The Economist - UK (2019-06-29)

72 Finance & economics The EconomistJune 29th 2019

2 bravedthebrutalsummerheattovisitfam-

ily—andtook theopportunity todo the

roundsofgovernmentofficesinDelhi.

il&fsdefaultedinthesummerof2018,

leaving$14bnindebt.Atfirstlatepayments

by local governments for infrastructure

projectswereblamedfora cashsqueeze.

Butsincethenofficialinvestigatorshave

allegedgrossmisconduct.Therehavebeen

fourarreststodate,withchargesyettobe

madepublic.

Whyare globalauditorscarrying the

canwhenothersweresurelymoreculpa-

ble?il&fs’scomplicatedstructuremadea

comprehensiveviewofitspositionallbut

impossible.Oneofitstwomainsubsidiar-

ieshadmorethan 300 subsidiariesitself.

Thesetypicallyhadotherinvestors,often

municipalities. State entities served as

owners,managers,debtorsandcreditors.

Morethan 50 firmsauditedvariousparts,

underlocallawsthatoftenbarredindepen-

dentoversight.

Responsibilityforoverseeingsuchan

opaquestructuregoesbeyondemployees

andexternaladvisers.Twoofil&fs’slarg-

estshareholders,untilrecentlyrepresent-

edontheboard,arelic, a hugelifeinsurer,

andCentralBankofIndia,acommercial

bank.Botharestate-owned.Somesuspect

thattheauditorshavecomeunderfirebe-

causetheymaketheeasiesttarget. 7

F

inancial crimescome in all shapes

and sizes, from politicians siphoning

off state wealth and officials taking bungs

to terrorists buying arms and gangs laun-

dering drug profits. A common element is

the use of shell companies, partnerships or

foundations to hide the identities of those

moving dirty money. Such brass-plate enti-

ties, whose ownership is typically hard if

not impossible to trace, were at the heart of

the theft from 1mdb, a Malaysian state

fund, and a $230bn money-rinsing scandal

at Danske Bank. They have been dubbed the

“getaway cars” of financial crime.

ngos such as Global Witness and Tran-

sparency International have long high-

lighted shells’ pernicious role, picking up

support from government investigators

sick of trails going cold. Their biggest suc-

cess was to persuade Britain, in 2016, to be-

come the first g20country to set up a public

register of company owners. The rest of the

European Union is set to follow once a new

money-laundering directive takes effect.

That leaves plenty of gaps. But two of the

biggest, Britain’s offshore territories and

America, are also moving in the direction

of ditching secrecy.

Earlier this month Britain’s three Crown

Dependencies—Jersey, Guernsey and the

Isle of Man—issued a surprise joint state-

ment pledging to table legislation to intro-

duce public registers by 2023. They had

long insisted that efforts by British mps to

force such a move could trigger a constitu-

tional crisis. But the growing clout of the

transparency movement persuaded them

to jump rather than wait to be pushed.

Were three of the biggest offshore fi-

nancial centres to end secrecy, it would

make it harder for others—including Brit-

ain’s Caribbean territories, such as the Brit-

ish Virgin Islands and the Cayman Is-

lands—to keep owners in the shadows. But

campaigners’ optimism is tinged with cau-

tion. The Crown Dependencies envisage a

staged implementation, with access first

for police, then for financial firms doing

due diligence, and only later for everyone

else. Some fear a ruse to buy time.

Shell companies in America, where in-

corporation is at state level, are among the

world’s most secretive. A recent study

found that in all 50 states more personal in-

formation is needed to get a library card

than to register a company. In some, such

as Kentucky, registration can be done with-

out giving contact details. A study of inter-

national corruption cases in 2012 found

that more of the shells involved were from

America than from anywhere else.

In every congressional session since the

financial crisis, a group of federal lawmak-

ers has proposed corporate-transparency

legislation, only to see it fail. This time

looks different. On June 12th a bill was ap-

proved by the House Financial Services

Committee—the first time such a law had

reached that stage. A similar bill has been

introduced in the Senate. Campaigners are

hopeful that a merged version will become

law by the end of the year.

If it does, America would not get a pub-

lic register but its companies would be re-

quired to disclose their beneficial owners

to the Financial Crimes Enforcement Net-

work, a federal agency, and to keep their

ownership information up-to-date. There

is still opposition, including some from a

small-business association that worries

about red tape. But Delaware, the biggest

state for incorporation, is on board, as is

America’s treasury secretary, Steven Mnu-

chin. (His boss, Donald Trump, whose

businesses have sold many a property to

anonymously owned companies over the

years, has not made his views known.)

If the bill passes, anti-graft activists

would then push America to adopt a public

register. But Britain’s experience shows

that transparency alone is not enough. In-

vestigations by campaigners suggest that

the information provided to its register is

of mixed quality, to put it mildly. With en-

forcement lax, ne’er-do-wells are seeming-

ly tempted to lie about who owns a firm and

hope to get away with it. The government

has promised an overhaul, with more

money to police submissions. It will be

some time before robbers’ cars are forced

off the world’s financial highways. 7

The war on money-launderers’ vehicle

of choice intensifies

Financial crime

Cracking the shells

C

ompanies and governments need to

borrow money for years or decades. But

ordinary savers often want instant access

to their nest-egg. That age-old mismatch is

the origin of many of modern finance’s in-

termediaries, from banks to fund manag-

ers. They promise to lend money for long

periods, backed by money they must re-

turn to their own creditors and investors at

the drop of a hat. Aided by regulation, the

arrangement usually helps savers to save

and borrowers to borrow. The trouble is, it

does not always work so seamlessly.

Fears over the “liquidity mismatch”

created by such intermediaries have re-

curred in recent months, notably in Eu-

rope. They resurfaced on June 18th, when

an article in the Financial Timeshighlighted

how h2o, a fund manager based in London

that invests mainly in government and big-

company bonds, had a sideline lending

money to smaller businesses. Their bonds

are far less liquid, meaning that it maybe

hard to find a buyer quickly and at a reason-

PARIS

Another European fund manager runs

into concerns over market liquidity

Fund management

Mismatch point

1