Offshore News Digest for Week of February 21, 2005

GLOBAL BUSINESS

EXPANDING THE PANAMA CANAL

The expansion of the Panama Canal with the construction of a new set of locks is generating uncertainty among Panamanians. How much will it cost? Who will pay for it? The idea is to build a new set of locks parallel to the three existing ones to permit the passage of post-Panamax ships, which are too large for the existing locks. The capacity of the Panama Canal is limited today to ships with volumes of up to 5,000 TEU, a unit equivalent to 20 cubic feet. The challenge for the Panama Canal authorities is how to allow the transit of the new generation of containerships of 8,000 TEU, capable of loading up to 17 rows of containers along the decks of the vessel. Canal authorities anticipate that the new lock sluices will not have floodgates like the old ones but a “sliding one” that will slide laterally, weighing in at nearly 3,000 tons.

Any decision of the Panamanian government to expand the canal will have to be ratified by the people through a popular referendum, as established by the Constitution. Before that the electorate will vote on social security system reforms, which could cause the referendum on the expansion of the canal to become an assessment of President Martin Torrijos’s government. Although the expansion work’s cost has been calculated at $7 billion to $12 billion, former Vice President Ricardo Arias Calderon has noted that the Panamanian government could not count on securing investment of more than $5 billion.

The Panama Canal Authority, known as the ACP, has refused to give its official cost estimate. Panama’s foreign debt is around $9 billion, of which about $1.3 billion is being paid annually to hold down accumulated interest. A recent survey conducted by the company Latin Network Dichter & Neira found that 70.6% of Panamanians approve expanding the Canal with only 17.9% of those surveyed opposing it. While funding remains an important issue, one thing is clear: The 91-year-old canal in an era of increasing globalization is becoming more important for international trade, not less.

The expansion project would be a huge undertaking requiring 10 years of labor and about 10,000 workers. Environmentalists worry that the expansion would harm ecosystems, displace thousands of peasant farmers, and use too much water. At present the water used in the canal locks is flushed out to the Pacific and Caribbean. One of the officials speaking off the record said the authority is leaning towards using a system that would recycle water used to fill up the locks, similar to systems used in some European ports.

PANAMA’S ATTORNEY GENERAL REPORTS ON HIGH-PROFILE CORRUPTION CASES

As she said she would do, after 40 days on the job Attorney General Ana Matilde Gómez issued her report on a number of public corruption cases that had grabbed the public’s attention during the term of her predecessor. In some of these she is reopening what had been dead letters, while in others she said that the courts have either blocked or delayed any action.

On the “Durodollars” case, wherein several people were convicted for stealing in excess of $35,000 in cash from the freezer of a secretary at the Ministry of the Presidency, Gómez noted that her predecessor never questioned the provenance of these funds, which would not be readily explained by a government secretary’s salary. The matter has been referred to the Comptroller General for a financial analysis that may in turn lead to a prosecution for inexplicable enrichment while holding a public post. Another possible unjust enrichment case to be similarly probed has to do with where Mireya Moscoso’s brother, then the Panamanian consul in Greece, got the money to buy the Punta Mala presidential beach house.

Panamanians reject President’s fiscal policies.

Many adults in Panama are against recent financial measures implemented by their government, according to a poll by Dichter & Neira published in La Prensa. 58.3% of respondents are opposed to the “fiscal equity” package. Martín Torrijos -- the son of Omar Torrijos, an army general who ruled Panama from 1968 to 1981 -- won the May 2004 presidential election as a candidate for the Revolutionary Democratic Party (PRD) with 47.4% of the vote, and was sworn in last September. The president vowed to develop new tax reform proposals, and pledged to sign a free trade agreement with the U.S.

On Feb. 2, Torrijos implemented a controversial fiscal reform that effectively raises taxes for businesses. The government is seeking to generate $300 million to deal with a $700 million budget deficit. Torrijos said the solution “seeks not to benefit some in detriment of others, but to establish levies that are proportional to income.” The measures are expected to reduce Panama’s fiscal deficit from 5.3% in 2004, to 1.0% in 2009, the last year of Torrijos’s presidential term.

U.K. LIKELY TO PULL PASSPORTS AFTER BERMUDA INDEPENDENCE

Bermudians without family ties to the UK are unlikely to retain British passports granted in 2002 if the Island goes independent, according to a letter from Governor Sir John Vereker to the Bermuda Independence Commission. Further details of nationality and citizenship would be a matter for negotiation if Bermuda goes Independent, Sir John wrote in a letter sent to BIC chairman Bishop Vernon Lambe. However the Governor added that he had no reason to think those details would be different from the arrangements made for any other former British Territory.

Britain gave all Overseas Territories citizens the right to hold British passports in 2002. The passports give OT citizens the right to live and work in Britain and the EU. As of last March, more than 3,600 Bermudians has applied for the passports. Details regarding nationality would have to be examined should Bermuda go Independent in order to prevent anyone -- such as long-term residents -- falling through the cracks between the UK and Bermuda, and becoming stateless.

As for the question of referendum or General Election to decide the issue, the UK has the final say and does lean towards a referendum -- however Sir John stated in the letter that, as with the details regarding nationality and citizenship, it is not yet necessary to specify the details of that process. Details pertaining to the process would include a stipulation of the majority necessary in a referendum for a decision on Independence to be made.

PROCESSING OF BUSINESS VISAS CUT TO 15 DAYS IN U.S.

The U.S. government has over the past year cut from 67 days to just 15 the average time for processing visa applications for foreign scientists, students and business travelers, the congressional Government Accountability Office reported. The findings will help bolster claims by the administration of President George W. Bush that it has responded seriously to concerns that U.S. visa policies are hurting universities and companies. Several high-profile business executives have recently criticized the administration over visa problems, with Bill Gates calling it “a disaster”.

The GAO report said that the Department of Homeland Security and the State Department, which set and administer U.S. visa policies, had made several significant changes to reduce waiting times. One change, which could raise some concerns among privacy advocates, has given the FBI full access to fingerprint data on all foreign visa-holders entering and exiting the U.S. Bill Reinsch, president of the National Foreign Trade Council, a corporate lobby that has criticized the visa delays, said that while the reduced processing times were encouraging, delays were still too long in China, India and Russia, the main countries affected by the visa restrictions.

RUSSIAN BILLIONAIRES SUFFER FROM “CONSUMER DISCOMFORT”

Analysts believe about 16,000 to 20,000 U.S. dollar multi-millionaires live in Russia today. However, although run-of-the-mill millionaires are very happy with their lives, the organizers of a new cross-marketing project called “Vladenie” think the superrich are experiencing some discomfort. The project takes its name from a Russian word, “vladenie”, which has a broad meaning stretching from property to a manor, and involves producers, designers and distributors of items costing $1 million and upwards (aircraft, yachts, real estate, vintage cars etc).

The project organizers believe that it is hard for wealthy people in Russia to find their bearings and use their millions wisely. The problem is that the Russian market is mainly oriented to either the poor or middle class. In such circumstances, billionaires are hard put to satisfy their needs. The Vladenie project was launched as an attempt to find a niche that could satisfy the needs of the superrich. Now, if you are looking for a yacht, you can pick up the phone and dial the number of the project’s call-center, place an order and wait a while. The Vladenie team is continuing to expand the range of services on offer. For example, its catalogue includes Abyssinianmares, islands, and, perhaps, stars. Each client will receive a bonus card. For example, after totting up enough points, a billionaire can receive a personal birthday greetings from a famous actor or musician.

To all appearances, Russian society’s stratification is becoming increasingly obvious, and the gulf between the rich and the poor is rapidly widening. According to the Federal Statistics Service, 10% of the wealthiest people in Russia shared 29.8% of the total incomes in 2004, and 10% of Russians with low incomes received only 2%. The average income of the poorest people in Russia (1.9%) did not even reach $30 a month per capita.

YUKOS SAGA HURTING INVESTMENT IN RUSSIA

Russian prosecution of the oil group Yukos is hurting investment in the country, Finance Minister Alexei Kudrin acknowledged in an interview with French financial daily La Tribune. “We understand the worries of investors. When a lawsuit is under way, you are simply afraid of investing. It’s understandable. And it does not encourage investments,” Kudrin admitted. On December 19, Yukos was forced to sell its main production subsidiary, Yuganskneftegaz, to the Russian state-owned oil firm Rosneft to settle tax evasion charges. The campaign was widely seen as politically motivated, and other Yukos assets are expected to be sold this year.

Kudrin declined to comment on a lawsuit filed with a UN trade law commission by Menatep, the biggest Yukos shareholder, which has claimed $28 billion in damages from the government’s seizure of Yukos assets. He did say that “These rumours of a new offensive against the oligarchs are unfounded,” while claiming that the government is enacting measures that grant greater independence to tax authorities. Kudrin was referring to businessmen who made billions in the first hectic period of post-Soviet reform, often by buying strategic state-owned industries. He also that that Russia would be ready to join the World Trade Organisation either this year or in 2006.

U.S. court’s decision on Yukos jurisdiction case expected this week.

A U.S. court is expected to give its ruling this week on whether to allow the bankruptcy case of the Russian oil giant Yukos to proceed in the U.S. Judge Letitia Clark said last week that she would take a quick decision. Yukos filed for bankruptcy in a Houston court in December last year in an effort to stall the auction of its main production unit, Yuganskneftegas, by the Russian authorities. The lawyers representing the Russian oil giant have argued that the company would not get a fair hearing if it filed a bankruptcy application in Moscow. Deutsche Bank has argued that the U.S. court should not intervene in a matter between the Russian government and a Russian company.

REGULATION HARMING FINANCIAL SERVICES IN IRELAND, INDUSTRY WARNS

Ireland is becoming increasingly unattractive for investment because of tighter regulation, financial services industry chiefs warned the Government, saying that less, not more, regulation is needed. William Slattery, chairman of Financial Services Ireland, which represents the banking industry, warned against a knee-jerk reaction to last week’s money laundering events. “The flexible regulatory environment has led to huge overseas investment and this investment should not be taken for granted. We’ve had an enormous amount of regulation over the last 15 years, but no regulation in the world would have stopped the events that happened over the weekend,” Mr. Slattery said. “Anyone who tries to introduce regulation to cater for those extreme activities, will simply end up closing down the rest of the economy. What I am arguing for is balance when we are contemplating regulatory measures.”

Mr. Slattery said incoming provisions under the Companies (Auditing and Accounting) Act 2003, will place huge burdens on company directors. Under this change to the Companies Act, all company directors will have to sign off on accounts stating that they are compliant with all aspects of the law. Mr. Slattery says the cost of this is excessive and will make the country less attractive to foreign investors. He said it was not a case that companies coming here wanted as little regulation as is the norm is tax havens like the Caymen Islands, but a level playing field with other countries.

ECONOMIC KIWI FRUIT

In 2001, the U.S. Congress cut income tax rates for the first time since 1986. However, it did little to reduce the extreme complexity of the tax system -- and may have made it even more complicated. And things have gone downhill ever since. The tax code and regulations are now 46,000 pages long, up from 26,000 in the mid-1980s. The number of different IRS tax forms jumped from 400 to 500 in the past 10 years. Congress is now considering proposed reforms to decrease this complexity. Before embarking on a new path, and potentially repeating some of the mistakes that undermined the 1986 reform, U.S. policy makers may want to learn from reforms in other nations. New Zealand’s tax code overhaul in the 1980s and 90s led to incredible economic growth. This experience provides a good role model for the U.S. to follow.

NZ has one of the simplest income tax systems in the world. It was not always the case. At the beginning of the 1980s, New Zealand had an old-fashioned system with high tax rates and lots of loopholes. Not surprisingly, the economy was suffering from years of stagnation, high unemployment and fiscal disarray. The widespread view was that the tax system was failing. It was not raising sufficient revenue to finance the nation’s bloated welfare state in spite of extremely high marginal tax rates. The tax complexity and the huge amount of loopholes gave great incentives to tax avoidance and evasion. Consequently it was commonly described as unfair and corrupt.

Subsequently, New Zealand’s tax system was dramatic transformed. Combined with other reforms such as trade liberalization and elimination of agricultural subsidies, NZ’s economy boomed. The country got rid of inflation, unemployment dropped and the deficit disappeared. NZ shifted its income tax towards a simpler and flatter structure using a broad-base, low-rate principle. The top marginal personal income tax rate was reduced from 66% to 33%. The tax base was extended and most loopholes removed to reduce complexity and compliance costs to a minimum. The NZ tax base is broad by international standards but avoids double-taxing certain types of income,e.g., there no second layer of tax on capital gains.

In recent years, some small countries with stable political and monetary arrangements have become quite wealthy by offering a business-friendly environment and low tax rates to individuals and corporations, such as Switzerland, Luxembourg, and Iceland. Clearly, New Zealand has joined their rank with great success. Unfortunately, the current labor government is not as wise as its 1980s predecessor. Spending is going back up along with regulatory costs. Notwithstanding a bit of back-sliding, New Zealand remains a great success story.

TAXES

SINGAPORE TO LOWER TOP INCOME TAX RATE TO 20%

Singapore offered new incentives to retain its status as a leading Asian business center, including cutting its top personal income tax to 20% by 2007 to attract skilled foreigners and multinational companies. Measures to help small businesses and the poor were also contained in the $18 billion budget proposal for fiscal 2005, which appeared aimed at preparing the ground for a general election this year, the first to be contested by the new prime minister, Lee Hsian Loong.

ALTERNATIVE MINIMUM TAX FINGERED IN THE CASE OF THE VANISHING DEDUCTIONS

The valuable federal tax deductions that people receive for paying local and state taxes have quietly started to vanish for many households, raising the cost of living in places that are already among the nation’s most expensive. The culprit is a once-obscure federal tax provision known as the alternative minimum tax, which was created in 1969 to ensure that a relatively small number of wealthy people did not use loopholes to avoid paying taxes. But it is increasingly being applied to families with incomes of $75,000 to $250,000 a year who claim relatively high deductions -- like the ones for property taxes, state and local income taxes -- and the exemption for children. When it does apply, it cancels some of those deductions.

The impact is about to mushroom. Barring a change in the law, almost 19 million taxpayers will be subject next year to the A.M.T., up from roughly 3.4 million this year and 1.3 million in 2000, according to the Tax Policy Center, a Washington research group whose calculations on this issue are widely accepted. About half the people paying the alternative minimum tax in recent years live in one of four states -- California, Massachusetts, New Jersey and New York -- accounting for almost a quarter of the nation’s population.

The A.M.T. effectively sets up a parallel tax system for all households, in which few deductions are allowed. Taxpayers whose alternative tax is higher than their regular federal income tax must pay the alternative one. The taxes that people pay to their local and state governments become a deduction in the standard federal system but not in the alternative one. The higher those deductions, the more likely a household is to fall into the A.M.T. While many powerful members of Congress have called for a change, the administration’s proposed budget did not offer one.

The interplay between local taxes and the A.M.T. has in effect become a face-off between two forces that many economists consider unsustainable: the rising federal budget deficit and the continuing leaps in home prices. Left unchanged, the alternative tax would produce more revenue by 2009 than the ordinary federal income tax, according to the Tax Policy Center, a joint venture of the Brookings Institution and the Urban Institute.

EC “WELCOMES” PHASED CLOSURE OF GIBRALTAR’S EXEMPT COMPANY REGIME

In a misleadingly-worded statement likely to anger the Gibraltar government, the EC announced that it welcomed “the notification by the UK Government that it has formally accepted the Commission recommendation of 19 January 2005 ... to abolish the Exempt Company tax regime in Gibraltar by the end of 2010.” It went on to add that “The UK’s acceptance renders the abolition of the regime legally binding on the United Kingdom and will put an end to the last offshore scheme in Gibraltar. The Commission found that the scheme violated the EC Treaty’s ban on state aid liable to distort competition.”

Despite the impression given by the EC, the Gibraltar authorities were substantially involved in the negotiations, and in actual fact recently welcomed the compromise reached as the best solution available in the circumstances. In a statement released last month, the Rock’s government observed that under the terms of the EC’s initial challenge to the jurisdiction’s exempt status regime, launched in 2001, the closure of the tax-exempt company scheme would likely have been ordered within a year, long before the European Court of Justice had announced a decision regarding the proposed replacement to the exempt company regime, which has also been rejected by the Commission on state aid grounds.

BELGIAN TAX AMNESTY NETS HALF AMOUNT HOPED, BUT GOVERNMENT INSISTS IT WAS A SUCCESS

The tax amnesty, introduced last January, gave people a year to declare earnings hidden abroad in return for paying a lenient tax rate on them of between 6-9%. Tax evaders were warned that after the December 31, 2004 deadline, the authorities would come down hard on anyone with undeclared cash, bonds and shares. At the start of 2004, the government said it expected around €850 million to be legalized under the One-Time Voluntary Declaration scheme, but had to rapidly downscale its expectations when little overseas cash was declared in the first few months of the amnesty. Last week, the media estimated that Finance Minister Dider Reynders would announce a final haul of around €400 million. The figures were based on some of the first announcements from financial institutions and financiers.

The government subsequently insisted the law was a success after revealing that the one year tax amnesty netted around €500 million -- that amount was returned to Belgium from overseas bank accounts. Cynics point out however that the government is still €350 million short of the original amount it had hoped to bag. But despite such observations, most experts do seem to be genuinely surprised by the final amount the scheme netted. Analysts say the last-minute nature of most of the DLU declarations was the reason why nearly all of the predictions about the total amount the tax amnesty would bring in were on the low side.

The government added that €75 million of the fines paid in return for legally returning money to Belgium would go to the country’s regions. The other €400 million or so would go to the state pension fund. Very few individuals who took advantage of the scheme committed to invest their money in Europe for at least three years. Only 7.4% paid the lowest tax fine of 6%. Some 90% preferred to pay the highest rate of 9% in order to be free to invest their money however they wanted.

NO NEW TAXES IN ST. KITTS-NEVIS 2005 BUDGET

Prime Minister and Minister of Finance, Dr. Denzil Douglas delivered a tax free budget to a packed National Assembly. Not only were there no new taxes and levies, but, fuel surcharges passed on to consumers were far less than anticipated. The entire country was bracing for an astronomical increase in petrol and liquefied petroleum gas, given the fact that the St. Kitts and Nevis Government was the only Caribbean administration still absorbing the global increases in fuel prices. The non-imposition of new taxes was a major relief, as it came on the heels of a public realization by the Government that something significant had to be done about the debt situation in the country.

The Prime Minister himself has admitted on several occasions that the national debt needs to be checked, but, he said the work of the Inland Revenue Department had seen a steady increase in revenue collections and therefore the government saw no need, at this time, to increase taxes as a means of meeting debt obligations. The Prime Minister and Minister of Finance said debt was a definite problem and challenge for the government, but it was not out of control since the asset base of the government and country was still relatively strong and therefore could easily attend to the medium and long term challenges of the country. He said further that an aggressive approach would be taken to privatizing some state assets, so as to generate much needed non-tax revenue.

Not surprisingly, the Prime Minister and Minister of Finance frowned once again on the notion of a reintroduction of Personal Income Tax, stating that his party, the St. Kitts-Nevis Labour Party, was opposed fundamentally to such a tax and furthermore that it considered the existing Social Services Levy, which was introduced by the previous Peoples Action Movement Government, as a disguised form of income tax. He said this government had no plans of tinkering with the salaries of workers, at this time.

THE NEW YORK TIMES DEPLORES TAX DODGING, EXCEPT WHEN THEY DO IT

The New York Times editorial page is unsparing when it comes to flogging tax-dodging corporations. Corporate tax avoidance, it intoned in a typical piece last April, is “both a straightforward fiscal problem” and “a broader threat to our civic culture.” Indeed. Last week, the New York Times Co. did not exactly practice what their editorial page preaches. The company’s $410 million cash purchase of Primedia’s About.com subsidiary is set up to maximize tax benefits.

For those of you who adore complicated details, the Times Co. is using the portion of Section 338 of the tax code that lets the buyer of the stock of a second company’s subsidiary act as if it had bought the subsidiary’s assets. It can then put a value on the assets for tax purposes and take depreciation deductions on some or all of them. This has become conventional tax-avoidance strategy. The Times Co.’s response? “The editorial policy of the paper is not dictated by the business side and business-side policy is not dictated by the editorial side,” says spokesman Catherine Mathis.

IMF CALLS ON HONG KONG TO BROADEN ITS TAX BASE

In its Article IV report on the Hong Kong economy, the IMF noted that strong economic growth during 2004, combined with the rapid scaling back of the territory’s fiscal deficit, was “a testament to the resilience and flexibility of the Hong Kong SAR economy, especially given the significant external shocks of recent years.” However, the IMF Directors encouraged the authorities to take advantage of the current favorable macroeconomic environment to “forcefully address” the long-standing structural deficit problem, adding that broadening the tax base and stabilizing revenues remain key policy priorities.

Among the options on the table, the IMF considered that the proposed goods and services tax would be an appropriate measure for improving the efficiency of the tax regime and reducing the territory’s reliance on volatile revenue sources. They stressed that the technical preparations for the implementation of the GST would need to get under way “without delay”, given the long lead time involved.

IRS OFFERS REDUCED PENALTIES TO STOCK OPTION TAX SHELTER PARTICIPANTS

The IRS unveiled a settlement initiative for executives and companies that participated in an abusive tax avoidance transaction involving the transfer of stock options or restricted stock to family controlled entities. Under this tax sheltering arrangement, executives, often facilitated by their corporate employers, transferred stock options to family controlled partnerships and other related entities typically created for the sole purpose of receiving the options and avoiding taxes on compensation income normally taxed to the executive. The tax objective was to defer taxes on the compensation for up to 30 years and, in many cases, resulted in the corporation deferring a legitimate deduction for the same compensation.

Such schemes were aggressively marketed by professional service firms and financial institutions during the late 1990s and early 2000s, according to the IRS. The IRS revealed that to date, it has identified 42 corporations, many more executives and unreported income of more than $700 million involved in such arrangements. Executives who engaged in these transactions will have until May 23, 2005, to accept an IRS settlement offer to resolve their tax issues, and the offer is also being extended to corporations that issued the options to executives and directors as part of their compensation. Although the firms in question will not face any penalties, the IRS will recommend that the company’s use of the shelter be examined by its board of directors’ audit committee.

TAX SHELTERS REMAIN A MYSTERY TO MANY AFFLUENT INVESTORS

Do not assume that wealthy investors know all the tricks to avoiding taxes. More than two-thirds (70%) of affluent investors admit they have little to no knowledge of tax shelters, according to the Spectrem Perspective report “Tax Planning and the Affluent Investor”. Further, the majority of these investors express little to no understanding of many of the most common vehicles used to reduce taxes. The report found, for example, that over 60% of affluent investors have little to no knowledge of Section 529 educational savings plans (68%), annuities (62%), in-kind charitable contributions (64%) and KEOGHS (72%). Other blind spots include tax-exempt bonds (58%), tax-free annual gifts (55%), cash-value insurance (52%), and SEPs or IRAs (51%). The majority of affluent investors expressed strong understanding only of company-sponsored retirement accounts -- 401(k) or 403(b) plans (just 27% with little to no knowledge), and financial charitable contributions (42%).

The percentage of affluent investors turning to accountants as their primary financial advisors stands at 28%, second only to full-service brokers (29%) and ahead of investment advisors (22%) and financial planners (16%). This may well reflect the importance of tax- planning advice as part of these investors’ overall approach to managing their wealth.

ASSET PROTECTION

FLORIDA HOMESTEAD LAW ENABLES DEBTORS TO KEEP THEIR HOMES

As his creditors and the plaintiffs in the WorldCom lawsuit circle, John Porter, WorldCom’s former chairman, will be able to keep them largely at bay. He lives in Palm Beach, Florida and as a Florida resident, is protected by the state’s homestead exemption. When he sells his oceanfront estate -- if he gets the asking price -- he will be able to hold on to about 80% of $16.9 million. His case has brought renewed attention to a part of Florida’s constitution enacted more than 100 years ago to protect the tiny homesteads of poor settlers struggling to pay their debts. The trouble is, critics charge, the exemption has turned into a way for the rich to shelter money through their multimillion-dollar estates.

Florida is one of five states with an unlimited “homestead exemption” that allows residents who declare bankruptcy to keep their homes, no matter how much they owe. The other states are Texas, Kansas, Iowa and South Dakota. Florida also allows a home to be shielded even if the owner has not declared bankruptcy. If a Florida homeowner has not “committed fraud, it’s virtually impossible to break the homestead” protection, said Michael Goldberg, a bankruptcy attorney at Akerman Senterfitt in Fort Lauderdale.

Porter’s home is not fully shielded under the state’s homestead exemption, which applies to lot sizes up to a half-acre within a city, and up to 160 acres outside a city. Porter’s home sits on roughly five-eighths of an acre -- which means proceeds from the home’s sale will be apportioned, with Porter keeping nearly 80% covered by the exemption and creditors getting the rest. Porter must reinvest the proceeds in another home or other exempt asset, such as a life insurance policy, to protect his portion after the sale closes.

FIRST BORN NO LONGER NECESSARILY COME FIRST IN WEALTHY BRITISH FAMILIES

The idea that the eldest son always inherits the bulk of a wealthy estate or family business is falling out of fashion, with many families dividing their assets more equally among siblings, a new study of Britain’s rich has found. The survey of both the old and new wealthy found that the notion of the eldest son continuing the family line is still considered a “default option”, but perpetuating the life of an estate and keeping control of a business have become the main goal rather than any deference to traditional concepts of primogeniture. Some said eldest sons were considered “less competent” than their siblings, or in cases of landed estates, not wanting to lead a country lifestyle.

Mike Beattie, chairman of accountant Saffery Champness, who conducted the study, said the rich were now more freethinking about planning how their heirs will handle wealth. “People worry that great wealth will ruin a young life. They worry their children will lose the drive to make something of themselves, or marry the wrong people, and then have their wealth diluted, so they plan more carefully,” he said. “Many of our clients, first generation or sixth generation money, want their children to enjoy money, but not be spoilt.”

Michael Maslinski, who oversaw the study, said the research had picked up “significant changes” to the way inheritance is planned over the past 50 years and that there was now “more wealth than ever before to be passed on.” The research also found that the majority of rich people believed that family members should no longer expect a job in the family company and few first-time entrepreneurs wanted to create a family dynasty.

U.S. CONGRESS DEALS A BLOW TO CLASS ACTION SUITS, BUT LEAVES BASIC TORT SYSTEM INTACT

Trial lawyers and Democrats have long protested that Big Business is exaggerating the woes of America’s tort system in order to tilt the system in favour of rich defendants. If so, this dastardly plan is certainly working. On February 10th, the Senate approved by 72 votes to 26 the Class Action Fairness Act, which is designed to push class-action suits away from places like Madison County, Illinois to the fairer federal system. As we went to press, it looked as if the House would pass the bill too, giving Mr. Bush a chance to sign it into law when he returns from Europe.

In political terms, this is a big victory for Mr. Bush, who pushed class-action reform in his re-election campaign. He can also boast bipartisan support, as 18 Democratic senators deserted the lawyers’ lobby, which has given their party so much. Indeed, in general the lawyers were out-muscled by the US Chamber of Commerce. Mr. Bush and his business allies are now keen to move on to the other two parts of his tort-reform plan: sorting out the asbestos-litigation mess and medical-liability reform. But what exactly will this week’s new measure achieve? Opinion, inevitably, is split between lawyers, who think it goes too far, and reformers, who wish it had gone much further.

The bill hits trial lawyers in their pockets, by limiting their fees to a proportion of the amount of money the plaintiffs actually collect rather than the theoretical amount awarded to them, if the award is in coupons rather than cash. (In a big case, companies often compensate plaintiffs with coupons, which are either fiddly or too small to redeem.) But the bill’s main aim is to stop “forum-shopping” -- looking for magic jurisdictions. It says that any big class action (one that has more than 100 plaintiffs and more than $5 million at stake) must go to federal court.

The claim that this is the toughest tort-reform package in a decade is no great boast. Since trial lawyers have kept all chance of reform locked in their vice- like grip, there is virtually nothing to compare it with. The new law may well restrict the number of class-action lawsuits, but it does nothing about the underlying principles of the tort system. A more radical plan might simply have changed the system to remove the punitive incentive to sue -- for instance, by paying all punitive damages to the state in the form of a fine for bad behavior. Even if they get most of what they want, the Republicans will merely have curbed the more outrageous abuses; they will not have pushed through structural reform.

FBI ISSUES WARNING ABOUT COMPUTER VIRUS, INSIDE UNSOLICITED E-MAILS PURPORTEDLY FROM THE FBI

The FBI warned this week that a computer virus is being spread through unsolicited e-mails that purport to come from the FBI. The e-mails appear to come from an fbi.gov address. They tell recipients that they have accessed illegal Web sites and that their Internet use has been monitored by the FBI’s “Internet Fraud Complaint Center”, the FBI said. The messages then direct recipients to open an attachment and answer questions. The computer virus is in the attachment.

The agency earlier this month shut down fbi.gov accounts, used to communicate with the public, because of a security breach. A spokeswoman said the two incidents appear to be unrelated.

PRIVACY

THEY’VE GOT YOUR NUMBER (AND MORE)

A potential disaster has taken place. It has received virtually no attention. You have probably not heard of ChoicePoint. Over the last twenty years, ChoicePoint has compiled a private data base on Americans that dwarfs anything the I.R.S. has. Unlike the I.R.S., ChoicePoint has a comprehensive computer system that is state of the art. The information covers name, address, Social Security, transactions, and much, much more. Last week, the company notified over 30,000 people in California that it has experienced a breach in security. Hardly any of these people had ever heard of ChoicePoint. But they are in bed with ChoicePoint, like it or not. So are you.

ChoicePoint maintains a dossier on virtually every American consumer, according to Daniel J. Solove, George Washington University professor and author of The Digital Person. The Atlanta-based company says it has 10 billion records on individuals and businesses, and sells data to 40% of the nation’s top 1,000 companies. It also has contracts with 35 government agencies, including several law enforcement agencies. So, what exactly has happened? The company is not quite sure. Neither is the government.

Criminals posing as legitimate businesses have accessed critical personal data stored by ChoicePoint Inc., a firm that maintains databases of background information on virtually every U.S. citizen, MSNBC.com has learned. The incident involves a wide swath of consumer data, including names, addresses, Social Security numbers, credit reports and other information. ChoicePoint aggregates and sells such personal information to government agencies and private companies. While the criminals had access to ChoicePoint data, it is not clear what, if any, information was stolen, said Chuck Jones, a ChoicePoint spokesman. Last week, the company notified between 30,000 and 35,000 consumers in California that their personal data may have been accessed by “unauthorized third parties”, according to another ChoicePoint spokesman James Lee. The words “may have been accessed” are not reassuring to me. I am in the database. Now I wonder who has access to it.

What does it all mean? We are not sure yet. This much we know: the concerns that you have had about providing your Social Security number to strangers are now on the front burner. You have worried that someone might pass on this information to criminals, who would use this information to penetrate your accounts and start spending your money. It looks as though thieves got this information wholesale: a volume discount operation of historic proportions. Subsequent research by ChoicePoint revealed that about 50 fake companies had been set up and then registered with ChoicePoint to access consumer data.

ID theft scam count up to 145,000.

As many as 4,500 residents in D.C., Maryland and Virginia were among up to 145,000 people whose names, addresses, Social Security numbers and, in some cases, credit files were electronically shipped by ChoicePoint of Alpharetta, Georgia, to people posing as business officials in the Los Angeles area. Investigators said they think the number of victims will continue to rise as officials learn more about the scheme. At least one lawmaker on Capitol Hill has called for stiffer regulation of commercial data services. This week, others are expected to push for hearings about the information industry.

To control the damage to consumers and the company, ChoicePoint executives decided to announce changes in how they assess their clients and maintain security. Starting today ChoicePoint will offer victims free credit reports and credit-monitoring services for the next year. ChoicePoint officials said they expect to finish sending out notices by the end of the week. Company officials also said they will curb access to some sensitive information for as many as 17,000 small-business clients, including some lawyers, private investigators and insurance companies, while verifying their legitimacy. Conducting the background checks could take as long as two months, the officials said.

ChoicePoint has become an information giant since it formed in 1997. It has acquired more than 50 other companies and, according to recent figures, has more than 100,000 customers, including most Fortune 500 corporations, local, state and federal law enforcement, and every major federal government agency. The company says it has 19 billion records that are routinely delivered in reports and analyzed for an array of reasons, including fraud detection, police investigations and journalism.

ID theft victims could have trouble recovering damages for losses incurred.

The recent security breach at data aggregator ChoicePoint that exposed at least 145,000 consumers to identity theft and renewed a call for regulation of the data industry will likely leave victims of the breach twice bitten -- first from the identity theft itself and second from thwarted attempts to recover damages for their losses if they decide to seek recourse. Legal experts say that people who suffered losses as a result of the breach will find it difficult to get compensation from ChoicePoint for selling their personal data to con artists, even if the victims can prove that ChoicePoint was negligent in screening customers who purchased their data. That is because courts have been unwilling to penalize companies when victims of identity theft are not their direct customers.

Experts are hoping the ChoicePoint case may begin to swing court opinion, which could force companies like ChoicePoint to take better care of consumer privacy and data in the absence of federal legislation. “There is a lot of political support behind consumer frustration in this area,” said Charles Merrill, a New Jersey-based attorney who focuses on information technology cases. “I think that information security liability may be the next ‘toxic tort’ -- like asbestos. The time is right for it.”

Since 9/11, ChoicePoint has positioned itself as a homeland security company to provide government agencies with data to help them authenticate and verify the identity of individuals. This strikes an ironic chord for privacy advocate Richard M. Smith, who noted that the company’s inability to verify and authenticate the identities of its own customers led to the recent breach in which scam artists illegally purchased consumer data from the company and stole the identities of more than 700 people. It was not the first time ChoicePoint has had a security lapse. In 2002, the company acknowledged that it had left an internal corporate database viewable by anyone with a web browser.

Identity-theft case the latest in a series of incidents showing consumer vulnerability to electronic fraud.

The Choice Point Inc. identity theft case also underscores the fact that consumers can do little to protect themselves other than checking their credit reports often and being careful about to whom they give their personal information. “We live in an information-rich society,” said Beth Givens, director of Privacy Rights Clearinghouse, a consumer information and advocacy organization. “If someone is intent on committing identity theft, it’s not all that difficult.” Privacy Rights Clearinghouse says consumers should check their credit reports from the any of the three major credit bureaus, Equifax, Experian or Trans Union, at least once a year to search for evidence of fraudulent transactions.

Obtaining personal financial information can be as easy as stealing mail sent by a bank or looking at workplace records of customers and fellow employees, she said. Most often, thieves steal the information from checkbooks or wallets, according to the Better Business Bureau. Only 12% of identity theft results from computer crimes. Auditing firm Deloitte & Touche LLP found in May that 83% of the nation’s financial institutions acknowledged their computer systems had been hit in the past year, up from 39% a year earlier.

Identity theft tops the list of consumer complaints, according to the most recent Federal Trade Commission report on consumer concerns. Last year, 39%, or 246,000 of all complaints, involved identity theft. At the same time, consumers and businesses seem to be trying harder to protect their credit information. The percentage of identity theft complaints involving thieves trying to open credit accounts with stolen information dropped from 24% in 2002 to 17% in 2004, according to the FTC.

NEW ZEALAND RICH CRY FOUL ON FINANCE PRIVACY

New rules -- following Inland Revenue’s move to target the 100 top “high-wealth” New Zealanders -- would force the wealthy family-owned companies to open the books for closer inspection. The war drums have been beating up and down the country. Many objections to the proposed reforms of the Financial Reporting Act appear likely to be lodged before submissions close at Parliament. One member of the families involved warned that, if the reforms were passed, it would drive New Zealand’s wealthy families into the National Party’s arms.

Private companies are upset at Government plans for limited liability companies -- with revenues greater than $20 million and more than 50 full time equivalent staff -- to be required to file audited company accounts open for public inspection for the first time. The reforms are aimed at creating more transparency for creditors and employees of large businesses, as well as bringing New Zealand into line with international practices. However, Mike Dormer, a long-term director of several private companies, said the reforms were a direct attack on “the families who built New Zealand. ... It’s an invasion of privacy driven by a socialist government. It’s absolutely scandalous. We are going to fight it to the nth degree.”

DEPARTMENT OF HOMELAND SECURITY FILLS OUT PRIVACY PANEL

The DHS has convened a coterie of privacy activists, corporate privacy officers, former government officials, academics and security officials to oversee and guide its privacy and information-sharing policies. The 20 members of the Data Privacy and Integrity Advisory Committee will be charged with reviewing and advising the department about issues like data sharing, data mining and biometric identity documents, and taking a close look at specific projects such as the ongoing upgrade to border-control technology known as US-Visit.

Since the panel is governed by federal advisory committee rules, all meetings have to be announced and open to the public unless confidential material is being discussed. Members, who serve for staggered terms of two to four years, include Joseph Alhadeff and Richard Purcell, current and former chief privacy officers for Oracle and Microsoft respectively; James Sheehan, general counsel for the Milton Hershey boarding school; and Paul Rosenzweig and James Harper, privacy experts from the conservative Heritage Foundation and libertarian think tank the Cato Institute, respectively. The group, which will meet four times a year, will have latitude to set its own agenda and decide what reports to issue, according to Nuala O'Connor Kelly, DHS’s chief privacy officer.

LAW

NO DEFENSE

The conviction of Lynne F. Stewart for providing material aid to terrorism and for lying to the government is another perverse victory in the Justice Department’s assault on the Constitution. Ms. Stewart, the lawyer who was convicted last week of five felonies, will be disbarred and faces up to 30 years in jail. She represented Sheikh Omar Abdel Rahman, not exactly a sympathetic character. He is the leader of the Islamic Group, a terrorist organization that plotted the assassination of President Hosni Mubarak of Egypt and masterminded the 1993 bombing of the World Trade Center. He was sentenced in 1996 to life in prison.

When Ms. Stewart sought to visit her client in jail, prison officials required her to sign an affirmation that she would abide by special rules requiring that she communicate with the sheikh only about legal matters. The rules also forbade her from passing messages to third parties, like the news media. Yet the jury found that Ms. Stewart frequently made gibberish comments in English to distract prison officials who were trying to record the conversation between the sheikh and his interpreter, and that she “smuggled” messages from her jailed client to his followers.

But if the federal government had followed the law, Ms. Stewart would never have been required to agree to these rules to begin with. Just after 9/11, Attorney General John Ashcroft gave himself the power to bypass the lawyer-client privilege, which every court in the United States has upheld, and eavesdrop on conversations between prisoners and their lawyers if he had reason to believe they were being used to “further facilitate acts of violence or terrorism”. The regulation became effective immediately. In the good old days, only Congress could write federal criminal laws. After 9/11, however, the attorney general was allowed to do so. Where in the Constitution does it allow that?

Mr. Ashcroft’s rules, with their criminal penalties, violate the Sixth Amendment, which grants all persons the right to consult with a lawyer in confidence. Ms. Stewart cannot effectively represent her clients -- no lawyer can -- if the government listens to and records privileged conversations between lawyers and their clients. The threat of a government prosecution would loom over their meetings. In truth, the federal government prosecuted Lynne Stewart because it wants to intimidate defense lawyers into either refusing to represent accused terrorists or into providing less than zealous representation. Since 9/11 the federal government’s message has been clear: if you defend someone we say is a terrorist, we may declare you to be one of them, and you will lose everything.

SWISS CABINET FAVORS RETAINING DUAL NATIONALITY

The government has rejected a proposal by the Swiss People’s party to abolish dual nationality. It also came out against calls by the Greens for a law to streamline the citizenship procedure. Dual nationality has been legal since 1992. The government said that abolishing dual citizenship would create difficulties for married couples of mixed nationality and for children of immigrants. It also pointed out that about 70% of the Swiss abroad had dual nationality. There are also half a million people living in Switzerland who benefit from dual citizenship, according to the last federal census in 2000.

NEW FATF BLACK LIST TO BAR CERTAIN INDIVIDUALS FROM CLEARING SYSTEMS

The U.S., the EU and international financial organizations have made up a list of individuals suspected of money laundering and financing of terrorism, a source in the FATF said. The FATF has revealed that $120 billion in annual transfers evade control. The majority of transfers are made through clearing offices of the Western Union kind. International experts think that some of the transferred money fund international terrorism. Financial organizations will soon receive a list of individuals, who are prohibited to transfer money through international clearing systems. In addition, every person making transfers of over €8,000 per year will be put under control.

CLARKE REVEALS U.K. ANTI-TERROR PLAN

Charles Clarke wants house arrest and other powers to replace indefinite jail for foreign terror suspects -- something the law lords have ruled against. But the Tories, Liberal Democrats and some Labour MPs say ministers would get too much power to curb people’s liberty. The plan means the 11 current terror detainees will be freed next month. The existing detention powers lapse on 14 March and Mr Clarke says the security services believe house arrest is not yet needed. Instead, “control orders” will initially include curfews, tagging or restrictions on using telephones. The new powers would apply to British as well as foreign terror suspects for the first time. It would be the home secretary, not judges, who decided to impose control orders.

Critics say the plans could still mean “internment” at home or in government accommodation for the worst cases at the home secretary’s say-so. The Tories and Liberal Democrats are taking the rare step of jointly tabling a Commons motion opposing the powers, to be debated when the plans go to a vote of MPs. Conservative shadow home secretary David Davis said he did not under-estimate the security problem, but, he told Mr. Clarke, “I believe you have settled on the wrong answer. You are planning to sacrifice essential, long-standing principles of British liberty and justice in a way which may act to reduce that security.”

Liberal Democrat home affairs spokesman Mark Oaten said ministers had “moved some way” by allowing judges to review any orders quickly -- but it was not enough. “We believe it should be the judge that takes decisions, not politicians,” he said.

ANTI-TERROR POWERS RARELY USED BUT STILL NEEDED, SAYS CANADA’S JUSTICE MINISTER

Controversial police and judicial powers granted three years ago to combat terrorism are still needed, even though most of them have never been used, says Justice Minster Irwin Cotler. “The whole purpose of anti-terrorism laws is to ensure that terrorist acts don’t take place to begin with,” Cotler said. “My position at this point is that those provisions, even if we have not had to have resort to them, are still required.” At issue are portions of a law rushed through Parliament in December 2001, which gave Canadian police the power to make arrests without warrant and to hold suspects without charge for up to 72 hours if they believe a terrorist act is imminent. Suspects can also be compelled to testify before a judge, rather than remaining silent as is their normal right.

Cotler, who won fame as a human rights lawyer before entering politics, expressed reservations about the legislation as a Liberal backbencher in 2001. He successfully lobbied the government of then-prime minister Jean Chretien to impose a 5-year sunset clause on the sweeping new police powers. That means the provisions will automatically expire in 2006 unless Parliament specifically re-enacts them. As justice minister, Cotler now seems reluctant to let the powers die -- although he denies he is contradicting his previous position. “I have not found reason to sunset it at this time,” he said, “But I am saying it is for Parliament to make that determination after the 5-year period.” Other provisions of the legislation are up for examination now, as part of a separate three-year review that was built into the law.

Just one person has been prosecuted under the legislation. Momin Khawaja, a 25-year-old Ottawa software programmer, was charged last year and is awaiting trial for allegedly participating with six people in Britain in a bomb plot there. But police did not see any need to use their special powers of preventive arrest and detention in that case. Nor have they used them in any other investigation. There has been only one attempt to compel a reluctant witness to testify before a judge -- and that arose from an old terrorist act, not a new one. Crown attorneys in Vancouver tried to use the law last year to gather evidence for the belated trial of Sikh extremists on charges of downing an Air India plane in 1985.

BANK FOR INTERNATIONAL SETTLEMENTS KNOW-YOUR-CUSTOMER RULES OUTLINED

The Basel Committee on Banking Supervision in its paper on Customer Due Diligence for Banks published in October 2001 referred to the intention of the Working Group on Cross-border Banking1 to develop guidance on customer identification. Customer identification is an essential element of an effective customer due diligence programme which banks need to put in place to guard against reputational, operational, legal and concentration risks. It is also necessary in order to comply with anti-money laundering legal requirements and a prerequisite for the identification of bank accounts related to terrorism.

What follows is account opening and customer identification guidelines and a general guide to good practice based on the principles of the Basel Committee’s Customer due diligence for banks paper. This document, which has been developed by the Working Group on Cross-border Banking, does not cover every eventuality, but instead focuses on some of the mechanisms that banks can use in developing an effective customer identification program.

These guidelines represent a starting point for supervisors and banks in the area of customer identification. This document does not address the other elements of the Customer Due Diligence for banks paper, such as the ongoing monitoring of accounts. However, these elements should be considered in the development of effective customer due diligence, anti-money laundering and combating the financing of terrorism procedures.

World Compliance tells its prospective customers that they can automatically screen every existing or potential client with a custom-built due diligence database with over 600,000 Senior Political Figures, known or suspected terrorists, money launderers, suspected narcotic traffickers, fraudsters, and other white collar criminals. Its system is said to contain proprietary investigative research, government sanctions, regulatory warnings and criminal indictments, and to be particularly strong in the area of offshore tax havens.

FEDERAL CRIMINAL LAW: EXPEDIENCY OVER PRINCIPLE

For the past few weeks, I have been following the Richard Scrushy trial in Birmingham, Alabama. Like so many other highly-publicized trials, this one has had its media drama, the hype, and all of the other things that come with high-profile cases -- sans murder -- and it provides part of the “bread and circuses” that the public and news media seem to demand these days. The gist of the case is as follows: Scrushy was the CEO of HealthSouth, a large healthcare firm headquartered in Birmingham. According to federal documents, the company’s financial records were “doctored” for many years in order to fool Wall Street analysts into believing the company was more profitable than it really was, thus meeting Wall Street expectations and allowing its stock price to remain higher than it would have been had the truth been known about the firm’s finances.

While Scrushy admits that accounting fraud took place, he contends he knew nothing about it and that it was orchestrated by underlings, something that “shocked” him. One set of charges against him comes from the 2002 Oxley-Sarbanes Act, which makes it easier for prosecutors to levy charges against CEOs like Scrushy, and the courts long ago did away with the prohibition on vicarious criminal liability. In other words, while Scrushy is paying megabucks for a “star” defense team, in the end a jury will convict him of all or nearly all counts and would have been no worse off had he represented himself or picked someone from a nearby homeless shelter to act as his lawyer. Such is the nature of the federal system, which is nothing less than a huge conviction machine.

My purpose here is not to defend Scrushy’s alleged behavior. From what I can tell, the company simply made up numbers out of whole cloth, which constitutes deliberate criminal fraud. Unlike Enron, which used quasi legal means to hide its losses, the numbers people at HealthSouth simply used disappearing ink. Yet, as I follow the trial to its inevitable conclusion (and then Scrushy will spend at least 20 years or more in federal prison), I find a number of things that are terribly disconcerting. Whether or not Scrushy is guilty (and almost everyone who falls into the federal criminal system is found guilty) takes a back seat to the larger issue of how “justice” is administered in the federal system.

What we see here is that the federal system has become a legal system that exists of the prosecutors, by the prosecutors, and for the prosecutors. A legal system that at its founding was set up as a mechanism to ensure rights of the accused has become a system of guilty pleas and show trials, and is more akin to what Stalin enjoyed in the U.S.S.R. than what George Washington, Thomas Jefferson, and the great William Blackstone helped create more than 200 years ago. If Blackstone were observing this “trial”, he would find two things that were most disconcerting. The first is that all of the “star” witnesses for the prosecution are people who already have pleaded guilty in exchange for their testimony against Scrushy. The second has been the use of hearsay testimony. Almost the entire case being built against Scrushy has been done through means that could only have been in place following the destruction of the core of the Bill of Rights and what Blackstone called the traditional “Rights of Englishmen”.

OPINION & ANALYSIS

BLOGS OR BLOTTO?

The delightful book, The Experts Speak, described as a “compendium of authoritative misinformation”, illustrates how even highly respected authorities in their fields of endeavor can get tripped up and embarrassed by the unpredictabilities inherent in a complex world. If another edition of this book is forthcoming, the authors would be well-advised to pay attention to the whining coming from members of the established media, who are doing their best to convince us that Internet “blogging” is just another fad that will soon go the way of the hula-hoop and the hokey-pokey. A recent CNN news feature on “blog power” was such an exercise, with one speaker focusing on the fact that there are so many sources, so much conflicting data and analysis, and so much error inherent in the blogging process that readers are burdened in their efforts to discover the truth of things. No mention was made, of course, of the lying, distortions, and propagandizing that has long infected traditional news outlets -- nor was credit given to blog-sites for catching and correcting a number of these institutional deviations from truthfulness.

In the face of so much competing and conflicting information, CNN hostess Judy Woodruff pondered, would people not be better advised to rely on the “mainstream media” for their news? She might just as well have added, “you have been content to let us do your thinking for you; why do you want to undertake such tedious and unceasing work? Let us continue to tell you what we think you should know!” That CNN is one of the “mainstream” institutions, the self-interested nature of her question expresses the empty desperation of the practitioners of an information system model that is rapidly dying.

The image that comes to mind when I think of the present institutional order, is that of the stegosaurus, the bell-curve-shaped dinosaur with plated armor along its spine. The stegosaurus was so large that it had two brains, one in its head the other in its tail. It is said that a stegosaurus might have been fatally attacked at its backside, while the frontal brain -- due to the sluggish nature of the animal’s nervous system -- might have continued munching tree leaves, not knowing that its fate was already sealed.

NOW THAT THEY ARE IN POWER, U.S. CONSERVATIVES ARE FREE TO DIFFER

With their Republican allies in control of the federal government, conservative intellectuals, activists and philanthropists battled this past week over popular culture, over President Bush’s expansive foreign policies, and even over the legitimacy of God and faith in the formulation of social policy. At a symposium last week, 20 leading figures on the political right ranging from traditionalists to libertarians debated the successes and failures of the conservative movement and its future now that it has consolidated power.

The debate participants include some of the foremost intellectual figures in American conservatism, men and women whose ideas have helped fuel the GOP’s rise to power. Now their focus is on where the conservative movement needs to go, whether it focuses on making government smaller and less intrusive or making it more active in fostering morality. In written essays and in discussions, participants explored the continuing fissures within conservatism. They fell into two factions, one arguing that the state has an interest in managing the behavior and moral conduct of individuals, the other contending that individuals should be free to manage their own lives as long as they do not harm others.

Grover Norquist, president of Americans for Tax Reform, took issue with those who would seek to use the power of government to curb what many others on the panel saw as a debasement of personal behavior and of the content of movies, television and music. Instead, he argued, government should avoid regulating individual behavior as long as they are not “stealing their wallets or burning their houses down.” Michael Cromartie, vice president of the Ethics and Public Policy Center, asked, “How do you find a public grammar, a public language in order to work with people who actually agree with you on the policy but don’t agree with you on the theology?”

Another vexing issue for conservatives -- Bush’s activist and interventionist foreign policy -- was raised in the written essays but not in the public discussion. Scott McConnell, executive editor of the American Conservative, attacked Bush’s “wildly ambitious foreign policy vision ... which holds that America can only be secure in a democratic world and so we must challenge much of the world, even threaten to invade it. Conservative foundations ought to be at the forefront of challenging these ideas and fighting against them.”

Why liberty is necessary for morality.

It is often taken to be a feature of a free society that it rests on the belief that no one can tell what is morally right or wrong. That is supposed to be why people are not imposed upon with strictures the government forces them to follow. If, however, we could determine what is right and wrong, then, the idea follows, government could just proceed to force everyone to behave right. A sad result of so explaining the merits of a free society is that it begins to look like liberty is the enemy of morality. And it is just this way that a good many people have understood the Western tradition of liberalism. They have come to believe that if you accept the Western idea of a free society, you must not care about morality at all. Indeed, arguably a great many enemies of the West hold such a view. Love the West, reject morality; love morality, reject the West.

Yet this is completely wrong. In point of fact precisely the opposite is true. The reason the Western idea of a free society makes a great deal of sense is that unless people make their moral choices and act on them freely, there cannot be anything morally praiseworthy in what they do. A person who does the right thing because it is commanded -- forced upon him -- is not acting morally. Such a person is acting from fear, not the conviction that what he is doing is morally right. Indeed, it is only in substantially free societies that men and women can be morally good. If one is regimented to praise Allah or God or give to the poor or defend one’s country, there is absolutely nothing praiseworthy about that. One is then being a mere puppet, certainly not a morally responsible human agent.

Of course, there have been some who have defended the individual’s right to liberty on the ground that no one can tell what is right or wrong. Some very famous people have done this. Yet their defense of human liberty is a weak, ineffectual one. That is because if one cannot tell what is right or wrong, one cannot tell whether violating someone’s right to liberty is right or wrong. So, a moral skeptic simply has no consistent reason to complain if the right to liberty is violated.

No one is morally improved by being forced to be generous, just, kind, courageous, prudent, honest, charitable, moderate, humble or the like. The paternalistic motivations behind many governmental measures that ostensibly aim to make people good are hopelessly misguided. I would even question the motivation of those who promote coercive governmental measures aimed to reduce vice and increase virtue -- since coercion kills personal responsibility, and does this very obviously, it is more likely that advocates of coercively getting people to be good are power seekers, not promoters of morality at all. They merely use morality as an excuse to rule other people.

Of course, the laws of a free society cannot guaranteed that the citizenry will choose the right way to act. But in a free society, where no one is authorized to dump the results of his or her misdeeds on others’ lives, people are more encouraged to do the right thing than in societies where personal responsibility is missing because of the lack of individual liberty. So, critics of the free society who want more emphasis on morality than on liberty would do better if they first stood up to defend liberty.

NAPOLEON IN EGYPT: THE LESSONS OF HISTORY

“My glory is declining. This little corner of Europe is too small to supply it. We must go East. All the great men of the world have there acquired their celebrity.” ~~ Napoleon Bonaparte

One of the fascinating things about the history of Western civilization is its recurrent bouts of manic utopianism. Stretching back at least to Alexander the Great, movements have appeared with astonishing regularity organized around various abstract philosophies agitating for a new, “higher” stage of human existence and social perfection. The Inquisitions, the Crusades, communism, fascism, etc., have never brought utopia, but they have left a horrible trail of blood and sorrow.

It is a matter of historical curiosity that this behavior is predominantly a trait of Western civilization. Only rarely have non-Western societies been consumed by a fiery creed which has prompted them to engage in massive ideological bloodletting or fanatical attempts to convert the world by force of arms. Pol Pot and Chairman Mao, both of whom engaged in mass ideologically-driven domestic atrocities, are perhaps the exceptions that prove the rule. What is the origin of this Western neurosis? Is it nature or nurture? Can the West be cured?

It was with just such thoughts in my mind that I recently perused Alan Moorehead’s classic book The Blue Nile. First published in 1962, it is a wonderful historical narrative of the storied branch of the Nile River which originates in the highlands of Ethiopia. While the whole book is filled with fascinating tales and poignant historical anecdotes, the contemporary reader is drawn to the middle portion which tells the story of Napoleon’s ill-fated attempt at nation-building in Egypt. The tale reinforces Marx’s dictum that history repeats itself, first as tragedy and then as farce.

Two Ugly Americans

It is fascinating to re-read a book nearly forty years later. To look back upon historical events through the eyes of someone on the other side of the process. Today, when we think of Vietnam, images of helicopters franticly scurrying away from the U.S. embassy in downtown Saigon come to mind. Boat people braving uncertain seas and predictably vicious pirates to escape a concealed holocaust. The killing fields of Cambodia.

The 1958 book The Ugly American pointed out that the battle for hearts and minds in southeast Asia was actually a myriad tiny battles, conversations with people one at a time. All too often, the Americans were the amateurs, political hacks who lived well hobnobbing with one another and wealthy locals. Foreign aid, you recall, is when poor people in rich countries are taxed to engorge rich people in poor countries. The Ugly American alternates heroes and villains. The “good guys” are those who actually live with the people, learn their languages, and offer real-world solutions to grass-roots needs. The black hats are the guys in pin stripes, tax-consuming elites with no regard for the real people sacrificed on the altars of their massive projects. In Paul Theroux’s The Mosquito Coast, Mr. Fixit goes into jungle, gets mugged by reality, and self-destructs. Imagine Swiss Family Robinson meets Lord of the Flies.

The bottom line? History can be warped, but not finally shaped, by the personal or corporate schemes that self-anointed elites make for others. What happens in my house matters more than what happens in the White House. In a normal home, men and women made in the image of God grow up to become producers, not parasites, with an independent streak, not conditioned to bow before Caesar’s bloody altars. Truly creative thinkers, who will find new resources in the created order around them, rather than docile pawns of statist “wise men”. As J.R.R. Tolkein said during his nation’s apocalypse, “No man can estimate what is really happening at the present sub specie aeternitatis. All we know, and that to a large extent by direct experience, is that evil labours with vast power and perpetual success -- in vain: preparing always only the soil for unexpected good to sprout in.”

THE FUTILITY OF LABELS

Call me Federalist, or Anti-federalist. Patriot or Rebel. Progressive or Populist. Liberal or Conservative. Libertarian. Call me American for supporting Jeffersonian principles. Or call me Anti-American when Jeffersonian principles conflict with the policies of our Glorious Leader, President Bush. Call me Right-wing because I want taxes cut. Call me Left-wing because I think everyone deserves a fair shake. Call me whatever you like. I don’t know if it matters anymore. All I want is what the Revolutionary leaders wanted, to get our freedoms back.

What a new poll says about left vs. right.

The Harris polling agency last week released the results of an interesting study. In a survey of 2209 adults, they discovered that most Americans only have the vaguest idea of the meaning of two important pairs of words that play crucial roles in the national political discourse: conservative and liberal, and left and right. “The label left-winger is broadly perceived to be similar to liberal,” the agency concluded, “except that more people are not sure what it means.”

I am glad the Harris people never called me for this survey, because I would have had to answer “not sure” to every question. Even after working as a political reporter for many years, I still have absolutely no idea what the American versions of left and right mean -- in an ideological sense, that is. It is hard not to be confused when we call a saber-rattling free trader like John Kerry far left, while a man who keeps a portrait of Lenin on his wall, like Grover Norquist, is considered the very definition of a right-winger. When I see someone called a leftist or left-leaning in print, I am never sure whether they are talking about an actual communist, or just some timorous capitalist yuppie whom David Brooks spotted drinking a latte, or standing in line to see Cinema Paradiso. Politically, it is just not a very concise definition.

Why I miss Bill Clinton.

Lately I have missed having Bill Clinton as president. When Clinton was serving as president, I thought he was clearly the worst president in American history. I was right then, of course. But it is now two terms later and what I once believed is no longer a fact. A few of my fellow conservatives are now moaning, wondering if I have flipped my lid. But consider the facts and the inevitable conclusion is that the current President George W. Bush is more liberal than Bill Clinton ever was during his 8-year reign of terror. I knew, more or less, that when Dubya called himself a “Compassionate Conservative” that by “compassionate” he meant “not a”. But I could not have known then that he would place himself so far to the left of Clinton.

Corporatism and socialism in America.

Principled advocacy of the free market requires an understanding of the differences between genuine free enterprise and “state capitalism”. Although the Left frequently exaggerates and overemphasizes the evils of corporate America, proponents of the free market often find themselves in the awkward position of defending the status quo of state capitalism, which is in fact a common adversary of the free marketer and the anti-corporate leftist. Indeed, corporatism, implemented by the state -- whether through direct handouts, corporate bailouts, eminent domain, licensing laws, antitrust regulations, or environmental edicts -- inflicts great harm on the modern American economy. Although leftists often misunderstand the fundamental problem plaguing the economy, they at least recognize its symptoms.

Conservatives and many libertarians, on the other hand, frequently dismiss many ills such as poverty as fabricated by the left-liberal imagination, when in fact it does a disservice to the cause of liberty and free markets to defend the current system and ignore very real and serious problems, which are often caused by government intervention in the economy. We should recognize that state corporatism is a form of socialism, and it is nearly inevitable in a mixed economy that the introduction of more socialism will cartelize industry and consolidate wealth in the hands of the few. Leftists usually understand how wartime provides politically connected corporations with high profits and cushy contracts. What is more often neglected is that the history of the American domestic welfare and regulatory state also corresponds closely to the rise of corporatism. It is no coincidence.

To convince the anti-corporate skeptic of the benefits of the free market, it is crucial to defend the legitimate systems of profit and private property, but it is also vitally important to make clear that America does not have a free-market economy, and indeed many of the ills associated with free markets are actually the result of state capitalism -- or socialist corporatism. That the expansion of government regulations, often done in the name of combating corporate excesses, is frequently supported most enthusiastically by corporate interests makes it all the easier to explain economic liberty to those who have become disenchanted with the current system and misattribute the problems to the free market.

TO THE ANTI-REVISIONIST ESTABLISHMENT, EVERY CHALLENGER IS “FRINGE”

How interesting it is that the mainstream left and neoconservative right are equally appalled by Tom Woods’s book, The Politically Incorrect Guide to American History. But it makes sense. Unlike many libertarians, I never really thought of the conventional history taught in schools as uniformly “leftist”, but rather as simply pro-establishment. Statist liberals and conservatives both have a stake in preserving the historical interpretation that upholds Lincoln, Wilson and FDR as the great heroes in the sweep of American history.

Notice one of the frequent critiques you will hear from the mainstream: So-and-so’s view sounds just like the “fringe” right (or the “radical” left)! Those who dare question the conventional wisdom on the Cold War are attacked as being in bed with the “anti-American” left. Those who point out Allied atrocities in World War II are condemned as being sympathetic to the “reactionary” right. A consistent libertarian history will be mischaracterized as being pro-Southern slavery, pro-Kaiser, pro-Nazi, pro-Communist, pro-inequality, pro-racism, pro-“Islamofascist”, or pro-anything bad that the U.S. state supposedly expanded to defeat. These attacks often come from people who have adopted the worst possible memes of establishment history.

Mainstream forces, both left and right, seek to maintain a story of history most favorable to the status quo. They have small disagreements with each other, but by and large accept the historical case for the expansive U.S. state. It is little wonder that many of the most trenchant and fundamental, however imperfect, critiques of American history, and especially of the largest expansions and projects of the warfare state, appear on the fringes, outside mainstream historical opinion. As truly problematic as the fringes are, with their fair share of kooks and troubling economic and historical theories, they are much less inclined than the mainstream to show enthusiasm for violations of civil liberties, the war on drugs, perpetual warfare, or the corporate-social democratic state as it now functions. You will see the far left and far right more willing to condemn the atrocities at Waco and Ruby Ridge and U.S. military interventions and police-state terror -- and stand accused of sympathizing with all the views and sins of those enemy regimes and fringe elements pitted against the U.S. government.

Such accusations are a ruse. Those who seek fundamental change in the system are simply less attached to the conventional myths and legends. When those myths and legends involve the whitewashing of great atrocities, such as the firebombing of Tokyo, the carpet bombing of Cambodia, or the invasion of Iraq, it comes as no surprise that the people who consistently bring attention to such white elephants in American history are branded as extremists and friends of the fringe. Surely many on the fringes would be very dangerous if they enjoyed power and universal, unquestioning obedience. But a principled sensitivity to peace, individualism and liberty, when applied to history, can hardly do evil.

THE DREADED “S” WORD

It should be clear to anyone who has been paying attention to politics in recent years that the modus operandi of the statist and imperialistic neoconservative cult that now dominates the Republican Party is not to debate its intellectual opponents but to wage campaigns of character assassination against them. They are modern-day Jacobins and, like the French precursors of totalitarian communism, believe that they alone possess knowledge of “the general will”. Consequently, all dissenters must be “destroyed”. The neocon cult began in the early 1980s by smearing the late Mel Bradford after President Reagan appointed him to head the National Endowment for the Humanities. It then carried on this immoral practice for some 20 years, with its current target being Professor Tom Woods, author of the phenomenally-successful book, The Politically Incorrect Guide to American History.

Since their targets, like Professors Bradford and Woods, are decent, honorable, educated and intelligent people, the neocons simply lie about them (and their writings), and then wage a very well-organized repetition of the lies in their various publishing vehicles and web sites. Not just little white lies, but outrageously absurd and vicious ones. In Bradford’s case, they absurdly claimed that he once praised Hitler in his writings! More recently, they are attempting to paint Professor Woods as a friend of the KKK because of his association, shortly after graduating from Harvard, with an organization called The League of the South.

So what is it, exactly, about the League’s statement that causes such a violent reaction among our modern-day Jacobins? First of all, it is the Statement of Purpose: “We seek to advance the cultural, social, economic, and political well-being and independence of the Southern people by all honourable means.” Good God, these people must be stopped! They want to improve the lives of all their friends and neighbors! There is more. The League also makes the “outrageous” claim that “Southern culture is distinct from, and in opposition to, the corrupt mainstream American culture.” The preferred “culture” of the neocons is a culture of death, of war, censorship, and imperialism. War is the very thing that makes us human, says prominent neocon theorist Victor Davis Hanson. The more war, the better. Obviously, no alternative culture is permitted in the neocon mind.

The League of the South advocates peace and prosperity in the tradition of a George Washington or a Thomas Jefferson. It is high time that Americans recognize that the Republican Party was established as the political vehicle for destroying the Jeffersonian tradition of states’ rights and limited, constitutional government. The Republican Party of the 19th century was the political descendant of the Whig Party, which itself was derived from the Hamiltonian/Federalist/nationalist tradition. It was the political vehicle that had evolved as the anti-Jeffersonian movement in America, and it succeeded in destroying the Jeffersonian, states’ rights tradition once and for all and establishing a consolidated empire, centered in Washington, D.C. The neocons are simply the latest manifestation of this anti-Jeffersonian tradition. Perhaps the biggest lie of all is the neocon insistence that they are merely carrying on the traditions of the founders, such as Jefferson.

Jefferson understood that if the day were ever to come when the federal government, under the auspices of the Supreme Court, were to be the sole arbiter of the limits of its own powers, then it would inevitably assert that there were in fact no limits at all. That day came in April of 1865 and led to the creation of an American state that would cause many of the founders – certainly Jefferson – to rebel. The League of the South understands this, which is why it also advocates peaceful secession as the only viable means of restoring a free society. Peace and prosperity are deadly poison to the advocates of “national greatness conservativism”, however, which is why the neocons are so vicious in their personal attacks on anyone, like Professor Tom Woods, who dares to associate himself with such ideals.

THE MIND OF THE TERRORIST

I do not read very much hard-boiled detective fiction, but I have read enough to know that the genre is a type of horror fiction, and like all horror, is based on goodness and order being attacked by evil and chaos. A fine example of this is John D. MacDonald’s 1979 novel, The Green Ripper, a book I read only because Stephen King praised it. A horror writer praising a detective novel about MacDonald’s famous anti-hero, Travis McGee? It made me curious. It turns out King was right in his assessment. Like all good writers, MacDonald has acute insight into human nature, a nature that sometimes is not such a great thing. In the case of The Green Ripper the human nature that McDonald writes about is the mind of the political terrorist. If you want to understand that mind, this is the novel to read.

How does a good writer have such insight? MacDonald describes McGee, underneath his hard exterior, as “unusually sensitive, intelligent and imaginative”. McGee is obviously a part of MacDonald. In his search for the killers McGee discovers exactly what makes political terrorists tick. It has, I must point out, nothing to do with “they hate us for our goodness” or “they attacked us because we are good and they are evil.” Such a view is extraordinarily naïve. If anything, those views describe the mind of terrorists. Potential terrorists are often marginal, ostracized people, or at least think they are, which is essentially the same thing. They have no community to which they belong, or any meaning or purpose to their lives, or love.

McGee describes people as “herd animals, social and imitative”. That is true, and anyone who underestimates the power of a cohesive group, whose members feel loved and who are united by what they consider a great, meaningful purpose, is making a very grave mistake. Eric Hoffer, in his book, The True Believer, understood as much as McDonald the terrible trouble that can be caused by a fanatical group that wants to change the world. “Saving the world” is always an excuse for destroying and conquering it.

All terrorists see things as either good or bad, black or white, with nothing in-between. Of course, they see themselves as good, which is why they are paranoid about people hating them “for their goodness”. They are utopians and idealists. As such, they believe in destroying society so a new, better one can arise. Whom they destroy in the process is irrelevant. They are necessary sacrifices. Ultimately, all terrorists are utopians. Perhaps all utopians and idealists are in some degree terrorists.