ETFs

January 2021

Jan 1, 2021

Country Ranking Trends

  • Magni recently assessed the implications of the Corporate Transparency Act on the Magni Country Score for the U.S. (see below). Opaqueness of LLC ownership is one of the most significant weaknesses in this country’s governance, as well as a primary source of corruption. Consequently, the U.S. score for Market Integrity was upgraded based on the passage of the legislation.

An Unprecedented Presidential Process

  • Joseph Biden has been sworn in as the 46th president of the United States. His inauguration, taking place during a pandemic, was unlike that of his predecessors. The unprecedented inauguration followed an equally unprecedented transition period that was marked by claims of election fraud by the now-former president and his supporters, despite the absence of evidentiary support. A January 6th rally, intended to draw attention to the fraud claims, devolved into a mob storming the U.S. Capitol. The mob’s goal was to block final ratification of Mr. Trump’s election defeat. The events of that day led the U.S. House of Representatives to carry out an expedited impeachment of Donald Trump for his role in inciting what has been labeled an attempted insurrection, thus giving him the ignoble distinction of being the only president impeached twice. The details of a Senate trial are being finalized; there is no precedent for trying a president after his term of office ends.
  • The trial also threatens to slow President Biden’s agenda and the confirmation of his cabinet. Getting the pandemic under control is Biden’s stated top priority. He has proposed a $1.9 trillion economic relief plan, which must be approved by both the House and the Senate, as well as issuing a slew of executive orders to address the pandemic and reverse Trump-era policies.
  • Implications: Despite the chaos, the events do not impact the Magni Country Governance Score. The institutions and processes of this country are stronger than one individual or a set of events. The ugliness of the storming of the Capitol is traumatizing and embarrassing, but this country will move forward.

United States Corporate Transparency Act is a Good Start

  • The United States Congress overrode President Trump’s veto to pass the National Defense Authorization Act (NDAA). Included in the bill was the Corporate Transparency Act (CTA); when implemented, it will bring the biggest change to the United States’ anti-money-laundering framework in 20 years. The CTA establishes a federal standard for tracking the beneficial ownership of all U.S. companies. The measure addresses a long-standing deficiency in our governance. Unlike most developed countries, we have inadequate safeguards to prevent anonymous shell companies from being used as a cover for illicit activities.
  • The previous opaqueness was the principal reason for the U.S. receiving a low score in the Economic Standard related to Market Integrity. The U.S. score was comparable to many of the countries in the emerging markets. The Act passed despite the opposition from some in the business community, concerned that the new reporting requirement would be unduly burdensome on legitimate small business.
  • The Treasury Department has a year to issue regulations detailing how companies will be expected to comply. Companies already formed will have up to two years (from issuance of the regulations) to comply with the new requirements. The registry, to document ownership of LLCs by real persons, will not be disclosed to the public, but federal law enforcement will have access to the data. Financial institutions will have access with customer consent.
  • Implications: The legislation justified a Market Integrity upgrade of the U.S. If the law is implemented and expanded to achieve even more transparency, the U.S. would overcome its governance weaknesses. Should the U.S. fulfill its commitment to make financial statements using GAAP accounting interchangeable with IFRS, then the remaining major governance weakness would be overcome. Due to this incompatibility, U.S. financial statements are not compatible with those in the rest of the developed world. Collectively these changes would return the U.S. to a governance leadership position.

How Long Will Brexit Disruption Last?

  • The European Union and the United Kingdom came to a last-minute trade deal on Christmas Eve, which completed the UK’s economic separation from the EU following a one-year transition period. The EU-UK Trade and Cooperation Agreement brings a whole new set of customs and regulatory checks for trade between the two economies. Also, gone are automatic recognition of professional qualifications and licenses.
  • As expected, additional legal and logistical obstacles have already hampered trade flows. Exporters have reported difficulties acquiring transit documents because of a shortage of agents with the authority to issue them. Large companies have reported few problems, but many small businesses have struggled with the new post-Brexit rules. Fresh seafood exports have been particularly hard hit. It will take some time to know if the issues are temporary or a new reality. However, overall trade volumes have been lower reflecting Covid-19 lockdowns as well as stockpiling by businesses ahead of the January 1st Brexit deadline. The UK will start full customs checks in July which likely will cause more disruption.
  • Implications: The United Kingdom may also face internal disruption. Scotland seeks yet another vote on independence. As we have stated for several years, the United Kingdom has strong governance and will be fine…eventually. The disruption is inevitable, though the duration and intensity will be determined by many factors, including the quality of leadership.

Russia arrests Navalny

  • Russian opposition leader Alexei Navalny was arrested upon his return to Moscow. Navalny had been in Germany receiving treatment for an attempted assassination using the nerve-agent Novichok. Navalny has been one of President Putin’s most effective and persistent critics, vowing to return to Russia upon recovery. While in Germany he collaborated on an investigation tying the Russian Federal Security Service (FSB) to the attack. In 2014, Navalny was given a suspended sentence in an embezzlement case that the European Court of Human Rights ruled was politically motivated. This latest arrest ostensibly derives from violating the terms of his probation, which required him to check in with the authorities twice a month (something he could not do from a hospital bed in Germany). Navalny urged his supporters to take to the streets and protest his detention. His anti-corruption organization also published an investigation describing a billion-dollar palace reportedly built for Putin on the Black Sea. Russian officials have dismissed widespread criticism of the case, describing it as an internal matter. The episode is likely to increase already high tensions with the West. Some European Union countries are suggesting the possibility of more sanctions against Moscow.
  • Implications: Leaders in countries with weak governance can use the system to stifle opposition, embezzle, and distribute largesse to friends. Even after Putin is gone, Russia will remain at risk of more autocratic and corrupt dictators, given its weak governance. Transparency, in and of itself, limits the ability of a future dictator from entrenching his or her position.