Finding private bankers is far more difficult than clients imagine

Since the financial meltdown of 2008, private bankers have been busy devising schemes to both maximize the fees they earn from wealthy clients, as well as make it more difficult for clients who wake up to discover they’ve been hosed, to fire them.

The new financial products and strategies that private bankers have been sneaking into client portfolios in recent years serve a purpose that has nothing to do with what’s best for clients. It’s all about improving the bottomline of the private banks. Unfortunately transferring wealth from client accounts is the means to the end that private banks are seeking.

Structured notes, hedge funds, hedge fund of funds and other high risk investment products lack transparency and liquidity and are hard-to-value assets. As a seasoned investigator I can assure you, it is impossible for you to evaluate and monitor the risks related to these investments. Don’t even try to.

Even if you were able to get hold of the terms sheets, offering memoranda and other documents related to these investments, good luck understanding the unique features involved in each and every one of these highly complex products. Further, the investment strategies and portfolio composition of hedge funds and hedge fund of funds can be changed at any time.

That domestic equity, long-only, unleveraged fund you invested in today may become global, short and levered to the max tomorrow. With respect to hedge fund of funds, you will not even know who’s managing your money or where your money is being custodied. Caymans? Bermuda? Guatemala? Who knows?

Structured notes, hedge funds and hedge fund of funds are purchased for discretionary clients by private banks because they pay significantly higher fees to the bank.

A private bank may earn 20 to 50 basis points in revenue sharing by steering client portfolios into mutual funds managed by others. (Private banks may deny they receive these revenue sharing payments but, trust me, they do.)

A bank may earn far more – 100 to 150 basis points—from proprietary mutual funds. This is still chump change.

Exponentially greater fees, say 3% to 8% and performance fees of 40%, can be earned by the bank from alternative investments. Given the financial pressure banks are under today, is it any surprise where they’re steering investors? But that doesn’t make it right. These discretionary investment managers are supposed to be guided by what’s best for their clients—held to a fiduciary standard of care. Unfortunately, no regulator is scrutinizing the investment management activities of private banks which are not required to register with the SEC.

Investing client assets in high risk, high fees products that do not perform competitively is a violation of applicable fiduciary duties, in my opinion. Whenever I have examined the performance of these private bank investment products (net of all fees) compared to relevant benchmarks, the perfomance is not just bad—its horrific. T-bill performance for Madoff-size risk.

Since the financial meltdown of 2008, private bankers have been busy devising schemes to both maximize the fees they earn from wealthy clients, as well as make it more difficult for clients who wake up to discover they’ve been hosed, to fire them.

The new financial products and strategies that private bankers have been sneaking into client portfolios in recent years serve a purpose that has nothing to do with what’s best for clients. It’s all about improving the bottomline of the private banks. Unfortunately transferring wealth from client accounts is the means to the end that private banks are seeking.

Structured notes, hedge funds, hedge fund of funds and other high risk investment products lack transparency and liquidity and are hard-to-value assets. As a seasoned investigator I can assure you, it is impossible for you to evaluate and monitor the risks related to these investments. Don’t even try to.

Even if you were able to get hold of the terms sheets, offering memoranda and other documents related to these investments, good luck understanding the unique features involved in each and every one of these highly complex products. Further, the investment strategies and portfolio composition of hedge funds and hedge fund of funds can be changed at any time.

That domestic equity, long-only, unleveraged fund you invested in today may become global, short and levered to the max tomorrow. With respect to hedge fund of funds, you will not even know who’s managing your money or where your money is being custodied. Caymans? Bermuda? Guatemala? Who knows?

Structured notes, hedge funds and hedge fund of funds are purchased for discretionary clients by private banks because they pay significantly higher fees to the bank.

A private bank may earn 20 to 50 basis points in revenue sharing by steering client portfolios into mutual funds managed by others. (Private banks may deny they receive these revenue sharing payments but, trust me, they do.)

A bank may earn far more – 100 to 150 basis points—from proprietary mutual funds. This is still chump change.

Exponentially greater fees, say 3% to 8% and performance fees of 40%, can be earned by the bank from alternative investments. Given the financial pressure banks are under today, is it any surprise where they’re steering investors? But that doesn’t make it right. These discretionary investment managers are supposed to be guided by what’s best for their clients—held to a fiduciary standard of care. Unfortunately, no regulator is scrutinizing the investment management activities of private banks which are not required to register with the SEC.

Investing client assets in high risk, high fees products that do not perform competitively is a violation of applicable fiduciary duties, in my opinion. Whenever I have examined the performance of these private bank investment products (net of all fees) compared to relevant benchmarks, the perfomance is not just bad—its horrific. T-bill performance for Madoff-size risk.

HK regulator bows to private banking demands

Hong Kong’s banking regulator has bowed to private banking industry demands to cut red tape in a bid to help the Chinese territory compete better with Singapore.

Norman Chan, chief executive of the Hong Kong Monetary Authority, told bankers in a speech that was made public on Wednesday that his “vision” was for Hong Kong to become “the most competitive and dynamic private banking hub in the region”.

Private bankers in Hong Kong had sought rule changes to address concerns that the city is falling further behind Singapore – the leading Asian wealth management centre – particularly as more wealthy Chinese look to move their money outside the mainland.

Singapore, with 48 private banks, is the main base for private banks seeking to gain market share in Asia, according to Celent, an arm of consultancy Oliver Wyman. This is partly because of the city-state’s privacy protection laws, in addition to its lack of estate duties, which Hong Kong only repealed in 2010.

Mr Chan announced key rule changes and in a separate letter sent to chief executives pledged to make the regulations “more user friendly”.

But he warned the changes could not be an excuse to compromise investor protection, particularly when it came to making sure clients understood the products they were buying. He told bankers in the predominantly Cantonese-speaking city that they needed to improve their Mandarin Chinese skills to ensure they could communicate properly with mainland clients.

“It is hard to imagine that quality service can be provided to a mainland customer who does not speak English or Cantonese if the account manager cannot communicate in Putonghua [Mandarin],” Mr Chan said.

He added that it would be “helpful if important contracts or documents are written in bilingual forms”, again to help mainland Chinese clients.

Silvan Colani, deputy chief executive of Liechtenstein’s LGT Bank in Asia, welcomed the efforts to clearly distinguish private banking from retail banking.

“We fully agree with the HKMA that Hong Kong has the potential to be a leading private banking hub for Asia, given that Singapore is arguably at a more advanced stage,” he said.

The pressure for rule changes has grown since widespread losses among retail investors on Lehman Brothers-related investments led to a regulatory crackdown that hampered private banks’ dealings with wealthy clients.

Alongside making clearer the distinction between wealthy clients and ordinary retail customers, the HKMA has relaxed requirements for the wealthy to undergo suitability assessments for every product, saying they could instead be assessed for a portfolio of investments when they first became a client.

Alan Ewins, a partner at Allen & Overy in Hong Kong, said the adoption of the “portfolio” suitability assessment standard, and the classification of private banking customers, were key developments for the industry. But he said wealth managers outside of the banking sector could now be left at a disadvantage.

“[Mr Chan’s letter] shows the need for a co-ordinated approach by regulators, given the existence of private wealth arms of non-banks where there clearly needs to be a level [regulatory] playing field. They were not catered for here,” he said.

More than US$5tn of the roughly US$11tn of assets held by non-Japanese wealthy people in Asia is in the hands of people with $1m-$5m each. According to Oliver Wyman, this is exactly the population of private banking clients that were not distinguished under the current Hong Kong rules.

Mr Chan said such people could be highly seasoned investors or “unsophisticated clients with only very basic investment knowledge, notwithstanding [their] substantial wealth”.

“Private banks must ensure that their account managers take extra care in offering investment advice and marketing investment products to the less sophisticated clients,” he said.

Italy, Switzerland to cooperate against tax evasion

Monti said Italy and Switzerland are considering double taxation and information exchange to fight tax evasion.

Speaking after his meeting with Switzerland's President and Finance Minister Eveline Widmer-Schlumpf, Italian prime minister Mario Monti said fighting tax evasion is a goal shared by Italy and Switzerland and "a priority for the Italian government". Monti went on to say that he was "very pleased to announce the good progress of the ongoing meeting of the bilateral working group tasked with discussing various financial and fiscal issues and suggesting possible operating solutions fully compatible with the EU discipline, especially in the fields of double taxation and information exchange"

Dubai banks lag behind offshore peers in attracting region's wealth

Although there are trillions of dollars in private financial wealth in the Middle East and Africa, a relatively large proportion of these assets are held in offshore accounts as opposed to Dubai banks.

According to a recent report by Boston Consulting Group, private financial wealth in the Middle East and Africa rose 4.7% in 2011 to $4.5 trillion despite the instability caused by the Arab Spring. As wealth in the region has climbed, Qatar, Kuwait, the UAE, and Bahrain are now among the top ten countries in the world by proportion of millionaire households.

However, the report also found that although the region has a large amount of private financial wealth, much of it is kept in offshore accounts. In fact, the Middle East and Africa had the highest proportion of offshore wealth in the world, with over a third of all assets booked abroad in 2011.

In terms of percentage of private wealth booked offshore, Saudi Arabia (65%) took the lead in the region, followed by Kuwait (53%), UAE (52%), Tunisia (45%), Bahrain (37%), Lebanon (34%) and Morocco (30%).

High net worth individuals in the Middle East have the choice between an onshore and/or offshore offering. As the product programme and service offering of the domestic banks increase, one will see a larger share of money kept onshore.

However, in order to succeed, local banks have to take a medium- to long-term view on this segment. They need to invest in qualified advisors, broadening their product program and providing local solutions which international banks cannot provide. A simple "me-too" offering will not succeed.

The prerequisite of success is a qualified product and service offering. Most Dubai-based banks need to innovate and offer a good reason for wealthy individuals to bank with them instead of established international players. Dubai banks need to find their competitive differentiation - this could be around Islamic wealth products, products with local assets/real estate, or regional private equity. We believe that a simple "me-too" offering will not succeed.

Furthermore, it is important to realise that the established offshore centres like Zurich and London have a long track record of preserving wealth for banking clients. The Middle East is a nascent centre from that perspective.

The Boston Consulting Group believes that there is a white space for local banks to capture a higher share of wealthy individuals' portfolios. However, copying the business models of international banks may not be the best strategy; instead local banks need to look at creating a new form of private banking "the Dubai way".

It will require a transformational move by Dubai banks to seriously outperform the incumbents.

Choose your offshore bank in haste, and you may end up regretting it

Moving overseas is a major upheaval for any family, and getting the finances right from the start is a key part of being able to settle into your new home as soon as possible. Yet many people will make a panic decision about which bank they want to use because they are about to be paid, and they could be left rueing that decision for months or even years to come.

Choosing an offshore bank as an expat is not simple – some people will prefer the comfort of choosing a name they know from home, which is effective as many banks are now global entities – while others would prefer to use a service that is part of the local economy, and provides good access to cash machines and other services that could be lacking from other providers.

When choosing your bank account, the first thing to consider is what you are using that account for. For example, are you intending to save money in the account, or do you need to make regular transactions from it? It may seem obvious, but you would ideally not use a single account to do both.

Current accounts are the day-to-day accounts that you use to pay bills and transfer money. Some will offer cheque books and cards, access to ATMs worldwide, and the ability to set up money transfers to make life easier. Some services do cost, however, so check the charges on like-for-like accounts before you make your decision.

An existing relationship in the UK with a bank that has an offshore arm, such as Barclays, HSBC or NatWest, can make it easier to open an account because of the history you have built up with that provider. But check what you are getting, because it won't necessarily offer you the services you need at, more importantly, the price you want.

If you are after a savings account, it is not as vital that the bank has a physical presence where you are. The interest payment you will receive is clearly a key driver to the particular account you choose, but it should not be the only thing. You need to look out for special introductory rates that may expire after six or 12 months, which can leave your interest looking the worse for wear.

By all means make the most of them while they are available, but remember to move your money when the introductory rate ends, so you are making the most of your offshore savings.

You also need to decide how long you can tie your money up for, as you can often get better rates on accounts that require a notice period. So if you are happy to give, say, 60, 90 or even 180 days' notice of a withdrawal, you will boost your interest payment. Penalties are charged, however, if you make a withdrawal without the notice period being completed, so try to stick to
the rules.

If you are travelling extensively for work or leisure, you may need to use a variety of currencies, and you can do this from the same account by choosing a multi-currency account. You can hold funds in a range of currencies, including sterling, dollars and euros.

Using these accounts effectively can reduce your costs when you need to move money around the world. You can also boost your earning potential thanks to the variations in exchange rates and interest applied on multi-currency accounts to the different currencies available.

Of course, an important thing to remember is that if you are subject to tax in the UK, you must declare any interest you receive to HM Revenue & Customs, as the taxman is clamping down on tax avoidance by expatriates.

It may seem easy to find a bank account, but it is easier to find the wrong one. There is a lot to consider, so be prepared to do your research carefully whether you have already left the UK, or plan to do so in the coming months.

Liechtenstein informs bank clients of U.S. tax evasion request

Liechtenstein, an Alpine country of 36,000 people, has told American clients of the principality’s oldest bank that U.S. authorities have requested their account data as they widen a tax-evasion probe.

Accounts at Liechtensteinische Landesbank AG (LLB) that contained at least $500,000 at any time since the beginning of 2004 are covered by the information request, according to a May 30 letter sent to a client by the principality’s tax authority. Liechtenstein facilitated the so-called group request from the U.S. by amending a tax law in March.

Liechtenstein’s second-biggest bank, also known as LLB, is one of 11 financial firms, including Credit Suisse Group AG (CSGN) and Julius Baer Group Ltd. (BAER), being investigated as part of a U.S. probe of offshore tax evasion. The stakes for Swiss banks were raised after the Department of Justice indicted Wegelin & Co. on Feb. 2 for allegedly helping customers hide money from the Internal Revenue Service.

“The motivation for the law is the Landesbank issue, which has accelerated the process,” said Mario Frick, a partner at Liechtenstein law firm Seeger, Frick & Partner. “For a certain period of time, it will be possible to make group requests to clean up the past and the issue of legacy assets.”

Landesbank, which had 48.1 billion Swiss francs ($50 billion) of assets under management at the end of 2011, confirmed it has received a group request via the Liechtenstein authorities, Cyrill Sele, a spokesman for the bank in Vaduz, said in an e-mailed response to questions.

“The ruling to extend the period of applicability back to the tax year 2001 in the administrative assistance law with the U.S. is limited to 12 months from the date it comes into force,” said Sele. It “is closely linked to the ongoing U.S. offshore voluntary disclosure program.”

Those affected by the U.S. request for information have the right to appeal, according to the letter.

In the Liechtenstein group request, U.S. authorities are also targeting lawyers, accountants, financial advisers, asset managers and those responsible for professional “asset protection,” who “conspired with a U.S. taxpayer to commit U.S. crimes or provided assistance,” according to the letter.

“It’s a sign that the U.S. is not just focused on Switzerland, but on all offshore jurisdictions with Singapore, Dubai and Hong Kong very much on the radar screen,” said Milan Patel, a partner at Zurich-based law firm Anaford AG. “This request appears to be much more expansive than the agreement with Switzerland and aims to get information on third parties.”

Swiss banks are seeking a settlement with the U.S. as Liechtenstein’s larger Alpine neighbor, the world’s biggest center for offshore wealth, tries to shed its image as a haven for undeclared assets. That may involve negotiating separate deferred prosecution agreements with U.S. authorities.

UBS AG, the biggest Swiss bank, avoided prosecution in 2009 by paying $780 million, admitting it fostered tax evasion and giving the IRS data on more than 250 accounts. It later turned over data on another 4,450 accounts. Before the UBS deferred- prosecution deal, U.S. prosecutors said the bank managed $20 billion in undeclared assets for American clients.

Landesbank declined to comment on whether the handover of account data under the group request would allow the bank to enter a deferred prosecution agreement.

Christof Buri, a spokesman for larger Liechtenstein rival LGT Group, which had 86.9 billion francs of assets under management at the end of last year, said the bank only has tax- compliant U.S. clients. The bank, owned by Liechtenstein’s princely family, declined to comment further.

Liechtenstein started to unwind secrecy after data stolen from LGT was used by Germany to prosecute tax evaders in 2008. Former Deutsche Post AG (DPW) Chief Executive Officer Klaus Zumwinkel was convicted of tax evasion and received a two-year suspended prison sentence plus a penalty of 1 million euros ($1.25 million).

Under pressure from the U.S., Germany and France, Liechtenstein said in March 2009 that it would conform with tax standards set out by the Organization for Economic Cooperation and Development to avoid being blacklisted as a tax haven.

Markus Amman, a spokesman for the Liechtenstein government, and Katja Gey, who helped negotiate a tax deal for the principality with the U.K., didn’t answer calls to their mobile phones.

“It’s only a question of time, say three to five years, when this type of group request will become standard for future business,” said lawyer Frick. “Liechtenstein is a small country that has had a reputation for not cooperating in the field of tax and that’s something that has to change. We have to find new areas of business.”

Offshore investing gets easier for South Africans

For some South Africans, getting tax clearance to take your money overseas has been a bit like trying to move through airport security with a chicken strapped to your head.

This has all changed, and not a moment too soon – the case for investing abroad has rarely seemed so solid.

Government recently issued a circular announcing that you can now invest R1m/year outside South African borders without having to obtain a tax clearance certificate.

Before the announcement, South Africans had an annual “single discretionary allowance” of R1m to take out of the country, which could only be used for travel, study, alimony and child support as well as for donations. You were then also allowed to take R4m to invest abroad, but you needed to have tax clearance from the SA Revenue Service.

But now you may also use the single allowance to invest abroad – without tax clearance.

This has been welcomed, with some financial advisers claiming that it was “virtually impossible” to get tax certificates for some clients.

There have been complaints about constant changes in the way applications have been processed and that SARS often decided not to issue the certificate because of minor technicalities. In response, a number of small outfits have sprung up, promising to assist investors in getting clearance certificates.

Gregg Sneddon of The Financial Coach in Cape Town, says SARS sometimes seemed to require that applicants had to have the money they were planning to invest abroad actually sitting in their bank account - they could not move it from another investment.

This was part of anti-laundering efforts, says Sonja Frank, a legal and tax adviser and director of Exceed Trust. SARS therefore requires extensive source documents - including property transaction contracts and transfer documentation - to make sure it knows where the money comes from. If a client’s tax returns were not up to date this could also delay getting tax clearance.

And the process for those wanting to start a business abroad - proving where your money will go, including premises and other expenses - could be particularly onerous, says Frank.

She thinks that the new regulation will make a big difference to those wanting to invest abroad.

So, the world is your oyster - and if you haven’t done so already, you should get a tiny fork and some Tabasco, and dig in.

There seems to be bargains elsewhere, with valuations in the local market on the expensive side. The local market is trading at a price-to-earnings ratio (which tells you how expensive a market is) of more than 13 times - in line with its long-term average.

But US stocks are also trading at 13 times - significantly cheaper than its historical average of 16. Other emerging markets like Brazil, Russia, India and China are also trading at lower ratios than SA.

Also, the rand is looking shaky. The currency has already lost 13% in the past year to the dollar, and 22% to the euro. Any further weakening in the rand will give you an instant profit on your overseas investments. With inflation ticking higher in SA, no sign of an interest rate hike (which will make the rand more attractive to overseas investors looking for yield) and amid continued nervousness about the eurozone (SA’s biggest trading partner), it’s expected that the local currency may come under further pressure in the future.

As a general rule of thumb, experts recommend having at least 30% of your portfolio invested outside of SA.

“Offshore assets are included in investment strategies as they behave differently to local assets and thus offer diversification benefits. Investing offshore also allows access to opportunities that are not available in SA - investing in Google or Microsoft for example,” says Jonathan Brummer, Financial Planning Coaching Support Consultant at acsis.

Another reason to diversify is that the local market is very resource-heavy, a sector, which may face a bit of a rough ride, according to some. Allan Gray’s chief investment officer, Ian Liddle, recently questioned the sustainability of commodity prices and mining company profit margins, which are mostly substantially higher than their long-term averages. “For example, the 21st century boom in iron ore prices has been of a similar magnitude to the Nasdaq tech bubble in the Nineties, the Japanese stock market bubble in the Eighties and the gold bubble in the Seventies.”

If you do want to diversify abroad, Sneddon likes direct investments in global unit trusts – which are cheaper than going though platforms like Glacier, which adds more costs and layers. Institutions like Ashburton, Investec and Templeton, which operate in SA and are approved by the Financial Services Board, offer offshore unit trusts to local investors.

Corruption is still Tunisia's challenge

In the year since the Arab Spring, attention has been riveted on one issue above all others: the place of religious practice in public life. In Tunisia, where the movement began, full-face and body veils, now often worn complete with gloves, are increasingly visible on the streets — an exotic sight for locals and foreigners alike. And the secular opposition seems increasingly strident in its conviction that the Islamist government is driving the country the way of Iran.

But it wasn't religion that set off the Jasmine Revolution; it was acute economic injustice and the pervasive and structured corruption that helped produce it. The fate of Tunisia, and its neighbors, may depend most on whether that lingering problem is addressed.

You can usually tell which buildings in this sparkling, white-and-sky-blue country the family of former dictator Zine el Abidine ben Ali had a stake in; they're eyesores. Last month, a small group of protesters gathered in front of one of them, a squat, mustard-colored hotel complex on a beach in the town of Kilibia.

Kilibia, home to extensive Roman and Punic archaeological sites, also boasts beaches of silky, ash-white sand, which audibly sings underfoot as you walk across it. The seafront is exactly the kind of resource members of the Ben Ali family liked to commandeer for their personal gain.

They had shares in several sprawling hotels here, including the yellow one, built with an Italian investor. Typically for the Tunisian tourism industry, it functioned and still functions as a closed system: Tunisians are not allowed on the beach; the hotel employs no Tunisians except for a few guards, purchases no Tunisian supplies or food — not even any luscious local olive oil. Everything is shipped in from Italy.

Now the hotel is dumping coarse yellow sand across the top half of the beach to cushion tourists' feet from a rock formation.

This may sound like a trivial transgression. But it typifies the arrogation of public resources and financial opportunities for the personal enrichment of regime insiders that sparked last year's uprising.

Under the Ben Ali dictatorship, physical repression, torture and disappearances were fairly uncommon. The regime perpetrated its oppression by means of a diabolically intrusive system of state corruption.

This particularity has prompted Tunisian activists to blaze new paths in human rights doctrine. They are seeking to expand the definition of "gross violations of human rights" to include systematic economic crimes. They want perpetrators to answer for these crimes in a public reckoning, as part of a transitional justice process, like the ones in South Africa or Rwanda that focused on physical abuses.

Tunisia's new Cabinet includes a minister for "governance and anti-corruption." This is an innovation, certainly, but activists worry that his appointment was more show than substance.

A commission established in the weeks after Ben Ali's overthrow, and including public accountants and specialists in the intricacies of administrative or real estate law, examined some 5,000 complaints. The report it released in November exposed a vast system of structured corruption by which the Ben Ali in-laws and their cronies helped themselves to the best of everything: stakes in the most lucrative businesses, exemption from customs dues, choice public land. Government institutions such as tax authorities and the judiciary, even private banks, became instruments of coercion. Recalcitrant chief executives would get slapped with an audit or see their loans dry up or their authorizations revoked.

The commission developed evidence on 400 cases, which it transferred to courts. But according to member Amine Ghali, only a handful have been taken up by a judiciary still largely staffed by Ben Ali-era personnel.

"We're no one's first priority," says Ghali, detailing examples of neglect by the current government. "We have no office equipment or vehicles, no power to subpoena witnesses or to protect them. Members who are government employees don't even get relieved of their regular duties but have to do this work on the side. You get the feeling the government doesn't care if we succeed."

Many fear that the current political elite, including the leadership of the ruling Islamist party, intends to quietly appropriate the old structures and practices for their own benefit. Recently passed provisions of this year's budget include Ben Ali-style shelters for potentially ill-gotten gains, in return for a financial contribution. Taoufik Chamari, of the National Anti-Corruption Network, warns of the "real risk that the same system of corruption will be maintained, legitimized by new beneficiaries."

Corruption is a less photogenic issue than heavily veiled women. Yet when it grows so pervasive as to amount to capture of the state by a structured criminal network, as it did in Tunisia and in Egypt, public outrage can get explosive. Many here predict that if Tunisia does not use this remarkable post-revolutionary moment to impose accountability, then a frustrated people may truly radicalize, turning to militant, puritanical readings of Islam to afford a recourse the post-revolutionary democracy did not.

As the example of the yellow hotel suggests, actions of Westerners — conscious or unconscious — matter. Our support for Arab nations in transition, our behavior as investors and visitors, should break with past habits of contributing to corruption.

Mastro mystery: Aging ex-magnate nears 1 year on the lam

Michael R. Mastro celebrated his 87th birthday Friday.

The big question, of course, is — where?

It's been nearly a year since the onetime Seattle real-estate magnate and his wife, Linda, moved out of the $2 million house they had been renting in Palm Desert, Calif., and headed for parts unknown.

The couple left June 23, days after the judge in Mastro's massive bankruptcy case ordered them to turn over two giant diamond rings valued at $1.4 million. They officially became fugitives a month later when warrants were signed for their arrest.

But they remain at large, and there are just two plausible explanations:

Either federal authorities don't know where the Mastros are — or they do know, but haven't moved to apprehend the couple yet because legal complications stand in the way.

Denny Behrend, a retired deputy U.S. marshal, suspects it's the latter. His former colleagues in the Marshals Service are very good at finding people who don't want to be found, he says, but extracting fugitives from other countries can be legally tricky.

"I'd bet they're just putting all their ducks in line so that when they do move in, it'll go smoothly," says Behrend, now vice president of Lacey OMalley Bail Bonds in Seattle.

Mark Ericks, U.S. marshal for Western Washington, won't say if Behrend is right. The U.S. Attorney's Office in Seattle won't say anything about the Mastros.

But all this silence hasn't halted rampant speculation about the couple's whereabouts.

"I was at a charity event recently and I had people come up to me and swear they'd seen Mike and Linda in South America, or Europe, or Canada, or Sun Valley," says James Frush, Mastro's lawyer. "It was ridiculous."

Frush won't say whether he's been in contact with his client-on-the-lam. When he's asked if he knows where the Mastros are, he jokes about one of their favorite restaurants.

"I tell people they're in the wine cellar at Canlis," Frush says.

Michael Mastro was a longtime and prolific real-estate developer and lender whose website alluded to his "billion-dollar career." But his highly leveraged empire fell apart when the market tanked.

Three lenders pushed Mastro into bankruptcy in 2009. The most recent estimate of his debt to unsecured creditors is $250 million, and court-appointed trustee James Rigby has said those creditors will be lucky to get back more than a few pennies on the dollar.

In the Mastros' absence, the $5,000-a-day fine that Bankruptcy Judge Marc Barreca imposed to persuade them to turn over the rings has continued to accrue. It now totals more than $1.5 million.

Ericks, the U.S. marshal, revealed last September that his agency had tracked the Mastros to an apartment in Canada in August — only to find they had left a day or two before.

If they are in another country, marshals can't bring them back without that nation's cooperation. And some countries are more cooperative than others.

About 70 — from Russia and China to Afghanistan and Somalia — don't even have extradition treaties with the U.S. But Douglas McNabb, a Washington, D.C., criminal-defense attorney who specializes in international extradition, says those nations hold little appeal for most fugitives.

"Any country that you could go to without an extradition treaty — they wouldn't want to live there," he says.

Extradition can be challenging even in countries with treaties, however.

For one, there's no indication the Mastros have been charged with a crime. Barreca issued the arrest warrants for them last July for contempt of court, a civil violation.

Extraditing someone on that basis is difficult, if not impossible, experts agree.

"They're not going to get to extradite him on a civil matter," says Jacques Semmelman, a New York lawyer and international extradition expert. "There has to be a crime."

John Strait, who teaches criminal law at Seattle University, agrees. "There might be some ways you could do it," he says, "but it wouldn't be easy, and it would take a lot of time."

Mastro is the subject of a federal criminal investigation. While the U.S. Attorney's Office in Seattle won't confirm it, Frush acknowledged the probe more than two years ago. It's still under way, lawyers for a Mastro associate who also is under investigation said last month in court documents.

If federal marshals know where the Mastros are, they could be waiting for a grand-jury indictment before they move to apprehend the couple. That would make extradition much easier, experts agree.

But they also say it's possible a sealed indictment already has been issued that hasn't been made public for fear of pushing the Mastros further underground. There could be new arrest warrants — also sealed — based on that indictment, they add.

McNabb suspects that's what has happened. The Marshals Service probably wouldn't have been pursuing the Mastros in Canada last year with warrants based only on a contempt citation, he says.

If Mastro has been — or will be — indicted, the government's success in extraditing him could hinge on exactly what the charges against him are.

One likely possibility is bankruptcy fraud — hiding assets from creditors. Rigby filed a civil suit accusing Mastro of that, and Barreca ruled in the trustee's favor last fall.

Experts differ on how easy it would be to extradite Mastro to be tried for that offense.

Some extradition treaties list specific crimes for which other countries will turn over a fugitive American to U.S. authorities. Other treaties are more general, authorizing extradition if the offense with which the American is charged also is a crime in that country.

Bankruptcy fraud is recognized as a crime almost universally, says Strait — if not by that name, then as a form of "theft by deception." Semmelman agrees.

But McNabb says it's not always that clear-cut.

One example: While Brazil's treaty with the U.S. authorizes extradition for "crimes or offenses against the bankruptcy laws," that country's Supreme Court declined in 1999 to extradite an American charged with bankruptcy fraud.

If foreign authorities balk at extraditing Mastro for that offense, McNabb says, the hurdle might be overcome by also charging him with other, possibly related crimes: perjury, mail fraud or wire fraud, for instance.

Tax fraud is another possibility. Internal Revenue Service agents, as well as FBI agents, interviewed Mastro associates last summer, Frush says. One Mastro associate, Bellevue developer Winstron Bontrager, was indicted in March for tax fraud, including concealing income from a real-estate deal in which Mastro was involved.

But the people who know what charges Mastro may — or does — face aren't talking.

"You're trying to read the tea leaves," says Frush, "but the tea is just too murky."

There are a few shards of new information about the search for the Mastros that only raise more questions:

• In January, the Mastros' Bentley, Chihuly glass pieces and other household goods were auctioned off in Palm Desert. Auctioneer Tim Murphy observed a large number of hits on the auction website from Italy, and he speculated the Mastros might be staying there.

Murphy said recently that he allowed the FBI to burrow into his firm's computers to try to learn more, but he understands they hit a dead end. The FBI also asked for a list of people registered for the auction, he said.

• Last November, after Barreca ruled that Linda Mastro, now 62, owed her husband's creditors more than $1.3 million, her lawyer, Michael Gossler, filed an appeal on her behalf.

Did she authorize it? Gossler won't discuss whether he's been in contact with his client. Frush says Gossler could be acting in what he considers Linda Mastro's interests without communicating with her.

The last person who publicly acknowledged speaking with the Mastros was Gloria Plischke, Michael's sister. She said last September that he had phoned her several times. (Plischke couldn't be reached for comment for this story.)

Behrend, the retired marshal, says the Mastros almost certainly aren't communicating with family or friends now. They're probably living under assumed names, he says, and paying for everything with cash.

But "the Mastros are really not fugitive-type people," he says. "And being a fugitive is really hard work."

Authorities could be negotiating with the country where the couple are staying to extradite or deport them, Behrend says. Or marshals could be trying to lure the Mastros to a country where extradition might be easier.

Few fugitives remain at large this long, says Frush, a former federal prosecutor: They can't withstand the tug of home, family and friends.

"But once those ties are cut, at a certain point your life changes so much that you escape that pull," he says.

Ericks, the U.S. marshal, won't respond to all this speculation. "There's just things I can't talk about," he says.

"Just know that if we have the authority to get him, we're going to get him."

Swiss minister sees U.S. tax deal by November

U.S. officials seem to want an end to a dispute over wealthy Americans with hidden Swiss offshore bank accounts before the U.S. presidential election in November, the Swiss finance minister said in a newspaper interview on Saturday.

"My impression at the moment is that the U.S. wants a solution by the elections. Both sides endeavour to find a solution in the foreseeable future," Switzerland's finance minister Eveline Widmer-Schlumpf told Basler Zeitung.

Eleven Swiss banks - including Credit Suisse and Julius Baer - are under investigation by the United States for aiding U.S. citizens suspected of dodging taxes with the help of offshore bank accounts.

Switzerland wants the investigations dropped, in exchange for payment of fines and the transfer of names of thousands of U.S. bank clients. At the same time, Switzerland is seeking a deal to shield the remainder of its 300 or so banks from U.S. prosecution.

The talks appear to have stalled in recent months. A visit by Widmer-Schlumpf to Washington in April brought no breakthrough.

The U.S. prosecutor most closely linked with piercing the veil of Swiss bank secrecy, Kevin Downing, quit to join a law firm earlier this month, a move which experts say won't hinder U.S. efforts to pursue Swiss banks.

4.7% rise in private financial wealth in Mideast and Africa

Private financial wealth in Middle East and Africa grew by 4.7 per cent in 2011, according to a new report by The Boston Consulting Group (BCG). The report, entitled The Battle to Regain Strength: Global Wealth 2012, is BCG’s twelfth annual look at the global wealth-management industry and addresses the current size of the market, the state of offshore wealth , the performance levels of leading institutions, the emergence of alternative business models, and key trends that all players must adapt to.

According to the report, private financial wealth in Middle East and Africa grew to $4.5 trillion in 2011, up from $4.3 trillion in 2010, marking a 4.7 per cent increase. Furthermore, it is expected to grow by a compound annual growth rate (CAGR) of 6.6 per cent by 2016, to reach $6.1 trillion, largely as a result of continued strong GDP expansion in oil-rich countries.

Dr Sven-Olaf Vathje, Partner and Managing Director at BCG Middle East said: “We see this growth despite the fact that Middle Eastern and African stock markets suffered from the political instability caused by the uprisings across the Arab world in 2011. Despite this, the region’s private wealth grew in 2011 driven by high savings rates and strong economic growth in commodity-rich countries such as Saudi Arabia and Qatar. The wealth held in bonds rose by 13.3 per cent, and cash and deposits grew by 5.1 per cent — only the amount of wealth held in equities decreased by 2.6 per cent, mostly driven by weak market performance.”
The BCG study also estimates that between 2011 and 2016, private financial wealth in the region will grow by a CAGR of 8 per cent for households worth more than $100 million, 8 per cent for households worth between $1-$100 million and 5 per cent for households worth less than $1 million.

"In 2011, Qatar, Kuwait, UAE and Bahrain were among the top ten countries in the world by proportion of millionaire households," Markus Massi, Partner and Managing Director at BCG Middle East added. “Qatar stood at second place with 14.3 per cent millionaire households; Kuwait came in third (11.8 per cent); the UAE came in sixth (5 per cent); and Bahrain stood at tenth place (3.2 per cent).”

In terms of proportion of $100 million-plus, ultra-high-net-worth (UHNW) households, Kuwait and Qatar each had 6 UHNW households per 100,000 households, while the UAE had 4 UHNW households per 100,000 households.
For private financial wealth originating from Middle East and Africa in 2011, Switzerland was the biggest offshore centre attracting $0.56 trillion, followed by the UK drawing $0.33 trillion.

In fact, with over a third of all assets booked abroad in 2011, Middle East and Africa had the highest proportion of offshore wealth in the world. In terms of percentage of private wealth booked offshore, Kuwait (53 per cent) took the lead in the region, followed by UAE (52 per cent), Tunisia (45 per cent), Bahrain (37 per cent), Lebanon (34 per cent) and Morocco (30 per cent).

As a regional offshore financial centre Dubai held assets worth $0.2 trillion with Saudi Arabia, Kuwait, India, Iran and Turkey as the top five sources of offshore wealth.

Global private financial wealth grew by just 1.9 per cent in 2011 to a total of $122.8 trillion. In the BRIC countries, total private wealth increased by 18.5 per cent, compared with negative growth in North America (–0.9 per cent), Western Europe (–0.4 per cent), and Japan (–2.0 per cent).

In terms of household segments, the highest growth rate was in the UHNW segment, which saw its wealth rise by 3.6 per cent — compared with average growth of 1.7 per cent across all other segments.

Although the number of millionaire households decreased by a combined 182,000 in the United States and Japan, globally the number grew by 175,000 as many households crossed the millionaire threshold in developing economies, particularly China and India. The United States still had the largest number of millionaire households (5.1 million), followed by Japan (1.6 million) and China (1.4 million).

The report says that the highest density of millionaire households in 2011 was in Singapore — where more than 17 per cent of all households have private wealth of $1 million or higher.

Offshore wealth increased to $7.8 trillion in 2011, up 2.7 per cent from the previous year. The increase was driven partly by a flight to safe havens by investors in politically unstable countries and partly by inflows from UHNW families based in rapidly developing economies.

Globally, the asset bases of wealth managers remained flat in 2011, compared with a gain of 11 per cent in 2010. The lack of growth was mainly attributable to the deterioration in market values, which was not offset by net new inflows. There was wide variation in how wealth managers fared across regions and performance categories.

A handful of business models outside the mainstream — such as external asset managers, family offices, and online wealth managers — have taken advantage of the disruption caused by the financial crisis and the willingness of clients to consider new alternatives. According to the report, traditional wealth managers should aim not only to defend their turf but also to profit from evolving client preferences by adapting their own business models — borrowing different elements from those of unconventional competitors and making sure that they keep their finger on the pulse of what their clients want.

Numerous industry dynamics are affecting wealth managers. One theme, BCG says, is that emerging markets will fuel the growth of global wealth in the future. Players that hope to succeed in emerging markets must first define their strategies, operating models, and ambition levels — as well as recognise the pitfalls that have felled many attempts at expansion abroad. Another key trend is that the core economics of wealth managers will continue to be strained.

“We expect equity markets to remain volatile, and the risk appetite of private banking clients will be subdued,” said Vathje. “Therefore, wealth managers will need to continue their pricing initiatives, refocus on client discovery, master the ever-shifting regulatory environment, bolster risk management, manage costs, and find ways to use alternative business models to their advantage.”

Facebook's expatriate and the US Senate's demagogues

As the son of one American immigrant and the father of another, I find it hard to muster much empathy for Facebook co-founder Eduardo Saverin and his decision to renounce his US citizenship.

Saverin, who was born in Brazil and brought to this country as a child, turned in his American passport last year and moved to Singapore; it is widely assumed that he did so to reduce the taxes he would otherwise have to pay on the billion-dollar gains generated by Facebook's IPO. Saverin denies, not very convincingly, that his expatriation was motivated by tax considerations. "His decision had nothing to do with dissatisfaction here," a spokesman said, "but with his strong desire to do business there."

Well, it takes all kinds to make a global economy, and maybe Saverin genuinely prefers doing business in a quasi-authoritarian society where freedom of the press is unknown. Singapore's economy is one of the world's freest, and its taxes are considerably lower than America's. If such things matter more to Saverin than the blessings that come with American citizenship, it was always his right to leave. At least he had the grace to describe himself as "very grateful to the US for everything it has given me."

Yet while Saverin may not come across as the most appetizing of creatures, he is not nearly as odious as US Senators Chuck Schumer of New York and Bob Casey of Pennsylvania. To hear the two Democrats tell it, Saverin is a virtual traitor, a turncoat who has sinned against America and must be given no quarter.

"It's infuriating to see someone sell out" -- sell out! -- "the country that welcomed him and kept him safe, educated him and helped him become a billionaire," Schumer snarls. "We plan to put a stop to this tax avoidance scheme. There should be no financial gain from renouncing your country." Casey inveighs against "allow[ing] the ultra-wealthy to write their own rules" -- Saverin's departure, he says, is "an insult to middle class Americans and we will not accept it." The senators have introduced legislation that would penalize wealthy expatriates by imposing a 30 percent capital gains tax (double the current rate) on all their future US investments, and bar them from ever re-entering the United States.

Even by the usual standards of congressional demagoguery, this is appalling. Saverin broke no laws. He didn't cheat on his taxes. He certainly didn't write his own rules. In fact, under existing law expatriation vastly enlarged his current tax bill, by deeming most of his investment gains to have been realized and taxable on the date he renounced his citizenship. Far from escaping the taxman, Saverin's Facebook fortune enriched the US Treasury by hundreds of millions of dollars. It is only gains he accumulates after giving up his citizenship that will avoid the reach of the IRS.

But if Schumer and Casey really believe that citizens who pick up and move to improve their tax status should be smeared as sellouts and punished ex post facto, why stop with Saverin? Every year, millions of Americans relocate from high-tax jurisdictions to those with lower taxes. Between 2000 and 2010, for example, Schumer's state of New York, which has one of the nation's heaviest personal tax burdens, experienced a net outflow of 1.3 million citizens. Hundreds of thousands of those ex-New Yorkers now reside in Florida. Many no doubt moved for the weather, remarks Scott Hodge of the Tax Foundation, but how many more preferred the sunnier tax climate in Florida, where there is no individual income tax, no estate tax, and no inheritance tax?

When former Cleveland Cavalier LeBron James, spurning an offer from the New York Knicks, joined the Miami Heat two years ago, it was noted that he had a clear financial incentive to do so: Income taxes in New York would have cost him more than $12 million. Would Schumer call him a "sellout" too? Leaving Cleveland's high taxes behind saved James millions as well. Should Ohio lawmakers pass a law banning him from ever setting foot in the Buckeye State again?

Casey and Schumer both maintain Facebook pages, which together have been "liked" by more than 17,300 people. Thanks to Facebook, their reach is extended and their message amplified -- all at no cost to them. They benefit every day from Saverin's willingness to do something they never did: invest his savings in a risky start-up venture with no guarantee of success. Rather than slamming him for leaving the country, perhaps they ought to be thanking him for what he helped make possible. Or better yet, repairing the US tax code so it doesn't drive people like Saverin to seek economic refuge elsewhere.

Saverin may not be very lovable, but he at least understands economic incentives. Schumer and Casey, by contrast, have yet to grasp that the more governments try to soak their taxpayers, the more likely those taxpayers are to end up somewhere else.

Global action on tax evasion has largely failed, study shows

The most concerted global push ever undertaken against international tax evasion has failed to reverse the flow of funds to offshore financial centres, according to banking industry data.

Despite unprecedented action from political leaders, and a blizzard of bilateral co-operation treaties entered into by offshore centres, deposit data from the Bank of International Settlements (BIS) shows bank accounts in tax havens still held $2.7 trillion last year – about the same amount as in 2007.

Niels Johannesen and Gabriel Zucman, academics who were granted access to a rarely seen breakdown of BIS data, concluded: "So far, the G20 tax haven crackdown has … largely failed … Treaties have led to a modest relocation of bank deposits between tax havens but have not triggered significant flows of funds out of tax havens."

Their findings are in sharp contrast to the official verdict on the G20 initiative in London in 2009. Last November Angel Gurria, general-secretary of the Organisation for Economic Co-operation and Development, the body whose job is to oversee the crackdown, told the G20 in Cannes: "The era of bank secrecy is over." Acknowledging work remained to be done in some areas, he nevertheless insisted: "It is now no longer possible to hide assets or income without risking detection." The excuse fell flat with his audience.

Presented with Johannesen and Zucman's findings last week, Pascal Saint-Amans, the OECD's head of tax, said: "It's an interesting survey, but perhaps it is published a bit early. Let's see what the impact is in a couple of years."

However, tax campaigners claim the latest study shows getting offshore centres to sign bilateral co-operation treaties is an ineffective means of tackling the problem. Weakly worded treaties, they argue, allow signatories to request financial details only where they can already demonstrate suspect evasion activity. Reformers have called for more robust transparency treaties to weed out tax evaders.

Adding to the challenge facing tax authorities is the widespread use of corporate structures spanning multiple havens. Johannesen and Zucman's study found that some $550bn – about a quarter of all deposits in tax havens – was owned by individuals or companies in other havens. The British Virgin Islands and Panama are popular jurisdictions for such holding companies.

Money flowing to opaque offshore financial centres has in recent years been the subject of intense political scrutiny as many of the world's largest economies – not least the US and Britain – have been straining to raise sufficient taxes to pay for public services and to service rising debts without choking off economic growth.

The G20 crackdown has pressured many offshore financial centres to sign co-operation treaties. Jersey and Guernsey have signed 18 and 19 such treaties respectively. According to Johannesen and Zucman, BIS data suggests that these bilateral treaties typically lead to a 3.8% fall in the deposits held on behalf of individuals or companies from the treaty partner.

Bank deposits in Jersey have dropped by more than a half, a fall of $110bn over four years; deposits in Guernsey have declined by 15%. By contrast, Johannesen and Zucman said, Cyprus has signed only two co-operation treaties meeting OECD criteria and saw deposit levels rise by 60%.

"The deposit gains and losses correlate strongly with the number of treaties signed by each haven," the academics found. "The least compliant havens have attracted new clients, while the most compliant have lost some, leaving roughly unchanged the total amount of wealth managed in tax havens."

However, they also noted that those withdrawing deposits around the time of co-operation treaties – possible tax evaders – were frequently shifting their wealth to other, similarly secretive, offshore centres where no such equivalent treaty existed.

"Alternative markets will develop whenever and wherever the free market provides less than optimal opportunities for personal financial growth," the report concluded.