Wealth International, Limited

Offshore News Digest for Week of February 28, 2005

Note:  This week’s Financial Digest may be found here.

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Fears that the dollar could go into a free fall because of big budget and trade deficits are overblown, says Henry Kaufman, known for his longtime work as an economist at Salomon Brothers, where he was often bearish about American economic prospects. Now 77, he is an independent consultant and is on the board of Lehman Brothers. He believes the dollar will remain the key reserve currency for the foreseeable future. The U.S. is the dominant world power, and with world power has gone leadership of the currency. The U.S. economy is performing far, far better than the other industrialized countries. Therefore, profits here are better than they are in most places around the world, while interest rates are competitive.

Mr. Kaufman says that Japan, China, some members of OPEC, and the Fed will finance the budget deficit for a while longer. He advised the secretary of the Treasury and the president to always articulate that “we are in favor of a stable currency.” As for the quotation attributed to Vice President Dick Cheney that “Reagan proved deficits don’t matter”?: “That is an incorrect observation by the vice president. Deficits do matter over the long term. There are times in the business cycle in which the U.S. Treasury competes very heavily against the private sector. When that occurs, it escalates interest rates. It puts pressure on inflation. It’s a dangerous approach. ... [O]ngoing budget deficits of [the current] order of magnitude over time will matter.”

Also, he believes that the Chinese and Japanese, “down deep”, realize that if they shifted from the American dollar to the euro, it would endanger their export drive to the U.S. His prognosis for the dollar? Reasonable stability with occasionally a little bit of a give in the value of the dollar. The huge fiscal and trade imbalances? Today, there is an enormous international disequilibrium. For the near term, it is in the best interest of all the participants to maintain it.

Link here.


Before considering the Belizean reporting on how much money is involved in the 3-way battle for control of the nation’s phone company, Belize Telecommunications Ltd., it would be helpful to note the sequence of events in the controversies between the Government of Belize, Jeffrey Prosser’s Innovative Communication Corporation, and Lord Michael Ashcroft’s Carlisle Holdings, Ltd. ICC, one of the largest employers in the Virgin Islands, is the parent corporation of Vitelco, the V.I. phone company, now called Innovative Telephone. Ashcroft’s position is that the sale has not been completed and that he has grounds for repurchasing the stock he sold.

Link here.


Late in 2001 I wrote a piece on Latin America “The darkening continent” that aroused considerable reader skepticism, since at that time Latin America was still thought to be a bastion of “neo-liberal” success. Several years later the continent has indeed darkened -- even Chile now appears now too prone to relapse into the economic swamp of the rest of the continent -- but is it fated to continue doing so?

Listing a catalog of disaster, the question screams out: why? In the 1990s, many Latin American countries appeared to be embarked on a course of economic reform, carrying out long-needed restructurings of their public sectors and reining in the populism of their irresponsible governments. Yet today, throughout the continent, those policies are derided as “neo-liberalism”, even though there are no obvious cases of their failure. In China and India, both far poorer than most Latin American countries, a process of modest reform, unaccompanied by radical political change, has fed upon itself and produced rapid economic growth, which is transforming those societies. Yet China and India are not uncorrupt, and both have public sectors comparable in size to those in Latin America. So why is their economic performance so much better?

One obvious difference is the level of inequality in the respective societies. The Latin American poor see no virtue in protecting the property rights of the rich, since unlike in China, India or the U.S. they do not believe that either they or their children will ever be rich. Another difference, very likely caused by the first, is the greater respect given to savings in China and India. In Argentina in particular, partial expropriation of middle class savings has taken place in every decade since the advent of Juan Peron in 1945. Little wonder therefore that the Latin American middle classes save relatively little, and tend to run offshore bank accounts in Miami or the Caribbean. Middle class savings are important because they are by far the most important source of finance for small business, the principal creator of wealth and new jobs. In India and China, secure savings and strong family ties provide ready support for entrepreneurship. In Latin America, savings are either kept offshore or, in the poorer classes, are not available at all.

Finally, there is the question of the time horizon of decision makers in business and government. Both in China, where the government has changed only glacially since the death of Mao Zedong in 1976 and in India, where Manmohan Singh’s modest economic reforms of 1991 were taken up by both main parties and extended over the years that followed, creating a consensus on the issue, there is an expectation that elections (if they occur at all) will not change much. In Latin America, this is quite different. There is a messianic quality to the local politics that is wholly destructive. On the one hand, free market policies can be tried for a few years and then completely reversed. On the other hand, decades of subsidization and state handouts can be ended at a stroke by a new team of Chicago-trained economists, producing real hardship for many people. The result is a short-term business time horizon and an insane fascination with political intrigue that are completely counterproductive to solid economic progress over the long haul.

In order to change expectations of the participants in its economy, any Latin American country will need at least 15 years of stable, reformist government. However, events in Chile in the last few years suggest that even this is not enough. Maybe Brazil has the best chance of achieving this currently. But I would not put a great deal of money on it. Meanwhile, Latin America is a worsening problem for the world and for the U.S. in particular, while India and China are not.

Link here.


Vladimir Putin and George Bush have had a “candid” discussion about American fears that the Russian leader is sliding back into his country’s old, authoritarian ways. The public expressions of concern over Mr. Putin’s authoritarian drift that Mr Bush made during his European tour this week have encouraged a challenge to the Russian leader from Mikhail Kasyanov, whom the president sacked as prime minister a year ago. Mr. Putin can hardly have welcomed Mr. Bush’s interference in Russian politics, so it would be unsurprising if the word “candid” was diplomatic language for angry exchanges between the two summit leaders.

Nevertheless, despite their differences, they did reach a number of important agreements, including pledges to continue co-operating in the fight against terrorism and in preventing the spread of nuclear weapons. Mr Bush also reiterated his strong backing for Russia’s entry to the World Trade Organization, which may happen as soon as this year. Mr. Putin craves a seat at the world’s top tables, and due respect for him and his country from the West’s main powers. Thus if America and Europe applied the right mix of incentives and pressures -- and worked together in applying them -- then there should be some scope for constraining his autocratic tendencies.

Link here.

Fear rules in Russia’s courtrooms.

Concerns about the independence of Russia’s justice system have recently focused on high-profile cases such as the prosecution of Mikhail Khodorkovsky, an oil baron, and a series of treason trials involving Russian scholars. President Bush raised the issue of the rule of law as it relates to the quality of Russian democracy during his summit with President Vladimir Putin this past week. But a case involving a juvenile from Tajikistan who had gotten into a shoving match with a co-worker illustrates how a climate of fear generally pervades the bench in Russian criminal courts. Judges are targeted for forced retirement or dismissal if they apply the law to acquit even everyday defendants, issue sentences that are seen as too lenient by court chairmen or fail to follow prosecution requests to send suspects to overcrowded pretrial prisons where they can languish for months, according to judges, law professors and lawyers. The climate reflects the growing power of the state in Putin’s Russia.

In 2002, Russia adopted a code of criminal procedure that was supposed to herald a legal revolution by firmly establishing the independence of the judiciary, increasing the rights of the accused, and forcing firm rules of procedure and evidence on police and prosecutors. But the current system continues to perpetuate the Soviet practice of almost automatically convicting everyone who appears in court. According to legal scholars, efforts to bring about change have stalled. The goal of breaking old habits and creating a system in which judges act as independent arbiters between the state and the individual, has not been met yet.

Link here.

Here is the word on Putin Inc.

In recent weeks, Russian President Vladimir V. Putin’s politics have generated most of the worry in the West. He has been cutting welfare benefits for veterans and pensioners, clamping down on free media and meddling in the Ukrainian election. Even President Bush, who badly needs the Kremlin’s cooperation in combating terrorism, the spread of nuclear weapons and narcotics trafficking, gently chided Mr. Putin about maintaining democratic standards when the two met in Bratislava last week. But the real threat to Russia’s future could lie in the economy. For now, its GDP is booming, it boasts a budget surplus and a windfall from record high oil prices. But it is pursuing a model of corrupt, state-managed capitalism, economists and political analysts say, that is inimical to democracy and could condemn its economy to perpetual third world status.

Many here believe the turning point was reached last December, when Russia renationalized one of its largest private oil fields in a deal that Andrei Illarionov, an outspoken Kremlin aide, acidly called “the swindle of the year”. The transaction was an offshoot of the Yukos affair, the Russian government’s campaign to dismember what was once Russia’s largest private oil company and jail its billionaire founder, Mikhail B. Khodorkovsky. Having staggered the company with a questionable $28 billion tax bill, the Kremlin seized the oil fields and auctioned them for about half their worth. The winner, a state-owned business named Rosneft, overnight joined the ranks of Russia’s top oil companies. Big oil fields changing hands at a cut-rate price recalls the rigged privatizations of Russia’s robber baron era in the 1990’s. But instead, it was the Kremlin cutting this deal, a parallel that for some crystallized thinking on Mr. Putin’s course for the country.

“Today, by our own decisions, we have done what is now, regrettably, clear to the outside world -- we opted for the third world,” Mr. Illarionov said after the auction. “We used to see street hustlers do this kind of thing,” snapped Mr. Illarionov, who until recently was among Mr. Putin’s most fervent supporters. “Now officials are doing it.” A few days later, he was relieved of his duties as Russia’s Group of 8 representative; he still has an office in the Kremlin. Exactly what Mr. Illarionov meant by third world is unclear, but the point was made. Instead of embracing free-market capitalism, Russia has veered away: renationalizing oil assets, weakening property rights and signaling to foreign investors that their millions -- and their presence -- are not entirely welcome.

Link here.


Building on their lengthy presence in The Bahamas, the Franklin Templeton Fiduciary Bank (FTFB) and Trust Ltd. was officially opened at Lyford Cay. The bank is the newest member of the Franklin Templeton Investment Family and joins some 264 companies that hold bank and Trust licences in The Bahamas. Prime Minister Perry Christie said that the opening of FTFB shows that the company feels safe doing business in The Bahamas. He noted that this was an exciting time for the Bahamian financial industry, which marked a period of progress and growth. He said the financial industry has always been a valued part of the Bahamian economy, contributing some 15% to the GDP. The 264 companies hold some $300 billion in assets.

Governor of the Central Bank, Julian Francis, said the opening of FTFB has demonstrated that The Bahamas is a credible jurisdiction that is able to attract a first class institution from a highly regulated environment such as the U.S. He said that American regulators closely examined the proposal of FTFB to open in The Bahamas and after discussions with Templeton and the Central Bank of The Bahamas, the regulators fully agreed that the bank’s opening was an “interesting proposition that merited their support.”

Minister of State for Finance, James Smith said that the opening of FTFB was a very important milestone for The Bahamas because since 2001 when The Bahamas was blacklisted by the OECD, there was a reduction in the number of banks and trust companies operating in The Bahamas and many companies were unable to meet the new conditions. He also pointed out that more emphasis is being placed on having “first class” financial institutions establish themselves in The Bahamas, as opposed to those established some 15 years ago when regulations were “slack”.

John Marks Templeton has been a pioneer in financial investments. Beginning a Wall Street career in 1937, Templeton created some of the world’s largest and most successful international investment funds. Termed “arguably the greatest global stock picker of the century” by Money Magazine (January 1999), he sold his various Templeton funds in 1992 to the Franklin Group for $440 million.

Link here.


Two-thirds of the American people say the American Dream is becoming harder to achieve, especially for young families, and they point to financial insecurity and poor quality public education as the most significant barriers, according to a new survey released today by the National League of Cities (NLC). The survey, conducted last August, found that more than one in three Americans feel that they are not living the American Dream and nearly half think it is unattainable for them. The survey also shows considerable growth in the number of people who say government makes it more difficult to achieve the American Dream. Since 2001, there has been an 11% increase in the number of Americans who say the government is more of a hindrance than a help.

Financial stability (24%) is the most frequently cited characteristic of living the American Dream. However, significant generational differences are apparent. Adults aged 62 and older (23%), those from 45 to 61 (29%) and adults aged 23 to 44 (26%) cite financial security, while only 5% of 18-22 year-olds did the same. Living in freedom is the top definition for this age group, cited by 23%. Being financial secure drives the perception of the American Dream for African-Americans and Hispanic adults. Among older respondents, enjoying good health was a critical factor, with 24 percent of those over 65 believing this defines the American Dream for them.

Link here. Full results of survey here.


A small mountain village in south-east Switzerland is cashing in on demand for a Swiss passport by offering a fast track to citizenship. But the authorities are pushing for legal amendments to end the controversial policy. Castaneda, in the Italian-speaking region, has only 240 local residents, but granted 620 foreigners citizenship in 2004. Castaneda’s naturalization policy, which paves the way for a Swiss passport, is much frowned upon although it is strictly legal. Applicants are charged up to SFr3,000 ($2,564) in fees and must have lived for at least six years in canton Graubünden. But the commune is more generous than other local authorities when it comes to welcoming new citizens.

Applicants do not have to be residents of Castaneda, nor do they have to attend a face-to-face interview. The complicated 3-stage citizenship procedure is mainly handled by post. Castaneda’s liberal policy has attracted people from nearby Italy, as well as Germany, the Czech Republic, the former Yugoslavia and Turkey. Last year, Castaneda’s record 620 new citizens accounted for two thirds of all citizenship applications in the canton. The policy has brought in extra revenue for the village authorities over the years; in 2003 and 2004 alone, SFr1.5 million was raised in application fees, according to officials. But many people in Castaneda are reluctant to talk on the subject, and the authorities are outraged about inaccurate media reports, suggesting that any foreigner can receive a Swiss passport through the post.

Link here. Foreigners (usually) face a tough road to Swiss citizenship -- link here.


Hong Kong chief executive Tung Chee-hwa on Wednesday flew to Beijing to meet other Chinese leaders, leaving the territory’s government gripped by uncertainty over the timing of his resignation and the identity of his successor. Mr. Tung’s office refused to comment on his plans to step down, despite reports in local media. Mr. Tung said in Beijing that he would issue astatement “at an appropriate time”. The prospect of his resignation triggered a negative reaction in the currency markets. Dealers said the Hong Kong dollar remained under pressure from fund outflows partly caused by fears of political uncertainty.

Mr. Tung’s succession could be contested by the former British colony’s increasingly active pro-democracy camp, which fears that an election may be conducted quickly to ensure a candidate favourable to Beijing wins. Donald Tsang, the chief secretary for administration and the territory’s second highest-ranking official, is the early favorite. For a start, he controls many of the city’s most important policy dossiers, including political reform and a controversial project to develop a cultural hub. Even if only on a temporary basis, Mr Tsang would have first crack at the top job in the event of a vacancy. Under the Basic Law, Hong Kong’s mini-constitution, he is first in line to stand in for up to six months, during which an election must be held. With a high political profile and the mechanics of the constitution on his side, Mr Tsang is also one of the leading candidates for the job on a permanent basis.

Mr. Tsang is best remembered, however, for his tenure as Hong Kong’s financial secretary from 1995, which included the 1997-98 Asian financial crisis. As the Hong Kong dollar, which is pegged to the US currency, came under pressure from speculators, Mr. Tsang supported the unprecedented step of intervening in the local stock and futures markets. The move cost Hong Kong HK$118bn and provoked international criticism that the territory was departing from its free-market principles. Mr. Tsang’s judgment proved sound, however. Hong Kong’s markets rallied and the peg stayed. “In retrospect, most people think that this was a smart move and the right one,” says one former government official.

Links here and here.

Tung departure turns spotlight on China’s role.

As the Hong Kong public’s confidence in Tung Chee-hwa, the chief executive, has fallen over the past two years, Beijing has tightened its grip on the territory’s governance. The mainland Chinese government has been unequivocal about its desire for political stability in Hong Kong, extending economic incentives such as a bilateral trade deal with mainland China and relaxing rules on tourist travel in the hope of quelling popular frustration with the administration.

The prospect of Mr. Tung’s early departure cemented Beijing’s role in the territory’s politics, analysts said. China is expected to select a successor, although this person must then be elected by an 800-member committee in Hong Kong. But other analysts, members of the business community and politicians expressed surprise at the timing of Mr. Tung’s preparations to step down, given that he had already taken a less prominent role in key policy issues in recent months. “It is too abrupt,” said one businessman. The question now is whether a succession would help to rebuild the public’s confidence in the Hong Kong government, or shake it even further.

The government's political capital is running low. Mr. Tung’s administration has faced a stream of controversies since mid-2003, when it tried to push through unpopular anti-subversion legislation. In recent months, nearly every government initiative from the territory’s first property investment trust to a proposed cultural hub to an initiative to help the poor has either failed or met with criticism. Analysts said the popular reaction would depend largely on how Beijing managed the succession process. In the longer term, observers believe, Beijing’s assertion of a larger role could call into question its promise in Hong Kong’s constitution of “a high degree of autonomy”. Many believe the Hong Kong government’s problems are systemic, not personal. Without political reform, these people say, Hong Kong will continue to be plagued by controversy.

Link here.



High-earning self-employed professionals are likely hearing one word from their accountants these days, “incorporate”. It might make sense in light of President Bush’s recent comment that he is “open-minded” to an increase in the amount of salary -- now $90,000 -- that the Social Security payroll tax is levied on. The idea is to do what Democratic vice presidential candidate John Edwards did back when he was a trial lawyer: Set up your practice as an S corporation, pay yourself a reasonable salary as an employee and then take the rest as S corp profits that are subject to income but not payroll taxes. (S corp profits are not subject to corporate tax but are all passed through to an owner’s return and taxed at ordinary income rates.)

Right now wages of more than $90,000 a year are subject to the Medicare tax, which amounts to 2.9% when both the employer and employee contributions are counted, but not to the combined employer-employee levy of 12.4% for Social Security (although the self-employed get to deduct part of the payroll taxes paid from net income). If the cap on the SS tax is eliminated, some doctors, lawyers, actors and other high earners could find the extra payroll tax more than eats up their savings from the 2001 and 2003 tax cuts. Earn enough and the numbers get pretty big. But before you rush to incorporate, consider this: If Congress raises the ceiling on the SS tax, it is also likely to crack down on the John Edwards ploy.

Link here.


Despite growing public opposition, some 3,000 wealthy foreigners in Switzerland benefit from special tax perks and the country’s complex fiscal system. Parliament is due to consider a proposal to scrap these breaks, although the authorities are happy to grant them to the rich and famous. The number of beneficiaries is likely to grow in the near future, as more wealthy foreigners move to Switzerland as a result of bilateral agreements with the EU. While the public frowns upon the system more and more, the cantonal and local authorities, which have the right to raise their own taxes, appear keen to make good use of it. Attracting rich foreigners helps boost their revenue -- a more than welcome source of income when the authorities are facing public-spending cuts. Undercover research by the consumer magazine Beobachter carried out last year revealed just how enthusiastic some officials were.

Link here.


President Bush went out of his way last week in Europe to praise the growing number of countries that have junked their complicated tax codes and adopted a flat tax. Mr. Bush speaks for a growing number of Americans who are embracing the idea -- among them Clint Eastwood, who said few years back that the adoption of a flat tax would mean “a little old lady on a home computer [could do] the work of all these thousands of bureaucrats and accountants. Passing that would be amazing, wouldn’t it?” The bipartisan tax-reform commission Mr. Bush has appointed will no doubt look carefully at the global spread of the flat tax, a concept its supporters hail because it is simple to calculate, is harder to cheat on, encourages investment and fosters growth economic growth. Little wonder it is catching on in Eastern Europe.

In 1994, newly independent Estonia borrowed the idea of the flat tax from highly prosperous Hong Kong, which 45 years before had introduced a dual income tax system, allowing taxpayers to pay a flat rate on their gross income. (In practice, almost everyone in Hong Kong pays the flat tax.) Lithuania and Latvia quickly followed Estonia’s lead. Today, all three Baltic states are booming, and, along with Slovakia, a recent convert to the flat tax, they are the least-taxed countries in the EU.

The success of the Baltics attracted the attention of Andrei Illarionov, Russian president Vladimir Putin’s economic adviser. At his suggestion, Mr. Putin implemented a 13% flat tax for individuals, along with a 15% rate for most business income. The results have been astonishing as Russia’s black-marketers decided the tax was low enough and transparent enough that it was not worth evading. After struggling for a decade, Russia’s economy grew 5% a year after inflation in 2002 and 2003 and 7.3% last year. The flat tax has been a key reason that revenue from the country’s personal income tax has grown by 150% since 2001. “This constant expansion of the government tax revenue is the result of less tax evasion and increased incentive to work, save, and invest,” noted the Adam Smith Institute in London in a report on the flat tax’s success. Russia’s experience set off a wave of imitators. In 2003, Serbia introduced a 14% tax on income and corporate profits along with plans to cut it further. Russia’s neighbor, Ukraine then set a 13% rate, with dividends and bank interest taxed at only 5%. Last year Slovakia junked an old tax system that included 66 exemptions, 19 sources of untaxed income and 27 items with their own specific tax rates, with a 19% flat tax on income and profits.

Alvin Rabushka, a senior fellow at Stanford’s Hoover Institution who consults with countries all over the world on how to design a flat tax, can barely keep up with all the new adherents. Within two weeks after taking office in December, Romania’s new prime minister, Calin Popescu Tariceanu, issued an emergency edict to take effect only three days later: Companies and individuals now pay a single flat rate of 16%. Georgia also adopted the flat tax as of Jan 1. Europe is becoming so crowded with flat-tax nations that the original proponents of the idea are having to play catch-up. Estonia has just cut its rate to 24%, and has promised to slash it to 20% over the next two years. Mr. Rabushka’s book The Flat Tax has just been published in Chinese, with a preface by Lou Jiwei, the vice minister of finance. If China were to climb on board the flat-tax train, more than a quarter of the world’s population would be filling out their taxes on the back of a postcard.

In the U.S., interest in the flat tax languished after Steve Forbes, who championed a 17% flat rate during his 1996 presidential campaign, failed to win the GOP nomination. Liberal Americans often deride the flat tax on the ground that its lower rates would starve public services and allow the rich to escape the higher taxes. But as former California governor Jerry Brown pointed out during his 1992 presidential campaign, the rich will always be able to hire experts to lobby for tax loopholes and avoid the higher rate traps set for them. Envy and the lust for the political control that complicated tax regimes can provide are powerful motivations to keep progressive tax systems in place. Karl Marx in The Communist Manifesto was among the first to call for “a heavy progressive or graduated income tax” at a time when a flat rate was the norm in advanced countries. It is therefore ironic that every country that has adopted the flat tax is a former communist nation -- except Hong Kong, the modern originator of the concept, which has seen its new communist rulers retain the flat tax as a centerpiece of its economic policies.

Link here.

The flat tax in the old Soviet bloc.

Hoover Institution political scientist Alvin Rabushka points to 8 different countries in the former Soviet bloc that have adopted some form of flat tax in recent years: Russia, Slovakia, Romania, Georgia, Estonia, Latvia, Serbia and Ukraine. He predicts that Poland and the Czech Republic will soon joint them. Why so much interest in the flat tax? A key reason is that it is far more effective at raising revenue than progressive rates. With progressive rates, it looks as if extra revenue is being extracted from the wealthy. But it is also giving them a powerful incentive to arrange their affairs so as to minimize their tax liability or to evade taxes altogether.

With a flat tax, there is much less incentive to engage in tax avoidance or tax evasion. Also, the knowledge that everyone is being treated equally helps eliminate the culture of evasion that often becomes pervasive in high-tax countries, which often drives even the law-abiding into the underground economy. Consequently, it comes as no surprise that a new study by the IMF found that Russia’s flat tax led to a substantial rise in government revenue. This was due almost entirely to a sharp increase in compliance, which significantly raised the share of income declared on tax returns.

While compliance here is not as bad as it was in Russia before its tax reform, it is a growing problem. In his new book, Many Unhappy Returns, former IRS Commissioner Charles Rossotti warns that we are approaching a crisis in tax administration. He estimates that in 1999, the IRS was only able to collect about 17% of the $277 billion that corporations and individuals failed to pay that year. Recent data from the Department of Commerce suggests that tax evasion has risen since 1999. In 2002, the latest year for which there is data, there was almost $1 trillion paid out that was not reported by individuals.

The flat tax is not a cure-all for tax evasion, but as the Russian example shows, it can help a lot. When people perceive that the tax system is fundamentally unfair, because everyone appears to be paying different tax rates despite having similar incomes, it diminishes any guilt taxpayers may feel about underpaying their taxes. Too often in Washington, tax fairness is defined solely in terms of what economists call vertical equity -- whether the rich pay more than the poor. But horizontal equity - - treating equals equally -- is much more important for tax compliance. When there is a single tax rate, people are more confident that their neighbors are paying the same tax they are, which boosts compliance.

It also improves compliance because the IRS does not need to know as much about the nature and timing of taxpayers’ income. Since all income is taxed the same, they have no incentive to convert wages into capital income or shift income from one year to another, for example.

Link here.


The Treasury and the IRS finalized a regulation designed to limit the use of life insurance and annuity contracts as a way to avoid current taxation of investment earnings. The regulation, together with other guidance previously issued, will prevent taxpayers from turning otherwise taxable investments in hedge funds and other entities into tax-deferred or tax-free investments by purchasing the investments through a life insurance or annuity contract. This has been accomplished by removing provisions of the tax code implementing regulations that apply a look-through rule to assets of a nonregistered partnership for purposes of satisfying the diversification requirements of section 817(h) of the Internal Revenue Code.

Link here.



Claims have been made that a company using a tax haven could get control of South Australia’s uranium resources. Analysts argue that if the claims were true, Australian law would have little effect on these global corporate manipulators -- an Australian board that tried to play by Australian rules could simply be removed. It has again put the thorny issue of tax havens under scrutiny and how Australian authorities can manage them, if at all. Worldwide in 2001, the OECD identified 38 tax havens doing business and requiring no or little tax. Its criteria included a non-existent or minimal tax system and whether there was a lack of transparency, laws or administrative practices were in place that prevent the effective exchange of information with other governments, and there was an absence of a requirement that the activity be substantial.

The legality of the tax haven is not at issue. The use of these places to hide wealth which should be taxed under Australian law is what concerns regulators. Specifically at issue for the Australian Tax Office is when offshore operators create deductions in Australia and avoid tax on tax-haven income and provide access to tax-haven funds on which no Australian tax has been paid. At their most benign, tax havens create legitimate wealth for small investors. At worst, U.S. authorities argue, they can even be havens for terrorist funding.

However, visiting fellow at the Australian National University’s national center for development studies Terry Dwyer argues tax havens are pilloried by large high-taxing and high-spending economies simply because they resent the competition posed by small countries which want to attract business through tax breaks. “You could say a tax haven can be defined as an economy which is not as greedy or stupid as you are and therefore gets the business you have driven away,” he said. “It may be a sensible national policy.”

Link here.


Mystery surrounded a network of offshore bank accounts in the Isle of Man and Jersey that appear to be connected with Bernard Swanepoel, the chief executive of Harmony Gold, which is at the center of a massive mining merger in South Africa. Asked for an explanation for the accounts, a spokeswoman for Mr Swanepoel and Harmony confirmed that he did hold one offshore account and that was held “in line with all South African regulations”. Foreign offshore accounts are sensitive, because South Africa has tough foreign exchange laws, placing conditions on its citizens from moving funds abroad. The existence of foreign accounts may raise eyebrows as Harmony’s aggressive bid for Gold Fields is poised on a knife-edge.

South African residents have a long history of moving their assets and cash abroad. Many of them hesitated to repatriate their funds for fear of future political instability. But on February 28, 2003, the government agreed that if its citizens disclosed their accounts, they would receive an amnesty. So far, South Africans who have declared their foreign accounts have either received a fine of 10% of the account balance or been allowed to repatriate their funds.

Link here.

South African Treasury opposed to another tax amnesty.

The Treasury will not support reopening a tax amnesty offered to residents who illegally stashed money offshore years ago, despite calls for more time, a Treasury official said. The amnesty, which is estimated to have netted R2.4 billion in levies from about R65 billion in funds declared, ended in February last year. “We must be mindful that a repetitive approach to tax amnesties is a very dangerous one,” Martin Grote, the head of tax policy at the Treasury, told parliament’s finance committee. The amnesty was offered by government in 2003 to allow South African citizens who illegally took money offshore in the past to declare those assets and regularize their tax affairs. Individuals could choose to either repatriate the money or leave it offshore, after paying a levy of 5% or 10% respectively.

Link here.


A federal grand jury and the SEC are investigating whether trusts controlled by Michaels Stores leaders Sam Wyly and Charles J. Wyly Jr., wealthy benefactors of President Bush, failed to disclose their involvement in offshore trusts that traded in company stock, the crafts-store chain said this week. Michaels said trusts to benefit Sam Wyly and his family members hold 2.15 million shares and trusts benefiting Charles Wyly and his family control 2.87 million shares. Together, the trusts hold 3.7% of the company’s outstanding shares. Charles Wyly is currently chairman and former chairman Sam Wyly, a financier who sold a software company for $4 billion in 2000, is now vice chairman. Both are Michaels directors.

According to court records in a recent lawsuit filed by the Wylys, they set up several trusts in the Isle of Man to benefit themselves, their children, or other relatives. Subsidiaries of some trusts acquired stock in private deals with the company in 1996, Michaels said. The company said its sales of stock to some of the trust subsidiaries had been disclosed in SEC filings. However, the SEC filings did not report the Wylys and their family members as beneficiaries of the irrevocable non-U.S. trusts.

Link here.


A Washington telecommunications entrepreneur has been accused of evading more than $200 million in taxes by hiding almost $500 million in personal income through an elaborate network of offshore corporations. The Justice Department said that Walter Anderson, 51, took in vast sums throughout the 1990’s and evaded paying about $170 million in federal taxes and $40 million in taxes to the District of Columbia. Mr. Anderson was arrested at Dulles International Airport in Virginia after a federal grand jury in Washington returned a 12-count indictment against him last week. Charges include obstructing the I.R.S., tax evasion, and fraud.

The Justice Department said that Mr. Anderson was involved in starting long-distance telecommunications businesses as the industry was being deregulated, and that he realized in the early 1990’s that the merger of his first successful company, Mid-Atlantic Telecom, with another company would result in substantial taxable earnings. To avoid paying those taxes, the DoJ said, he formed an offshore corporation in the British Virgin Islands, Gold & Appel Transfer, and hired a trust company to serve as its registered agent and sole director. Gold & Appel was owned by another British Virgin Islands company previously formed by Mr. Anderson. Mr. Anderson structured his dealings so that he had complete, albeit hidden, control of the corporations, prosecutors said. They said he further obscured his holdings by forming another offshore corporation in Panama, transferring Gold & Appel shares to that entity and having the shares sent to a mail drop in Amsterdam that he had rented under an alias.

The indictment said Mr. Anderson concealed his illegal dealings from his accountants, repeatedly tried to thwart I.R.S. inquiries, sometimes used the alias “Mark Roth” and falsely proclaimed himself a citizen of the Dominican Republic when he opened accounts with a New Jersey bank. From October 1992 to July 1996, prosecutors said, Mr. Anderson transferred his interests in Mid-Atlantic telecom and two other telecommunications companies to the offshore companies he had formed, thereby creating the impression that the companies, not Mr. Anderson himself, should be liable for taxes as the telecommunications companies appreciated in value.

Mr. Anderson did not report the net earnings of Gold & Appel on his federal and District of Columbia tax returns as he was required to, prosecutors said. They said he sometimes claimed that he lived in Florida, which has no state income tax, during the time specified during the indictment, when in fact he resided at two homes in Washington. At other times, prosecutors said, Mr. Anderson wrongly obtained a Virginia driver’s license and registered his car there to avoid paying District of Columbia “use taxes” on paintings and other expensive items purchased outside of Washington but for use there. From 1987 through 1993, officials said, Mr. Anderson failed to file a tax return.

Prosecutors noted that it was difficult to catch determined tax cheats but said that some countries known as tax havens had been cooperating with American investigators more often since the 9/11 terrorist attacks. The government has stepped up investigations but managed to recommend only 1,400 tax prosecutions out of the 130 million tax returns filed annually. For budgetary reasons, the I.R.S. relies almost entirely on data reported to it on computer files, not on traditional detective work, to help identify tax evaders.

Links here and here.

Man of many names now called no. 1 tax cheat.

Walter Anderson, the telephone entrepreneur accused of being the biggest tax cheat in American history, started playing with his name when he was 12 years old. Acquiring aliases became a habit that the government now says is central to how he evaded taxes on at least $450 million in income. His first alias, his mother told the government, involved unofficially shortening his given name, Walter Anderson Crump. The government says he has used at least seven other aliases to hide his income. The most intriguing alias listed in court papers is Ragnor Danksjold, a variation on the character Ragnar Danneskjold in the Ayn Rand novel Atlas Shrugged. He went on to develop what the government says are elaborate schemes to conceal his movements and money. Even after five years of investigation, the government cannot fully estimate the size of his untaxed fortune, although filings by his companies suggest it is more than $1 billion.

Business associates said yesterday that Mr. Anderson was obsessed with keeping his actions out of sight, and even those who did business with him for years said that he revealed little other than his hatred of government and his fascination with space travel. Henry G. Luken III, whom Mr. Anderson retained to bill clients of his first long-distance telephone company 15 years ago, said that even investment bankers had a hard time finding out much about Mr. Anderson. Mr. Luken said he bought several companies from Mr. Anderson and served with him on the board of a publicly traded telecommunications company. “Since Day 1, he has always told us that he didn’t own the entities,” Mr. Luken said, adding that Mr. Anderson drove a 15-year-old Oldsmobile and that, except for part ownership of a Gulfstream IV jet, he saw no signs of a lavish lifestyle.

The Justice Department, in a 12-count indictment, said that Mr. Anderson engaged in elaborate schemes to hide his ownership of his American businesses through two offshore entities, Gold & Appel Transfer in the BVI and a Panamanian company named Iceberg Transport. He paid $10 for 1% of Gold & Appel, creating the appearance that he did not control the firm and could take advantage of technical tax rules to escape taxes, the government said. In reality, the government charged, he paid $990 for an exclusive option to acquire the other 99% of Gold & Appel, which made him the sole owner and made all its income subject to tax in the U.S. From 1995 to 1999, the indictment charges, he sent more than $450 million out of the country without paying taxes. In fact, in 1998, he paid just $494 in taxes, the government said.

The government says that over the last two decades, Mr. Anderson used fake identification papers and a purloined baptismal certificate to create his aliases. Among the volumes seized from his three apartments were Poof! How to Disappear and Create a New Identity, The ID Forger, and Reborn Overseas, a how-to guide with the double subtitles “Identity Building in Europe, Australia and New Zealand” and “Methods of Disguise”.

Link here.


[Ed note: The information in this article rather overdoes its strawman characterization of trusts in order to highlight the benefits of foundations. However, the information on foundations is well worth taking in.]

Originating in Roman times, foundations really can claim to be the original financial planning vehicle, predating trusts by around a thousand years. But if you thought that private foundations were the exclusive domain of people like Bill Gates, think again. Foundations are one of the most overlooked and yet most effective forms of asset protection you can put in place. Like good investment vehicles, they are designed to save you money without costing you the earth.

The concept of both foundations and trusts is quite simple. Assets such as property, shares, cash and so on are transferred out of the estate of the legal owner, known as the Founder or Settlor. These assets are managed by a person or persons selected by the Founder/Settlor on behalf of the beneficiaries. A “letter of wishes” confers both powers and restrictions on the managers and also identifies the beneficiaries. By transferring assets into a foundation or trust, the Founder/Settlor can avoid the forced heirship laws of countries that permit a will to be challenged and overturned if it does not meet with minimum statutory legacy requirements. Locating such estate planning vehicles offshore can also avoid future taxes that would have arisen both during one’s lifetime as well as on death. What one does not own cannot be taxed.

Foundations and trusts are structurally different. Technically a trust is just a legal action and does not exist as a separate legal entity. A trust is a common law concept and while different countries have enacted laws governing the way in which trusts are managed, they are not distinct entities. Thus, the “trust” does not and cannot own the trust assets. Trust assets are legally owned by the Trustees -- albeit strictly for the benefit of the beneficiaries.

Foundations are separate legal entities that can own assets. Although similar to a corporate body, a foundation has no issued shares or stock. This is important for those expatriates who are required by their home countries to report foreign-controlled companies. What is not legally owned cannot be reported.

Link here.


Bankruptcy legislation being debated by the Senate is intended to make it harder for people to walk away from their credit card and other debts. But legal specialists say the proposed law leaves open an increasingly popular loophole that lets wealthy people protect substantial assets from creditors even after filing for bankruptcy. The loophole involves the use of so-called asset protection trusts (APTs). For years, wealthy people looking to keep their money out of the reach of domestic creditors have set up these trusts offshore. But since 1997, lawmakers in five states -- Alaska, Delaware, Nevada, Rhode Island and Utah -- have passed legislation exempting assets held domestically in such trusts from the federal bankruptcy code. People who want to establish trusts do not have to reside the five states. They need only set their trust up through an institution in one of them.

“If the bankruptcy legislation currently being rushed through the Senate gets enacted, debtors won’t need to buy houses in Florida or Texas to keep their millions,” said Elena Marty-Nelson, a law professor at Nova Southeastern University in Fort Lauderdale, Florida, referring to generous homestead exemptions in those states. “The millionaire’s loophole that is the result of these trusts needs to be closed.”

The Senate bill is favored by banks, credit card companies and retailers, who say it is now too easy for consumers to erase their debts through bankruptcy. It is almost identical to previous versions that have been introduced in Congress, unsuccessfully, since 1998. Perhaps because the current bill was written so long ago, some legal authorities say, it does not address the new state laws that have allowed APTs to flourish. Money held in APTs can elude creditors because federal bankruptcy law exempts assets governed by “applicable nonbankruptcy law”. Intended to preserve rights to property under state law, the exemption makes it difficult for creditors to get hold of assets that they would not be able to seize through a nonbankruptcy proceeding in state court. APTs have become increasingly popular in recent years among physicians, who fear large medical malpractice awards, and corporate executives, whose assets are at greater peril now because of new laws.

While it is difficult to quantify how much money is sitting in domestic APTs, their popularity is undeniable, bankruptcy specialists said. Current federal bankruptcy law protects assets held in a type of trust, known as a spendthrift trust, traditionally set up by one family member to benefit another. But current law does not protect the assets of people who set up spendthrift trusts to benefit themselves. And the law limits the purposes of the trusts that qualify for exemption -- retirement planning or paying for education are two approved purposes. By contrast, domestic APTs can be set up by the same people who plan to benefit from them. In addition, there are no caps on the dollar amount of assets they can hold and no restrictions on their purpose. (The trusts cannot be set up by people who are already insolvent.) Ms. Marty-Nelson recommends that the bankruptcy bill should at least apply such a cap to domestic APTs. Better yet, she said, the bill should exclude these trusts from the federal exemption altogether.

Link here.



Despite widespread criticism from security experts that a proposed high-tech upgrade to Americans’ passports actually introduces new security risks, the government is declining to encrypt data on new high-tech e-passports, according to proposed new rules published. In response to this outside criticism and some public questioning by one of its own contractors, the State Department delayed its rollout of the chip-equipped passports and hired additional companies to provide prototypes. Other countries are also wrangling with the issue, as the U.S. is requiring all 27 countries whose citizens do not need visas to visit America to begin issuing e-passports by October.

The new passports will include an RFID tag, a chip that will store all the information on the data page of the passport, including name, date and place of birth, and a digitized version of the photo passport, according to the proposal in the Federal Register. Border agents, equipped with readers, would be able to pull up passport information on a screen and visually compare the digitized photo against the passport bearer. But the rules, which are open for comment until April 4, rule out encrypting the bearer’s name, birth date and digital photo, saying such a move would impede worldwide adoption of e-passports and that encrypted data would slow down entry and exit at customs.

The lack of encryption baffles privacy advocates and security researchers, who say the new passports are vulnerable to “skimming”, an attack that uses an unauthorized reader to gather information from the RFID chip without the passport owner’s knowledge. The State Department concedes that skimming is a legitimate threat, but says the chips will have a read range of inches, that eavesdropping at border stations would be very conspicuous and that the passports will have a shielding mechanism -- perhaps a foil case or a weave in the cover that will cloak the chip when the passport is closed. That does little to satisfy critics.

Link here.


The Bank of America has revealed it has lost computer tapes containing account details of more than one million customers who are US federal employees. Several members of the U.S. Senate are among those affected, who could now be vulnerable to identity theft. Senate sources say the missing tapes may have been stolen from a plane by baggage handlers. The bank gave no details of how the records disappeared, but said they had probably not been misused. Customers’ accounts were being monitoring and account holders would be notified if any “unusual activity” was detected, bank officials said. Bank of America said the tapes went missing in December while being shipped to a back-up data center.

Link here.


Remember chatter? After 9-11, it was all over the news. For months, snatches of cellphone conversations in Karachi or Tora Bora routinely made the front page. Television newscasters could chill the blood instantly by reporting on “increased levels of chatter” somewhere in the ether. But what exactly was it? Who was picking it up, and how were they making sense of it? Patrick Radden Keefe does his best to answer these questions and demystify a very mysterious subject in Chatter, a beginner’s guide to the world of electronic espionage and the work of the National Security Agency, responsible for communications security and signals intelligence, or “sigint”. In a series of semiautonomous chapters, he describes Echelon, the vast electronic intelligence-gathering system operated by the U.S. and its English-speaking allies, surveys the current technology of global eavesdropping, and tries to sort out the vexed issue of privacy rights versus security demands in a world at war with terrorism.

Mr. Keefe writes, crisply and entertainingly, as an interested private citizen rather than an expert. A 3rd-year student at Yale Law School, he follows in the footsteps of freelance investigators like James Bamford, who, through sheer persistence, managed to penetrate at least some of the multiple layers of secrecy surrounding the NSA in his book The Puzzle Palace. Chatter is a much breezier affair, filled with anecdotes, colorful quotes and arresting statistics. The U.S. has fewer than 5,000 spies operating around the world, for example, but 30,000 eavesdroppers. The NSA employs more mathematicians than any other organization in the world, and every three hours its spy satellites gather enough information to fill the Library of Congress.

As fiber-optic cables become the main channel for data transmission, surveillance will become more difficult, but at the moment the ability to collect electronic signals is far outstripping the ability to analyze it. Some messages are chatter. Others are chit-chat. In February 2003, the New York City police went on high alert, sending special teams into the subways and posting extra police at the tunnels leading in and out of Manhattan, all because the word “underground” had been picked up in an intercepted conversation between terrorists. Nothing happened. Was the word or the context misinterpreted? Or did the police presence thwart an attack? It is impossible to know.

Chatter is often quite amusing. Mr. Keefe has great fun with Total Information Awareness, the ill-fated antiterrorist program announced by the Pentagon in the late summer of 2003. By linking private and government databases, Total Awareness would pick up on every electronic click, ping or chirp created by private citizens in the course of their daily lives. A suspicious Congress strangled the program in its cradle, which sounds like cause for celebration. But, as Mr. Keefe points out, that program might have noticed when $10,000 was wired to a Florida SunTrust bank account in the name of Mohamed Atta on July 19, 2000, or set off alarm bells when a dozen men, some of them on terrorist watch lists and others with lapsed visas, bought one-way tickets on flights departing at about the same time on Sept. 11, 2001.

Mr. Keefe is a privacy agnostic. He does not know quite where to draw the line between legitimate national security concerns and the privacy rights of citizens. Somewhat feebly, he calls for vigorous debate on the issue. By temperament and by vocation, he loathes the secrecy culture of national spy agencies, but he has no patience with conspiracy theorists and idealists. Mr. Keefe seems almost as naïve, though, when he notes, in astonishment, that the NSA does not publish a list of its employees, and that they are not allowed to write about their work in their diaries. Imagine that.

Link here.


Paris Hilton is not alone. According to a Los Angeles security consulting firm that went skulking outside the Academy Awards ceremony in Hollywood last Sunday, as many as 100 people who walked the red carpet were carrying cellphones vulnerable to the kind of privacy invasion that recently gained Ms. Hilton a new round of unwanted notoriety. Three employees of the company, Flexilis, positioned themselves in the crowd of more than 1,000 people watching celebrities arrive at the Kodak Theater. John Hering, one of the company’s founders, wore a backpack in which he had placed a laptop computer with scanning software and a powerful antenna.

The Flexilis researchers said they were able to detect that 50 to 100 of the attendees had smart cellphones whose contents -- like those of Ms. Hilton’s T-Mobile phone -- could be electronically siphoned from their service providers’ central computers. The contents of Ms. Hilton’s phone, including other celebrities’ phone numbers, ended up on the Internet. The researchers said they were uncertain about the precise number of vulnerable phones because some phones may have been detected more than once, They did not tap into any of the cellphones that were scanned -- which would have been illegal -- and so could not identify exactly whose phones were vulnerable.

The researchers said that their stunt, which scanned the red carpet from about 30 feet away, was meant to raise awareness of a threat to privacy that is becoming more common as advanced cellphones carry a growing range of personal data, including passwords, Social Security numbers and credit card information. Mr. Hering noted that despite extensive security measures at the Oscars, his company’s surveillance activities went unnoticed. “We were only doing this passively, but it was possible that someone could have been standing right next to us doing this maliciously,” he said.

Flexilis has specialized in a short-range wireless data technology known as Bluetooth, which is intended to replace cables over short distances. Many cellphones now have Bluetooth wireless capability to permit synchronizing with computers, or to connect to peripherals like wireless headsets. Bluetooth is also becoming a standard technology in luxury cars to permit them to integrate easily with cellphones, and is increasingly found in personal computers as a cable replacement for keyboards, mice and printers. The Flexilis team said their concern was not with Bluetooth itself, which contains adequate security protection, but with the way the technology has been used by many manufacturers.

Link here.



After a landmark eminent-domain case was argued before the U.S. Supreme Court last week, I am left with the depressing realization that the court is populated with justices who are not capable of making the most basic constitutional distinctions, or of even understanding the crucial property-rights issue at stake. The case, Kelo vs. the city of New London (Connecticut), involves this question posed to the court, “Does the Public Use Clause of the Fifth Amendment permit condemnation of private property for transfer to other private parties solely for the purpose of promoting ‘economic development’?” Any Joe off the street could understand the Fifth Amendment’s simple words. No person shall be “deprived of life, liberty or property without due process of the law; nor shall private property be taken for public use without just compensation.”

So, the government cannot kill you, imprison you or take your stuff without giving you a chance to make your case, and it can take your stuff only for a public use. And it must pay you a fair price for it. Yet the justices, like those medieval scholars who argued about the number of angels who can dance on the head of a pin, seemed to be focused on irrelevancies and unable to grasp the fundamental issues. “Do you really want the courts in the business of deciding whether a hospital will be successful ... or a road will be successful?” asked Justice Sandra Day O’Connor.

Well, the issue here is whether the state can take property from one private property owner and give it to another private owner for the sake of economic development. Nothing in this case in any way questions the ability of government to take property for a genuinely “public use”, such as a road, hospital, prison or school. For the longest time, the courts had no trouble distinguishing a road from a chain store. And, excuse me for noticing, shouldn’t the justices be more concerned about the civil liberties of individuals than about inconveniences placed on the government? The Constitution -- the document the high court is supposed to defend and interpret -- is about protecting individuals from the government, not about protecting the government’s interests. I am left concerned not only about the state of property rights in America, but at the state of the high court where, apparently, the simple words of the Constitution count for little.

Link here.


Increasing numbers of banks across the country are closing accounts of what they deem “high risk” customers in part because of confusing regulations put in place as part of the Patriot Act, according to a national banking official. The issue came to the fore in New Jersey last week when the Islamic Education Center protested the closing of its account at Hudson United Bank after almost 13 years. The bank did not say why it took the action, and cited laws that allow financial institutions to shut down accounts at any time without giving a reason for the closure.

John Byrne, director of the American Bankers Association’s Center for Regulatory Compliance, said more banks are taking an aggressive posture toward account closures because of a lack of consistency in the interpretation and enforcement of regulations instituted after the Sept. 11 terrorist attacks. The number of suspicious-activity reports filed by banks rose from 81,197 in 1997 to 288,343 in 2003, the newspaper reported. “It’s getting to the point where we are defensively filing suspicious-activity reports because we fear reprisals,” Byrne said.

“The Patriot Act places a burden on banks and now holds them liable if they participate in what ultimately is found to be money laundering or handling money from terrorist organizations or assisting someone to send money to a terrorist organization,” said New York-based attorney Sam Schmidt. “Instead of doing the necessary work to make the determinations that they can handle this account, they decide it is not worth doing the work at all, and they decline or close the account.”

Link here.


Tony Blair and the bulk of the Parliamentary Labour Party could (well OK, should) find themselves qualifying as subjects for control orders, under the sweeping powers Home Secretary Charles Clarke and, er, Tony Blair are currently asking them to rush through Parliament. Their offence? Involvement in “terrorism-related activity” as it is defined in the terms of the proposed Prevention of Terrorism Act 2005.

The notion is of course absurd, but it neatly illustrates the absurdity of the entire, outrageous proposal. It considers “the commission, preparation or instigation of acts of terrorism” as constituting “involvement in terrorism-related activity”, which seems logical enough, but then it reaches for the broader brush and gets carried away. Conduct which “facilitates” terrorism-related activity is included, so is “conduct which gives encouragement” (shouting “Troops out of Iraq now!” could count, here), and “conduct which gives support or assistance to individuals who are known or believed to be involved in terrorism-related activity.”

Anyone considered by the Home Secretary to be covered by any or all of these can have a wide range range of their liberties curtailed by order of the Home Secretary -- do not pass court, do not have sight of evidence, do not even think of saying “beyond reasonable doubt”. It seems probable to us that we could bang up the Labour Party on several of them, but we will take the last one as an example, considering funding as constituting “support or assistance”. Hello Gerry Adams MP. ...

Link here.

U.K. Home Office plans to restrict freedom to preserve liberty.

Who gets to switch your life off? On what grounds, and what can you do about it? And at what point does tagging, surveillance and curtailment of movement constitute deprivation of liberty? Prison definitely counts as deprivation, but what about the graduated scale of technological “prisons without bars” (David Blunkett’s words) that UK Home Secretary Charles Clarke is currently building? The issue is central to the Prevention of Terrorism Bill, which Clarke rammed through the House of Commons amid scenes of chaos. Clarke is ostensibly pushing through emergency legislation in order to deal with the cases of the Belmarsh detainees, whose current incarceration has been ruled illegal by the Law Lords, but as we noted (see above article) the section of the Bill he proposes to use immediately covers “ASBOs for terror” rather than detention.

Clarke is introducing measures which will allow him to impose a wide range of restriction on individuals, including movement, use of Internet and communications, without his producing evidence, with the legal process only being involved when the restrictions amount to “deprivation of liberty” as defined by the European Convention on Human Rights. Which surely suggests that the point at which this deprivation occurs is kind of important, in the particular case of the Belmarsh detainees and in the wider context of the UK Home Office’s medium term planning for technological controls. Clarke is at the moment insisting that the current measures will only be applied to a small number of “special cases”, but they could equally apply in a “deprivation lite” form to larger numbers, which is precisely what Blunkett envisaged when he first outlined the mechanisms last year. Technology has the capability to impose graduated restrictions on liberty, but this is an issue the Government is specifically avoiding confronting.

Link here.

U.K. goverment faces anti-terror crisis.

The British government is facing the prospect that its controversial anti-terrorism legislation could unravel in Parliament after failing to make sufficient concessions to satisfy opponents. Although the Prevention of Terrorism Bill was finally approved Monday night by 272 to 219 in Parliament’s main house, the House of Commons, the strength of opposition indicates that it could run into greater trouble in the House of Lords. The radical content of the bill is currently dominating both the political and media agenda in Britain. It proposes a series of control orders, ranging from electronic tagging to house arrest, applicable without charge to foreign and British nationals suspected of involvement in terrorism.

Labor does not have a majority in the Lords, and peers across the parties have warned that without substantial rewrites it could face failure. It had been widely expected that Home Secretary Charles Clarke would strike a compromise with opponents by proposing amendments to the bill during its final stage in the House of Commons. Instead, Clarke caused parliamentary chaos by sending a letter to party leaders just three hours before the debate, detailing his proposed changes. The amendments would be tabled during the reading by the House of Lords, he said, leaving many MPs wondering how the bill could be debated and passed when it was not in its final format.

Opposition and rebel MPs tried to stall the process, calling for tabled amendments and extra time for discussion. Conservative Shadow Attorney General Dominic Grieve said it was an “impossibility” to pass a bill of such enormous legal and constitutional consequence without proper parliamentary scrutiny. Neither were opponents entirely satisfied with the home secretary’s concessions.

Clarke may ultimately have little choice but to ultmately make more concessions. The government’s current anti-terror legislation expires on March 14, and as it has already been ruled unlawful by Britain’s highest court, renewing it would open the government up to litigation in the European Court of Human Rights. Without the new legislation in place, the government could be forced to release terror suspects currently detained without charge in Britain’s prisons. Neither option would be palatable for the government, particularly in the run-up to a general election, widely expected on May 5.

Link here.


The Court of First Instance has granted an order, under the Organized and Serious Crimes Ordinance (OSCO), to confiscate HK$14.8 million (US$1.9 million) in assets linked to an international fraud syndicate. The syndicate, active since 1997 and orignially based in Manila, targeted victims worldwide using cold calls and pressure sales tactics to sell bogus share investment schemes, the government said. They used numerous offshore nominee companies with bank accounts in Hong Kong to launder proceeds, officials said.

Their activities were stopped following joint action by the Philippines Securities and Exchange Commission and the Hong Kong Police in mid-2001. After a 4-year investigation, this is the first non-drugs case using the “absconder proceedings” of the OSCO and is also the largest confiscation to date under the ordinance.

Link here.


A federal judge ordered the Bush administration to either charge or release an American suspected of plotting terrorist attacks with Al Qaeda, saying that his continued confinement after nearly three years would “only offend the rule of law”. The case of Jose Padilla has drawn unusual attention because it pits the rights of a U.S. citizen against the powers of the government to fight the war on terrorism. The government contends that by designating Padilla an “enemy combatant” -- not a criminal defendant -- and putting him in military custody, it can hold him without charge indefinitely.

He was deemed to be an enemy combatant by President Bush in June 2002, a month after his arrest at Chicago’s O’Hare International Airport. Officials accused him of participating in a plan to detonate a radioactive “dirty bomb” in the U.S. Federal prosecutors had hoped to keep the New York native behind bars in an attempt to learn all they could about his reported ties to al Qaeda and his alleged attempt to scout targets for attack in the U.S.

But Monday’s ruling by U.S. District Judge Henry F. Floyd found that Padilla’s “indefinite detention without trial” violated his constitutional right to due process and ordered the administration to release him or charge him within 45 days. “Great decision”, said Donna Newman, a New York lawyer representing Padilla. “The Constitution is alive and well and kicking.” Government lawyers, who had no immediate reaction to the order, are likely to appeal the ruling quickly and forestall any immediate release of the man they have portrayed as a grave threat to American security.

Link here.

The Padilla ruling is a victory for freedom.

As I have been writing for the past two years, it is impossible to overstate the importance of the Jose Padilla case. The power assumed by the U.S. military and the Bush administration in the Padilla case constitutes what is arguably the most ominous and dangerous threat to the freedom of the American people in our lifetime. Fortunately, this past Monday a U.S. district court in South Carolina put the quietus to the assumption and exercise of such power. The court’s ruling was a major victory for freedom, the Constitution, the Bill of Rights, and the rule of law. Unfortunately, however, the government is appealing, hoping to overturn the district court’s judgment.

Jose Padilla was arrested at a Chicago airport almost three years ago on suspicion of having conspired to commit terrorism. The ordinary procedure -- the procedure that has been followed in the U.S. since our nation’s founding -- would have been to charge him with federal crimes dealing with terrorism, indict him, bring him to trial before a jury, and, if convicted, sentence him. That’s the way the U.S. criminal justice system has worked for more than 200 years. With Padilla, the Pentagon has tried to do something completely different, something that is alien to the American way of life, something that was obviously modeled on the procedures employed by the military regimes in Chile and Argentina. Securing a statement from President Bush that Jose Padilla was an “enemy combatant” in the “war on terrorism”, the Pentagon took the position that it could bypass the entire federal criminal justice system set up by the Constitution, including rights and guarantees stretching all the way back to Magna Carta. These included habeas corpus, due process of law, trial by jury, and right to counsel.

Make no mistake about it: If the Pentagon’s power to arrest Americans for terrorism and punish them without federal court interference is upheld by the courts, the floodgates will be open to omnipotent military power in America. American life will never be the same again. Life will be transformed by such power in ways unimaginable. No one will be safe from military arrest, including newspaper editors, government critics, and dissidents. Any person – any person – deemed to be an “enemy combatant” and taken into military custody will have no recourse to avoid punishment, except for the “good faith” of the Pentagon, the government organization that is responsible for plunging this nation into one of the most shameful torture, sex abuse, rape, and murder scandals in its history, not to mention the resulting cover-up.

There can be no doubt that the Pentagon is salivating over the possibility of wielding the same power over U.S. citizens that it has been wielding over foreigners ever since 9/11. This includes the power to send detainees to U.S. gulags in different parts of the world for indefinite detention and punishment without interference from the courts. Fortunately, in a testament to the wisdom and foresight of our ancestors, who established the judicial branch of government with independent judges, the federal judiciary has stopped the Pentagon dead in its tracks. We can hope only that the federal judiciary stands firm in the defense of the Constitution, the Bill of Rights, and the criminal-justice system that has distinguished our nation from all others in history -- stands firm in the defense of our freedom.

Link here.

Jose Padilla: No charges and no trial, just jail.

Jose Padilla is the U.S. citizen who supposedly plotted to detonate a “dirty bomb”. Since his capture -- not on the battlefields of Afghanistan or Iraq, but at Chicago’s O’Hare Airport -- he has not been charged with any crime. Yet, for more than a year, Padilla has been held incommunicado in a South Carolina military brig. Padilla’s indefinite detention, without access to an attorney, has civil libertarians up in arms. That is why the Cato Institute, joined by five ideologically diverse public policy organizations -- the Center for National Security Studies, the Constitution Project, the Lawyers Committee for Human Rights, People for the American Way, and the Rutherford Institute -- filed a friend-of-the-court brief in Padilla v. Rumsfeld, [then] pending before the U.S. Court of Appeals for the Second Circuit in New York.

Consider this specious logic, endorsed by the Bush administration: Under the Sixth Amendment, the right to counsel does not apply until charges are filed. The government has not charged Padilla. Ordinarily, U.S. citizens cannot be detained without charge. But the administration has avoided that technicality by designating Padilla as an “enemy combatant”, then proclaiming that the court may not second-guess his designation. Essentially, on orders of the executive branch, anyone could wind up imprisoned by the military with no way to assert his innocence.

An unambiguous federal statute and the U.S. Constitution both prohibit the executive branch from doing to Padilla what it is now doing. More than three decades ago, Congress passed Title 18, §4001(a) of the U.S. Code. It states, “No citizen shall be imprisoned or otherwise detained by the United States except pursuant to an Act of Congress.” Today, we have not had from Congress any statute that authorizes Padilla’s detention. Yes, Congress enacted the PATRIOT Act, which says that non-citizens suspected of terrorism can be detained, but only for seven days. After that, they have to be released or charged, unless the attorney general certifies every six months that they present a security risk. Two months earlier, Congress had passed a resolution empowering the president to use all necessary force against the 9/11 terrorists. But that resolution surely did not give the administration unfettered discretion to detain citizens without charge. If it had, then the ensuing PATRIOT Act would have afforded more protection to aliens than to citizens -- a proposition lacking credibility.

Link here.


In a landmark decision, the Swiss Supreme Court has decided to free the bulk of the assets of the late Nigerian President Sani Abacha that were secured and blocked in Switzerland. This decision opens the way for the Swiss government to immediately return more than $450 million to Nigeria. Finding that these funds are of obvious criminal origin, they can now be handed back against the will of Mr. Abacha’s family and even without a Nigerian court decision. The Swiss ruling facilitates the rapid repatriation of the assets to an aggrieved country and its people, and is to be regarded as progressive by international comparison.

Politically exposed persons (PEPs) who illegally enrich themselves at the expense of the state, most notably in poor regions and developing countries, and invest such assets abroad do not only perpetrate criminal acts. The presence of illicit assets of PEPs poses a serious threat to the integrity of many of the world’s major financial centers. Like other big financial centers, Switzerland has not been immune to this threat, and has been misused for criminal purposes in the past. The latest Supreme Court ruling confirms that Switzerland’s financial center does not provide a safe haven for illegal money. On the contrary. It proves that Swiss banking secrecy law does not apply to assets of criminal origin. It is not an obstacle to the investigation of criminal acts and to international efforts to combat crime.

Link here.



After reading Frank Chodorov’s wonderful book The Income Tax: Root of all Evil, I have gained a better understanding as to why America has devolved from a republic to a social democracy (i.e., a nanny state). After all, a nanny state cannot grow unless it is constantly fed the fruit of our labor -- mostly in the form of personal income taxes. As the state grows, one’s sense of self-ownership is destroyed, liberty is traded for “security”, the human spirit diminishes, rates of time preference increase, and the citizenry increasingly thinks and behaves like dependent children. Quite frankly, the evils of the income tax have manifested themselves into the absurd collective belief that everyone can live at the expense of everyone else (as if we have an ownership stake in one another -- collectivized slavery). Such an absurd mindset, unfortunately, results in bizarre human behavior.

As we mindlessly continue to waddle down the path of decivilization thinking the state will always be there to protect us, it is clearer as to the nature of our collective disembodiment. Americans have become little more than characters in a surreal Hansel and Gretel video game. Americans seek the security of the gingerbread house, get fattened up by what appears to be a kindly nanny, and then end up being sold into slavery by what turns out to be an evil witch. It is amazing how destructive the income tax is. So what shall we be, chattel or free? We must choose soon.

Link here.


In trying to find a rhetorical justification for invading the sovereign nation of Iraq, President George W. Bush stumbled via the back door into the “spreading democracy” rationale. Yet this rhetoric -- which is at the same time both idealistic and opportunistic -- is leading to policies that are far reaching and have counterproductive consequences worldwide. When no weapons of mass destruction were found in Iraq and the 9/11 Commission and others dismissed any operational connection between Saddam Hussein and al Qaeda, a desperate Bush administration latched onto the war rationale of “making Iraq and the Middle East democratic.” The idea was that a newly free Iraq would put pressure on neighboring autocracies, such as Iran, Syria and Saudi Arabia, to liberalize their governance.

Then, to cover up the fact that such “save Iraq and the Middle East” rhetoric was merely window dressing to use as a last ditch justification for war, the president, in his second inaugural address, upped the ante again. To pretend that the reckless invasion of Iraq was part of grander plan all along, he spoke of spreading democracy around the world. The world has not seen a “do-gooder” American president with such a grandiose plan since Jimmy Carter’s public campaign for global human rights. And who said only soft headed, touchy-feely Democrats are naïve?

There are several problems with wearing human rights advocacy on your sleeve. The first is that merely holding a vote does not mean that a country will eventually be free. Even the Nazis in Germany initially took power by a democratic election. The second problem, which Carter experienced acutely, is that rhetorically lambasting countries publicly about their human rights policies or their domestic systems of governance often leads to a vitriolic response. In a Carteresque manner, President Bush recently demanded that Russia “must renew a commitment to democracy and the rule of law.” Certainly Russia has seen an erosion of freedom under the Putin regime, but the important question is how the U.S. should deal with those realities.

Although Jimmy Carter’s presidency has been excessively criticized, he did find out that publicly nagging countries about their human rights policies had a counterproductive effect. Instead, the president can be more effective by privately letting autocratic regimes know that the United States is watching their behavior toward dissidents, human rights, and democratic practices. Even more important, the U.S. government can ensure that freedom flourishes within its own borders so that the U.S. can lead by example. The post-9/11 prison torture scandals and passage of the draconian USA PATRIOT Act, which clamped down on civil liberties, have smudged that image.

Link here.


Thomas E. Woods Jr.’s Politically Incorrect Guide to American History, recently put out by Regnery, the venerable conservative publisher, has caused a storm of controversy, the outlines of which define the parameters of the politically permissible. In today’s constricted political “debate” -- especially when it comes to foreign policy -- only two flavors are allowed: right-wing neocon and left-wing neocon. A “right-wing” writer who opposes foreign interventionism, condemns World War I as the senseless slaughter it indubitably was, and shows how FDR (and the Brits) dragged us into a second world war is bound to come under attack from the battalions of the neoconized Right as well as the Left, and the frenzied response to the Woods volume has not disappointed.

Woods’s defense of the right of the states to defy the federal government -- and even secede! -- cuts too close to the bone in an era when the gulf between “red” and “blue” states is every bit as deep as the chasm that separated North from South in the run-up to the Civil War. And the Woodsian critique of Reconstruction -- which looks, from here, every bit as merciless and stupid as the “de-Ba’athification” of Iraq in the wake of our “victory” -- earns the ire of the neocon critics, too. But there is a complete aversion to answering Woods’s arguments: that slavery, clearly an odious institution in the author’s eyes, would have withered on the vine without the Civil War; that Lincoln was a tyrant who closed newspapers, arrested his political opponents, and trampled on the Constitution; that the Civil War was as much about sectional pride and tariffs as about slavery -- and that the slaughter of the war was a tragic and entirely avoidable event.

The neocon fusillade of criticism underscores two key points about them, the first being that they cannot and will not tolerate any dissent from the Grand Consensus, especially coming from the “ultra-reactionary” Right. The Woods book represents their worst nightmare: it is the voice of the Old Right, the limited-government, culturally conservative, and anti-imperialist Right of Robert A. Taft, John T. Flynn, and Garet Garrett. They stood for a foreign policy that put America first -- not the abstract ideal of “freedom”, or the defense of our puppets and allies, or the idea of America’s alleged “global leadership”.

The neocons, with their domestic program of “big government conservatism” and their foreign policy of perpetual war, are politically vulnerable at their very base. They fear Tom Woods far more than Michael Moore, Noam Chomsky, and Naomi Klein combined, because he represents a real threat to their claim to the mantle of conservatism, and that, above all, is something that cannot be tolerated. The viciousness of the attacks on Woods underscores neocon sensitivities on this subject. They, after all, were Scoop Jackson Democrats and errant Trotskyites not so long ago, and the Woods book is an unwelcome reminder that conservatism is, for them, an alien tradition -- which is the second point to be made here.

Woods, says a clueless critic, hates America. But his opposition to a foreign policy of global militarism is rooted in Jefferson, Washington, and John Quincy Adams, not Marx, Engels, and Lenin. His is a profoundly American creed, one that sees the quest for Empire as a source of corruption, and will not be so easily dismissed as “ultra-reactionary”. For its antiwar message alone -- and its very readable layout, with little squibs and pull-quotes featured throughout -- it is worth buying and reading no matter where you are coming from on the ideological spectrum.

Link here.


In a world aflame with war and terrorism, George W. Bush’s second inaugural address was a match flung onto an oil slick. By the time his 17-minute peroration reached midpoint, it was clear that was his intention:Because we have acted in the great liberating tradition of this nation, tens of millions have achieved their freedom. And as hope kindles hope, millions more will find it. By our efforts we have lit a fire as well, a fire in the minds of men. It warms those who feel its power; it burns those who fight its progress. And one day this untamed fire of freedom will reach the darkest corners of our world.

“A fire in the mind” -- such a felicitous phrase. It aptly and succinctly describes the feverish mental state of our neoconservative policymakers, who set out to build an empire in the Middle East and now, with this speech, clearly envision much more. It also describes the mental state of some of the characters in Dostoyevsky’s The Possessed (or The Devils), from which the fiery metaphor is taken. Michael Barone pointed out the allusion in his U.S. News column, wherein he described Dostoyevsky’s work as “a novel about a provincial town inspired by new revolutionary ideas. After a turbulent literary evening, a fire breaks out, and one townsman says, ‘The fire is in the minds of men, not in the roofs of buildings.’” Well, not quite. The novel is about a group of revolutionaries who plot the destruction of a small provincial town -- and, by extension, the whole of Russia and of human civilization.

Bush’s peroration was suffused with fire, it burned with the steely-eyed fanaticism of the ideologues who forged it, full of phrases that soared so far above the real world that a good many listeners had trouble believing their ears. Does the president seriously believe “the survival of liberty in our land increasingly depends on the success of liberty in other lands”? Surely he did not really mean to explain away the exponential expansion of big government in America as due to the lack of civil liberties in, say, the former Soviet Union or the oppression of women in Saudi Arabia? In a vain attempt to reassure the panicked, Bush senior made a rare intervention. “People want to read a lot into it,” he said, “that this means new aggression or newly assertive military forces. That’s not what that speech is about. It’s about freedom.” In other words, it is all talk and no action. But there is already plenty of action going on in Iraq and good reason to expect more.

In Dostoyevsky’s day, urban radicals influenced by Marx and emboldened by Bakunin went out into the countryside proclaiming the doctrines of socialism and syndicalist anarchism, to little effect. They committed sporadic acts of spectacular violence and functioned roughly. Such groups as the Narodnaya Volya (Peoples’ Will), whose militants assassinated two Russian czars, were 19th-century versions of al-Qaeda. Dostoyevsky’s novel is a dark chronicle of the psychology that energized their terroristic brand of nihilism. The “fire in the minds of men” eventually engulfed all Russia; The Possessed bitterly foreshadowed the red inferno of the 1917 revolution.

The neocons threw their hats in the air as Bush embraced their core agenda. “This is real neoconservatism,” Robert Kagan exulted to the Los Angeles Times. “It would be hard to express it more clearly. If people were expecting Bush to rein in his ambitions and enthusiasms after the first term, they are discovering that they were wrong.” Others were not so ebullient. “If Bush means it literally, then it means we have an extremist in the White House,” said Nixon Center president Dimitri Simes. “I hope and pray that he didn’t mean it … [and] that it was merely an inspirational speech, not practical guidance for the conduct of foreign policy.”

Peggy Noonan found the speech “startling”, and confessed it left her “with a bad feeling, and reluctant dislike” evoked by such grandiose phrases as “we are ready for the greatest achievements in the history of freedom.” This, she averred “is the kind of sentence that makes you wonder if this White House did not … have a case of what I have called in the past ‘mission inebriation.’ A sense that there are few legitimate boundaries to the desires born in the goodness of their good hearts.” Drunk with power, flush with Pyrrhic victories, and convinced that they are on the right side of history, the “mission inebriation” that bedevils this administration is Ms. Noonan’s polite way of describing megalomania. That American policymakers will likely end up like Dostoyevsky’s revolutionary conspirators -- increasingly committed to state terrorism in pursuit of some utopian vision -- seems horribly and tragically inevitable.

Link here.
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