Sunday, 18 December 2011

The Euro Drama

After several false starts, Europe’s leaders failed, yet again, to come up with credible steps to solve the euro crisis.  The markets are getting weary and as investors lose faith and patience, the task of saving the single currency will become a lost cause. Sooner or later, the euro will be beyond saving. The way things are headed; this may be sooner than most people think!

In the run up to the Summit, the ECB has been extending its support to euro-zone banks—in effect lending them unlimited cheap money. That will help the banks and might in theory feed the demand for euro-zone sovereign debt. But it hardly counts as the “big bazooka” investors want, if only because the banks are wary of taking losses on ever larger stashes of government debt. What is required is not more liquidity but more capital for the banks.  Further, the ECB cannot intervene as the lender of last resort to euro-zone sovereigns.

In light of the above, the main objective in Brussels was to draw up a plan to save the euro. Governments needed to commit to credible fiscal rules that provided incentives for good fiscal governance. In return, the solution was expected to be in the form of joint liability for debts, with only the conforming countries benefiting from the purported Eurobonds. The European Central Bank (ECB) was to support to all solvent members. In addition to that the government’s were expected to announce measures to strengthen the banks and plans to drive economic growth.

But none of that happened.  Instead what we got was a British veto to a plan for ‘a plan’!  The proposal was to write fiscal discipline into national constitutions and enable the EU’s institutions to punish profligate countries and enforce fiscal discipline. The package focussed too much on austerity, and too little on economic growth.

Clearly, the leaders were hurtling down the wrong path. Forcing further austerity measures would further aggravate the recession and potential cause further civil disorder in most countries.  Besides, this could prompt a downgrade of most of the Eurozone’s credit ratings and cause economies to miss their deficit targets, increase borrowing costs — triggering still more austerity or sovereign default.  A downward spiral in the making!

Although the plan was greeted as a demonstration of European solidarity, it is more likely to provoke conflict. The summit rejected the idea of Eurobonds, in which all members would share some or all of the troubled economies’ debt burden.  Instead the pain is being imposed almost entirely on deficit countries, making it a bitter pill to swallow. If further austerity measures stir up civil unrest, the external enforcers from the EU will become a target for popular rage.

Already governments that agreed to the idea are warning that its ratification depends upon the detail and some countries may be pressured to hold a referendum. France and Germany, two of the major orchestrators can’t agree on the way to resolve the crisis, with France backing the Eurobonds idea while Germany is opposed to it.

Meanwhile the British government, having fallen out with its EU partners after exercising the veto, is promising that it will remain a central part of the union—and that London will remain Europe’s financial capital.  It must be conceded that an EU without Britain would be less liberal and Germany (and some of the smaller Eurozone members) recognises the importance Britain can play within the EU.

What is the hullaballoo about Britain’s veto

David Cameron’s plan was to seek safeguards for the financial sector and to subject some parts of financial regulation to unanimous approval, in exchange for backing a new treaty. When he failed to get what he wanted, he withheld his support.

Britain has real cause to worry about financial regulation. London is host to by far the biggest financial-services industry in Europe—in some areas it has as much as 90% of the EU’s business. The European Commission, encouraged by the French and others, has produced many ill thought out proposals to regulate it, as well as suggesting a financial-transactions tax a.k.a. ‘Tobin Tax’ named after the Nobel laureate economist James Tobin.

Mr Cameron’s veto was if anything symbolic as it fails to serve much more. He may have briefly basked in glory for his bold stance but if his aim was to protect the City and the single market, he has failed. Both are threatened more by Britain’s absence from the summits of up to 26 leaders that will now take place than by Britain’s participation in a treaty of 27 that placed no constraints on it. Britain could have achieved more by staying inside the tent that being outside.  After all, Britain has not been outvoted on a serious piece of financial-services legislation.

What next?

Germany has played down the significance of Britain’s veto and expects Britain to play an important role within the EU. As the balance of power shifts in Europe, there will be opportunities to mend the fences.  A compromise that gives Britain some reassurance about the financial sector and would let Britain return to the table may still be possible.

Ultimately, the euro zone faces tough choices. Its members could agree to deploy the ECB’s balance-sheet (much like the FED) and issue some form of Eurobond in exchange for fiscal integration. The question is not whether they can save the currency but whether some of them are prepared to pay the price for the profligate ones. This summit suggests not and it remains to be seen whether there will be a change of approach. Given the cultural, historical, political and historical divergences, this will remain a pipe dream.

It is more likely that some of the profligate countries may be forced out of the Euro and may only be readmitted post the criteria for fiscal rules are properly met.

But one thing is certain that this is not the last of the Euro Drama. Most certainly not!  In the coming weeks we will witness many more episodes of this epic!!!

What does this mean for global economy?

The unravelling of the Euro would impact the West severely denting growth and most definitely throwing the West into recession.  Already Europe is likely to face recession and the US would suffer recession should some of the Euro economies were to default given large exposure of US banks to Europe sovereign debt.

Rest of the world will experience a significant slowdown and overall global growth will falter.

While the drama plays itself out, in the interim brace for increased market volatility, further aggravating the poor economic outlook.

Tuesday, 28 June 2011

Greece – will it all end in tears?

The rampant violence and social unrest at Syntagma Square in front of the Parliament in Athens tells a tale of EU riches gone wrong. The dream of rich lifestyle, strong currency, single common market and above all an easy life have all come unstuck. The Government has been firing tear gas with an alarming regularity in a week where the Greek capital has witnessed extraordinary scenes of violence.  The people are protesting against the fiscal reforms and spending cuts and are not convinced about the economic reform measures.

All this creates a climate in which young people are struggling to see a future. Wages are low, the cost of living is high and they are wondering how they will find jobs. This generation is now looking for answers from the country's politicians, and they are not getting them from New Democracy and PASOK, which have ruled Greece since 1974.  The unemployment rate is currently at 16% with a total labour force of 5.5million.

So what's the problem in Greece?

Years of unrestrained spending, cheap lending and failure to implement financial reforms have left Greece in a financial mess. Greece currently runs a fiscal deficit of 10.5% against the EU limit of 3%.  Only 5000 people out of total workforce of 5.5 million declare income in excess of USD140,000p.a.!! Almost a million have managed to retire in their 50s while the official retirement age is 61 (rest of EU 65) with full state pension through nepotism.

Such is the state of tax evasion and corruption that almost USD 20bn is lost annually in tax collection as tax returns are accepted as filed facilitated by backhanders!  That amount represents 15% of its total revenues.  Technically Greece could run a surplus with proper tax administration but corruption is so deep rooted that it is nigh impossible!!

How big are these debts?

Greece’s debt (at USD 470bn), already the biggest in the euro’s history at 143 percent of gross domestic product last year, will jump to almost 158 percent this year and 166 percent in 2012 as per the European Commission.

Greece was badly exposed when the global economic downturn struck. Greece’s Finance Ministry blames the deeper-than-forecast recession for the government’s failure to meet its 9.4 percent deficit target last year and for a 1.9 billion-euro revenue shortfall in the first four months of 2011.  Greek GDP contracted 4.5 percent last year. The economy is forecast to shrink 3.5 percent this year, according to today’s report.

So what happens now?

The government next week will submit to parliament a 76 billion-euro package of spending cuts and asset sales to help meet its fiscal targets. The government has started slashing away at spending and has implemented austerity measures aimed at reducing the deficit by more than €10 billion ($13.7 billion). It has hiked taxes on fuel, tobacco and alcohol, raised the retirement  age by two years, imposed public sector pay cuts and applied tough new tax evasion regulations.

The country faces two pressing issues. First, although the fiscal deficit was reduced to 10.5% of GDP in 2010 from 15.4% in 2009, this year has seen a renewed deterioration due to weak revenue collection and higher-than-targeted spending. New austerity measures to cut EUR 6.5bn in 2011 and altogether EUR 28bn over five years need to be agreed.

Greece's credit rating -- the assessment of its ability to repay its debts -- has been downgraded to junk status, meaning it will likely be viewed as a financial black hole by foreign investors. This leaves the country struggling to pay its bills as interest rates on existing debts rise.
So in short, it has liquidity problem and solvency problem!  A state on the verge of declaring default!!

A Greek default is just a matter of how and when 

Greece was bailed out a year ago to the tune of USD150bn
EU/IMF bailout, Greece has the lowest credit rating of any sovereign state (CCC at S&P) and the most expensive debt to insure (5Y CDS above 2,000bps). The government promised to slash the budget deficit - the annual shortfall of state spending minus the tax take. 

Yet lenders still didn't believe the country could service its existing borrowings. The debt pile Greece had already built up was just too great.  So they slashed the value of Greek government bonds, driving up the yield. If Greece tried to borrow today, it would have to pay up to a whopping 30% p.a as interest!! That indicates just how little faith investors have in the country's ability to repay any loans. Small wonder.

By the end of this year, the Greek government will owe over 150% of the country's annual output, reckons the International Monetary Fund (IMF). By 2016, even with huge state spending cuts, that figure will only have fallen to 146%.

History shows that once a country's debt/GDP ratio rises above 150%, a default is just a matter of time. Greece is going to be no different.

What will it really mean for investors if Greece goes bust? 

In other words, Greece is about as bust as can be. Trouble is, Europe's finest can't agree on what to do about it.
The EU authorities want to buy time, first to allow European banks to rebuild their capital bases, second to give Greece the opportunity to enact structural reforms that could boost the countrys productive potential, and third, to allow the other peripheral countries to strengthen their finances so that they have some protection in the event of the crisis escalating. As time passes, official creditors will hold a higher share of Greek debt and so will remain reluctant to trigger a debt default.

But Germany isn't keen. It wants private investors in Greek debt to take some of the pain as well. And the Germans are trying to delay a second bail-out package until September, according to Reuters yesterday.   And the French are preparing to extend the maturing debt into new 30 year term facility.

Unfortunately, time is running out fast. Protests against cuts on the streets of Athens are getting nasty, and could pull the government down. That increases the risk of a 'disorderly' default, where Greece just turns around and tells its creditors and the rest of the Eurozone where to stick their austerity. 

Could Greece become Europe's Lehman Brothers? 

What happens then? Let's look at who's got what on the line. 

At the end of 2010, according to data from the Bank of International Settlements (BIS), Italian banks held $2.3bn of Greek debt, and UK lenders were in for $3.4bn. They should be able to cope with those losses. 

But then the numbers get much scarier. French lenders held $15bn of Greek sovereign bonds, while German banks were exposed to more than $23bn. The total for European banks was $52bn.  This does not include the ECB debt, which itself has bought €47bn-worth of Greek bonds in a failed attempt to boost confidence in the country. It's become an enormous dumping ground for bad loans. No expert can say how it can jettison these without dealing a fatal blow to the European banking system.

On top of this, exposure to Greek banks in emerging Europe "is rife". Greece's banking sector is largely Romania's and Bulgaria's banking sector. Subsidiaries of Greek banks in these countries have accounted for a large slice of domestic lending. As these subsidiaries are forced to send more money back home, the least bad outcome, is that lending will collapse in Romania and Bulgaria. That would be damaging for growth. 

But if those Greek bank subsidiaries run out of money, they in turn could be forced to default. And in a mad scramble for cash, that could lead to the worst-case scenario: "a fire sale of emerging European assets". 

And then there's the question of what happens to all the credit default swaps (CDS) written as insurance against Greece going bust. If Greece defaults, would the banks who wrote this insurance be able to pay out? 

This may all sound familiar. That's because we've seen it before. The probability of a Euro Zone “Lehman Brothers” moment is increasing. Markets are looking at a scenario of a Greek debt default becoming disorderly. 

The big worry is that, as happened with the Lehman collapse in 2008, banks will stop trusting one another as fears over exposure to the country's debt contaminate the Euro Zone.  'Counterparty risk' will become an issue once again, as banks that once looked credit worthy will have their capital eaten up by Greece-related debts going bad. So banks will stop dealing with each other - which is key to a functioning economy.

Finally, the combination of defaulted bonds and a likely acceleration of withdrawal of deposits from Greek banks would place the Greek banking system under particular strain.

The pressure to abandon the euro would doubtlessly increase from some Greek politicians and public – an apparent “quick fix.

You are beginning to see a - very, very messy - picture by now. Eventually a disorderly exit of Greece from Euro. And it's likely to prove to be bad news for the Euro. 

So where are the safe havens?

Clearly, GOLD is one. If ever there's a time to stick with it, now is that time. 

The other is less obvious. America is hardly trouble-free, as reflected by the weak dollar. But compared with Europe's looming woes, US's problems are small. The Euro land outlook has to be dollar-positive for the balance of 2011. 

In summary, tighten your seat belts for a bumpy ride!!! And REMEMBER...CASH IS KING!!!

Tuesday, 10 May 2011

CHINA…….a slowing dragon?

The Western economies, tottering from the financial crisis, have been depending on China and other emerging markets to drive economic growth. Increasingly, machinery exporters, energy suppliers and metals producers across the globe look to China and other fast-growing emerging economies for business growth.

Never has been so much riding on China's success as now - Foreign direct investments, global trade, the energy, metals and mining sectors dependence on continue demand from China, property and currency speculators, macro hedge funds and above all the lives of more than a billion people.  The growing influence of China has in both the global scene and the Asian region has been palpable.

However, what’s interesting is how different sets of prognosis are being made by economists based on the same set of facts. Well that's what makes a market. Of course you could also dismiss it as economists are six of one and half a dozen of the other!  On one side of the spectrum we have some who argue about China’s bright future and declare that it’s a forgone conclusion for it to emerge as the largest economy in the world by the turn of this decade.  On the other end, some see a looming disaster on the horizon and a collapse of the Chinese economic miracle by 2015. In The Coming Collapse of China, Gordon Chang forcefully argues the pessimist's case. So which side should we believe?

…..current economic outlook

Chinese officials have warned that their economy is poised to slow. In late February, Premier Wen Jiabao announced that the target for annual GDP growth over the next five years is 7%. This represents a significant decline from the 11% rate averaged over the five years through 2010.

That blistering growth was achieved despite the global financial crisis as they aggressively pushed up bank lending in 2008.  It is hard to fault the Chinese policy as it had ensured country’s robust growth in tough economic times, nothing short of a miracle.  So should we believe China’s forecasts as they have always under-promised and over-delivered? 

Or is it a response to foreign and domestic pressure against currency revaluation. China will have to rebalance its economy, placing less weight on manufacturing and exports and more on services and domestic consumption.  China appears to be absolutely no closer to the hallowed goal of rebalancing with currency being the focal point of any US and China talks.

Inflationary pressures are growing with high commodity prices and increasing wage pressures.  Chinese workers have started demanding higher wages and better working conditions which could lead to more consumption as well as reduced wage arbitrage resulting in slowing exports and lesser investment.  All of this implies could imply slower growth.

So what is at issue is not whether Chinese growth will slow, but when.

…..increasing wage pressures

Wages in China have been rising fast in the past couple of years and workers have demanded better pay and conditions.  Foxconn came into spotlight last year due to increasing workers’ suicides arising from stress and poor wages. Thus the wage arbitrage is eroding fast and it seems then that manufacturers are going to raise their prices on account of increase in commodities prices and increase in wages. This could further fuel inflation across the consumer goods.  There is already significant social unrest in many markets over increase in food prices.

Herein lies the conundrum: Producers cannot pass higher costs to consumers which will lead to the exit of high cost producers.  It follows that this will mean an increased number of liquidations with concurrent increases in the unemployment rate in the short term till demand/supply imbalance is restored.

While wages in China are still a fraction of what U.S. workers earn but that difference is expected to narrow, with the weakening US Dollar, increasing Chinese wages and factoring the transportation costs and the risk of Intellectual Property rights violations.

In the US, high unemployment is already driving state incentives to attract factories, while unions are becoming increasingly flexible.  The next few years could see a wave of reinvestment by U.S. multinational manufacturers in their home base, as rising wages and a strong yuan currency make China a less attractive proposition according to BCG. There is some evidence of this trend emerging with the likes of Caterpillar and NCR moving some of their units back to United States.

…..abundant labour supply?

China has been able to grow so rapidly by shifting large numbers of underemployed workers from agriculture to manufacturing. It has an extraordinarily high investment rate, about 45% of GDP. And it has stimulated export demand by maintaining what is, by any measure, an undervalued currency and has even been branded by a section of lawmakers in the US as a “currency manipulator”.

China has about 250 million rural residents who work off the farm, and about 150 million of them are migrants.  Nationwide, rural incomes in China rose 10.9 percent in 2010, outpacing a 7.8 percent rise in urban incomes, reflecting rising wages for the hundreds of millions of migrant workers. The proportion of Chinese aged 14 or younger was 16.6%, a fall of 6.3% from the 2000 census. Those aged >60 increased to 13.3% of the population, up 2.9%.

The converging consequences of a disappearing labor surplus and the transition to an older population with more non-working retirees dependent on their families and welfare will be an "enormous challenge" for China, per Ba Shusong, a senior economic advisor to the Government.

…..reaching Lewis’s turning point

China's census results show the world's second-biggest economy is nearing a demographic watershed that will auger wage rises, higher inflation and relatively lower growth.  The current data show that China has already crossed the Lewis turning point and the window of the demographic dividend will soon close.

Nobel-prize winning economist Arthur Lewis' theory contended that as a developing country modernizes, workers' wages begin to rise quickly once surplus rural labor shrinks to the point that labor shortages emerge.

The shortages of rural migrant workers since 2004 have been no passing blip, but it is now signaling a major turning point -- a transformational trend.

…..other empirical studies

Empirical studies on fast growing economies indicate that a slowdown kicks in typically when the per capital income reaches around the USD 16,500 mark.  China will achieve that by 2015.  There is no cast-iron law on slowdowns, of course as not all fast-growing countries slow when they reach the same per capita income levels. But slowdowns come sooner in countries with a high ratio of elderly people to active labor-force participants, which is increasingly the case in China, owing to increased life expectancy and the one-child policy implemented in the 1970’s.

Slowdowns are also more likely in countries where the manufacturing sector’s share of employment exceeds 20%, since it then becomes necessary to shift workers into services, where productivity growth is slower. This, too, is now China’s situation, reflecting past success in expanding its manufacturing base.

Most strikingly, slowdowns come earlier in economies with undervalued currencies. While currency undervaluation may work well as a mechanism for boosting growth in the early stages of development, when a country relies on shifting its labor force from agriculture to assembly-based manufacturing, it may work less well later, when growth becomes more innovation-intensive than labour-intensive.

Finally, maintenance of an undervalued currency may cause imbalances and excesses in export-oriented manufacturing to build up, as happened in Korea in the 1990’s, and through that channel make a growth deceleration more likely and the economy vulnerable to external shocks.

… big is the bubble

On Thursday, Moody's Investors Service downgraded China’s property sector from "stable" to “negative". This may have something to do with the significant property construction in China despite the large number of vacant and under-performing commercial and residential properties.  There are approximately 64 million vacant apartments in China, essentially creating "Ghost Cities." These vacancies are due in large part to the speculative investment leading to the  increasing divide between China's rich and poor leaving many without adequate housing.

Residential housing investment as a share of China's GDP has tripled from 2% in 2000 to 6% in 2011 - the same mark the U.S. housing market hit before imploding. Additionally, over the past eight years, housing prices in China have gone up 140 percent nationwide and as much as 800 percent in Beijing.

China's central government has launched several rounds of regulations in order to cool down the over-heating market. It remains to be seen on how effective they are. Meanwhile there is a bubble that is waiting to be burst.

…..the extreme view

Gordon Chang, author of ‘The coming collapse of China’, contends that the glitzy Shanghai, increasing foreign trade and investment, and a developing high-tech sector do not represent the real China. Instead, the real China is characterized by massive banking problems, failing state-owned enterprises (SOEs), corrupt and repressive Chinese Communist Party (CCP) rule, dissident movements such as Falungong, and separatists in Tibet and Xinjiang. The situation is so critical that "Beijing has about five years to put things right". Unfortunately, he believes, the shock of China's World Trade Organization (WTO) obligations, the government's lack of fiscal resources, the straitjacket of Communist Party ideology, the Party's lack of ideological authority, and the power of the Internet mean there is no hope. China is a lake of gasoline and one individual "will have only to throw a match. An extremely grim view indeed!

In summary

Finally, which side should we believe? We will have to wait a few years before we see whether either of them got it right!  My view is that China will begin to encounter a slowdown in growth but will still post super growth by Western standards, although not as blistering as in the past.

Higher wages and demand from a growing Chinese middle class, while raising costs, will increase domestic consumption and reduce export, resulting in a rebalancing of the economy, a goal that has been elusive so far.

China will continue to be a manufacturing powerhouse, possibly more at the lower end of the technology spectrum.  The higher-end goods or products lead by innovation and breakthrough technologies are more likely to be in the developed world.

Both the pace of investment and economic growth will slow with a decisive shift to domestic consumption as the main driver of economic growth.

While there are headwinds, prognosis of a major collapse is far too dramatic.  China will remain a significant global player both in political and economic terms.  An economically strong China is vital for global growth, I say, break a leg for that!

Friday, 4 March 2011

Law of Large Numbers

If you thought this blog is about probability theory of the law of large numbers, please read no further!

This note is about......the absence of law for large numbers!  Or more precisely, a totally different set of rules!!

Every time a despot or a politician is ousted, stories of their ill-gotten wealth make the headlines. This begs the question(s) – why were they allowed to stash? Why does this not hit the news while they are in power? Why is stashing cash so easy? When does wealth become ill gotten so that it becomes topic of national interest?  Is it only after a dictator or a politician is ousted? Does it require a revolution in a country to bring it to the fore?  A multi-trillion dollar issue, quite literally!!

When Roman Abramovich buys up Chelsea FC or Thaksin buys Man City or Mohammed Al Fayed makes significant business investments, the source of their wealth seldom attracts sufficient scrutiny.  Whereas you and I would be asked to explain much smaller credits in our account sighting “Know your Customer” (KYC) and Anti money laundering (AML) rules.  It seems that those rules go out of the window for large numbers….

Why is stashing cash so easy?

It is reported that the wife of ousted Tunisian President Zine al-Abidine Ben Ali shoved 1.5 tons of gold (worth $60 million) in her bag before fleeing to Saudi Arabia last month. However, illicit funds are not always so brazenly swept from a nation.  We have this image from movies where guys show up with a million dollars of ransom in a small suitcase – apparently, you can’t do it: as it takes three small suitcases!
But there are many ways of moving money to the international money centers with the help of lawyers, accountants and bankers. During one of my forensic audit assignments, many moons ago, I had unearthed a suspect transaction wherein a Libyan official had carried bearer bonds worth $ 200 million in a bag to London where it was deposited with a private bank.  There are other ways too…payments from corporates’ to a web of companies in the guise of commissions or consultancy fees for contracts……names like A. Raja, Kalmadi, Adnan Khashoggi and Ottavio Quattrocchi rings a bell…

The World Bank estimates $20-40 billion is stolen from developing countries each year, while a report from Global Financial Integrity put that figure over $1 trillion annually. Often this money is held through a web of companies for the benefit of politicians, ruling families, cronies, corrupt officials and tax dodging businessmen.

Leading the list is China, which reportedly lost over $200 billion annually in illicit financial flows since 2000. During his 30-year-rule, Hosni Mubarak and his family reportedly amassed a fortune estimated up to $70 billion. It is estimated that the Libyan leader has plundered over $20billion with several American and European banks managing his wealth. Many Indian politicians and businessmen have their billions stashed in Leichtenstein, Switzerland, St. Kitts, Channel Islands, Luxembourg etc. And the government is dithering to come out with the details.

Most of these kleptocrats also own significant real estate, financial and business assets in the western world and their families enjoy a very lavish lifestyle while the vast majority of their countrymen struggle for daily meal. 

The estimates of illicit money in the major wealth centres like Switzerland, Leichtenstein and other financial safe havens in the western world is mind bogglingly large. 

The rules are there……..

The Financial Action Task Force (FATF) is an inter-governmental body whose purpose is the development and promotion of national and international policies to combat money laundering and terrorist financing. In order to protect the financial system from money laundering and terrorist financing risk and as part of on-going efforts in this area, the FATF has identified and will work with jurisdictions with strategic AML/CFT deficiencies.

FATF has laid out measures to be taken by financial and non financial businesses and professions to prevent money laundering and terrorist financing.  The rules are all there…..but the enforcement of these rules are neither stringent nor consistent.

So what makes it easy…

Switzerland, Britain, and the United States are historically financial beehives for kleptocrats looking to stash money, because their cities offer the best bankers, lawyers, and financial resources. In these countries with large concentrations of financial advisors, with clusters of services such as banks, lawyers, corporate advisers – there is everything that is required to manage wealth.  Money is often laundered through a web of legal entities and structures. It's like untying the Gordian knot. These people have protected themselves with various layers and to break through all these layers is a complex procedure.

About 27 percent ($2 trillion) of the world's privately held offshore wealth is managed in Switzerland, according to Boston Consulting Group.  Switzerland's new Return of Illicit Assets Act, which took effect Feb. 1 allows the Swiss government to determine the legality of funds of any person hailing from a "failing state". 

The focus seems to be on remedial measures than preventative measures.  How do these institutions and countries get away from not enforcing the laws in the first place? Stricter enforcement of rules with severe consequences for non-compliance has to be way ahead.

What can be done?

In June, the US Justice Department launched a new Kleptocracy Asset Recovery Initiative.  It is well laid out that Banks must take reasonable measures to establish the source of wealth and source of funds related to their customers and the beneficial owners of the funds.  

But a real difference can only be made, when they start throwing the facilitating bankers, lawyers and accountants in jail and cancelling banking licenses of conniving institutions for “Knowing their Customers too well”!!

That will be a pipe dream!!!