Monday, June 12, 2006

Businessmen Without Borders

Some excerpts from a very interesting "Reporter at Large" from the Summer 2006 issue of The National Interest, by Tatiana Serafin, a senior reporter at Forbes:

_________


Billionaire Calvin Ayre has a $3.5 million, 10,000-square-foot compound in Costa Rica, does business with 16 million customers—mostly in the United States—and is a native Canadian holding the country’s passport. He has no allegiance but to his own cause—online gambling. He pays no taxes to the United States or to Canada. He is persona non grata in the United States, is on shaky ground in Canada (which has similar restrictions against online gambling) and was recently raided by Costa Rican authorities, though not charged.

This is the new face of today’s international businessman who may hold a passport or two from one country, reside in another and do business in yet another. That leaves loyalties up for grabs, if they exist at all. The name of the game is self-interest, not national interest, and a stateless ego may do more to shake-up the dusty premise of the nation-state than any supranational movement to date.

Businesses have long taken advantage of loopholes in tax laws, favorable registration locales and amenable politicians. The rise of offshore entities in the 1970s was one big step towards separating businesses from national ties. A 2004 report by the Center for Public Integrity uncovered at least 882 oil and gas subsidiaries based in tax havens like the Cayman Islands and Bermuda ...

The ease of multiple citizenships has added fuel to the fire—allowing individuals to reshuffle a considerable volume of assets. As the number of nation-states grew with the demise of colonial empires and the Soviet bloc, the crossover options for entrepreneurs and investors multiplied. High-net worth individuals pick not only the best passport, but also the optimal offshore tax haven to get around pesky national ties. A 2003 report by the Boston Consulting Group estimated that these high net-worth individuals hold $9 trillion, or a quarter of their total assets (cash deposits and listed securities) offshore—resulting in at least $250 billion in tax losses for nation-states.

How to retain control over assets often drives decisions about moving offshore or acquiring “extra” passports. For example, before the 1997 handover of Hong Kong to China, several billionaire businessmen reached for offshore company registrations and dual citizenships to protect their assets. The sons of Asia’s richest and most influential investor Li Ka-shing (net worth: $18.8 billion) have dual citizenship in Hong Kong and Canada. Billionaire Ronnie Chan, whose family made their fortune in real estate, has dual U.S. and Hong Kong citizenship. That maneuvering proved propitious for the billionaires. After Forbes first published its list of the richest Chinese, several arrests followed and businessmen like Yang Rong wised up—he fled to Los Angeles to avoid detention.

It gets even more complicated when looking at entrepreneurs from the former Soviet Union. Take the three businessmen—the multi-billionaires Alexander Machkevich, Alijan Ibragimov and Patokh Chodiev—now collectively known as the “Kazakh trio.” Once stalwart Soviets (Chodiev was even with the Ministry of Foreign Affairs), their Soviet passports and identity became meaningless overnight. But how “Kazakh” are they? Only one of them actually has a Kazakh passport and none were born in Kazakhstan. Their jointly owned holding company, the $2.9 billion (2005 revenue) Eurasian Natural Resources, is not even registered in Kazakhstan.

So why are they the “Kazakh trio” and does that mean their collective allegiance is to Kazakhstan? Ninety percent of Eurasian Natural Resources production comes from Kazakhstan’s iron ore, ferroalloy and alumina assets, which the partners allegedly obtained access to via favorable ties to Kazakhstan’s long-serving president, Nursultan Nazarbayev. (Kazakhstan’s government recently started to re-examine the joint ventures with the trio.) The partners say that they are among the highest taxpayers in Kazakhstan and their corporate entities tout a variety of social spending initiatives on health and education in the towns where mines are located. Noteworthy to be sure, but Alexander Machkevich carries an Israeli passport, Patokh Chodiev holds a Belgian passport and all three reside abroad in the UK or Switzerland. ...

Perhaps the goal of multiple passports and residences is to avoid having to make such a choice and to maintain the broadest array of options? Certainly Saudi multimillionaire Khalid Masri who received an Irish passport in 1992 after investing over a billion dollars in an Irish pet-food company may have been interested in a more Western-friendly ID. This phenomenon may gain more momentum as countries create stricter travel rules, as the United States did post 9/11.

Clearly, Czech national Viktor Kozeny was shopping around, allegedly obtaining Irish and Venezuelan papers, in addition to his Czech credentials. Nicknamed “the Pirate of Prague”, officials from both the Czech Republic and from the FBI investigated him for alleged fraud arising out of privatization deals. At last notice, he was in a Bahamanian prison awaiting extradition to the United States. ...

How countries cope with the loss of tax revenue, jobs and even rent—recent research estimates that 54 million square feet of corporate office space, roughly the equivalent of one-third of Chicago’s downtown office area, will be vacated per year in the United States—is an issue continuously being debated.

The more global the world becomes, the more nation-states try to play up national identity, in spite of the multiple passports, residences and offshore registrations of local businessmen. For example, post 9/11, the U.S. government has become increasingly prickly about awarding contracts to non-U.S. companies, managing to block a corporate deal, the sale of six U.S. ports to Dubai Ports World as part of its takeover of Peninsular and Oriental Steam Navigation Co. The congressional uproar has led many foreign companies to publicly assert they are prepared to work with U.S. representatives to make mergers more palatable. A similar wave of foreign takeover-anxiety has swept Europe with politicians in Italy and Poland recently calling for a stop to mergers in strategic sectors, like utilities and banking. These Western governments seem to want to reassert their authority as citizens become nervous over slowing economies, rising fuel prices and lack of jobs. But the nationalist resurgence may backfire and lead to even more offshore activity, if governments impose more regulations and taxes on businesses.

Comments:
An interesting piece. The follow on is the growing political gap between business interests which thrive in a globalized world versus political pressures to hold the line. The Dubai port deal is just one example.
 
Helps to put a "face" (with interesting anecdotes) the trend Huntington identified in your Spring 2004 issue about the transnational elites ("Dead Souls"), and why what is good for a company is no longer automatically good for the country.
 
What about the Chinese firms from the mainland, particularly those with state ownership? I think those companies may be a bit more responsive to the needs of the host government.
 
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