AN OUTSIDE CHANCE: PROSPECTING FOR FOREIGN CAPITAL A Report to the Governor and the 55th Legislature of the Subcommittee on the Foreign Investment Depository January 1997 Published by Montana Legislative Services Division State Capitol, Room 138 Helena MT 59620-1706 PHONE: (406) 444-3064 FAX: (406) 444-3036 INTERNET (Home Page): <http://www.mt.gov/leg/branch/branch.htm> 2 SUBCOMMITTEE ON THE FOREIGN INVESTMENT DEPOSITORY MEMBERS Senator Mike Sprague (R) Representative Jon Ellingson (D) Presiding Officer Vice Presiding Officer Senator B.F. "Chris" Christiaens Representative Ray Peck (D) (D) Representative Paul Sliter (R) Senator John Hertel (R) Representative Dan Fuchs (R) Senator Barry "Spook" Stang (D) Committee Staff Stephen Maly, Research Analyst David Niss, Staff Attorney Ellen Garrity and Christen Vincent, Secretaries Montana Legislative Services Division Robert B. Person, Executive Director Gregory J. Petesch, Director, Legal Services Division David D. Bohyer, Director, Office of Research & Policy Analysis TABLE OF CONTENTS SENATE JOINT RESOLUTION NO. 19 ......................... i AN OUTSIDE CHANCE: PROSPECTING FOR FOREIGN CAPITAL ..... 1 Introduction: Suspending Disbelief .................... 1 Organization of the Report .......................... 3 SUMMARY OVERVIEW .................................. 7 Genesis and Evolution ............................. 7 Purposes and Goals ............................... 8 Shaping the Study: Several Lines of Questioning .......... 9 Taking Stock of Interests and Influences ................10 PUBLIC SECTOR .............................11 PRIVATE SECTOR ............................12 Caveats and Qualifiers .............................13 A Feast of Assumptions .......................16 Why Montana? ..............................27 Benefits, Risks, and Costs to Consider .............29 A View from Afar .................................31 Endnotes ...........................................33 PART ONE: THE CONTEXT ...............................35 I. An Age (and State) of Anxiety ......................35 Endnotes .......................................39 II. Financial Privacy: a Right, Privilege, or Fantasy? ..........41 Customers Vulnerable to Tax Treaties and other Arrangements .........................43 Legal limits to Privacy Invasion ..................45 Endnotes .......................................49 III. Flight Capital and Foreign Clientele ..................51 Some Sources and Their Characteristics ............53 Promising Targets ............................56 Endnotes .......................................59 IV. Offshore Banking: High Standards v. Low Regard .......61 The Swiss Model ............................62 Caribbean Gems .............................64 A Trend Toward Trusts ........................65 Endnotes .......................................69 V. Dirty Money ..................................71 The War Against Financial Laundromats ............73 FinCEN and FATF: Treasury Cops at Home and Abroad ..75 Regulatory Overkill? ..........................78 Know Your Customer! .........................79 Endnotes .......................................83 VI. Electronic Money: D-Basing the Currency ..............85 A Gray Area for Policymakers ....................87 Endnotes .......................................91 VII. Treasure State Redux: Oro y Plata y Platinum? ..........93 As good as Gold, Only Better ....................94 The Enduring Appetite for Metal .................95 A Scenario, Likely or Not? ......................96 Endnotes ......................................101 VIII. Financial Federalism: Trends and Development ........103 A Relevant Aside: "The Fed" ...................103 Shifting Legal Parameters .....................106 Endnotes ......................................111 IX. Roads Not Taken ..............................113 Endnotes ......................................119 X. Further Information ............................121 Books ...................................121 Reports ..................................124 Articles ..................................125 PART TWO: THE DETAILS ...............................127 I. Factors in Focus: Compliance and Contingencies ........127 Compliance With National and International Legal Norms 128 Relevant Contingencies .......................129 II. The Formula:P³ ................................131 1. Privacy .................................132 2. Protection ..............................133 3. Profit ..................................137 Endnotes ......................................141 III. The Bottom Line: State Revenue Projections ...........143 Revenue Gains (in $Millions) (Spreadsheet) .........149 Escheatment ..............................150 Last Words ...............................151 Endnotes ......................................153 IV. The Bill .....................................155 Creative Suggestions ........................155 Goals ...................................156 DRAFT BILL .........................................157 APPENDIX 1 ........................................195 Statutes Requiring Amendment for Depository Legislation ...197 APPENDIX 2 ........................................199 Memorandum ...................................203 APPENDIX 3 ........................................207 Memorandum ...................................209 SENATE JOINT RESOLUTION NO. 19 i AN OUTSIDE CHANCE: PROSPECTING FOR FOREIGN CAPITAL Introduction: Suspending Disbelief Senate Joint Resolution No. 19 (SJR 19) called for an interim study of the feasibility of establishing a new type of financial institution in Montana. The foreign investment depository, as envisioned in the resolution, would be either a state-owned or state-chartered nonbank facility that would attract capital from abroad and produce revenue as well as economic development benefits for Montana. The resolution was greeted with a superabundance of skepticism but nevertheless survived the 1995 Legislative Session and subsequently won the second-highest number of votes in the poll legislators take among themselves to help determine which interim studies will actually be conducted. What began as an exotic proposal evolved into an intriguing prospect; so intriguing, in fact, that the eight-member bipartisan committee voted unanimously at their final meeting (on September 11) to recommend enabling legislation to the 55th Legislature. Robert Svoboda, a Montana expatriate and early enthusiast for this project, likened the establishment of the depository to landing on the moon. In the closing week of the interim, NASA scientists reported that they had found fossil evidence of microbial life on Mars. Anything can happen. An interim study resembles a journey of exploration with no certain end. From the time the members of this interim subcommittee* first hailed each other in August 1995, until they said farewell 13 months later, their deliberations were guided by the provisions of SJR 19 and a staff-devised study plan. These map-like devices were helpful, but crude. A number of the "whereas" clauses in the resolution led to vistas almost too vast to * Hereinafter, referred to as committee. 1 contemplate, let alone comprehend, and had the committee taken all the side trips recommended in the study plan, the journey would have seemed interminable. The study plan was prefaced with a set of principles designed to orient the members to the scope and methodology of their endeavor. In abbreviated form, these principles were as follows: • begin with and maintain positive assumptions and expectations; • keep a broad scope; • maximize educational benefits (i.e., learn something); • honor legislative intent; • consider alternatives to the depository as originally conceived. The outcome of the study was not apparent to anyone involved. Members and staff alike resolved early on to treat the venture seriously and to gain as much practical knowledge as possible given limited time, a predetermined budget allocation, and virtually no collective experience in the field of international finance. There were no foregone conclusions about whether the process would result in draft legislation, a set of less formalized recommendations to the Legislature, or simply a final report documenting activities and highlighting a number of educational milestones. As it happens, this report contains both a summary account of the committee's proceedings and a draft bill that incorporates the essential elements necessary to enable one or more foreign capital depositories to obtain a state charter, provide specialized financial services, earn a profit, generate revenue for the state, and operate in compliance with state and federal laws. During the course of the study, which entailed seven formal meetings (five in Helena, one each in Missoula and Billings), the members heard or received written comments from individuals representing a variety of interest groups, including federal and state regulatory authorities, law 2 enforcement agencies, Montana banks, other banks and trust companies, law firms, University System affiliates, scholars of international finance, and management consultants. On several occasions, legislators who were not members of the committee also participated in discussions. For the most part, these people fit into one of the following categories. (The parenthetical blurbs typify the outlook of each respective group.) • Enthusiasts ("Great Idea!") • Cautious & Conditional Optimists ("Sounds good, IF...") • Skeptics ("I don't think so.") 3 • Curious