Hawaladar’s Lament

from Priceonomics

Hawaladar is a person who provides money services (hawala) to criminals. He is part of the criminal part of the shadow banking system. Shadow banking system is the banking services offered by non-banks. For example, a hedge fund could provide a loan to a company, which would be a shadow banking activity. Halawadar does something similar.

A Hawaladar is a person who moves money from one place to another using his network of contacts he’s developed usually from traditional import-export activity. So, for example, if a criminal in London wanted to payoff another criminal in New York in the amount of $10,000, the criminal could go to a Hawaladar in London, give the Hawaladar $10,000. The Hawaladar would call up an associate in New York and ask him to pay the criminal in New York $10,000. The Hawaladar in London would settle up with the associate in New York at a later time. The settlement usually is underpricing or overpricing of the goods being traded. The Hawaladar and the associate have both charged money for the service, of course, which the criminal in London is usually responsible for. And, in order for all of this to work, the associate in New York must trust the Hawaladar in London to settle up.

Nowadays, are Hawaladars really doing any trading? They are just a money service business.

The Hawaladar has been facing more competition over the past decade. Now, the London criminal could buy a prepaid debit card with cash at any store and then send that to the criminal. It does not require any intermediaries. The cost of buying a prepaid debit card is next to nothing. I think I could go to the corner store on my block and get one for about $5 and load thousands of dollars on it.

There are also other ways as well. People who do not have international trade businesses can get in on the Hawaladar game. I could pay off someone on behalf of a criminal using my PayPal account. I could use my Google Wallet. I could use my ApplePay. I could use Square, the payment service. I could use Venmo. I could use any store with a credit machine merchant account and pay them on my credit card and the store could pay off the criminal. It will just look like I paid for a product or service. I could even use Bitcoin.

The increasingly greater number of easy payment/transfer options are making it possible for criminal activity to be paid without the use of a Hawaladar.

What do you think was the weapon that was used to kill churchgoers in Charleston, South Carolina, confederate flag or gun?

About the Author: M. C. Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses. 


Spicing Up the 10-K

On August 5th, SEC will vote on a rule that would publish the ratio of CEO compensation to the typical worker of their own firm. This disclosure is required by Dodd-Frank, but, as with many laws, the details and implementation makes all of the difference in the world. SEC has delayed the implementation of this requirement, but I don’t really know why, other than CEO’s don’t like the idea.

I don’t like the idea because it unnecessarily target the CEO over other top executives. The likely comparison will be made between the CEO and an average of some pool of individuals, which is unfair. The better comparisons are with individuals against individuals or pools against pools.

full-trailer-for-50-shades-of-grI’m in favor of pools. The pools should be large and the distinction should be simple and indicative of something important. If the pay disparity is what the SEC wants to highlight because it feels that bigger disparities lead to more compliance issues, then they need to identify what is driving the disparities within the organization. Across the board, the biggest portion of disparity is equity compensation. The two pools should something quite simple. My suggestions: compare average total compensations where more than 50% of the total compensation is equity versus less.

Here’s the other problem with this disclosure: what is defined as the organization. I’m assuming Goldman Sachs does not hire any janitors. Janitors are employees of an outside firm. But Goldman Sachs wouldn’t exist without working in buildings of some sort. So, in terms of running the company called Goldman Sachs, some manager has to decide what janitorial company will be responsible cleaning their offices. As long as having offices is part of Goldman Sach business model, office cleaning services are part of its business. But legally, those janitors don’t work for Goldman Sachs. These types of outsourcing is usually on the low end of the payscale, unnaturally raising the average of the lower pool.

Similar pool problem are labor market disparities. A company whose employees are primarily in Bangladesh will be paying their lower pool significantly less than the upper pool. At the same time, the disclosure is actually made worse but hiding the disparity it is actually trying to reveal: American disparity. So, does one exclude foreign employees?

Still, the greatest benefit to my proposal is getting an understanding about how what the pay disparity is between those who are working to pump up the value of their stock and those who are trying to increase their cash compensation. This will also require the firm to put everyone in two buckets, forcing them to make a decision about what roles should be trying to pump up the stock and what roles are to be productive.

But these are implementation problems. Politicians and interested parties are still arguing over whether such information in important to shareholders. Republicans are saying that the purpose of the rule is to produce societal pressures on corporations, not actually add informational value to shareholders. I don’t have a problem with putting societal pressures on corporations, but I do wonder if this really should be the role of the SEC or if it should be the role of the DOL. Democrats and Labor are saying that  the information is going to be important for shareholders because they will be given another key piece of information about how to pay their executives, which shareholders do in a vote each year.

Should corporations be required to disclose the pay ratio between its top executive and the average worker in the firm?

About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.


Greece’s story includes tax compliance

World Bank data to the end of 2013 shows Greece has only 29 per cent of its GDP as tax receipts; the EU average is 37 per cent. – Breitbart

Navagio beach, Zakynthos, Greece

There are three major factors in Greece’s success in the future:

  1. Government expenses (primarily employee compensation and pensions)
  2. Youth unemployment (which is at about 55%)
  3. Tax Compliance

The first two are discussed a lot because of the dramatic human toll newspapers can interest readers in. Decreasing government pay could look like the government is gouging its employees when they could be raising taxes on wealthier people who can afford to pay, but Greece is also notorious for high pay and early retirement, some as early at 50 years old, which makes employees look like they are milking the system. Youth unemployment is a particularly difficult topic of people because many older Greeks do not make much money but then they must also support their grown children (18 to 24 year old) who cannot get career jobs and are employed part time for part of the year. There is a generational battle here. Older people can command higher wages with their knowledge and experience, but younger people are cheaper.

Tax collection has its human aspects as well. In this day and age, there is really no tax collector. It is all done through administratively by filing papers or filing online. The human aspect of the tax collection story is on the issue of tax evasion. In greece, such a small percentage of people actually pay taxes when they owe taxes that the tax rate really doesn’t matter. If tax rates were raised in order to close the deficit (government funding gap), then more people will evade taxes. If taxes were lowered, the government would just reduce revenues because people had evades taxes for so long that they would not want to reveal how they have been making a living to begin with. Tax avoidance isn’t much of an issue since Greek tax structure is simpler than in the United States. When so few people pay taxes, making it more difficult to figure out how much one is supposed to pay only increases the likelihood of evasion. (Tax avoidance is the act of avoiding taxes in ways the law allows, like a deduction. Tax evasion is to not pay taxes in part or in whole.)

It is hard to blame Greeks for not paying taxes. First, non-government employees get very little for the Euros paid. It isn’t like Greek infrastructure is among the best in the world. It isn’t like Greece is a leader in an industry. Greece’s biggest attraction is tourism. Just look at the picture of the beach. Beautiful sand, clean blue water, happy people sunbathing; it’s the type of place people imagine when they imagine paradise.

But even if Greece paid its taxes, it has a long way from being financially healthy. Let me bring the financial aspect of this discussion down to ground level. Each of Greece’s 11 million people owe about $23,000 and they earn about $22,000 per year. That actually isn’t too bad except each Greek owns only about $18,545. Compare that to the United States. Each American owes about $55,000 and earns about $53,000. Per cent, it is almost exactly the same as Greece. But each American owns about $257,232. These are all averages, of course, and it does not address distribution. The point is that on average a Greek person can’t give up all of his wealth to pay of the debt and start outright, while an American could pay off the debt with about 80% of their wealth intact.

Greece now has a little bit of a surplus, meaning they are making a little more than they are paying to live. If this continues, with some adjustments in the way it collects taxes, it could work its way toward financial solvancy. But at this point, it looks like it is just too difficult people for Greeks to do, at least not while the sun continues to shine on their beaches.


What do you think about Chris Evans becoming a new Top Gear host?

About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.


Black Market Peso Exchange (BMPE)

Black Market Peso Exchange (BMPE) is a way of laundering money, or to make illegitimately earned monies seem legit, hiding the criminal activity that created the income.

Diagram of Black Market Peso Exchange from Chase & Associates, Inc.

It is really no different than other common forms of laundering money but a term was created to capture the massive amount of activity that takes place to clean drug money.

About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.


Bank Resolution Plan

Basel, Switzerland

You may or may not have heard about something called a Resolution Plan. A requirement from Title 1, Section 165(d) of the Dodd-Frank Act, any bank holding company with assets greater than $50 Billion is required to have one submitted to the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC). The Plan is specifically fulfilling the requirement in subsection 1 of the section. It has three enumerated requirements and one catch all requirement. The enumerated requirements are: the extent to which the institution is adequately protected from nonbank subsidiary risks; descriptions of the org structure, assets, liabilities and other obligations; and enumerate collateral with which securities are guaranteed. The catch all requirement just states the institution must provide “any other information that the Board of Governors and the Corporation jointly require by rule or order.”

This is a yearly exercise banks must pass in order to keep their bank charters. The idea is that the two major insurers of these institutions receive enough information so that there is enough insurance to cover for any losses by depositors and debtees. Unlike regular insurance plans, the insurance premium won’t go up. That has been taken off of the table. Instead, the institution could be required to increase its ability to cover for the risks.

The risks are measured using Basel 3 standards. Metrics such as CCAR and CVar are used to determine a financial instrument’s ownership and level of risk. So, basically this is an exercise in accounting, primarily, and finance, secondarily.

Despite the title of the section, it is left up to the Fed and the FDIC to figure out if a resolution plan can be derived from the requirements. That is to say, the “Resolution Plan and Credit Exposure Report,” submitted by the institution does not actually contain a plan on how to resolve a dissolution of the institution. It provides information with which the Fed and FDIC can do so.

For banks that are smaller and simpler, FDIC is implementing a plan to perform the exercise itself, taking the burden of performance off of these other institutions that do not face direct risks from collateralized securities.

Credit Unions have their own equivalent to the FDIC called National Credit Union Administration (NCUA). There are some similar rules for credit unions but because of the limited offerings credit unions are allowed to provide, the risks are inherently lower, therefore, the standards are lower.

This short explanation is a good start to understanding the goals DFA Title 1 Section 165 (d)1.

One time stimulus bill

President George W Bush had a wonderful idea to stimulate the economy: one time tax break to repatriot offshore corporate profits.

Okay, so we know that this didn’t work. This didn’t work because repatrioting, bring back, corporate profits with a lowered tax incentive didn’t come with the restrictions necessary to funnel the funds toward productivity. What do I mean by this?

Simply put, buying things does not always lead to productivity. What is bought is very important. If I bought undeveloped land and decided to build a house, that increases productivity (not the rate but just overall), it distributes the wealth that was brought into the country and lowers unemployment.

However, the companies that had loads of profits sitting outside of the country didn’t do that. They didn’t invest in making their factories more productive. They didn’t give employees a raise. They didn’t hire new workers for the demand that was being created. Let’s remember what types of companies had lots of profits sitting outside of the country: large corporations. They decided to buy their competition, the smaller firms that were creating products and providing services that could force them to lower prices to compete for customers and increase wages to compete for workers. The result was less competition for customers and employees.

So, repatrioting offshore profits can work as long as we don’t give the tax break to buying non-productive assets, like equities or debt or commodities or, essentially, any financial instrument. Repatrioting the profits is supposed to replace financial instruments for financing activities, not bolster them.

Today, corporations are, again, sitting on mountains of cash from profits offshore, ready to be repatrioted but are not because it would cost them dearly in taxes. Plus, deflation is still a risk. Unemployment hovers above 5% and people are making 10% less than they did 15 years ago. People should be making 10% more, though.

So, I would like to propose bringing back the one time repatrioting of corporate profits. But this time, do not allow companies to buy other companies, or anything in the capital markets. Force companies to spend on meeting more of the market’s needs. After all, in good times and bad, a healthy economy is one that meets the needs of the people as a whole, not the few people who can afford to own lots of shares of corporations.

About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.