TheChek News Flow

Senior partners advised to tell clients objective of fraud was to ‘deceive investors and EY’

EY has told its partners how to prepare for difficult conversations with clients about its audits of Wirecard, the German payments company that has filed for insolvency after admitting that €1.9bn of cash probably never existed.

In an internal note to senior partners on Friday, EY advised them to tell clients that the “objective” of the large international fraud at Wirecard was to “deceive investors and EY”.

It also provided partners with “summary talking points” about the scandal — the largest accounting fraud in German postwar history — and said they should contact EY general counsel for Europe, Sajid Hussein, or head of risk management for the region, Jonathan Blackmore, “to assist with client discussions”.

The Financial Times revealed last week that Wirecard’s auditors in EY’s German office failed for at least three years to request crucial account information from a Singapore bank where Wirecard claimed it had up to €1bn in cash, a routine audit procedure that could have uncovered the fraud.

Wirecard’s new chief executive James Freis, Deutsche Börse’s former head of compliance who joined Wirecard only this month, has in recent days told supervisory board members that basic checks should have been enough to spot the scandal, according to people briefed on the discussions.

The company said on Saturday that its business activities would continue despite the insolvency and that Wirecard Bank, which holds most of the group’s licences to process credit card payments, is not part of the insolvency proceedings.

However, it has suspended the payment of June salaries to its employees in Germany, France, Luxembourg and some other countries, according to people with first-hand knowledge of the matter, while the bulk of the 5,400 staff employed by subsidiaries elsewhere have received this month’s pay.

Mr Freis told the board that he did not understand how the fraud could have remained undetected for so long. The comments by Mr Freis were first reported by Süddeutsche Zeitung. Wirecard and Mr Freis declined to comment.

In its memo to senior partners, EY claimed responsibility for discovering the fraud, despite signing off Wirecard’s accounts for more than a decade in the face of growing questions about its accounting practices from journalists and certain investors.

The Netherlands-based shareholder rights group European Investors VEB on Friday called for a “thorough investigation” of EY’s work at Wirecard to be led by Germany’s financial watchdog BaFin.

“EY’s performance is unacceptable,” said Paul Koster, chief executive of the group, adding that it would seek compensation “for the significant damages caused by EY”.

EY said it would not comment on internal communications or pending litigation. It said: “We’ve established that third parties, with a deliberate aim to deceive, provided EY with false documentation in connection with its 2019 Wirecard audit. The extent and sophistication of these suggest a large-scale international fraud at Wirecard.”

EY informed Wirecard’s board in June that €1.9bn of cash apparently held in bank accounts in the Philippines probably did not exist, after special auditors at KPMG — brought in by Wirecard’s supervisory board last year to investigate allegations reported by the Financial Times — said they were unable to verify significant account balances.

The audit firm advised its partners to tell their clients: “There are indications that this was an elaborate and sophisticated fraud with the deliberate aim of deceiving our audit team in Germany.

“The CEO is accused of having inflated the balance sheet total and sales volume of Wirecard, likely in co-operation with other perpetrators, by feigning income . . . to make the company more financially powerful and more attractive for investors and customers.”

A number of people close to EY said the scandal had caused dismay among some partners around Europe, particularly in non-audit teams, who feared that a backlash would affect client relationships and undermine EY’s brand.

The fraud is just one of several international accounting scandals that have emerged this year where EY audits are under scrutiny, including at NMC Health and Luckin Coffee. EY has declined to comment on NMC Health and Luckin Coffee.

The firm is already facing a lawsuit in Germany brought on behalf of Wirecard investors by Wolfgang Schirp, a Berlin lawyer. About 1,500 investors have joined the case, which is seeking up to €1bn in compensation from EY, according to Mr Schirp.

One EY partner based in the UK said the matter could encourage non-audit partners to push harder for separation from the audit part of the firm.

The “Big Four” auditors have been under pressure from UK regulators and politicians to move towards this type of reorganisation.

The EY partner said: “Wirecard is unlikely to bring down the German firm in my view, but it has stoked many fires across the business and, depending on the nature of regulatory interventions, I wonder if this will accelerate calls for separation from within, not just from the outside. Some partners have already had enough.”

Russia denies its atomic plants are responsible for radiation leak

‘Elevated’ levels of three radioactive substances detected in Scandinavia

Russia has denied that its nuclear power stations in the north-west of the country were responsible for a mild leak of radiation detected in Scandinavia last week.

Rosenergoatom, the power-plant subsidiary of state-owned nuclear group Rosatom, said its installations near St Petersburg and Murmansk were operating normally.

“Aggregated emissions of all specified isotopes in the above-mentioned period did not exceed the reference numbers. No incidents related to release of radionuclide outside containment structures have been reported,” Rosenergoatom said, according to Tass news agency.

The International Atomic Energy Agency, the UN nuclear watchdog, said late on Saturday it had contacted member states seeking more information “and if any event may have been associated with this atmospheric release”.

The IAEA said it had received evidence from international monitoring systems of “elevated” levels of three radioactive isotopes in the Nordic region.

Russia has denied that its nuclear power stations in the north-west of the country were responsible for a mild leak of radiation detected in Scandinavia last week.

Rosenergoatom, the power-plant subsidiary of state-owned nuclear group Rosatom, said its installations near St Petersburg and Murmansk were operating normally.

“Aggregated emissions of all specified isotopes in the above-mentioned period did not exceed the reference numbers. No incidents related to release of radionuclide outside containment structures have been reported,” Rosenergoatom said, according to Tass news agency.

The International Atomic Energy Agency, the UN nuclear watchdog, said late on Saturday it had contacted member states seeking more information “and if any event may have been associated with this atmospheric release”.

The IAEA said it had received evidence from international monitoring systems of “elevated” levels of three radioactive isotopes in the Nordic region.

Russia has denied that its nuclear power stations in the north-west of the country were responsible for a mild leak of radiation detected in Scandinavia last week.

Rosenergoatom, the power-plant subsidiary of state-owned nuclear group Rosatom, said its installations near St Petersburg and Murmansk were operating normally.

“Aggregated emissions of all specified isotopes in the above-mentioned period did not exceed the reference numbers. No incidents related to release of radionuclide outside containment structures have been reported,” Rosenergoatom said, according to Tass news agency.

The International Atomic Energy Agency, the UN nuclear watchdog, said late on Saturday it had contacted member states seeking more information “and if any event may have been associated with this atmospheric release”.

The IAEA said it had received evidence from international monitoring systems of “elevated” levels of three radioactive isotopes in the Nordic region.

High fees have morphed into a benefit-free annual donation to the finance industry

Nearly half a century ago, Charles Ellis, a well-known US investment consultant, wrote an influential paper likening the money management business to a game of tennis.

Just as amateur players tended to win matches not by hitting brilliant passing shots, but by keeping the ball in play and thus capitalising on their opponents’ errors, he noted that successful investment depended largely on making the fewest mistakes. The laurels did not go to the flashiest players; they went to those who charged — and paid — the lowest fees.

There is more than a whiff of loser’s tactics about the way that pension funds and endowments have gone about investing in the past few decades.

Take two recent papers by Richard Ennis, a respected US investment consultant of more recent vintage. These look at their costly infatuation with so-called alternative asset classes and the opaque fees and expenses that come with them. It looks like a textbook case of going unwisely for those winning shots.

US public pension funds have over the past three decades plunged deeply into alternatives such as private equity, venture capital and hedge funds. In 2019, they had 28 per cent of their assets in these products. For endowments, the figures were even more startling at 58 per cent.

Yet all that high-priced talent has done little for their performance. Those same funds still managed to underperform index trackers by about 1 per cent annually since 2009; an outcome Mr Ennis attributes to all the extra alternative asset costs they are bearing. As he amusingly points out, it’s as if they are donating 1 per cent of their assets annually to the fund management and brokerage industries for no benefit. Spread across the US public pension sector’s roughly $3.6tn average assets under management over the period, those extra costs notionally compound up to more than $400bn since 2010. It’s questionable whether pensioners will see the joke.

Mr Ennis also explodes the dubious argument that the funds are engaged in some form of shrewd diversification. Alternative assets such as private equity and venture capital account for just 4 per cent of the investable universe. If you add hedge funds (which simply buy publicly traded stocks and bonds) it gets to about 6 per cent. 

A diversified portfolio is, by definition, one that matches the spread of investable assets in the market. By putting 58 per cent of their chips on just a few squares on the investing roulette board, endowments are not diversified. They are making a highly concentrated bet.

Of course, alternatives had a great run between 1994 and 2008, when their returns outpaced the market and fund managers such as Yale’s David Swensen acquired Roger Federer-like status for piling into buyouts and venture deals. Yet there are always interludes, as Charles Ellis acknowledged in his 1975 paper, when perceived skill and opportunity might drive outcomes. The snag? That these rarely last because they “attract too much attention and too many players”. 

That certainly sums up the postscript to the “Golden Age” of alternatives. Between 1997 and 2018, hedge fund assets multiplied 27-fold. And over the 1994 to 2019 period, private equity funds increased in size no fewer than 37 times. 

The real concern of course, is why pension funds don’t seem able to kick the habit. More efficient pricing means they receive closer to market returns on which they then must pay a multiple of market average fees. Underperformance becomes a mathematical certainty.

Mr Ennis attributes their flogging of the alternative horse to an unusual agency problem. For once, there are few perverse financial incentives: trustees, for instance, are unpaid, while the chief investment officers of public schemes are relatively modestly remunerated (endowments are rather different: Harvard, for instance, pays its chief investment officer nearly $10m). 

Rather it’s that these people want to have an interesting life. It is simply more fun hobnobbing with private equity chieftains in five-star hotels than it is just sticking the money into tracker funds. Who knew?

The bigger question is why beneficiaries should be financing this entertainment — whether they are pensioners or students whose tuition fees might be lower were the college endowment to pay out fewer fees. 

Current regulation treats pension funds as sophisticated investors, capable of entering into complex contracts where the money flows are not transparent. This leaves a good deal of discretion when it comes to what they disclose publicly about what they are doing. As Mr Ennis points out, many funds benchmark against self devised, uninvestable benchmarks such as “Consumer Price Inflation plus 3 per cent”, whose main virtue (to them) is that they are always beaten. 

The only way to change this dynamic is to admit some sunlight. Regulators need to pull back the veil on these arrangements so that beneficiaries and the wider public can see the action. Only then can they know whether pension funds are playing carefully, or striving wastefully to make every service an ace.

Watchdog’s powers to be transferred to BaFin as deputy finance minister calls for ‘radical solutions’

Germany is to overhaul the way it regulates accountancy firms as it seeks “radical solutions” to contain the fallout from the huge fraud at payments group Wirecard.

The government will terminate its contract with the country’s accounting watchdog, the Financial Reporting Enforcement Panel, as early as Monday, according to officials briefed on the matter.

The power to launch investigations into companies’ financial reporting would then be handed to BaFin, Germany’s financial regulator, the officials said.

Wirecard, a once high-flying German payments group, filed for insolvency last week after it admitted that €1.9bn in cash probably “did not exist”.

German regulators have faced accusations that they failed to adequately supervise the financial technology group, which has been audited by Big Four accountancy firm EY for a decade.

FREP, a private-sector body with quasi-official power, monitors the financial reporting of listed companies on behalf of the government.

“What the Wirecard affair has shown is that . . . self-regulation by the auditors doesn’t work properly,” Jörg Kukies, Germany’s deputy finance minister told the Financial Times. “So we will inevitably have to question whether the bodies that currently regulate the industry should continue to do so in their current form.”

For more than three years, EY failed to request crucial account information from a Singapore bank where Wirecard claimed it had deposited cash — a routine audit procedure that could have uncovered the vast fraud at the German payments group at a much earlier stage.

The Wirecard affair has proved highly embarrassing for the German government, which fears it could damage the reputation of the country’s financial services industry. Through her spokesman, Chancellor Angela Merkel on Friday described the case as “alarming”, while Olaf Scholz, finance minister, called it “a scandal which is almost unprecedented in the world of finance”.

“We should see the Wirecard story as a signal to address these problems, which have existed for quite a long time now, and to find radical solutions,” Mr Kukies said. “Only then can we contain the fallout from this affair.”

Mr Kukies, a former Goldman Sachs banker who joined the finance ministry in 2018, said BaFin “currently has very limited powers” to oversee accountancy firms in Germany. “We have to think about how the regulatory regime should be changed,” he added.

FREP was founded in 2004 in response to the Enron accounting scandal but has only 15 employees and a small annual budget of €6m. KPMG’s special audit into Wirecard’s accounting, which resulted in an inconclusive report, involved 40 employees and cost €10m, according to a person with first-hand knowledge of the details.

Under German law, BaFin can ask FREP to open a probe into a company’s financial reporting but has no sway over the actual process. The Bonn-based regulator needs to wait for the result of a FREP probe before it can start its own investigation. 

BaFin in early 2019 asked FREP to start a probe into Wirecard after the FT reported accusations by whistleblowers of accounting manipulations, according to people briefed on the matter.

However, only one investigator at FREP has been working on the case and little progress was made, officials briefed on the matter told the FT. It only gained pace after a company-commissioned special audit by KPMG in April failed to verify that large parts of Wirecard’s business, as well as €1bn in company cash reportedly held on accounts in Asia, really existed. 

“We've seen that FREP can really take its time when it investigates a company, and then the authorities can only intervene at a relatively late stage,” Mr Kukies said. “We need to check whether that’s right. The Wirecard affair has shown that these checks should happen much more quickly.”

Berlin-based lawyers Marc Liebscher and Wolfgang Schirp said on Sunday they are preparing a class action lawsuit of investors against the Federal Republic of Germany. The investors demand damages for an alleged “failure of German regulatory authorities” in the Wirecard case. 

After the termination of the contract with FREP, which was first reported by Bild am Sonntag, an 18-month notice period starts that will give the government time to hammer out a new regulatory set-up.

However, only one investigator at FREP has been working on the case and little progress was made, officials briefed on the matter told the FT. It only gained pace after a company-commissioned special audit by KPMG in April failed to verify that large parts of Wirecard’s business, as well as €1bn in company cash reportedly held on accounts in Asia, really existed. 

“We've seen that FREP can really take its time when it investigates a company, and then the authorities can only intervene at a relatively late stage,” Mr Kukies said. “We need to check whether that’s right. The Wirecard affair has shown that these checks should happen much more quickly.”

Berlin-based lawyers Marc Liebscher and Wolfgang Schirp said on Sunday they are preparing a class action lawsuit of investors against the Federal Republic of Germany. The investors demand damages for an alleged “failure of German regulatory authorities” in the Wirecard case. 

After the termination of the contract with FREP, which was first reported by Bild am Sonntag, an 18-month notice period starts that will give the government time to hammer out a new regulatory set-up.

Improvement in sentiment fuels optimism but activity data still depressed

Europe’s economic recovery from the coronavirus pandemic is well under way, according to sentiment indicators, high-frequency measures and hard data — but activity remains far below normal levels, suggesting that the recovery from recession will be a struggle.

The continent’s workers and consumers began to return to work, shopping and dining out from last month onwards, generating an initial post-lockdown rebound.

But high-frequency data indicators such as footfall and consumer spending suggest that the economic improvement is patchy and limited by social-distancing measures.

The figures are more up to date than official economic indicators, although they are also experimental and the extent to which they reflect the subsequent trends documented in official data is variable.

Real-time data “have spurred hopes of a quick economic rebound . . . but this expectation is overly optimistic”, said Madhavi Bokil, vice-president of credit rating agency Moody’s. “The recovery is more likely to be a long and bumpy slog rather than a quick rebound.”

On Monday, the European Commission’s latest economic sentiment indicators for the eurozone are expected to show sharp improvements in June, mirroring gains in business sentiment indicators which were published last week.

The strong rebound recorded in survey-based data “provides further evidence that the recovery is a little quicker than we had anticipated”, said Jessica Hinds, European economist at Capital Economics. However, “the level of activity remains very depressed compared to the start of the year”.

A large chunk of the continent’s economy remains restricted and international travel and trade are still in a deep downturn.

“We see a sharp initial rebound in consumption to be followed by a much slower recovery, as households will prefer to keep precautionary savings, due to uncertainty and income risks,” said Nicola Nobile, economist at Oxford Economics.

Peter Vanden Houte, chief economist at ING, warned that waning government aid and rising job cuts would begin to weigh on the rebound in the coming months, while social-distancing measures only allow a partial return of service sector activity.

On Monday, the European Commission’s latest economic sentiment indicators for the eurozone are expected to show sharp improvements in June, mirroring gains in business sentiment indicators which were published last week.

The strong rebound recorded in survey-based data “provides further evidence that the recovery is a little quicker than we had anticipated”, said Jessica Hinds, European economist at Capital Economics. However, “the level of activity remains very depressed compared to the start of the year”.

A large chunk of the continent’s economy remains restricted and international travel and trade are still in a deep downturn.

“We see a sharp initial rebound in consumption to be followed by a much slower recovery, as households will prefer to keep precautionary savings, due to uncertainty and income risks,” said Nicola Nobile, economist at Oxford Economics.

Peter Vanden Houte, chief economist at ING, warned that waning government aid and rising job cuts would begin to weigh on the rebound in the coming months, while social-distancing measures only allow a partial return of service sector activity.

Luxury groups experiment with China’s livestreaming boom

Brands from Tiffany to Hermès are turning to sales channel but some say it is at odds with desire for exclusivity

Amanda Xie was sceptical when Tiffany, the luxury US jeweller, asked the online influencer to promote a $3,500 diamond necklace in a livestream from her Shanghai apartment.

“I don’t have a lot of confidence in selling luxury goods online, there is no discount and you don’t get the in-store experience,” she said. Like many of her peers, Ms Xie, who has 414,000 followers on the popular fashion platform Xiaohongshu, thinks livestreaming is best suited to raising brand awareness.

Yet she and another two “key online influencers” sold 300 of the Tiffany necklaces in the broadcast viewed by more than 5,000 people, most of them wealthy women in small cities.

After coronavirus lockdowns closed stores and footfall since reopening has been sluggish, brands from Lanvin to Louis Vuitton have launched livestreaming promotions in China.

The need to experiment to lift sales is pressing: analysts are forecasting a drop in global luxury revenues of 17-35 per cent in 2020. And while stores are reopening, at Beijing SKP, the nation’s largest luxury mall, assistants said a resurgence of virus cases in the city was deterring wealthy consumers and footfall was half that of pre-pandemic levels.

Brands hope to ape the huge success of online celebrities in marketing products through livestreaming in China. Chinese consumers drove 80 per cent of the growth in the €281bn of luxury goods sold last year, according to Jefferies, and accounted for 40 per cent revenues.

Jo Sun, a Shanghai-based influencer with 693,000 followers, sells an average of 70-80 items worth more than Rmb1m, in three hours for brands including Gucci, Chanel and Louis Vuitton. In contrast, a top-performing luxury store in Shanghai or Beijing achieves between Rmb500,000 and Rmb700,000 in sales a day, according to store managers.

Few businesses can afford to ignore China’s “live commerce” boom. The industry more than tripled its gross merchandise value to Rmb434bn last year from 2018, according to consultancy iiMedia. In contrast, China retail sales grew 8 per cent over the same period, the slowest pace in 30 years.

The pandemic has propelled the sector yet further. Daily active livestreaming shoppers on Kuaishou, a video sharing site, surpassed 100m this month, up from fewer than 50m at the end of last year, according to TF Securities. Goods up for grabs range from Rmb30 salted duck neck to Rmb370,000 Hermès bags.

Livestreaming offers a chance to broaden brands’ reach. Zhu Liang, owner of Yanzu Culture, a digital marketing agency, said the channel appeals to small city residents, an increasingly important consumer segment as luxury looks to lift sales in China but one with limited knowledge of the brands themselves. 

“A 30-second TV commercial or a full-page magazine advertisement isn’t enough to tell you how the brand becomes what it is,” said Mr Zhu. “A 30-minute live broadcast serves the purpose.”

In an added boon for luxury, 73 per cent of China’s active livestream shoppers are aged 20 to 40, according to Data100: the cohort, says fellow consultancy McKinsey, accounted for 78 per cent of luxury sales in 2018.

But industry observers warn the channel’s reputation for discounts is at odds with luxury’s desire for exclusivity and elevated prices. “There is a natural conflict between livestreaming and luxury goods,” said Gao Ming, director of luxury practice at Ruder Finn in Shanghai, adding that few western brands are “ready to take the challenge”.

“We would rather lose money than cut prices to boost sales,” said a marketing manager at French luxury house YSL in Shanghai, “discounts are detrimental to a brand’s reputation”.

Some brands including Louis Vuitton and Chanel have raised prices in China as they seek to ensure exclusivity.

Another concern is how the down-to-earth approach of influencers and livestreaming runs counter to the exclusive nature of luxury goods. “It is very easy to hurt the brand with the wrong [influencer],” said Simon Tye, executive director at CSG Worldwide, a market research firm in Hong Kong.

A Louis Vuitton open live stream in March hosted by renowned influencer Yvonne Ching received a mixed reception, with many local commentators describing the setting as “cheesy”. The French label said it had no immediate plans for another open broadcast and was watching how trends play out.

However, Mr Tye said the success of livestreaming should not be judged by viewers: “more important is the conversion of sales”.

But most luxury consumers remain to be won over to livestreaming. Patricia Kan, a clerk at a state bank in Beijing, said poor shopping experience deterred her from buying through livestreams.

“The showroom doesn’t look high-end, nor does the sound effect,” said Ms Kan, who spends Rmb50,000 a year on luxury, “that makes me reluctant to place an order even if the goods are real.”

Livestreamers understand the risk. Ms Sun said the key to winning customers was professionalism, adding: “Buyers will walk away if they hear you pronounce [the classic Hermès bag] Birkin as Brikin.”

Hedge funds eye new corporate structure in Singapore

City state challenges low-tax jurisdictions amid concerns about status of Hong Kong

Multibillion-dollar hedge funds, private equity firms and family offices from Asia, Europe and the US are poised to move assets to Singapore, after the city state launched a corporate structure in a bid to become the region’s leading financial centre.

The moves come amid growing concerns about the status of Hong Kong. Funds have been developing contingency plans for life outside the semi-autonomous territory after months of pro-democracy protests last year and Beijing’s decision to impose a national security law.

Japan and Singapore have both stepped up efforts to present themselves as the best alternative, with Tokyo expected to offer free office space, visa waivers and fast-tracking of licences.

Singapore launched a legal structure in January called the Variable Capital Company, designed to lure the assets of fund managers and family offices registered in low-tax jurisdictions such as the Cayman Islands and Luxembourg. The VCC is designed for both traditional and alternative investment funds and can be used either as a standalone entity or as an umbrella for multiple funds.

The structure shares many tax-efficient features of Luxembourg’s Sicav, the Segregated Portfolio Company (SPC) in the Caymans and Hong Kong’s Open-Ended Fund Company (OFC), said tax experts.

A large part of the VCC's appeal derives from the country’s strong regulatory reputation relative to other domiciles, said asset managers that have launched the structure.

The government is also offering to offset up to 70 per cent of eligible set-up costs with a cap of S$150,000 ($108,000) per VCC, under a scheme valid until January 2023.

At least four multibillion-dollar real estate and credit funds with managers based in Tokyo, Hong Kong and Singapore are in the process of registering VCCs. One $1.5bn private equity fund as well as several Japan and Asia-focused hedge funds are also in discussions to do so, according to people with direct knowledge of the situation.

Seventy VCCs — many set up by small and boutique funds or local family offices — have already been launched.

But a much larger wave of companies is coming, say bankers, fund managers, tax advisers and other people familiar with the situation.

“We’ve heard of families from Europe and North America looking at this in a very serious way . . . and some of these have engaged lawyers to work on their mandates,” said Lee Woon Shiu, regional head of wealth planning, family office and insurance solutions at DBS Private Bank in Singapore.

The Cayman Islands, which has historically attracted a large portion of new global hedge fund assets, is reeling from the EU’s decision in February to add the jurisdiction to its blacklist of non-cooperative tax jurisdictions. A significant number of funds with assets in the Cayman Islands are run by managers based in Hong Kong.

The VCC legislation “came out at the right time to soak up this demand where asset managers are now slightly nervous of having their product not only in offshore jurisdictions”, said Armin Choksey, Asia Pacific Asset & Wealth Management Market Research Centre Leader at PwC Singapore, who helped set up the structure.

Yap Chee Wee, chief executive of Fleur Capital, a Singapore-based wealth management firm that has set up a VCC jointly with a visual effects company, said Singapore’s structure marked the first solid challenge to existing fund domiciles in years.

“In my 20 odd years in the financial industry, this is the first time there’s [been] major change. It was long awaited and should have been done much earlier,” he said, adding that he is considering redomiciling the company’s existing funds from the Cayman Islands.

Benny Chey, assistant managing director at the Monetary Authority of Singapore, the de facto central bank, said he expected the VCC to “attract the interest of private wealth and large institutional investors” thanks to its “capital variability, segregation of assets and liabilities, and its ability to access tax treaty benefits”. 

Mr Chey added that requiring VCC fund managers be regulated by the MAS and imposing anti-money laundering and counter-terrorism obligations are among the measures that will ensure these structures’ legitimacy.

Luxury groups experiment with China’s livestreaming boom

Brands from Tiffany to Hermès are turning to sales channel but some say it is at odds with desire for exclusivity

Amanda Xie was sceptical when Tiffany, the luxury US jeweller, asked the online influencer to promote a $3,500 diamond necklace in a livestream from her Shanghai apartment.

“I don’t have a lot of confidence in selling luxury goods online, there is no discount and you don’t get the in-store experience,” she said. Like many of her peers, Ms Xie, who has 414,000 followers on the popular fashion platform Xiaohongshu, thinks livestreaming is best suited to raising brand awareness.

Yet she and another two “key online influencers” sold 300 of the Tiffany necklaces in the broadcast viewed by more than 5,000 people, most of them wealthy women in small cities.

After coronavirus lockdowns closed stores and footfall since reopening has been sluggish, brands from Lanvin to Louis Vuitton have launched livestreaming promotions in China.

The need to experiment to lift sales is pressing: analysts are forecasting a drop in global luxury revenues of 17-35 per cent in 2020. And while stores are reopening, at Beijing SKP, the nation’s largest luxury mall, assistants said a resurgence of virus cases in the city was deterring wealthy consumers and footfall was half that of pre-pandemic levels.

Brands hope to ape the huge success of online celebrities in marketing products through livestreaming in China. Chinese consumers drove 80 per cent of the growth in the €281bn of luxury goods sold last year, according to Jefferies, and accounted for 40 per cent revenues.

Jo Sun, a Shanghai-based influencer with 693,000 followers, sells an average of 70-80 items worth more than Rmb1m, in three hours for brands including Gucci, Chanel and Louis Vuitton. In contrast, a top-performing luxury store in Shanghai or Beijing achieves between Rmb500,000 and Rmb700,000 in sales a day, according to store managers.

Few businesses can afford to ignore China’s “live commerce” boom. The industry more than tripled its gross merchandise value to Rmb434bn last year from 2018, according to consultancy iiMedia. In contrast, China retail sales grew 8 per cent over the same period, the slowest pace in 30 years.

The pandemic has propelled the sector yet further. Daily active livestreaming shoppers on Kuaishou, a video sharing site, surpassed 100m this month, up from fewer than 50m at the end of last year, according to TF Securities. Goods up for grabs range from Rmb30 salted duck neck to Rmb370,000 Hermès bags.

Livestreaming offers a chance to broaden brands’ reach. Zhu Liang, owner of Yanzu Culture, a digital marketing agency, said the channel appeals to small city residents, an increasingly important consumer segment as luxury looks to lift sales in China but one with limited knowledge of the brands themselves. 

“A 30-second TV commercial or a full-page magazine advertisement isn’t enough to tell you how the brand becomes what it is,” said Mr Zhu. “A 30-minute live broadcast serves the purpose.”

In an added boon for luxury, 73 per cent of China’s active livestream shoppers are aged 20 to 40, according to Data100: the cohort, says fellow consultancy McKinsey, accounted for 78 per cent of luxury sales in 2018.

But industry observers warn the channel’s reputation for discounts is at odds with luxury’s desire for exclusivity and elevated prices. “There is a natural conflict between livestreaming and luxury goods,” said Gao Ming, director of luxury practice at Ruder Finn in Shanghai, adding that few western brands are “ready to take the challenge”.

“We would rather lose money than cut prices to boost sales,” said a marketing manager at French luxury house YSL in Shanghai, “discounts are detrimental to a brand’s reputation”.

Some brands including Louis Vuitton and Chanel have raised prices in China as they seek to ensure exclusivity.

Another concern is how the down-to-earth approach of influencers and livestreaming runs counter to the exclusive nature of luxury goods. “It is very easy to hurt the brand with the wrong [influencer],” said Simon Tye, executive director at CSG Worldwide, a market research firm in Hong Kong.

A Louis Vuitton open live stream in March hosted by renowned influencer Yvonne Ching received a mixed reception, with many local commentators describing the setting as “cheesy”. The French label said it had no immediate plans for another open broadcast and was watching how trends play out.

However, Mr Tye said the success of livestreaming should not be judged by viewers: “more important is the conversion of sales”.

But most luxury consumers remain to be won over to livestreaming. Patricia Kan, a clerk at a state bank in Beijing, said poor shopping experience deterred her from buying through livestreams.

“The showroom doesn’t look high-end, nor does the sound effect,” said Ms Kan, who spends Rmb50,000 a year on luxury, “that makes me reluctant to place an order even if the goods are real.”

Livestreamers understand the risk. Ms Sun said the key to winning customers was professionalism, adding: “Buyers will walk away if they hear you pronounce [the classic Hermès bag] Birkin as Brikin.”

Amid a mountain of bad polling and stark warnings from allies, the president has acknowledged his reelection woes to allies.

Donald Trump knows he's losing.

The president has privately come to that grim realization in recent days, multiple people close to him told POLITICO, amid a mountain of bad polling and warnings from some of his staunchest allies that he's on course to be a one-term president.

Trump has endured what aides describe as the worst stretch of his presidency, marred by widespread criticism over his response to the coronavirus pandemic and nationwide racial unrest. His rally in Oklahoma last weekend, his first since March, turned out to be an embarrassment when he failed to fill the arena.

What should have been an easy interview with Fox News host Sean Hannity on Thursday horrified advisers when Trump offered a rambling, non-responsive answer to a simple question about his goals for a second term. In the same appearance, the normally self-assured president offered a tacit acknowledgment that he might lose when he said that Joe Biden is “gonna be your president because some people don't love me, maybe."

In the hours after the interview aired, questions swirled within his inner circle about whether his heart was truly in it when it comes to seeking reelection.

Trump has time to rebound, and the political environment could improve for him. But interviews with more than a half-dozen people close to the president depicted a reelection effort badly in need of direction — and an unfocused candidate who repeatedly undermines himself.

“Under the current trajectory, President Trump is on the precipice of one of the worst electoral defeats in modern presidential elections and the worst historically for an incumbent president,” said former Trump political adviser Sam Nunberg, who remains a supporter.

Nunberg pointed to national polls released by CNBC and New York Times/Siena over the past week showing Trump receiving below 40 percent against Biden.

If Trump's numbers against erode to 35 percentage points over the next two weeks, Nunberg added, “He’s going to be facing realistically a 400-plus electoral vote loss and the president would need to strongly reconsider whether he wants to continue to run as the Republican presidential nominee.”

Behind the scenes, Trump and his team are taking steps to correct course. In the week since his Tulsa rally, the president has grudgingly conceded that he’s behind, according to three people who are familiar with his thinking. Trump, who vented for days about the event, is starting to take a more hands-on role in the campaign and has expressed openness to adding more people to the team. He has also held meetings recently focusing on his efforts in individual battleground states.

Trump's son-in-law Jared Kushner, who effectively oversees the campaign from the White House, is expected to play an even more active role.

Trump campaign manager Brad Parscale was blamed internally for the Tulsa rally failure. Some people complained about him trumpeting that 1 million people had requested tickets, a boast that fell flat when thousands of seats sat empty during Trump's speech.

Parscale has been a target of some Trump allies who argue the campaign is lacking a coherent strategy and direction. But people close to the president insist that Parscale's job is safe for now. Trump, who visited the campaign’s Arlington, Virginia headquarters a few months ago, has told people he came away impressed with the sophistication of the organization.

Parscale, whose background is as a digital strategist, has received some reinforcements in recent weeks. Longtime Trump adviser Bill Stepien was given added responsibilities in the campaign, including working with political director Chris Carr and the Republican National Committee on voter turnout. And Jason Miller, a veteran of the 2016 campaign, was brought back to serve as a chief political strategist, a position that had been unfilled.

But those internal moves have done little to calm Republican jitters about the president's personal performance. Fox News host and Trump favorite Tucker Carlson issued a blunt warning on his show this week that the president “could well lose this election.” South Carolina Sen. Lindsey Graham, another close Trump ally, told reporters that the president needs to make the race “more about policy and less about your personality.”

Trump's team insists the president’s numbers are bound to improve as he steps up his public events and intensifies his attacks on Biden. People involved in the campaign say they have settled on two main avenues to go after the former vice president: That he’s beholden to liberals who want to do away with law and order, and that he’s a consummate Washington insider.

The campaign has begun a massive TV ad campaign going after the 77-year-old former vice president, including over his mental capacity and his nearly five-decade political career. Hoping to make inroads with African-American voters, Trump's campaign is running ads slamming Biden over his central role in the 1994 crime bill.

The commercials are airing in an array of states including Georgia, a traditionally red state where Trump suddenly finds himself in a fight. The cash-flush campaign is expected to remain on the TV airwaves in a host of key states through the election.

Veterans of Trump’s first presidential campaign liken their current predicament to the nightmarish summer of 2016, when he was buffeted by an array of self-inflicted scandals — from his criticism of a Gold Star family to his attack on a federal judge of Mexican ancestry.

Then as now, Trump trailed badly.

“There was similar fretting in 2016 and if it had been accurate, Hillary Clinton would be in the White House right now. Joe Biden is the weakest Democrat candidate in a generation and we are defining him that way,” said Trump campaign spokesman Tim Murtaugh. “We are four months from Election Day and in the end it will be a clear choice between President Trump’s incredible record of achievement and Joe Biden’s half-century of failure in Washington, D.C.”

Still, Trump advisers acknowledge that tearing down Biden will require a level of discipline he isn’t demonstrating. They have pleaded with Trump — who has used his Twitter account to vilify critics from MSNBC host Joe Scarborough to former National Security Adviser John Bolton — to stop focusing on slights that mean little to voters.

Biden's low-profile during the pandemic has made it that much harder for Trump to land a punch, his advisers said.

But Republicans say he and his campaign need to figure out something soon.

“The key factor has been that Biden has been able to stay out of the race,” said David McIntosh, the president of the pro-Trump Club for Growth. “Republicans have to start defining Biden and put resources and effort and consistent messaging behind it.”