Monthly Archives: December 2013

Why the Rich Love Dubai

dubai mall

But Dubai…has an asset that counts as much as location, infrastructure, an eager multinational workforce, business-friendly rules and an absence of politics. With much of the region in distress, skilled workers and capital are pouring in faster than ever. Recent arrivals include rich Syrian and Egyptian exiles, and if Western sanctions on Iran are eased, Dubai is poised to cash in mightily, too. “The Arab spring has been great for us,” says Mishaal Gargawi, a young Emirati from a notable merchant family who is launching a private think-tank. “Everyone comes here, from Colonel Qaddafi’s lieutenants to Saudis getting a government payrise and blowing it on iPads in the Dubai Mall.”

Dubai:It’s bouncing back, Economist, Nov. 23, 2013, at  52

The Airport as a Tax Haven

freeport singapore

The world’s rich are increasingly investing in expensive stuff, and “freeports” such as Luxembourg’s are becoming their repositories of choice. Their attractions are similar to those offered by offshore financial centres: security and confidentiality, not much scrutiny, the ability for owners to hide behind nominees, and an array of tax advantages. This special treatment is possible because goods in freeports are technically in transit, even if in reality the ports are used more and more as permanent homes for accumulated wealth. If anyone knows how to game the rules, it is the super-rich and their advisers.

Because of the confidentiality, the value of goods stashed in freeports is unknowable. It is thought to be in the hundreds of billions of dollars, and rising. Though much of what lies within is perfectly legitimate, the protection offered from prying eyes ensures that they appeal to kleptocrats and tax-dodgers as well as plutocrats. Freeports have been among the beneficiaries as undeclared money has fled offshore bank accounts as a result of tax-evasion crackdowns in America and Europe.

Several factors have fuelled this buying binge. One is growing distrust of financial assets. Collectibles have outperformed stocks over the past decade, with some, like rare coins, doing a lot better, according to The Economist’s valuables index. Another factor is the steady growth of the world’s ultra-wealthy population. According to Wealth-X, a provider of data on the very rich, and UBS, a financial-services firm, a record 199,235 individuals have assets of $30m or more, a 6% increase over 2012.

The goods they stash in the freeports range from paintings, fine wine and precious metals to tapestries and even classic cars. (Data storage is offered, too.) Clients include museums, galleries and art investment funds as well as private collectors. Storage fees vary, but are typically around $1,000 a year for a medium-sized painting and $5,000-12,000 to fill a small room.

These giant treasure chests were pioneered by the Swiss, who have half a dozen freeports, among them sites in Chiasso, Geneva and Zurich. Geneva’s, which was a grain store in the 19th century, houses luxury goods in two sites with floor space equivalent to 22 football pitches.  Luxembourg is not alone in trying to replicate this success. A freeport that opened at Changi airport in Singapore in 2010 is already close to full. Monaco has one, too. A planned “freeport of culture” in Beijing would be the world’s largest art-storage facility.

The early freeports were drab warehouses. But as the contents have grown glitzier, so have the premises themselves. A giant twisting metal sculpture, “Cage sans Frontières”, spans the lobby in Singapore, which looks more like the interior of a modernist museum or hotel than a storehouse. Luxembourg’s will be equally fancy, displaying concrete sculptures by Vhils, a Portuguese artist. Like Singapore and the Swiss it will offer state-of-the-art conservation, including temperature and humidity control, and an array of on-site services, including renovation and valuation.

The idea is to turn freeports into “places the end-customer wants to be seen in, the best alternative to owning your own museum,” says David Arendt, managing director of the Luxembourg freeport. The newest facilities are dotted with private showrooms, where art can be shown to potential buyers….Iron-clad security goes along with style. The Luxembourg compound will sport more than 300 cameras. Access to strong-rooms will be by biometric reading. Singapore has vibration-detection technology and seven-tonne doors on some vaults. “You expect Tom Cruise to abseil from the ceiling at any moment,” says Mark Smallwood of Deutsche Bank, which leases space for clients to store up to 200 tonnes of gold at the Singapore freeport.

Gold storage is part of Singapore’s strategy to become the Switzerland of the East. The city-state’s moneymen want to take its share of global gold storage and trading to 10-15% within a decade, from 2% in 2012. To spur this growth, it has removed a 7% sales tax on precious metals. (The Economist understands that the Luxembourg freeport’s gold-storage ambitions will get a fillip from the Grand Duchy’s central bank, which plans to move its reserves—now sitting in the Bank of England—to the facility once it opens. The bank declined to comment.)

Switzerland remains the world’s leading gold repository. Its imports of the yellow metal have exceeded exports by some 13,000 tonnes—worth $650 billion at today’s price—since the late 1960s, says the customs agency. The gap has widened sharply since the mid-2000s. But trade statistics do not tell the whole story, since they fail to capture the quantities of gold that go straight from runways to the freeports.

Wealth piled up in freeports is a headache for insurers. The main building in Geneva holds art worth perhaps $100 billion. The Nahmad art-dealing dynasty alone is said to have dozens of Picassos there. More art is stored in Geneva than insurers are comfortable covering, says Robert Read of Hiscox, an art insurer. Coverage for new items is hard to come by at any price….In a bid to soothe worries about concentrated storage, the private firm that operates Geneva’s freeport (which leases it from the majority owner, the local canton) is building a new warehouse a short distance from its existing structures. Most of the art is now stored in vaults under the main building. These were built in the 1970s as a way for banks to avoid a planned tax on gold held in their own vaults. The levy was repealed, the banks took back their gold, and paintings and sculptures soon began to fill the void. Luxembourg’s freeport, which is scheduled to open next summer, recently conducted a roadshow for insurers that highlighted the facility’s state-of-the-art safety features, including fire-fighting systems that suck oxygen from the air while releasing inert gas instead of water, so as not to damage art.

Insurance is cheaper for those willing to park assets in remote places. Switzerland is dotted with disused military bunkers, blasted into the Alpine rock during the second world war and cold war. The government has been selling these, and some have been bought by firms hoping to convert them into high-altitude treasure chests. One is Swiss Data Safe, which sells storage for valuables and digital archives at several undisclosed sites deep in the Gotthard granite. It claims to offer protection from “the forces of nature, civil unrest, disasters and terrorist attack”. Such places have a low risk of fire or being hit by a plane. But they cannot offer the tax advantages that freeports can.

Freeports are something of a fiscal no-man’s-land. The “free” refers to the suspension of customs duties and taxes…. this is all legal—though some countries have had to alter their statute books to accommodate the concept. Luxembourg amended its laws in 2011 to codify its freeport’s tax perks. That, plus the offer of land by the airport, helped persuade the project’s backers to put it there rather than in London or Amsterdam….Luxembourg’s government views the freeport as a useful adjunct to its burgeoning financial centre, which has been built on tax-friendliness. Deloitte, which helps firms and rich individuals minimise taxes, brokered the deal. Mr Arendt believes the freeport could help Luxembourg compete with London and New York in art finance, which includes structuring loans with paintings as collateral… As Swiss banks come under pressure to shop tax-dodgers, for instance, some are said to have been recommending clients to move money from bank accounts to vaults, in the form of either cash or bought objects, since these are not covered by information-exchange pacts with other countries. A sign that this practice may be on the increase is the voracious demand for SFr1,000 ($1,100) notes—the largest denomination—which now account for 60% of the value of Swiss-issued paper cash in circulation. Andreas Hensch of Swiss Data Safe says demand for its mountain vaults has been accelerating over the past year. The firm is not required to investigate the provenance of stuff stored there.

Western countries have started to clamp down on those who try to use such repositories to keep undeclared assets in the shadows. America has led the way. Under a bilateral accord, Swiss banks will have to deliver information on the transfer of funds from accounts, including cash withdrawals. Tax authorities are growing more interested in the contents of vaults. Americans with untaxed offshore wealth who sign on to an IRS voluntary-disclosure programme are required to list foreign holdings of art, says Bruce Zagaris of Berliner, Corcoran & Rowe, a law firm.

Tax-evaders are one thing, drug traffickers and kleptocrats another. In many ways the art market is custom-made for money laundering: it is unregulated, opaque (buyers and sellers are often listed as “private collection”) and many transactions are settled in cash or in kind. Investigators say it has become more widely used as a vehicle for ill-gotten gains since the 1980s, when it proved a hit with Latin American drug cartels. It is “one of the last wild-West businesses”, sighs an insurer.  This makes freeports a “very interesting” part of the dirty-money landscape, though also “a black hole”, says the head of one European country’s financial-intelligence agency. In a report in 2010 the Financial Action Task Force, which sets global anti-money-laundering standards, fretted that free-trade zones (of which freeports are a subset) were “a unique money-laundering and terrorist-financing threat” because they were “areas where certain administrative and oversight procedures are reduced or eliminated”.

Numerous investigations into tainted treasures have led to freeports. In the 1990s hundreds of objects plundered from tombs in Italy and elsewhere were tracked down to Geneva’s warehouse (along with papers showing that some had been laundered by being sold at auction to straw buyers, then handed straight back with the legitimate purchase documents). In 2003 a cache of stolen Egyptian treasures, including two mummies, was discovered in Geneva; in 2010 a Roman sarcophagus turned up there, perhaps pinched from Turkey.

Under pressure to respond, the Swiss have tightened up their laws on money-laundering and the transfer of cultural property. A law that took effect in 2009 brought Switzerland’s freeports into its customs territory for the first time. They must now keep a register of handling agents and end-customers using their space. Handlers must keep inventories, which customs can request to see.

In practice, however, clients can still be sure of a high degree of secrecy. Swiss customs agents still care more about drugs, arms or explosives than about the provenance of a Pollock. They do not have to share information with foreign authorities. Much of it is of limited value anyway, since items can be registered in the name of any person “entitled” to dispose of them—not necessarily the real owner.

Even greater secrecy is on offer in Singapore. Goods coming in to the freeport must be declared to customs, but only in a vague way: there is no requirement to disclose owners, their stand-ins or the value or precise nature of the goods (“wine” or “antiques” is enough). “We offer more confidentiality than Geneva,” Mr Vandeborre declared when the facility opened.  However, it is not quite true to say that Singapore and other new sites are in arm’s-length competition with the more established facilities. In fact, they share the same tight-knit group of mostly Swiss owners, managers, advisers and contractors. Yves Bouvier, the largest private shareholder in the Geneva freeport, is also the main owner and promoter of the Luxembourg freeport, a key shareholder in Singapore and a consultant to Beijing. His Geneva-based art-handling firm, Natural Le Coultre, is closely involved in running or setting up all these operations. Singapore’s architects and engineers were Swiss, as are its security consultants.

This has fuelled speculation that Swiss interests have deliberately developed a strategy to globalise the high-end freeport concept as a way to continue to benefit, even as the crackdown on undeclared money in Zurich and Geneva drives some of it to other countries. Franco Momente of Natural Le Coultre rejects this interpretation. “It’s nothing more than supply and demand,” he says. “Today many countries see the advantages of freeports for the local economy and to have a place in the global art market. They’re looking for solutions with experienced operators, and [the Swiss] have long experience.”

Barring dramatic regulatory intervention or moves to end their tax benefits, freeports are likely to grow, driven primarily by clients in emerging markets. At current growth rates the collective wealth of Asia’s rich will overtake Europe’s by 2017, reckon UBS and Wealth-X (see chart 2). As this population grows, so too could wealth taxes in the region, which are now low or non-existent. That could drive yet more Indians, Chinese and Indonesians towards the discreet duty-free depots which—if they aren’t already there—may soon be coming to an airport near you.

Freeports: Über-warehouses for the ultra-rich, Economist, Nov. 23, 2013, at 27

Where Does Dark Money Hide? the power of 501(c)(4)

dark money

The $180m raised last year by Crossroads Grassroots Policy Strategies included 50 donations of at least $1m. No one knows who those generous people were. Crossroads, co-founded in 2010 by Karl Rove, a Republican strategist, does not have to reveal its donors because it is registered as a non-profit “social welfare organisation” under section 501(c)(4) of America’s tax code. Chief among the groups receiving grants from Crossroads was Americans for Tax Reform, a group founded by Grover Norquist, which during last year’s elections extracted pledges on tax and spending from Republican politicians.

To its critics, this made Crossroads the most egregious example of “dark money”: anonymous donors financing political campaigns under the guise of traditional social-welfare charity. The volume of dark money has soared in recent years. Last year some $256m was spent on political ads, phone calls and mailings by around 150 501(c)(4) non-profits. Most of this was by conservative groups; only 15% was from the left and centre, such as Organising for America, which raises funds for Barack Obama…  The proposed rules are a response to social-welfare charities being used for a purpose they never previously had, as money denied its traditional voice sought new ways to influence politics…

The proposed new rules would apply only to 501(c)(4) organisations, not to (c)(5) or (c)(6), notes Kim Barker of ProPublica, a news outfit that has done pioneering research into dark money. Because most money going to (c)(5) groups is from trade unions, anonymous wealthy donors may be tempted to switch to (c)(6) groups, which are mostly trade associations, such as the US Chamber of Commerce and Freedom Partners, a group set up by Charles and David Koch, two conservative billionaire brothers. But Marc Owens, a lawyer who works to tackle dark money, says the proposed rules are sufficiently ambiguous not to shut down the big partisan players. They could, however, restrict non-partisan organisations such as the League of Women Voters, which provides information on elections to its members.

The consultation process is likely to be fierce, but it is still uncertain whether the new rules that emerge will be enforced. Since 2010 only one small non-profit has been denied tax-exempt status by the IRS on political grounds. Unless the IRS makes this a higher priority, it may be some time before the days of dark money are over.

Regulating political spending: Lighten our darkness, Economist, Nov. 30, 2013, at 30

Unable to Control its Borders: Amazonas, Venezuela

amazonas, Venezuela. Image from wikipedia

Amazonas [in Venezuela] has many problems, but those most cited by local people are mainly the responsibility of central government. Frequent and lengthy power-cuts, unpunished violent crime, a precarious air link with Caracas and an almost non-existent internet service are among them. Outside Puerto Ayacucho, in the jungle that extends almost unbroken to the Brazilian border, an even darker mood prevails in the scattered Amerindian villages. Illegal mining is destroying the forest and polluting the water. The armed forces, whose duties include environmental protection, are accused by the Amerindians of complicity with the illegal miners and with the guerrillas of Colombia’s FARC, who have shifted their camps to Venezuela to evade military pressure at home.

“The guerrillas ordered the villagers not to go out at night,” says Uriel Blanco of OPIJKA, an organisation that defends the rights of the Jivi tribe. In the early hours, community leaders claim, boats laden with fuel and food head upriver to guerrilla camps. Neither these boats nor the miners seem to have problems with checkpoints run by Mr Maduro’s National Guard. But the guard seizes game from Amerindian hunters, as well as any fuel or processed food for which they lack receipts. The state’s Catholic bishop, José Angel Divasson, says that for the FARC, Amazonas is more than just a refuge: “It’s clear that they are trafficking drugs. Why else would they need 500-metre airstrips? The light planes go over [to Colombia] with guns and they come back with drugs.”

The cocaine business, along with illegal mining of gold and coltan, a mineral used in the manufacture of electronic devices, creates an almost insatiable demand for petrol and diesel, which are heavily subsidised by the Venezuelan government. The official price of a 200-gallon drum of petrol is just 14 bolívares. But once it leaves the river-port of Samariapo, it sells for at least 2,000 bolívares on the black market. By the time it gets to San Carlos de Río Negro, near the Brazilian border, it can cost five times that. Permits to buy fuel are controlled by the army.

“We get diesel for our generator once a month,” says a villager. “That gives us six hours of electricity.” Shops on the Colombian side of the river are well-stocked with subsidised Venezuelan food, while the people for whom it was intended go hungry. Amerindian groups have demanded a meeting with the president, but there has been no reply.

Venezuela’s Amazonas state: Lawless rivers and forests, Economist, Nov. 30, 2013

China Space Program: the military arm

Shenzhou

Most space programmes are military to some extent. Both America and the Soviet Union used modified missiles to launch their satellites and spacemen in the early days. And even in the days of the Space Shuttle, NASA was employing that device to put spy satellites into orbit, and recover them. For China’s space effort these still are the early days, so civilian and military applications remain intertwined.  In July, for example, the CNSA (China National Space Administration) launched a trio of satellites, allegedly as part of a project to clean up space near Earth by removing orbital debris. Such debris is indeed a problem, given the number of launches that have happened since the hoisting of Sputnik in 1957. Nor did China itself help when, during the testing of an anti-satellite weapon in 2007, it blew one of its own redundant satellites into about 150,000 pieces. So a charitable view might be that this mission was a piece of contrition. Cynics, however, suspect that what was actually launched was another type of antisatellite weapon—or, at most, a piece of dual-use technology which could act as a space-sweeper as well.

One of the newly launched probes was indeed equipped with a robotic arm of the sort that might pick up space litter. The other two were, the story went, to stand in for bits of debris. But once initial tests were over, the satellite with the robotic arm made a number of unusual manoeuvres and approached not one of the devices it was launched with, but rather an ageing satellite in a different orbit—just the sort of behaviour that would be useful if you wanted to eliminate an observation or communication satellite belonging to another country.

The Chinese are not the only ones working on space weaponry, of course. America is busy in the field, too. And that accounted for a slightly more desolate atmosphere at the meeting than is normal at astronautical congresses. American law prohibits NASA from collaborating with China, or even organising bilateral exchanges with it.

Excerpt, China in Space: How Long a Reach?, Economist, Sept. 28, 2013, at 75

The Jihadist View of the World

us troops in afghanistan.  image from wikipedia

Al-Qaeda.., including militia groups under the umbrella name of Ansar al-Sharia (Partisans of Islamic Law)in Yemen, Libya, Tunisia, Mali and Egypt that both compete and co-operate with the organisation, have recovered momentum and self-confidence as the hopes invested in the Arab spring have withered. Indeed, the reverses of the Arab spring have been a boon to it.Take Egypt. After the coup that toppled President Muhammad Morsi in July, Mr Zawahiri posted a 15-minute message on jihadist websites arguing that “the crusaders” in the West and their allies in the Arab world will never allow the establishment of an Islamist state…Look to the biggest gift the Arab spring has given al-Qaeda: the increasingly sectarian civil war in Syria.  The prospect of overthrowing Bashar Assad is catnip to jihadists; his Alawite regime is an heretical abomination to the hyper-orthodox Salafis from which al-Qaeda draws its support. Western intelligence thinks most of Syria’s effective rebel militias may now be jihadist, with thousands of fighters from other Muslim countries and hundreds from Europe, especially Britain, France and the Netherlands.

The Islamic State of Iraq and al-Sham (ISIS), formerly al-Qaeda in Iraq (AQI), has recently pushed into eastern Syria from Iraq, following a resurgence there that is part of the more general pattern of ineradicability…Al-Qaeda wants to bring Iraq, Syria and Lebanon together into a single “caliphate”, and ISIS uses foreign fighters drawn to Syria on both sides of the porous border with Iraq. It has also tried to merge with Jabhat al-Nusra (JAN), one of the most militarily formidable rebel militias (and the one with which Mr Qunaibi is associated). …For the time being, ISIS and JAN are focused entirely on the would-be caliphate of the Levant. Most of the network’s affiliates are similarly engaged in regional struggles, the most extensive being that of al-Qaeda in the Islamic Maghreb, the north African branch. AQIM is seeking to make use of Libya’s post-revolutionary chaos, and weapons from Muammar Qaddafi’s former arsenal, to create an “arc of instability” across the Sahara and the Sahel. It provides help and advice to jihadist organisations from Boko Haram in Nigeria to the Shabab in Somalia.In 2012 AQIM commanders allied to an indigenous insurgent group, Ansar Eddine, took control of the northern half of Mali. They ruthlessly implemented sharia law and picked an unnecessary fight with the National Movement for the Liberation of Azawad, a grouping of rebel Tuaregs…

An intense drone campaign has killed several of AQAP’s (al-Qaeda in the Arabian Peninsula) senior leaders; its second-in-command, Said al-Shihri, died on July 16th. Yemeni government operations have driven it out of some of the southern tribal areas it overran in 2011. But it has lost none of its ambition….Bruce Riedel, who has advised four presidents and is now at the Saban Centre for Middle East Policy in Washington, DC, recently warned that al-Qaeda in Pakistan remains embedded in a network of local support groups from the Taliban to Lashkar-e-Taiba. After the departure of NATO combat forces in 2014 it may be able to regenerate itself, rather as ISIS did in Iraq….Thomas Sanderson of the Centre for Strategic and International Studies, also in Washington, says al-Qaeda and its allies in Pakistan are weaving a narrative that equates America’s post-2014 withdrawal with the mujahideen defeat of the Soviet Union, another superpower with feet of clay, 25 years earlier…

One counter-terrorism intelligence source recently observed: “Tactically, we may have defeated the central leadership, but strategically, they are winning.”  While attacks on the far enemy are important both as a deterrent and as a source of jihadist inspiration, they are not al-Qaeda’s main purpose. Its overriding aim remains, as it has been since bin Laden saw the retreat of the Soviet Union, the creation of a new caliphate across the Islamic world based on unswerving adherence to sharia law. That requires the corrupting influence of the “Zionist-Crusader alliance” in the region to be extirpated and all apostate Muslim governments removed.

Seen from that point of view, things are not going badly. Al-Qaeda believes America is in retreat not just in Afghanistan but also across the Middle East. The poisoning of the Arab spring has given it new purpose and ideological momentum. Al-Qaeda itself may be divided and in some places depleted. It may be shunned by some with similar ideologies, and its affiliates may increasingly ignore its ageing leadership. But the Salafi jihadist view of the world that al-Qaeda promotes and fights for has never had greater traction.

Excerpts, The state of al-Qaeda: The unquenchable fire, Economist. Sept. 28, 2013. at 21

Depleting a Country: Laos

laos

On the ground in the northern province of Oudomxay (Laos), most jeeps roaming the deforested valley bear Chinese and Vietnamese number plates…Investment is flowing into agriculture, typically rubber plantations, market gardening and other cash crops, much of it destined for the huge Chinese population to the north. The side-effects include a loss of forests and biodiversity, serious soil erosion and growing numbers of people in this multi-ethnic province being pushed off their land.

Chinese firms have secured rubber concessions in the province covering 30,000 hectares (74,000 acres). The idea is that tens of thousands of Chinese workers will eventually be needed to tap the rubber. In the past decade the government has granted land concessions across the country for up to 100 years, often at knock-down prices, to Chinese, Vietnamese and, to a lesser extent, Thai operators. More land is now in the hands of foreigners than is used to grow rice. The fear of one expert in Laos is the emergence of a landless poor.

Not all Chinese influence is welcomed by the government. Recently a deputy prime minister, Somsavat Lengsavad, announced the closure of a Chinese-run casino near the border that had attracted drugs and prostitutes along with gamblers. Yet Mr Lengsavad, ethnically Chinese himself, has his own patronage network built on granting concessions for Chinese-run special economic zones. And he is the point man for one of Asia’s most ambitious projects: a proposed 262-mile (421-km) passenger and freight railway connecting Kunming, in the south-western Chinese province of Yunnan, with Vientiane, the Laotian capital. The $7.2 billion price tag (including interest) is nearly as big as Laos’s entire formal economy. It will take 50,000 workers five years just to lay the tracks. Two-thirds of the route will run through 76 planned tunnels or over bridges.

The collateral for such a huge project lies in the mines of Laos. In other words, the extraction of natural resources in this undeveloped country is about to accelerate. Economic rents already accrue to an oligarchy, for which the railway, one way or another, will prove a bonanza… The capital of Laos is on the mighty Mekong river, which forms the border with Thailand. Though it still has a torpid air, Vientiane is growing fast in the hands of a Communist kleptocracy whose members queue up on Saturdays in their big cars to cross the Mekong for a dose of shopping across the border. For many of the remaining 6.6m Laotians, unease and sometimes fear are the predominant emotions.

Last December a well-known democratic activist and advocate of sustainable development, Sombath Somphone, disappeared. At the same time, the government clamped down on foreign NGOs, especially those advocating land rights. Two months ago the American embassy hung a banner from its water tower calling for the return of Mr Somphone. In September the head of the American-based Asia Foundation in Laos was told to pack her bags….The trauma of its long civil war and of American carpet-bombing during the Vietnam war is never far away. One-third of the country is still contaminated by unexploded American ordnance. Hundreds of people lose limbs every year to cluster bombs.In few countries do development agencies have to operate in thinner air than in Laos. In e-mails, foreign residents drop syllables from the names of Politburo members in attempts to outsmart new Chinese surveillance technology. The regime is constantly on guard against foreigners who might be seeking to “change our country through peaceful means”.

The future of Laos: A bleak landscape, Economist, Oct. 26, 2013, at 50