Offshore News Digest for Week of December 13, 2004

GLOBAL BUSINESS

DUBAI’S FANTASY ISLANDS

The World, a $4 billion spectacle set to be completed in 2008, is a cluster of 300 man-made islands off the United Arab Emirates port. It will be arranged as a world map, and the properties will be named for many real places. There are plans for “Ireland”, “Thailand” and even “Yemen”. Ten islands -- average size 300,000 square feet -- have been created. Have a hankering for Utah shrunk to 2.8 acres and moved 7,800 miles? You can get that for $10 million.

Fifteen properties, including “Australia” and “Kuwait”, have been sold for a total of $500 million. A large corporate investor is a Kuwaiti investment group called Efad Holding Co. As for private owners, rocker Rod Stewart supposedly shelled out $30 million for “Great Britain”. There are whispers that actor Al Pacino snapped up another.

The World, the most ambitious project in booming Dubai, is part of a grand plan by Sheikh Mohammed bin Rashid Al Maktoum, Dubai’s crown prince, to woo rich foreigners to this tax-free city-state. He hopes investors and tourists will help offset the loss of oil money, expected to dry up by 2020. The projects are peddled as hedonistic hideaways for fun and profit. Wahid Attalla, the project’s “director of commerce” -- and its own version of Fantasy Island host Ricardo Montalban -- urges potential investors to re-create their wildest island reveries. But few U.S. players are in a rush. Attendees at a promotional lunch raised some real-world concerns. Couldn’t this high-profile enclave be a target for terrorists? And there are other risks. No federal law permits foreigners to buy land in the UAE. Some potential investors are not sold on the 99-year leases offered.

BAHAMAS OPPOSITION PARTY SAYS COUNTRY MUST OUTGROW TAX HAVEN STATUS

Free National Movement chairman Carl Bethel charged that the government is planning to contract 50 Indian nationals to work in the public service. Calling for a reform of the financial services sector, Mr. Bethel said that The Bahamas must move beyond its tax haven status and directly participate in some of the multi-million dollar transactions taking place around the world on a daily basis. In order for The Bahamas to survive as an international financial services center, he suggested, the range of services offered must be diversified.

“We need to find creative and innovative ways to expand the size of the pie,” Mr. Bethel said, charging that the financial services sector in The Bahamas is losing ground under the PLP. He attributed a recent argument between the Financial Services Consultative Forum and practitioners over immigration policies to a disagreement over who gets the largest share of a “shrinking” pie. He continued, “The fact is that the basic services provided in The Bahamas - private banking and asset management -- are those aspects of the off-shore financial services industry that are most vulnerable and most under threat from the tax collectors of the OECD and the FATF.”

According to Mr. Bethel, multi-million dollar transactions are taking place internationally on a daily basis, whether it is in the use of debentures or other means to secure borrowing internationally; buying and selling goods, tools or equipment; or in corporate re-structuring. These sophisticated transactions, he said, are being managed in competitive off-shore jurisdictions, and they are not attracting the attention of the OECD and those who see The Bahamas merely as a tax haven. Such business arrangements, made by international companies across borders, are also non-tax-sensitive, he pointed out.

CALL OF INDIA LURES EUROPEAN WORKERS

European companies may be outsourcing work to Indian firms but in one Delhi-based call center it is Europeans who make up a fair number of the workforce. A Tecnovate eSolutions office recruits at least 10% of its 900 employees from Europe. Its clients come from 11 countries using nine different languages. Entry and mid-level employees are recruited from European countries on Indian salaries to service their native markets from India.

THE PERILS OF CURRENCY SPECULATION HIT BERMUDA

As if it is not enough to worry about rampant inflation in Bermuda, now we are reminded -- through the talking heads and print media -- about how the US dollar (which our dollars floats with) is continuing to lose value against the Kingdom of England, Euroland and Japan. It is enough to stop and make you think -- it may be enough to make some investors weep. Four major world powers are stonewalling each other, using their currency as leverage, to see who will be the first to blink. And all eyes are to the East, watching China’s currency manoeuvrings, wondering if or when it will be unpegged from the dollar.

This is not the first time that the dollar was allowed to sink against other currencies, nor is the term allowed used lightly. The perceived U.S. currency strategy is to bring market forces and currency values into play in order to restore a more competitive trade market, thereby benefiting the U.S. economy weakened over the past three years by slow domestic growth, little upward movement in its foreign markets (where it sells about one third of its output) and an overvalued dollar. The strategy may help to reduce the U.S. budget and balance of payments deficits while increasing exports overseas.

Both the nations of Japan and China have sought to keep their competitive edge by providing cheaper goods and services to the rest of the world. Japan, by artificially and fiercely resisting the appreciation in its own currency, sells off yen and purchases U.S. dollars. If the yen rises too much, their goods become too expensive for western consumers on both sides of the Atlantic. China has employed a far more effective method of competitive commerce -- pegging its currency to the dollar. China also holds the world’s second largest hoard of foreign exchange reserves ($300 billion, despite its low per capita income of about $1,000).

The refrain lately is “what am I going to do about my investments, savings, etc. I should be converting all of my investments in sterling or euro because the US dollar keeps dropping and I am losing money.” Here are some thoughts to consider before you make the mistake of chasing the pack.

U.S. PRESSES POISED TO PRINT FOREIGN MONEY

The government’s giant printing presses soon could be cranking out something in addition to the old greenback. The Treasury Department’s Bureau of Engraving and Printing has received the go-ahead from Congress to print other countries’ currencies. A provision giving the bureau this authority is part of a bill awaiting President Bush’s signature that overhauls the country’s intelligence operations. Although the government would not profit from such ventures, bureau director Thomas Ferguson said, the experience could help it sharpen its anti-counterfeiting skills. So far, the bureau has not lined up the business of any countries, he said. It plans a low-key marketing approach.

He sees a potential target in small, developing countries that lack the technical wherewithal to produce their own currencies. Under the bill, the bureau would have the authority to produce paper money, postage stamps and other so-called “security” documents, such as driver’s licenses and passports, for foreign governments. Over the years, the bureau has had to turn down requests by countries, including Turkey, South Africa and Kuwait, for various printing projects because it lacked the necessary authority, government officials said. The U.S. Mint, which makes U.S. coins, does have the authority to make coins for other countries, but it is not currently doing so, officials said. Its last project, for Panama, ended in 1984, officials said.

AIR TRAVELERS CHOOSE TO ROUTE THROUGH CANADA TO AVOID U.S. VISA CONTROLS

Air Canada is seeing an upsurge in business as passengers opt to fly via Canada rather than brave the tighter visa and security regime facing transit passengers at U.S. airports. The company says a growing number of international passengers are choosing to travel via Toronto, Vancouver and Montreal rather than US cities. Ben Smith, Air Canada’s vice-president of planning, said the airline’s traffic destined for Latin America originating outside Canada had trebled in the first 11 months of this year, compared with January to November 2003. Passengers flying between Brazil and Japan made up a sizeable part of the extra traffic. U.S. visa restrictions and airport congestion have “certainly been a positive for us,” he added. “Because of 9/11, we have got this extra traffic, which we weren’t originally counting on.”

The Air Transport Association in Washington, which speaks for U.S. airlines, acknowledged that “several of our carriers have been impacted” by the new visa rules. However, one airline said, “We haven’t seen as big a drop-off as we expected.”

The U.S. suspended its transit-without-visa program in August 2003 as part of its intensified security since the September 2001 terror attacks. Passengers from many more countries, including Brazil, the Philippines and South Korea, now require transit visas. In addition, passengers passing through U.S. airports face more stringent security checks and longer delays at immigration counters. Air Canada has greatly expanded its Latin American services over the past year, with the pace accelerating since it emerged from bankruptcy protection at the end of September. Air Canada’s investment in Latin American routes means it is well placed to cash in at the expense of its US counterparts on the region’s burgeoning trade and business ties with Asia, which were underlined by a string of recent trade pacts.

SWISS LEARN DEMOCRACY BY VOTING

The editor of a new book on direct democracy says that he wants to dispel the numerous misconceptions about the Swiss-style of politics. The Guidebook to Direct Democracy in Switzerland and Beyond explains citizens’ involvement in the political decision-making process. Bruno Kaufmann is one of the editors of the book and president of the non-governmental Initiative and Referendum Institute Europe in Amsterdam, has a very positive view of the Swiss system, which allows every citizen a say in government policy.

He says, in an interview, “We aim at a balanced view. We want to show that direct democracy is an everyday working reality, which does not lead to catastrophe or anarchy. But we express scepticism about the use of direct democracy when it comes to… granting citizenship. [In some parts of Switzerland, voters decide on individual citizenship applications.] The book also raises questions about Switzerland’s failure to combine its system of direct democracy with a more active and open approach towards Europe.”

He adds, “[Y]ou can say that the Swiss system is surprisingly citizen-friendly. It is a form of government which has allowed many minorities to live together… and to solve problems without going to war. Direct democracy appears to have a positive impact on welfare. People have a clear sense of what is needed. The individual citizen is more than just a consumer -- he or she is more aware of the society they are living in.”

Swiss cantons strike gold.

Switzerland’s cantons are to receive the bulk of the proceeds from the sale of 1,300 tons of excess gold reserves. The regional authorities will receive SFr14 billion ($12.25 billion), while the remaining SFr7 billion will go to the federal government. The Senate rejected for a second time a proposal by the House of Representatives to put the proceeds into a fund and distribute the annual interest -- estimated at SFr500 million. The House of Representatives wanted two-thirds of the money to go to the state old-age pension fund, and the remaining third to go to the cantons. But the Senate threw out the proposal by 32 votes to nine. “The cantons can look forward to golden times,” said Finance Minister Hans-Rudolf Merz.

Over the past seven years, parliament and Swiss voters have been asked on a number of occasions to decide what to do with the proceeds from the Swiss National Bank’s excess gold reserves. The Swiss constitution stipulates that the reserves should be split between the federal authorities and the cantons in the way outlined in the Senate proposal -- and this is how the money will now be divided, since the two parliamentary chambers have been unable to resolve their differences.

DIFFERENCES IN CONSUMER LENDING REGULATIONS IN JERSEY VS. THE U.K. HIGHLIGHTED

Islanders who have taken out loans to pay their income tax bills or make Christmas purchases are not currently protected by Jersey law. The Jersey Financial Services Commission has confirmed that lending -- which includes mortgage lending -- is not a regulated activity in Jersey, as it is in the UK, nor has its absence been raised at a political level. JFSC deputy director general Helen Hatton said, “There is no consumer credit law in Jersey, nor a regulatory protection regime. Potentially firms do not even have to tell consumers the true rate of interest. There is no code of practice or standards that they have to comply with.” However, in practice the absence of regulation does not appear to be a particular problem for Island borrowers, at the present time.

YUKOS FILES IN U.S. FOR BANKRUPTCY UNDER CHAPTER 11

OAO Yukos Oil Co., Russia’s 2nd-largest oil producer, said it filed for Chapter 11 bankruptcy protection in the Houston and asked for an emergency court hearing to stop the sale of its main unit in four days. The Russian government plans to auction OAO Yuganskneftegaz, which pumps 60% of Yukos’s oil, to cover part of Yukos’s bill for back taxes of $22 billion. The next day, Yukos shareholders are scheduled to vote on a bankruptcy filing. The company has yet to decide whether to file for court protection under Russian law, a Moscow-based spokesman said.

“The step we took today was done as a last resort to preserve the rights of our shareholders, employees and customers,” Yukos Chief Executive Steven Theede said in the statement. “The actions by the Russian authorities appear to be expropriation -- 21st century style.” Yukos shares have plunged 95%, wiping $30 billion off the company’s market value, since Russia arrested Yukos’s biggest owner, Mikhail Khodorkovsky, on Oct. 25, 2003, on charges of fraud and tax evasion, allegations that he denies as politically motivated.

“U.S. bankruptcy law has worldwide jurisdiction over (the) property of the debtor, and the company is seeking a judiciary that will protect the value of all shareholder investment in Yukos,” the company’s statement said.

MONACO BROODS OVER FUTURE AFTER RAINIER’S REIGN

In a cliff-top castle overlooking the Mediterranean ocean, Europe’s oldest and longest-living monarch is failing, his days -- so local gossip has it -- numbered. For over half a century, Prince Rainier of Monaco has presided over the extraordinary transformation of a mile-square outcrop of sheep-nibbled land into one of the world’s most glamorous and moneyed hubs. Today, as Monaco contemplates life after its 81-year-old monarch, it is trying to reposition itself to remain on top of an increasingly competitive and interconnected Europe -- and to shake its reputation as a mecca for tax evaders and crooks.

Monaco’s government argues the principality has tightened its fiscal policies, and diversified its economy. Today, officials suggest, this sun-washed principality offers the face of 21st Century Europe. But skeptics wonder about the fate of Monaco and of handful of other very small European countries -- medieval-era throwbacks with few obvious attractions beyond their allure as offshore tax havens. “It’s a very interesting case in Europe that these principalities have managed to survive,” said Daniel Keohane, senior analyst at the London-based Center for European Reform. “They’re tiny places that don’t have many natural resources. And with the pressure to reform themselves, the pressure will also be on them to survive economically.”

It is hard to imagine hard times hitting Monaco. For 700 years, this Riviera city state has been ruled by the Grimaldi family, with periodic intervention from Paris. From its yacht-choked port to its hilly, bougainvillea-dotted borders, modern Monaco is a study in concrete and human ingenuity. Just about every square inch is filled with expensive boutiques and high-rise apartments. Bulldozers bite into the earth, creating more for sale at breathtaking prices. Those snapping up the property include the movie stars, sports celebrities and business magnates who account for three-quarters of Monaco’s 32,000 residents. But in recent years Monaco has attracted more unsavory characters, including reputed members of Italian and eastern European mafia.

Monaco has quietly expelled a number of questionable residents in recent years, most of them from Eastern and Southern Europe. And earlier this month, the principality -- along with tiny Liechtenstein and San Marino -- signed an agreement with the EU to begin levying taxes on business profits. “I think Monaco’s starting to play another card,” said author Frederic Laurent, who published a thick book on the principality last year. “Not as a place known for its money laundering, but as a place known for being clean financially -- for being a place of excellence.”

ESCAPING THE GREEDY HANDS OF THE GREAT WHITE NORTH

While the majority of articles on Escape Artist are written from the American perspective, I thought I would write a few words for the readers of Escape Artist from the perspective of your quiet neighbours from the North. Why leave Canada? While we have a great standard of living, it comes at the expense of sky-high taxes. I personally prefer a less invasive and therefore less expensive form of government and, since I am no politician, I am not in any real position to change the system. That leaves two choices -- endure it and stay, or, wave good-bye to the country of my birth. When the opportunity came to leave Canada, I embraced it wholeheartedly. (And let’s not forget snow. I am not a winter kind of person).

For the past year, I have had the pleasure of calling myself an expat. I am not yet an expat retiree, but trust me, I am working on it. Last December, I, along with my wife and dog, packed it all up, and moved from the Snowy North to Beautiful Bermuda. Why Bermuda? There were many reasons, but most importantly, that is where the job offer was.

From the expat point-of-view, one of the best advantages of being a Canadian (as compared to being American) is that it is much easier to shed one’s residence, and therefore, tax obligation. While there are many “tests” which the government uses to decide whether or not they still have a right to tax you as a resident, the challenge of losing Canadian tax residency can be simply solved by following the following golden rule: Sell everything, close all accounts, and act as if you are never coming back. You can change your mind later, but for all intents and purposes, you have to make like you are never coming back.

Life in India without the trappings of power.

India when viewed through the eyes of a Westerner is quaint, archaic, mystic and charming on the one hand. On the other, it is a mosquito-ridden, poverty-ridden and full of religious zealots. But to me India is a home like none other. Traveling within the country fills me with pride and marvel, the uniqueness of this beautiful land which is so rich in culture. These are oft-repeated cliches from Indian authors. But the mystic, the charm and the cultural diversity are what make India today what it is.

When there was a power outage in the whole of the Eastern U.S. and parts of Canada, the region went into a tailspin. The President had to make a speech of sorts to calm peoples nerves. Imagine the same power outage in India, but with the boiling Indian summer heat. It is 9:00 a.m. and you are ready to go to the office and there is a power cut (outage) immediately heads roll ... if the generator does not start whirring in a minute and the UPS or inverter does not start functioning immediately, then the generator attendant will lose his job. If you call up the local company bijliwallah (power company) the standard reply is “don’t know when the supply will resume”. If people hammer out the same question again and again the power company will put the receiver off the hook. End of Power struggle.

This is why I love India: we take shortcuts to salvation and spirituality not to mention that famous leap we have taken into the 21st century. If anyone really wants to escape from the drudgery and mechanically routine life in the West, then you are welcome to live in India without the trappings of Power because the beauty of India lies with its people and within its boundaries. Make no mistake Indians irrespective of religion and caste love India for what she is. I am glad to live in this land without the trappings of power. It is full of fun and joy.

Buying real estate in the Dominican Republic.

For the local poor people, the Dominican Republic is a country of queues. In every sizable town we passed through, people were waiting in lines, holding propane tanks in the hopes they would be one of the lucky few who would have them filled that day. It seems the Dominican government had neglected to pay the Venezuelan government for the gas the latter country has been selling them. No gas, no cooking. If you are a person of some means, of course, you never wait in line. The propane man comes to your home regularly and fills your tanks, no problem. This disparity between rich and poor is typical throughout Latin America. It is something each new governmental administration promises to address, but they never seem to get far.

So why do I, and so many foreigners who live in the DR, believe in the future of this country? Despite its recent economic ups and downs (more about that in a minute), there are signs that the country’s middle class is growing. I met many local people, well educated and articulate, who are working as secretaries, salespeople, tour guides, drivers, and employees for companies large and small. Most work in tourism-related fields as that industry is the country’s biggest source of revenue. These people love their country, believe in its future, and are champions of the less fortunate. They see progress and opportunity around every corner.

In 2000, the Dominican economy captured the attention of the international community and was acclaimed as having the fastest-growing economy in all of Latin America and the Caribbean. From 1996 to 2000, the president of the DR was Leonel Fernandez. During his time in office, the economy grew by over 7% a year, led by tourism and duty-free assembly plants, making clothes, and other goods for the U.S. In 2002 and 2003, under the new leadership of left of center President Hipólito Mejía, things turned sour. A banking crisis put the economy into a tailspin. Inflation has been pushed to 35%. Electricity blackouts, frequent enough in the DR, occur even more often now.

President Mejía responded by imposing a 5% tax on exports and tourism, a 2% import surcharge, and a tax on financial transactions. But receipts have been lower than expected since businessmen are reluctant to pay more taxes as long as the government fails to cut its spending. Two months ago, Leonel Fernandez was reelected as president. One of the major reasons for his victory was that while he was president from 1996 to 2000, the country prospered. Mr. Fernandez promises to tidy up government finances.

The economy already looks like it will recover -- although it is still struggling with political and economic issues. Protests and riots still erupt with volatility at times -- most often in Santo Domingo, the capital. But in tourist areas, including the tranquil Caribbean-kissed shores of La Romana and Punta Cana, and along the northern shore from Puerto Plata to Sosúa and Cabarete, all is peaceful. No one wants to jeopardize tourism, the country’s top source of revenue. Most accommodations are all-inclusive resorts and are among the least expensive in Latin America and the Caribbean, making this island truly a bargain destination.

December issue of Escape From America Magazine table of contents here.

TAXES

SAVINGS TAX AGREEMENTS SIGNED BY LIECHTENSTEIN, SAN MARINO AND MONACO

The EC has welcomed the signature of agreements concerning the taxation of savings with Liechtenstein, Monaco and San Marino. The new agreements form part of a framework for co-operation in the field of direct taxation that includes both the Savings Tax Directive adopted by EU member states, and the agreements on the legislation with several third countries and dependent and associated territories of Member States. The three agreements are based on the same four elements as the savings agreement between the EU and Switzerland which was signed on 26 October 2004.

FRENCH POP STAR REFUSES TO SING TO TAXMAN’S TUNE

The traditional French disdain for the inland revenue was on display when fans packed a Versailles court for the trial of a pop idol whose latest hit is a long rant against his tax inspector. Florent Pagny, 43, one of France’s biggest pop stars, is defending himself in the appeal court against a tax-evasion conviction which got him a suspended prison sentence and £30,000 fine last January.

He is the latest in a line of French celebrities convicted of “forgetting” to declare large chunks of income -- about £300,000 in his case. Since avoiding tax is a French national sport, to use the words of Jacques Delors, a former Finance Minister, celebrity miscreants often enjoy sympathy. However, Pagny, who styles himself a left-wing rebel, has made his case a national cause by scoring a smash hit with a song casting himself as a heroic martyr to the greed of the tax man.

Called Ma Liberté de Penser (My Freedom of Thought), the song tells the taxman, “Seize my wife, the sofa, the microwave, the fridge ... I can empty my pockets on to the table. They have long had a hole in them. But you can’t take away my freedom to think.” In reality, the assets that the fiscal bailiffs tried to seize from Pagny’s Paris house included a new Bentley, several Harley-Davidson motorcycles, artworks and a well-stocked wine cellar. He was additionally convicted of hiding the property to prevent seizure.

The problem for “le fisc”, as the inland revenue is nicknamed, is that “everyone else” does not pay their dues to the state in France, which is one of the world’s most-taxed nations. Plain evasion is estimated to cost the state £31 billion a year. Hairdressers and restaurateurs for example, were alleged in a recent study to declare only 50 to 55% of their income.

LAWRENCE TURPEN SENTENCED FOR CONSPIRING TO DEFRAUD IRS VIA OFFSHORE ACCOUNTS

A Reno, Nevada man has been sentenced to six months of home detention and fined $10,000 for his guilty plea to conspiring to defraud the IRS. At the same time, the U.S. District Judge ordered Lawrence Turpen to perform 300 hours of community service and placed him on three years probation. Turpen, a former Reno dentist who became a financial consultant, was accused of advising clients to conceal their personal or business income in offshore accounts. He solicited clients at speaking engagements and through his book, How and Why Americans Go Offshore. Turpen, who pleaded guilty in July to the felony charge, also must cooperate with the IRS concerning back taxes he owes.

U.S. TREASURY’S DELAY MAY IMPACT VIRGIN ISLANDS FINANCIAL PICTURE

The U.S. Department of Treasury’s delay in handing down the rules and regulations for the recently enacted Jobs Bill has left some Economic Development Commission beneficiaries uncertain as to whether they will remain in the territory. Benjamin Riviera Jr., USVI Economic Alliance executive director, said that a number of the designated financial services or “Category 2A” companies are contemplating pulling out of the EDC program because they are unsure whether they will be able to meet the requirements.

The Jobs Bill further defines the residency laws as residing for no less than 183 days in a particular jurisdiction, which has been met with complaints by some of the financial services companies. “We’ve received indicators that there are some companies that are winding down their businesses,” Riviera said. “The specific number, I can’t say, but these are the types of businesses bringing in the significant revenues.” Dwain Ford, owner of Ford Real Estate, said he does not think the territory’s residents realize how the territory will be impacted if the financial services companies leave. “183 days is half a year. You’re talking about worldwide people whose work demands constant travel.”

NEW RULES LIMITING TAX ADVICE FROM AUDITORS PROPOSED

Regulators proposed new rules that would bar auditors from peddling questionable tax strategies and preparing tax returns for top executives whose companies’ accounting they review, the latest move in a broad debate about ethics in the accounting industry. The Public Company Accounting Oversight Board, created by Congress to help impose a new disciplinary regime on accountants after a series of corporate scandals, voted unanimously to issue the rules for public comment.

Two years ago, under intense lobbying from big accounting firms, Congress and the Securities and Exchange Commission declined to place limits on the kinds of tax services that auditors could provide clients. Instead, according to the current rules, corporate board members must preapprove any tax work that auditors might do. But oversight board officials said that a series of recent disclosures about abusive practices, including widespread tax shelter marketing schemes uncovered by a Senate probe last year, had spurred them to act. The board’s plan is designed to ensure that accounting firms do not review their own advice and that their auditing judgments are not compromised by lucrative tax fees, officials said. Industry surveys suggest that the nation’s four biggest accounting firms realize between one-quarter and one-third of their revenue from tax work.

Under the proposed rules, auditors would be barred from accepting contingent fees, which are set based on the success of a particular tax deal. They also would be prohibited from helping clients use any of about 30 questionable tax shelters monitored by the Treasury Department. Even if the deals do not explicitly fall into that category, auditors still must consider whether they amount to an “aggressive interpretation of applicable tax laws and regulations.” The proposed rules would not impose a blanket ban on tax advice, a step that some consumer advocates had advanced two years ago. Auditors still would be able to perform routine tax work, including preparing tax returns for companies. They would also be permitted to prepare tax returns for some employees of client companies but barred from providing personal tax consulting to executives responsible for the companies’ financial statements.

EU EXPECTS WTO RULING ON NEW U.S. TAX LAW IN SEPTEMBER 2005

The World Trade Organization is set to examine in September a new U.S. law aimed at eliminating a corporate tax subsidy it had deemed illegal, and a negative ruling could lead the E.U. to reimpose U.S. trade sanctions in January 2006, the E.C. said. The E.U. is seeking clarification on whether the new U.S. law that ended export tax breaks for U.S. corporations operating in off-shore tax havens conforms fully with WTO regulations. In the face of $4 billion (€2.9 billion) worth of E.U.-imposed sanctions on U.S. exports, the U.S. enacted a law on October 22 that repeals the so-called Foreign Sales Corporation scheme. Three days later, the then-E.U.. trade commissioner Pascal Lamy announced the suspension of E.U. sanctions on U.S. exports from January 1, 2005. But the commission also called on the WTO to verify that the transition mechanisms of the new law conform with WTO rules.

ASSET PROTECTION

ONLINE IDENTITY THEFT: MANY MEDICINES, NO CURE

As the incidence of online identity theft has steadily climbed in recent months, banks and online retailers have struggled to stay on top of the problem and to protect their customers, whose personal financial information and online account details are coveted by criminals. But as problems like phishing scams change from e-crime phenomenon to endemic online threats, technology companies -- both large and small -- are bringing products and services to market that they claim can end, or greatly reduce, the threat of online identity theft. These are some of the technologies aimed at curbing online identity theft.

WATCHDOGS SEEK BETTER ASSISTANCE FROM OFFSHORE TAX HAVENS

Securities regulators are to press offshore tax havens to provide them with better assistance during investigations into wrongdoing by individuals and companies. The International Organization of Securities Commissions (IOSCO) plans to start a dialogue with the havens in January after expressing concern that offshore financial centers could be thwarting effective supervision of capital markets. Roel Campos, joint chairman of a special taskforce set up by IOSCO, warned that some havens could be ostracized if they maintained an uncooperative stance.

IOSCO is the main caucus body for securities regulators and it is reviewing which financial centers should be regarded as uncooperative in cross-border cases involving violations of securities laws. Most of the centers are small jurisdictions, but some bigger countries with low tax regimes are being studied by IOSCO. Tax havens have traditionally protected individuals and companies from outside scrutiny through stringent confidentiality laws, and IOSCO wants reforms to enable assistance in cases involving breaches of securities laws.

Mr. Campos, who is a commissioner at the U.S. S.E.C., said, “IOSCO members believe we need to work with these havens and show them the error of their ways, or essentially seek to ostracise them, and any company that seeks their refuge will also be subject to the world’s disdain.” He promised careful consultation with the havens, and said sanctions should only be considered as a last resort. The IOSCO taskforce will publish a report next year that seeks to draw lessons from Parmalat and other financial frauds, and it is expected to include a section on how offshore centres can provide better assistance to securities regulators.

HONG KONG COMMITTED TO MAINTENANCE OF CUTTING EDGE ASSET MANAGEMENT INDUSTRY

Speaking at the opening session of the “Forum on Hong Kong as an International Asset Management Centre: Challenges and Opportunities” last week, Secretary for Financial Services and the Treasury, Mr. Frederick Ma, was keen to point out that Hong Kong was one of the most prominent asset management centers in Asia, with a significant presence of international fund houses.

According to a recent survey conducted by the Securities and Futures Commission, total assets under management by the fund industry in Hong Kong in 2003 amount to $2.95 trillion, of which $1.86 trillion or 63% originates from overseas investors. However, speakers said that the territory must capitalize on its strengths, particularly given its strategic position as the gateway to China, and continue to invest in its human capital

AMERICA’S “JUDICIAL HELLHOLES”

Illinois is either heaven or hell, depending on how you look at it. Madison County and neighboring St. Clair County, two southern Illinois counties with populations of no more than 260,000 each, took the No. 1 and No. 2 spots as the worst places for companies to be hauled into court, according to a report released by Washington-based American Tort Reform Association (ATRA). On the other hand, if you are looking to sue a business for doing you wrong, then Madison and St. Clair counties might be the place to go. The ATRA’s study looks at how corporations view their treatment by select state courts.

Given that the survey addresses corporate views, it is hardly scientific or unbiased. And trial lawyers say the study misrepresents crucial facts about the lawsuits brought and the results that ATRA considers outlandish. The goal of the report, said ATRA president Sherman Joyce, is to help foster fair treatment at courts around the country. “This report really focuses on the most egregious problems,” he said. And what makes places like Illinois and South Carolina stand out, added Joyce, are provisions allowing almost anyone to sue there. Accusers and accused do not need to reside in these states, nor does the underlying injury have to occur there.

The report -- sure to be embraced by litigation reform advocates and derided by trial lawyers -- comes at a crucial time. President Bush has made it clear that tort reform, which refers to civil lawsuits brought by individuals claiming injury, will be a top legislative priority in his second term. Bush singled out medical malpractice cases, which reform advocates say are driving up health care costs and driving doctors out of business. With Republicans firmly in control of Congress and various state legislatures around the country, tort reform advocates are optimistic that key initiatives they support will become law.

U.S. HIGH YIELD FRAUDSTER FACING PRISON THANKS TO BERMUDA’S COOPERATION

An international con artist faces a lengthy prison term next month after a paper trail unraveled while trying to launder money in Bermuda. American Dennis Herula was jailed for a month in Bermuda in 2001 but left to fleece millions from super-rich investors in Denver. But American authorities were able to snare him using documents seized during the Bermuda investigation and he faces sentencing next month along with his partner in crime, financier Claude LeFebvre. LeFebvre was convicted in a Denver federal court this month on charges of luring an heir to the Coors brewing fortune and other wealthy people to invest more than $60 million in a scheme promising weekly returns of 75%.

LeFebvre was found guilty of fraud and making illegal monetary transactions. Prosecutors said LeFebvre, along with former stockbroker Dennis Herula and Herula’s wife, spent $4.3 million of the money on automobiles, jewelery, antiques and cosmetic surgery before investigators froze the accounts. Investors were told their money would be placed in “financial institution instruments” and that they had to have at least $10 million to participate. Prosecutors called it “a sophisticated scheme to defraud wealthy individuals”.

LeFebvre, 61, was convicted after an 8-day trial while Herula, 57, had earlier pleaded guilty to wire fraud, money laundering and bankruptcy fraud. He also pleaded guilty to fraud for allegedly conning $13 million in a separate scheme and could face more than 20 years in prison when he is sentenced January 21 in both cases. LeFebvre faces up to 50 years in prison and $2.3 million in fines when he is sentenced on February 25.

Bermuda Detective Inspector Raphael Simons, now in charge of CID, was working in the Financial Investigations Unit when Herula was jailed for a month in December 2001 after admitting trying to open a new bank account using false documents and information. The 54-year-old told the bank he wanted the account to be in the name of Platinum Asset Management -- a company he was hoping to set up here. And he said a check for $10 million dollars, which was the proceeds of bond trading, would be credited to the account soon after from a company named Legacy 2000 Incorporated based abroad. However investigations by the bank showed Legacy 2000 did not exist and Police were informed. Herula and his wife, were arrested.

Herula was carrying documents and a laptop computer which had all the necessary evidence to nail him for that fraud and also help convict him of further charges in Denver. “Because of his fraudulent lifestyle he had to back himself up -- he was going to financial institutions all over the world purporting to be something he wasn’t. He basically carried his office with him so everything he wanted was at his fingertips. Everything was on credit cards and he had the flashy jewelery,” said Det. Insp. Simons, adding that Herula had plans to buy a house in Bermuda and ensconce himself in the posh golf clubs. But authorities in Rhode Island, including the FBI, were already onto Herula who had operated scams there before he came to Bermuda.

WHY LEGITIMATE CROSS-BORDER TAX PLANNING REQUIRES MORE CARE THAN EVER

The central thesis of this article is that the ability to raise taxes has always been dependant upon taxing authorities having access to information about the affairs of their taxpayers and that recent developments in extracting information from tax havens has put taxing authorities in an unprecedentedly strong position to successfully tax cross-border transactions. I will trace a short history of tax havens, demonstrate how they have operated in the modern era with such effect and describe the response of the developed nations to what they saw as a serious threat to their revenue base. Finally, I will look at the result of these developments and what it means for cross-border tax planning going forward.

Words like “know your client” and “source of funds” are the catch phrases of modern international banking. Opening a bank account in Hong Kong in the name of a British Virgin Islands company is a near impossibility particularly if the shareholders and directors are not in Hong Kong. If the company is owned by a trust, it is a double nightmare. If you want your company to send money to another company, you may have to tell the bank why. If your company receives in its bank account substantial sums of money or even regular payments, you may need to tell the bank what the money’s for and exactly where it came from. If the bank is suspicious about the transaction, i.e., if they form a reasonable suspicion that the money they are dealing with is somehow linked to, say, tax evasion, they are in most places duty-bound to report the transaction to their local agency and the bank officer commits a criminal offence if they tell you that they have made a report.

The tax collectors are in the best position they have been in for a long time, possibly since Ancient Roman times. They have never had so much access to so much information and information is power in the hands of the tax collectors just as it is with anyone else. This means that cheating on taxes is more dangerous than ever and it means that legitimate tax planning requires more care than ever. But the good news is that in the cross-border context in particular, there is still lots that can be lawfully done to achieve what most people consider to be an acceptable rate of tax. Zero tax is often, but not always, an overly ambitious goal these days.

The careful use of corporate vehicles, trusts and partnerships still allows for significant and entirely legitimate reduction in exposure to income, capital gains and inheritance taxes. The use of life insurance and retirement schemes is becoming increasingly popular in shielding income from tax in high tax countries whilst at the same time allowing for tax efficient inter-generational wealth transfers. The old approach of meeting tax circumstance with guile is finished; the smart money now meets tax circumstance with strategy.

PRIVACY

STATES BEGIN SECURITY CHECKS OF DRIVER’S LICENSE PHOTOS

At least two state motor vehicle registries in the U.S. have begun scanning new license photos against databases of pictures, to guard against issuing fraudulent IDs. The measure is one of many new security checks being applied to licenses and ID cards across the country. Prompted in part by the false IDs discovered in the cases of the 9/11 hijackers and the District of Columbia-area snipers, states have begun raising security for IDs in an attempt to limit the ease with which they can be faked.

For instance, the Colorado Department of Revenue Motor Vehicle Business Group randomly selects for such checks a sample of people who are renewing their licenses, according to a spokesperson for Digimarc, a company in the forefront of the new technologies. Digimarc supplies secure driver’s license issuance systems that produce two-thirds of all U.S. driver’s licenses.

Ari Schwartz, associate director of the Center for Democracy and Technology, doubts that the enhanced security features will significantly deter fake IDs. He cites a recent study by the center, which showed that a significant number of identity frauds originate from insiders who work or have connections with motor vehicle registries, as proof that preventing outsiders from obtaining fraudulent IDs is only half the battle. Although Schwartz says he has few objections to the current technology, he adds that it could pose threats for the future -- specifically its potential to create a national database of information. “A linked-up database, that’s where it becomes a national issue,” Schwartz says.

TOTAL SURVEILLANCE DRAWS CLOSER

The debate comes down to is whether you believe our countries are at war. Most people accept that tighter restrictions are necessary in wartime. Britain’s last national ID card, e.g., was in World War II, and quite a few people who are at least not terribly opposed to having one now seem to take the view that this is the situation we are in. That might be justification for introducing something temporary quickly now. It does not provide justification for spending billions of pounds on a scheme due to begin rolling out in 2008.

The fact is that governments, and especially civil servants, like surveillance and documentation. It seems neat and tidy to know who everyone is. It must feel like control to be able to inspect dossiers and papers. Most of the people proposing national ID cards probably really do believe that these will engineer a more secure world in which everyone is known. Like things used to be, when everyone lived in small villages.

But real life is mess and uncertainty and risk. Fingerprint and document people all you want, you will never be able to predict when someone who has been entirely law-abiding up until now is activated as part of a unit you had no idea existed. That requires a different kind of intelligence than identification documents will ever provide.

HOMELAND SECURITY DEPARTMENT EXPERIMENTS WITH NEW TOOL TO TRACK FINANCIAL CRIME

The Department of Homeland Security has begun experimenting with a wide-ranging computer database that allows investigators to match financial transactions against a list of some 250,000 people and firms with suspected ties to terrorist financing, drug trafficking, money laundering and other financial crimes. The program, developed by a British company and used in recent test runs at the Department of Homeland Security, gives investigators what amounts to an enormous global watch list to track possible financial crimes at American border crossings, banks and other financial institutions.

David Leppan, chief executive of World-Check, the British company that has provided the database to American officials, said the recent test runs had produced a number of promising hits on people with suspected criminal ties overseas who had entered the U.S. with more than $10,000 in cash or made other financial transactions in this country that were reported to the government.

The program provides yet another indication of the wide-ranging efforts by American officials to look for new technological tools in fighting terrorism and other international crime. But it also raises privacy and civil liberties questions because domestic security officials are relying on a private overseas firm to provide a voluminous list of people and companies that it considers to represent a “high risk” of committing financial crimes, based on an assortment of public records and data.

PRIVACY AND THE USA PATRIOT ACT: IMPLICATIONS FOR BRITISH COLUMBIA PUBLIC SECTOR OUTSOURCING

This report continues the public dialog about privacy that was triggered earlier this year by a lawsuit aimed at halting the B.C. government’s plan to retain a U.S.-linked contractor to run the province’s public health insurance program. The concern was that contractors who possess sensitive personal information could be secretly compelled under the USA Patriot Act to turn it over to U.S. authorities. This report’s scope and detail speak to the breadth of the issues that figure in that debate.

Our review of the USA Patriot Act and the outsourcing of public services in B.C. has caused us to confront the most challenging and important privacy issues my office has faced since I took this job just over five years ago. A central theme of this report is that we cannot wait for historians to tell us whether or how much a shift to a national security focus has imperilled our hard-won rights and liberties. We have to do our best now, not tomorrow, to ensure that the law and practices introduced after September 11 are consistent with our democratic tradition and civil rights.

FUNCTIONAL FASHION HELPS SOME THROUGH AIRPORT CHECKPOINTS

Rolf Reifgies always got in trouble at the airport security checkpoint because of his suspenders. Whenever the Wisconsin businessman flew out of Minneapolis, Milwaukee or Madison, Wisonsin, the metal in his suspenders set off the magnetometer. Then, six weeks ago, he discovered BuzzNot, a brand of suspenders with plastic clasps. In this era of tightened airport security, retailers are coming to the aid of the aggravated traveler, offering new products -- such as bras and shoes -- designed to get passengers through the checkpoints without the indignity of a pat-down. Shoemakers Johnston & Murphy, Florsheim and Rockport sell dozens of styles without metal shanks in the soles and market them to frequent fliers. Florsheim identifies the styles with tags that look like passports labeled “airport friendly” inside the shoebox.

Many passengers think it is worth the effort to find shoes and clothing that will help them avoid added scrutiny at the airport checkpoint. Travelers who set off the walk-through magnetometer are automatically pulled aside, and a screener waves a hand-held metal detector over their body. Then, the screener conducts a physical pat-down search to check for hidden explosives or other prohibited items. The pat-downs have become more common since September, when two Russian planes exploded after two women allegedly brought explosives on board.

Even if passengers do not set off the metal detector, the TSA warns that passengers may be pulled aside for more screening. Typically, passengers who buy tickets at the last minute or buy one-way trips will automatically be selected. Screeners also may choose passengers at random for additional screening, no matter what they are wearing. The unpredictability of the screening process has prompted many frequent travelers to wear slip-on shoes, rather than ones with laces.

LAW

WASHINGTON ATTORNEY IS ON A CRUSADE TO EXPORT AMERICA’S LEGAL SYSTEM

Michael Hausfeld has built a career pushing the boundaries of American law. In the 1990s his firm wrung a $176 million settlement out of Texaco, then the most ever in a race discrimination case. A leader in Holocaust litigation, he obtained $8 billion from Swiss banks and German industry and government. His firm is now lead counsel in the largest class action in history, representing 1.5 million current and former female Wal-Mart employees.

Now the 58-year-old lawyer is building an international network of plaintiff lawyers in such diverse places as Great Britain, India, Panama and South Africa. The goal: to export U.S.-style litigation tactics, including contingency fees and class actions, throughout the world. In coming months, he says, he and allied lawyers in various countries plan to file antitrust, product liability, securities and human rights cases. Hausfeld’s plan should terrify corporations already reeling from the U.S. plaintiffs’ bar. But he says his plan is for the defendants’ own good. By hooking up with foreign law firms he can offer corporate defendants a settlement that will stick in other countries. Now a corporation that settles in the U.S. might still get socked with billions of dollars’ worth of claims abroad.

Cold comfort maybe, but he is already naming targets. Parmalat and Marsh & McLennan look ripe for securities actions in the U.K. His British partner firm, Irwin Mitchell, is looking for potential Vioxx claimants against Merck. In India Hausfeld and a partner are investigating filing a claim related to the cleanup of the site of the 1984 Bhopal disaster. And in South Africa Hausfeld and U.K. human rights lawyer Martyn Day are exploring an environmental suit against Anglo American.

Hausfeld is tapping into a trend suggesting U.S.-style litigation is already spreading, particularly in the E.U. But Hausfeld is fighting immense procedural differences among countries. In the U.K., for instance, each member of a class must be identified, a policy that prevents lawyers from dreaming up cases where there are few identifiable victims. Even some of Hausfeld’s simpaticos wonder whether U.S.-style litigation will ever take root overseas. At least in the U.K., America’s “compensation culture” is frowned upon. Elsewhere people have not historically thought of private litigation as a remedy. Meanwhile Hausfeld is planning to exploit the differences in legal systems.

AUSTRALIAN POLICE GIVEN COMPUTER SPY POWERS

Federal and state police now have the power to use computer spyware to gather evidence in a broad range of investigations after legal changes last week. The Surveillance Devices Act allows police to obtain a warrant to use software surveillance technologies, including systems that track and log keystrokes on a computer keyboard. The law applies to the Australian Federal Police and to state police investigating Commonwealth offences.

Critics have called the law rushed and imbalanced, saying police will be able to secretly install software to monitor email, online chats, word processor and spreadsheets entries and even bank personal identification numbers and passwords. Irene Graham, executive director of watchdog Electronic Frontiers Australia, said the law went too far in allowing police surveillance. Ms. Graham also believed the act could override parts of the Telecommunications Interception Act, which tightly regulated telecommunications monitoring. A spokesperson for the federal Attorney-General, Philip Ruddock, denied this, saying the act specifically said it should not be read to override the Telecommunications Interception Act.

In addition to redefining the kinds of surveillance devices that can be used, the Surveillance Devices Act allows surveillance for offences far less serious than those allowed under the Telecommunications Interception Act. Warrants to intercept telecommunications can only be obtained to investigate offences carrying a maximum jail term of seven years or more. However, Surveillance Devices Act warrants can be obtained for offences carrying a maximum sentence of three years. Ms. Graham said the three-year benchmark was too low and the act went too far in setting out circumstances in which police could use surveillance devices.

GEORGE BUSH VS. BARRY BONDS

The U.S. government has sent the impressionable Youth of America an unmistakable signal: Do not, under any circumstances, break any sporting records after adding 18 pounds of muscle at age 36. If you do, Uncle Sam will use the awesome powers at his disposal -- grand jury inquisitions, illegal leaks, even the State of the Union address -- to humiliate you in public and pressure your union to accept year-round random urine testing, even if you will never be charged with breaking a single law.

In 2001, the San Francisco Giants’ Barry Bonds, one of the five best players ever to wear a baseball uniform (he has won an unprecedented seven Most Valuable Player awards, including the National League’s last four), broke Mark McGwire’s single-season home run record, with 73, far surpassing his own previous high of 49. Unluckily for him, he did so in a media market inhabited by an ex-jock IRS agent, Jeff Novitzky, who did not appreciate Bonds’s famously surly attitude.

Sespite Congressional huffing and puffing, the unprescribed use of drugs, anabolic steroids, that are playing an increasingly important role in the treatment of breast cancer and HIV had been very low on the feds’ things-to-enforce list. Until 2001, when Bonds broke the home-run record ... and George W. Bush took over the White House. Bush, a former minority owner of the Texas Rangers, has a classic baseball owner’s mentality when it comes to employee drug use: Players should be granted the same privacy as racehorses, in order to Protect Our Kids. The use of the ultimate Bully Pulpit, the 2004 State of the Union Address, should come as no surprise. By then, IRS agent Novitzky had long established that the Bonds-implicating BALCO case would be more about the pressure of negative publicity than the assembling of a viable criminal case.

The federal justice system should be about apprehending serious criminals, not “sending messages” to schoolchildren by abusing the grand jury process to compile and illegally leak publicly damaging information about non-criminals. There is such a thing as the presumption of innocence, no matter what you read in the sports pages. As it stands, Barry Bonds has not even been formally accused of violating a single baseball rule, let alone federal law. President Bush has indeed “sent a message” to the kids of America: We can make you look guilty, even when you have never been charged. It is a rough lesson, but they might as well start getting used it.

BERMUDA PASSES LAW AGAINST TERRORISM FINANCING

Bermuda’s lawmakers gave final approval to a bill to prevent terrorists from hiding money in bank accounts or property in the offshore finance center. The Anti-Terrorism Act followed a law against money laundering and an agreement by the British colony to share financial information with U.S. tax authorities. Junior Labor, Home Affairs and Public Safety Minister Reginald Burrows said the anti-terrorism bill was necessary to help “ensure our island does not become the destination of choice for tax evaders and perpetrators of other forms of illicit financial activity.” It will require businesses to report immediately to police if they believe money is being used for terrorist purposes. Judges can order accounts to be monitored, and the law allows money and property of suspected terrorists to be seized for up to two years during an investigation and potentially forfeited for good.

As with other offshore finance centers, Bermuda has come under pressure from industrialized nations to toughen its banking laws. A March 2003 review by the IMF recommended Bermuda enact its own domestic terrorist financing regulations rather than rely on British law. In July, Bermuda more than doubled the number of investigators tackling money-laundering allegations. The authorities said at the time they were not investigating any reports of suspected terrorism financing.

INTELLIGENCE BILL INCLUDES DISPUTED ANTI-TERROR MOVES

The intelligence package that Congress approved last week includes a series of little-noticed measures that would broaden the government’s power to conduct terrorism investigations, including provisions to loosen standards for FBI surveillance warrants and allow the Justice Department to more easily detain suspects without bail. Other law-enforcement-related measures in the bill include an expansion of the criteria that constitute “material support” to terrorist groups and the ability to share U.S. grand jury information with foreign governments in urgent terrorism cases.

These and other changes designed to strengthen federal counterterrorism programs have long been sought by the Bush administration and the Justice Department but have languished in Congress, in part because of opposition from civil liberties advocates. Justice Department spokesman Mark Corallo characterized the measures as “common-sense reforms aimed at preventing terrorist attacks.” But civil liberties advocates and some Democrats said the measures would do little to protect the public while further eroding constitutional protections for innocent people caught up in investigations.

Critics also say the proposed changes were overshadowed by the debate over other aspects of the bill, which puts in place many intelligence agency reforms proposed by the independent commission that investigated the Sept. 11, 2001, attacks. Some Democrats say they reluctantly approved the package because they favored the broader intelligence changes. Sen. Russell Feingold (D-Wisconsin) said that while he voted for the bill because of its intelligence reforms, he opposed much of the expansion of law enforcement power. Most of it was not part of the September 11 panel’s recommendations. “I am troubled by some provisions that were added in conference that have nothing to do with reforming our intelligence network,” Feingold said. He later added, “This Justice Department has a record of abusing its detention powers post-9/11 and of making terrorism allegations that turn out to have no merit.”

Charlie Mitchell, legislative counsel for the American Civil Liberties Union, said the law enforcement measures are “most troubling in terms of the trend they represent. They keep pushing and pushing without any attempt to review what they’ve done.” Congressional aides said most of the law enforcement measures were included as part of the original House proposal for intelligence reform, which also called for wide-ranging changes in border and immigration policies. Although some of the most controversial provisions were removed in House-Senate negotiations, several remained in the bill. As with parts of the original Patriot Act, some of the new powers would expire at the end of 2005 or 2006 unless Congress renewed them.

CLARKE TAKES CHARGE OF BLUNKETT’S FEAR AGENDA

British Home Secretary David Blunkett’s resignation casts doubt over his ambitious and controversial plan to implement a compulsory biometric ID card scheme. The plan has been deemed “technologically impossible” by the Government’s own IT chief. Blunkett was also viewed as Tony Blair’s most senior political ally. He resigned after he could no longer deny giving his nanny preferential immigration treatment. In the highly centralized UK political system, the Home Secretary officially wields power over the police, prisons, immigration and drug crime, a role so broad that clashes with the judiciary are considered part of the job. Like his New Labour predecessor, Blunkett made a virtue out of antagonizing as many civil liberties groups as he could. Last year he oversaw the publication of the Civil Contingencies Bill, which permits politicians, with a handful of Privy Council votes, to bypass the monarch and impose sweeping restrictions on movement, and seizures of property, however they see fit.

This year Blunkett has proposed making every offence arrestable, and in turn, giving police the power to make every arrestee submit to a drugs test and DNA sample. So be careful where you park. But it is the expensive ID card plan that has raised the most widespread concern. Although mooted as a voluntary card, it is really compulsory for employers. Based on unproven technology, even the Home Office cannot work out how much it will cost. The list of fields to be stored on the card looks ominously like an open-ended data trawl.

Which sensible politician, with an election just months away, would not want to kick this as far away as possible? Well, Blunkett’s successor at the home office, Charles Clarke, isn not much more of a civil libertarian. At the Department of Education he welcomed the installation of X-ray machines and police stop and search tactics into schools. But Clarke must decide how much political capital he wants to spend on a scheme that has already been compared to the Poll Tax.

BRITAIN’S HIGHEST COURT OVERTURNS ANTI-TERRORISM LAW

Britain’s highest court ruled that the British government cannot indefinitely detain foreigners suspected of terrorism without charging or trying them, and called the process a violation of European human rights laws. A specially convened panel of judges in the Law Lords ruled 8 to 1 in favor of nine foreign, Muslim men who have been in detention, most of them in Belmarsh Prison in London, for as long as three years. The prison has been called “Britain’s Guantanamo” by human rights groups.

In its powerfully worded decision, the court said that the government’s “draconian” measures unjustly discriminate against foreigners since they do not apply to British citizens and constitute a lopsided response to the threat of a terrorist attack. The judges deemed it a clear violation of the European Convention on Human Rights, a declaration that complicates the British government’s strategy on combating terrorism. The ruling by the Law Lords, a panel of senior judges who sit in the House of Lords and act as the country’s highest court, parallels a June decision by the United States Supreme Court that said “a state of war is not a blank check for the president.”

Using the sharpest language of the nine judges, Lord Leonard Hoffman, said the case was one of the most important decided by the court in recent years. He went on to say that the government’s actions posed a greater threat to the nation than terrorism. “The real threat to the life of the nation, in the sense of a people living in accordance with its traditional laws and political values, comes not from terrorism but from laws such as these,” Lord Hoffman wrote. “That is the true measure of what terrorism may achieve,” he added. “It is for parliament to decide whether to give the terrorists such a victory.”

The ground-breaking decision removes one of the government’s crucial anti-terrorism tools and muddles its ability to deal with suspected foreign terrorists. It also forces Prime Minister Tony Blair, his cabinet and the Parliament to either modify the law, or release the men and do away with the law altogether. The law must be renewed next year and is scheduled to expire in 2006. Until the government makes that decision, the detainees will remain in prison. Human rights groups said the law made a mockery of democracy. It also infuriated the Muslim community, since it appeared to be aimed only at Muslims.

KANGAROO COURT IN GUANTANAMO BAY

While U.S. District Judge James Robertson irritated the White House on Feb. 9 by stopping a military tribunal at Guantanamo Bay because, he said, it was not a competent tribunal to decide the legal protections due those before it under the Geneva Convention, there is a separate set of proceedings for detainees there. The lawfulness of those proceedings is also under serious, continued question. Recently, Jameel Jaffer, an American Civil Liberties Union lawyer, returned from observing this other series of hearings -- the Combat Status Review Tribunals, which are set up to determine whether the hundreds of detainees at Guantanamo Bay are being lawfully held. Jaffer concluded, as have even some of the military defense lawyers who have previously submitted briefs to the Supreme Court, that they are defying a June decision by the U.S. Supreme Court that these prisoners must get due process -- in the simplest terms, basic fairness.

In the 6-3 ruling, the court wrote that these alleged unlawful enemy combatants are entitled -- “no less than American citizens” -- to challenge the evidence against them, among other rights. Yet, as the New York Times’s Neil Lewis noted on Nov. 1, a recent brief by the Bush administration pretends there was no such Supreme Court decision. The government stated that “the notion that the U.S. Constitution affords due process and other rights to enemy aliens captured abroad and confined outside the sovereign territory of the U.S. is contrary to law and history” -- an argument the Supreme Court smacked down. With regard to sections of the Patriot Act and subsequent executive orders, the government has previously been charged with making up the law as it goes along. This now appears to include bypassing the Supreme Court.

The crude attempt by the government to skip the Supreme Court is not surprising in view of attitudes of key administration officials long before these fake proceedings at Guantanamo Bay started. Dick Cheney called the detainees “the worst of a very bad lot ... devoted to killing millions of Americans.” Mr. Cheney, where is the presumption of innocence? And Donald Rumsfeld said they were “among the most dangerous, best-trained vicious killers on the face of the Earth.” But the overwhelming majority have not been charged with any crime. If they are so heinous, then charging them should have been a swift, clear process. Instead, as Jaffer says, “Guantanamo remains a legal black hole.”

OPINION & ANALYSIS

THE MISNAMED CONFLICT

The continual stream of books about the Civil War generally focus on soldiers, generals, weapons, uniforms, medical procedures, and battlefield maneuversalong with the usual accounts of suffering, misery, and death. The calm picture of businessmen and clerks engaged in their business of buying and selling cotton at the New Orleans Cotton Exchange is not the typical image one finds on the cover or dust jacket of books about the Civil War. But the Edgar Degas painting that graces the cover of Tariffs, Blockades, and Inflation: The Economics of the Civil War tells the reader that this is no ordinary book on the Civil War. This is an insightful book that breaks much new ground. The authors apply economic theory to historical events to illuminate the causes and consequences of the Civil War as no other book about that misnamed conflict.

Although the authors do acknowledge that “slavery and its opposition were interwoven into the economic, political, social, and religious fabric of America,” they do not consider slavery to be the sole cause of the war. Instead, they emphasize politics and economics as the major factors that led to the war. This does not mean that the issue of slavery is ignored. To the contrary, Thornton and Ekelund acknowledge that many economic interests were indeed “at least somewhat related to slavery”. But instead of the Civil War being about just slave holders and abolitionists, the authors see the war as a sectional conflict with a number of related parallels: free trade vs. protectionism, Jeffersonians vs. Hamiltonians, agrarian society vs. industrial society, states’ rights vs. strong central government. These dichotomies are all explored in the book along side of the misguided economic policies that both sides undertook to their detriment.

The authors correctly view the mercantilist agenda of the new Republican Party (protective tariffs, national bank, and public works) as being anathema to the agrarian South, and reminiscent of the policies of the Federalist Alexander Hamilton and the Whig Henry Clay. The Southern States saw the election of Lincoln as harmful to them economically, and left the Union -- an action that Lincoln himself endorsed in a speech in Congress on January 12, 1848. Because of the new role of government that emerged from the war, the authors make the case that the Confederate defeat resulted in an “ideological downfall” for the limited government established by the Founders. They view Lincoln’s massive intervention of the federal government into the economy and subsequent increase in the size and scope of the national government as the starting point of the growth of the federal leviathan. The great emancipator was an even greater centralizer.

TO THINK OR NOT TO THINK

General semantics is the study of language and meaning and is intended to help us to think clearly and to stay in touch with reality. Neither of those is as easy as one might suppose. A basic theme of general semantics is recognition that language is a system of symbols, both written and aural, that relate to the stuff of reality. For example, when we English-speakers wish to refer to H₂O, we say, “water”. A Spanish-speaker would say, “agua”. Here we have the same reality but two different symbols for it. There is only one reality, but there are thousands of languages.

The important thing to remember is that the word is not the thing itself. People who confuse words with reality are said to suffer from a belief in word magic. Words actually produce no effect whatsoever on reality. They are just arbitrary symbols we use for the purpose of communication. When we say someone is guilty of some crime, merely saying it does not prove it. To say that a country is a “terrorist state” does not prove that it is.

Another rule of semantics is to remember that the universe consists of unique stuff. No two people, no two trees, no two anythings are precisely identical. Alfred Korzybski, the founder of general semantics, used a numbering system to remind us of the uniqueness of reality. Cow-1 is not cow-2. The United States-1945 is not the same as the United States-2004. Not only does our world consist of unique stuff, but everything, including ourselves, is undergoing continuous change. The U.S. in the 1940s was literally the arsenal of democracy. Today, we lack that capacity.

Still another important tip is to know the difference between fact and opinion. There is a difference between informed opinion and uninformed opinion. Quite often in this age of propaganda, propaganda gets absorbed into people’s minds and then repeated as fact. We should always distinguish between what we know, what we do not know and what somebody else told us.

Stretch your intellectual comfort zone.

We have developed a very simplistic approach to reasoning where all points of views that do not correspond with our own are filtered out and never considered. This pseudo-reasoning plagues individuals in almost any academic field and is especially evident in how people approach religion, politics, and other broad and complicated cultural issues. Usually, when people write to tell me that a column was “brilliant” what they are actually saying is “I agree with you, therefore what you are saying is great.” When people say I am ignorant, hateful, etc., more often than not they are just outraged somebody could possibly disagree with them. I am not convinced either group actually takes the time to sit down and work through the complicated issues at hand, gather all the facts and various opinions, and then reach their own conclusions.

On politics for instance, most politically “aware” people see the system in a highly dualistic fashion. If you are a Democrat then Democrats = forces of goodness and Republicans = forces of evil. Or if you are a Republican just switch things around. There is no room for nuance. Everything is black and white, a battle between ultimate good and ultimate evil. If you want an example of this, just watch the hysteria on both sides before each election.

I think it is good for an individual to take the time to actually consider and evaluate positions, people, and points of view they do not agree with. Instead people would prefer to expose themselves only to materials and points of view that reinforce their own. There is no room for critical thinking or actually trying to figure out why others think, feel, and believe as they do. If all an individual does is evaluate everything through the narrow prism of his narrow point of view then he is denying himself the opportunity to ever learn anything new or be challenged.

Some may object and claim that being truly open-minded will make someone spineless and intellectually cluttered. Therefore, it is better to be obtuse and stubborn. John Kerry was too wishy-washy on some matters, but Bush demonstrates the rigid stubbornness that in any other profession would be a major vice, but in politics for some reason is a great virtue. Instead of being a nation of critical thinkers, America has become (or perhaps always has been) a society of black and white comic book dualists who are incapable of thinking outside the box. It is not only true in politics but other institutions as well. The irony of all this is while people are trying to protect themselves from points of views that will corrupt them, they are actually making themselves less effective as intellectual thinkers. The moral of this whole story? Life and the big issues that confront us are rather complicated and call for intelligent and informed thinking.

NEXT TARGET: IRAN?

Will the newly energized President Bush interpret his narrow election win as public approval for his spaghetti Western–style shoot-‘em-up foreign policy? Many neo-conservatives outside the Bush administration have made noise about going after Iran. Could the swaggering sheriff be convinced by these pundits to take on the black-hatted mullahs of Iran? Let’s hope not. Attacking Iran would be a bigger folly than invading Iraq.

With no viable military options, even the aggressive Bush administration will probably be forced to give peace a chance. If the United States can negotiate with the erratic Kim Jong Il in North Korea, it can certainly do so with the authoritarian mullahs in Iran. The secret in both sets of negotiations might be to recognize that these “rogue states” might be genuinely frightened of a U.S. invasion and willing to accept a non-aggression pact with the United States in exchange for a verified elimination of their nuclear weapons. If that does not work, the United States may just have to live with unfriendly nations having nuclear weapons. The U.S. allowed the Soviet Union to obtain nuclear weapons in the 1940s and radical Maoist China to get them in the 1960s. No matter how quirky or radical a nation’s leaders, if a government has a home address that can be incinerated by the most capable nuclear arsenal on the planet, that government can be deterred from attacking the United States.

MOMMY STATE DEAREST GOES OVER THE EDGE

Lots of people today claim we are living in a Mommy State. We are children to be scolded, smacked, ordered around. Wear your seatbelt, lose weight, be nice to everyone. It is worse than annoying. It can drive you batty. It is like being in kindergarten all your life, or being forced to sit at the little kid’s table during Thanksgiving when you are 35 years old. I am also reminded of Bizarro World, where the cars have square wheels. Things there do go, but they do not go very well. They do not go very far, either, before they break down. There is a lesson in that.

There is truth to the theory about Mommy. I do not think it goes far enough, though. Mommy is now insane. These days we are supposed to not think bad thoughts. Orwell called this “thought crime”. God forbid one of those thoughts slips out. You could end up in the pillory. Now, we have got kids expelled from school for bringing nail clippers or aspirin. Little boys cannot draw pictures of tanks or airplanes. Point a finger and say “bang” and you might be arrested. A 5-year-old boy giving a 5-year-old girl a kiss on the cheek will end up in therapy for sexual harassment.

The loons at the airports confiscate cigarette lighters and Medal of Honors (got points on it, you know). I am comforted by the fact terrorists will not hijack the plane by lighting up a Bic and threatening to hurl a Medal of Honor like a shuriken. I have got a theory about all of this. The State is a Monster. It just wants to keep growing and growing like the Blob. If the government would do its job you would hardly even notice it was there. When the government goes beyond those minimal functions then it turns into the State. All that hectoring and irritating it does -- for our own good, of course -- is bad enough. But somewhere along the line, it just goes plain nuts. It gets too big and then it gets wacky. It never seems to end. And just how big can it get before collapsing? If it does, that means taking us with it. We are not going to have jackboots in America. We are going to have Mommy, meddling, suffocating, irritating, enraging, always petty, always there, everywhere

HAPPY BILL OF RIGHTS DAY

December 15 is neglected by most Americans for its historical significance as the anniversary of the Bill of Rights. Even worse, American politicians neglect the actual Bill of Rights on a day-to-day basis. Whether or not the Bill of Rights can ever be an effective means of limiting the government is open to debate. However, the Bill of Rights does offer a fairly good outline of a free society, and it shows how far our country has strayed.

In an America with a full respect for the Bill of Rights, there would be no Federal Communications Commission regulating the airwaves and forbidding certain speech, no Federal Election Commission limiting how much Americans can donate to political candidates or what they can say in independent political ads, no Food and Drug Administration harassment of pharmaceutical and wine producers regarding their commercial speech, no federal laws that have anything to do with religion whatsoever, and no federally established “free-speech zones”. There would be no laws disarming Americans, prohibiting airlines from allowing pilots or passengers to carry guns on planes, or limiting how much ammo or what kind of firearms people can buy and own. There would be no Patriot Act, no secret searches, no spying on telecommunications without a warrant. There would be no civil asset forfeiture, no horrendous eminent domain abuses, no kangaroo courts, star chambers and phony hearings for the accused. There would be no federal programs not authorized by the Constitution: no Departments of Energy or Education, no Medicare or Social Security, no Federal Reserve or Selective Service, no farm subsidies or corporate welfare. We have come a long way, haven’t we?

If either the ninth or tenth amendment alone had full recognition, almost everything now done by the federal government would come grinding to a halt. A government that obeyed the Bill of Rights would cost a small fraction of its current size, and would not require an income tax to fund. The young would be liberated from Social Security and any fear of conscription ever coming back. The streets would be safer, free from the violent crime augmented by the War on Drugs and gun control. America would no longer have a higher per capita prison population than Saudi Arabia, Russia and North Korea. The free economy would be unleashed to produce the largest revolution in technology and commerce and greatest increase of the American standard of living since the Industrial Revolution. The productive sector would no longer be persecuted by the political class for producing too much, not enough, or not according to the specifications of central planning. Many if not most political tensions would be decentralized down to the state level, and after that, competition and experimentation among states would likely point the way to the benefits of liberalizing and shrinking government at all levels.

Americans would become more responsible, tolerant, caring, cooperative, industrious, wealthy and safe. A lot of problems would still exist, but without the amplification that they now get in the political process. If today you hear a politician mention the Bill of Rights -- a politician besides Ron Paul, that is -- try to imagine which Bill of Rights he is referring to. Which Bill of Rights is it that allows for two-and-a-half-trillion-dollar budgets, airport Gestapo, thousands of gun laws, a federal war on drugs, No Child Left Behind and McCain-Feingold? Where in the Bill of Rights does it say that the president can disqualify suspected terrorists from their rights to a trial, an attorney, and due process? The officials who violate the Bill of Rights are breaking the very law that supposedly brings their jobs and the government that employs them into existence. And yet we are supposed to take them seriously when they talk about “the rule of law”, “law and order”, and “justice”.

I celebrate Bill of Rights Day, not out of some delusion that we have the enumerated and unenumerated freedoms protected by the document, nor with some nostalgia for a past when the Bill of Rights was perfectly obeyed. It never was. George Washington and John Adams violated the Bill of Rights. Ever since Lincoln, the document has suffered major violence, and four years of Bush have probably done more harm to the freedoms in the Bill of Rights than this country has seen in 30, maybe even 50 years. But Bill of Rights Day is still a good time to think of that document, which comes as close to a libertarian founding legal charter as any in the world. Celebrate Bill of Rights Day, if only to think of the great freedoms that might exist, that could exist, and that can exist, one day, in fuller force and greater glory than ever before.

A REVIEW OF ALEXANDER, REFLECTIONS ON EMPIRES

Artists have a long history glorifying empire and lionizing conquerors. Virgil’s Aeneid, for all its stylistic brilliance and good storytelling, is also a justification of the Roman Imperium with Augustus as its legitimate ruler. The painter Jacques Louis David might have immortalized the liberating spirit of the French Revolution, but he also romanticized the aggressive militarism of Napoleon with his vainglorious and preposterous painting of the Corsican adventurer crossing the Alps. Kipling wrote poems exalting the British imperial mission and invited the Americans to do their share, and so on.

Late in life, the famed director Oliver Stone seems to have fallen for this same temptation. In a November 25th interview, Stone praised Alexander for freeing slaves, overthrowing tyrants, building cities, spreading commerce and culture, and attempting to blend Hellenic (Western) and Asian civilizations. He even suggested that Bush’s delusional ambition to democratize and pacify the Middle East is of a similar nature and might succeed where Alexander failed. Stone did not support the Iraqi war, or Bush’s wilder plans, but in glorifying Alexander he furnishes a precedent and thus gives it unwitting moral and artistic support. His admiration for Alexander is unsettling and even seems a betrayal. His Born on the Fourth of July (1989) is one of the most powerful antiwar films ever made, and few films puncture the myth of American martial valor -- disciplined and righteous -- more than Platoon (1986).

Alexander is not a great film, but it is very, very good. My biggest complaint was the smarmy soundtrack, and there are editing issues. Yet, overall, I know of no film that captures the spirit and feel of the classical world more than this one. Stone takes the polytheistic faith and ancestral piety of the Greeks seriously and has them thinking and speaking like ancients, not moderns. And, unlike some of his other films (Nixon, JFK) he stays true to the history. Stone chose to depict only two of Alexander’s great battles, Gaugamela in Mesopotamia and Hydaspes in India. They are stunningly rendered and both evoke the terror of war in a way that few films ever manage to do. In addition, the recreations of ancient Alexandria and Babylon are gorgeous.

Imperialists have always dressed up their conquests as contributions to civilization and boons to mankind. The Romans claimed to be spreading peace and the rule of law, the British boasted of Christianity and commerce, the French had their culture and language, and now the Americans claim to be extirpating evil, liberating women, and implanting righteous democracy. For such worthy ends, all means are justified, all atrocities are covered, and profit and power justly accrue to the strong. If the Americans are sanctimonious, brutal, self-interested, and hypocritical, so were those who went before. Simone Weil wrote her masterpiece, L’Enracinement (Rootedness), or The Need for Roots, in early 1943 while living in London in exile from her native France, then under German occupation. She rebuked her countrymen for helping to prepare the way for Hitler’s aggressions by their veneration for Napoleon and, before him, Caesar, the ancient conqueror of their land. Her argument was simply this -- if one says yes to Caesar, Alexander, Napoleon, one must say yes to Hitler; if not, take your stand with the hypocrites. “If one admires the Roman Empire, why be angry with Germany which is trying to reconstitute it on a vaster scale by the use of almost identical methods?” Why indeed?

It all depends on which side one is on. It was easy for Virgil, lounging in his comfortable villa, to rhapsodize that the Romans had civilized Gaul, but it was harder for the forty thousand Celtic inhabitants of Bourges who were butchered by the Roman infantry for daring to resist the peace and good order offered them (their beautiful city was then burned to emphasize the lesson). So it was with Alexander, and now is with his modern multicultural apologists. As they blunder and butcher their way through the heart of Alexander’s eastern empire, the Americans have a lot to learn (having already forgotten the lessons of Vietnam), especially of the insanity and corruption of absolute power.

WEST VIRGINIA, ENVIRONMENTALISM, AND SECESSION FROM THE “GREAT WISH MACHINE”

Much has been written about various bubbles and manias. History is replete with them -- Holland’s tulip bulb mania, the South Sea Company, the dot.com and telecom bubbles, the current real estate bubble, etc. Taking the real estate bubble as an example, many Americans now have the expectation that it is possible to get “wealthy” by simply borrowing money to buy a house, make the monthly payments, and then breathlessly watch home equity grow to the moon -- wealth creation without effort. Ah, but there is a greater mania in the United States. It is the belief in big government as the “great wish machine”. The larger the government grows, it is believed, the stronger the wish machine becomes. Both Democrats and Republicans proclaim to be the most skillful at operating this machine and promise to make it better than ever -- so please vote accordingly and watch your entitlements and benefits grow without bound.

In 2000, something unexpected occurred. When Al Gore promised to paint the great wish machine green, West Virginians rejected environmentalism and unwittingly put the neocons at the helm -- another unintended consequence of environmentalism. Unfortunately, the Bush administration’s borrowing and spending habits have reached such nutty proportions that there is no sense of fiscal sanity left in Washington, D.C. In fact, the neocons have so accelerated the growth of the American welfare-warfare state, that it may reach the breaking point, as did that other welfare-warfare state named the Soviet Union. The laws of economics, after all, cannot be defied. Hence, when it is realized that the great wish machine is a fraud, Americans may outright withdraw their support of the federal Leviathan. Could this mean secession and a break up of the United States?

Most Americans find the prospect of secession to be extremely unlikely in light of the Civil War. Then again, the Democratic Party found it highly unlikely that West Virginia’s electoral votes would go to a Republican presidential candidate. Frankly, Democrats never expected their own party’s environmentalism to be its own Achilles heel. Nonetheless, in the 2000 election, a majority of West Virginia’s voters displayed uncommonly clear thinking and rejected the premise that governmental/federal (“green”) central planning paved the road to prosperity. Al Gore was seen as a threat to West Virginia, and rightly so. Ironically, the very neocons the West Virginians help thrust into power may eventually be deemed a threat to all states. After all, this is perhaps the most belligerent, reckless, and profligate administration the U.S. has ever seen. Consequently, George W. Bush’s “guns and butter” approach to governance may very well break the bank. Should this occur, the central government may be identified as nothing but a redistributionist and bankrupt parasite unworthy of further support -- for the folly of social democracy will have been finally exposed. At this point, secession from the union would become a logical choice.