Offshore Round-Up - offshorefinancecanada.com
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ABOUT OUR SPONSOR:
This newsletter is sponsored by Offshore Finance Canada magazine. The
March/April 2000 issue is now available on major newsstands across Canada.
Editorial from this issue includes:
- China funds: international investors are waking up to the returns
generated by Chinese equities as the sleeping giant of the east begins to
stir.
- The caveat emptor column looks at a variety of abusive and defective
offshore trust structures and the increasing crackdown by tax authorities.
- Our cover story features offshore credit and debit cards. While they
offer easy access to offshore funds, they can be costly and usually
require a security deposit larger than the credit line they offer.
Investors must also beware of unsecured offshore credit card scams and
multi-level marketing pitches. A separate article discusses the level of
privacy associated with offshore cards. Do they match the level provided
by other offshore products and services? Finally, we examine some of the
challenges faced by offshore e-commerce companies when trying to set up
merchant accounts and payment systems for their offshore businesses.
- And of course, lots more in our offshore reports, industry news and the
always indispensable Due Diligence Directory.
You can order a copy of the March/April 2000 issue at a price of CDN$15
(US$12) through our web site at: offshorefinancecanada.com
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Vol. 2, No. 1
Jan. 2 to Jan. 8, 2000
OFFSHORE ROUND-UP: An OFC publication
Copyright 2000 O.F.C. Publications Inc. ISSN Pending
Table of Contents
1. E-commerce firms rethink opposition to privacy regulation
2. Hedge funds sought to regain trust in 1999
3. Spy agency wins changes to privacy bill
4. Canada faces choice over global accounting rules
5. Anti-money laundering law a necessity, professor argues
6. Hedge fund threatened by rogue trader's losses
7. Internet, global economy may fuel backlash, author warns
E-COMMERCE FIRMS RETHINK OPPOSITION TO PRIVACY REGULATION
Date: Jan. 6, 2000
Source: Wall Street Journal
The e-commerce industry is reconsidering its long-held opposition to
federal regulation of Internet privacy issues.
Until now, the industry has championed the concept of "self-regulation" to
handle the rapidly growing practice of collecting data on Internet
consumers. That position is now under increasing pressure from Congress,
the states and election-year politics. As a result, some people in the
industry are wondering "whether we're not better off working at a federal
level to create some standards," said Washington lawyer Ron Plesser, a
past advocate of self-regulation. Plesser coordinates the Electronic
Commerce and Consumer Protection Group, an industry organization that
includes America Online Inc. and Microsoft Corp.
The industry has previously claimed that new legal restrictions could
hinder the commercial growth of the Internet. But privacy is becoming an
increasing public concern as reports of surreptitious data collection by
Internet marketers and questionable distribution of personal data by other
companies multiply.
Lawmakers from both major parties are now calling for safeguards such as
requiring companies to disclose how they collect and use personal
information, and to seek consumers' permission before they resell the
data. States like California and New York are considering tough Internet
privacy legislation and the EU has also taken a tough stance on privacy.
Most telling, privacy is polling at the top of the charts as a voter
concern.
HEDGE FUNDS SOUGHT TO REGAIN TRUST IN 1999
Date: Jan. 3, 2000
Source: Wall Street Journal
Hedge fund managers worked hard last year to change their reputation as
out-of-control risk takers and focused on bringing in respectable returns.
The hedge fund industry suffered badly in 1998 from the near-collapse in
the U.S. of Long-Term Capital Management LP, but 1999 has provided a
resurrection of sorts. The average hedge fund returned 14 percent
year-to-date through November, just under the S & P 500 index, according
to the Credit Suisse First Boston Tremont index.
Equity funds and emerging market funds returned 30 percent and 25 percent
respectively through November, but overall industry results were dragged
down by the lackluster performance of macro global funds and short selling
funds, which lost money. Futures traders, who make money betting on
trends in commodities and currency prices, also took a beating, with the
average futures fund losing seven per cent through November.
After heavy losses by some hedge funds in 1998, banks forced the industry
to scale down its reliance on borrowed money, making it more difficult for
managers to boost returns using leverage. Investors became more aware of
risk.
Now hedge funds are facing the prospect of increased regulation. A bill
has been introduced in Congress that would impose quarterly reporting
requirements on hedge funds for items such as the size of their investment
positions and the amount of leverage used. The U.S. federal General
Accounting Office has recommended more stringent oversight of
broker-dealers who provide financing to hedge funds.
However, industry sources point out that by and large hedge funds are
doing exactly what they're supposed to be doing, namely providing returns
in the mid-to-high teens with reasonable risk.
SPY AGENCY WINS CHANGES TO PRIVACY BILL
Source: National Post
Date: Jan. 7, 2000
The Canadian Security Intelligence Service convinced the government to
redraft privacy legislation to accommodate national security concerns,
according to documents newly released under the Access to Information
legislation.
The changes to the bill, currently before Parliament, would allow CSIS and
the police ready access to personal information for investigative purposes
and would also allow secret court hearings into privacy complaints from
the public.
The privacy legislation is intended to help promote electronic commerce.
It sets rules to govern the collection, use and disclosure of personal
information by the private sector. It requires businesses to receive the
consent of the individual before using personal information and provides
people with the right to access files about themselves. Individuals have
the right to complain about breaches of these principles to the privacy
commissioner, and to bring unresolved disputes to the Federal Court of
Canada.
Under the changes CSIS and other investigative agencies are exempt from
key provisions of the bill. This means private-sector organizations can
in fact disclose personal information without consent to government
agencies for law enforcement, administration and national security
purposes.
CANADA FACES CHOICE OVER GLOBAL ACCOUNTING RULES
Source: Financial Post
Date: Jan. 5, 2000
Major changes in internationally-recognized accounting rules that govern
the way companies report financial results are on the horizon, along with
a possible convergence of international accounting standards.
The changes under consideration in Canada and other countries could lead
to a reassessment by investors of company earnings prospects and stock
prices.
Some of the changes include: banning pooling-of-interests accounting for
mergers and acquisitions and allowing only the purchase method; abolishing
the category of extraordinary items; prohibiting the reporting of the same
item twice; preventing companies from "juicing up" the way they report
e-commerce revenues; revisiting accounting approaches to operating leases
and sale-and-leaseback transactions; and presenting a company's financial
performance in one single, comprehensive statement (some gains and losses
are currently reported outside the income statement or not at all).
What could also emerge is a core set of worldwide accounting and auditing
standards acceptable to government securities regulators around the world.
Two major camps are involved in standards setting: the London-based
International Accounting Standards Committee (IASC), whose rules are
favored in Europe, and the U.S. Financial Accounting Standards Board
(FASB). About 10 countries accept FASB standards, while 46 countries
accept IASC standards.
FASB standards are significant for Canada because of heavy cross-border
trade. However, those standards are too detailed, oriented to large
corporations and designed primarily to suit U.S. interests, said the
Certified General Accountants Association of Canada. The group favors
adopting IASC standards and wants the Canadian Senate's committee on
banking and commerce to hold hearings on the issue.
The Canadian Institute of Chartered Accountants also favors
"internationalization," but is more concerned with bringing Canadian rules
in line with the FASB, pointing out that the vast majority of Canadian
companies go to the U.S. for cross-border financing.
However, a recent survey of U.S. investment fund managers found 87 per
cent favored harmonizing with international accounting standards under
IASC auspices. Ontario Securities Commission chairman David Brown and the
U.S. Securities and Exchange Commission head Arthur Levitt also favor
international standards of some sort
ANTI-MONEY LAUNDERING LAW A NECESSITY, PROF ARGUES
Date: Jan. 5, 2000
Source: Financial Post
A recent editorial slamming Canada's proposed anti-money laundering
legislation as unnecessary and Orwellian misses the point, says Allen
Castle, a political science professor at the University of British
Columbia.
According to Castle, the system of letting banks file suspicious activity
reports without having to answer to any real financial supervision has
been an abject failure in combating organized crime. Financial crimes
such as stock manipulations, illegal arms trafficking, nuclear smuggling,
embezzlement, international sex slavery, major telemarketing and
health-care frauds, car theft rings, protection rackets have all occurred
in Canada and have benefited from Canada's lax attitude towards money
laundering. All these crimes create victims, says Castle, often among the
poor, sick, old or vulnerable.
Organized crime routinely uses sophisticated techniques such as wire
transfers, complex shell trust arrangements, anonymous bank accounts, and
false invoicing across multiple jurisdictions to evade authorities. In
Canada, these activities are typically
fought by self-taught police officers with low pay and little computer
familiarity.
Requiring banks to report suspicious activity to an arm's-length agency
would help somewhat in redressing the balance.
HEDGE FUND THREATENED BY ROGUE TRADER'S LOSSES
Date: Jan. 7, 2000
Source: Globe & Mail
Toronto-based Phoenix Hedge Fund Corp. has been severely damaged by losses
incurred by one of its traders who has since gone missing.
The fund, which had $250 million in funds going into the disaster, is
still trying to assess the damage from a failed play in the U.S. bond
market early in the year by veteran trader Steve Duthie. Several hundred
angry investors also want an explanation.
Until the drama began, Phoenix was prospering, posting an average annual
return of 12 per cent. The company's various funds would pick up bonds
that, for one reason or another, had been mispriced against comparable
debt. Phoenix would use its own money as collateral and then leverage, or
borrow heavily, to increase exposure to the market. It was a huge client
of most dealers, doing up to $800 million of business on a busy day.
Duthie's responsibilities included the running of the firm's holdings of
U.S. bond repurchase agreements, or "repos," whereby the Phoenix trader
would borrow U.S. bonds from another financial institution, promising to
return them within a few days. A low-risk business with razor-thin profit
margins, repos make money on volume.
At some point several months ago, Duthie apparently stopped playing repos
and started buying U.S. government bonds. Unlike repos, holding bonds is
a risky proposition, since a sharp move in interest rates can lead to
substantial losses. In early January, U.S. bond prices plunged over fears
of rising interest rates. Phoenix management speculates that Duthie
suffered a loss somewhere and tried unsuccessfully to trade his way out of
it.
Currently the damage to one of the company's publicly listed hedge funds
has been pegged at $7.4 million, 30 per cent of its holdings, and the fund
is being wound down. Duthie's whereabouts are still unknown.
INTERNET, GLOBAL ECONOMY MAY FUEL BACKLASH, AUTHOR WARNS
Date: Jan. 3, 2000
Source: New York Times
Will human society continue to blindly embrace a global, increasingly
unregulated capitalist economy driven by information flows over the
Internet? Or will other societies and cultures start to reject this
US-dominated phenomenon based on a different political and economic vision?
Author Manuel Castells, who wrote "The Information Age: Economy, Society
and Culture" in 1998, said in a recent essay that the Internet may be a
very big gamble indeed. As a result of the globalization of largely
unregulated and increasingly fluid financial markets, we are moving
towards "an electronic system of financial transactions which overwhelms
controls and regulations by governments, international institutions and
private financial firms, as well as individual investors, consumers and
citizens," said Castells.
Castells also questioned whether other developed societies like Europe and
Japan will completely buy into technology-driven productivity solutions
that first take away jobs, then dismantle government social supports. The
role of network technology in these social realities could create a
"backlash of social struggles and political reactions that could block
reform and innovation."
This would affect the U.S., now interdependent on global economic
performance, "and ultimately exhaust the growth capacity of the U.S.
economy," warned Castells in the essay, titled "Information Technology and
Global Capitalism."
Global capitalism is very fragile, he noted. A crisis such as the collapse
of Internet stocks or a sudden panic around electronic trading networks
could induce some governments of segments of society to opt out, "not
necessarily to build an alternative system, but just to recover some
degree of control over their own lives."
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