Citco Fund Services, one of the world's largest hedge fund administrators, has announced plans to open an office in Halifax, Canada with plans to eventually employ about 350 people.

Citco Fund Services has offices in Bermuda, most other offshore centres, London, the US and Asia. Citco has operated in Canada since 1992, and now employs about 350 people in Toronto, primarily as a back-office for its offshore centres.

"We see Halifax as a strategic centre to develop our Canadian operations," said William Keunen, global director of Citco Fund Services. "With Nova Scotia's education infrastructure and competitive advantages, we know it is the right place for our new office and training centre."

Citco is just the latest company with Bermuda connections to announce it is opening an office in Halifax, taking advantage of the ample university-educated work force and costs lower than those found in Bermuda.

Recently, Bermuda-based Bank of N.T. Butterfield & Sons Ltd. said its fund services unit would hire about 400 people in Halifax within the next seven years. Last year, Bermuda based fixed-income fund manager West End Capital Management agreed to create 75 positions in Halifax.

The Globe and Mail reports that their sources have indicated that the Bermuda based hedge fund administrator Olympia Capital International Inc. also plans to open an office that will hire about 150 people in Halifax, and that hiring commitments by Bermudian financial companies will soon reach almost 1,000 jobs.

 

HedgeFund.net has released its Q3 2006 Hedge Fund Asset Flow / Performance Report.

The report estimates single manager hedge fund asset levels increased from $1.725 to $1.786 trillion during the third quarter of 2006. Net new assets allocated to single manager hedge funds increased an estimated $51.5 billion. The increase is less than the two prior quarters, but still represents the third highest inflow since the beginning of 2005. Performance gains added an additional $9.3 billion to total assets. Fund-of-fund assets increased 4.40%, $34 billion in new assets, to an estimated $901 billion.

HedgeFund.net  reports that hedge fund industry assets have grown over 20% in the last 12 months.

John Deuss has been remanded in jail for a further 90 days in Holland.

From the Times of London:

"Sir Andrew Large attacked London’s ban on listed hedge funds as "anachronistic" yesterday as he was named chairman of a record-breaking new $1 billion (£675 million) hedge fund floating in Amsterdam.

The former Bank of England Deputy Governor and chairman of the Securities and Investments Board, forerunner to the Financial Services Authority, is to chair the new investment vehicle operated by the London hedge fund manager Marshall Wace. If it succeeds in raising its target of $1 billion it will be the world’s biggest listed hedge fund.

Sir Andrew said that London’s restrictions on the listing of single-strategy hedge funds was one reason for the choice of Amsterdam. Single-strategy hedge funds are usually banned from full listings in London because they are not sufficiently diversified and because of restrictions on short-selling. "It’s a historic thing," Sir Andrew said. "I think it’s a bit of an anachronism."

Marshall Wace is the second hedge fund manager this month to choose Amsterdam to raise money in a permanent capital vehicle. Two weeks ago the Anglo-French hedge fund manager Boussard & Gavaudan chose it to raise $562 million.

Investment bankers say more hedge funds are queueing up to float permanent capital vehicles, which are attracting investors precluded from investing in traditional hedge funds.

The FSA said in March that it was considering relaxing restrictions on investment companies. But the earliest the new regime could come in would be the third quarter of next year.

There was confusion last night about whether the new vehicle could have been listed in London, with the FSA claiming that foreign-based investment companies - the new fund, MW Tops, is registered in Guernsey - were already able to list in London.

Sir Andrew’s appointment is a coup for Marshall Wace, whose highly successful investment style has come under scrutiny from regulators amid concern that it might inadvertently encourage market abuse.

Marshall Wace, which has $5.9 billion under management, solicits investment ideas from investment bankers and brokers and rewards the best with generous commissions. That might tempt bankers to exploit inside information, it has been claimed.

However, last month the FSA gave a nod of approval to so-called alpha capture systems, arguing that cheats were more likely to use other methods. Marshall Wace also expects to be formally cleared next month of any wrongdoing in a case involving Alcatel shares in 2002 being investigated by French regulators.

Sir Andrew is being paid a one-off £250,000 by Marshall Wace and will receive £70,000 a year in director’s fees."

Max Re Capital Ltd. has announced that Chairman and Chief Executive Robert Cooney resigned after an internal investigation into a controversial type of coverage known as finite reinsurance uncovered potential wrongdoing.

The company also said it has contacted the Securities and Exchange Commission about the matter.

Max Re said it has decided to restate quarterly and annual results from 2001 through 2005 to reflect concerns that oral side agreements had negated the supposed risk transfer in two finite insurance deals. Regulators such as New York Attorney General Eliot Spitzer and the SEC launched investigations in late 2004 and early 2005 into whether companies used finite reinsurance to manipulate their financial statements.

Ewart Brown has defeated former Premier Alex Scott to take the leadership of the Progressive Labour Party by a vote of 107-76 at the PLP delegates conference. Dr. Brown, who was Deputy Premier and Tourism and Transport Minister until his resignation from Cabinet two weeks ago, has now been sworn in as the Island's Premier (and the third PLP Premier).

UPDATE:  After being arrested without charge in Bermuda and then released on $10 million bail, John Deuss flew voluntarily to Holland (under a police escort). He was arrested on arrival and is now being questioned about the role of his Caribbean bank FCIB in a systematic EU tax evasion scheme called "carousel fraud".  A Dutch judge ordered that he be detained for 2 weeks. Deuss, a resident of Bermuda, denies any wrongdoing and has not been charged with any offence, but he is suspected by EU tax authorities of being in charge of a "criminal organisation".  The warrant for his arrest listed allegations of habitual or deliberate money laundering, handling of stolen property, and being in charge of a criminal organisation.

For an unsentimental profile of the man by David Marchant (as published in Bermuda's Royal Gazette) see here.

The Jersey government has published a summary of the responses received in connection with its consultation on the introduction of a goods and services tax (GST). The report is available here.

The document summarises the views expressed in the public consultations held between 28 March and 31 August this year concerning the implementation and operation of the levy, which is due to be introduced in 2008. The following is an excerpt from the pdf:

"BACKGROUND

In 2004, the States agreed two major changes to Jersey’s tax structure - a reduction in the general rate of tax on corporate profits, from the current 20% to a rate of 0% for most companies but with a higher (and yet internationally competitive) rate of 10% for financial services providers.

These changes, known as “zero/ten” were considered to be vital to secure a sustainable economic future for Jersey since they would enable European Union demands for nondiscriminatory taxes to be met, whilst combating competition from other business centres seeking to attract the highly mobile and economically important financial services industry away from the Island.

However, an effect of “zero ten” will be to reduce the States’ future annual tax revenue by an estimated £80-100 million. The main impact of this is expected to be felt in 2008 and the full effect by 2010.

In order to fill this anticipated ‘revenue gap’ the States agreed a package of measures that included restrictions on its spending, an economic growth plan, an Income Tax instalment system, legislation to ensure that shareholders in zero per cent companies would ultimately pay personal Income Tax on their share of profits and a phasing out of certain Income Tax allowances for higher income groups.

Nevertheless, even after these provisions, there remained a £40-45 million annual revenue shortfall and some form of new tax, or taxes, became inevitable to ensure the continued provision of high quality public services.

However, in addition to producing the required £40-45 million of annual revenue, the aim was to design a tax, or taxes, which would be as simple as possible for all concerned, while maintaining Jersey’s economic competitiveness and having the minimum possible impact on the cost of living and on business activities.

After detailed consideration, and following comprehensive public consultation, the States decided in 2005 to adopt a GST as the best of the alternative tax-raising measures - with a proviso that an income support scheme would be introduced to mitigate the effect of the tax on lower income groups.

It was agreed that Jersey’s GST should be broad-based but levied at the lowest possible rate and with the highest possible registration threshold (below which businesses would not be required to register for GST). It was therefore decided that a single standard rate of three per cent (the lowest in the world) should be applied to most goods and services supplied in or imported to Jersey and that the registration threshold should be set at £300,000 of taxable turnover (one of the highest in the world). By comparison, the United Kingdom standard rate is 17½ per cent and its registration threshold is currently only £60,000. It was calculated that the combination of the broad tax base and single low tax rate (capped for at least three years), would minimise the cost of administration and result in a one-off cost of living impact of only one to one-and-a-half per cent, while the high threshold would mean that only the biggest businesses would be required to register for and collect GST from their customers. (In fact, it is estimated that three quarters of Jersey businesses, about 4,500, will be relieved from the responsibilities of GST - thereby reducing the burden on smaller business and further reducing the cost of administration).

However, having decided to adopt GST, the States agreed that there should be full public
consultation on the manner of its implementation and operation and that the views expressed would be taken fully into account by the States when final decisions were made on the scope of GST and the enabling legislation.

...............With the exception of detailed submissions from the Financial Services Industry and businessassociations, Crown Agents was surprised at the relatively low level of responses to the consultations - especially in the light of the importance of GST to Jersey and the widespread publicity that it has received.

CONCLUSIONS AND WAY FORWARD

.....The views expressed by this correspondent are, in fact, included under various subject headings in this report and are currently under consideration by the GST Consultation Team.

It is the view of Crown Agents that the consultations, under the management of the GST
Consultation Team, were properly conducted within States’ guidelines. They were well
publicised and adequate supporting public information was made widely available. All
reasonable opportunities were afforded for all who wished to make submissions. Crown Agents notes that the GST Consultation Team will continue to accept and consider comments and suggestions even beyond the closing deadlines for submissions.

The issue of exclusions generated the greatest response, particularly in terms of numbers. The submissions from private individuals concentrated almost exclusively on the treatment of school fees.

There were presentations from some providers of childcare about the adverse impact of GST on that sector.

One submission called for exclusion of medical services and several charitable organisations made representations about the detrimental effects of taxing their caring activities and pointing out the knock-on effects on the States. Towards the end of the consultation period there were a significant number of submissions from charities, mostly via the Corporate Services Scrutiny Panel. To allay any unnecessary concerns the GST consultation team prepared an explanatory leaflet on the possible implications of GST for charities and supported the Minister for Treasury and Resources at a public meeting called by the Scrutiny Panel.

With one exception, there was an absence of requests for exclusion for the following:
Food;
Children’s clothing;
Books and newspapers;
Fuel and energy.

The majority of responses from businesses and business organisations supported the concept of a broad-based, low rate, simple to operate tax with minimal exclusions. One organisation pointed out that this was the foundation of its support for the original proposal to introduce GST.

A number of submissions were directed at ensuring the ‘business friendly’ approach referred to in the main consultation paper and a range of suggestions for amendments to the draft Primary Law were made. Some of these have already been taken on board and others are under consideration.

The consultation exercise has proved very useful in reviewing and re-formulating policy and, more specifically, in finalising the enabling legislation. The GST team should be in a position to provide further drafting instructions to the Law Draftsman to enable a revised version of the draft Law to be lodged in time for States debate by early January 2007."

The Credit Suisse/Tremont Hedge Fund Index was up 0.13% in September, according to Oliver Schupp, President of the Credit Suisse Tremont, LLC.

“The Fed's decision to keep interest rates stable, due to an expected slow down in US economic growth and successive easing of inflation pressures gave most investors confidence that further interest rate hikes remain unlikely. With this sentiment, hedge funds ended September on a mixed note”, said Oliver Schupp “As the markets essentially overlooked concerns regarding the US housing sector and negative geopolitical developments, Event Driven managers profited from the positive equity market trend in developed economies ending the month up 0.60%. Dedicated Short Bias managers were inversely affected by positive global equity trends and ended the month down, 3.11% for the month of September.

“As global financial markets were particularly sensitive to growth and inflation news in September, volatility in the global equity markets remained muted for the month and yet strong technical factors led to the richening of overall convertible valuations against a stable credit backdrop for Convertible Arbitrage Managers who ended the month up, 1.15%”, said Robert I. Schulman, Chief Executive Officer of Tremont Group Holdings, Inc. “Managed Futures managers generally experienced a loss on the back of exposure to declining energy prices and ended the month down 1.15%.”

Germany is putting hedge fund transparency on the agenda of next year’s meeting of the group of eight leading industrial nations in the wake of the Amaranth debacle.

Peer Steinbrück, the German finance minister, is reported as saying that Germany saw “the new sensitivity” in the US about the systemic risks of hedge funds as an opportunity to discuss the issue.

G7 finance ministers will tackle ways to improve transparency of hedge funds when Berlin takes up the presidency of the G8 next year, according to a draft programme for Wednesday’s German cabinet meeting.

“The discussion in the US is qualitatively very different from what it was four or five years ago,” Mr Steinbrück said in Berlin. “The case of Amaranth seems to have played a role in this.”

Efforts in the US to boost oversight of the lightly regulated $1,500bn industry hit a wall in June when a court struck down a rule by the Securities and Exchange Commission requiring hedge fund managers to register with the financial market watchdog. But the investigation of Amaranth by US federal regulators and the Connecticut banking department has given fresh momentum to the debate.

Meanwhile, Sir John Gieve, Deputy Governor of the Bank of England, has delivered a blunt warning over “aggressive risk-taking” by hedge funds.  Sir John questioned whether some funds would survive the stress of severe market turbulence. He noted that the huge growth in hedge fund activity had taken place in a largely “benign environment”, and that firms risk management had yet to be “tested by a severe shock”.

Sir John said that “some comfort” could be taken from the lack of wider market disruption after the collapse of Amaranth Advisors. But in a stark message, he argued that future failures could have graver repercussions. “We should not conclude that it will be as smooth and easy next time — and of course there will be a next time. If we face a financial crisis in the next few years, we are almost bound to find some hedge funds at or near the centre of it.” Sir John tempered his remarks by praising the role of hedge funds as means to boost markets.
However, it is also understood that the UK Treasury remains sceptical over the case for a tougher regime of oversight of hedge funds. It is likely to set out its views in more detail within a few months.

In addition, Jean-Claude Trichet, the European Central Bank President, said recently that regulators worldwide are edging closer to a concerted approach on a new regime.

KPMG has raised the alarm that new draft guidelines have been published under which UK based investment managers of offshore funds could see their funds’ profits losing their tax free status in certain circumstances.
 
HM Revenue and Customs (HMRC) has published new draft guidelines on the tests which investment managers need to satisfy to qualify for the “Investment Manager Exemption” (IME) enabling profits from offshore funds to remain outside the UK tax net.
 
KPMG tax partner, John Neighbour, formerly of the OECD and HMRC where he was in charge of the review of the tests for the IME, said: “These new draft guidelines are of huge significance to investment managers, particularly in ‘alternatives’ such as hedge funds. Assuming these new draft guidelines are adopted, they will all need to review their arrangements as a matter of extreme urgency in order to ensure that the funds for which they act maintain their tax free status. We expect most fund managers to adapt their arrangements as necessary in order to remain in the UK and keep the funds’ tax free status.”
 
The key changes in the new draft guidelines affect the following two tests:
 
1. The “customary remuneration” test
2. The “independence” test
 
The customary remuneration test
 
Under the current test, an investment manager of an offshore fund needs to demonstrate that the remuneration received for this management service is not less than “customary” for that class of business. There has been little guidance as to what is meant by customary but under the new draft guidance, HMRC confirms that it will determine whether this remuneration is “customary” by applying the transfer pricing concept of arm’s length pricing.
 
John Neighbour commented: “An element of certainty of what HMRC actually means by the term ‘customary’ is welcomed as is the reference to internationally accepted transfer pricing principles as found in the OECD Transfer Pricing Guidelines. However, it does make satisfying this test more onerous. Applying transfer pricing methodology means that UK fund managers will need to ensure that they can demonstrate all amounts paid to parties related to their funds are at arm’s length rates and, in this sense, the burden of proof that the arrangements are satisfactory shifts from HMRC to the UK fund managers.”
 
The independence test
 
In contrast to the changes to the remuneration test, the new draft guidance on the independence test introduces further uncertainty. The previous guidance set out a list of circumstances under which HMRC will regard the independence test to be satisfied. The new draft guidance now states that no one factor will be treated as decisive in determining whether the manager and the fund are independent; the list merely illustrates what may be significant.
 
John Neighbour concluded: “These moves are the latest steps in the increasing level of scrutiny HMRC is applying to the fund management industry. There is a perception that some fund managers have played a little ‘fast and loose’ and HMRC is tightening up the rules in response. Everyone in the industry will need to pay attention to these proposed changes and, at the very least, review their procedures. We would expect that most will satisfy the new guidelines but some will have to make some changes to their arrangements very quickly.”
 
Affected UK based investment managers have until 12 January 2007 to comment on the draft proposals.
 
Ironically, this alarm comes at a time when the UK is celebrating the 20th anniversary of “Big Bang” and the huge success of London as an international financial centre since then. As the Economist notes, as a result of Big Bang -  “London has kept its long-standing dominance of foreign-exchange trading; its share of the market for over-the-counter derivatives has increased from 27% in 1995 to 43% in 2004. A fifth of the world's hedge-fund assets (including 80% of Europe's) are managed out of London, compared with a tenth in 2002. Though London's insurance market has suffered from tax competition, the City has powered ahead in services such as the law and ship-broking. In equities, the business Big Bang was designed to secure, London has hosted 172 international listings so far this year, compared with 134 in regulation-bound New York.”
 
Sometimes you have to wonder if the UK Tax man has even the vaguest clue as to how the wealth is generated that pays for their salaries!

The Dubai International Financial Exchange (DIFX) recently listed a $150 million Sukuk created by The Investment Dar Company K.S.C. (TID), making the exchange the global leader in Sukuk by listed value.

The value of Sukuk (Islamic-compliant bonds) on the DIFX totals $4.11 billion with the TID issue, a higher figure than on any other exchange.

Per E. Larsson, Chief Executive of the DIFX, said: “As the international exchange of the Middle East and surrounding countries, the DIFX is a natural home for Sukuk and other Islamic products. We will intensify our focus on this rapidly growing sector.”

Gulf-based non-sovereign borrowers issued $4.6 billion worth of  Sukuk between January and June 2006, a 117% rise on the figure for the same period in 2005.

TID is a prominent Islamic financial institution based in Kuwait and is active in areas including consumer financing, real estate and investing. The Sukuk has been issued by TID Global Sukuk I Ltd, a company set up specifically to carry out the issuance. 

Amr Abou El Seoud, Executive Vice President of TID, said: “We are delighted to become the first financial institution to bring a Sukuk to the DIFX. The exchange is known for its international standards and this listing raises awareness of our company and its development.” 

 Nasser Alshaali, Chief Operating Officer of the DIFX, said: “The DIFX has attracted listings from many countries since it opened in September 2005, including companies with roots in Jordan, Saudi Arabia, Switzerland, India and now Kuwait. In our second year of operation we will reinforce our status as the region’s international exchange.”

WestLB AG, London Branch is book runner and joint lead manager of the TID Sukuk. Unicorn Investment Bank is Sharia advisor and joint lead manager.

The Securities and Exchange Commission (SEC) has brought securities fraud charges against James N. Stanard and Martin J. Merritt, the former CEO and former controller, respectively, of RenaissanceRe Holdings Ltd. (RenRe) and also against Michael W. Cash, a former senior executive of RenRe’s wholly-owned subsidiary, Renaissance Reinsurance Ltd. The complaint, filed today in federal court in Manhattan, alleges that Stanard, Merritt, and Cash structured and executed a sham transaction that had no economic substance and no purpose other than to smooth and defer over $26 million of RenRe’s earnings from 2001 to 2002 and 2003. The SEC also announced a partial settlement of its charges against Merritt, who has consented to the entry of an antifraud injunction and other relief.

Mark K. Schonfeld, Director of the SEC’s Northeast Regional Office, said, "This is another case arising from our ongoing investigation of the misuse of finite reinsurance to commit securities fraud. The defendants enabled RenRe to take excess revenue from one good year and, in effect, “park” it with a counterparty so it would be available to bring back in a future year when the company’s financial picture was not as bright."

Stanard, age 57 and a resident of Maryland and Bermuda, was Ren Re's chairman and chief executive officer from 1993 until he resigned in November 2005.
 
Merritt, age 43 and a Bermuda resident, held various positions, including that of controller, at both the holding company and the subsidiary.
 
Cash, age 38 and a Bermuda resident, was a senior vice president of the subsidiary until he resigned in July 2005.

It will soon be illegal for banks and credit card companies in the US to conduct transactions with online gambling companies due to the unexpected passage of the Unlawful Internet Gambling Enforcement Act.

The Act was passed in Congress when Republicans added the provisions to a port security bill, and President Bush has already indicated that he will sign it. The Act will effectively cut off the traffic of money to large offshore gambling companies. Offshore gambling companies have seen explosive growth until now. News of the ban sent publicly traded gambling stocks such as SportsBetting, and PartyGaming plummeting. About 78 percent of PartyGaming’s revenue and 62 percent of SportsBetting’s revenue currently comes from the US. While the extent of the impact that the bill will have on the global online gambling market is yet to be measured, many online gambling firms which are heavily reliant on American traffic are scrambling to make alternative plans to bring in new clients.

Congressional representatives argue that they passed the bill in order to protect Americans from gambling losses.

Charles Schmitt, 61, has pleaded guilty to 19 charges of false accounting involving the CSA Absolute Return Fund and was sentenced to 4.5 years in prison and banned from being company director for 10 years in Hong Kong.

The Judge described it as a "well planned and sophisticated" fraud. There is still a short fall of US$32.5 million in the fund after it was liquidated, and some of that was apparently used by Schmitt to buy real estate assets for himself. Schmitt declared personal bankcuptcy in December last year.

The liquidator is still suing HSBC Institutional Trust Services (Asia) and E&Y for their alledged role in the fund's failure.

The Royal Gazette reports that John Deuss has been arrested in Bermuda and likely spent the weekend in custody at Hamilton Police Station.

A court hearing is expected to be held next week – possibly as early as Monday – to determine whether he should be bailed and/or released.

Mr. Deuss resigned from the board of BCB last week, along with his sister Tineke and president Timothy Ulrich, after FCIB was effectively shut down by authorities in Europe. Authorities in the Netherlands want Deuss extradited there for questioning and a Bermudian magistrate has granted a provisional warrant for his arrest. Deuss' lawyers made a second attempt, on Wednesday, in Supreme Court to overthrow that decison, arguing in open court, that it was unlawful for the warrant to have been granted in Bermuda because no extradition treaty exists between the two countries.

Meanwhile, the Royal Gazette reports that "The whereabouts of the oil tycoon himself, who denies any wrongdoing on the part of any of his companies, are not known and Police on the Island have asked the public to help trace him". Anyone with information about Mr. Deuss’ whereabouts should call Bermuda Police on 295-0011

The Guardian reports that UK tax authorities have "dealt a devastating blow to criminals defrauding the British taxpayer of billions of pounds every year after discovering that they all channelled their funds through the same small Caribbean bank" - John Duess' First Curaçao International Bank (FCIB), which holds 40% of Bermuda Commercial Bank (BCB). FCIB's volume of business apparently jumped from $60m two years ago to $6.5bn, before the bank was effectively closed last week.

The criminals engage in a tax scam called "carousel fraud", which apparently involves the repeated import and export of items, such as mobile phones and computer chips, from one EU state to another. No VAT is paid on the import but is "charged" on the sale. This VAT is then being retained. Tax losses through carousel fraud have shot up over the past year, to at least £100m a week, as traders have used sophisticated computer programmes to create "virtual" trades without actually moving goods.

In a joint Anglo-Dutch operation that included raids in London, the Netherlands and South Wales, FCIB has been effectivley shut down after it was found that every individual arrested and charged with carousel fraud in the last two years had an account there. John Deuss and others have resigned from the board of BCB whilst the investigations proceed.

Now a warrant has been issued in Bermuda for the arrest of John Deuss, on the back of a warrant issued in the Netherlands, as the authorities want to question Deuss - a frequent resident in Bermuda.

The problem has developed in Deuss' Transworld Payment Solutions (TPS), which is a very powerful, online, global payments mechanism that he developed for his own use (ie, Transworld Oil). TPS aparently was responsible for vetting FCIB clients in Europe. TPS enables account holders to move money between accounts in real-time, 24 hours a day, and in multiple currencies. The transfers all occur in the book-entry records of TPS.  To enable EU customers to get their money out of the system, without travelling to Curaçao or Bermuda, FCIB had correspondent banking arrangements with EU banks. These were Barclays Bank in the UK and Rabobank in Holland, and more recently, Union Bank of Switzerland. Each bank in turn has shut the door on FCIB because they became anxious about the transactions. This prompted FCIB to warn many of its clients that it was being forced to shut their accounts, as without a correspondent bank in Britain, it would no longer be able to move funds for them.

Like the Internet itself, which is an amazingly powerful tool that can be used for good, or for bad purposes, a fully electronic, book-entry payments mechanism is a very powerful application that can facilitate legitimate trade, and apparently, assist criminals.

Although Duess' bank may have earned millions of dollars in fees from FCIB's customers, there is no suggestion that he has been involved in carousel fraud trades. Deuss told the Guardian that all of his companies have always complied with all applicable laws, regulations and rules. "Accordingly, the companies deny any wrongdoing in connection with this matter and will vigorously defend their interests," he reportedly said. However, the question will no doubt be asked, "Did Deuss know, or should he have realised from the extraordinarly rapid growth in TPS's business, that something was amiss?"

In a statement, BCB said its operations should not be affected by the investigations of FCIB as their business is "entirely unconnected" and added: "However, the fact that FCIB is BCB’s largest shareholder has resulted in scrutiny by the rating agencies and the downgrading by Moody’s. If nothing else, this does affect the reputation of BCB. We will be contacting our clients to assure them of the bank’s unimpaired financial strength."

UPDATE II: Amaranth now reports that, after closing out positions to meet margin calls, it has lost around $6 billion.

UPDATE: Latest news reports suggest that Amaranth lost $4.5 billion (approx 50% of the $9 billion under management) in September, after being up 20% at the end of August.   Given the absolute size of the loss, the speed with which it was incurred (based on massive leverage - as with LTCM), and the volatility in this fund throughout 2006, there have been the usual, renewed cries for greater supervision of hedge funds.  In fact the energy markets have absorbed the losses without much turmoil. Amaranth is now under investigation in Connecticut and I suspect that the state authorities and the SEC have more than enough existing powers to deal with any fraud or wrongful disclosure (if any occured).  As with LTCM, the lenders will have to look again at their risk management controls and it seems likely that redemptions will lead to the fund's closure. In other words, the market is dealing with this without the need for new regulations. 

The FT reports that Amaranth Advisors has told investors that its main funds are down 35 per cent or more this year in the wake of a big losing bet on natural gas prices.

Natural gas prices fell nearly 15 per cent over the last two weeks on strong winter storage levels and predictions of a mild winter.

Amaranth’s funds were up about 20 per cent for the year as recently as mid-August and that means that the firm’s losses over the past few weeks could be as high as US$4bn. Amaranth, a hedge fund with US$7.5bn under management, was founded in 2000 and bills itself as a multi-strategy fund specialising in energy trading, merger arbitrage, convertible bond and long-short strategies.

The FT reports that in a speech in Hong Kong, Timothy Geithner, President of the New York Fed, said supervision of core banks and investment banks had encouraged the transfer of risk to unregulated institutions such as hedge funds. Their growth was now increasing the risk that if large hedge funds run into problems, it could damage the regulated core of the financial system.

Mr Geithner said that, for the moment, regulators should continue to focus on encouraging the banks and brokers that lend to hedge funds to improve their "counterparty discipline" of the funds.  But, over time, the growth in hedge funds "will force us to consider how to adapt the design and scope of the supervisory framework to achieve the protection against systemic risk that is so important to economic growth and stability."

John Deuss, Tineke Deuss and Timothy Ulrich have been obliged to step down from the board of Bermuda Commercial Bank (BCB), which is listed on the Bermuda Stock Exchange. Legal authorities in Holland and Curacao are conducting an investigation at the offices of First Curacao International Bank (FCIB), and at the offices of its Dutch administrative services provider in Holland, into FCIB's involvement in alleged money laundering activities by some of its clients and whether the activities of its Dutch service provider require a banking license. The investigation by legal authorities in Holland and Curacao has impacted BCB because FCIB is a significant shareholder in BCB.

John Deuss, Tineke Deuss and Mr. Ulrich who serve as directors of FCIB have advised the board of directors of BCB that they will temporarily step aside from their responsibilities as directors and officers of BCB until this matter is resolved.

John Deuss is a maverick businessman with major intrests in oil and gas (Transworld Oil) who is now trying to build a global electronic payments processing service called Transworld Payments. Formerly resident in Bermuda he is now rumoured to be resident in the US.

The Barclay Group, an independent provider of alternative investment research data, announced today that it has purchased the Alternative Asset Center (AAC) database, creating the world’s largest database of hedge fund performance.

"Integration of AAC and Barclay data will enable us to provide up-to-date monthly performance figures on nearly 7,000 hedge funds," said Sol Waksman, founder and president of The Barclay Group. "Our internal database now maintains information on over 12,000 alternative investment vehicles."

According to current industry estimates, there are 10,500 active hedge funds with more than USD 1.4 trillion in combined assets. Analysts expect hedge fund assets to triple during the next decade.

The Barclay Group, founded in 1985, currently tracks more than 6,000 hedge funds and managed futures programs. Barclay has created and regularly updates 18 proprietary hedge fund indexes and eight managed futures indexes. Institutional investors, brokerage firms and private banks worldwide utilize Barclay’s indexes as performance benchmarks for the hedge fund and managed futures industries.

"Given the dramatic growth of hedge funds in recent years, sophisticated investors need up-to-date and reliable tools to properly evaluate this sector," says Waksman. "Barclay will now be able to deliver accurate and timely performance data on more hedge funds than any other provider in the industry."

The combined resources of Barclay and AAC will be utilized to produce the 6th annual Directory of Fund of Hedge Funds scheduled for release in November and to maintain an exhaustive product line that includes analysis software, proprietary indexes, publications, reports, and electronic data feeds.

AAC was established in 1999, and quickly constructed the largest proprietary fund of hedge fund database in the industry. Three well-known AAC products will be added to Barclay’s product line: the annual Directory of Fund of Hedge Funds, the Fund of Hedge Funds DataFeeder, and the Alternative Investment Manager DataFeeder.

Financial News reports that the Dubai International Financial Centre, the financial services hub being built in the United Arab Emirates, has gained the first hedge fund licensed to operate in the country.

The Constans Crescent investment fund, launched by US hedge fund group Argent Financial, will be an equity long/short fund investing in the "crescent belt" of Islamic countries stretching from Morocco to Pakistan.

Several of the world’s largest ratings agencies are developing wide-ranging credit and risk ratings on hedge funds and their managers, as the $1.5 trillion hedge fund business becomes even more mainstream.

As hedge funds attract more investment from institutional investors such as pension funds they have to convince investors that the perception of hedge funds as a risky investment is no longer valid. S&P is developing a comprehensive set of ratings criteria that are expected to be launched before the end of this year. S&P already assigns counter-party credit ratings to some hedge funds. Its funds group assigns ratings to the managers of funds of funds that reflect the quality of management and operations. They do not directly reflect performance.

Moody’s and Morningstar are reportedly working on similar products.

US regulators have been campaigning for more information about hedge funds to be made available to investors. The Securities and Exchange Commission is reconsidering the best way to police hedge funds after a US federal court threw out an SEC rule requiring funds to register with it.

S&P’s ratings criteria are being developed to assess the creditworthiness of hedge funds and hedge fund managers. The ratings will reflect the likelihood of a fund defaulting on an obligation, such as a bank loan or other debt, or in the form of a derivative contract.

S&P said its ratings would incorporate all aspects of operational risk, and performance to the extent that it impacts liquidity.

The Financial Times reports that tens of thousands of investors with money tied up in offshore financial centres have been successfully exploiting loopholes in the new EU savings directive, allowing them to escape the scrutiny of tax authorities or bypass withholding taxes introduced last year under the new law.

Figures released by the Swiss Finance Ministry reveal only $100m (£69m) was raised by Switzerland - the world's largest offshore financial centre - in the second half of 2005, the first six months of the new law's operation.

Over the same period,Jersey raised just £9m and Guernsey just over £3m, a tiny fraction of the £70bn of assets held in these offshore financial centres.

Tax accountants said the surprisingly low figures were the latest signs that many offshore savers had channelled their money to centres such as Singapore which are not covered by the EU savings directive or had re-organised their offshore savings so they escaped the scrutiny of tax authorities.

Under the directive, which came into force in July last year, all EU member states and more than a dozen offshore financial centres from the Cayman Islands to Liechtenstein must share account holder information with relevant local tax authorities or levy withholding taxes of up to 35 per cent. The rules apply to money held in offshore savings accounts.

Tax experts said there was evidence that as well as moving money to offshore jurisdictions not covered by the directive, many savers had taken less dramatic steps to escape the directive - including moving money into deferred interest accounts where interest is paid only when the account is finally closed. Offshore insurance "wrappers" have also become more popular as these also escape the directive.

Offshore insurance bonds are exempt from the directive because all the assets in the bonds are technically held by the life company running it rather than by individuals.

Many savers also appear to have set up corporate accounts as companies are exempt from the directive.

In light of the recent publicity, speculation and queries about the desire by Cable and Wireless to buy KeyTech Limited, KeyTech issued a statement to confirm that KeyTech has not received new or revised terms from C&W to purchase KeyTech Limited since a suggested value of $205 million was discussed at KeyTech’s Annual General Meeting on July 21st. C&W (formerly the sole provider of long distance telephony services in Bermuda) now competes with TeleBermuda for long distance. KeyTech is Bermuda's main domestic/fixed line telephone services provider.

At the AGM, the Chairman, Dr. James King, told shareholders that "having considered the inherent value for the KeyTech group’s operations, its various assets and its current strategic position your Board is not recommending this price as being in the shareholders’ best interests".  This statement was part of a letter to shareholders which outlined the Board’s reasons for considering that the proposal significantly under valued KeyTech.

The statement says that the Board of Directors will give careful consideration to any matter of significance that affects KeyTech and its shareholders.

The Jersey Financial Services Commission (the "Commission")has commenced a public consultation exercise on a number of proposed amendments to the Banking Business (Jersey) Law 1991. The Law establishes provisions for the regulation of banks operating in Jersey and the amendments relate to:

The appointment of a manager in prescribed circumstances;
The issue of Codes of Practice and measures that address the failure of registered persons to adhere to them;
Changes to the right of appeal and appeal procedures;
Improved specificity on the way in which conditions imposed on the registration of a person may be amended;
The power of the Commission to issue directions; and
Provisions to effect the transfer of deposit-taking business from one Jersey deposit taker to another.

The Consultation Paper can be viewed on the Commission’s website at www.jerseyfsc.org and paper copies are available at the Commission’s reception area and the Jersey Library.

The Commission welcomes input from any interested parties. Responses must be submitted by 3 November 2006.

The Jersey Financial Services Commission (the "Commission") has announced the appointment of John Harris as the next Director General to replace David Carse on the latter’s retirement on completion of his promised three year term of office from which the Commission, the finance industry and the Island has benefited greatly.

John Harris is currently Director - International Finance in the Chief Minister’s Department of the States of Jersey. In this role he has advised the Chief Minister, the Minister for Economic Development and the Treasury Minister on a wide range of matters including legislation and policy impacting on the regulation and the development of the finance industry where the approval of Ministers and/or the States is required. Prior to his appointment to that position in 2002 he was Chief Executive Officer for NatWest Offshore.

Commission Chairman, Colin Powell CBE, said, "we are delighted to be able to make this appointment. We are facing a period of consolidation of regulatory legislation and practice with particular emphasis on the most effective management of the Commission’s resources while continuing to deliver effective supervision of the finance industry to international standards. John comes to us with considerable management experience combined with extensive industry and public policy experience relevant to the role of the Commission.  Working with the existing strong team of executives in the Commission we are confident that John brings to the Commission skills and experience ideally suited to the key tasks before us in the years ahead. We are also confident that he will build on the legacy to be left by his predecessor and maintain the existing good relationship the Commission has with the Island authorities, the finance industry and the international community. We welcome John very warmly to the Commission."

John Harris Biography

As the first Director - International Finance in the Chief Minister’s Department John Harris has been responsible for all aspects of the Island’s approach to the development and maintenance of Jersey’s successful financial services industry. The principal features of this ground breaking role are:

Government development strategy for financial services in Jersey including fiscal strategy, education and training needs;
International relations including OECD and EU tax initiatives;
new legislation in support of finance industry needs;
close liaison with senior figures in Government, the Commission and the finance industry; and
regular representative for the Jersey Government on finance industry matters – in both domestic and international arenas.
From 1998 to 2002 he was Chief Executive Officer for NatWest Offshore with responsibility for offices in Jersey, Guernsey, Isle of Man, Gibraltar, Cayman, Bermuda and the Bahamas. He spent 22 years working for NatWest Bank during which time he held management positions in France, Switzerland and Singapore.

The Jersey Financial Services Commission (the "Commission") has commenced a public consultation exercise on proposed changes to the Codes of Practice for registered trust company business service providers in the Island.

Codes of Practice set out the fundamental principles and requirements by which registered trust companies must organise and conduct their business.

The revision will update Codes of Practice first introduced by the Commission in November 2000 and takes account of recommendations made by the International Monetary Fund during their last assessment of Jersey’s regulatory regime as well as findings from the Commission’s ongoing supervision of the trust company business sector.

The Consultation Paper can be viewed on the Commission’s website www.jerseyfsc.org and paper copies obtained from the Commission’s reception area or the Jersey Library.

The Commission welcomes input from interested parties. Responses must be submitted by 15 November 2006.

In some good news for offshore centres with insurance industries, Bloomberg reports that the worldwide reinsurance industry will expand faster than the global economy as demand for insurance grows in emerging markets such as China, India and Brazil, said Inga Beale, chief executive of Converium Holding AG.

These countries show "the classical pattern of insurance demand expanding significantly faster than the overall economy," Beale said in Zurich. A new middle class "and their increasing purchasing power" is fuelling demand for assets including cars, homes and durable goods that need insurance. Converium, a Swiss reinsurer that’s been working to restore its credit rating since a reserve shortfall two years ago, competes with companies including Swiss Reinsurance Co. and Germany’s Munich Re by selling coverage to primary insurers. The insurance industry had its costliest year on record after the 2005 hurricane season caused $83 billion in insured damage, Munich Re said. Beale said demand for reinsurance also will increase as more assets are "concentrated in regions which are exposed to natural catastrophes."

A Memorandum of Understanding (MoU) was signed today between Bahrain Stock Exchange (BSE) and Dubai International Financial Exchange (DIFX) to develop and strengthen capital markets activity in the region.

The MoU was signed by Fouad Rashid, BSE's Director, and Nasser Alshaali, Chief Operating Officer of the DIFX

The MoU aims at strengthening and increasing cooperation between both parties in areas relating to exchange of expertise and information by both parties. The MoU will work on increasing awareness among both parties’ market participants regarding the legal framework and investment opportunities available in both bourses. It also encourages listed companies in both stock markets to cross list their securities.

The MoU encourages both parties to jointly organize training programs and enhances relations and cooperation between market participants operating on both stock exchanges

Mr. Rashid, BSE’s Director, said: "This landmark agreement promotes the interests of issuers, brokers and investors as well as of both exchanges. We are committed to working towards substantial ties that will promote enhance and develop the Investment environment in both countries and make it more attractive and profitable."

Mr. Alshaali, Chief Operating Officer of the DIFX, said: "As the region’s international exchange, the DIFX welcomes cooperation with other exchanges to the benefit of all.

"Closer ties will facilitate international and regional investment, spurring capital markets activity and economic development."

The DIFX and BSE will seek additional avenues of mutual interest in discussions in coming months.

Bahrain Stock Exchange

Bahrain Stock Exchange was established in 1987 and started operation in 1989.  The existence of the stock exchange has enhanced the investment environment of the capital market in the Kingdom and increased the quantity and quality of instruments listed on BSE.

BSE is managed by a Board of Directors chaired by the Governor of Bahrain Monetary Agency (BMA). The board consists of 8 members representing both government and private sectors.

Ownership regulation in the kingdom of Bahrain allow GCC citizens to own up to 100% and non-GCC up to 49% of the Bahraini Shareholding Companies unless other stated in the companies article of associations.

To encourage long-term development of the region's capital markets, the BSE has signed several cross-listing agreements and memorandums of understanding with other exchanges in the region.

Non- Bahraini companies listed on BSE include three Kuwaiti, 2 Omani, one from Qatar and one Sudan.

Bahrain Stock Exchange is considered one of the most GCC Bourses in terms of listed instruments that include Ordinary Shares, Preference Shares, Conventional Bonds, Islamic Bonds (Sukuk) and Mutual Funds.

The number of Bahraini listed companies listed on BSE is 42 having market capitalization BD 6.53 billion. Bonds & Sukuk listed are 19 with total value of $ 2.83 billion and the number of mutual funds is 36.

In addition non- Bahraini companies on BSE include 3 Kuwaiti, 2 Omani, one from Qatar and one from Sudan

The Dubai International Financial Exchange (DIFX) has announced that Jefferies International Ltd has been admitted as a member firm able to trade securities.

Jefferies International Ltd, a UK-based investment bank and institutional securities firm, is a subsidiary of Jefferies Group, Inc (NYSE: JEF).

Jefferies becomes the 14th Member firm to join the DIFX since the exchange opened in September 2005.

Per Larsson, Chief Executive of the DIFX, said: "The arrival of Jefferies further strengthens the role of the DIFX as the only international exchange serving the vast region between Western Europe and East Asia. The DIFX has a unique membership mix of leading international and regional banks, reflecting its position as a gateway for capital to enter the region."

Cliff Siegel, CEO of Jefferies International, said:"We are committed to identifying new opportunities to enhance our footprint in the global capital markets to better serve the needs of our clients. As Jefferies expands into key regions around the world, our DIFX membership and the access that it provides to this strategic financial centre will help position our firm for continued growth."

Membership of DIFX is the latest in a series of actions taken by Jefferies to provide clients with access to the global capital markets. In 2006, Jefferies’ NOMAD status was approved on the London AIM, and the firm joined the Tokyo Stock Exchange, Euronext and the Deutsche Börse electronic trading platform, Xetra. In addition, Jefferies began working with transportation & oil service group, Ness, Risan & Partners, in Scandinavia to expand the investment bank’s strong shipping and oil service practice. Jefferies also opened an office in Singapore this past April.

A.M. Best Co. has assigned a financial strength rating of A- (Excellent) and an issuer credit rating of "a-" to Greenlight Reinsurance Ltd. (Greenlight Re) (Cayman Islands). The rating outlook is stable.

Extract from a PRESENTATION BY LANGSTON SIBBLIES GENERAL COUNSEL CAYMAN ISLANDS MONETARY AUTHORITY
AT THE EIGHTH ANNUAL CARIBBEAN COMMERCIAL LAW WORKSHOP 20-22 AUGUST 2006

".....I will at this stage return to a theme that I referred to earlier, that is, the level playing field. You may very well ask, if the picture of the Cayman Islands financial industry is as rosy as painted by myself and other speakers why do we keep going on about the lack of a level playing field?
 
The fact is that the Cayman Islands, like many other offshore jurisdictions, have undergone more reviews of our financial regulatory regime in the last 8 or so years than most onshore jurisdictions.
We have been reviewed by the Organisation for Economic Development and Cooperation (the OECD), the Financial Action Task Force (the FATF), the Caribbean Financial Action Task Force (CFATF) with another review to come next year, the IMF (with another review due next year), the Financial Stability Forum (the FSF), the Basel Committee on Banking Supervision in addition to a major review commissioned jointly by the UK Government and the British Caribbean Overseas Territories which was carried out by KPMG in 2000.

We at CIMA (I am sure this is the case with Government and some extent the private sector), have expended substantial resources in personnel and time simply trying to explain or respond to questionnaires by the various international standard setters and other international bodies like the IMF, tasked with the review of Offshore jurisdictions. The upshot of all this is that some offshore jurisdictions like Cayman have implemented significant enhancements to our regulatory regime.
In some cases we have gone beyond what other Governments and regulators in leading financial centres of the G7 countries are prepared to do.
 
A case in point was the retrospective due diligence exercise, which was mandated in Cayman in 2001 at the urging of the FATF. While the Cayman Islands financial industry was required by law to carry out a retrospective identification of all of its then existing clients at great effort and expense, we later discovered that Governments and regulators in leading G7 jurisdictions that make up the FATF, were reluctant to impose similar measures in their jurisdictions, on the basis that such measures would not be cost effective.

Similarly, the Cayman Islands was also one of the a few jurisdictions to immobilize bearer shares in response to concerns expressed by the FATF while leading FATF members have declined to follow suit.
The new frontier in the review of offshore jurisdictions is in the area of cross border exchange of information. While international cooperation and the exchange of regulatory information has always been an accepted and necessary aspect of cross border financial regulation, more recent trends seek to blur the traditional distinctions between information for use for regulatory and supervisory purposes and information for use in criminal investigations and proceedings as well as the channels for providing such information.
 
This trend, manifested primarily in the securities area, requires that the regulator acts as a "one stop shop" in relation to the provision of information and assistance for both regulatory and supervisory as well as for criminal investigations and proceedings.
This of course presents significant challenge to regulators to find the right balance between the necessary cooperation on the one hand and the protection of the basic rights of individuals in the context of criminal investigations and proceedings.

More recently we have seen the International Organisation of Securities Commission (IOSCO), leading this particular charge. The IOSCO multilateral MOU is now being promoted as the new international "benchmark". To highlight the challenges it should be noted that to date only 34 of the 183 IOSCO members have signed this MMOU. A similar multilateral MOU is being developed by the International Association of Insurance Supervisors (IAIS). We are cautiously optimistic that the IAIS will not follow the same aggressive pattern as some of the other standard setters and will adopt a more collaborative approach in addressing these issues.
 
One of the fundamental challenges facing offshore regulators like CIMA is to ensure that we are at the table when these new benchmarks or standards are being developed so that we can have some influence on the rules of the game. It is not an easy task where you are not a part of the standard setting body as in the case of the FATF and IOSCO.
CIMA’s approach is to be a participant where possible from the earliest stages of the development of international standards.

It is for this reason why we are participants (through the CFATF) in the FATF’s Typologies Working Group on the Misuse of Corporate Vehicles, and have positively contributed to moving the discussion away from it being an offshore problem to one of a cross border international problem affecting offshore and onshore jurisdictions alike. We have similarly participated through the Offshore Group of Banking Supervisors ("OGBS") in the drafting of the Statement of Best Practice in relation to Trust and Company Services Providers, the only existing international benchmark in this area.
Representatives of CIMA have attended and presented at the various IMF Round Table discussions dealing with offshore and onshore regulatory issues that have been held since 2003.
 
In December this year Cayman will be hosting the Fourth Annual IMF Roundtable for Offshore and Onshore Supervisors and Standard Setters. CIMA will endeavour to be an active participant in the discussions as in the past.

While there continue to be challenges some positive things have come from our involvement in these various reviews and international discussions. It has allowed us to identify more clearly the area of vulnerabilities in our financial system and to make enhancements in most cases before the reviewers arrive.

CIMA does not, however, make recommendations for regulatory enhancements solely on he basis of the recommendations of international standard setters or other international bodies. We do our own assessment of the costs and benefits involved in any recommendation, consult with our industry and on that basis make recommendations to Government for any legislative changes required.
The international engagement and participation in standard setting discussions by CIMA will of course continue.
 
It is however quite time consuming and resource intensive to be constantly engaged in discussions with representatives of some G7 jurisdictions when they chose to blatantly ignore factual information and continue to rely on negative stereotypical perceptions about the Cayman Islands."

The Cayman Islands Monetary Authority (CIMA) is implementing a new electronic reporting initiative which is due to come on stream in early 2007. For CIMA-regulated funds with a December 2006 year-end, fund managers will have to submit, in a prescribed manner, their annual reporting requirements using a paperless system.

CIMA cliams it will then have accurate, electronic data, extracted mostly from audited accounts, for use in reporting aggregate information on the fund industry. CIMA believes the change in how fund information is filed - not the information itself - will represent a marked improvement to the submission process.

"The system we are seeking to develop will eliminate redundant data requirements, align reporting to make use of more of the data that regulated entities use for their own purposes, and minimise ad hoc requests from us to those entities, thereby making CIMA more effective in its regulatory oversight," said Mr. Gary Linford, Head of Investment and Securities for CIMA.

He added: "CIMA-regulated funds will not need to file "information on transactions" as recently reported in an online media, nor is CIMA seeking to increase its prudential regulation of hedge funds beyond the existing regulatory framework. The initiative will allow us to significantly improve our compilation of aggregate statistics on the 8,000 funds regulated in our jurisdiction. This will better enable CIMA to meet the needs of our stakeholders for reliable, representative industry statistics, such as size, growth, change, market share, and investments by and in funds."

Mr. Linford stressed that the information submitted has always been and will continue to be managed in an extremely confidential manner. "In no way will fund- or manager-specific information be made available to the public, only aggregate industry statistics."

Demand for such data from industry and others is high, but as CIMA currently does not have the mechanisms in place to collect the relevant data from manual reports, aggregate statistics on Cayman's fund industry are not available. For example, to report total assets under management by CIMA-regulated funds would currently require manually reviewing each set of audited accounts held in paper form - e-filing will change all of that.

"The industry has been supportive of this move," said Mr. Linford, who added that CIMA undertook a consultation exercise with the private sector to seek input. "Many of the investment managers and service providers with whom we have had dialogue are relieved to hear that meaningful statistics on the industry will soon be available from a credible source."

With the growth rate in CIMA-regulated funds, electronic reporting will also enable the Authority to maintain the appropriate supervisory capacity without a proportionate increase in staff.

South Korea's finance ministry has declared Labuan a tax haven, allowing Seoul to apply domestic tax laws to capital gains on foreign investments made through the Malaysian island, despite the existence of double taxation treaties.

From July 01, companies or funds investing in South Korea through Labuan have to pay a 25 per cent withholding tax on interest and dividends collected on investments made in Korea. They will also have to pay 10 per cent of the total selling price or 25 per cent of the capital gains, whichever is less, on stock transfer income.

Labuan was established as a tax haven in 1990, years after Malaysia and South Korea signed their double taxation agreement, and Seoul has become increasingly agitated as foreign funds registered there reap large profits without paying Korean tax. The finance ministry has repeatedly tried to convince Malaysian authorities to renegotiate the treaty but has been rebuffed on every attempt.

The ministry said on June 29 it might designate other regions as "tax havens". However, Belgium was not designated a haven, as initially feared by European countries and companies, because it would be too problematic, ministry officials said. Belgium, Ireland and the Netherlands were initially on the list of countries under scrutiny. Korean officials are now conducting talks with Belgium, Ireland and the Netherlands to try to renegotiate their treaties but the European countries are understood to be reluctant to change the rules.

The announcement came in the middle of new crackdown on alleged tax avoidance by foreign investors, including another raid on Korea Exchange Bank, as authorities look for evidence to help them levy taxes on Lone Star, the US private equity fund that invested in KEB through Belgium.

Lone Star is set to make $3.85bn in profits on its three-year investment in KEB once it sells its stake to Kookmin Bank, the country's largest lender, later this year.

Senior finance ministry officials have conceded that they cannot apply the new laws to the Lone Star investment, but the tax office has apparently not given up hope, saying taxation issues related to Lone Star's gains will be handled separately.

Financial regulators said major regulatory hurdles for the listing of Chinese firms on the Seoul bourse have gone, and that they will now allow overseas holding companies to go public in Korea.

The Financial Supervisory Committee lifted the ban on holding companies established by foreign firms in tax havens like Malaysia's Labuan last week, raising expectations that one or two Chinese firms will shortly be listed in Seoul.

Many Chinese companies set up offshore holding companies prior to listing outside of China as many international investors prefer not to invest directly into an entity in mainland China (which is still a communist state).

But despite the deregulatory efforts, skepticism still remains over the recent globalization drive of the Korean stock market in luring foreign firms.

Critics and some officials pointed out the Seoul bourse still lags far behind Asian rivals such as Hong Kong and Singapore.  Hong Kong has been playing a pivotal role in raising capital for many state-run manufacturers and banks in China over the past decade.