International Business Law Advisor : International Business Lawyer & Attorney : Santiago Cueto Law Firm : Global Business Litigation & Finance Commentary

In a trend that could spread to other jurisdictions, Liechtenstein is asking wealthy UK investors who have assets hidden abroad to take advantage of its “unique and attractive” amnesty program.

The agreement reached between the UK and Liechtenstein combines generous terms with a promise by the principality to close the accounts of customers who could not prove they were tax-compliant. The disclosure facility offers minimal penalties, a guarantee of no prosecution in non-criminal cases and an exemption from the threat of “naming and shaming”.

You can read about the program in the Financial Times article Liechtenstein woos investors with tax amnesty.

While I think the deal comes close to striking a balance between banking confidentiality and tax transparency, it comes at the expense of rewarding the users of the most secretive jurisdictions.

Trend to Watch: Look for Similar Deals to Be Forged with Monaco, Singapore, Hong Kong and Gibraltar

      -Santiago

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The International Law Prof Blog has passed along details about an upcoming teleconference, “Doing Business with Japan,” sponsored by the American Bar Association Section of International Law.

The conference could not come at a better time. Businessweek’s Daniel Kruger reported this week that Japan has overtaken China as the largest foreign holder of U.S. Treasury securities. The number is staggering--Japan is now holding $768.8 Billion in U.S. T-Bills.

Folks, the conference is a great first step towards bridging the trade gap and getting back some of those T-Bills.

Here are the details:

90-Minute ABA Teleconference on Doing Business with Japan

Are you interested in getting a better understanding of the legal system in Japan?  Or in the advantages (and dangers) of selecting Japanese law or Japan as a place to arbitrate?  Or other issues relating to doing business with (and in) Asia? 

There's a teleconference on "Doing Business with Japan" on Wednesday, February 24, 2010 from noon to 1:30 p.m. Eastern US Time.  The program is organized by the Asia/Pacific Committee of the American Bar Association Section of International Law.  Click here for the program description, speaker bios, and registration form.  Download Japan.  There is an extremely modest fee to call in ($15 for section members and $25 for non-members).  Register by Monday, February 22, 2010.

Looks like an excellent program. Will you be attending?

    -Santiago

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In response to the Copenhagen Climate Summit’s call for innovative environmental solutions,  my law firm launched a groundbreaking program today to allow law firm clients to pay legal fees with carbon credits. The initiative is the first of its kind in the professional services industry. You can read more about my firm’s initiative in the Wall Street Journal article Will Work For Carbon Credits!’ says Florida Lawyer written by Ashby Jones.

Carbon credits are units that can offset a company’s carbon footprint. One carbon credit is equal to one ton of carbon dioxide. The credits, which can be bought and sold in international markets, have gained significant traction as a legitimate currency to transact business.

I’ve been closely tracking the Copenhagen Climate Conference currently underway in the Danish capital. Over 100 heads of State and government including President Barack Obama and Chinese Premier Wen Jiabao, as well as more than 15,000 participants, have gathered at the Conference to come up with innovative ways to address climate change.

One of the most promising solutions are carbon credits, which hold immense promise to radically change the world energy system and the way business is transacted.

My research on carbon credits as a currency to transact business led me to a groundbreaking article published several years ago in the Harvard International Review. The article, A New Currency: Climate Change and Carbon Credits was written by David Victor Joshua House of the Stanford University Institute of International Studies. The Authors presented a fascinating thesis on the power of carbon credits to transform the world energy system:

A new currency is emerging in world markets. Unlike the dollars, euros and yen that trade for tangible goods and human services, money exchanges hands for pollution - particularly emissions of carbon dioxide, which are caused by burning fossil fuels and are the leading cause of global climate change. Carbon credits, as they are called, are poised to transform the world energy system and thus the world economy.

The thesis, written in 2004, was prescient in its prediction of how the market for carbon credits would skyrocket. The global carbon credit market was worth $126 Billion in 2008. The World Bank estimates that the market could grow up to $150 billion by the end of this year.

Of course, the creation of a new global currency implies the need for coordination on a scale unprecedented in history, as Mr. Victor and Mr. House point out in their article. While the task may be daunting, it’s important to keep in mind that historically, the strongest currencies have emerged “bottom-up” from the initial efforts of a committed few.  

If carbon credits were to gain global consensus, the benefits to the atmosphere and to the world economy could be enormous.

Trend to Watch: Look for More Industries to Transact Business With Carbon Credits.

   -Santiago 

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Brazil is on a roll.  Yesterday’s Financial Times included a special 10-page section devoted to Brazil. One of the articles, Olympic Accolade Sets Seal on Progress, written by Jonathan Wheatly, succinctly describes the “exuberant optimism” that has gripped the country since it was awarded the 2016 Olympic Games.  And the Wall Street Journal recently reported on the Brazilian stock exchange making spectacular gains in the article Brazilian Stock Scores Spectacular Gains on US GDP Growth.  This is following last month’s IPO of Banco Santander’s Brazilian unit, the world’s largest IPO so far this year, as reported in the New York Times article, Banco Santander's Brazil Unit Raises $8 Billion in I.P.O.

While these events are certain to fund rapid expansion in Brazil’s capital sector, the exuberance is tempered by a look at the long road ahead. Yet it is impossible not to be blinded by the bright future that seemed out of reach not long ago.  Antonio Quintella, country manager at Credit Suisse Sao Paulo put it succinctly:

Nothing is guaranteed. But it is reasonable to assume that [Brazil] won’t repeat the mistakes of the past…it is very difficult not to be bullish”

Brazil Should Ratify Bilateral Investment Agreements

Brazil has emerged from the global recession as the darling of international investors; this has created a wealth of investment opportunities.  However, it lags behind all other Latin American countries in one important respect: it has yet to ratify any bilateral investment agreements (BITs).  These agreements protect international investors when disputes arise in host countries. In light of Brazil’s recent good fortune, the time has come for Brazil to rethink its approach to BITs and implement measures to protect foreign investors.

Bilateral Invest Agreements Provide Important Safeguards

BITs obligate host countries to provide safeguards for foreign investment. If host governments fail to heed these safeguards, investors maybe awarded money damages. The following safeguards are among those afforded by BITs:

1. host countries are prohibited from expropriating foreign investment without compensation.
2. The agreements often include national treatment provisions, which require a government to treat foreign investors no less favorably than they treat domestic investors. They also often include most favored nation provisions, which extent the same protections afforded to foreign investors from one country to foreign investors from other countries.
3. foreign investors have the right to transfer funds into and out of the host country without delay.
4.  In addition to substantive protections, BITs provide powerful dispute resolution mechanisms. Under these mechanisms, Foreign investors may choose to resolve disputes in binding international arbitration such as in the International Center for Settlement of Investment Disputes (ICSID) and arbitral tribunals organized under the United Nations Commission of International Trade Law (UNCITRAL).

These agreements provide important safeguards against government mistreatment, mitigating some of the political risks associated with making investments in foreign countries.

Conclusion

Although Brazil’s reluctance to ratify BITs may help to protect it against claims by foreign investors, the recent surge in outbound Brazilian investment should cause Brazil to reconsider its position against international investment agreements. 

While Brazil is busy contemplating this proposition, there is a way investors can structure their investments to take advantage of BITs between other states. Stay tuned, and I’ll let you know how in a follow-up post.

Trend to Watch: A Surge in Investment Activity in Brazil Will Lead to the Adoption of International Investment Agreements

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As Forbes reported today in the article Dainippon completes tender offer for Sepracor, Dainippon Sumitomo Pharma Co. of Japan agreed to buy Sepracor, based in Marlborough, Mass., for about $2.6 billion, or $23 per Sepracor share. Sepracor makes drugs for respiratory and nervous system disorders. It reported $1.29 billion in revenue in 2008, with almost half of that total coming from sales of its sleep aid Lunesta.

The Dainippon/Sepracor deal is the latest example of the resurgence of tender offers as a vehicle for growth. An insightful article entitled The Peculiarities of Tender Offers appears in today’s New York Times’ DealBook section. According to the article, 26.15 percent of acquisitions so far this year were structured as tender offers, compared with 16.28 percent in 2007 and 23.34 percent in 2008.

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on my visit to Switzerland with my wife and daughter this past April, there was a palpable sense of uneasiness in the unusually damp alpine air. As we made our way down Zurich’s Bahnhofstrasse---the main artery running through the city’s financial district, I could not help but notice the sheer number of jaw-clenched bankers passing us by. Given the current regulatory climate, the bankers' uneasiness is understandable. As Mark Scott of Business Week’s Europe Insight blog explained in his post U.S. May Target Other Swiss Banks in Tax Probe, Swiss bankers are coming under intense scrutiny concerning the portfolios of their  wealthy U.S. clients:

Swiss banks also are becoming more reticent towards U.S. clients. Several bankers, who declined to give their names due to the sensitivity of the topic, say the extra oversight involved in managing American money -- coupled with the bad publicity associated with the UBS case -- has taken the shine off providing wealth management services to U.S. high-earners. Despite the sizeable American market, many would prefer to tap the growing wealth from Asian economies, instead of dealing with the added pressure associated with U.S. clients.”

Although I touched on this topic in an earlier post, it remains to be seen whether Swiss banks will continue to limit or even eliminate private wealth services to U.S. clients.  Due to the ongoing saga between the IRS and UBS, many Swiss banks have chosen to shut out U.S. clients entirely.  At present, it's mostly the smaller Swiss banks that have announced their intent to limit their services to non-U.S. clients. Wegelin & Co., Switzerland's oldest bank,  for example, has instructed wealthy clients to sell their U.S. assets, or switch banks, because of concerns that new rules will burden investors with tax obligations in the U.S. At least two of the major Swiss banks -- Julius Baer (JBHGF) and Credit Suisse Group (CS) -- have yet to publicly announced whether or not they will change their procedures for handling U.S. clients. 

As this banking saga continues to unfold, it will be up to Switzerland to draw the line on banking reform. Swiss foreign minister MichelineCalmy-Rey put it succinctly when she told Reuters, "For us this is not primarily about UBS. It is about Switzerland's sovereignty. We want our laws to be respected. It is also about our financial center and about jobs. A solution in the UBS case must fall within Swiss laws."

 Trend to Watch: Look for increased tension between Switzerland and other nations as France and Germany step up their efforts to further erode Swiss bank secrecy laws.

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On August 3, 2009, UBS reached a deal with U.S. authorities to turn over the names of 5,000 U.S clients holding secret Swiss bank accounts. Although this amounts to a mere 10 percent of the names Washington was after, the controversy surrounding Switzerland and UBS will continue to swell. The pressure on Switzerland and UBS to stop shielding the wealthy from paying their dues will likely increase as U.S. authorities step up their efforts to stem the tide of illicit capital flight entering the offshore banking world.

Swiss officials have downplayed the deal, asserting that the settlement plan would do nothing to impart Swiss banking secrecy.  From this Washington Post article:

“The proposed resolution to a U.S. government demand for information about thousands of Americans suspected of using Swiss accounts to evade taxes would leave Swiss bank secrecy intact, a top Swiss official has said.”

Notwithstanding this assertion, Swiss banks will be subject to much greater scrutiny now – at least as far as their Swiss operations go. Many Swiss institutions are setting up operations in Singapore, which is growing quickly as a rival to Switzerland as a banking haven. By cutting personal income taxes to 20% and tightening account privacy, Singapore is quickly becoming a go-to haven for Asia’s growing number of millionaires.

In advising a client on the placement of funds offshore, Singapore may hold more sway in comparison to Switzerland. The deal reached between UBS and the U.S. all but eviscerates the competitive advantage long held by Swiss banks. If it is no longer possible for U.S. citizens  around the world privately to stash cash in Switzerland, then why not bank at the local branch of Bank of America?

There are a number of reason why Switzerland is still a viable option as a banking safe haven.  Apart from the controversy threatening its secrecy laws, Switzerland still has its advantages in safeguarding funds against such uncertainties as coup de main, coup d’etat, revolution and hyperinflation. Moreover, a host of multinational corporations have recently moved their European headquarters to the Swiss power centers of Zurich and Geneva. The resultant surge in international activity is sure to buoy Swiss banks until the UBS controversy subsides.

Trend to Watch: While Singapore Banks may bode well in the short term, the Swiss banking industry will remain a strong contender in the pageant of offshore banking havens.

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