International Financial Law Prof Blog

Editor: William Byrnes
Texas A&M University
School of Law

Tuesday, February 10, 2015

Banking giant HSBC sheltered murky cash linked to dictators and arms dealers

Journalists logoSecret documents reveal that global banking giant HSBC profited from doing business with arms dealers who channeled mortar bombs to child soldiers in Africa, bag men for Third World dictators, traffickers in blood diamonds and other international outlaws.

The leaked files, based on the inner workings of HSBC’s Swiss private banking arm, relate to accounts holding more than $100 billion. They provide a rare glimpse inside the super-secret Swiss banking system — one the public has never seen before.

The documents, obtained by the International Consortium of Investigative Journalists via the French newspaper Le Monde, show the bank’s dealings with clients engaged in a spectrum of illegal behavior, especially in hiding hundreds of millions of dollars from tax authorities. They also show private records of famed soccer and tennis players, cyclists, rock stars, Hollywood actors, royalty, politicians, corporate executives and old-wealth families. 

read ICIJ's incredible story here!

February 10, 2015 | Permalink | Comments (0)

Regulating Against Bubbles: How Mortgage Regulation Can Keep Main Street and Wall Street Safe - From Themselves

SSRNNYU Law and Economics Research Paper No. 15-03

RYAN BUBBNew York University School of Law and PRASAD KRISHNAMURTHYU.C. Berkeley School of Law, University of California, Berkeley - School of Law, Berkeley Center for Law, Business and the Economy, University of California, Berkeley

As the Great Recession has painfully demonstrated, housing bubbles pose an enormous threat to economic stability. However, the principal mortgage market reforms in response to the latest boom and bust — the Dodd-Frank Act’s provisions on mortgage lending and securitization — are not designed to protect the economy from a housing bubble. Instead, these reforms tinker with the incentives of securitizers and lenders to prevent their exploitation of naïve investors and borrowers. In particular, they require securitizers to retain credit risk and lenders to assess borrowers’ ability to repay. 

This approach misses the mark. The sine qua non of a bubble is market-wide overoptimism about future house prices. Irrational exuberance in a bubble leads parties across the entire system of housing finance to make risky bets based on rosy beliefs. It is not just investors who underprice credit risk and borrowers who overextend. Securitizers and lenders are also eager to take on dangerous levels of risk and leverage. The Dodd-Frank Act’s incentive-based reforms, by relying on rational behavior by supposedly sophisticated parties, will do little to protect the economy from a bubble. They might even increase systemic risk by concentrating mortgage risk in large financial institutions.

Because indirect incentive-based regulation is ineffective in a bubble, more direct mandates should be employed. We suggest a number of direct regulations to limit mortgage leverage, debt-to-income levels, and other contractual features that enable or induce borrowers to take out larger loans. We show how such limits can curb bubbles, lower defaults, and reduce household exposure to housing risk. While such limits would undoubtedly entail costs, such as restricting access to mortgage credit and homeownership, we suggest straightforward ways to mitigate many of these concerns. Our critique of incentive-based regulation also provides an important new perspective on current legislative efforts to reform the broader architecture of housing finance.

The Dodd-Frank Act’s mistargeted approach reflects in part the growing literature in behavioral law and economics that shows how sophisticated firms take advantage of biased consumers. Indeed, much of the debate over the appropriate response to the Great Recession has been about how to keep Main Street safe from Wall Street. We advance this literature by showing that the mistakes of firms have important implications for the design of regulation. Our analysis calls for a fundamental paradigm shift. The central policy challenge is to keep Main Street and Wall Street safe from themselves.

February 10, 2015 | Permalink | Comments (0)

Monday, February 9, 2015

OECD BEPS Meeting Today and Tomorrow

Logooecd_enThe OECD will present the latest developments in the OECD/G20 project to combat base erosion and profit shifting (BEPS) by multinational enterprises during a G20 Finance Ministers meeting today and tomorrow (9-10 February) in Istanbul, Turkey.

OECD and G20 countries have agreed three key elements that will enable implementation of the BEPS Project:

  • a mandate to launch negotiations on a multilateral instrument to streamline implementation of tax treaty-related BEPS measures;

  • an implementation package for country-by-country reporting in 2016 and a related government-to-government exchange mechanism to start in 2017;

  • criteria to assess whether preferential treatment regimes for intellectual property (patent boxes) are harmful or not.

“These are important steps forward, which demonstrate that progress is being made toward a fairer international tax system,” OECD Secretary-General Angel Gurría said. “These decisions signal the unwavering commitment of the international community to put an end to base erosion and profit shifting, in line with the ambitious timeline endorsed by G20 leaders.”

The G20-OECD BEPS Action Plan sets out 15 key elements of international tax rules to be addressed by year-end 2015. The project aims to help governments protect their tax bases and offer increased certainty and predictability to taxpayers, while guarding against new domestic rules that result in double taxation, unwarranted compliance burdens or restrictions to legitimate cross-border activity. The OECD presented 7 of the 15 elements of the Action Plan to the G20 Leaders Summit in Brisbane, Australia in November 2014, and is scheduled to present the remaining elements by the next Leaders Summit in Antalya, Turkey in November 2015.

The implementation of the BEPS Action Plan will require modifications to the existing network of more than 3,000 bilateral tax treaties worldwide. The planned multilateral instrument will offer countries a single tool for updating their networks of tax treaties in a rapid and consistent manner.

The agreed mandate authorises the formation of an ad-hoc negotiating group, open to participation from all states. The group will be hosted by the OECD and will hold its first meeting by July 2015, with an aim to conclude drafting by 31 December 2016.

Another key objective of the BEPS project is to increase transparency through improved transfer pricing documentation standards - including through the use of acountry-by-country reporting template that requires multinationals to provide tax administrations with information on revenues, profits, taxes accrued and paid, along with some activity indicators. The new guidance presented to the G20 requires country-by-country reporting by multinationals with a turnover above EUR 750 million in their countries of residence starting in 2016. Tax administrations will begin exchanging the first country-by-country reports in 2017. Countries have emphasised the need to protect tax information confidentiality.

The guidance confirms that the primary method for sharing such reports between tax administrations is through automatic exchange of information, pursuant to government-to-government mechanisms such as bilateral tax treaties, the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, or Tax Information Exchange Agreements (TIEAS). In certain exceptional cases, secondary methods, including local filing can be used.

Determining which intellectual property regimes (patent boxes) and other preferential regimes can be considered harmful tax practices is another key objective of the BEPS Project. In Brisbane, G20 Leaders endorsed a solutionproposed by Germany and the UK on how to assess whether there is substantial activity in an intellectual property regime. The proposal – based around a “nexus approach,” which allows a taxpayer to receive benefits on Intellectual Property income in line with the expenditures linked to generating the income - has since been endorsed by all OECD and G20 countries. Transitional provisions for existing regimes, including a limit on accepting new entrants after June 2016, have been agreed, and work on implementation is ongoing.

Officials from more than a dozen developing countries participated in the discussion, of the new BEPS implementation guidance, in line with the broader strategy for deepening engagement of developing countries in the BEPS Project, which was launched on 12 November 2014 and welcomed by the G20 Leaders in Brisbane. This direct participation will be complemented by dialogues with tax administration and policy officials from all countries in each region, as well as regional tax organisations. This broader engagement is consistent with the global effort to mobilise resources for financing the Post-2015 Framework.

February 9, 2015 | Permalink | Comments (0)

DOJ and State AGs Secure $1.375 Billion Settlement with S&P for Defrauding Investors in the Lead Up to the Financial Crisis

Justice logoThe Department of Justice and 19 states and the District of Columbia have entered into a $1.375 billion settlement agreement with the rating agency Standard & Poor’s Financial Services LLC, along with its parent corporation McGraw Hill Financial Inc., to resolve allegations that S&P had engaged in a scheme to defraud investors in structured financial products known as Residential Mortgage-Backed Securities (RMBS) and Collateralized Debt Obligations (CDOs). 

The agreement resolves the department’s 2013 lawsuit against S&P, along with the suits of 19 states and the District of Columbia.  Each of the lawsuits allege that investors incurred substantial losses on RMBS and CDOs for which S&P issued inflated ratings that misrepresented the securities’ true credit risks.  Other allegations assert that S&P falsely represented that its ratings were objective, independent and uninfluenced by S&P’s business relationships with the investment banks that issued the securities.

The settlement announced today is comprised of several elements.  In addition to the payment of $1.375 billion, S&P has acknowledged conduct associated with its ratings of RMBS and CDOs during 2004 to 2007 in an agreed statement of facts.  It has further agreed to formally retract an allegation that the United States’ lawsuit was filed in retaliation for the defendant’s decisions with regard to the credit of the United States.  Finally, S&P has agreed to comply with the consumer protection statutes of each of the settling states and the District of Columbia, and to respond, in good faith, to requests from any of the states and the District of Columbia for information or material concerning any possible violation of those laws.

“On more than one occasion, the company’s leadership ignored senior analysts who warned that the company had given top ratings to financial products that were failing to perform as advertised,” said Attorney General Holder.  “As S&P admits under this settlement, company executives complained that the company declined to downgrade underperforming assets because it was worried that doing so would hurt the company’s business.  While this strategy may have helped S&P avoid disappointing its clients, it did major harm to the larger economy, contributing to the worst financial crisis since the Great Depression.”

Attorney General Holder was joined in announcing the settlement with Acting Associate Attorney General Stuart F. Delery, Acting Assistant Attorney General for the Civil Division Joyce R. Branda and Acting U.S. Attorney for the Central District of California Stephanie Yonekura.  Also joining the Department of Justice in making this announcement are the attorneys general from Arizona, Arkansas, California, Connecticut, Colorado, Delaware, Idaho, Illinois, Indiana, Iowa, Maine, Mississippi, Missouri, New Jersey, North Carolina, Pennsylvania, South Carolina, Tennessee, Washington and the District of Columbia.

“This resolution provides further proof that the Department of Justice will vigorously pursue investigations and litigation, no matter how challenging, to protect the best interests of the American people,” said Acting Associate Attorney General Delery.  “As part of the resolution, S&P admitted facts demonstrating that it misrepresented itself to investors and the public, allowing the pursuit of profits to bias its ratings.  S&P also agreed to retract its unsubstantiated claim that this lawsuit was initiated in retaliation for the decisions S&P made about the credit rating of the U.S. government.  Today's announcement is the latest result of our dedicated effort to address misconduct of every kind that contributed to the financial crisis.”

“Today’s historic settlement demonstrates that we will use all of our resources and every legal tool available to hold accountable those who commit financial fraud,” said Acting Assistant Attorney General Branda.  “Thanks to the tireless efforts of our team in Washington and California, S&P has not only paid a record-setting penalty, but has now admitted to the American people facts that make clear its own unlawful role in the financial crisis.”

Half of the $1.375 billion payment – or $687.5 million – constitutes a penalty to be paid to the federal government and is the largest penalty of its type ever paid by a ratings agency.  The remaining $687.5 million will be divided among the 19 states and the District of Columbia.  The allocation among the states and the District of Columbia reflects an agreement between the states on the distribution of that money.

In its agreed statement of facts, S&P admits that its decisions on its rating models were affected by business concerns, and that, with an eye to business concerns, S&P maintained and continued to issue positive ratings on securities despite a growing awareness of quality problems with those securities. S&P acknowledges that:

  • S&P promised investors at all relevant times that its ratings must be independent and objective and must not be affected by any existing or potential business relationship;
  • S&P executives have admitted, despite its representations, that decisions about the testing and rollout of updates to S&P’s model for rating CDOs were made, at least in part, based on the effect that any update would have on S&P’s business relationship with issuers;
  • Relevant people within S&P knew in 2007 many loans in RMBS transactions S&P were rating were delinquent and that losses were probable;
  • S&P representatives continued to issue and confirm positive ratings without adjustments to reflect the negative rating actions that it expected would come.

In addition, S&P acknowledges that the voluminous discovery provided to S&P by the United States in the litigation does not support their allegation that the United States’ complaint was filed in retaliation for S&P’s 2011 decisions on the credit rating of the United States.  S&P will formally retract that claim in the litigation.

“S&P played a central role in the crisis that devastated our economy by giving AAA ratings to mortgage-backed securities that turned out to be little better than junk,” said Acting U.S. Attorney Yonekura.  “Driven by a desire to increase profits and market share, S&P blessed innumerable securitizations that were used by aggressive lenders to offload the risks of billions of dollars in mortgage loans given to homeowners who had no ability to pay them off.  This conduct fueled the meltdown that ultimately led to tens of thousands of foreclosures in my district alone.  This historic settlement makes clear the consequences of putting corporate profits over honesty in the financial markets.”

February 9, 2015 | Permalink | Comments (0)

Stephen Platt: Criminal Capital

Money LaunderingCriminal Capital is the first book to examine the role played by the financial services industry in facilitating crime and laundering criminal property by analysing the vulnerability of banks, brokerages, trust companies and investment funds to criminal abuse. 

The book examines the causal factors that link harmful behaviours in finance including mis-selling, rate fixing, sanctions evasion money laundering and the facilitation of terrorism, drugs, human trafficking, corruption, piracy and tax evasion. It also considers why such behaviours correlate with the excessive risk taking that toppled the global economy in 2008.

Covering the role of both on and offshore finance centres the book also considers the limitations of the money laundering model relied upon by regulators and the finance industry to identify abusive customer relationships. The book proposes a new model of money laundering prevention.

This highly acclaimed and informative book challenges the reader to consider whether following the financial crisis sufficient steps have been taken to address toxic behaviours in finance or whether radical reform is needed.

Stephen Platt is one of the world’s most experienced practitioners in the conduct of regulatory investigations. He is widely regarded as a leading expert in the criminal abuse of financial services and related regulatory issues with particular specialisms in anti-money laundering, sanctions and US extra territoriality.

Stephen is an English barrister and a visiting Professor of Law at Georgetown University Law Center in Washington D.C. He acts for regulatory authorities in the conduct of investigations and skilled person reports and for financial institutions on large-scale remediation projects following enforcement action.  Stephen is slated to teach a course in Offshore Financial Centers:  Use and Abuse at Georgetown University Law Center as part of their LL.M. in Taxation and Executive LL.M. in Taxation programs.

February 9, 2015 | Permalink | Comments (0)

Can a Foreign Financial Firm Open An Account Without a US FATCA Self-Certification?

Irs_logoA new FAQ has been posted to the FATCA web page. The FAQ can be found under the General Compliance category, Question 10.

If a Reporting Model 1 FFI or a Reporting Model 2 FFI that is applying the due diligence procedures in section III, paragraph B, of Annex I of the IGA cannot obtain a self-certification upon the opening of a New Individual Account, can the FFI open the account and treat it as a U.S. Reportable Account?

No.  Pursuant to section III, paragraph B, of Annex I of the IGA, the FFI must obtain a self-certification at account opening.  If the FFI cannot obtain a self-certification at account opening, it cannot open the account.


February 9, 2015 | Permalink | Comments (0)

Saturday, February 7, 2015

Ross Ulbricht Convicted of Running Silk Road Online Black Market, Faces Life in Prison

Bloomberg reports that Ross Ulbricht, founder of Silk Road, was found guilty and may spend his life in prison.  Ulbright used the moniker “Dread Pirate Roberts.”  Silk Road offered people the chance to anonymously buy illegal merchandise and services with bitcoins.

Also see WSJ article

February 7, 2015 | Permalink | Comments (0)

Will Your In-Flight Wi-Fi Allow Terrorists To Attack Your Flight?

Since mid-2013, the Federal Communications Commission has been considering rules that would establish an air-to-ground mobile broadband service that would be aimed at bringing Wi-Fi speeds on planes on par with the speeds consumers are used to receiving on the ground. ...

“In the opinion of the AFA and DGI representatives, either proposal would greatly enhance communications capabilities for terrorists and increase cyberwarfare vulnerabilities, leading to unacceptable risks of successful attacks on the United States aviation system,” ...

read the full article at Bloomberg Law


February 7, 2015 | Permalink | Comments (0)

Friday, February 6, 2015

Goodbye Japan, Hello San Diego

WasedaThis past week I have been the guest of Waseda University (Tokyo), Japan's Premier institution.  It's cold for a professor from San Diego - 28F and below.  But the faculty, deans, and students of Waseda have been extremely warm, and made this visit memorable.  The workshop topic is once again, FATCA and tax information exchange with the USA, its impact on Japan's financial institutions.

Professor Dr. Maji Rhee is on sabbatical this year completing her JSD which includes an empirical analysis of valuation methodologies used within Japanese intangibles transfer pricing disputes the past decade.  She has obtained redacted information from court decisions, published and unpublished, corporations and the Revenue.  She is examining specifically the impact of the burden of proof on the methodology choice.  I am a member of her Board, her main supervisor being transfer pricing expert Dr. George Salis (Vertex).  

Special thanks to the hospitality of each Waseda dean, the dean of the law school, the SILS faculty, the international programs and advisor to the President.

February 6, 2015 | Permalink | Comments (0)

Basel III and Its New Capital Requirements, as Distinguished from Basel II

SSRN"Basel III and Its New Capital Requirements, as Distinguished from Basel II" Free Download 
The Banking Law Journal, Vol. 131(1), pp. 27-69  EMILY LEEThe University of Hong Kong - Faculty of Law

From July 1988 when the original Basel Accord, Basel I, was introduced until January 2013 when Basel III implementation began, over the past 25 years, capital adequacy requirements have emerged as the dominant form of regulation for maintaining the financial soundness of banks.

The rationale for reserving regulatory capital is to allow a bank, when under financial stress, to draw upon a pool of reserved funds comprised of shareholders’ equity and its retained earnings, providing a buffer against a bank’s unexpected losses. The Basel Committee on Banking Supervision (“Basel Committee”) issued a consultative document in December 2009 titled “Strengthening the Resilience of the Banking Sector,” often referred to by practitioners as “Basel III.”

Though a consultative document, the Basel Committee saw it as a set of proposed changes to the Basel II framework that was first issued in 2004. A comprehensive reform package, Basel III draws lessons from the global financial crisis of 2007-2009, one of them being the banking sectors in many countries had built up excessive on- and off-balance sheet leverage that was accompanied by a gradual erosion of the quantity and quality of the capital base.

Basel III strengthens and redefines the global capital framework by raising banks’ capital adequacy ratios and requiring banks to build up its capital defenses in periods when credit is at excessive levels, upholding a financially sound banking system that is the backbone of a functional market economy; because a market economy needs a financially sound banking system for raising capital and extending credit.

Despite its relatively long five year phase-in period, Basel III is stricter than Basel II; and, Basel III, like its predecessors, does not have enforcement mechanisms due to its soft-law nature. Focusing especially on Basel III’s capital adequacy requirement, this article aims to examine Basel III’s implementation and measures for reducing systemic risk, its improvement from Basel II as well as its impact on trade finance, project finance and small- and medium-sized enterprises (“SMEs”).

February 6, 2015 | Permalink | Comments (0)

Thursday, February 5, 2015

The Principles of Maximizing Post-Retirement Income

ThinkAdvisorFor each and every client who is retired or approaching retirement, a single key question will undoubtedly arise: how does the client determine the order in which to draw from the hard earned savings that he has accumulated during working years?

Proper sequencing of withdrawals from taxable accounts, tax-deferred accounts (IRAs and 401(k)s) and Roth accounts can make or break a client’s retirement income plan, making this one of the most important counseling points for any financial advisor.

While every client’s circumstances will be unique, fortunately there are several key guiding principles that can be followed to ensure that each client withdraws funds in a manner that will maximize retirement income potential.

Read the Think Advisor article 

February 5, 2015 | Permalink | Comments (0)

Wednesday, February 4, 2015

Anti Trust Division 2014 Total in Criminal Fines Collected

Justice logoThe Department of Justice collected $1.861 billion in criminal fines and penalties resulting from Antitrust Division prosecutions in the fiscal year that ended on Sept. 30, 2014.

The Department of Justice collected $1.861 billion in criminal fines and penalties resulting from Antitrust Division prosecutions in the fiscal year that ended on Sept. 30, 2014.

Contributing in part to one of the largest yearly collections for the division, five of the companies paid in full penalties that exceeded $100 million, including a $425 million criminal fine levied against Bridgestone Corp., the fourth-largest fine the Antitrust Division has ever obtained. 

The second-largest fine collected was a $195 million criminal fine levied against Hitachi Automotive Systems Ltd.

The three additional companies that paid fines and penalties exceeding $100 million were Mitsubishi Electric Corp. with $190 million, Toyo Tire & Rubber Co. Ltd. with $120 million and JTEKT Corp. with $103.2 million.

The collection total also includes penalties of more than $561 million received as a result of the division’s LIBOR investigation, which has been conducted in cooperation with the Justice Department’s Criminal Division.  In addition, in the last fiscal year the division obtained jail terms for 21 individual defendants, with an average sentence of 26 months, the third-highest average ever.

“The size of these penalties is an unfortunate reminder of the powerful temptation to cheat the American consumer and profit from collusion,” said Assistant Attorney General Bill Baer for the Antitrust Division. 

February 4, 2015 | Permalink | Comments (0)

Tuesday, February 3, 2015

Court Blocks Restrictive State Medicaid Annuity Practices

ThinkAdvisorMedicaid compliant annuities can play an important role in long-term care planning for many married clients, but in recent years, restrictive state and local policies have often prevented clients from fully taking advantage of these federally regulated products.

Because a Medicaid compliant annuity is often the only means by which a healthy client is able to secure a stable income stream once his or her spouse requires state-sponsored Medicaid assistance, state-imposed restrictions in this area can force a Medicaid-reliant client into poverty.

To prevent this, a federal court recently stepped in to issue an injunction against the program that implements Ohio’s Medicaid policies, indicating that the tides might be turning and easing the path for clients who wish to use Medicaid compliant annuities in their long-term care planning.

Read about this case and its potential impact on Think Advisor


February 3, 2015 | Permalink | Comments (0)

Monday, February 2, 2015

Overcoming Sequence of Return Risk in Retirement Income

ThinkAdvisorWhen it comes to retirement income planning, considerations underlying a client’s accumulation of assets during working years traditionally take center stage.  Equally important, however, are the issues that a client will face regarding investment decisions once he or she has reached retirement age—but unfortunately, in many cases these concerns are overlooked when determining how best to structure the client’s retirement assets. 

Sequence of return risk is one of these critical, yet too often overlooked, decumulation-stage issues that can make or break your client’s retirement income withdrawal strategy—luckily, this type of risk can often be diminished by incorporating annuities into the mix, safeguarding the client’s retirement resources in the process.  Read William Byrnes and Robert Bloink's full story on Think Advisor

February 2, 2015 | Permalink | Comments (0)

Sunday, February 1, 2015

Lux Leaks: Revealing the Law, One Plain Brown Envelope at a Time

Tomorrow's Research Today

"Lux Leaks: Revealing the Law, One Plain Brown Envelope at a Time"


Tax Notes International, Vol. 76, No. 12, 2014

ALLISON CHRISTIANSMcGill University - Faculty of Law

A group of journalists recently revealed “LuxLeaks”: a set of documents showing that Luxembourg’s tax authority has been systemically delivering secret deals to multinationals. In this column, I explain why LuxLeaks has revealed a feature, not a bug, in the international tax system. Governments around the world have intentionally placed much of international tax law outside of public view -- in letter rulings like Luxembourg’s, but also in other agency-level decision-making processes, notably in the context of tax treaty dispute resolution. The outcomes of these confidential processes are surely the world’s largest collection of the “real” law of international taxation. But law should not be something discovered through leaks to journalists. Lawmakers could alter this flawed status quo with greater disclosure. I conclude that they don’t appear to favor this approach, but they should.

February 1, 2015 | Permalink | Comments (0)