Global Glance: May 2, 2016

A quick look at intriguing international stories

By John Bostwick, Managing Editor, Radius

Welcome back to Global Glance. This week we look at:

• Malware that targets SWIFT has financial institutions scrambling
• China's new restrictions on nonprofits
• China's transition to VAT

SWIFT Malware Has Global Financial Institutions Scrambling to Protect Themselves

If you’ve ever received or sent an international wire transfer, there’s a good chance you had to obtain a SWIFT code — also known as a Bank Identifier Code, or BIC — to process the transaction. SWIFT stands for the Society for Worldwide Interbank Financial Telecommunication, a Belgium-based cooperative of some 3,000 banks that manages BICs. It also manages and maintains the messaging service that more than 11,000 banks and securities organizations use to communicate. The SWIFT service facilitates the transfer of billions of dollars every working day.

In a press release last Monday, SWIFT reps announced that the organization had become aware of malware that essentially covers up evidence of fraudulent electronic transactions made on SWIFT. It appears that the thieves who stole millions of dollars from the Bangladesh central bank’s account at the New York Fed earlier this year probably used the malware to obscure their theft.

Last Tuesday, Reuters reported that SWIFT’s announcement “marked the first acknowledgement that the Bangladesh Bank attack was not an isolated incident but one of several recent criminal schemes that aimed to take advantage of the global messaging platform.” The article explains that the thieves obtained the credentials of a valid SWIFT user and then submitted fraudulent wire-transfer orders on the service. It adds that “more attacks could surface as SWIFT's banking clients look to see if their SWIFT access has been compromised.”

In the Monday release, SWIFT mostly put the onus on its users to prevent further attacks by shoring up their local cyber security, though SWIFT has, it announced, “developed a facility to assist customers in enhancing their security and to spot inconsistencies in their local database records.” It also updated its software to combat the malware. According to Reuters, that security update must be installed by May 12.

For that large and growing population of Global Glancers more technically savvy than I, check out this post published on the BAE Systems blog for more information on the malware used in the Bangladesh Bank heist. Here’s an excerpt: “This malware appears to be just part of a wider attack toolkit, and would have been used to cover the attackers’ tracks as they sent forged payment instructions to make the transfers. This would have hampered the detection and response to the attack, giving more time for the subsequent money laundering to take place.”

The BAE Systems post is long, thorough and mostly beyond me. (And I think it’s fair to say it’ll be beyond most lay readers). The post does however conclude with some simple, useful information for virtually everyone in finance. The post indicates that much is still unknown about the malware, including its authors, and that financial institutions using SWIFT “should be seriously reviewing their security now to make sure they too are not exposed.” More generally, it observes that as cyber threats evolve, “businesses and other network owners need to ensure they are prepared to keep up with the evolving challenge of securing critical systems.”

By the way, the $81 million stolen from the Bangladesh central bank’s account is still missing.

China’s New Restrictions on Nonprofits

Foreign academics operating in China may need to be there to conduct their research. But if they hope to remain in or return to that country, their published works and public comments will almost invariably be shaped by the Chinese Party line. If an academic openly criticizes the government, he or she could be deported or denied entry.

In the summer of 2014, for example, Professor Elliot Sperling of Indiana University flew to Beijing from the US with a valid Chinese visa to act as a visiting scholar for one year. According to an article in The New York Times, Sperling was detained and interrogated by Chinese authorities at the airport and sent back to the US that day. Sperling, the Times explains, believes he was deported for his public support of another professor who had been arrested by Chinese authorities for separatism.

The trend of suppressing dissenting foreign views in China is apparently on the rise. Another Times article, published last Thursday, reports that the Chinese government has passed a law that will require foreign nongovernmental organizations to register with police and partner with an official local organization. The Times explains that the new regulation is not only an extension of President Xi Jinping’s ongoing efforts “to impose greater control and limit Western influences on Chinese society,” but also “part of a wider global trend in which powerful nations, including Russia and India, are cracking down on nongovernment organizations and consolidating power in the state.”

The law takes effect on January 1, 2017. The Times notes that about 7,000 NGOs operating in China will be affected, and that some nonprofits — including those “promoting workers’ rights, ethnic equality and religious freedoms” — may have difficulty obtaining approval under the legislation. As a result, some may have to terminate operations in-country.

The Guardian indicates that the Chinese government’s recent “offensive against civil society” is being described by some as “the worst in nearly three decades.” It adds that deportation and denied visas are not the only possible consequences of noncompliance: “Criminal measures will be taken against any individual who is directly responsible for a foreign NGO found to have engaged in activities that ‘split the country or damage national unity or subvert the state.’”

According to Inside Higher Ed, it is unclear whether the law applies to foreign academic institutions operating in China. The article indicates that a Chinese state media outlet reported last Thursday that the final draft of the law does not apply to “exchanges and cooperation between Chinese and overseas colleges, hospitals, and science and engineering research institutes.” However, experts warn that “greater clarity is needed before the impact of the law is known,” and “many ... worry that university exchanges of all kinds could potentially be affected.”

China Now Fully Transitioned to VAT

As of yesterday, China’s years-long process of converting from a business tax system to single value-added tax (VAT) system concluded. On March 7, Minister of Finance Lou Jiwei announced that the final industries in China that had yet to be transitioned to VAT — including construction, real estate, finance and consumer services — would be covered effective May 1. The official English-language version of the announcement helpfully explains: “Business tax refers to a levy on the gross revenue of a business while VAT refers to a tax levied on the difference between a commodity’s price before taxes and its cost of production.” (For more information on VAT — including a summary of the basics of indirect taxes and a 2013 piece on China’s VAT-reform program — check out these excellent blog posts by Radius’ own Nick Hart.)

A Wall Street Journal article published last Thursday addresses the final stage of China’s VAT transition, explaining that the overhaul is intended to reduce red tape, stimulate domestic growth and facilitate the country’s planned evolution from a manufacturing economy to a service-provider economy. It’s all part of a wider effort, the Journal explains, “to counter the burden of rising corporate debt, factories churning out products there’s little demand for and higher unemployment in the manufacturing sector with its potential for social unrest.”

The Journal article notes that while the transition will lower corporate tax burdens and stimulate growth, there will be ongoing challenges: “Experts say the new tax rules are complex, unclear or subject to interpretation and continue to rely on paper rather than digitized invoices. Companies and their advisers say they were given inadequate time to adapt to a host of new rules, rates and business practices.”

For more information, read “China’s Biggest Tax Reform for 20 Years Set to Buoy Growth,” from The South China Morning Post. The article quotes Larry Hu of Macquarie Securities in Hong Kong on the transition: “It’s more about longer-term economic restructuring than a short-term boost, because shifting from the business tax to VAT will end discrimination against services companies, helping the economy to rebalance.” The article points out that local Chinese governments will lose substantial tax revenues as a result of the reform; however, “the central government plans to expand its fiscal deficit-to-gross domestic product ratio to three per cent this year, in part to help plug that gap.”