In March 2014, three men kidnapped Reynaldo Pacheco and bludgeoned his head with rocks, leaving the 44-year-old father of a young daughter dead in a creek bed in California’s Napa County. Local authorities determined that his murder was a consequence of an investment fraud that targeted low-income Latino and Asian immigrants around the world.
Like other victims of the World Capital Market scheme, or WCM, Pacheco energetically promoted the deal to relatives and acquaintances. When the Ponzi scheme collapsed, an unlucky investor decided to have him killed.
Four days before Pacheco was beaten to death, compliance officers at the global banking giant HSBC raised a warning about millions of dollars flowing into a big-dollar account in Hong Kong controlled by the scammers. It was at least the third in a series of so-called suspicious activity reports that the bank’s internal watchdogs had lodged about WCM over several months.
Yet HSBC continued to handle the Ponzi network’s massive flow of dirty money into — and out of — its accounts at the bank.
HSBC was profiting from an international criminal scheme even while on probation for having served murderous drug cartels and other criminals. HSBC had admitted to U.S. prosecutors in 2012 that it had helped dirty money flow through its branches around the world, including at least $881 million controlled by the notorious Sinaloa cartel and other Mexican drug gangs.
In a controversial decision, prosecutors declined to seek an indictment of the bank but instead allowed it to pay a $1.92 billion settlement and serve five years of probation during which its efforts to prevent money laundering would be monitored by a court-appointed watchdog. The court named a former top New York state financial crimes prosecutor, Michael Cherkasky.
A 16-month investigation by the International Consortium of Investigative Journalists, BuzzFeed News and 108 other media partners has found that HSBC continued to provide banking services to alleged criminals, Ponzi schemers, shell companies tied to looted government funds and financial go-betweens for drug traffickers. This occurred even while the bank was on probation and under Cherkasky’s scrutiny.
The FinCEN Files investigation found that HSBC’s highly profitable branch in Hong Kong played a key role in keeping the dirty money flowing. Although providing only a partial view of HSBC’s suspicious activity reports, the records show that between 2013 and 2017, HSBC’s U.S. compliance staff, who are charged with monitoring customer activity, filed reports lacking crucial customer information on 16 shell companies that had processed nearly $1.5 billion in more than 6,800 transactions through the bank’s Hong Kong operations alone. More than $900 million of that total involved shell companies linked to alleged criminal networks, according to an analysis by ICIJ and its media partners.
In a statement, HSBC defended changes the bank made under the monitorship. “Starting in 2012, HSBC embarked on a multi-year journey to overhaul its ability to combat financial crime,” said Heidi Ashley, a spokesperson for the bank. “HSBC is a much safer institution than it was in 2012.”
The bank told ICIJ that it increased its compliance staff from a few hundred members in 2012 to several thousand in 2017 and invested more than $1 billion in compliance initiatives since 2015. “Though we have made significant improvements in our financial crime compliance programme, we are continually seeking ways to improve,” the bank said in a statement.
The investigation is based on a review of dozens of leaked suspicious activity reports, or SARs, as well as interviews with more than a dozen former HSBC anti-money-laundering employees. Banks doing business in the United States submit the confidential reports to an intelligence office within the U.S. Treasury Department known as the Financial Crimes Enforcement Network, or FinCEN. Suspicious activity reports reflect concerns of watchdogs within banks and are not necessarily evidence of any criminal conduct or wrongdoing.
Leaked records show HSBC processed at least $31 million between 2014 and 2015 for companies later revealed to have moved stolen government funds from Brazil; and more than $292 million between 2010 and 2016 for a Panama-based organization branded by U.S. authorities as a major money launderer for drug cartels. The organization, Vida Panama, denies wrongdoing and is fighting the U.S. designation. The records show HSBC worked with a bank in Tiraspol, within Moldova’s breakaway territory of Transnistria, for four years after the U.S. Treasury Department issued a 2011 advisory warning of the risks of doing business with the Tiraspol bank.
Why are we filing SARs? … Nothing is actually being done.– Alexis Grullon
In interviews with ICIJ and BuzzFeed News, more than a dozen former HSBC compliance officers expressed deep concerns about the bank’s anti-money-laundering program, even during its probationary period. Compliance officers said that the bank did not give them enough time to meaningfully investigate suspicious transactions and that branches outside the U.S. often ignored requests for crucial customer information. They said they were treated as a second-class workforce within the bank, with little power to shut down problematic accounts.
The FinCEN Files raise new questions about the U.S. Justice Department’s decision in 2012 to forgo indicting HSBC or any bank executives in the Sinaloa cartel case. The decision was opposed by rank-and-file prosecutors, who had prepared a list of up to 175 criminal charges against the bank that the government ultimately shelved. No one went to prison over the bank’s historic wrongdoing. The findings also raise questions about the department’s decision, five years later, to pronounce HSBC reformed and allow its probation to lapse. The investigation builds upon ICIJ’s previous Swiss Leaks project, which exposed how HSBC’s Swiss private banking arm profited from doing business with tax dodgers and criminals around the world prior to 2008.
FinCEN Files documents show that HSBC knew regulators were investigating its customer, the WCM Ponzi scheme, even as it helped move its money.
A federal class-action lawsuit brought by bilked investors alleged that HSBC Hong Kong was “instrumental in helping WCM777 to continue its Ponzi scheme.” A federal judge dismissed the suit last month, ruling it had been brought in an improper jurisdiction.
In an exclusive interview with ICIJ, the Ponzi scheme’s bow-tie-sporting founder, Ming Xu, said HSBC did not contact him to ask about massive money flows WCM was moving through the bank’s Hong Kong accounts.
Banks’ SARs form the backbone of U.S. authorities’ attempts to fight money laundering, but the system fails to stop deluges of dirty money. Banks can, but are not necessarily required to, block or close accounts suspected of being used for money laundering, and they can fulfill a key legal obligation by simply reporting the transactions to FinCEN. The office received more than two million of those reports last year, more than its agents could hope to read.
The SARs reviewed by ICIJ and its partners include 73 reports filed between 2012 and 2017 by HSBC. The documents contain information on more than $4.4 billion in more than ten years of transactions reported as suspicious. That amounts to a tiny fraction of the tens of thousands of SARs HSBC files each year but offers a window into the bank’s troubled compliance efforts.
The confidential records and interviews with former employees reveal that compliance officers often filed SARs lacking even basic information about who owned companies banking with HSBC, the nature of their businesses, and where the money came from. Sometimes, records show, they asked branches for the information and were ignored or rebuffed.
“It was impossible to do the job without this information,” said Alexis Grullon, a former compliance officer who monitored international suspicious activity for HSBC’s New York offices from November 2012 to August 2014. Grullon said that, in most cases, HSBC branches in other countries would simply ignore his requests for ownership information about suspicious accounts.
“They would say: ‘Sure, we’ll get back to you.’ But they’d never get back,” he recalled.
Grullon said that a key component of his job was submitting SARs to the federal government but that the reports did little to stop customers’ suspicious activities.
“Why are we filing SARs?” Grullon recalls wondering. “The account is still open. Nothing is actually being done.”
‘The world’s local bank’
Founded in Hong Kong as the Hong Kong and Shanghai Banking Corp. in 1865, HSBC prospered managing British government accounts across East Asia. By the mid-2000s, the bank had become one of the world’s most pervasive retail financial institutions, with thousands of branches in more than 70 countries, dubbing itself at one point, “the world’s local bank.”
It was more than a slogan. Under the global brand, HSBC operated as a loose confederation of largely autonomous fiefs. This degree of decentralization meant that the bank’s headquarters, which moved to London in 1941, extended its hands-off approach even to anti-money laundering questions.
One result: HSBC accepted clients whose massive wealth translated into big profits but who turned out to be criminals.
In 2003, HSBC agreed to a consent order drawn up by U.S. authorities in which the bank promised to fix its anti-money laundering program and empower compliance officers by providing better tools and information about customers.
Instead, the bank took part in one of the most notorious episodes in money laundering history. As the Mexican drug war metastasized in the mid-2000s, the bank provided essential U.S. dollar-denominated accounts to narco-gangs needing to clean hundreds of millions of dollars in drug earnings. The cartels designed specially shaped boxes that fit HSBC’s teller windows to deliver the massive amounts of illicit cash pouring in.
In 2010, the bank was forced to submit to another court order secured by its primary regulator, the U.S. Office of the Comptroller of the Currency. The bank promised to boost anti-money-laundering systems and provide compliance officers with more information about its clients — again.
In the summer of 2012, the U.S. Senate investigative panel released its 339-page report on the bank’s work with Mexican narco-gangs and its role in terrorist financing. Later that year, the Justice Department and HSBC reached their deferred-prosecution agreement. Critics cast the government’s decision to forgo indictment of the bank or any of its executives as a sign of big banks’ virtual impunity from meaningful consequences for their misdeeds.
Although no longer the banking giant’s headquarters, Hong Kong remains the beating heart of HSBC. In 2015, its operations in the island territory, which include a subsidiary called Hang Seng Bank, accounted for nearly half of HSBC’s global profits, and its market share in Hong Kong dwarfs that of its competitors.
On June 20, 2012, the same day HSBC’s attorneys were describing the bank’s anti-money-laundering protocols to Senate investigators on Capitol Hill, HSBC’s Hong Kong branch began transmitting funds for a shell company called Trade Leader Corp. Ltd.
By February 2014, transfers into and out of the shell company’s Hong Kong accounts totaled more than $581 million.
Records from the FinCEN Files show that, when the bank’s U.S. compliance staff asked for information about who owned the big-dollar account, HSBC’s Hong Kong bankers simply responded that there was “none available.”
According to a review of data collected by an ICIJ media partner, the Organized Crime and Corruption Reporting Project, Trade Leader Corp. Ltd. was a major East Asian node in the “Russian Laundromat,” a sprawling network that moved criminally tainted money from former Soviet states to the West. Incorporated in Hong Kong, Trade Leader lists one company official in its 2015 filing in the Hong Kong corporate registry, a director whose address is an apartment unit in a decaying Soviet-era building in the far-eastern Russian city of Novosibirsk.
In 2014, Hong Kong’s corporate registry listed Trade Leader’s sole shareholder as a company called INHK Ltd. In an email to ICIJ, Trade Leader’s registration agent, a firm called Intercorp Asia, acknowledged that INHK’s only purpose was to hide Trade Leader’s true owner, known as the “ultimate beneficial owner,” or UBO.
INHK does not have “any business activity and [is] used to hide the real UBO information in [the] company registry of HK,” Alex Orso, an Intercorp representative wrote. He declined to share further information about Trade Leader.
Trade Leader was not an isolated case. Though documenting only a tiny fraction of HSBC’s activities during this period, the FinCEN Files reveal a striking tolerance of questionable customers within HSBC’s Hong Kong branch.
ICIJ analyzed nearly $1.5 billion in transactions that flowed through shell companies holding commercial accounts with HSBC Hong Kong between 2011 and 2016. In each case, HSBC filed SARs that failed to include fundamental facts about the bank’s own big-dollar customers, including who owned the accounts, what countries the owners lived in, and where the money came from.
The U.S. Senate’s 2012 report on HSBC highlighted the danger of bank compliance officers remaining in the dark about such basic information.
“Information sharing was one of the major things HSBC promised they were going to do,” said Elise Bean, lead author of the Senate report and former aide to then-Sen. Carl Levin, Democrat of Michigan.
The FinCEN files show that HSBC broke the pledge repeatedly.
In mid-2013, a shell company client, Vic Charm Ltd., sent or received more than $80 million through HSBC Hong Kong accounts during the first several months of the bank’s probation. HSBC compliance officers listed virtually nothing about the firm, aside from a series of Hong Kong addresses linked to it and the name of an owner, about whom the officers said they knew nothing, not even the person’s country of residence. In 2015, prosecutors in Malawi alleged that the shell company had received $3.8 million in a scheme to launder money out of the resource-deprived country.
The case remains pending, according to a statement from the Reserve Bank of Malawi, which is involved in pressing the laundering charges.
In February 2016, well into HSBC’s probation period, bank compliance officers asked the Hong Kong branch about a suspected laundering operation involving a customer called Enjoy Trading Shanghai Co., but had received no response before filing a SAR one month later.
In May of that year, the bank’s compliance staffers filed a report on a former HSBC Hong Kong customer called Alahdin Limited, saying that documents posted to the internet alleged that more than half a trillion dollars in transactions had flowed through the firm. Relying on information received from HSBC’s Hong Kong branch, the report offered almost no information about the company’s ownership, listing Alahdin’s owner with merely a first name and initials — “SHAHUL H H M” — along with an email address.
The report did not note that Alahdin, a company registered in Hong Kong, had two years prior changed its name to the Abu Dhabi National Oil Company Ltd. Little is known about this company, but it shares its name with one that decades ago created Pakarab Fertilizers Limited, a subsidiary of Pakistan’s Fatima Group, according to the group’s website. In 2012, U.S. military officials accused Fatima’s fertilizer operations of providing chemicals used to make Taliban roadside bombs targeting U.S. and other coalition forces in Afghanistan.
Profit Accounting Company Limited, a firm that Hong Kong registry documents say acted as Alahdin’s corporate secretary, told ICIJ it had no record of ever having worked with the firm. Fatima Group did not respond to multiple requests for comment.
In July 2016, HSBC filed a suspicious activity report on a customer called Cool Distribution Ltd., which had sent or received more than $92 million between 2011 and 2015 through the bank’s accounts. ICIJ’s research found that $19 million of that amount went to a company run by a businessman who had been convicted in a 2015 tax fraud case in Bologna, Italy, involving Italian organized crime.
The SAR lists three names for Cool Distribution’s owners, but without addresses, country of residence or other basic information. Two of the names have been linked to a Hong Kong financial fraud scandal, another belongs to a Russian intellectual property tycoon who denied to ICIJ knowing anything of Cool Distribution. HSBC’s report listed a Dubai address for the company but searches of corporate registries in Dubai and the United Arab Emirates found no record of the firm.
In March 2017, HSBC filed a report on another suspected money laundering account — a shell company called Well Fortune HK Ltd., which had moved more than $167 million in transactions through HSBC accounts over more than five years. The bank listed addresses for the company in Russia and Hong Kong, an email address and the name of a purported owner but no other identifying information, including the person’s country of residence.
Well Fortune’s 2014 filing in the Hong Kong corporate registry lists Adrian Matthew Bradley, a resident of Belize, as its sole shareholder. Bradley’s name appears on records of dozens of shell companies around the world, according to leaked documents and public records. ICIJ sent requests for comment to Bradley’s apparent email address, but received no response. Bradley is a “decoy name” for a Ukrainian oligarch named Serhiy Kurchenko, according to an article published by the Atlantic Council, a Washington-based think tank. Ukrainian prosecutors have accused Kurchenko of amassing millions of dollars via tax evasion and stealing from bank investors. In March 2014, the EU sanctioned him for his alleged links to state corruption. The following year, the U.S. sanctioned Kurchenko.
In September 2013, not long before financial regulators around the world announced investigations into the business, the leaders of WCM moved the Ponzi scheme’s headquarters from Los Angeles to Hong Kong.
In October, Colombia’s then-President Juan Manuel Santos announced that the national police would launch an investigation into allegedly illegal activities by the business. Three days later, HSBC compliance officers filed the first of several suspicious activity reports related to WCM accounts, noting that more than $6 million in transactions had moved through a single account over the preceding three months. The SAR said an internet search had revealed “Ponzi allegations” against the business.
Four months later, in February 2014, HSBC filed another suspicious activity report on the scheme, saying WCM had received or sent $15 million between 2013 and early 2014 through its HSBC Hong Kong account and company accounts with other banks to which HSBC provided U.S. dollar services. By then, authorities in Peru, Colombia, California and Massachusetts had publicly launched civil or criminal investigations into the company.
Yet massive dollar amounts kept flowing into the Hong Kong account.
Shane Riedel, a former HSBC compliance executive who now runs a Berlin-based anti-money-laundering consultancy, says a bank in this situation should take action.
“If a Ponzi scheme is flagged in one country and the accounts are not closed in another, that’s not a mistake,” Riedel said. He added that banks’ systems for analyzing and sharing compliance information are often inadequate.
In March 2014, HSBC compliance officers filed yet another suspicious activity report on WCM, whose business continued to hum despite intense law enforcement scrutiny around the globe. Four days after the report was filed, the U.S. Securities and Exchange Commission obtained a restraining order that sought to freeze the company’s bank accounts.
But even after the SEC order, WCM’s accounts at HSBC remained highly active. According to court documents later filed by attorneys appointed by the SEC to seek restitution for the scheme’s victims, WCM drained more than $7 million from the accounts during the following week, drawing its balance to zero.
HSBC’s 2010 cease-and-desist order stipulated that the bank must examine its handling of subpoenas and law enforcement inquiries. Eleven days after the restraining order, HSBC Hong Kong formally declined to comply with a U.S. court’s subpoena for records.
“Our bank is outside the jurisdiction of U.S. courts,” HSBC Hong Kong’s law firm said in a letter to lawyers seeking money for victims. By February 2015, the bank had not provided account information to the attorneys. As a result, “the cost of tracing these funds overseas will be very expensive,” the lawyers said in a court filing of the HSBC accounts and an account with UBS bank that had allegedly moved more than $2 million in transfers relating to the scam.
The SEC alleged that the scheme had used accounts at a variety of banks in addition to HSBC, but little is known about those accounts, including exactly how long they remained active. A summary of the forensic accounting report filed by the SEC-appointed lawyers focused largely on the HSBC Hong Kong accounts.
Meanwhile, WCM executives bought golf courses in Southern California, million-dollar homes and vacant land in Santa Barbara County that the scheme’s zealously religious founder, Ming Xu, told ICIJ was supposed to become a Christian “community of caring and sharing.”
In early 2014, 29-year-old Elvis Callejas was working toward his dream of building a set of retail stores in Bolivia’s rural northernmost region. But he was forced to lay off the men helping to construct the project when his savings of $10,000 evaporated in WCM’s collapse. “I realized that I had fallen into a trap,” Callejas told ICIJ.
Callejas found himself taking out loans to cover the sudden loss. “That is a very large amount of money here,” Callejas said.
Reynaldo Pacheco, the WCM investor murdered in Napa County, was also not a rich man. According to local law enforcement, he had searched for years for business opportunities and believed that WCM was a legitimate investment. Three people were later convicted for his kidnapping and murder.
Ming Xu, denies that WCM was a Ponzi scheme and told ICIJ that the SEC had “plundered” him. When he returned to mainland China in early 2015, he started a new version of WCM there, according to Chinese court documents. In November of that year, Chinese authorities arrested Xu for related financial crimes. He was subsequently convicted and spent three years in prison.
The Chinese court documents in Xu’s case state that his venture in China had accounts with a list of Chinese banks, along with a single global bank: HSBC.
You can’t get a man to believe in something when a salary depends on him not believing it.– Mike Coates
HSBC’s 2012 deferred prosecution agreement (DPA) was cast by Justice Department prosecutors as serious punishment – akin to a criminal reporting to a probation officer – bringing both serious consequences and strict oversight. It required, for instance, the bank to tie executive bonuses to the progress of its anti-money-laundering systems. Top salaries were supposed to be reduced if compliance fell short.
By 2014, HSBC was back to paying huge executive bonuses, including more than $2.5 million for then-Chief Executive Stuart Gulliver. The bonuses were so large that the bank had to exploit a loophole in EU regulations meant to keep bank executive bonuses from exceeding twice their yearly salary. The bank circumvented this by providing its senior executives with large “allowances.”
“HSBC substantially revised its approach to remuneration in the context of our financial crime reforms to ensure that it captured our expectations for employees around risk and compliance,” HSBC’s Heidi Ashley said. “As disclosed in our annual report and accounts, since 2013, a portion of our Executive Directors’ variable pay awards have been expressly linked to risk and compliance measures to underscore the Group’s commitment.” Ashley noted that the new executive pay plan was assessed by the monitor and approved by U.K. financial regulators.
The DPA had given wide latitude to the bank’s independent monitor, Michael Cherkasky, who submitted to prosecutors annual reviews of HSBC’s anti-money-laundering performance. The reviews are secret, but short summaries published in court documents offer glimpses of Cherkasky’s dissatisfaction at times. In 2016, for instance, the monitor mentioned, “instances of potential financial crime” occurring within HSBC’s accounts. It also questioned whether HSBC was satisfying all requirements of the DPA.
As HSBC’s probation neared its end in 2017, prosecutors mulled whether to let the probation lapse.
In December of that year, the Justice Department agreed to allow the bank’s probation to end. The bank claimed that it had “lived up to all of its commitments” under the DPA.
The news stunned one HSBC senior anti-money-laundering executive, who left the bank shortly after the DPA expired. The executive, who asked to speak anonymously for fear of retaliation by the bank, identified Hong Kong as the epicenter of the bank’s financial crime problems and said the issues there had remained “largely untouched” during the monitorship.
The former executive credited HSBC for bringing in top talent to address the DPA, including former FinCEN chief Jennifer Calvery, but said the bank’s leadership often appeared unaware of how difficult the changes were to implement on the ground level.
Six former HSBC employees interviewed by ICIJ said the ending of the DPA coincided with a broad cultural shift at the bank toward profit-making over compliance. The shift, they said, included layoffs, lapsing contracts of anti-money-laundering staffers and the closing of a transactions-monitoring office in New Castle, Delaware.
HSBC declined to share numbers regarding its staffing after the DPA, but noted that its financial crime compliance personnel had grown to roughly five thousand in 2017. In comments to ICIJ, the bank also touted initiatives to fight laundering it made after the DPA’s lifting, including a platform it launched in 2018 to analyze social networks to make it easier for the bank to identify customers potentially involved with criminal networks. The bank says it screens 689 million transactions across 236 million accounts per month.
In a statement to ICIJ and its reporting partners, the department of justice defended its record of enforcement actions against big banks.
“The Department of Justice stands by its work, and remains committed to aggressively investigating and prosecuting financial crime — including money laundering — wherever we find it,” Matt Lloyd, a spokesperson for the department’s Criminal Division, said.
Since the DPA’s conclusion, the bank and U.S. authorities have vigorously fought to keep Cherkasky’s monitoring reports secret.
In November 2015, Hubert Dean Moore Jr., a homeowner who sued HSBC, alleging that the bank had mishandled his request for mortgage relief, asked a federal judge in New York to unseal one of Cherkasky’s reports on HSBC. The judge agreed, but an appeals court panel overturned the decision, siding with the Justice Department’s argument that the report was not a releasable document. Cherkasky’s reports remain under seal.
In 2019, ICIJ partner BuzzFeed News sued for the release of Cherkasky’s final report, arguing that the public’s interest in understanding the government’s handling of the HSBC case demands that it be unsealed. The Justice Department continues to fight to keep the Cherkasky report sealed and has sought repeatedly to delay preliminary hearings, citing the coronavirus pandemic. The suit is pending.
Mike Coates, a former HSBC employee who worked on financial crime compliance during the DPA and left the bank in 2018, said the industry’s profit-focused incentive structures can still override the fight against financial crime.
“You can’t get a man to believe in something when a salary depends on him not believing it,” said Coates, who declined to provide specifics about his time at the bank. “That’s the biggest challenge you have in this industry.”
Contributors: Jason Leopold, Anthony Cormier, Kyra Gurney, Roman Anin, Emilia Diaz-Struck, Agustin Armendariz, Delphine Reuter, James Oliver, Golden Matonga
7 business owners share lessons they've learned through success and hardship during the pandemic – CBC.ca
A few weeks ago, Erin Moraghan and her staff celebrated the five year anniversary of her fitness studio. This week, the studio permanently closed its doors.
Like so many small businesses across the country, the fitness operation was no longer financially viable because of the pandemic.
A few hours before leading the final class at the Revkor studio in Cambridge, Ont., Moraghan was trying to be positive about the experience.
“There will be a lot of tears, there were some good tears this morning. It’s tough, but to be honest, we also really recognize that we’re in a very real global situation,” she said.
Moraghan has several pieces of advice for other entrepreneurs, including how important self-care can be.
“It’s been a lonely journey for a lot of business owners,” she said.
It’s just one helpful suggestion among many lessons a group of small business owners shared from their successes and struggles this year.
‘Trusting the numbers’
Moraghan’s fitness studio struggled because the number of participants was heavily restricted. Instead of 60 or 70 people for a class, there was a limit of just 12.
The small capacity was partially Moraghan’s decision because she wanted to go above and beyond the provincial government’s restrictions to ensure customers would be comfortable.
“We really wanted our studio to always feel like a safe haven for people,” she said.
WATCH | The challenge of reopening:
While the process of closing down the operation has been difficult, she credits having a business coach for preparing her for the tough decisions she had to make.
Her other recommendation, especially for people in the service industry, is to be practical and honest about the financial situation.
“We really can’t serve our communities if we are deeply compromised, personally, and so trusting the numbers, sometimes it’s very tough to face those realities.”
‘Call me cautious’
Kaevon Khoozani was at the Winnipeg airport in early March about to board a plane for a fitness trade show in Ohio when the event was cancelled.
His aspirations of growing his business in the United States seemed to be getting derailed.
Khoozani designs fitness equipment targeted toward people interested in powerlifting and CrossFit workouts. Calgary-based Bells of Steel opened 10 years ago and has seven employees in Canada and the States.
In March, sales began to pickup, but there was a big decision to make. Khoozani and his partner didn’t know whether to stock up on inventory or not. He found it difficult to understand if the pandemic would create an immense amount of interest in home-based fitness equipment or whether demand would fall because so many people would be negatively impacted financially due to lockdown measures.
“We could have jumped the gun a little faster. Call me cautious,” he said. “We waited a few months to see where things were at and because of that we lost out to some competitors.”
Fortunately, they had more inventory than normal to begin the year because of their growth plans in the U.S.
Overall, sales are three times as high this year as they were last year, but growth could have been significantly higher if they had acted sooner to put in orders with their suppliers.
Still, Khoozani said the company was able to grow its market share in the States.
On one day in particular, he said sales were $600,000.
He’s now contemplating expanding to Europe.
WATCH | Whether to coast or be aggressive:
‘A sudden shift’
When the Alberta government introduced lockdown measures in March, Kyle Hansen was able to keep his business open, but he expected sales to drop.
He cut back on staffing at his Benjamin Moore paint store in Calgary and decided to take the weekend off.
About 20 min into opening on the Saturday morning, he got a call from an employee who said, “I need you to get to the store right now.”
“It was a pretty big shift, a sudden shift that we weren’t expecting, and we were very fortunate to have it.”
With most people stuck at home, a variety of home improvement businesses saw a boost in demand.
Hansen had planned to start an online store next year, but worked long hours in the spring to get it up and running. A day after it launched, the online sales began.
Overall, paint sales are up about 40 per cent compared with last year.
While Hansen considers himself a planner, he credits the quick decision making as a lesson he learned.
Meanwhile, while sales were strong, the store was understaffed at times with three full-time employees. That, too, was a learning experience, Hansen said, as some staff members became burned out.
WATCH | It’s tough to plan when you don’t know what’s coming:
‘There are no customers’
At Chiles Sandblasting and Painting in Red Deer, the shop can be busy one week and then absolutely dead the next week.
Owner Brian Chiles describes his business as an autobody shop for heavy duty and oilfield equipment. With a severe downturn in the oilpatch, sales at his business are down between 25 and 75 per cent, depending on the month.
The lesson he has learned is how important it is build up some savings and not carry around debt.
“I’ve been around a little bit. It would be very difficult for a new company to start up right now, so I am thankful for the financial situation we’re in.”
Still, there are challenges ahead. Not only are sales down, but even if the business closed, he can only reduce his expenses so much. Chiles owns his building, which costs money to operate. It’s an asset he can’t sell or rent because, he said, three-quarters of the buildings in his industrial park are already sitting empty because of business closures.
He’s unsure if his shop will experience the same fate.
“The problem happens to be there are no customers.”
‘I went with my gut’
After her Vancouver-area fitness studio was forced to close in March, PJ Wren decided over the next month to leave the brick-and-mortar gym in the past and pivot to an online business, Fitness with PJ.
“What I learned the most was how to make some tough decisions with very limited amount of information, as well as the fear of the unknown. So I went with my gut,” she said.
The world of online fitness coaches and programs is saturated, so Wren decided to focus on women over the age of 40. There was a learning curve, especially with understanding so many new online platforms where she can offer her services.
So far, the new venture is a success. Her revenue is similar to when she operated her fitness gym, but her expenses are lower. Instead of a staff of 12, with her online business she has three.
The 50-year-old said she’s less stressed and has more free time.
‘When they call, you answer your phone’
For Vittorio Oliverio, the big lesson of 2020 is communication.
As the pandemic arrived in the spring, uncertainty swept across the country. For many people, it was centred around their jobs, their bills, and how they were going to make ends meet.
At his mortgage business, Oliverio admittedly had just as many questions as clients, but he purposely tried to reach out to as many people as he could to share what information he had.
In hindsight, he said that gave him an edge over his competition as he gained a level of respect as a business that was actively seeking to help and get answers for people.
“Everyone was struggling with what to do,” he said.
“Instead of hiding, we decided to go on the forefront and provide help and advice on how to handle their financial situation,” said Oliverio, who runs Centum Professional Mortgage Group in Lethbridge, Alta.
Over the summer, the phones kept ringing at the office as people wanted more information about mortgage payment deferral programs and other issues.
“It was surprising to me that banks make all these announcements without any indication to the client how to contact them,” he said.
The company ended up gaining a significant number of new clients, he said, and sales of mortgages are up 30 per cent compared with last year.
“It’s been phenomenal, business-wise,” said Oliverio. “A lot of times, people just want to know that when they call, you answer your phone.”
‘Once everything is normal …’
Of all the times to start a business, this year was not the best.
That’s the reality for Mohammad Anis, who began a new venture in the automotive sector.
After more than a few decades in the industry, he started his own business in Toronto to help local companies expand internationally and, conversely, work with foreign firms about how to grow into the Canadian market.
Since COVID-19 arrived around the time his business began, he hasn’t moved past the starting line.
His lesson? No matter the business idea, there can be impacts outside of your control, like a pandemic.
“Once everything is normal, then definitely it will be easier to convince people and convince the industries to look at this [venture],” he said.
It’s a setback, but he’s not giving up. He’s keeping costs low with hopes the business can pick up next year.
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Canadian Investors: 2 TSX Stocks for Peace of Mind in Volatile Times – The Motley Fool Canada
There weren’t many places to hide on Wednesday, as the TSX Index shed nearly 3% of its value, while the tech-heavy NASDAQ 100 tanked nearly 4%. The market-wide sea of red had many worried in what shaped up to be an “everything sell-off” that spared few. With the markets nearing correction territory once again, Canadian investors may wish to put some cash on some battered plays that are better poised to hold their own if the bear were to re-emerge from his cave before the holidays.
Nutrien: A lone green arrow on a big red day
Now, I’ve been a raging bull on shares of the fertilizer kingpin for quite some time now — not just because the long-term prospects for agricultural commodity producers are bright, given the secular tailwind in an ageing global population, but because Nutrien stock had been so beaten up such that its correlation to the broader markets is likely to be near zero, if not negative.
“Nutrien was in a world of pain well before the coronavirus crash hit.” I said in a prior piece where I referred to Nutrien as a dividend darling that was to be bought whether a market crash happens or not. “With a robust retail segment and operational advantages (in potash production in particular) that Nutrien holds over its peers in the space, the company is a ‘moatier’ stock that most folks would give it credit for.”
With shares of NTR trading at one times book value, the stock looks so undervalued that I suspect we’ll see more days where the stock holds its own when the rest of the market crumbles like a paper bag.
Hydro One: Low in beta and high in defence
Shares of the wide-moat municipal utility Hydro One (TSX:H) fell 0.8% on Wednesday. But it easily could have been in the green given the stock’s ridiculously low 0.21 beta. Ryan Vanzo, my colleague here at the Motley Fool, recently referred to Hydro One as one of the safest stocks on the TSX. I think he’s right on the money.
“The company primarily delivers electricity to customers in Ontario, where its transmission lines cover 98% of the province. Even during a recession, electricity demand doesn’t recede that much. And with regulators guaranteeing a level of profits, often years in advance, Hydro One has extreme visibility into future cash flows.” wrote Vanzo.
With a virtual monopoly that’s defending its cash flows, Hydro One is one of the few bond proxies that makes for a decent hiding place for investors worried that things could go south in a hurry. The company may not have the best growth profile in the world, but it certainly has one of the most well-covered 3.5%-yielding dividends out there. With shares trading at 1.7 times book value, you’re getting a lot of bang for your buck with H stock versus the likes of those ridiculously unrewarding fixed-income assets.
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Fool contributor Joey Frenette has no position in any of the stocks mentioned. The Motley Fool recommends Nutrien Ltd.
Bank of Canada Signals Low Rates Until 2023, Unveils Changes to QE Program – Mortgage Rates & Mortgage Broker News in Canada – Canadian Mortgage Trends
Mortgage shoppers take note: Cheap money is here to stay, at least for the next two years, the Bank of Canada reaffirmed during its interest rate decision on Wednesday.
The BoC had previously provided guidance that rates would remain at their effective lower bound—currently 0.25%—“until 2 percent inflation target is sustainably achieved,” but went a step further this time by providing a specific year.
“The Governing Council will hold the policy interest rate at the effective lower bound until economic slack is absorbed…In our current projection, this does not happen until into 2023,” the Bank’s statement read.
As part of the announcement, the BoC decided to leave its current policy rate at 0.25%, where it’s been since March.
Long Recovery Ahead
While the Bank left its policy rate untouched, it did announce changes to its Quantitative Easing program, whereby the BoC has been purchasing bonds to maintain market liquidity, which has helped keep mortgage rates low.
That bond-buying will be reduced to $4 billion per week from the current $5 billion, and purchases will increasingly shift to longer-term bonds.
“Our main message today is that it will take quite some time for the economy to fully recover from the Covid-19 pandemic,” BoC Governor Tiff Macklem said during a press conference that followed the rate announcement. “The Bank of Canada will keep providing monetary stimulus to support the economy through the recovery.”
And that recovery is facing fresh headwinds as a result of a second wave of the pandemic, which is intensifying by the week.
Despite a stronger-than-expected rebound in unemployment and GDP over the summer, the Bank said “growth is expected to slow markedly.” Looking ahead to 2021 and 2022, the Bank expects the economy to grow by 4% on average each year.
“After a tumultuous spell for all forecasters, the Bank’s view on the economy has largely moved into line with consensus,” BMO Economics Chief Economist Douglas Porter wrote in a research note. “And the main message there is that growth will be put on hold in Q4 by the second wave, but it won’t go into reverse, and should resume in 2021.”
What Does this Mean for Mortgage Rates?
The Bank’s announcement affects both fixed and variable rates. Fixed rates are expected to remain low, and likely fall further, due to the Bank’s renewed commitment to purchasing longer-term bonds, which will help keep rates low for the ever popular 5-year fixed term.
And the Bank’s guidance on maintaining its overnight rate at 0.25% until at least 2023 bodes well for existing variable-rate holders, to the extent they can rest assured their rates won’t rise.
But the Bank’s continued reluctance to entertain negative rates also means that new floating-rate mortgage holders aren’t likely to see their rates fall any further. (Although, an additional rate cut can’t be completely ruled out. Overnight Index Swaps markets are still pricing in a 15% chance of a 25-bps cut in the next 12 months.)
In this environment, many borrowers are gravitating towards fixed rates.
A recent BMO survey found that 57% of first-time buyers said they’ll choose a fixed rate when they’re ready to secure their mortgage. Another 30% who were undecided said COVID has made them more likely to choose a fixed rate.
“The best nationally available 5-year fixed and variable rates are currently just 5 bps apart. Insured 5-year fixed rates are below variable rates,” wrote RateSpy founder Rob McLister. “Most consider a 5 bps rate premium peanuts for peace of mind, as they should…Even if the BoC dropped rates 25 bps, the cost of being wrong by choosing a 5-year fixed is modest ($245 of extra interest per year per $100,000 of mortgage).”
And while the Bank said rate hikes are off the table until at least 2023, some economists believe they’ll remain where they are for longer than that.
“We see this as a reasonable timeline but wouldn’t be surprised if the overnight rate remained at 0.25% into 2024 as well,” economists at National Bank of Canada wrote. “As always, the progression of the pandemic will be in the driver’s seat here and ultimately dictate the health of the economy, and thus, monetary policy.”
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