John Francis was of the same board, a free marketeer, he did not believe in the constraints of what he saw as socialist ideas, he knew in the long run they did not work, he believed economic prosperity went hand in hand with governments that ensured national wealth. Francis did not see Ireland as a tax haven, rather it offered a simple and transparent corporation-tax system that favoured investment, levelling the playing field as Pat Kennedy would have put it, enabling Ireland to compete with the City, Luxembourg and Switzerland.
Kennedy, for example, envisaged setting up a vehicle in Dublin to finance selected parts of the Nicaragua Canal project, through different fund raising structures without putting the bank at risk. Such methods were employed by businesses to reduce risks via hedge fund securitisation, that is pooling loans, transforming the shares into into securities or tradeable assets that could be sold to investors in smaller parts.
Setting up a fund in Ireland was child’s play for a bank like INI once authorisation from the Central Bank of Ireland was acquired; a formality that consisted of establishing an Irish based depository; an Irish regulated external auditor; an Irish based administrator; an approved management company, the form of which could either be an Investment Company, a Unit Trust, a Common Contractual Fund, or an Investment Limited Partnership; with of course two Irish resident directors.
The beauty of it was Ireland was an onshore base which had the effect of attracting more and more funds away from, for example, Caribbean islands; a consequence of the European Union’s Alternative Investment Fund Manager directive that imposed severe restrictions on the marketing of funds domiciled outside the EU for European investors.
Kennedy would appoint a hedge fund manager to administer the fund designed to attract high worth net worth individuals through a network of brokers, a great many of whom were based in the City of London. With its vast processing structure, the City disposed of lawyers, accountants, analysts and other experts: a nerve centre of a vast network that covered the entire planet, a vestige of Empire.
However the City would have been nothing without the UK’s precious string of pearls, starting with those nearest to home: Jersey, Guernsey and the Isle of Man; further afield were its British Overseas Territories, previously known as British Crown Colonies, there were fourteen in total including Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Gibraltar, Montserrat, Turks & Caicos, all of which were undisputed tax havens, conduits for the City’s most nebulous business transactions.
They were known as the CDOTs - the UK’s Crown Dependencies and Overseas Territories. On maps they appeared no bigger than dots, but each year billions of dollars were hidden in the tens of thousands of offshore companies and accounts secreted away on these islands, part of it used to buy super-yachts, private jets, fine art and property.
This precious string formed part of the City of London’s planetary network providing banks like City & Colonial, HSBC and UBS the means to set up thousands of offshore companies for their clients.
Added to that was Hong Kong, a former colony, which in spite of the transfer of sovereignty to Beijing had never cut its close links with the City. Hong Kong’s web of guanxi stretched deep into the heart of China and served as the City’s principal Asian conduit, closely followed by another former colony, Singapore.
A
Black Swan
There were few taxes on businesses and with bank secrecy guaranteed in Hong Kong, Kennedy could do whatever he liked for his clients, wherever their production bases were located, through the links he controlled between the former colony, London and Dublin.
Smart phone owners would have been astonished to learn that many of their applications were produced by one of Pat Kennedy’s clients: an almost anonymous Chinese software firm that counted their global users in the hundreds of millions; one the world’s largest publishers of software applications; boasting an annual growth in the order ten percent; and profits of one billion US dollars. Their places of business situated in Beijing and Hong Kong and their registered offices in George Town. Yes! George Town in the Cayman Islands.
Users across the world employed the software daily without realizing it was produced in China and that the profits were banked in one of the world’s most notorious offshore tax havens … British to boot!
Michael Fitzwilliams as CEO of a large international banking group had been blithely unaware of the opacity of many of his clients, who businesses were entirely legal, but whose activities where hidden behind a formidable language barrier, incomprehensible to outsiders, safely hidden from preying eyes in the labyrinth of the Middle Kingdom.
KALUGA – RUSSIA
John Francis did not need to be convinced that rich Russians, who had not already moved abroad, were heading for the door, or at least making plans to do so. Those who could had no intention of hanging around to see what happened when Putin turned the screw, raising new taxes to cover the deficit caused by falling oil revenues.
The problem for those whose intentions were to get out, was to do so without being seen to. A lack of patriotism was a grave sin in the eyes of Putin’s government.
To make matters worse, if the nuclear non-proliferation negotiations with Iran ended in an agreement, the situation was likely to worsen; oil prices could fall to thirty dollars a barrel once Iranian producers came back into the market, adding to the pain already felt by Russia.
One fifth of Russia’s wealth was controlled by one hundred and ten individuals, making it one of the most unequal countries on the planet. How long would Russians suffer such a regime?
Vladimir Putin’s Russia was fast becoming a non-destination for foreign investors, and rich Russians who could have invested money at home wanted out. The difficulties were reaching alarming proportions as GDP fell and inflation rose at an eye watering pace. The prime concern of oligarchs and wealthy Russians was to do all that was in their means to conserve their wealth, which explained their interest in London; not very surprising given the UK tax system offered advantageous conditions to such exiles who could acquire an investment visa at the cost of two million pounds up front.
*
As John Francis turned off the M3 to Kaluga, one hundred and fifty kilometres south of Moscow, he discovered to his surprise an agreeable, airy, green city. A little research had told him that Kaluga meant a bog in Russian, and in the Middle Ages it had probably been just that.
It was there the Princes Vorotynsky established a small fort on the south-western borders of the Grand Duchy of Moscow. Later, in the autumn of 1480, on the banks of the Oka River, a tributary of the Volga, the armies of Moscovy held back the Golden Horde, a turning point in Russian history.
On arriving in the city centre, Francis was welcomed by the traditional colours of czarist period urbanism. Incongruously mixed with the elegant czarist theatres, museums and ancient churches stood the eyesores of Soviet and post-Soviet architecture. These considerations apart, Kaluga had become a modern industrial city, which was not been the case two decades earlier when the Soviet Empire imploded.
V
olkswagen Kaluga – Russia
At that time it was a run down backwater that had suffered years of neglect as the economic fortunes of the Soviet Union slowly declined. A paroxysm was reached in 1998 with an economic crisis that resulted in Russia’s default and the collapse of the rouble and only when Boris Yeltsin handed over the reins of power to Vladimir Putin did things started to look-up.
The economic collapse of the USSR and its disintegration, freed Eastern Europe and coincided with China’s astonishingly sudden emergence as the world’s workshop, unleashing hundreds of millions of new workers onto the labour markets.
Almost overnight the globalised world work pool doubled, leading to a quarter of a century of wage stagnation, during which Workers from Canton to Manchester and Detroit, not forgetting Bangkok, Jakarta, Calcutta and Karachi, suffered as a consequence. At the same time men like the chief executive of UK home builder Persimmon, Jeff Fairbur
n, pocketed an obscene bonus of one hundred million pounds, offered a middle finger to the ordinary wage earners of the world.
In 2000, helped by the rise in the price of crude oil, Russia’s troubled economy started to pick-up. It was the dawn of an economic renaissance and consumer boom with foreign businesses pouring into Kaluga, conveniently situated not too far from Moscow. These were led by major automobile firms that set-up production lines and international leaders in other sectors such as L’Oréal, Samsung, General Electric; pharmaceutical firms including AstraZeneca; and Lafarge a leading producer of cement and building products.
In 2010, Kaluga had topped The Moscow Times’ regional investment list, attracting more the one billion dollars in direct foreign investment, more than double that of its nearest rival.
It was for both business and pleasure that Francis was in Kaluga, the home town of Ekaterina’s family. The Easter holiday was a good moment to relax and discover life in that middle sized Russian city and meet Ekaterina’s family. It addition he hoped to measure the effects of sanctions and falling oil revenues on the Russian economy.
With its population of more than three hundred thousand, Kaluga was described by the Western financial press as a boom city, though its industrial tradition dated back Soviet times. It had had undergone a remarkable metamorphosis, from a city known for its heavy traditional mechanical industries - and fame as the cradle of space exploration in more glorious times - to a modern and dynamic manufacturing centre where Volkswagen, Volvo, Renault and Citroen had built assembly lines.
Office and factory workers had flooded in from Moscow. Their new prosperity was visible in the new steakhouses, unheard of in Soviet times, where they could enjoy imported cuts of prime beef. The good life was attested to by the bright and bustling shopping malls that had sprung up all around the city, outside of which shoppers parked their new SUVs, foreign models built or assembled in Kaluga. In the bars and coffee shops, drinking imported wines and cappuccinos they had talked of plans for their next vacation in Thailand or Cyprus, or discussed the latest designer clothes in the fashionable boutiques in the malls.
They were the new Russians, proud of their country and confident in Vladimir Putin’s leadership.
So where had everything gone wrong?
Ekaterina whispered travel agents were going bust, Russians were cancelling their foreign holidays as the rouble exchange rate priced them out of the market, restaurants were empty, and on top of that, what with sanctions, American steaks and imported foodstuffs had disappeared from menus.
The plenitude of the boom years was suddenly replaced by restrictions along with a return of images of the bad old days as consumers struggled to adjust to steep inflation and the country’s new economic realities.
For the first time since 2000, ordinary Russians were seeing their wages fall in real terms. Manufacturers were laying off workers, putting them on short time, as vehicle sales stalled, as purchasing power fell and the price of imported car parts rose. A blood bath, as one of Ekaterina’s friends put it.
Russia’s tragedy was the making of Vladimir Putin’s regime, which was one step away from transformation into a fully fledged authoritarian dictatorship, already visible by the manner in which it cracked down on any form of dissension. It was as if Moscow was determined to break with Western influence.
The root lay in Putin’s perception of the West and more precisely NATO, which was designated as the Kremlin’s arch-enemy, a threat to the very existence of Mother Russia.
Nevertheless, from an academic point of view, it was the duty and obligation of Francis to judge the situation from the Russian point of view, or at least with a certain impartiality. The facts were there. The Cold War had been won by the West, more precisely Washington. Once the Soviet threat had been removed, little had been done to accommodate the wounded bear. Instead it had been circumvented, surround by a sanitary cordon. The inevitable happened: Moscow, like Berlin after after its humiliating defeat in 1918, and an even more humiliating peace, chose a nationalistic authoritarian path.
BREAKING NEWS
Kennedy stopped in his tracks. He looked at his phone in stunned disbelief. Switching from flight mode his phone flashed breaking news from Reuters: Banker Michael Fitzwilliams’ yacht Marie Gallant II disappears in Irish Sea off Wexford coast.
He hurried through the controls to a discrete VIP exit and his waiting car. He was confused unable to decide what to do, who to call, as the driver headed out into the traffic in the direction of the Harbour Tunnel and Hong Kong Island.
He looked at his watch, it was six in the morning in Dublin. He hesitated then called John Francis.
A thick voice replied.
“Hello John?”
“Pat! Where are you?”
“Hong Kong. You’ve heard the news?”
“Yes. It’s awful. An accident they say … late yesterday afternoon.”
“Michael?”
“He’s missing. They are still searching.”
“Jesus.”
“What happened?”
“There’s no details. Irish and English coastguards said there was an explosion, the boat sank …,immediately … there was no mayday call, when they got there all they found was floating debris.”
“Feekin Holy Jesus!”
“What should we do?”
“If something has happened to Michael, it’s first of all a family matter, if you see what I mean. Then there’s the bank.”
“Yes, of course.”
He’s no longer on the board. Just a shareholder, even if he holds a very large minority. It doesn’t affect the functioning of the bank, but that’s our problem today.”
“Where’s Sergei?”
“I haven’t heard from him for the last week or more.”
“Was it an accident?”
“They’re talking about an explosion.”
“OK John. Try to find out more and call me back when you’ve got something.”
Pat switched off his phone and tried to think. If Fitzwilliams was dead it was a game changer.
Was it an accident?
Pat thought back. Fitzwilliams had spoken of his fears, however, he had never seriously talked of physical danger, though he often voiced his concern for Tarasov’s safety.
There was the recent example of the chairman and chief executive of Total SA, Christophe de Margerie, who was killed when his private jet hit a snow plough at Moscow airport, reported as a tragic accident, at least that was how it was interpreted in the French and international press. Some Russians saw it differently: a CIA plot to eliminate the Frenchman who was a leading opponent of Western sanctions against Moscow.
Michael Fitzwilliams had many enemies and not only Russians. He was also, or had been, an embarrassment to Downing Street. Rumours had been making the rounds of the extreme measures the secret service would go to to silence individuals, especially those whose knowledge of sensitive or damaging information could affect the credibility of the government if divulged.
To Kennedy’s mind the INI grab, if not a plot, was an opportunist swoop to dispossess the banker of his rightful position, filling the pockets of certain interested parties, whoever they were, and who could have faked an accident to silence the banker.
As the car pulled into the forecourt of his home on Severn Road, Kennedy realised his world had changed, his mentor had gone. In a manner of speaking Fitzwilliams had been a dominant elder brother, suddenly the chain was broken, with Ireland, the City, his past, and the future was his.
A LESSON IN SOUTH AMERICAN POLITICS
“Venezuela, has become a very dangerous place,” Alfonso told Barton as he spread out his design plans, “in fact it has been classified as the most dangerous country in the world.”
“How does this affect you?”
“Me? nothing, but we have a lot of illegal immigrants from Venezuela. The Venezuela-Colombia border is more than two thousand kilometres long; mountains, rivers and jungle. Very difficult to control.
There’s a lot of smuggling.
“Smuggling?”
“Yes. Gasoline costs almost nothing in Venezuela, about four cents a gallon, so a tank of gas sold over the border in Colombia, two-thirds of the going price in our gas stations.”
“Where?”
“Cucuta, near the Simon Bolivar international bridge. They’re called pimpineros, that’s what we call the plastic drums … pimpins. They make about two dollars a gallon.”
“Is it serious … I mean it can’t be that much.”
He laughed
“Serious? Yes it’s a huge loss in tax revenue for the our government and a loss for Venezuela because more the fifteen percent of the gas produced in their refineries ends up in neighbouring countries.”
“That’s huge. What does the law do?”
“Nothing, at least here. It’s been going on for years. But it’s not just gasoline. With their oil revenues the Chavez and Maduro governments used the money to win votes, under the guise of socialism. The smugglers sell almost everything, meat, rice, beer, even powdered milk and diapers, at half or even a quarter of Colombian prices. With all their political problems and the price of oil, their money, the Bolivar, has been devalued, making contraband gas and food stuffs even more profitable.
“It’s a disaster for Venezuela, there’s shortages of almost everything. Maduro’s government’s really in deep trouble and things are not about to get better. But we have to keep him happy because of the negotiations with the Farc being held in Cuba, with Maduro’s buddies.”
“Incredible.”
“It’s an institution. Everybody’s in on the act, government officials, police, criminal and even the Farc.”
Barton laughed.
“Yes. I’m sorry to say it’s part of our tradition in Latin America … corruption.”
“What about emigration? Illegal or otherwise.”
It’s always been low compared to the USA or Europe. Who wants to come to a country that’s fighting against Marxist revolutionaries? Iraqis … Syrians?
Cornucopia Page 38