Even before the onset of the recession I noticed on several occasions that people tend to confuse Cyprus with Greece, considering the island country to be part of the larger nation. However, although they share a common language and, to a certain extent, culture, financially the two countries are totally independent of one another. Naturally, here we are talking about the southern or “Greek” part of Cyprus, as opposed to the northern part, which, since the split of 1974, the Turks have formed into the Turkish Republic of Northern Cyprus.
The friendly relationship between Greece and Cyprus is completely understandable, as a result of the “Greek brotherhood.” A significant part of the Cypriot intelligentsia studied, and still studies today, in Greece, and there are close economic links between the two. It would be pointless here to mention the spread of the Greek recession and their possible exit from the eurozone, as this has been covered in so much detail in the press over the last two years. Cyprus became the centre of international attention in July 2011 when the power station between Larnaca and Limassol supplying the island’s electricity exploded one morning. In addition to the fatalities, there were also serious economic consequences, as the island lost some 50% of its electricity production and had to spend more than a billion euros repairing the damage. Although they planned to complete the reconstruction last December, the end is still not in sight.
Following the explosion, events seemed to speed up around Cyprus. And, as if the country had suddenly appeared in the financial world’s gun sights, the international credit rating agencies repeatedly downgraded the Cypriot banks, attaching significant risk factors to the country. Panic set in, and the international public pricked up its ears, saying “Aha, so here is Greece No. 2.” Some investors started taking their money out of the island. Cypriot political leaders and bankers made matters worse with their statements, some of which immediately asked for foreign bailouts. This probably sent the wrong message to the outside world, who had difficulty as it was distinguishing between Cyprus and Greece, where the major problems surrounding the euro occurred and where they held elections in spring this year. It’s no surprise that many people got cold feet, and I was constantly being asked what would happen in Cyprus and whether they would go bankrupt.
In my opinion, that is a very long way off, and I, here in Hungary, would gladly swap places and have the “huge problems” that they have in Cyprus! What I am about to explain below is basically very subjective. This isn’t going to overflow with statistical data or be interwoven with cross references, and I admit that I myself am tired of all the expert explanations of the last 4 years; tired of those theories which they develop one day, only for reality to shoot down the prophecies of the super-economists the next, as events very often take a very different turn to those expected by the “gurus”.
So, what exactly does Cyprus live on? Basically 2 things. One of them is tourism, as the country’s main export is “sunshine”. And here we could justifiably put a “smiley”, as anyone who has visited the island will have seen, this is not the Garden of Eden. Basically, we are talking about a sparse, rocky territory, with relatively little vegetation, but a clear blue sea and a friendly, hospitable population, who are delighted to welcome foreign visitors year after year. And the foreign visitors do come. Although there was a sharp drop in numbers at the start of the recession, they have now recovered from the loss and, thanks in particular to tourists from Russia, are about to close a very good year. The other main branch of the economy is the financial sector, which includes the “company industry”, banking services and the real estate market. If we look at tourism and the financial sector as percentages of the economy, then, from the point of view of income, the proportion of the financial sector is considerably larger than that of tourism; that is, it contributes more to the economy than all those millions of tourists all together. If anything were to happen to this, then this would literally mean the end of Cyprus financially. They would not be able to survive on tourism alone.
Everybody on the island, from the president to the last hotel porter or taxi driver, is quite aware of the significance of this. This national consensus is no accident; some three quarters of the parliament is made up of lawyers and solicitors, who are 100% involved in company registration, which forms such an integral part of the financial services. So it is impossible to even speak about matters which may be detrimental to the industry without involving them. There is currently legislation which they have been unable to pass for 7 years, despite pressure from the EU, as this would have an effect on lawyers’ confidentiality rules.
Cyprus has been present in the international financial arena since 1974 – almost 40 years. In those 4 decades such interests have been concentrated here as would be able to save the country from bankruptcy by themselves. Russia alone has records of around 70 billion euros worth of investments direct from Cyprus. Although the majority of this money is probably of Russian origin, there is no alternative to the agreement for the avoidance of double taxation between the two countries: Cyprus can’t be “replaced.” Little wonder, then, that when the Cypriots gave their cry for help last year, Russia immediately threw them a 2.5 billion dollar lifebelt. Then this year, when they again asked for money, the Russians again promised a package worth 5.5 billion euros. And all “for peanuts.” It is true that the value of the gas field discovered on the seabed, and belonging partly to Cyprus, has been estimated at 100 billion euros, which is roughly equal to the GDP of Cyprus for 5 years, so there would be more than ample collateral. This was probably the motivation behind the Russian loans. Oh, of course, not to forget the increasing of the power of the “new rich” Russians living there and the nurturing of the financial relationship between the two countries which has always been good. The Cypriot president, who also happens to be the current EU president as well, studied in Moscow, so language is never a problem when he negotiates with the Kremlin. Although he is often criticised at home, Christofias has very good standing with the Russians. The Russians are key players here, and who knows what additional motives they may have in unconditionally helping this small country.
So, where does all the money really disappear to in Cyprus? It’s a logical question, as on the credit side, with 2 sectors bolstering the economy, the situation wouldn’t be that bad. So the problem must be on the debit side. And here human fallibility, stupidity and failure to plan for the long term can be felt every step of the way. In a country with a population of 850 000 there are almost 100 000 civil servants. This in itself would not be a problem, but here the salaries and bonuses are significantly higher than in the private sector, not to mention the “job for life” guarantee. So everybody wants to be a civil servant, as a secondary school teacher can earn up to 4000 euros a month, which they also receive in the 3-month summer holiday. These sorts of salaries are obviously over the top and wasteful, as very often the individual doesn’t even spend the excess at home, but rather on ebay or in the casinos on the Turkish side. 2000 euros would be enough, but the logic is different here: everything depends on family ties and connections. Who knows who, and who is what to who. You can only get a good state job if you have the right connections. Allegedly, there are currently 40 000 unemployed Cypriots on the island. At the same time, there are 150 000 immigrant workers. So where, in fact, is the unemployment?
The list could go on and on, from the deficit of the local transport company to the problems of Cyprus Airways, the national airline. In short, they overspend and waste money, and have been doing so for decades. To be fair, they too are aware that this can not go on indefinitely, and they will have to give up at least part of their salaries and bonuses. But nobody wants to take the responsibility for the decisions which will have painful consequences. Especially not in the year before an election. And can they do this? It seems that the answer is yes… Why? At this point I’m sure you are expecting some concise, comprehensive conclusion, in which I give the final word on the future of Cyprus and whether or not they will go bankrupt. In my opinion, there is very little chance of bankruptcy, and even if the statistics tell a different story, in the case of Cyprus you can’t always believe the figures.
Back in July, while having dinner with the leaders of one of the large Cypriot banks, I asked them about the future, to which one of them replied:
“László, we are too big to be bankrupted..”
How should this be interpreted? The Bank of Cyprus has 29% of the market, Marfin Laiki 17% and Hellenic Bank 9%. That’s 55% all together. If these three banks have a problem, then that is the end of Cyprus, end of story. The Russians would also disappear and they would be left with serious financing problems. And I haven’t even mentioned all of the other countries with very close links to the Cypriot financial system, such as the UK, Israel and a significant number of Arab countries, to name but a few.
Think about it logically yourself. I’ve been spending several weeks a year on the island for 13 years now, and have a pretty good overview of events. When I established LAVECO Ltd. in Cyprus in 1999, it wasn’t by chance. I felt that this was a country which would be able to offer a stable home to our clients. And I still believe that today, in spite of the recession and all the horror stories. Cyprus is eternal. Despite the Greek mentality, the local elite are capable of getting on top of the situation and resolving all the difficulties caused by the recession.

I hope you will enjoy reading this, and wish you continued business success.

Warm regards

László Váradi
Managing Director
LAVECO Ltd.

10 years or so ago we didn’t even know of the existence of compliance departments, let alone what they did and how they worked. Even here at LAVECO, where we use the banks’ services day in day out, we were blissfully unaware. Of course, we all knew about the legal departments within the banks, just as was the case in general with large, serious companies.
The terrorist attacks against the USA on September 11th 2001 led to new momentum in the fight against terrorism in all areas, and at the financial level they started looking at how these organisations were being financed through the banks. The EU announced a greater fight against the small tax haven countries, accusing them of “harmful tax competition.” At the same time the USA is also trying to clamp down on its own citizens who take their tax savings abroad. The OECD is also striving for the elimination of money from illegal activities, calling for transparency in financial processes. Numerous countries, international organisations and financial institutions adopt the OECD guidelines in order to try and prevent money laundering. Various EU directives are introduced in an attempt to standardise anti-money laundering regulations, and since the beginning of this century every EU member state has passed anti-money laundering legislation, though with only limited standardisation.
Naturally, financial institutions, banks and other companies offering financial services, such as brokers, feature very prominently among the subjects of the anti-money laundering legislation. This makes sense, as without banks it is not possible to launder money, with the illegal funds inevitably finding their way there. For the average businessman this would not provide a problem, since companies are not usually formed for the purpose of money laundering, but for some business activity: production, trade, services, investment etc.
The monitoring of procedures, identification of new clients and continuous tracking of their transactions is the competence of the compliance department, naturally in conjunction with the bank’s legal department. In this way, a new division is born within the bank, and its task is to adhere to the legal requirements. There wouldn’t be any problem with this, except that they too are financed by our money, the money which we, as clients of the bank, pay for banking services. At the end of the day the maintenance of the bank becomes more expensive as it has to employ more staff. But of course, this is all in our interest!
The real problem begins when these people in Compliance start working. It would appear that for them the best thing would be if the bank had no clients at all, as they merely obstruct the bank’s operation. If a client always makes the same transactions, then that is the problem, and if he doesn’t, then that is the problem. The only thing is, the bank also has to make all the usual super profit from somewhere, so sooner or later a conflict will arise within the bank between the business division and the compliance people who carry out the client identification and monitoring. Of course, this is not widely known, as none of the banks wash their dirty laundry in public, but when I had lunch recently on a small island with the management of a not-so-small bank I quizzed them, after a couple of glasses of wine, on the subject of compliance. One of them opened up and said: “If I granted these idiots everything they want, then we wouldn’t open accounts for anybody.” On another occasion, another bank manager admitted that of the 10 requirements placed on clients, his bank would not be able to meet even one.
In the name of client identification compliance departments often ask for documents which don’t even exist, or, if they were ever produced, then would probably be fakes. In countries with the continental legal system, for example, they are unable to comprehend that it is not possible to obtain authentic public documents on a company’s owners or directors in a significant number of Anglo-American law jurisdictions. In many cases, it is only possible to obtain a common-law document. Then, if they accept the common-law document, the next battle begins. Even if the document is authenticated with Apostille, for example, the wording of the text written by the notary public may not be to the liking of the man from compliance.
Their main enemy is the bearer share, because anybody could be hiding behind it. In many cases, they are not even satisfied if the client or the company director declares unambiguously who the 100% ultimate beneficial owner or possessor of the bearer shares is. For them, the bearer share is the devil itself: this is what they were taught, and what is reiterated to them in training courses several times a year. They have never even heard of the “dummy” company. If we think about it logically, even in the case of registered shares, we can not be certain that the name on the share certificate is that of the true owner. It could just be a trustee. It is certainly not worth getting into a fight with compliance about that, though. They have it written down in black and white… where it is not possible to detect the true owners. At the same time, for the client the compliance department is an unseen and untouchable division within the bank. You can’t call them, can’t address a letter to them, and they don’t put anything down in writing for outsiders. They are simply just there, and show how clever they are. True, I have had the chance to speak to them once or twice. It was truly an incredible experience. I explained to the head of compliance of one of the large banks, for example, why their system was lacking as they failed to deal with one of the most basic questions: that is, the reason why this whole compliance thing came about, to see whether a client exists or not. I pointed out to him that in Hungary we still haven’t even reached the point where the banks link the records of the public records office and the registrar of companies to their own databases and are able to see when an individual passes away or a company is dissolved or struck off. As a result, their systems are quite probably showing that the bank still runs accounts for hundreds of dead people and defunct companies. In the world of online banking, anybody who knows the codes can log in to the account and withdraw money, and the bank would be responsible because they had failed to spot that they were maintaining an account for a non-existent client. The banker concerned reacted by giving me a dressing down: “don’t poke your nose into our system, because we are extremely thorough and fully aware of the legal requirements.”
Dear Reader, I wouldn’t be surprised if you had come across similar or even more hopeless cases. For me, the “more than 3 countries involved” problem was the best. Basically, the bank wouldn’t open accounts for companies where more than 3 countries were involved. Maybe, in this globalised world, you can not comprehend this. Let me explain. A Spanish businessman establishes a company in Hungary because corporate tax is 10%, instead of the 35% in Spain. The company then transports beer from the Czech Republic to the UK, but as the businessman had asked his Austrian friend to be the director of the company, the Hungarian company decided to open a bank account in Austria. That is, it would open an account, but the Austrian bank informs them that, according to the compliance department, the opening of an account is not justified because “more than 3 countries are involved in the enterprise.” Logical, isn’t it? Maybe there’s football on and maybe it’s summer, but the English fans can’t drink Czech beer because their thirst is not justified. At least according to the compliance department, here in the 21st century in the middle of a 27-member European Union.
But what can you, the poor victim, do? Sit back in your armchair, watch the Olympics, drink your beer, while you still can, and enjoy life. Leave compliance to us at LAVECO. Unfortunately, we spend a significant part of our time fighting with them, instead of doing something more worthwhile. But we are now used to it, and generally we are winning the battle. Or at least in a significant number of cases.
Wishing you a pleasant and relaxing summer watching the Olympics.
With warm regards,

    László Váradi
    Managing Director
    LAVECO LTD.

A month from now Offshore Investment, the most important professional offshore publication in the world, is expected to publish its report summarising the results from the company world for 2011. Before that, in this article we will try to outline the trends which the experts at LAVECO believe will characterise 2012. It is not our intention to be prophets, but rather, based on earlier events, law changes, processes and the individual nature of each country, we are trying to anticipate those characteristics which are likely to define 2012. Like any other similar article, this will be somewhat superficial, as it is impossible to cover every single detail, and even in the most thoroughly researched topics there is always some uncertainty, as we can see all around us in the world economic processes typical of today.

First of all, what is the significance of the role played by the offshore sector in today’s world economy? Nobody can provide exact figures, so we can only base estimates at the proportion of today’s economy represented by offshore structures on snippets of information. Today, it is likely – if we add up stock market turnover and forex and derivative deals – that more than half of global financial turnover goes through offshore companies, funds and banks. Ten years ago more than 60% of the turnover of the London Stock Exchange already went through offshore companies, and the majority of commercial real estate in the City of London is in offshore hands. These are only part of the picture, and I am convinced that the situation is no different in New York, Frankfurt or Hong Kong. It was also interesting years ago to notice that 92% of the turnover on the Russian stock exchange was performed by “foreigners”. Knowing the local situation, the majority of these “foreigners” would have been Russian investors hiding behind offshore companies.

The anti-offshore “experts” always forget to mention that the financial transactions of these companies can be two-way for a given country. On the one hand there is disinvestment, where capital leaves the country through offshore companies. At the same time though, if a region offers advantageous investment opportunities, then the opposite effect can be observed, with offshore companies appearing in the country as investors. From the country’s point of view, it is important to have a positive balance: more capital should come into the country through offshore structures than leaves. With the right economic policies, a country can attract substantial offshore money into the economy, and there are numerous examples of this in recent history. Just as there are examples from the other end of the scale, when the policy makers’ blinkeredness and lack of understanding of offshore affairs frighten off foreign investors.

At the same time, we consider it important to offer some guidance to those who wish to plan their future a little in advance, or who wish to make important structural decisions. The choice of jurisdiction is very much arbitrary. We have chosen to put the jurisdictions which have proved popular in recent years under the microscope. Naturally there will be exceptions, as there are also those which we consider to be on the threshold of success at the current time. We’ll start straightaway with “the odd one out”, as even the USA was never exactly a classic tax haven, they still probably managed to incorporate the most companies.

I don’t know whether you remember the problems surrounding Y2K in 1999. At the time, some 12 years ago now, the world was waiting in dread for the end of the world, fearing the chaos caused by computers unable to cope with the problems of the change of millennium. The hysteria lasted for months, with specialist companies by the thousand examining computer systems and securely storing all the data. Naturally, none of this came cheap; good specialists don’t work for nothing! This, of course, I accept, provided that it is backed up by good reasoning and real substance.
Then came the tensely awaited moment, and the end of the world never happened. With the exception of a few faulty computers, there were no problems with computer systems on New Year’s Eve 1999. The world breathed a sigh of relief and got its breath back, and now very few of us remember those tense days, even though it seemed deadly serious and was only 12 years ago.
Those currently predicting the end of the euro are also sending out a “the end is nigh” message, as in the financial world everybody is linked to just about everyone else, just as in the case of internet relations. Based on the domino effect, the collapse of one country could lead to a complete banking failure in another country. And we are not only speaking about Europe, the tension can be felt worldwide. Just think about the Chinese, who haven’t only bought American dollar securities, but have also invested heavily in euro-based bonds. If the euro crashes, what will happen to their investments? Will they be lost, too? If Europe falls apart, will China and the developing world be able to continue with their dynamic development? Yesterday I read an analysis which claimed that Russian economic performance will outstrip German performance by 2020. To me this seems somewhat unbelievable, given the current economic situation in Russia. It’s not easy to find your bearings. Only yesterday I was saying to a friend that we are living in a world struggling with a topsy-turvy system of values, where orientation will prove very difficult for our children. Here’s just one small example: if somebody who develops and manufactures electronic goods comes up with a memory unit half the size of the current ones but with a storage capacity several times larger, then his business will be worth billions. Just think about the Apple story; how far have they come in less than 30 years? There were several days this year when Apple was the most valuable company in the world. What can happen in sixty seconds around the world? Today around the world, every 60 seconds 910 latest generation iPhones are sold, whereas only 760 personal computers and laptops are bought in the same time. These are figures which make you think about what the future holds.
On the other hand, if a simple farmer somewhere in eastern Europe grows potatoes on his own land, in a very professional way, he, and his family, may go hungry, or constantly be dancing on the edge of bankruptcy. Either the weather is against him, or the prices are too low, or he is simply not paid, and his produce may just rot in storage. The dangers are numerous.
Would the world survive another 100 years, I wonder, if the current microchips didn’t shrink to half their current size and there wasn’t a new generation iPhone in every teenager’s pocket? I dare say the answer is yes, just as we have lived for thousands of years without all these gadgets. And much more happily!
But then over those 100 years, how would we feed those 7 billion or so people whose stomachs are constantly emptying? At the foot of the hierarchy of needs comes physiological need, that is, hunger, which can not be satisfied with an iPhone. We need the potatoes. But where from, if in the meantime the farmers have gone bankrupt, or, totally disillusioned, have sold up everything and joined the benefits queue, which, of course, is financed in part by the extra profits of the electronics industry. For a while at least. That’s all very well, but then why all the money, if there are no potatoes in the shops to spend it on?
I smiled to myself at the end of 2009, when, at the start of the recession, in Germany they had to re-print Marx’s ominous opus “Das Kapital” 5 times in a year. The work, labelled as Communist for decades, must have contained something important, if it was in such great demand. Yes, because it gives a precise and timeless description of the era of free competition capitalism. It’s like an anatomy text book in medical school: homo sapiens will very rarely grow a third kidney. What the anatomists studied 200 years ago is still true today.
So, then something doesn’t add up. If we have these highly-trained super economists, who have 3 degrees in their pockets and know the rules of the game, running the financial world, then why is the world economic situation getting worse? Why do global recessions occur? Why is it that in some cases they can’t step in, like doctors working in an intensive care unit, so that “the patient’s breathing and circulation don’t stop?” If, on the other hand, they have so little clue about how the whole thing works, then what have they spent years, or decades, studying in the university lecture theatres? Not to mention the money from our taxes spent on maintaining the education system! Or is this plethora of qualifications a waste of time, and only good for the multi-nationals who can boast about who has the most over-qualified employees? Or maybe these can be used to get pay-rises?
I recently had lunch with some bankers in Cyprus, who spiced up this annual ritual by vehemently describing to me just why there will not be total failure in Europe. There was every type of scientific explanation, from the writing-off of loans to the change in the proportion of compulsory deposits. After listening to this for at least an hour, I had no choice but to interrupt them: this is all very well, but my clients aren’t the least bit interested, and as they’re not bankers, they don’t even understand all the “brain-washing super blah blah blah”. They need a more tangible explanation, which will appease them straightaway. They put the ball straight back in my court by asking what I meant. For example, something like the fact that it is not in the interest of the Chinese to let Europe, or even the USA, go bankrupt. Afterwards, who would they sell all their products to? Their own internal market is not well enough developed for them to be able to pass on anything at any price and in any quantity. They need the markets, because producing just to store in warehouses is no good even for them. The buying power in the underdeveloped countries of Asia, Latin America and Africa is too restricted. On the other hand, the Chinese are very much interested in buying up cheap, strategically important company shares, or even government securities, keeping whole countries in hand. And where are the securities cheap? Where there is chaos, where the countries’ ratings have been downgraded, or where, either really or artificially, countries are on the edge of bankruptcy and investors have deserted the sinking ship. Or maybe where the company policy of institutional investors won’t allow them to invest in a given country, on the advice of the extremely intelligent and even more powerful ratings agencies, who, incidentally, only found out about the developing crisis of 2008 from the press. Despite this, the whole world believes them.
The Chinese are presumably not alone in their desire to “shop” on the cheap. This takes me back to dear old Karl once more: capital primarily wants to go where, in comparatively safe surroundings, the most can be earned with it, where the profit is the greatest. The law of profit itself sums up the essence of capitalism. And there is no shortage of “mobile” money in the world. Money which is just waiting to be invested. Ready for action, moving as soon as a good opportunity arises. In today’s Internet world it can take mere tenths of seconds for money to jump from one continent to another.
I would be very wary, therefore, of creating “collapse theories”. Even if today nobody can even see the near future with any clarity, and uncertainty has settled in people’s psyche. Or maybe that was the whole idea? In situations of uncertainty people tend to make rash economic decisions, which leads to the position of those directing the process becoming even stronger. In this recession – if, indeed, we can speak about recession - there are winners as well as losers. Just as the broker always wins, whether the exchange rates go up or down, so certain players in economic life always come out on top.
The real question is how do we get on to that side? The winning side. I am convinced that this takes more than just a little perseverance, and certainly not giving up our positions stupidly or through panic. Even if this means that for a while it may look like we’re losing. Sometimes we need to know how to wait, and this in itself can produce results.
I would like to wish you a Happy and Prosperous 2012. May you keep your self-control and good judgement, as it is only when we have these that we can feel successful and happy, and can also help others feel that way.

It is fair to say that everybody tries to make the most of what they have got, depending on how the situation develops. In certain segments of business life - adjusting to changes in circumstances – this is totally normal. This is the everyday way of life for the majority of firms in the small and medium-sized category, who are forced to be flexible and to adapt accordingly in the face of the economic changes around them.
All too often we hear the now boring phrase that company X or Y wants to line its pockets or make a quick killing. The peaceful atmosphere we once knew is a thing of the past: you can no longer find a cobbler who spends his whole life stretching shoe leather over the last to earn an honest day’s living. Instead, they are now developing trading networks using the MLM system, and importing the shoes from China, because it’s more economical this way. Production is cheaper, sales are increased, profit is higher. It’s obvious.
However, it looks like the bad example is contagious. It’s as if the tax systems of some states have got on to this track, and they won’t deviate from it for love nor money. I recently spoke to one of my colleagues from Cyprus, who left Hungary to work in the island state exactly one year ago. I asked her to report on the situation, asking what news she had. Her reply really surprised me. “Life here is changing, too; the recession has reached the island. The state is trying to make money wherever it can. Parking meters have appeared on the streets of Larnaca for the first time, so motorists are really being hit hard, as petrol is also much more expensive than it used to be. And the fines are brazenly high, so it’s not worth the risk of just hoping they won’t notice.”
They need money. In fact they desperately need money. This could be the best explanation of the philosophy behind the way the state treasuries are trying to refill their purses. And at what price? At any price. Morals, fairness, or rather unfairness, don’t count for anything. The motto is lots and quickly, if possible during this financial year, as nobody thinks about the future – it simply doesn’t matter; a politician’s life may only last for 4 years, then they can try something else, or wait for an eternity to be given a second chance. The best example of this is the tax agreement between Switzerland and the UK. They estimate that the value of bank deposits placed in Switzerland is around 2000 billion dollars. I’m sure you will agree with me when I say that even if you have to share this, there’s still more than enough to go round. The British, who 2 years ago passed a law which stated that all tax residents must declare, and pay tax on, all offshore deposits retrospectively for the last 19 (yes, 19) years, or possibly even face jail, can no longer wait. They need the money now. And what a remarkable solution they came up with. The Swiss take between 19 and 34% from every bank account with a British beneficiary (it’s not clear, to me at least, how they decide how much). They then transfer the amount collected to the accounts of the state treasury in several instalments. At the same time, the Swiss do not terminate the banking contracts with their clients, and do not give the British the names of the people the money has come from. Then each year they take a smaller amount from the account of each client and forward that to the UK treasury as well.
Just do some simple sums: just 19% of 2000 billion is almost 400 billion dollars. They didn’t have to do much for it, as software can work that out in minutes. All they had to do was set up the software. The bank stays happy, as they are providing a service, and naturally the client will be charged for it. But at the same time, the accounts stay open, as they have not provided the UK tax authorities with the details of the clients. The client can be “happy” as he retains the majority of his fortune and is not hauled over the coals at home on account of the dirty money he has stashed away in a Swiss account. And as for the few honest people who paid the taxes, it serves them right for taking their money to such a “reliable” country.
So let’s see just what the UK stands to gain. They get the money straightaway, which was exactly what they wanted: to make lots of money without having to work too hard. They don’t have to suspect anybody, or set armies of police, lawyers and judges on businessmen, where they may have to fight for years against an astute defence lawyer who can drag the case out for years. And finally, they don’t have to lock thousands of people up in prisons, where they have to feed and keep them at 100 pounds a day, while also having to defend themselves against the human rights brigade because of the poor conditions. On the contrary, it’s better if they are free to go about their business creating money for the Swiss bank, which in turn will send out its annual “royalty.”
Let’s face it, that is real business. Everybody wins, everybody is smiling. The death of offshore? Whose interests would that serve? Fines? Yes ok, it’s that sort of game. But let’s not forget that in the middle ages there was an island country in Europe whose kings sent pirates out on to the seven seas to steal for the state. A little bit immoral? Nobody took any notice of that, and some of the pirates were even knighted by the king’s sword. Nothing is new, just the method changes a little? As I have said in this forum before, in the university of life only one thing is constant, and that is change. Modern times, modern methods, but the essence is just the same: take the money and run.
And if there is someone out there that I haven’t been able to convince, let me give you a recent example from my own experience. I’ll be honest: I was caught speeding. If any of you have never done that and have sufficient evidence to prove it, then I will pay out a significant reward. It happened on Sunday 29th August. On September 2nd the fine was waiting on my desk. They didn’t ask who had been driving, whether or not they had a driving licence or had been drinking. They had no intention of dishing out penalty points. They just wanted one thing: my money. And plenty of it. There was a scene in one of Fellini’s films - I think it was Amarcord – when the slightly deranged old man was sitting in a tree and shouting to the family members below him “I want a woman, I want a woman.” Blonde, brunette, black, fat or thin, the details didn’t matter. We are probably going through times like that now. It’s not unmanageable, we just have to change our outlook, and understand the unscrupulous logic of the other side. As my experienced friend Rogelio said: we just have to replace the chip in our own heads, that’s the only way to adjust to the logics of change. That’s the way it is… And there is no other way.

I watched in disbelief in the hall of the hotel the destructive pictures of the tsunami which followed the earthquake in Japan. On the morning of March 11th my colleagues and I were about to set off for the MIPIM real estate exhibition in Cannes when we first heard the news of the terrible catastrophe, and to be honest I had never seen anything like it.
As I returned to Budapest, little did I know that very soon a similar tidal wave would begin to sweep over the world offshore market, with as yet unknown consequences. A report from our legal team on the recent changes in the laws in the USA, which will effect the fate of hundreds of thousands, if not millions, of companies was waiting on my desk. We have dealt with this topic in an earlier edition of the Newsletter, so it would be a waste of time to repeat the whole text here. The essence of the changes is as follows: every company existing in the USA in 2010 is required to report any foreign bank accounts it has opened, including brokerage accounts, to the US federal tax authorities, on a specifically designed form, by June 30th 2011 at the latest, if the turnover on the account exceeded 10 000 USD during 2010. Thereafter, the report must be filed every year by every US company by the end of the first half of the year.
The technical details are perhaps less significant, as the report can be filed either on paper or electronically. According to provisional plans, the Internal Revenue Service (IRS), the US federal tax authority, are expecting some 400 000 reports. It is not clear from the commentaries just how they came up with this figure, as the number of companies registered and not “strictly” operating in the USA could be 10 times that number, that is 4 000 000! And it was exactly this point which led to the earlier arguments among the US legislators: who is classified as a US person? One of the biggest debating points was in the recognition as a US person of partnership type companies, and in particular Limited Liability Companies (LLCs) in which the members and managers are non-US resident.
It seems likely that there are two lobbies struggling for dominance within the IRS. One considers everything to be American on the basis of the place of registration without exception. The other lobby focuses on American residency, and doesn’t consider those LLCs where no American residents are involved to be subject to tax in the USA. And based on this logic, the latter do not even consider it important to know about any turnover, assets or bank accounts outside the USA.
The argument of the liberals is crystal clear: if there are no Americans involved in the structure of the company, then the interests of the US tax-wise are unaffected, so why should we be interested in what the company is doing? On the contrary, the US can only win, as the few hundred dollars a year from tax, duties, agents’ fees and services per company bring in tens of billions of dollars for certain states. Without all this, there is no income, and it would be silly to give up something which later other countries will gain from in our place. Even though many other countries pass judgement on the USA, and the state of Delaware in particular, on account of the low taxes and lack of transparency – areas which the USA and OECD constantly criticise when it comes to the tax havens – there is nothing illegal in this.
This lobby appears to have lost ground, and the “hardliners” are winning the battle. The consequences of this victory are uncertain: there isn’t an expert today who can say exactly what effect this decision will have, and we will probably be talking about this subject for many years to come. Here are just a few stray thoughts:
1. How will the IRS react? Although the requirement to report bank accounts does not automatically mean the requirement to pay tax for certain companies (such as numerous non-resident LLCs), we can not be certain that they are not just laying the foundations. Tomorrow they may pass a law whereby every entity registered in the USA is subject to (federal) tax, purely because they are registered there. Heaven forbid, just not retrospectively! It could happen, who knows? Today, in the middle of the recession each state takes whatever income it can. Super-taxes and extraordinary taxation are no longer just science fiction.
2. How will the banks react? Probably not with too much understanding. That is, as far as clients are concerned. Why am I so categorical? Because I am under no illusions. I saw this in 2006 with the Latvian banks, who got rid of their US-registered clients in the blink of an eyelid in the face of American pressure. Following the UBS scandal, the Swiss banks are running scared not just from American citizens, but companies too. Unfortunately we have also felt the effects of this process in the banks in Hungary. Furthermore, it is impossible to convince the banks’ compliance teams with common sense, as they are more like civil servants than businessmen. The problem is that all too often the bank management, through their own lack of understanding, put too much power in the hands of the compliance department.
3. And I wonder how clients will react? Should we maintain the company and declare its bank account to the IRS? Or close down the company and forget the whole thing, as if the entity no longer exists, what can they go after? Or close down the company, but make the declaration for 2010 and at the same time set up a new company “with a clean slate”? Or re-register the US company in a more attractive jurisdiction, and continue operations there? Life throws up question after question. Business life can be very complicated, as very often it is not easy simply to remove a company from a corporate construction; just think, for example, of a court case which may drag on for years, where it is necessary to maintain the company to the very end.
There is no limit to the absurdity of the American legislators: it is even necessary to make the declaration, if the company doesn’t have a foreign bank account, but is the holder of at least 50% of the shares of a foreign subsidiary. In this case, the foreign bank account of the subsidiary must be declared.
It is very difficult to remain calm when speaking about this. Having spent almost 20 years in the world of company formation, I have to make a particular effort to restrain myself, and concentrate on resolving the situation for my clients. Like an unqualified psychiatrist, all I can do is try to soothe the irate public opinion by focusing on the positive side of things. For the last 15 years or so US companies have been one of the most popular tools in international tax planning. The high level of prestige was coupled with a very good price. But it now looks like this period is over, and now, unless the law changes, we really have come to the end of an era. We should be grateful that we had 1, 2, 5 or even 15 good years. There is no point getting upset over what has passed. Now we must look for new ways forward, seeking secure solutions. As for what the future will bring, only those who survive this process will be around to see. I hope we will find the right corporate constructions, and LAVECO Ltd. definitely wants to continue to be a partner in the future. Whether you are an existing client, or a new enquirer reading our Newsletter, feel free to contact our staff for information. We are only too willing to help.

It’s now more than 15 years since I read a similar headline in an advert in the columns of a Russian weekly business magazine. The advert was for a company in Moscow with a similar profile to that of LAVECO, i.e. company formation agent (I should look for their advert in my archives, and see if they are still operating). At that time, I didn’t pay too much attention to the contents of the advert. Why, and from whom, should I or my clients have to protect anything anyway? Those were different times in central and eastern Europe, at the beginning of the original period of capital accumulation, when most of us could see no further than the limitless growth before us, and, as trailblazers, we had no time for certain technical details.
15 years down the line, it is time to ask the question again: is it necessary to establish corporate structures to provide the maximum security to the owners and their surroundings? This time, my answer is an emphatic “Yes!” The main reason is that there is now something there worth protecting. We can state quite categorically that over the past two decades huge private and corporate fortunes have been amassed all over the world. And I’m not talking about some kind of virtual sum on a stock exchange somewhere, but rather very real medium-sized firms which are now the owners of serious movable and immovable property and whose asset accumulation process has fallen right in the middle of the recession.
But just who is it that we have to protect the assets from? Here everybody’s first reaction is the state. The state which through its own legislation tries to finance its national duties through the taxation of its residents. Although it may sound strange, my experience of the last 20 years shows that it is not the state which provides the greatest threat to the assets of an enterprise, even if it does possess the necessary enforcement tools and power to seize at least a part of the fortune. But the state is remote and doesn’t know about everything. It is those with the information who are capable of acting. A malicious employee, a jealous relative, an angry former spouse or a lavish child potentially pose a far greater threat than the state with all its power, but which has to adhere to procedural regulations and deadlines. In many cases you have to wait 30 or even 60 days for an official body to send out a letter. Making off with the key to the safe, on the other hand, may only be a matter of a few minutes. The story always springs to mind of the chauffeur who was sent by his employer to take some cash out of one of his safes. The money duly arrived, but at the same time the chauffeur also stole all of the bearer shares of an offshore company registered in Panama. A very inconvenient situation, even if a professional service provider can handle such an accident.
And then there is also me, myself. Sometimes the very owner of the fortune can pose the biggest threat. The young partner of a talented businessman enjoying his second or third “bloom” doesn’t always enter the alliance purely out of blind love! The pre-nuptial agreements so common now in north America have not come about by chance, and even these do not offer 100% protection against the attacks of a partner entering a marriage with an ulterior motive.
Of course this list could go on and on. The 20 years that I have spent in the world of offshore companies have shown me many things; things that the average person may not get to see, as I come into contact with the type of events listed above on a daily basis. I have to say that from the point of view of asset protection, 95% of corporate structures are not set up thoroughly enough. Naturally, nobody likes thinking about their own death and the arrangements that need to be made, but like it or not, it is waiting for us all at the end of our lives. Who could imagine, for example, that as a result of a simple skiing accident the person involved endures such serious head injuries that all he can do is nod his head and is incapable of any actions. In such cases, who decides the fate of his business empire, and how?
Before anybody starts to panic, seeing their own vulnerability, let me reassure you: the corporate world has established and further developed over hundreds of years the asset protection vehicles which provide secure solutions for many of the cases listed above. Whether we choose the Trust favoured in common law jurisdictions or the Foundation developed for civil law legislation, our assets can be securely protected. Naturally, it is necessary to find not only the right structure, but also the right people to administer it. A professional service provider, who works on the establishment of such structures day after day, can provide significant help, with tips which might make the assets more secure, but which the client, acting alone, may overlook.
Nobody wants to lose what they have earned, and today security is not a luxury. The solutions which we provide at LAVECO are more than affordable for the average enterprise, and their establishment does not require specific legal knowledge.