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COLLAPSE OF GIBRALTAR STOCK BROKERAGE HITS EXPATS
Rock Financial Services, an execution-only brokerage company based in Gibraltar, collapsed last year losing £12 million and leaving hundreds of small investors out of pocket. The downfall of Rock risks seriously tarnishing the reputation of the territory, which has been seen as one of the better places for investors to manage their money offshore. Leonard Berney, a British financial adviser based in Spain who has many clients who lost money in the demise of Rock, described the collapse as scandalous and said it could badly damage the territory. “The figure lost is a lot of money in anyone’s language,” he says. “It is a catastrophe for little Gibraltar and could scupper the territory as a financial center.”
The collapse of the company hit about 400 investors, many of them expatriates living in southern Spain who are attracted to Gibraltar by its geographic convenience, English-speaking advisers and regulatory requirements that broadly match UK standards. It is unlikely that customers will see any of their money again since Gibraltar’s investors’ compensation scheme was only set up after the collapse of the company, which, according to an investigation by PwC, did not have adequate capital and had failed to properly safeguard customer assets. In June last year the Royal Gibraltar Police raided the company’s office and the company was wound up soon afterwards. The investigation into the £12 million shortfall is continuing.
Whatever the outcome, everyone connected with the Gibraltar financial services industry, which controls about £1 billion worth of assets and is the third-largest part of the territory’s economy, was shocked by Rock’s collapse. The debacle is also embarrassing for the territory, which operates in a highly competitive market dominated by offshore financial centers such as the Isle of Man and the Channel Islands. Marcus Killick, chairman of the Gibraltar’s Financial Services Commission, says the collapse of Rock was an extremely unusual event and should not be seen as symptomatic. Investors in Rock, however, are far from satisfied that enough was done to prevent the company from collapsing. Andrew Linn, a Briton who retired to Spain, says the problems should have been picked up far sooner by the FSC.More on this story here.
JUST AS SCARY AS TERROR: THE U.S. ECONOMIC POLICY
As American voters contemplate their choices in this presidential campaign year, the world’s investors have been voting with their money. The early results are in -- and they do not look good for the United States. Last month, the OECD released figures showing that last year for the first time, China supplanted the United States as the No. 1 destination for foreign direct investment worldwide -- that is, money that goes into factories, equipment, real estate or existing companies. And in a blow to fans of “freedom fries”, No. 2 was France. Though other major economies also suffered a drop-off in this category , no nation fell as far in percentage terms as the United States. While such numbers fluctuate and foreign direct investment is just one type of capital flow, this dramatic swing can be seen as further evidence that in the 21st century, America is going to have to fight hard for its piece of the global investment pie -- money that translates directly into new jobs and the industries of tomorrow. Clearly, the world economy is shifting around us and our place atop it is being challenged.
The OECD report included another revealing statistic: Investment flows into emerging economies grew dramatically between 2002 and 2003, with investors pumping more than six times as much into developing markets as they did in the prior year -- nearly $200 billion. OECD analysts concluded that the primary reason for this redirection of capital was not simply that countries like China offer cheap labor. Rather it was the size and promise of their markets. This is a big deal, because even when low wages in these countries go up, that will mean increased buying power -- so the attractive labor markets of today will gradually become the attractive consumer markets of tomorrow.
At the same time, the image the United States is presenting to global investors is increasingly tainted by our apparent disregard for both economic and diplomatic fundamentals. The message we have conveyed in recent years is that there is no economic problem we confront today -- from gigantic deficits to huge under-funded liabilities -- that we would not prefer to have our children solve tomorrow. So, it should not be surprising that other important measures of investor interest have also taken a dramatic turn for the worse in recent months. Yet our economic leadership seems to be looking the other way. Two weeks after the OECD report came out, Treasury Secretary John Snow told a Cleveland audience, “There is no more serious threat to our economy than the threat of terrorist attacks on our soil.” It is hard to assess the number of ways in which this statement is wrong, but let’s try...More on this story here.
WHO NEEDS AN ISLAND WHEN YOU CAN BUY A HOME ON A LUXURY, GLOBE-TROTTING LINER?
You are wealthy. Seriously wealthy. You own a townhouse, a country retreat, a holiday home and a condominium somewhere hot. Yet you grow tired of all that and cast around for something new. The idea of purchasing your own private island off Dubai briefly appeals but what you really want is variety. What if you could buy outright an apartment in a luxury cruise liner that spends the entire year gliding around the globe? That way, instead of flying off to all points of the compass, the world can come to you.
From the balcony on your new “home”, you could eat breakfast with a view of Sugarloaf Mountain, watch penguins in Antarctica at lunch or sip drinks as the sun sets over St. Mark’s Square. Or count the number of abandoned shopping trollies sticking out of the mud in Deptford Creek. For that was where “The World” anchored on a recent visit to London, dominating the Greenwich skyline as the 43,000-ton, two-year-old vessel sat in the middle of the Thames. It offered a rare opportunity to look around for those who are more likely to fly to the moon than be able to pay the $1 million starting price for the smallest type of apartment on the Bahamas-registered ship. A chance to watch the super-rich at play.More on this story here.
EU SAVINGS TAX DIRECTIVE POSTPONED BY FIVE MONTHS TO JULY 1, 2005
The EC has officially acknowledged postponement of the implementation date of the Savings Tax Directive by five months to July 1, 2005. The adoption date has been pushed back to allow sufficient time for Switzerland to ratify the “Bilaterals II” treaties through its parliament. The four key elements of this agreement with Switzerland will constitute the basis for the forthcoming agreements with other “third” countries, namely Andorra, Liechtenstein, Monaco, and San Marino.More on this story here.
BVI LEADER SEEKS TO CORRECT MISLEADING STATEMENT OVER EU SAVINGS TAX DIRECTIVE
The Chief Minister of the British Virgin Islands, Dr. Orlando Smith, has criticized what he considers to be inaccurate comments made in the UK’s House of Commons relating to the EU’s Savings Tax Directive. In a letter written to Parliamentary Under Secretary of State Bill Rammell, the BVI leader requested that statements suggesting that the EU directive will have no impact on the jurisdiction’s financial industry be amended in the light of recent findings.
“In fact, as you should well know, the Maxwell Stamp Report, which has recently been published, specifically looked at the potential economic consequences for BVI of the implementation of the EU Savings Directive,” stated Dr. Smith. He added that the report clearly explains that the savings directive will “have an initial and continuing negative impact on the BVI’s financial services sector from an initial loss of flight business and a future loss of new business.” It has been estimated that this decline could amount to between 10% and 20% of the jurisdiction’s economy.More on this story here.
EUROPEAN MERGER WOULD CREATE WORLD’S EIGHTH-LARGEST BANK
Banco Santander of Spain agreed to buy the British mortgage bank Abbey National for £8.5 billion, the largest cross-border banking deal ever in Europe. The $15.6 billion deal would create the world’s eighth-largest bank with a market capitalization of about $62 billion and a major presence in Latin America, Spain, England and Northern Ireland. Abbey makes home loans through branches in England and Northern Ireland and is the second-largest mortgage lender in Britain. With 741 branches and 17.8 million customers, Abbey National will bring Santander a stable foothold in Britain, one of Europe’s strongest consumer lending markets. Santander expects the deal to begin contributing to its profit in 2006 and to bring €560 million in cost savings by the third year after it closes.
If the deal does go ahead, it would create a new giant in Europe, but it probably would not herald a wave of copycat cross-border mergers. As long as the continent’s financial-services markets retain their national quirks, banks will worry about straying from home turf. Santander’s rivals will want to wait and see how it fares as it grapples with its bulky British bride. After all, bank mergers have an unhappy history, whether domestic or cross-border. More often than not, the cost savings and revenue gains achieved (as opposed to promised) fall far short of the premium paid by the acquirer. Is it different this time? If history is a guide, probably not.More on this story here and here.
$10 BILLION YUKOS BAIL OUT OFFER
A consortium of investors led by Group Menatep ally Konstantin Kagalovsky is proposing to pay off up to $10 billion in Yukos tax debts and buy out the group’s majority stake in the company, which is currently frozen as collateral in the state’s legal onslaught against Mikhail Khodorkovsky. The bailout proposal was sent to President Vladimir Putin, in a letter written on behalf of an unidentified group of investors by George Miller, a consultant whose ties to Kagalovsky date from the August 1991 coup.
Kagalovsky would not say who the main financial backers of the group were, saying only that none of them was Russian. He said his role was mainly organizational, and that he was also ready to participate in financing the deal, but not on a large scale. Kagalovsky has long held close ties to Khodorkovsky, first as a vice president of Menatep Bank, the core of the oil tycoon’s financial empire in the 1990s, and then as a Yukos executive and shareholder.
Some analysts speculated that Menatep could be seeking, via Kagalovsky, to strike a deal with the Kremlin over the initial 1995 bargain basement privatization of Yukos by offering to pay whatever sum the government named in back taxes, and reimburse the state for damages Khodorkovsky is alleged to have caused the state in the criminal fraud and tax evasion case against him. But Kagalovsky strongly denied any prior contact with Yukos’s majority shareholders ahead of sending the proposal -- which he said was two months in the making -- apart from putting in a call to one of Khodorkovsky’s lawyers informing him of the offer one day before it was sent to the Kremlin. He said he had sold his stake in Yukos shortly after the legal attack on the company began.More on this story here.
Yukos told to stop pumping.
The end of Yukos is in sight after court marshals instructed its main production units to essentially stop pumping crude, the beleaguered oil giant said Wednesday. In response, Yukos shares got hammered for a third day, tumbling below $3 for the first time since May 2001 and causing crude prices to rise to a record high in New York and a 13-year high in London.
Yukos said in a letter made public on Wednesday that court marshals’ demand that no assets be “alienated” from the company’s three main production units means that deliveries of oil would have to stop. With limited storage facilities, production would then stop as early as two or three days afterward, the company said. Investors also took the court marshals’ demand as a bad sign, even though there was doubt as to what they were prohibiting.
Yukos, which pumps more oil than Libya, has fallen by 46% in the past three days, wiping $6.7 billion from its market capitalization. “Yukos shares are worthless and I don’t see any chance for the stock, as the assets will go elsewhere,” said Harry Gallob, who helps manage 150 million euros ($180 million) at Vienna-based Erste Sparinvest, which has not held Yukos shares since Khodorkovsky was arrested last October. Since Khodorkovsky’s arrest, more than $31 billion -- equivalent to 5.7% of expected GDP this year -- has been wiped off of the company’s value.More on this story here.
SINGAPORE: MEET THE NEW MR. LEE, SAME AS THE OLD MR. LEE
In a recent speech to fellow graduates of Harvard University, Lee Hsien Loong, Singapore’s deputy prime minister, explained that his country was at a “major transition point”. He was referring, he went on to explain, not just to his own promotion to prime minister, which was this week scheduled for August 12th, but also to the economic and social reforms the government has planned. “We are prepared”, he said, “to take the plunge.”
Yet Mr. Lee hardly seems the plunging type. He is the son of Singapore’s founding father, Lee Kuan Yew, and shares his father’s measured, practical and technocratic approach to government. He also shares a somewhat condescending, didactic bent, and a tendency to chide and admonish rather than charm and encourage. His speeches brim with grim economic prognoses and stern injunctions to Singaporeans to tighten their belts. After a 14-year interval under the affable Goh Chok Tong, most Singaporeans will find the reversion of leadership to the Lee dynasty more like a cold shower than an exhilarating leap into the unknown. But for all his talk of reform, Mr. Lee is far too pragmatic to fix something that is not broken.More on this story here.
S&P DOWNGRADES OUTLOOK ON BELIZE’S CURRENCY RATINGS
Standard & Poor’s has downgraded its outlook on Belize’s “B+” long term foreign currency ratings and “BB-” local ratings to negative from stable. According to S&P, this change in outlook reflects the challenges faced by the government in tightening its fiscal policy coupled with mounting external liquidity pressures, and compounded by delays in the introduction of certain tax measures.
S&P analyst Olga Kalinina noted, “On the fiscal front, results may fall short of the original projection of a 0.9% general government deficit (including a social security surplus of 0.7%) in fiscal year 2004-2005, due to delays in levying a new one-time land tax and in eliminating some tax exemptions.” Kalinina went on to warn that the country’s ratings could come under downward pressure if the government fails to keep a grip on the fiscal situation and if the external liquidity position becomes more stretched.More on this story here and here.
STATISTICS SHOW BERMUDA’S GROWING DEPENDENCE ON INTERNATIONAL BUSINESS
Bermuda’s labour force grew by 8% between 1991 and 2000, but the number of expatriates jumped up by 10%, the latest figures show. The decline of tourism and growth of international business meant hospitality jobs dropped by 22% to 2,738 while the offshore sector expanded by 65% to 3,167. This continued expansion of international business and shrinking of tourism meant guest workers now are much more educated, with 2,868 (40% of the total) having degrees compared to 1,663 in 1991. And 55% of expatriates are now staying in Bermuda for four or more years.
International business now supplies 9% of all jobs in the economy (3,167), only lagging behind wholesale, retail and repair services (4,773), education, health and social work (4,026), construction (3,792), and business services (3,198). The figures from the Department of Statistics also show unemployment has dropped from 6% to 3% over the period and the number of Bermudians in training programs has dropped.More on this story here.
MANY U.K. PROPERTY FUNDS ARE HEADING OFFSHORE
More than £100 billion has been invested in UK property funds in the last 10 years. Predictions are that this will continue to grow in 2004, reflecting the strong performance of property as an asset class. A significant number of the large property funds are based in Jersey. In particular, Schroders has some £4 billion of property held through Jersey funds, with a 50-strong property team on the island. Merrill Lynch, Threadneedle Investments and Henderson also have property funds in Jersey, and there are many others. An estimated £17 billion of UK property is held through UK limited partnerships. In the last six months alone, there has been a significant number of these effectively relocating to Jersey.
So what is driving this move offshore? There are a number of factors. First of all, in December 2003 Stamp Duty Land Tax (SDLT) was introduced in the UK. From July this will be extended to cover transfers of interests in partnerships, which are currently exempted. This leaves the prospect of any transfer of an interest in a UK limited partnership being subject to SDLT at the rate of 4 per cent -- not an attractive prospect for institutional investors who may wish to buy and sell such investments. In contrast, transfers of units in Jersey unit trusts are not subject to SDLT, hence putting a Jersey unit trust over the top of a UK limited partnership is an attractive solution and one followed by a number of institutions.
SDLT is by no means the only driving force behind the growth in Jersey property funds. Indeed, Schroders set up its Jersey funds before SDLT existed. The alternative UK vehicles for property funds are authorized and unauthorized unit trusts. The unauthorized unit trust is the preferred UK vehicle. A Jersey unit trust can be offered to both exempt and non-exempt investors without compromising the tax position of the exempt investors -- which is not the case with the UK unauthorized unit trust. At the same time, the Jersey unit trust is transparent for income, distributions can be paid gross, and provided it is managed and controlled offshore, it will be exempt from capital gains tax (CGT). Hence it is an attractive, tax-efficient vehicle. But why have so many of the key fund managers chosen Jersey as opposed to other offshore jurisdictions? Time-zone and ease of access are two factors.More on this story here.
DEREK SAMBROOK REPORTS ON THE PROSPECTS FOR ARGENTINA, BRAZIL, AND CHILE
Argentina, Brazil and Chile walk on a tightrope trying to keep their economic balance and, so far, there has been a safety net of low US dollar rates and Chinese demand. But how secure is the safety net? When US dollar rates rise, perhaps investors will exit Latin America for safer havens (when this happened on previous occasions, it resulted in the Latin debt crisis in the early 1980s followed by the 1994 Mexican financial fiasco). If the rampant Chinese economy slows rapidly, rather than gradually, so will the demand for iron ore, soya and copper. An absence of investor funds and a drop in commodity prices will make that journey across the tightrope even more perilous.More on this story here.
THE BAHAMAS’ TAX SITUATION FACES MAJOR PROBLEMS
The Bahamas and other regional countries heavily reliant on import duties for government revenue could face major problems in the near future if their current revenue situation is not speedily addressed a regional tax expert claims. According to Paulo dos Santos, Tax adviser to the Caribbean Regional Technical Assistance Centre (CARTAC), heavy reliance on import duties could affect government revenues in these countries once trade liberalization initiatives like the Free Trade Area of the Americas and the World Trade Organization come into effect. “If you join the FTAA, if you join the free trade agreements with the European Union, you won’t be able to apply import tariffs anymore,” Mr. Santos said.
In his presentation during the second day of meetings of the Caribbean Organization of Tax Administrators (COTA), the adviser identified Barbados and Jamaica as being in a good position for future trade liberalisation initiatives with a less than 10% reliance on import related taxes. Other regional countries identified to be in the same precarious position along with The Bahamas were Belize, Haiti, Anguilla and Turks and Caicos. Recent data from the Ministry of Finance place the country’s reliance on import and excise taxes at 47.5%. In a later interview, Mr. Santos suggested that The Bahamas attempt to move towards another consumption-based tax that would be less disruptive to the current system.More on this story here.
HONG KONG: THE WORLD’S FREEST ECONOMY
Since 1970, Hong Kong has ranked as the world’s freest economy. In the just released Economic Freedom of the World, 2004 Annual Report, Hong Kong remains number one. The report, published by The Fraser Institute in conjunction with the Cato Institute and other think tanks around the world, ranks countries on their adherence to a set of policies that measure the degree of economic freedom. Those countries that safeguard property rights, enforce contracts, allow free trade, maintain low marginal tax rates, ensure sound money, and limit the size and scope of government will score well on the Economic Freedom of the World (EFW) index. Out of a possible score of 10 on the EFW index, Hong Kong achieved 8.7, Singapore came in a close second at 8.6, while New Zealand, Switzerland, Britain, and the United States tied for third with a score of 8.2. (There is a two-year lag in the data, so those scores are for 2002, not 2004.)
Japan, one of the world’s richest economies from past growth, ranked only 36 out of 123 countries, with a score of 7.0. Taiwan placed 22nd, with a score of 7.3. China, the fastest growing economy in the world, ranked 90th with a score of 5.7, while India, another high-growth country, placed 68th, with a score of 6.3. Russia came in at 114th, with a score of 5.0. The lowest scoring countries were the Central African Republic (4.5), the Democratic Republic of Congo (4.4), Zimbabwe (3.4), and Myanmar (2.5). North Korea and Cuba were not ranked because of lack of data.
Although China has made considerable progress, it still has a long way to go before it reaches the level of Hong Kong and other top scorers. But at least it is moving in the right direction, unlike Argentina whose rating has gone from 7.2 in 2000 to 5.8 in 2002. Unfortunately, Argentina, which was one of the world's top industrialized countries prior to World War II, failed to maintain its commitment to free markets and free people. Could the same happen to Hong Kong? Since becoming a Special Administrative Region of China in July 1997, Hong Kong’s rating has fallen slightly to 8.7 in both 2000 and 2002. If one were to take account of more recent policy changes, Hong Kong’s rating might actually be lower. When Hong Kong does achieve democracy, that political watershed could be a curse as well as a blessing. It would be a curse if it allowed voters to use the force of legislation to plunder private property by redistributing it to special interest groups in the name of “social justice”. The expansion of the welfare/regulatory state would endanger both economic and personal freedom in Hong Kong.More on this story here.
EMPLOYMENT TRENDS IN THE BAHAMAS FINANCIAL SERVICES SECTOR
The higher skill requirements of the international banking sector versus the more labor intensive skills required by domestic banking translates to employees in the international sector making an average of 58% more than their domestic counterparts. According to a survey of the “Gross Economic Contribution of The Financial Sector in The Bahamas for 2003” compiled by the Central Bank, a salary comparison of the two sectors revealed that the international banking sector in the country saw employees in this area averaging yearly increases of 5.6%, while domestic counterparts saw a mere 3%. The report placed average salaries within the international sector at $63,773 compared to $40,379 for domestic banking employees in 2003.
Overall employment for the financial services sector showed a 5.7% reduction in 2003 with most of the shrinkage occurring among Bahamian workers. This reduction is a stark contrast to the sustained annual job growth experienced by the sector during the previous five-year period from 1998 t0 2002. The new financial services regime legislation introduced in 2000 and the requirement by the Central Bank in 2001 for all managed banks in the jurisdiction to establish a physical presence led to a reduction in the number of banks. This trend is beginning to reverse itself with an increase of banks maintaining stand-alone presence in The Bahamas increasing to 216 from 203 in 2002 the report said.More on this story here.
BERMUDA BANS INSIDER TRADING
After a half century as an offshore banking haven for companies from the US and other nations, Bermuda followed the lead of other financial centers, banning insider trading and market manipulation. Those found guilty of insider trading face up to seven years in jail or fines of $175,000, while market manipulation carries a maximum fine of $100,000 or five years in prison. The new laws apply to the 290 securities, including 180 offshore funds, listed on the local Bermuda Stock Exchange. The exchange has a total market capitalization of $125 billion.More on this story here.
HONG KONG MULLS ESTATE TAX REFORM
The Hong Kong government has issued a consultation paper on the future of the territory’s estate tax, which may lead to the eventual abolition of the levy. Among the measures up for consideration, the consultation proposes exemptions for non-Hong Kong domiciled investors, exemptions on certain classes of assets or complete elimination of the levy. The government collects some HK$1.5 billion per year from estate duty revenues.More on this story here.
EVERY U.K. CITIZEN CAN ENJOY A TAX HAVEN
It was revealed last week that Premiership champions Arsenal pay performance-related bonuses to foreign players and to manager Arsène Wenger via offshore trusts in Jersey in order to reduce the amount of tax they pay. According to reports, £7.6 million of the club’s wage bill was channeled through a trust, with 30 players paying a total of just £76,000 in tax in the 2001-02 season.
Although this practice is completely legal, offshore trusts are not a viable way for most of us to reduce our tax bills. “The legendary offshore bank account doesn’t work if you live, work and are domiciled in the UK,” says John Whiting, a partner at accountants PriceWaterhouseCoopers. “Wherever you earn your money, you are taxed so there is no benefit in putting it offshore unless it happens to be a particularly attractive investment with good rates of return in its own right.”
To avoid being taxed in the UK, you have to be non-resident, which is why offshore trusts are so popular with foreign footballers. “Non-domiciled players such as Thierry Henry and Dennis Bergkamp pay tax on the money they earn in the UK because they are resident here,” says Mr. Whiting. “Money they earn outside the UK, from product endorsements for example, they don’t pay tax on here -- as long as they keep this money outside the UK.” Yet even without the advantages of saving or investing offshore, you can reduce your tax bill without falling foul of the Inland Revenue.More on this story here.
QUICK CORPORATE EXPATRIATION PRIMER
How do companies such as Stanley Tools enjoy tax benefits from being incorporated in Bermuda if it is a controlled foreign corporation? The parent company re-incorporates in Bermuda or some other low tax country -- which is sometimes called corporate expatriation. When a U.S. based company re-incorporates in a foreign country with low tax rates (like Bermuda), the company saves taxes on foreign source (non U.S.) income that is also subject to U.S. taxes or where foreign taxes cannot be fully offset against U.S. taxes on the same income. These companies are not avoiding any taxes on the income they continue to receive from within the U.S.More on this story here.
IRS LOSING THE BATTLE AGAINST TAX SHELTERING, SAYS INFORMANT
An IRS informant warned lawmakers that the agency is ill-equipped to win the battle against the increasingly sophisticated use of tax shelters. “From my vantage point, the IRS simply does not understand how the tax shelters work, or how the transactions and structures fit together,” the Senate Finance Committee was told by the anonymous witness, who works for a Wall Street bank. The problem is being compounded by the IRS’s lack of trusted informants and confidential witnesses, the banker known as “Mr. ABC” testified.More on this story here.
BERMUDA AVOIDS EU TAX LEGISLATION, FOR NOW
European expatriates going home need not fear -- their offshore Bermuda savings are not at risk when they return. Or at least not just yet. Bermuda is still not subject to the treaty, even though all of the other British territories are. And the legislation which was due to come into force in January has been pushed back six months. For an unknown reason, Bermuda was the only British Dependent Territory not included in the list of EU countries and their Dependent Territories when it was published in June last year.More on this story here.
OECD RELEASES NEW EXCHANGE OF TAX INFORMATION GUIDELINES
The OECD’s Committee on Fiscal Affairs has agreed on new guidelines for the exchange of information between national tax authorities as part of a drive for improved co-operation to assist in the administration of domestic tax laws and international tax treaties. The new arrangements are set out in a revised version of Article 26 of the OECD’s Model Tax Convention, which covers the exchange of information on tax matters. The provisions of Article 26 are widely accepted as providing the international standard for exchange of information between tax authorities.
Bill McCloskey, Chair of the OECD’s Committee on Fiscal Affairs, said the vast majority of OECD member countries already meet the new standard and that he is looking forward to other countries, both inside and outside the OECD, moving towards the new standard of information exchange.More on this story here and here.
UK’S BLACK ECONOMY DEPRIVES GOVERNMENT OF £40 BILLION IN REVENUES
According to research published in the Economic Journal, work undertaken by the self-employed in the black economy amounts to more than 10% of the total value of the UK economy, or about £100 billion. By comparing what the self employed spend with their declared income, the researchers calculated that blue collar self-employed workers report less than half of their income, while equivalent white collar workers declare 61% of every pound earned.More on this story here.
CHINESE PERSONAL TAX REFORMS AIM TO CRACK DOWN ON EVASION
The Chinese government is poised to launch reforms of individual taxation aimed at improving the current collection system and preventing tax evasion. “The collection of individual income taxes must follow the principle of fairness and keep the burden on each tax payer at a reasonable level,” a source from within the Finance Ministry’s tax affairs department revealed. The official also emphasized the necessity of removing loopholes from the tax system which give “convenience to tax evaders”, and spoke of the government’s desire to use the income tax system in “readjusting social income distribution.”
The source conceded that the income tax system has struggled to cope adequately with the free market reforms introduced over the last ten years, and has exposed problems that are “incompatible with economic growth”.More on this story here.
ARBITRATOR: IRS EDUCATION REQUIREMENTS VIOLATE LAW
The IRS’s 11,700 revenue agents conduct audits that can involve the nation’s largest corporations and wealthiest individuals. Their job requires the equivalent of a college accounting degree, the IRS has maintained since 1995, when it increased the minimum education requirements for new agents. Those requirements violate the law, an arbitrator ruled July 9.
The ruling, which IRS says it will appeal, backs a National Treasury Employees Union challenge to the requirement that revenue agent applicants have 30 college-level accounting credit hours, up from the previous 24, and that they complete five required areas of coursework as a “selective placement factor” for the position. According to a July 26 NTEU news release, Arbitrator Carlton Snow struck down both IRS rules as violations of federal law that require an agency to show that the duties of a position can be performed only by an individual who meets any minimum education requirements. The ruling requires NTEU and IRS to negotiate an acceptable remedy within 90 days.
IRS Commissioner Mark W. Everson raised concerns that the decision, if upheld, will hurt the agency’s increased enforcement efforts against abusive tax shelters and other problem areas. He added, “If you accept the logic underlying the arbitrator’s decision -- that the higher standard is not essential -- we will be hard pressed to meet the challenges of increasingly complex schemes to hide income from IRS scrutiny. We will vigorously appeal this case.”More on this story here and here.
PUBLIC SPENDING WATCHDOG PROBES INLAND REVENUE COLLECTION FAILURES
The National Audit Office, the independent public spending watchdog, has started an inquiry into the Inland Revenue’s failure to stop millions of taxpayers filing late or inaccurate self- assessment tax returns. The inquiry follows criticism of the Revenue after the NAO revealed earlier this year that it had failed to collect £14 billion in unpaid taxes. About £4.5 billion of that was calculated through self-assessment, introduced in 1996. The inquiry is not formally part of a campaign by Gordon Brown, the chancellor, to clamp down on tax avoidance. However, accountants said the NAO was likely to tell the Revenue to tighten up on losses from late payments.
The inquiry will also look at how the Revenue selects taxpayers for self-assessment, whether it has tried hard enough to make the forms understandable, and whether the burden of compliance is too high. About 30% of the 9.8 million self-assessment returns filed each year are inaccurate. Just over £16 billion is collected by this method but about 10% of returns are late.More on this story here.
JUST WHO CAN YOU TRUST?
A trusted advisor does not happen overnight. Trust has to be earned and deserved. When you, as an investor are seeking advice, ideally you want someone who understands your interests and who will not put his or her own interest ahead of yours while working for you. A trusted advisor then is someone who has earned your trust, will build a relationship with you and can give advice effectively.
The Trust Equation: Trustworthiness = credibility + reliability + intimacy divided by self-interest.
Credible means you can trust what my advisor says because he knows what he/she is doing. Reliable means that my advisor is experienced, has professional standards, and will follow through with complete actions. Intimacy means you feel comfortable discussing difficult personal issues with your advisor. Self-Interest means your advisor always puts your interest first. The Trust equation has multiple dimensions. You might trust someone’s expertise, but distrust profoundly that person’s motive. You might find an advisor brilliant, but totally self-absorbed. Conversely, you might trust someone implicitly, but have little confidence in their abilities.More on this story here.
BERMUDA FREES UP THE EXCHANGE OF CONFIDENTIAL INFORMATION
Legislators fine-tuned Bermuda Monetary Authority Act provisions which allow the regulator to share normally confidential information held on clients of financial institutions with overseas authorities. The amendments uphold the principle of client confidentiality and prohibits the BMA from disclosing client information as a general rule. But the changes allow the regulator to share information with foreign and other local regulators for their regulatory purposes and to the Police in the event of a criminal investigation provided the information is relevant to that investigation.
“It is important to note that the sharing of information is primarily for regulatory matters,” Finance Minister Paula Cox said. “The persons noted above must justify why the client information is pertinent. Apart from these very narrow circumstances the information obtained by the Bermuda Monetary Authority must be protected and may not be shared without the person’s consent or unless the Authority is otherwise compelled by law to give the information.” The BMA, she added, will be drawing up guidelines on the management and protection of client information.More on this story here and here.
BRITISH VIRGIN ISLANDS POISED TO “IMMOBILIZE” BEARER SHARES
The BVI will take a major step towards immobilizing bearer shares this month by starting the applications procedure for custodians of bearer shares. New legislation will ultimately require all bearer shares in BVI IBCs to be held by a custodian and thus immobilized. Companies formed before 1 January 2005 will have until 31 December 2010 to comply, companies formed after 1 January 2005 must comply from their date of formation. To enable custodians to be in place by 1 January 2005, the BVI Financial Services Commission (FSC) will consider applications to act as custodians from 1 July 2004.
Those eligible to apply as an “authorized” custodian will be service providers licensed under any BVI financial services legislation, as well as bodies corporate incorporated or formed outside the BVI that are not resident in, and do not have a place of business in, the BVI. Those eligible to apply as a “recognized” custodian will be investment exchanges or clearing organizations that operate securities clearance or settlement systems in a jurisdiction which is a member of the Financial Action Task Force (FATF).
All applicants to be “authorized” custodians will have to satisfy the FSC that they meet certain “fit and proper” criteria and have the necessary systems in place for safe custody of their bearer shares. For bodies corporate, the Commission will consider the prudential regulation and anti-money laundering regulations with which the bodies have to comply.More on this story here.
TWO OHIO MEN SUED OVER ALLEGEDLY SHAM TRUST TAX SCHEMES
A government lawsuit filed in U.S. District Court in Cleveland asked for an injunction barring James L. Binge and Terrence A. Bentivegna from selling fraudulent tax shelters and stopping them from preparing tax returns. The government also asked for an order seeking the names of people who have purchased such services from the two and directing the men to explain to customers that they had sold “sham-trust schemes”.
The government said the two prepared tax returns based on a tax-law misinterpretation that claimed taxes only had to be paid on income earned outside [sic] the United States. The men could not be reached for comment.More on this story here.
Justice Department suit targets Florida firm for using sham structures.
The Justice Department filed suit in Florida against Tax Strategies Inc. for alleged tax schemes that have cost the Treasury $7.5 million. Court papers charged the defendants help their customers set up sham charitable foundations, trusts and corporations that customers use illegally to eliminate or reduce their reported federal tax liabilities.
The complaint seeks an injunction against the defendants prohibiting them from selling any type of asset-protection device, including trusts, LLCs or corporations, private foundations, or similar arrangements that advocate or facilitate tax evasion or noncompliance with the income tax laws. The suit also seeks the names, addresses, taxpayer identification numbers, telephone numbers and e-mail addresses of any individuals or entities who had purchased the firm’s products.More on this story here.
MONETARY AUTHORITY OF SINGAPORE SOUNDS THE ALERT ON INVESTMENT SCAMS
They call you out of the blue and propose sweet investment deals -- financial services firms touting their products. Investors often do not know if it is a sure thing or a setup. But now, the central bank has stepped in to help. The Monetary Authority of Singapore (MAS) has listed on its Web site 25 financial services firms that do not have the proper licences, the first time it has put out such an “investor alert list”. It has also put some advice on the site about how to spot an investment scam.
For example, watch out for sales agents who could be part of “boiler-room” operations, using high-pressure tactics to pitch speculative or non-existent stocks. They call from other countries but by using Singapore-based office services, they fool people into thinking that they are based here and, therefore, under the central bank’s regulations.
The MAS also stressed that being on its list did not necessarily mean that a firm had broken the law. Observers meanwhile noted that with many unregulated investment firms changing their names and addresses frequently, it would be difficult for the list to be fully up to date.More on this story here.
NEW ZEALAND TO IMPOSE NEW REQUIREMENTS ON FOREIGN TRUSTS
Revenue Minister Michael Cullen revealed plans to amend the Tax Administration Act to impose new requirements on foreign trusts setting up in New Zealand and ensure the country can meet its international commitments to full disclosure with other tax jurisdictions. “Foreign trusts will be required to have an IRD number, keep records for New Zealand tax purposes, provide certain information when they are first set up in New Zealand or appoint New Zealand trustees, and provide information to Inland Revenue on a regular basis,” explained Dr. Cullen.
Under New Zealand law, foreign income derived by non-residents is outside the New Zealand tax base, “and rightly so,” added Cullen. “The government has no intention of changing that.” Consequently, under current rules foreign trusts established in New Zealand do not have to file domestic income tax returns or keep records if they receive only foreign-sourced income.
“But this means that we may not be able to provide full information on foreign trusts operating here when foreign tax authorities request it -- as many are entitled to do under a double tax agreement they have signed with New Zealand,” he explained, adding, “The law change will provide an effective mechanism for obtaining information on these trusts. New Zealand will collect, store and transfer the information to the relevant foreign tax authorities on request, and to Australia on an annual basis -- as it has requested.”More on this story here.
IRREVOCABLE LIFE INSURANCE TRUST IS FLEXIBLE TAX-SAVING TOOL
An ILIT -- when you follow a ton of rules -- keeps life insurance proceeds out of your estate. One of the technical traps concerning an ILIT is the “incidents of ownership” rule. Violate the rule, and your hoped-for protection from the ILIT fails. The IRS nails you with a violation of the rule if you create an ILIT and retain certain powers.
For example, retaining any one of these would be a terrible mistake: 1.) power to change the beneficiary, 2.) power to surrender or cancel the policy. 3.) power to assign the policy, 4.) power to revoke an assignment to pledge the policy for a loan, or 5.) right to borrow against the CSV.
Conveniently, the IRS decided in Letter Ruling 9809032 that the loans in question to an ILIT were not an incident of ownership. When the taxpayer in the letter ruling died, five notes (with interest at prevailing rate) were included as an asset in his estate. An ILIT is a wonderful tax tool. Loaning money to your ILIT (instead of gifting the funds) to pay the insurance premiums provides great flexibility. Life insurance is the backbone of most estate plans. Why? Because if it is done right, everything is tax-free under the law. No income tax. No gift tax.More on this story here.
PENNSYLVANIA COURT WEB SITE EASY PICKINGS FOR ID THIEVES
You probably already know some of the oft-repeated tips for cutting the risk of identity theft, things like do not carry your Social Security card and remember to shred pre-approved credit card applications before throwing them away, to thwart Dumpster-divers. Well, you might want to add this warning to the list: Don’t get involved in a lawsuit. For nearly a year, the Allegheny County prothonotary’s office has been electronically scanning court documents in civil cases, including divorces and child custody cases, and posting them online for public access.
The problem is that many of the files contain potentially sensitive personal data, including birth dates, Social Security numbers, even bank account numbers -- the information ID thieves crave in order to steal people’s identities. The prothonotary’s office believes it is the only court in the state, and one of the few nationwide, that allows unfettered electronic access to court filings, throwing it into the forefront of a debate pitting greater public access against concerns about privacy.
Advocates of electronic access, including the local prothonotary’s office and the news media, defend the practice by pointing out that the court filings being displayed are already public record and can be viewed in hard copy at courthouses. Critics, chiefly consumer privacy groups, argue that since paper filings are relatively difficult and time-consuming to obtain (it requires visiting the courthouse and asking a clerk to retrieve them by case number or name), sensitive personal data is protected by “practical obscurity”. Simply put, electronic access makes viewing court records a whole lot easier, for both the public and ID thieves.
In Allegheny County, anyone can log into the system through the prothonotary’s Web site. It does not take long to figure out which types of cases typically include sensitive personal data. In less than 20 minutes, the Post-Gazette was able to view dozens of documents containing names, addresses, birth dates, Social Security numbers and other confidential information used by ID thieves.More on this story here.
DATA THEFT SUSPECT BUSTED
A Florida man has been charged with stealing large amounts of consumer information from Acxiom Corp., one of the world’s largest database companies. The new indictment comes on the heels of a separate case last year in which an Ohio man pleaded guilty to hacking into an Acxiom server. Acxiom manages personal information on millions of consumers, along with financial and other internal data for companies. Prosecutors said the stolen data included personal information about “a great number of individuals”, but they added that the information was not used for identity fraud. Levine ran Snipermail.com, which distributed ads over e-mail.More on this story here.
ACLU LINKS PIZZA DELIVERY TO PRIVACY EROSION
In a new online video, the American Civil Liberties Union takes a break from its serious side to illustrate how new technologies and weak privacy laws can be used to reveal sensitive information about a person involved in even the most mundane of business transactions, including ordering a pizza. In the video, a pizza parlor is able look up a caller’s medical records, employment history, credit card purchases, travel plans, library loans and even the magazines that his wife subscribes to, all with the click of a mouse. In one spot, after noticing that the caller recently purchased a pair of 42-inch khakis, the parlor employee suggests he change his order to a “sprout submarine combo” instead of his usual double meat pizza.
Text accompanying the video urges the viewer to help prevent a “Total Surveillance Society” and notes that “the Bush Administration’s policies, coupled with invasive new technologies, could eliminate your right to privacy completely.” The video comes in advance of the ACLU’s Summer Surveillance Campaign, which will be launched in August with the release of a new report detailing the government’s use of businesses and individuals in the construction of a surveillance society.More on this story here.
US BIOMETRIC PASSPORT REQUIREMENT DEADLINE IS EXTENDED BY A YEAR
The US has extended by 12 months a deadline by which UK passports must contain “biometric” data such as fingerprints. The move was welcomed by the Foreign Office and UK Passport Service, which had lobbied to allow British visitors entry without such passports. The extension applies to the US law requiring any passport issued after 26 October 2004 to contain biometric data. UK passports must be machine-readable under the US visa waiver scheme. British travelers can visit the US for up to three months without a visa under the scheme. The extension was passed by the Senate, and must be signed by President Bush.
Before the extension was granted, a traveler with a new passport issued after October 26, but before biometric ones are available, would have had to purchase a visa at a cost of £67. More than four million Britons a year travel to the US, and hundreds of thousands of them would be affected by the arrangements as they currently stand. About 15.1 million tourists entered the US under the visa waiver program last year.More on this story here.
6TH ANNUAL U.K. BIG BROTHER AWARDS ANNOUNCED
Cars that report your every false move to local law authorities. Huge databases with detailed information on every citizen. Companies that only honor privacy guidelines when it is profitable for them to do so. These were some of the winners of Privacy International’s sixth annual U.K. Big Brother Awards, announced Wednesday. The awards are an annual attempt to publicly name and shame the government and private-sector organizations that have done the most to invade personal privacy in Britain.
The winners of Worst Public Servant, Most Invasive Company, Most Appalling Project, Most Heinous Government Organization and Lifetime Menace were selected by a panel of experts consisting of lawyers, academics, consultants, journalists and civil rights activists. Winners were chosen from roughly 300 people and organizations nominated by the public. They receive a lovely gold statue of a boot stamping on a human head, which is usually mailed to the winners, as none has never shown up to collect its award. Big Brother Awards are now held as an annual event in 17 countries. Each event typically focuses on privacy violations in the host country.
But Privacy International opted to make an exception this year by including in the U.K. awards a U.S. initiative, US-Visit. This security program requires that most foreign visitors traveling to the United States on a visa have their index fingers digitally scanned and a digital photograph taken, so that immigration officers can verify their identity before the visitors are allowed entry into the United States. “The scheme is offensive and invasive, and has been undertaken with little or no debate or scrutiny,” said Simon Davies, director of Privacy International. “Nor has the requirement taken any account of the ‘special relationship’ between the U.K. and the U.S. The U.K. government has been silent about the program and has capitulated every step of the way.”More on this story here.
RFID TAGS BECOME HACKER TARGET
Low-cost RFID tags -- many of which are smaller than a nickel and cost less too -- are already being added to packaging by retailers to keep track of inventory, but could be abused by hackers and tech-savvy shoplifters, said Lukas Grunwald, a senior consultant with DN-Systems Enterprise Solutions GmbH. While the technology mostly threatens consumer privacy, it could allow thieves to fool merchants by changing the identity of goods, he said.
“This is a huge risk for companies,” Grunwald said during a discussion at the Black Hat Security Briefings. “It opens a whole new area for shoplifting as well as chaos attacks.” While expensive RFID reader hardware and hard-to-use software have hindered security research in the area, Grunwald said that is no longer a hurdle.
He announced a new software tool, RFDump, he helped create that can be used to easily read and reprogram radio tags. When such tools become widely available, hackers and those with less pure motives could use a handheld device and the software to mark expensive goods as cheaper items and walk out through self checkout. Underage hackers could attempt to bypass age restrictions on alcoholic drinks and adult movies, and pranksters could create confusion by randomly swapping tags, requiring that a store do manual inventory.
While there are significant malicious uses of RFDump, consumers could also use it to protect themselves, he said. “Everyone should have the right, once they leave the store, to erase the RFID tags,” he said. Deleting information on the tags would allow people to stop RFID checkpoints in stores and other places from tracking which products they are carrying, or which have been inserted under their skin. Solving the business security issues may not be easy.More on this story here.
UBS ACCUSED OF “LAUNDERING” CUBAN MONEY
Three members of the United States House of Representatives have accused Switzerland's largest bank, UBS, of laundering money for the Cuban government. They are calling for an investigation into transactions worth $3.9 billion (SFr4.9 billion) alleged to have been made between 1996 and 2003. They accuse UBS of buying old dollars from the Castro government and then crediting an account with new US banknotes. The transactions would have been in violation of a US economic and financial embargo against Cuba, which has been in place since 1962. At the time, UBS was one of a number of foreign banks contracted by the US Federal Reserve to exchange new dollar bills for worn-out notes being taken out of circulation. But the contract specifically stated that the banks were not allowed to do business with countries under US sanctions.More on this story here and here.
BANK TERRORIST LIST SOURCES
Pages with links to individuals and organizations whose assets have been frozen in the UK, which are suspected as being connected with terrorist activities, or are among the “Specially Designated Nationals & Blocked Persons”, can be found here and here.
RECORD NUMBERS IN U.S. CRIMINAL SYSTEM
The number of Americans under the control of the criminal justice system grew by 130,700 last year to reach a new high of nearly 6.9 million, according to a Justice Department report that is being released today. The total includes people in jail and prison as well as those on probation and parole. This is about 3.2% of the adult population in the United States, the report said. The growth in what the report termed the “correctional population” comes at a time when the crime rate nationwide has been relatively stable for several years. It also comes when many states have passed new, less strict sentencing laws in an attempt to reduce the number of inmates.
The report does not address why the numbers in jail and prison and on probation and parole have continued to increase. But experts point to the cumulative effect of the tougher sentencing laws passed in the 1990s, which led to more people being sent to prison and being required to serve longer terms.More on this story here.
IS POLITICAL CORRECTNESS SETTING US UP FOR A REPEAT OF THE 9/11 HIJACKINGS?
Few documents will have a more searing effect on US security and intelligence operations than the report of the commission on the 11 September attacks. We hope. Almost three years after the hijacks, surely such appalling attacks could not be repeated? Think again. Two reports from the US of disturbing incidents on recent flights suggest that the danger of terror hijack may be as “clear and present” as ever -- certainly in the mind of passengers.
One account describes highly unusual behavior by a group of 14 Middle East passengers on board a Northwest Airlines Flight on 29 June from Detroit to Los Angeles. The movements of the 14, which terrified a number of passengers, suggested an intelligence-gathering operation by terrorists. Other reported incidents on recent flights have included a Middle East passenger being caught in the toilet trying to break through the wall towards the cockpit. These reports come in the wake of a January FBI report that suicide terrorists were plotting to hijack transatlantic planes by smuggling “ready-to-build” bomb kits past airport security and later assembling the explosives in aircraft bathrooms.
While such reports need to be carefully studied and researched, what is also disturbing and not easily dismissed is the flow of corroborative accounts these reports have triggered both from airline passengers and crew. These would seem to suggest that the incident on the video clip showing the 9/11 hijackers passing through security checks to board the plane may not be as historic as we would wish it to be. And the reason for that may have less to do with slack airport security or faulty technology than with legislation forbidding discrimination. This works to prevent effective screening of passengers with certain ethnic backgrounds. Airlines are only allowed to scrutinize intensely two Middle Eastern passengers (or any other ethnic group) per flight, or they can be -- and have been -- sued. Consequently, a group of half-a-dozen Syrians cannot be taken aside by the airline and investigated. We have to ask whether we have a “security” problem in the real sense or a political problem in the reluctance to face the consequences of rigorous enforcement of the Human Rights Act.More on this story here.
FBI OFFICE IN BAHAMAS
Any assistance needed by the Bahamian police from the Federal Bureau of Investigation will soon be just a local phone call away with the establishment of an FBI office in New Providence. American Charge d’Affairs Robert Witajewski is resolute that the establishment is not because The Bahamas is a target for terrorist attacks but to continue the collaboration between the two countries. “This has nothing to do with terrorism,” Mr. Witajewski told The Guardian. “This is just a decision we looked at because we looked at the relationships that we have with the local police, we looked at the ability of a central location to be able to reach some of the other areas that the individual would be handling and we looked at future potential and we also looked at the space we have.”
The Charge d’Affairs said the FBI then looked at the same areas and made the decision that a Special Agent should be posted in New Providence. He said that an FBI office which functioned in Miami previously liased with The Bahamas and other Caribbean countries. This office, he said, made some internal reorganization decisions and now no longer functions.More on this story here.
After September 11, 2001, the Justice Department began asking for more and more “tools” to help law enforcement agencies identify potential terrorist threats and, as administration spokesmen like to say, “protect the American homeland”. But increasingly, conservatives outside Washington express real concern about giving federal law enforcement more power in the name of national security. They fear the “tools” the government seeks to protect us from our enemies eventually could circumscribe our own liberties. Given the maneuvering over H.R. 3179, they have good reason for concern.
H.R. 3179 is the latest attempt to expand the scope of the Patriot Act even before it is clear that all the current Patriot Act powers are necessary and used appropriately. Despite the unanswered concern, key congressional leaders resorted to stealth late last year in attaching a measure to the 2004 Intelligence Authorization bill that drastically increased the FBI’s power by allowing the agency to demand records from car dealers, pawnbrokers, travel agents and other businesses without judge or grand jury approval. Neither House nor Senate debated it; the real action took place behind closed doors.
This also seems to be happening with H.R. 3179 -- the Anti-Terrorism Intelligence Tools Improvement Act of 2003. House leaders planned to rush the bill to the floor for approval without any real debate until a ruckus was raised by a coalition ranging from the American Civil Liberties Union to the Free Congress Foundation and the American Conservative Union. In an attempt to skirt such opposition, there was talk of adding H.R. 3179 to the House intelligence bill, but to no avail. The intelligence bill passed the House without H.R. 3179. But this dangerous bill is not dead yet.
Even the most cursory examination reveals H.R. 3179 would expand Patriot Act powers without any built-in accountability and oversight. Congress granting great power -- without checks and balances -- to the Executive Branch, abdicates its own responsibility and encourages future abuses by federal law enforcement agencies. Conservatives well know a government bureaucracy’s appetite for power is never sated. Left unchecked, it will push the limits, mindless of the cost to our own freedom.More on this story here.
9/11 PANEL PROPOSES LIBERTIES WATCHDOG
Buried among the many proposals made by the September 11 commission in its final report last week is the establishment of a watchdog group to ensure that the extra governmental powers it suggests are not abused. “Many of our recommendations call for the government to increase its presence in our lives,” says the report, adding that the collection of anti-terror tools called the Patriot Act already has resulted in a “shift of power and authority to the government ...” This shift, the report says, “calls for an enhanced system of checks and balances to protect the precious liberties that are vital to our way of life.”
The commission recommends federal standards for identification documents, such as driver’s licenses, greater information sharing among government agencies and the private sector, and greatly enhanced border and internal transport security. In a suggestion that has set off alarm bells among civil liberties advocates, the report calls for the U.S. border security system to “be integrated into a larger network of screening points that includes our transportation system and access to vital facilities, such as nuclear reactors.”
Commission members and staff denied that the introduction of federal standards for identity documents and a single system of screening would amount to the introduction of a national ID system through the back door. “We don’t recommend an ID card,” said commission Vice Chairman Lee H. Hamilton. “We recommend federal standards for identity documents.” But, they stressed the need to balance security with liberty. The commission also calls for a “full and informed debate on the Patriot Act” before any decision is made to extend its key elements, which are scheduled to expire next year.More on this story here.
JOHN KERRY’S MONSTROUS RECORD ON CIVIL LIBERTIES
For John Kerry, the specter of Attorney General John Ashcroft trashing Americans’ civil liberties has been a useful campaign prop. In campaign stops, Kerry has promised to “end the era of John Ashcroft and renew our faith in the Constitution.” In a Kerry administration, he promised the liberal group MoveOn in June 2003, “there will be no John Ashcroft trampling on the Bill of Rights.” In his 2004 campaign book, A Call to Service, Kerry accuses Ashcroft and the Bush administration of “relying far too much on extraordinary police powers.” In contrast, Kerry positions himself as a civil libertarian -- or at least as a proponent of a reasonable balance between liberty and security.
Kerry, like every other senator in the chamber except Russell Feingold (D-Wisconsin), voted for the USA PATRIOT Act in the wake of 9/11. Now he is now co-sponsoring the SAFE Act, a bipartisan measure that restricts some of the powers that the PATRIOT Act granted the government. Furthermore, he is critical of the package of proposals from Ashcroft’s Department of Justice (DOJ) that has been dubbed Patriot II. But a close look at his campaign’s statements on the PATRIOT Act reveals that there is less to his opposition than meets the eye. And a look at past positions he has taken reveals still more. He argued for more encryption controls -- Ashcroft was then on the opposing side, along with the ACLU -- when the issue came up under the Clinton administration.
In general, whenever the ACLU was aligned with business interests, Kerry took the side of law enforcement against what he called “big money”. An example is the fight over asset forfeiture. In the 1980s war on drugs, the laws were stretched so that property that had been used for criminal purposes could be seized by law enforcement even if the owner of that property was innocent. In the mid-1990s, a bipartisan movement arose to reform the forfeiture laws, with proposals to increase the burden of proof on the government when it seized property. What was Kerry’s position? He thought U.S. asset forfeiture laws were working so well that he wanted to export them. There was, tellingly, no discussion at all of civil liberties issues. Indeed, the only “dark and dangerous underside” of international forfeiture he identified was the possibility that criminals would give up assets in exchange for avoiding jail sentences.
Kerry is a drug warrior, and after having discovered some genuine instances of bad guys’ stashing their money at the $23 billion BCCI, an international financial institution that was shut down in 1991 by various countries’ bank regulators, he became a crusader against banks holding “dirty money”. Kerry’s solution to money laundering was -- and is -- to deputize banks and force them to spy on all their customers. Kerry expressed his belief that bank customers are entitled to essentially zero privacy. Has a politician who seven years ago proposed all electronic transfers be monitored changed his views on civil liberties?
Kerry’s cosponsoring the SAFE Act, which would limit the circumstances under which “sneak- and-peek” warrants can be issued under the PATRIOT Act, is premised on what he calls Ashcroft’s abuses of the PATRIOT Act, not on PATRIOT itself: “The real problem with the Patriot Act is not the law, but the abuse of the law.” In fact, the “real problem” is the law’s provisions, which would be troubling in any administration. Meanwhile, Kerry continues to support intrusive efforts to stamp out money laundering. His campaign statement points out that Kerry “authored most of the money laundering provisions” in PATRIOT. The money laundering provisions are some of the most privacy-threatening aspects of the bill, and were used by the FBI in the much-criticized Operation G-String, an investigation of a strip club owner in Las Vegas accused of bribing local officials. Tellingly, Kerry -- whose provisions allowed it to happen -- has not cited this operation as one of Ashcroft’s abuses, even though other Democrats have.
We have been told repeatedly that the world has changed since 9/11. Indeed, that is the explanation many have offered for Ashcroft’s change of heart on civil liberties. But what about a candidate who, well before 9/11, consistently advocated measures that would have eroded those liberties? Would he be more or less constrained in the middle of a war on terror?More on this story here.
JOHN KERRY IS DIFFERENT FROM YOU AND ME
Poor President Bush. It is not often a man with a net worth in the low eight figures is made to feel destitute. But compared with the other three men atop the national tickets, Bush seems almost indigent. With a mere $18 million or so, Bush is very much the low end of this quartet, worth three times less than the two men running for vice president, who score in the neighborhood of $50 million apiece. But they all seem like pikers next to John Kerry, who, thanks to his wife, has access to something over $1 billion, making him by far the richest man ever to run on a national ticket.
Wealth in American politics is of course nothing new. The Revolution was largely led by rich men from Virginia. The Declaration was written by a rich planter’s son, Thomas Jefferson; the Constitution by Gouverneur Morris, son of a rich New York farmer. George Washington was a well-to-do planter whose wealth came from his wife, who was not rich herself but had married a wealthy first husband (the John Heinz of his era). We had the Kennedy brothers, the Roosevelt cousins, the various Bushes, brothers and sons, all of them comfortable. We have the many members of the millionaires’ club in the Senate. But we have never seen anything quite like John Kerry, both in the extent of his wealth and his attitude toward it. He is not merely rich, he is stunningly wealthy. He became rich in a way unconnected to merit. Yet he seems to believe it is his due.
In most cases, the well-to-do in American politics have been like the Kennedys, Bushes, and Roosevelts, people who lived in great comfort but not ostentation, with, say, a town house, a (family) place in the country, small pleasure boats, and of course live-in help. Kerry by contrast is master and commander of no fewer than five lavish mansions, all large, and all on the priciest real estate. When they want to live simply, the Heinz Kerrys make do with a 23-room town house in Georgetown, almost three times the size of the one that the Kennedys lived in, and worth a mere $4.7 million. To go back and forth between all of these places, the Kerrys have the deluxe model of the Gulfstream V private jet, which retails for about $35 million. Play, too, is costly for Kerry, who recreates with a bike that costs $8,000 and a motorboat that goes for $800,000.
With the exception of Nelson A. Rockefeller, who eyed the presidency three times in the 1960s, and served for a short time as the appointed vice president to Gerald R. Ford, there has never been so vast a gap between the life of a possible national leader and that of the people he wishes to govern. Whatever his politics, Kerry is living at a level of luxury wholly unseen in American politics.
Both Edwards and Cheney can fairly be said to have made it themselves, though the fields in which they made it -- trial lawyering and the oil business -- are not regarded with reverence. Bush comes from the ranks of the privileged youth who float through early life on family connections and money, and try later in life to earn it on their own. But it is with Kerry that the gap between money and effort is greatest. Add up his two marriages, and Kerry has been a consort for much of his life. Marrying money is hardly improper, but neither does it inspire confidence. Granted staggering wealth on the basis of marriage, Kerry seems to believe he deserves it, and perhaps always has. Such, at least, is the popular perception among the voters who know him best.
Throughout his career as an officeholder, John Kennedy gave his salary away to various charities, and lived on his trust fund. In this respect as in so many others, John Forbes Kerry is no JFK. According to the Boston Globe, between 1990 and 1995 (when he married John Heinz’s widow), Kerry earned a total of $724,042 and gave $4,869 to charity, or a grand total of 0.7%. In the years between his two marriages, Kerry leaned heavily on friends and constituents to cushion the stresses of living on a salary, receiving generous favors of condos and cars. In his new status of billionaire’s consort, he has not stopped asking for favors. A fire hydrant that prevented him and his wife from parking their SUV in front of their Beacon Hill town house was removed by the city of Boston. The lawn at the imported ski chalet in Idaho is kept fresh and green by a water pipe laid down and maintained by the state.
Most of the American political rich seem like American types, only richer, as they play in their none-too-elaborate family compounds, tossing a football, or whacking at brush. Kerry is a departure from this pattern, in the scale of his wealth, and his attitude to it. This is a republic, not the Austro-Hungarian Empire, nor even a plot from a Henry James novel. Are we really ready for a consort who seems to believe he’s a prince?More on this story here.
AMERICA’S SOCIALIST POLICY IN PANAMA
The 90th anniversary of the official opening of the Panama Canal to international commerce will be celebrated on August 15. (The first steamship traversed the canal on August 3, 1914.) That date also commemorates a leading example of the U.S. government’s pursuit of an interventionist foreign policy and rejection of private enterprise in favor of state-managed public works.
In 1903 America was basking in the glow of having entered the arena of “great power” world politics. The year 1898 had seen the Spanish-American War, out of which Cuba became independent under U.S. “protection” and Puerto Rico was annexed. In Asia, American forces had completed the brutal suppression of an independence movement in the Philippines. The U.S. took possession of the islands instead of giving the Philippine people the freedom they had been promised for their assistance in fighting the Spanish forces at Manila. Having now become a Pacific power, America needed an easy and reliable route for moving naval vessels from one coast to the other -- or so President Theodore Roosevelt was fervently convinced. And out of this vision of America as a two-ocean power Panama was born.
At the beginning of the twentieth century, Panama was a province of Colombia. A French-owned company, The New Panama Canal Company, held a concession from the government of Colombia to build a canal across the isthmus. Though virtually bankrupt and unable to find any private financial backing to continue construction, the company stockholders viewed the concession as valuable. They knew the U.S. government was interested in it and in building a canal at American taxpayers’ expense. After the company lowered its selling price to $40 million, in January 1903 Congress voted to buy the concession and to pay the Colombian government $10 million plus an additional $250,000 annually. The Colombian Senate rejected the offer. President Roosevelt was outraged, declaring that “we may have to give a lesson to these jack rabbits.” A “revolution” was arranged in Panama, with the new, independent government accepting the terms of the sale. Work on the canal began shortly afterwards, an the Panama Canal officially opened for traffic on August 15, 1914. Total construction costs were $400 million, a hefty sum at the time, considering that in fiscal year 1914, all U.S. government expenditures totaled only about $720 million.
Panama symbolizes the contradictions in American foreign policy. Verbally pledged to the principles of individual freedom and nonintervention, the United States has often practiced neither around the world. What are the consequences? The U.S. Constitution is weakened a little bit more -- after all, it is Congress that is supposed to declare war and thereby justify the use (and death) of American soldiers on distant shores. Economic freedom is eroded a little bit more -- after all, the costs of war and reconstruction must be paid for. Corruption and political privilege increase a little bit more -- after all, whenever government spends, there are those who desire to be on the receiving end, and foreign adventures are a useful way of justifying this while waving the flag.
And socialism, the great enemy of individual freedom and private enterprise, is strengthened. From its beginning, the Panama Canal was a U.S. nationalized company. Dissatisfied that the private sector found the risks and the costs of building a canal too high relative to the prospective market demand and profits to be made, President Roosevelt insisted on government action. Resources were socialized through taxation, and government went into the canal business. If socialism is good for America in Panama, then what is wrong with some socialism at home? Always, of course, for noble and worthy causes. Invariably, one economic intervention sets the precedent and rationale for others.More on this story here.
LAST AMENDMENT STANDING?
Looking around, the evidence is mixed. Eighty years ago, you could not even take a drink without risking a visit from the cops. Books were banned in Boston if they were considered too racy. And shacking up with a woman other than your wife -- especially if she was the wrong color -- was likely to get you arrested on a morals charge. All that is history. There are no morals charges anymore, because there are no morals worth charging. What used to be sin is now not only permissible -- but actually fashionable. The most sordid spectacles make their way to prime time -- on the evening news.
But while sinners have been let loose, the honest man can hardly make a move without running into someone who wants to protect society from him. Having to give his name to the fuzz on the scene when asked is the least of it. He has to reveal every detail of his life -- for tax returns, passports, medicare, social security, insurance, business licenses, gun licenses, hunting licenses, professional licenses, building licenses, dog licenses, liquor licenses. It may be a licentious age, but never have so many licenses been required to mind your own business. Except for the First Amendment, guaranteeing the right to say what you want, nearly every protection of the constitution has been swept aside so the do-gooders, regulators, politicians, inspectors, gendarmes, world improvers and snoops can get a grip on you.
In a recent brush with the SEC, what they want to do, as near as we can determine, is force our company to get the equivalent of another license. They want to be able to determine what we can say and what we cannot. Otherwise, the case makes no sense. It makes no sense until you realize that their real objective is to pry open the First Amendment, reach down and throttle financial publishers. There was no stock manipulation involved. This is a pure First Amendment case. It is a gem for the courts, a brazen opportunity for the SEC, and a gold-mine for the lawyers.
We would not mention the case, except it illustrates the status of the judicial system in America, 2004. “Don’t be so gloomy,” our lawyer advised. “The courts will do the right thing. They’re not going to throw away the First Amendment. It’s the last one standing. And remember, this is an important, landmark case. Lawyers will cite this case for many years.” Let us hope it is cited by the defense.More on this story here.
MISESIAN FOR LIFE
Hans F. Sennholz is one of a handful of economists who dared defend free markets and sound money during the dark years before the Misesian revival, and did so with eloquence, precision, and brilliance. From his post at Grove City College, and his lectures around the world, he has produced untold numbers of students who look to him as the formative influence in their lives. He has been a leading public voice for freedom in times when such voices have been exceedingly rare.
Sennholz was the first student in the United States to write a dissertation and receive a PhD under the guidance of Ludwig von Mises. Mises had only recently completed Human Action. Imagine how having such an outstanding student, and a native German speaker no less, must have affected Mises’s life... how it must have encouraged him to know that his work could continue through outstanding thinkers such as this. Sennholz was living proof that ideas know no national boundaries, that even in the darkest hour there was hope for a new generation of economic scientists who cherished freedom, and were not fooled by the promise of government planning.
His dissertation became the book How Can Europe Survive, published in 1955. It remains the best and most complete critique of European political union ever written. Sennholz demonstrated -- some fifty years before others even cared - that political union under the interventionist-welfare state was only a prescription for chaos and bureaucratic rule. True union, he demonstrated, comes from free trade and decentralized states that do not attempt to plan their economies. Europe today has a burgeoning movement of intellectuals who realize this same thing, and are working to curb the power of Brussels even as they attempt to preserve the free-trade zone. But we must remember that Sennholz anticipated this critique and agenda by nearly five decades.
Sennholz has never been shy about insisting on the centrality of ethics in the study of economics. He has decried the welfare state as confiscatory and immoral. He has called inflation a form of theft. He has identified government intervention as coercion contrary to the true spirit of cooperation. He did this at a time when saying such things was taboo in the profession. Here again, he was keeping alive the spirit of Mises, and the spirit of truth. Nobody can ever gauge the full impact of a great intellectual in the development of culture. But this much I am sure of. We are in Hans Sennholz’s debt far more than we know.More on this story here (scroll down to piece by Llewellyn H. Rockwell).
DEMOCRACY OF DOLTS
A national election is unbecoming at any time. But this year seems to bring out the worst in the American character. Americans are as susceptible to fraud and illusion as any people, but more ready to give into self-adulation than most. A long run of very good luck has made fools of them. But it is a Republic of happy morons -- going deeper and deeper into debt with no clue how ever to get out. Meanwhile, they sell houses to one another and believe they are getting rich. It is a Democracy of dolts, ready to believe that the world’s most powerful nation is in a life or death struggle against a handful of Muslim fanatics.
When times are really good, government is an inevitable but amusing flim-flam. In small, annoying ways, government bosses around its citizens, pretending to do so for their own good -- that is, as a “public service”. When times are bad, government murders people -- either its own citizens or those of some other government -- again, for the good of those who are left living. “Government,” said George Washington, “is not reason. It is not eloquence. It is force.”More on this story here. The Alexis de Tocqueville Tour, Exploring Democracy in America here.
Kerry nomination will have serious negative repercussions for our nation.
In what must be the most clueless, meaningless, and disjointed political convention in the history of our Republic, the Democratic Party is preparing to select a strange, yet seemingly harmless chimera as its nominee. The candidate has been seen wandering around the country speaking dull, mutually contradictory platitudes. Is he a fiscal conservative who will balance our budget? Or is he a wild-spending liberal who will throw open the doors of the treasury? Is he a ‘60’s antiwar radical, or a shoot’em up militarist who once cut a swath of destruction in the Southeast Asia? Did he support the Iraq invasion, or was he opposed to unilateral intervention.
While the critter wandering around rural Maryland will ultimately be of little consequence, this disastrous nomination by the Democrats will have serious negative repercussions for our nation. What America needs desperately at this juncture is a major-party candidate who will throw down the gauntlet to the interventionists in our political establishment and speak decisively against our slow-motion catastrophe in the Middle East. We are in dire need of a leader who will fight a vigorous campaign against our emerging Empire, and who will hearken back to our early Republic’s belief in non-interventionism. John Kerry is most definitely not that man. Liberals are in for a big, nasty surprise when he sends more troops to Iraq and bogs us down even further. But they cannot say they were not warned.
It is a sad day for America when the ideals of our Founders do not have a voice anywhere in mainstream political discourse, while all sorts of wild, un-American policies are being trumpeted in the full light of day. But, nevertheless, that is the situation in which we find ourselves.More on this story here.
KICK THE HABIT: POLITICS IS NOT THE ANSWER
“Do you want to help get rid of Bush?”, Nicole called out to me. “No,” I sighed, “I don’t,” and continued walking. “I respect that,” she smiled, “have a nice day!” I was not quite prepared for that. I stopped and turned back. We talked for a while about the war and the political process. “I’ve got a lot of my peers over [in Iraq],” she told me. She was young and black, and of course a lot of her peers were over there. She was not standing out on the street all day because she wanted to get John Kerry elected. All she wanted was for her friends to come home safely.
Nicole asked me who I thought would be better than Kerry. I said I thought the Libertarian candidate would be better -- he had at least promised to bring the troops home immediately. But I then qualified that by saying that a) he could not possibly get elected, and b) our problems ran a lot deeper than a matter of who was sitting in the White House. We had become a nation of empire-building, and in the game we called the political process, scaling back that empire was not going to win. We would have to think of something else. And she got it. She was open to hearing suggestions about how to achieve that, and I knew that my responses were inadequate. The question gnawed at me for days.
For some time now, I had been concerned for the sanity of some of my liberal anti-war friends, who would go on and on about the evils of the Bush administration -- as if our imperialistic escapades had begun in the last four years. Now I was starting to understand. Like addicts who tell themselves that the addictive substance is not to blame for the problems in their lives, those who are hooked on the state are reluctant to identify it as the source of the social ills they deplore. As long as it is just George W. Bush and Dick Cheney and John Ashcroft who are evil -- a “bad batch” -- then you do not have to kick the habit entirely. You can blame the “bad politicians” for any outcomes you do not approve of, and go on using government force to spend other people’s money and regulate other people’s lives.
And that is what it all comes down to: Force. Many of my friends who abhor the US invasion of Iraq have no problem using government force to achieve their own goals. And they do not seem to see the connection between the two. Not only do they not question the morality of using force to get what they want, they do not even recognize the practical implication of doing so: That the more power you give the state to do your bidding, the more power it has to act against you.
If I ran into Nicole again, first of all I would say that if your goal is to end war, you are not going to accomplish it by voting -- certainly not by voting for John Kerry. More importantly, if we want to end war, then we need to stop pouring our support and energy into the entity that thrives and expands by perpetuating war. We are not likely anytime soon to diminish the state’s motives to wage war. What we can do is limit its ability to do so. The only way to do that is to withdraw our support -- and for many of us, that is not going to be easy. As with any harmful addiction, we keep doing it because we are getting something out of it. If we truly want to end war, then we need to end our addiction to force, and that means ending our addictive relationship with the state.More on this story here.
The Poverty of Politics
During this past week, once again I have been thankful for not having access to outside television, thus depriving me of that “opportunity” to watch the Democratic National Convention. When the Republicans meet during the last week in August, I will be doubly thankful for my personal choice of deprivation. That does not mean I have been able to escape the inanity in Boston that has been provided by the botox-injection recipients who have been crowding the stage.
In fact, from what the headlines blared as I logged onto the Internet this morning, Edwards had presented John Kerry to the delegates as a practitioner of the “politics of hope”. Thus, I would like to dissect that phrase to demonstrate not only the phoniness of this entire charade, but also the outright poverty of the belief that politics gives us hope.
In the ancient Greek myth of Pandora’s Box, a curious girl named Pandora opened a chest and all sorts of evil sprang from the box, and she could not collect them to put them back. However, Pandora was not finished. She opened the chest once again, and out sprang Hope. Now, in our modern thinking, this second act has been presented as a good thing. The ancient Greeks, however, saw things differently. In their view it was bad enough that Pandora put evil into the world through her blundering, but then she made things even worse by giving us hope -- and we know full-well there is no hope. Therefore hope was not good, but rather an extension of evil, since people forever would be fooled into believing their repeated acts of failure suddenly would morph into something successful. Hope would keep people from recognizing their own folly and the poverty of their own thoughts.
In political terms, hope becomes the engine that permits politicians to foist failed schemes upon people, in the wrong-headed and cynical belief that after a thousand utter failures, a plan of action will prove successful. When the 9/11 Commission released its final report, it supposedly was criticizing government conduct and gave process improvement suggestions in order to prevent future terrorist attacks on Americans. The commission was unwittingly condemning the government itself and the political processes that went with it. In the vernacular, they were trying to rearrange the deck chairs as the Titanic was sinking, an act of absurdity.
Yet, the commission members have “hope”. John Edwards has “hope”. John Kerry has “hope”. The DNC delegates have “hope”. George W. Bush and his minions will tell the nation next month that they will provide “hope”. The political classes have “hope”, but no answers -- because their way of doing things can never provide hope. The welfare-warfare state always will have the same results, no matter who occupies the White House and Congress or sits in the judges’ chambers. For those of us who understand the true poverty of politics, we look elsewhere for answers, and even hope.More on this story here.
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