QThe head of HSBC's Mexican unit, Luis Pena, said Dec. 2 that he expects a return to growth

at Grupo Financiero HSBC as the country emerges from its recession, suggesting that although Mexico's recovery will be slow, '2010 will be better than 2009.' Will Mexico's banks indeed see growth next year? If so, how strong will that improvement be and which banks are best positioned for growth? How are new entrants in the financial sector like Walmex having an effect?
 

ARicardo Ortiz and Marta Colomar Garcia, associate attorneys at Diaz, Reus & Targ, LLP

in Miami: "It has been a difficult year for Mexico. The United States, which previously bought as much as 80 percent of Mexico's exports, dropped into a recession. As a tourist destination, Mexico was wracked by continuous news of extreme drug-related violence in the nation. In addition, the H1N1 flu struck the country, shuttering businesses and frightening travelers away. Fortunately, economic analysts have projected a 3 percent growth and an increased capital influx for Mexico in 2010. Despite a tumultuous 2009,Mexico's banking system remains robust. Banks are well capitalized and supported by a strong regulatory framework. Unlike its neighbor to the north, the Mexican government was not forced to bail out any of its banks. In fact, one of the best-positioned banks for growth in Mexico is Grupo Financiero HSBC. This financial institution has made it clear that it will continue to extend credit to small businesses, the real estate sector and consumers in 2010. Additionally, Spain's Grupo Santander is also flexing its financial muscles by working actively with Latin American governments and major regional clients to further boost its banking operations. Finally, BBVA Bancomer has received media attention as an institution positioned for growth. Indeed, the U.S. publication 'Banks of the Year 2009' named Bancomer the 'Best Bank inMexico.' If the predictions are accurate, Mexico will be an attractive market for business. New entrants in the financial sector will continue to create an incentive for better quality and increased competition. For example, by gaining more market share based on the quality of its product and its low-price campaigns, Walmex has increased competition and has created challenging situations for smaller businesses. Similarly, traditional financial institutions need to adapt new strategies to avoid changes in their relationships with traditional consumers. As Mexico's economy improves in 2010, so will its banking sector. Look for the jumpstart to begin with the business community reactivating the loan market, while the consumer segment becomes more dynamic."
 

ARogelio Ramírez de la O, director of Ecanal in Mexico City: "Bankers in Mexico expect credit to

recover in 2010 and may even incorporate this into their plans. But that would be too sanguine a view of the real economy, which, in the end, is the only sustenance of a healthy credit expansion. The feeble real economy is more likely to contribute to further credit deterioration. For one thing, there is no discernible increase in employment, Manufacturing employment fell 9.4 percent in October, while INEGI data on unemployed and under-employed rose by 2.3 million in the three quarters through last June. Adding those working less than 35 hours a week and those inactive
but 'available', the loss in jobs has been 5 million. Most employed workers did not receive a pay increase in 2009 and employers do not plan one for 2010. Thus, due to inflation alone, real wages will lose 10 percent over the last two years. In addition, the recent tax reform will reduce 6 percent of take-home pay in 2010, according to accountants. To be sure, this is what explains that overdue
housing loans jumped through October 48 percent on an annual basis, while for businesses the overdue loan rate increased 39 percent. Bankers have sold large consumer loan portfolios at a loss, and even so their consumer overdue portfolio is at 10 percent. This, in turn explains reduced bank lending. Consumer credit fell 16 percent through October, while for business it grew 1.4 percent compared to 27 percent in 2008. The cycle of deterioration in the real economy is far from complete; thus any increase in bank lending would remain risky."

ATapen Sinha, professor of risk management at the Instituto Tecnologico Autonomo de

Mexico and professor in the University of Nottingham Business School: "In December 2008, the consensus view of the 'experts' was that in 2009, the Mexican economy would grow 0.38 percent. By December 2009, the consensus view of the same experts was that the economy would contract 7.02 percent.Given this background, it is hard to take the views expressed by the same experts about the growth of banking activity in 2010 seriously. Just over 100 years ago, in 1907, there was a bank panic in the U.S. that eventually led to the birth of the Federal Reserve System in 1913. One direct consequence of bank panic in the U.S. is mentioned less often: the depression of 1908-09 in Mexico. This in turn led to the Mexican Revolution in 1910. Historian Kevin Cahill noted that 'the U.S. depression crippled the Mexican economy. Generating widespread dissatisfaction with President Porfirio Diaz's government, it thus was one of the factors that provoked the Maderistas and other revolutionaries to rebellion in 1910.' It is remarkable how similar the situation is between 1909 and 2009. Of course, it would be foolish to suggest that Mexico is heading for a revolution now. It is not. In October 2009, Walmex received approval for a 'correspondent license,' which enables it to take deposits and cash paychecks in 1,356 branches across Mexico. The two biggest banks in Mexico, Banamex and BBVA Bancomer, each have more than 1,500 branches. However,Walmex will be open for business for 16 hours a day, seven days a week. In comparison, banks are open for six to seven hours a day and around 250 days a year. Thus, it is clear that Walmex will have a big impact on some of the routine services."

ADavid Olivares-Villagomez, senior credit officer for Latin American bank ratings at Moody's

Investors Service: "Macroeconomic risks remain high in light of Mexico's sharp economic recession, where GDP is expected to shrink by around 7.5 percent in 2009, and nearterm recovery prospects are weak, increasing the downside risks to bank activity. The economic recession continues to affect overall business volumes, and stagnant lending is now a clear pattern. We've witnessed a drastic reduction in loan underwriting this year, which combined with important government and corporate loan repayments, led to a modest annual loan growth rate of only 3 percent—a rather low mark compared to some 25+ percent of previous years. Loan contraction responds to scarce demand as a result of high levels of customer indebtedness, weak labor markets and lower consumer confidence overall, or the fact that enterprises find lower demand for their products. Lower lending activity also reflects a rather weak credit supply, indicating that banks are still largely reluctant to lend because they have found themselves forced to adopt stricter underwriting following a period of aggressive expansion into the consumer segment—and because they continue to deal with loan deterioration in a context where borrower credit quality is still worsening. Under such a scenario, we believe that Mexican bank earnings and asset quality performance will continue to be under pressure in 2010, but systemic stress seems unlikely because of banks' strong capitalization and reserves. We expect loan growth to remain below historical levels, in the single-digit range. This opinion mirrors our view of prolonged recessionary macroeconomics and may contrast with some banks' more optimistic growth estimates. "
 

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Mary Nammour and Zoe Sinclair

15 December 2009

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The State Council meeting yesterday spelled out eight consumption policies in 2010. Most of them are in line with market expectations. But two changes can be viewed as negative by the market or some market participants: an effective increase in the auto purchase tax by 2.5ppts, and the resumption of the business tax for sales of properties held for less than 5 years from 2010.

These eights points from the State Council are:

1) "Continue the rural subsidy program for electronics products." This is in line with market expectation.

2) "Extend the go-rural policy for auto". This is also expected and has little impact on auto sales anyway.

3) "The old-for-new swap program for electronics will continue." This is in line with market expectations.

4) "Continue the subsidy program for agriculture machinery and further increase subsidies". This is largely in line with expectations.

5) "Expand the pilot program for new energy automobiles from 13 cities to 20 cities, and initiate a pilot program in 5 cities for individual purchases of new energy cars". This is new and a small positive for auto makers.

6) "The auto purchase tax will be adjusted to 7.5% for cars with engine size smaller than 1.6 liters for 2010". This means a 2.5ppt rise in the tax rate. It is unexpected and a negative for auto demand in 2010.

7) "The previous policy of exempting the business tax on sales of properties held for less than 5 years will be restored in 2010." This change is consistent with the announced policy schedule (the government officially stated at end-2008 when the rule was changed to exemption for sales of properties held for less than 2 years, that this temporary change would expire at the end of 2009) and is in line with our expectation. However, for some bullish observers who have been wrongly predicting that the govt would continue the same business tax policy in 2010, it could be a negative. On a fundamental basis, we think this is a right policy to limit speculative demand and prevent property bubbles.

8) "Extend the policy of reducing social insurance premiums for selected individuals". This is broadly positive of the low income population.

Jun Ma
Chief Economist, Greater China
Head of China/Hong Kong Macro Strategy
Deutsche Bank Hong Kong

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By CHIP CUMMINS, STEFANIA BIANCHI and MIRNA SLEIMAN

DUBAI -- As financial crisis roiled much of the world in October 2008, the head of Dubai's biggest state-owned developer unveiled his latest megaproject: a $38 billion development that would include a tower nearly two-thirds of a mile tall.

"I'm sure most of you are asking why we're launching this, and you'd be mad not to question it," said the executive, Chris O'Donnell, at a news conference. Though there would be economic ups and downs in the years needed to build the tower, he told listeners, demand would continue to outstrip supply.

"The fundamentals in the market are too strong," he said. "There won't be a crash."

Since then, residential real-estate prices in Dubai have slumped by almost 50%. Developers have slashed jobs and scrapped projects. Groundbreaking on the tower was long ago put on hold. The yearlong retrenchment culminated in last week's surprise announcement that Dubai would seek to restructure $26 billion of debts owed by Dubai World, the holding company for many of the government's port, infrastructure and real-estate businesses.

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A woman and child ride past the Burj Dubai skyscraper.

Behind this jolt was one of the world's most concentrated property bubbles. Some $430 billion worth of construction projects have been scrapped across the United Arab Emirates, a desert country with a population of just 4.5 million and an area smaller than South Carolina. The majority were slated for the emirate of Dubai, according to estimates by the Middle East Economic Digest, a regional projects tracker.

The boom was fueled by easy credit, a poorly regulated market overrun by speculators, and cheerleading from Dubai officials -- including the hereditary ruler, Sheik Mohammed bin Rashid Al Maktoum.

His vision for the city -- a tolerant, modern metropolis open to the world, its many faiths and some of its excesses -- has long rankled conservative Arab neighbors, including some officials in Abu Dhabi, the buttoned-down capital of the U.A.E. But for others, Dubai became a symbol of what a modern Arab state might achieve if it embraced the West and its financial system. President Barack Obama, in a June speech to the Muslim world in Cairo, singled out Dubai as a place where economic development worked.

“ Humans are really the same everywhere, subject to the same hopes and delusions and will participate in a mania wherever it crops up...Bubbles are great if you get in early enough. Just don't stay long! ”

                                                                                                                                — James Morrison

Dubai's soaring skyline is a symbol of pride here. At a National Day parade this week, men dressed in traditional Arab garb pushed floats consisting of scale models of the city's iconic buildings. There were models of the Burj Dubai -- the world's tallest skyscraper, due to open next month -- as well as the sail-shaped Burj Al Arab hotel and the Mall of the Emirates, which houses an indoor ski slope.

"Our leaders have been able to achieve all of this," said Ahmed Al Hammadi, watching the parade. As for the current debt crisis, "we will come out of it stronger," he said.

Officials and developers justified the breakneck pace at which these were built by touting Dubai's proximity to both Asia and Europe, its tax-free and tolerant way of life and its position as the region's business hub. Foreign executives, architects and real-estate brokers flocked here for the seemingly limitless scope to pursue big projects. International debt and property investors bought into the dream, too, until global financial markets seized up and much of the world plunged into recession. Then, buyers began to bail out, employers shed staff and companies put expansion on hold.

The result is a jaw-dropping real-estate overhang. "To Let" signboards adorn the facades of dozens of recently finished buildings along Sheikh Zayed Road, the superhighway that cuts through the city's canyon of skyscrapers. Office vacancies in new buildings run at 41%, according to international property agency Colliers International.

After taking markets by surprise last week with a request to delay debt payments at Dubai World by six months or more, the government here said early Tuesday it would begin a multiphase restructuring effort aimed at the company's debt, including $6 billion related to lending by the state-owned property developer, Nakheel. It said the restructuring would include the assessment of "deleveraging options," including asset sales. Dubai World said it had started discussions with its banks and these were proceeding on a "constructive basis."

International securities markets recovered their poise after a scare, but the effects aren't just financial. The debt announcement appeared to open a fresh rift between Dubai and U.A.E. capital Abu Dhabi. Federal officials there were livid at being left in the dark by Dubai's decision to seek a debt standstill, say people familiar with the situation. The rift has the potential to unsettle an important U.S. ally in the Persian Gulf, because Dubai, as a re-export hub and offshore financial center for Iranian businesses, is seen as key to U.S. efforts to isolate Iran.

Dubai and Abu Dhabi officials have underscored unity in recent days. But while the U.A.E. federal government orchestrated a $10 billion bailout earlier this year for Dubai companies, it hasn't stepped in to offer assistance to Dubai World.

Dubai's growth began in the early 1980s when Sheik Mohammed and his father pushed to diversify the economy in the face of dwindling oil. Dubai built luxury beachside hotels to lure wealthy visitors from India, Asia and the Middle East, plus package tours from Europe and Russia. In 2002, Sheik Mohammed opened the door to foreign ownership of property in certain developments. With little more than a brochure and a floor plan, buyers began to slap down deposits on townhouses, apartments and villas that wouldn't be ready for years.

Aarti Chana was living in the U.K. in 2004 when Nakheel pitched a project called Palm Jebel Ali to prospective buyers. As the second piece of a spectacular development jutting out in the sea in the shape of a palm tree, Palm Jebel Ali would include homes built on stilts, forming a 7.5-mile chain spelling out an Arabic poem written by Sheik Mohammed. "It takes a man of great vision to write on water," the poem reads in part.

Many units would be ready for occupancy by December 2009, Nakheel said. Ms. Chana, now 38 years old, put 10% down on a $780,000 five-bedroom beachfront villa and, making plans to settle here, sold her house near London. "I believed in the Dubai story," she says.

In 2006, Sheik Mohammed consolidated a handful of government businesses into the Dubai World holding company, with Sultan Ahmed bin Sulayem as its leader. To head Nakheel, Mr. Sulayem, in turn, plucked Mr. O'Donnell from Australia, where he headed a fast-growing property fund.

Messrs. Sulayem and O'Donnell declined to comment for this article. A spokesman for Nakheel didn't respond to emailed questions, nor did a spokesman for Dubai's ruler.

Nakheel was on a roll, preparing to open the first of the palm developments, Palm Jumeirah, and planning the next two. In September 2006, at a separate, 914-acre residential community called Jumeirah Park, villas starting at $654,000 sold out in a day. International banks and local lenders offered loans for up to 97% of the purchase price.

To help finance all this construction, Mr. O'Donnell turned to the bond markets. An investor presentation in November 2006 called Dubai a "vantage access point" that would draw in businessmen from a wide swath of the greater Middle East, from India to Egypt. It projected that Dubai's population, then just under 1.2 million, would grow by two million in 14 years.

Investors rushed to buy a piece of Nakheel's Islamic bond, known as a sukuk. Swamped by demand, the borrower increased the issue's size to $3.5 billion.

That year, Dubai's real-estate sector raised $4.9 billion through bonds and syndicated loans, according to data provided by Thomson Reuters. Real-estate borrowing soared in 2008 to $30.4 billion.

In 2007, a Dubai World affiliate bought the Queen Elizabeth 2, unveiling plans to moor the ocean liner at the Palm Jumeirah and turn it into a luxury hotel.

By then, cracks in the real-estate market were forming. Officials had put few regulations on development that might limit the speculation. Now, concerned that the market had grown overheated, they did so. And in early 2008, authorities embarked on a series of high-profile corruption investigations at some big real-estate and finance firms.

But police, courts and the companies themselves disclosed little about the probes. As a result of the lack of transparency, the crackdown on corruption, instead of comforting investors, spooked them.

"There is a complete distrust by investors in the system," said Michael Diaz, a Miami-based attorney with offices in Dubai. Dubai and U.A.E. officials say they have made efforts to improve the legal system.

In April 2008, police detained the Lebanese-American chief executive of one of Dubai's top developers. The company didn't disclose the arrest until after it was reported in the press. He denied wrongdoing

A string of other detentions followed at some of Dubai's biggest companies, including Nakheel. A Nakheel spokesman didn't answer emailed questions about the probe.

Typical was the case of British developer Arthur Fitzwilliam, an affable 58-year-old polo fan from London. He had lived in Dubai for two decades, dabbling in real estate and other ventures. In 2004, he inked a deal to develop a 14.5 million-square-foot plot of desert acquired from a government-controlled company.

The Plantation Equestrian and Polo Club would have air-conditioned stables for 800 horses, four polo fields, facilities to host horse shows and a five-star hotel. Mr. Fitzwilliam sought partners to help finance the project. A British banker agreed to provide financing, in exchange for a 30% stake, Mr. Fitzwilliam said in an interview.

But in June 2008, authorities detained Mr. Fitzwilliam, the banker and one other. Then in September, Dubai Islamic Bank, or DIB, foreclosed on the land for the project. It also seized more than 100 polo ponies, Mr. Fitzwilliam said. For almost a year, he sat in jail before charges were filed. In March 2009, authorities charged seven men with scheming to defraud DIB, according to a bill of indictment filed by Dubai's public prosecutors. Mr. Fitzwilliam was accused of aiding the scheme.

Last month, he was transferred to a Dubai hospital to undergo tests for cancer. Four Dubai police officers stood guard outside his room.

Mr. Fitzwilliam denied any wrongdoing, as did the British banker he was working with. "I want a fair trial, and I'm prepared to go with the system," he says, shackled to his hospital bed. "Anyone who knows the case knows I'm not guilty."

A spokesman for the Dubai prosecutor's office didn't respond to requests for comment.

Amid the uncertainty surrounding the arrests, the crisis roiling the rest of the world was catching up with Dubai. When global credit markets froze up in late 2008, international investors stopped buying Dubai property. Some who had already bought stopped making installment payments. Nakheel and others shed staff and scrapped or delayed dozens of projects.

Last February, the troubles touched Ms. Chana's plan for a new home in Dubai. Nakheel halted work on the Palm Jebel Ali. Though dredging had been done, little construction had.

Ms. Chana says she has sunk about $550,000 into her still-unfinished home. Earlier this year, she flew to Dubai to try to salvage the investment. She is living in a hotel-apartment with her daughter, helping to organize other investors and petition Nakheel for rebates. "I just won't let this drop," she says. "It's become my obsession."

In October, Nakheel proposed that Jebel Ali investors transfer their contracts to property elsewhere that is already finished or close to it.

Simon Murphy bought a $240,000 ground-floor apartment in the Palm Jumeirah in 2002 and moved in five years later. He is now a "resident representative" to Nakheel, like being part of a homeowners board. He says that in recent weeks, Nakheel has cut back on maintenance, including tree trimming.

Since Dubai's debt-standstill announcement, Mr. Murphy says, many apartment residents have stopped paying management fees, typically around $700 a month. Nakheel declined to comment. "Most people fear that their money will go into the bottomless pit of Nakheel debt," Mr. Murphy says.

—Andrew Harrison and Maria Abi Habib contributed to this article.

 

 

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A Spanish judge’s use of universal jurisdiction in a case involving a bank’s alleged role in laundering money for Augusto Pinochet could affect how countries cooperate in prosecuting financial crimes.

Madrid-based judge Baltasar Garzon has called on the former wife of the deceased Chilean dictator and three employees of Santiago-based Banco de Chile to pay a $77 million bond as part of the court’s investigation into whether the four individuals helped Pinochet launder money internationally, according to Nov. 30 reports by the Associated Press and Reuters.

The Spanish court’s criminal investigation began in 2007 after the Fundacion de Salvador Allende, a Madrid-based nongovernmental organization seeking compensation for human rights violations committed during Pinochet’s rule, claimed that the four laundered money for Pinochet, according to the reports.

Garzon fixed the amount of laundered money at over $77 million of stolen government funds, although the location of all the accounts was unclear, according to the Associated Press.

That prosecutors have sought Pinochet’s funds under the principle of universal jurisdiction is very unusual, and possibly unprecedented, according to Gregory Gordon, a University of North Dakota law professor who studies international law. The principle has solely been used for the conviction of jus cogens crimes such as genocide or torture, he said.

“There’s a fascinating legal issue presented here: can universal jurisdiction be extended to financial cases?” said Gordon. “Including financial crimes may be pushing the envelope too far with respect to the scope of universal jurisdiction.”

Should the prosecution prove successful and financial crimes be included within the ambit of universal jurisdiction cases, the move could open new legal avenues for international asset forfeiture cases, he said.

The citation of universal jurisdiction to target financial crime should put financial institutions on notice, said Steven Young, director of the Caux Roundtable, a Saint Paul, MN-based organization that lobbies for economic and social reform.

“At the minimum, this is going to be a big headache for the banks, but the impact will be mostly reputational,” said Young. “This is kind of a warning to this bank and other banks to be sure who their customers are.”

Garzon warned that if the four do not put up the bond within 10 days, he would seize the $77 million along with an extra $26 million penalty to cover “whatever financial liabilities may arise,” according to the reports.

“I’ve never seen that tactic used internationally,” said Michael Diaz, a managing partner with Miami-based law firm Diaz Reus & Targ, LLP, who believes that the accused won’t comply with the order. “The court is asking the defendants to freeze their own assets, to do the court’s job for them.”

That’s because Spain’s multijurisdictional laws aren’t very robust, said John Patrick Quirk, president of Asset Relocation and Recovery International, Inc, a Boca Raton, FL-based consultancy.

“Spanish law in the criminal area is not as strong as American law,” he said. “A U.S. attorney can go to a lawyer specializing in MLATs and seize money through these treaties, but the Spanish don’t have that ability.”  A mutual legal assistance treaty (MLAT) allows for cooperation and exchange of information between two countries in enforcing criminal laws.

The investigation is not new terrain for Banco de Chile.  The Spanish court’s probe follows a similar lawsuit filed in a Miami federal court in March by the Chilean government, which accused the bank—along with Banco Santander, Espirito Santo Bank and PNC Financial Services Group—of laundering over $26 million of funds stolen by Pinochet.

That figure matched later estimates arising from a September investigation into Pinochet’s finances by Chilean judge Manuel Valderramos. The investigation, which was independent of Garzon’s inquiry, ultimately found no proof that Pinochet’s former wife participated in money laundering, contrary to the Spanish court’s charges, according to a Nov. 30 report in Madrid-based Europa Press.

U.S. investigators have said they know of over $100 million in at least 125 accounts within the United States, according to a March 2005 report by the Senate Permanent Subcommittee on Investigations, which also revealed that senior officials of the Riggs Bank made several trips to Chile to entice Pinochet into opening bank accounts in the United States. 

Banco de Chile settled the lawsuit brought by Chile in October for over $2 million, while the South American country’s case against the other banks remain unresolved, according to William Hill, principal counsel for the Chilean government in the Miami lawsuit.  A discovery hearing in the case was held Thursday. 

Calls to the press offices of the three banks were not returned by press time. Multiple calls and emails to the Salvador Allende Foundation in Spain were not responded to by press time.

Augusto Pinochet died in December 2006 while under house arrest in London, having never faced trial on human rights violations arising from his military rule of Chile from 1973-1990.  English authorities refused his extradition to Spain on the grounds of poor health.

In October 2007, the Chilean government charged Pinochet’s five children, three retired army officials, his widow and fourteen others with “misuse of fiscal funds.”  The charges arose from allegations that Pinochet placed $25 million in embezzled funds in the now defunct Riggs Bank, but the case was dropped when a Chilean appeals court ruled that the defendants couldn’t be charged with embezzlement because they weren’t government employees, according to the Chilean Ministry of Justice.

PNC Financial Services merged with Riggs in 2004, after Riggs agreed to pay $9 million to Pinochet’s victims for laundering the former Chilean dictator’s money.

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 Xiaomin (Samantha) Hu, Esq. and Chad S. Purdie, Esq.

            Infrastructure is what most of us take for granted – roads, utilities, airports, and healthcare sites, and educational facilities. In Latin America, where governments face the age-old problems of budget deficits and strained public debt markets, the trend over the past few decades has been to depend more and more on foreign investment to improve the amount and quality of such infrastructure. It is in this area that China could step into the market, especially given recent policy adoptions benefiting the infrastructure investments sector.

            Although China has not traditionally been a major foreign investor in the region, with its $22 billion per year paling in comparison to the European Union’s $620 Billion, according to official Chinese data, its involvement in Latin America comprises about one-fourth of its total overseas investment.[1] Recent major Chinese investments include billions for Venezuela’s transportation and telecomm sectors, as well as Brazil’s aviation, rail, and shipping industries.[2]

            A quick look at the projected growth of the infrastructure industry in Latin America shows how the time for Chinese investment is now. For example, South America expects to triple its growth percentage in 2010 after a few down years. And Mexico, which had seen its infrastructure industry reach nearly 5% growth in 2007 before falling to -1.5% in 2009, is expecting to shoot up to nearly 3% growth in just one year.[3] What is more, total infrastructure investment in the region has fallen over the past two decades from a weighted average of 3.6% of GDP to 1.9% of GDP.[4]

            In that climate, various regional governments have pledged economic stimulus packages with large earmarks for infrastructure development and reinvestment. Likewise, they are enacting new legal frameworks that encourage more public-private partnerships. Through those private-public engagements, the partners share the costs and benefits of the infrastructure itself. And finally more infrastructure managers are entering the market with the goal of privatizing assets and lending their operational and financial expertise. The result: improved efficiency.[5] At the same time, infrastructure capital funds are raising money like never before. In 2004, there were only six Latin America infrastructure funds with $3.4 billion in capital. This year, there are 24 active funds raising $44.4 billion to invest in the Americas.[6] Critically, despite the recent credit crunch, transaction activity for Latin American infrastructure projects has held relatively steady over the past few years.[7]

           As Chinese investors start to be actively involved in infrastructure projects in Latin America, politics and economic and legal risks present paramount concerns. Moreover, due to the inherent language barriers and cultural differences, evaluating and mitigating those risks is not an easy job. 

Politically, the risk of expropriation and transfer loss are usually the key factors in investment decisions – especially in the infrastructure field, where projects tend to be long-term. Investors are loathe to invest millions of dollars in a country where the government is likely to take their property without compensation or prohibit expatriation of profits. According to the Office National du Ducroire (March 2007), Venezuela and Bolivia present the most risk in terms of expropriation among all Latin American countries, while Bolivia and Argentina’s transfer loss risks are the highest.[8]  In addition, the consistency and continuity of governmental economic involvement is another aspect to consider when attempting to mitigate political risks. In order to best avoid that problem, invest in Chile, says the World Economic Forum.[9]

Teaming up with a local partner is often the most effective way to avoid legal setbacks.[10]Many Latin American countries have overly bureaucratic, unstable, and inefficient judicial systems,[11] so it is crucial to work with a reputable, local enterprise that is familiar with the domestic laws and regulations. It is also suggested to ensure that the country’s government has a proven track record of maintaining continuity of the applicable investment regulations and policies for a long period of time – especially considering the often lengthy character of infrastructure projects. The worst-case scenario for any investor is to lose everything, without due compensation, merely because of the political whims of a volatile government.  

Another crucial issue for Chinese investors to consider is the lack of truly effective mechanisms for resolving disputes in Latin America. Quality dispute resolution procedures form an essential part of one’s overall investment, as it often becomes the last best chance to protect investors’ interests. Thus, as the Chinese move into Latin America, they need to always make sure that such procedures are firmly in place before any work is done. Arbitration is usually considered a better approach than litigation because of the savings in terms of cost and time. A well-drafted arbitration clause in investment and partnership agreements should include, at minimum, a proper arbitration tribunal and the applicable laws, procedures, and language.  

            The time is right for China to invest in Latin America. The market is becoming more bullish every day, and the financing structures are in place. Although potential pitfalls abound, investors can avoid many of the most dramatic economic and legal risks with some simple planning at the outset. Doing things right from the get-go could lead to an overall increase in Chinese economic influence in Latin America, particularly at a time when the region is begging for capital and infrastructure improvements. 

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By Vanessa Garcia   Michael Diaz Jr. doesn’t get much sleep. As an asset hunter, Diaz has been concentrating on the types of cases that have been blaring through news networks nationwide: Ponzi schemes. Through his firm Diaz, Reus & Targ, Diaz assists clients who are trying to recuperate their assets from the likes of Bernard Madoff, among countless others.. “We try to freeze the spoils of the assets acquired by the bad guys in order to give restitution to the victims,” explains Diaz. This is the business of international fraud and asset recovery. And Diaz is good at it. He was selected as a Florida Super Lawyer by Florida Trend Magazine for Global Affairs and has   been nominated for the Key Partner Award by the 2009 South Florida Business Journal. His current focus defending those affected by Ponzi schemes has come about for a variety of reasons, he says. “Due to our proximity to Latin American and the Caribbean, we see more of these schemes,” says Diaz. “But the problem is not just endemic to Miami; the economy is trying to pull itself out from the dredges, and when the tide goes out and everything is naked, you see the financial backing that’s all smoke and mirrors.” One of the smoke and mirror cases Diaz has been working on is the case against Frederick C. Elliott and his son, Derek – who are alleged to have defrauded clients out of $170 million through a resort development plan in Puerto Plata, Dominican Republic. The resort was never developed, and Diaz’s firm represents about 700 of the scammed investors. But Diaz hasn’t always been on this side of the fence. He’s defended those who were allegedly involved in creating various Ponzi schemes in Argentina and Venezuela, along with other parts of Latin America. When you ask him which side he prefers to be on, he will tell you the work he is currently doing against the bad guys is more satisfying. It beckons him back, he says, to how he started out. Straight out of law school, he was a public prosecutor under Janet Reno, where he investigated and prosecuted major crime cases. “I prosecuted a lot of murderers and drug dealers in the 80s. In the Julia Tuttle Causeway Murders – I sought and obtained a death sentence for those criminals,” he says proudly. Today his firm has an international presence from Frankfurt to Venezuela and Miami to Shanghai. The firm, as an entity, boasts nine languages: English, Spanish, French, Czech, Portuguese, Mandarin Chinese, German, and Arabic. In addition, Diaz himself is a frequent lecturer, giving talks on consumer protection, forfeiture, and fraud. He recently conducted a lecture in Cuba – a big step for the Cubanborn Diaz, who had not been back since he left with his parents in the 1960s. The son of two immigrant parents – who, as Diaz says, “Did anything they could just to get by when they first got here” -- he has come a long way. Despite the long hours, the lack of sleep and the need to look straight into the often dark parts of our humanity, Diaz will look at you, whole-heartedly, and tell you: “I still love what I do.” And, how many people can say that?

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