way bigger than the usual fluctuations, of less than 8 per cent in a year. And it would certainly boost the portfolios of those with offshore investments.

But what about the harm to their portfolios if, instead, the Kiwi dollar continues to rise? I have two responses:

* If you want to avoid foreign exchange risk, you can invest in a hedged international share fund.

The fund managers buy financial instruments that cancel out the effects of foreign exchange changes. You won’t gain if our dollar falls, and you won't lose if it rises.

Alternatively, you can go into a fund with 50 per cent hedging, which halves the effects of exchange changes.

* Over all, you may actually reduce rather than boost your risk by being exposed to foreign exchange movements - especially if you are saving for retirement.

It all hangs on how much of your savings you expect to spend on overseas travel or on imported items - such as electronic goods, cars, boats, many clothes, books, music and so on.

For many in retirement who have a mortgage-free home, travel and imports can be quite a high proportion of total spending.

Let's say, for you, that it's 30 per cent. It's best, then, to have 30 per cent of your savings offshore.

When the Kiwi dollar falls, which makes imports and overseas travel more expensive, the value of your offshore savings will rise to compensate.

True, the reverse will sometimes happen. When the Kiwi rises, your offshore savings will lose value. But you won't mind too much, because at the same time imports and overseas travel will be cheaper.

Confused? All that really matters is that, if you plan to spend a chunk of your savings on imports or overseas travel, it's best to put a corresponding chunk of those savings offshore.

Footnote: Changes proposed in the recent Budget will, if they go ahead, tax offshore shares more heavily than New Zealand shares.

The government will soon release a discussion paper on the proposed changes. I hope the discussion leads to the removal of these tax differences.

New Zealanders are better off if they diversify their investments offshore. And if individuals are better off, surely the whole country is.

If the next foot and mouth scare is real, any government that has discouraged offshore investment is going to look pretty silly.
© 2005 NZCity, Mary Holm