The Shadowy World of International Finance Written by Sam Vaknin
Strange, penumbral, characters roam boardrooms of banks in countries in transition. Some of them pop apparently from nowhere, others are very well connected and equipped with most excellent introductions. They all peddle financial transactions which are too good to be true and often are. In unctuously perfumed propinquity of their Mercedesed, Rolex waving entourage - polydipsic natives dissolve in their irresistible charm and temptations of cash: mountainous returns on capital, effulgent profits, no collaterals, track record, or business plan required. Total security is cloyingly assured.These Fausts roughly belong to four tribes: The Shoppers These are shabby operators of marginal shadows of world of finance. They broker financial deals with meretricious sweat only to be rewarded their meagre, humiliated fees. Most of their deals do not materialize. The principle is very simple: They approach a bank, a financial institution, or a borrower and say: "We are connected to banks or financial institutions in West. We can bring you money in form of credits. But to do that - you must first express interest in getting this money. You must furnish us with a bank guarantee / promissory note / letter of intent that indicates that you desire credit and that you are willing to provide a liquid financial instrument to back it up.". Having obtained such instruments, shoppers begin to "shop around". They approach banks and financial institutions (usually, in West). This time, they reverse their text: "We have an excellent client, a good borrower. Are you willing to lend to it?" An informal process of tendering ensues. Sometimes it ends in a transaction and shopper collects a small commission (between one quarter of a percentage point and two percentage points - depending on amount). Mostly it doesn't -and Flying Dutchman resumes his wanderings looking for more venal gulosity and less legal probity. The Con-Men These are crooks who set up elaborate schemes ("sting operations") to extract money from unsuspecting people and financial institutions. They establish "front" or "phantom" firms and offices throughout world. They tempt gullible by offering them enormous, immediate, tax-free, effort-free, profits. They let victims profit in first round or two of scam. Then, they sting: victims invest money and it evaporates together with dishonest operators. The "offices" are deserted, fake identities, forged bank references, falsified guarantees are all exposed (often with help of an inside informant). Probably most famous and enduring scam is "Nigerian-type Connection". Letters - allegedly composed by very influential and highly placed officials - are sent out to unsuspecting businessmen. The latter are asked to make their bank accounts available to former, who profess to need third party bank accounts through which to funnel sweet fruits of corruption. The account owners are promised huge financial rewards if they collaborate and if they bear some minor-by-comparison upfront costs. The con-men pocket these "expenses" and vanish. Sometimes, they even empty accounts of their entire balance as they evaporate. The Launderers A lot of cash goes undeclared to tax authorities in countries in transition. The informal economy (the daughter of both criminal and legitimate parents) comprises between 15% (Slovenia) and 50% (Russia, Macedonia) of official one. Some say these figures are a deliberate and ferocious understatement. These are mind boggling amounts, which circulate between financial centres and off shore havens in world: Cyprus, Cayman Islands, Liechtenstein (Vaduz), Panama and dozens of aspiring laundrettes. The money thus smuggled is kept in low-yielding cash deposits. To escape cruel fate of inflationary corrosion, it has to be reinvested. It is stealthily re-introduced to very economy that it so sought to evade, in form of investment capital or other financial assets (loans and credits). Its anxious owners are preoccupied with legitimising their stillborn cash through conduit of tax-fearing enterprises, or with lending it to same. The emphasis is on word: "legitimate". The money surges in through mysterious and anonymous foreign corporations, via off-shore banking centres, even through respectable financial institutions (the Bank of New York we mentioned?). It is easy to recognize a laundering operation. Its hallmark is a pronounced lack of selectivity. The money is invested in anything and everything, as long as it appears legitimate. Diversification is not sought by these nouveau tycoons and they have no core investment strategy. They spread their illicit funds among dozens of disparate economic activities and show not slightest interest in putative yields on their investments, maturity of their assets, quality of their newly acquired businesses, their history, or real value. Never sedulous, they pay exorbitantly for all manner of prestidigital endeavours. The future prospects and other normal investment criteria are beyond them. All they are after is a mirage of lapidarity.
| | Is Our Money Safe? - Part IWritten by Sam Vaknin
Banks are institutions where miracles happen regularly. We rarely entrust our money to anyone but ourselves – and our banks. Despite a very chequered history of mismanagement, corruption, false promises and representations, delusions and behavioural inconsistency – banks still succeed to motivate us to give them our money. Partly it is feeling that there is safety in numbers. The fashionable term today is "moral hazard". The implicit guarantees of state and of other financial institutions move us to take risks which we would, otherwise, have avoided. Partly it is sophistication of banks in marketing and promoting themselves and their products. Glossy brochures, professional computer and video presentations and vast, shrine-like, real estate complexes all serve to enhance image of banks as temples of new religion of money.But what is behind all this? How can we judge soundness of our banks? In other words, how can we tell if our money is safely tucked away in a safe haven? The reflex is to go to bank's balance sheets. Banks and balance sheets have been both invented in their modern form in 15th century. A balance sheet, coupled with other financial statements is supposed to provide us with a true and full picture of health of bank, its past and its long-term prospects. The surprising thing is that – despite common opinion – it does. But it is rather useless unless you know how to read it. Financial statements (Income – or Profit and Loss - Statement, Cash Flow Statement and Balance Sheet) come in many forms. Sometimes they conform to Western accounting standards (the Generally Accepted Accounting Principles, GAAP, or less rigorous and more fuzzily worded International Accounting Standards, IAS). Otherwise, they conform to local accounting standards, which often leave a lot to be desired. Still, you should look for banks, which make their updated financial reports available to you. The best choice would be a bank that is audited by one of Big Four Western accounting firms and makes its audit reports publicly available. Such audited financial statements should consolidate financial results of bank with financial results of its subsidiaries or associated companies. A lot often hides in those corners of corporate holdings. Banks are rated by independent agencies. The most famous and most reliable of lot is Fitch Ratings. Another one is Moody’s. These agencies assign letter and number combinations to banks that reflect their stability. Most agencies differentiate short term from long term prospects of banking institution rated. Some of them even study (and rate) issues, such as legality of operations of bank (legal rating). Ostensibly, all a concerned person has to do, therefore, is to step up to bank manager, muster courage and ask for bank's rating. Unfortunately, life is more complicated than rating agencies would have us believe. They base themselves mostly on financial results of bank rated as a reliable gauge of its financial strength or financial profile. Nothing is further from truth. Admittedly, financial results do contain a few important facts. But one has to look beyond naked figures to get real – often much less encouraging – picture.
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