Sunday, September 27, 2015

FATCA – cost and effect

Money Laundering Bulletin

The United States’ Foreign Account Tax Compliance Act (FATCA) went into effect on 1 July 2014. A year on, financial institutions are filing for the first time, but teething problems abound, Paul Cochrane discovers, with some banks no longer accepting new US clients and registration volumes far below expectations.

FATCA, which requires foreign financial institutions (FFIs) to provide information on US accounts above US$50,000 to the US' Internal Revenue Service (IRS), has been a complicated piece of legislation from the get-go. The over 1,000 page Act, which is aimed at curbing tax evasion, was delayed repeatedly after its passage in 2010, as US authorities worked to persuade more jurisdictions to sign Intergovernmental Agreements (IGAs), and FFIs to secure a Global Intermediary Identification Number (GIIN). 

The uptake was slow due to FATCA's extra-territorial nature, requiring legislative changes in many countries, including override of national banking secrecy and to effect financial institution reporting to a foreign jurisdiction.

With FFIs having to screen all clients for US indicia as well as hiring new compliance staff, FATCA has proved both onerous as well as expensive to implement; it has cost an estimated $8 billion worldwide. 

Deadlines and delays

Aware of the complexities, IRS set a 'transition' period, running to the end of 2015, for 'good faith' compliance efforts by FFIs; only then would it start cracking down on what it terms 'recalcitrance' via a 30% withholding tax on US-sourced income, and the risk of being shut out of the US financial system.
Despite the transition phase, the legislation's complexities has already led jurisdictions to extend reporting deadlines, notably one of the first to sign up to FATCA, the Cayman Islands, a FATCA world leader, with 30,868 FFIs registered, pushed the date for providing details of its US reportable accounts back to 26 June 2015. Luxembourg extended its deadline from 30 June to 31 July 2015. 

“The IRS has extended FATCA reporting for 90 days, if you ask for it,” said Malek Costa, Head of Group Compliance at BLOM Bank in Lebanon, which operates throughout the Middle East. “The real issue was with the software, at first we thought it would be easy to extract data from the core banking system and send it to the IRS but it has been a difficult task and took a lot of time. It involved many processes starting from getting the authorized certifications, buying necessary software that transform the file to be reported into .xml schema, encrypting it and then decryption when extracting the IRS response when validating the file.”

It is not just upgrading software that is causing issues for financial institutions. “Bankers are frustrated at the amount of paperwork, and US citizens with the extra paperwork, of 80 pages compared to 5 to 10 pages in the US,” said Liz Zitzow, Managing Director of British American Tax, a London-based US accounting firm.

Irreconcilable differences

The extra form-filling is expected to generate numerous problems, particularly filing figures that correspond with other tax files; filing on the value of shares; around beneficial ownership and exchange rate differentials. “I think everyone is going to be off the mark and figures that match will be less than 5 percent,” added Zitzow. For example, “tax filers don't use the exchange rate that banks use as many people do their own forms.”
Filing issues are compounded by the 7.6 million US citizens abroad having to fill in the Foreign Bank Account and Financial Accounts Report (FBAR), a BE-10 form on foreign affiliates, and other tax forms. “I estimate there will be around 100,000 false positives on FATCA,” said Professor William Byrnes, Associate Dean of Special Projects at Texas A&M University's School of Law. “I find the forms difficult, and I've written a 1,500 page analysis on FATCA. Many issues are unsolved or unworkable.”

A concern for FFIs is that the IRS will audit institutions over the data they send, with the ability to go over 10 years of records.
“They have the data to match taxpayers information with the information they're receiving from financial institutions. So if the IRS knows Mr X made a transfer from the US to an account in bank Y, and the bank did not report this account, the IRS may ask bank Y if the account is still active. If the bank says yes, the IRS will ask why it wasn't reported. They could investigate,” said Costa. “If the client declared non-US status with no US indicia in the electronic and paper records, the bank is then covered. The reason for doing enhanced due diligence is to mitigate the risk of identifying the accounts with US indicia and thus minimizing IRS investigations. This is a conservative approach for applying the FATCA procedures.”

American exodus

While banks have to screen for clients above $1 million, the next IRS requirement, by 2016, is to screen for all US clients.
An unintended consequence of FATCA has been Americans renouncing their citizenship due to the extra due diligence. Already a record 1,336 Americans have done so in 2015, according to the IRS, while earlier this year a survey by the deVere Group, a financial consultancy, found that 73% of expatriate Americans were considering relinquishing their passports due to FATCA. 

Banks are also shunning American clients, unless high net worth individuals, due to the extra due diligence required. “Over half of UK banks will not take Americans anymore,” said Zitzow.
Furthermore, FATCA is impacting the employment prospects of American managers abroad due to filing requirements. “Many Americans are becoming unemployable as they are not being given signing authority as (companies would then be) exposed to FATCA,” said Jim Jatras, Manager of in Washington D.C.

Not a priority for all

But despite the fallout (or maybe because of it), there is still a long way to go for global FATCA compliance. As of June 2015, 165,461 FFIs have registered on the IRS FATCA portal, according to Byrnes. Such a figure is well below what the IRS initially suggested, of 500,000 potential FFIs to be registered worldwide, while others suggested 800,000 to 900,000 FFIs. Indicative of the low uptake, the HM Revenue & Customs estimated that 75,000 UK financial institutions would be impacted, yet just 23,256 GIINs are in place in the mainland UK. The UK and its 10 main dependencies and overseas territories – the Cayman Islands, the British Virgin Islands, Montserrat, the Turks & Caicos Islands, Anguilla, Bermuda, Gibraltar, the Isle of Man, Jersey, and Guernsey - comprised 74,694 of the GIINs, representing 45% of the total, according to Byrnes. Of concern to global roll-out, of the four BRIC countries, there are just 8,254 FFI registrations. “At the end of the day the lagging GIIN registrations tell us FATCA is a back burner issue for most foreign governments,” said Byrnes. “The IRS should have upfront employed a more diplomatic and inclusive stakeholder approach.”

Regarding IGAs, 57 countries have signed Model 1 agreements (with 11 signed this year) as framed in FATCA, whereby the FFI reports directly to their central bank/regulator, which then reports to the IRS; and seven countries have signed Model 2, where the FFI reports directly to the IRS. A further 48 jurisdictions have signed onto FATCA “in substance,” bringing the total to 112 jurisdictions, according to IRS figures. The US, meanwhile, recognises 250 jurisdictions and territories worldwide. There are some 6,296 GIINs in 131 jurisdictions without an IGA. 

“The IGAs are potentially a weak link as without them FATCA is not enforceable - as the IGAs are not legal [agreements in the conventional sense], having not gone through Congress or the usual international treaties processes, and these vulnerabilities could be exploited,” said Jatras. There is a degree of uncertainty about the “consequences of sanctioning foreign institutions.”

Exaggerated claims

Meanwhile, FATCA is not expected to repatriate the amount of tax stated by the IRS and US Treasury in 2010 of more than $100 billion annually. In 2013, the Congressional Joint Committee on Taxation estimated that FATCA “will generate additional tax revenue of approximately $8.7 billion over the next 10 years,” or $870 million a year. “That is a pretty big difference. So where did the $100 billion come from? It was made up. My conclusion is FATCA will never pay for itself, as amounts are so small in the big picture of things,” said Byrnes. “The goal was already being achieved through the normal tools the IRS has at its disposal and through negotiations with Switzerland. There were 150,000 evaders before FATCA. Now, 100,000 of them have been caught (through tax evasion probes into banks in Switzerland and elsewhere), so that leaves only 50,000 left. As a percentage of 150 million tax payers, that is not even a correction error. A 50 percent whistle blower reward to find a tax dodger would have been a better idea.”

With some banks reluctant to on-board US customers due to the extra due diligence, and certain Americans not wanting to hand over their financial data to the IRS, an up-tick in financial crime is expected. “I think shell companies will increase as it is a way to evade tax, although AML (anti-money laundering) procedures are playing a strong role in fighting tax evasion by finding out who is the real beneficial owner of an account as this later may be a US person,” said Costa.

Looking ahead, FATCA is expected to play a role in the upcoming US presidential elections, with Senator Rand Paul proposing through Senate Bill S66 amendments to the IRS Code, which would amend FATCA. Also, the Organisation for Economic Cooperation & Development's (OECD) tax information sharing initiative is gaining steam, which could have implications for FATCA implementation and compliance.

Friday, September 18, 2015

Guilty countries doing little to bear brunt of refugee crisis impact

Global Times 

An informal refugee camp in the Bekaa Valley, Lebanon

There is a massive debate raging in Europe and the US as to what should be done about the Mediterranean refugee crisis. How many should be let in? What is our moral responsibility?

Largely absent from these discussions is the role of certain European states and the US in triggering the refugee crisis in the first place.

It was not Greece, whose beaches and borders are inundated with refugees, or other countries along the South-Eastern Mediterranean. Nor Lebanon, which has a staggering 1.2 million registered refugees, or Iraq or Jordan. Turkey is another matter, but all four of these Middle Eastern countries have taken in the bulk of 4 million Syrian refugees.

All the neighboring countries of Syria are reeling from the strain of such an influx, particularly Lebanon, which has taken in the equivalent of a quarter of its population in the last four years. Yet Europeans are complaining about collectively taking in 350,000 refugees: try over a million in one country and see what happens on the social and economic level.

Ironically, the countries that have taken in the most Syrian refugees on a per capita basis were not involved in any recent military adventurism in the Middle East.

The countries that beat the drums of war for the invasion of Iraq in 2003 have not been as welcoming, despite causing the deaths of over 1 million Iraqis and displacing 1.9 million people.

Initially, the US took in only a handful of refugees, and under pressure increased the number, since 2007 taking in 105,000 Iraqi refugees.

Britain was also not very refugee-friendly, despite London's role in pushing for the war. When it comes to Syrian refugees, the US has taken in just 1,243 since 2011.

This year, the US has pledged to take in a further 33,000. That figure should be seriously increased.

The Iraq war ties in with the Syrian refugee crisis, as does the NATO decision in 2011 to bomb Libya. The Iraq war provided the catalyst for the rise of the Islamic State, which did not exist prior to the West's "humanitarian intervention."

Libya's shoreline, which is being utilized primarily by African refugees to cross the sea, was not a launch pad prior to the overthrow of Muammar Gaddafi. Neither was Syria a source of refugees prior to the conflict in 2011.

Certainly such dictatorships should not be excused any blame since their clinging onto power at all costs has proved devastating, but it is the public, in particular women and children, that are bearing the brunt of conflict. Furthermore, the conflicts have negatively impacted economies around the region, adding further impetus for people to leave.

No wars, no refugees. It is essentially that simple. Indeed, the EU estimates that two out of every three migrants come from conflict areas. This is only likely to increase as Britain, France and the US up their military involvement in Syria.

The advocates of humanitarian intervention will argue that a new democratic state cannot emerge without a difficult "transition period," but is war the right way to make such a change happen?

A broken country that is not able to rebuild, like Iraq, Libya or Afghanistan, without the equivalent of a Marshall Plan that rebuilt postwar Europe, is not going to succeed.

Instead, we have hand-wringing about what to do with refugees.

Blame for the Mediterranean refugee crisis should also lie with the key regional US allies like the Gulf states, which have so far not taken one Syrian refugee despite their counter-revolutionary role in the Middle East, especially in Syria but also Libya and Egypt.

There needs to be a global debate about the refugee crisis, and the role of those countries most responsible should not be overlooked.

That said, supporters of the Assad regime should also be involved in taking in refugees, as they too hold culpability for the deaths of 240,000 Syrians and the displacement of 9 million people.

(Photograph by Paul Cochrane)

Saturday, September 12, 2015

Economics and the Syrian Uprising


Economics was a major factor behind the Arab uprisings, in Syria as much as in North Africa, but the role of economics has been downplayed by governments and the media alike. What is more, plans are underway to replicate the same economic policies in post-conflict Syria that helped trigger the uprising in the first place, writes Paul Cochrane in Beirut.

In the years immediately after the US-led invasion of Iraq in 2003, there were often discussions in Syria and Lebanon about whether there would one day be regime change in Damascus. Would the regime eventually be overthrown – internally or via external intervention – and Syria become a democracy? An often typical, if somewhat cynical statement was that Syrians did not want either. Syria was stuck like the meat in a sandwich, with on one side a devastating conflict in Iraq that had forced over 1.4 million Iraqis to seek refuge in Syria, and on the other side laissez faire Lebanon, a democracy in name but essentially a dysfunctional one due to a political-confessional system that maintains a fragile status quo but results in minimal development and a weak state.
The choice of a painful, bloody transition from autocracy that could lead to civil war and then perhaps be followed by a “demo-crazy” Lebanese style government was not overly attractive for Syrians compared to stability and security, and where minorities – which account for around 26% of the country's population of 23 million - were protected under a nominally secular regime.
So, the argument went that while Syrians wanted change, such as greater civil liberties, less corruption, and the reigning in of the omnipresent mukhabarat (the secret police), the trade off was questionable. In short it was that pithy statement of “better the devil you know, than the devil you don't.” Economics however barely figured into discussions.
Fast forward to the beginning of 2011, and the same conversations were being had: would the Syrians be the next citizens of an Arab autocratic state to rise up following the Tunisians, Libyans and Egyptians? In one such debate, a French embassy employee and a French NGO worker, both working in Damascus, argued that the conditions were different from North Africa, poverty was not as biting, and there was little room for a mass uprising to take place. A year later, the same French embassy employee – since evacuated from Syria – admitted how wrong she was, having been sucked into a “Damascene bubble” of the good life and not exposed to the rude reality of life in the towns and smaller cities outside of the capital and the second largest city, Aleppo.
Indeed, under the economic reforms initiated in 2001 following the death of President Bashar Al Assad's father, Hafez, the middle and upper middle classes in Damascus and Aleppo were doing better from a materialistic perspective, able to buy goods and services previously unavailable during the period of a state-run economy, and greater economic opportunities seemingly abounded. Tourism was also doing well, with the number of visitors surging from 2 million in 2002, to 8.5 million in 2010, and revenues reaching $8 billion. 

European tourists by Souk Hamidiyeh, Damascus in 2008

Decades of rising unemployment

The reforms, spearheaded by Assad and the Western-educated deputy prime minister Abdallah Dardari, gradually liberalized the economy, in part pushed by foreign banks – the bulk Lebanese – entering the market from 2004 onwards, and in 2009 the opening of the Middle East's newest stock market, the Damascus Securities Exchange (DSE).
Real estate projects, shopping malls and boutique hotels also sprung up, whether financed by expatriate Syrians returning home with an eye for an investment, to Levantine and Gulf investors (US investment was largely curtailed due to the Syria Accountability and Lebanese Sovereignty Restoration Act of 2003, while bilateral trade in 2010 was estimated at $928 million or 2.4% of all trade).
However, the economic reforms enabled the elite to further line their pockets – like Rami Makhlouf's Cham Holding, whose board members and investors read like a Who's Who of prominent Syrians – while creating massive income disparities amid high inflation, leaving ordinary Syrians with an average monthly salary of $234 but an average monthly household expenditure of $638, according to figures from the Syrian Central Bureau of Statistics in 2010.
The shift from a centrally planned economy to a more open market model still had too much of the cronyism and endemic corruption that had plagued Syria for decades. Indeed, there was massive capital flight between 2000-2009, with Global Financial Integrity estimating Syria lost $23.6 billion from corruption, trade mispricing, bribery and other illicit activity.
The billionaire businessman and maternal cousin of Assad, Rami Makhlouf, whose portfolio includes mobile phone operator Syriatel, was a particular figure of hate for ordinary Syrians, with his heavy-handed tactics of muscling in on business deals to get his cut, and judged to have too much of a controlling stake in the economy.
Not that the reforms were all negative. Syria sorely needed to overhaul its economy given declining oil revenues, a burgeoning population – reaching 3.5 percent growth a year in the early 2000s – and fiscal woes (Moscow had to write off $10 billion of Syria's $13 billion Soviet-era debt in 2005 in able to sell new weapons to Damascus).
When you look back, don't throw reforms in the dustbin,” said Jihad Yazigi, editor of financial paper The Syria Report. “Average Syrians were entitled to open a bank account, get loans and buy cars. The problem was economic reform was in no way accompanied by a real vision as to where to take the country to.”
On top of a lack of vision, Syria arguably opened up too soon in terms of trade liberalisation, such as joining the Greater Arab Free Trade Agreement (GAFTA), and inking a free trade agreement with Turkey, which did not give adequate time for Syrian industry to get up to speed with competitors.
The idea was to create jobs and exports, but it didn't work. The borders opened, and the Turks and the Chinese flooded the market; thousands of workshops closed,” said Yazigi. “People on the streets today are farmers, plumbers, semi-skilled workers and those that lost jobs over the past decade in the smaller cities and the suburb cities; not from Damascus or Aleppo, which benefited from the reforms.”
With topsy-turvey geographical economic development, the economy was not growing fast enough to handle a rising population. “Over the last three decades you've had low GDP growth and periods of high GDP growth, but according to most economists Syria needed growth of 8% per annum. Syria never grew more than 7%, some years by 5%, but most years by 2-3%. In other words, there was 30 consecutive years of rising unemployment every year,” said Yazigi.

The opening of the Four Seasons in 2005 was indicative of Syria's opening up to the world, and outside capital.

Downplaying economics

Economics played a key part in the uprisings in Tunisia and Egypt, both having adopted neo-liberal economic models and applied International Monetary Fund (IMF) recommendations. Both countries, like much of the Middle East and North Africa, have burgeoning populations, 50% of the populace under 30 years old, and unemployment rates among the highest in the world. Such dissatisfaction with the status quo had been growing for years, and in many senses the indicators were there for all to see.
In Egypt, there were 3,426 strikes, sit ins and protests by workers between 1998 and 2010. It was a “decade of unprecedented strikes,” said Joel Beinin, Professor of Middle East History at Stanford University, at a lecture on “Arab Workers and the Popular Uprisings of 2011” at the American University of Beirut. A major demand of workers was a minimum wage. “The mobilization of workers from the 1990s onwards is an ongoing story, and demands were primarily economic,” said Beinin.
However, the economic angle of the uprising in Egypt – and Tunisia – was barely covered in the Western media, focusing instead on demands for democracy and freedom, and downplaying the role of workers and economics in the uprisings. For instance, a key move in the struggle against the government of Hosni Mubarak came when tax collectors stopped working. Furthermore, workers' strikes have continued in Egypt even after Mubarak's fall, demonstrating the importance of the need for economic change in the country, with 1,419 collective actions by workers in 2011, with around 1 million participants in each protest.
If you compare the Polish Solidarity movement (in the 1980s) to the Egyptian uprising, it was championed by the West as it was anti-Communist, but in Egypt it was anti neo-liberal, so it was viewed as a “negative” phenomenon by the West,” said Beinin.
Regarding Syria, Damascus did not have the same economic relations with the West as Egypt and Tunisia had, nor had it IMF loans and stipulations or major worker movements. “The dynamics of the struggle in Syria” are different to that of Egypt, said Beinin. “It is hard to find a class dimension, although political-economics definitely played a part in what led to the uprising.”
The geography of the uprising in Syria is testament to the role economics played, starting in the southern town of Dera'a near the Jordanian border in March 2011, and spreading to other periphery towns and cities, with the last places affected the economic and political centres of Aleppo and Damascus.
There is a link between the economy and the uprising,” said Yazigi. “Early on in Dera'a, before the people said they wanted the fall of the regime, they burned down Syriatel stores, which is a reflection of their frustration with crony capitalism.”

Damascus skyline, 2008

A ravaged economy

The uprising quickly became violent, initiated by the Syrian regime's crackdown on what started as peaceful demonstrations and escalated as an armed opposition took form – when external involvement in training and arming rebels began is not clear, and may never be.
Unlike how the US, Britain and France did not initially support the uprisings in Tunisia and Egypt, or believe in the fall of their long time leaders, the West was quick to denounce the Assad regime, and by May the US imposed sanctions, followed by the European Union later in 2011, banning EU importation of Syrian oil and gas, which had accounted for 93% of Syria's exports to the EU (22.5% of overall exports).
As the conflict spread throughout Syria and the sanctions started to take hold, the economy was on a slippery downwards slope. According to the Syrian Center for Policy Research, Syria's real GDP contracted by 18.8% in 2012 following a contraction of 3.7% in 2011, with economic losses estimated at $48.4 billion in both 2011 and 2012, equivalent to 81.7% of its 2010 GDP. The Institute of International Finance (IIF) on the other hand estimated contractions of 20% in 2012, and 6% in 2011, and that the economy will contract by 15% this year, to $27 billion, from $30.9 billion in 2012, $46.7 billion in 2011 and $57.5 billion in 2010.
The economic ramifications of the conflict have also spilled over into Lebanon, with up to 375,000 Syrian refugees in the country, while in Jordan – also hosting refugees – the IIF estimated output losses to the economy from regional unrest at $1 billion in 2011 and $3 billion in 2012, equivalent to 3.4% of GDP in 2011 and 9.5% of GDP in 2012.
It is like history repeating itself, as Iraqis had taken refuge in both countries following the 2003 invasion, and now Iraqis are fleeing back to their war ravaged country while Syrians are taking refuge elsewhere. “What happened to Iraqis 10 year ago is now happening to the Syrians,” said Yazigi.

 The Citadel in Aleppo after a refit to encourage tourism, 2008

The future?

The outlook for the Syrian economy is pretty dire, while the government is hemorrhaging money to retain allegiances, fund the military and bolster public sector employment. How long Damascus will be able to handle the situation without assistance from allies is now a pressing question. The loss of government oil revenues due to the sanctions was estimated at $4 billion in 2012, or 25% of the budget, and the Syrian pound (SYP) has depreciated by 72% since 2010, now trading at SYP 81 to the US dollar, while the black market rate is around SYP 100.
Official foreign currency reserves are also in a precarious position, with the IIF estimating they will decline to $2.1 billion at the end of this year, equivalent to one month of import cover, from $5.6 billion in 2012.
The next big question is what will happen economically after the conflict is over, which may – if a long drawn out civil war is prevented - involve the remnants of the Assad regime, as some are predicting, with a transitional government of sorts in place, to a government made up of the numerous factions currently fighting Damascus. Whatever the outcome, tens of billions of dollars will be needed to get Syria and its economy back on its feet.
The West and Gulf backed National Coalition for Syrian Revolutionary and Opposition Forces announced in November, 2012, that it is seeking $60 billion for reconstruction efforts. However, the opposition does not have a publicly announced economic plan for a post-uprising Syria. “The Syrian opposition doesn't realize how important economics is or how it important a role it played in the uprising,” said Yazigi.
What is being discussed appears to be a return to the same economic policies as before, yet with a weaker state role, such as ending subsidies and pushing privatisation programmes. At the forefront of such discussions is Abdallah Dardari, the man that spearheaded Syria's economic reforms in the 2000s. He is now in Beirut, working at the United Nations Development Programme (UNDP) and advising the opposition. “Dardari is a neo-liberal, and the West wants him to steer economic reconstruction, yet he was responsible for how Syria's economic reforms were carried out,” said Yazigi.
The opposition is aiming for funding from Syrian businessmen, the West and the Gulf states, which have common economic aims. As the UAE's Minister of State for Foreign Affairs Anwar Gargash told the press in Dubai in November: “What we want to do is involve the private sector in what sort of economy emerges in a future Syria.”
Yet while the private sector needs a role in the future Syria, other voices need to be heard too. “If you want to talk about the economy the business community matters, but it is not the whole economy. They are working on cooking up a programme that suits their interests,” said Yazigi.
While the battle lines have been drawn in the current conflict, the next part of the battle will involve economic policy and how it is determined by local, regional and global players keen to exert their influence. 

Photos by Paul Cochrane 

Monday, September 07, 2015

Japan ready to operate in shadows of espionage with new spy agency

Illustration: Luo Xuan/GT

With Tokyo pushing for a more offensive military role, Japan not having an external intelligence agency is set to change with an agency reportedly just months away from being launched.

Modelled and developed in conjunction with Britain's external intelligence agency MI6 and the Australian Secret Intelligence Service (ASIS), news of Japan wanting a secret foreign intelligence service first emerged in a leaked 2008 diplomatic cable. Further news this spring confirmed that Tokyo was developing its human intelligence capabilities following the kidnapping and killings of two Japanese citizens in Syria by the Islamic State. 

Japan's intelligence services, which were confined to domestic matters following WWII, have had to rely on open-source intelligence and cooperation with foreign intelligence services for information, notably the countries that make up the surveillance alliance exposed by whistle-blower Edward Snowden, known as the "Five Eyes:" the US, Britain, Canada, New Zealand and Australia.

The development of such a spy agency dovetails with Prime Minister Shinzo Abe's drive for a reversal of the ban on overseas military engagement. New legislation has been passed at the lower house and needs to be endorsed by the parliament's upper chamber. The move however has been met with massive resistance from the public, with over 120,000 anti-war protesters demonstrating in Tokyo on August 30.

While the demonstrations were anti-military in nature, protests were not per se against the new agency, news of which has been clouded in secrecy. The agency, which has no name yet and is to be run out of the prime minister's intelligence service, the Naicho, or Cabinet Research Office, is expected to take years to get up to operational strength and be on par with the global intelligence giants.

It was reported in August that Abe met with Shigeru Kitamura, head of the Naicho several times, along with the Budget Bureau Chief Kazuho Tanaka, to finalize a new budget for the fledgling agency.

According to the 2008 leaked cable, Japan's foreign intelligence priorities were China and North Korea, followed by preventing terrorist attacks. Again, this gels with the reversal of Tokyo's stance on non-military engagement, which is aimed at containing China and strengthening ties with the US.

At the same time, Japan is establishing two new signal intelligence stations, on Yonaguni island which is close to Taiwan, with the second slated to open in 2017. Operated by the country's Defense Intelligence Headquarters, the two new facilities will bring the total to 19, enabling Japan to have one of the best interception services on the planet. This will link Tokyo even more with the "Five Eyes" in the global showdown over surveillance capabilities.

Unsurprisingly, such moves are being eyed with great suspicion in the Asia-Pacific region. Tokyo has been increasingly antagonistic in recent years toward China and the two Koreas, while heightened foreign intelligence and surveillance gathering brings back bad memories of Japan's brutal military intelligence in the first half of the 20th century. A new spy agency will only exacerbate current tensions.

Such surveillance and intelligence gathering will not of course be confined to military matters. As has been seen time and again, intelligence services work for the national interest in multiple ways, with economic intelligence a top priority. With Japan's economy going head-to-head with Asian rivals, greater intelligence gathering will bolster Japanese competitiveness. Surveillance will also be used to anticipate political, social and economic unrest overseas, giving Japan another advantage.

The big question now is whether the new military legislation will be passed by the upper chamber. This would officially green light the new agency. If the legislation is not passed, will the spy agency still go ahead? Given Abe's passing of a state secrecy act in 2013, and that training of intelligence agents has been underway for years in conjunction with the ASIS, it is likely either way.

We are going to see the rise of a much darker Japan that is able to better operate in the shadowy intelligence world.