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(Especially noteworthy articles’ headings highlighted in gold.)
THE COMING CHARITY CRACKDOWN
In 1998 Michael Gallop, an insurance broker, and his wife set up a family foundation – primarily to support their son’s Agoura Hills, California public school. They later deducted $262,000 in contributions to it. But last year the IRS revoked the foundation’s tax exemption and denied their deductions. An IRS agent concluded that the Gallops retained too much control over the charity, paid personal obligations (such as synagogue dues) from it and set it up as part of a “tax avoidance scheme” promoted by a Utah firm. As a supporting organization, the foundation was supposed to be overseen by the school. But the school’s principal told the IRS he had never been to a board meeting. One of the alleged promoters originally represented the school on the board. The Gallops deny any impropriety and are fighting both the revocation and a big personal tax bill in U.S. Tax Court. They say the foundation is meeting a desperate need in public education, having provided $9,600 in grants to the school through 2002.
Have people been misusing the charitable deduction? The IRS sure thinks so. The Senate Finance Committee agrees and is rustling up the biggest overhaul of this part of the code in 36 years. Charles Grassley (R-Iowa), the committee’s chairman, and Max Baucus (D-Montana), its senior Democrat, plan to introduce a corrective bill later this summer. If you are either a big donor or a small one who pushes the limits, the legislation may crimp your style.
Some donors are not even keeping up with the existing lax rules. In late July the Vanguard Charitable Endowment Program sent warning letters to 32 folks who set up tax-deductible donor-advised funds in 1998 but have not yet directed a penny from those funds to an operating charity. The message: Recommend a minimum $500 charitable grant by June 30, 2006 or Vanguard will take over the fund and select future recipients itself. The token payout requirement is a relic of a looser regulatory era. Under one proposal at which Grassley and Baucus are looking, the 32 close-fisted Vanguard donors, whose funds total $7 million, would have to dole out $1.4 million, not $16,000, in grants, pronto.Link here.
PANAMA OFFERS NATURAL BEAUTY, TAX BREAKS
Steve Arthur drives his SUV past the 9-hole golf course, the health spa and the church of his new neighborhood. He points to the plot where his 3,000-square-foot home will be built. “In any other place in the world, this is a national park” he says, indicating the lush mountains enfolding a cluster of $quarter-million homes in the gated community of Valle Escondido in Boquete, Panama. In mile-high Boquete, the tropics meet the mountains to create a landscape so lush even the air seems green. The weather is usually delightful. It is a far cry from Willcox, Arizona where Arthur grew up. Last year Arthur and his wife moved to Valle Escondido, the first of a growing number of gated retirement communities cropping up in the highlands and islands of Panama.
Lured by Panama’s natural beauty and foreigner-friendly tax system, Arthur and thousands of Americans like him are pumping hundreds of millions of dollars into the country of 3 million people. In 1995, to encourage tourism as the departure of the U.S. military neared, Panama passed Law 8, exempting tourism-related businesses from taxes on profits and property. Second homes subleased part of the year and retirement communities such as Valle Escondido all fall under Panama’s broad tourism umbrella.
Since the U.S. military left in 1999 after the turnover of the Panama Canal, Panama has been scrambling to find its place in the 21st century and diversify its economy beyond activities traditionally centered on the canal, such as its international banking center and the duty-free zone. Tourism is one option. There is also something called “residential tourism” – communities such as Valle Escondido. Boquete, a former coffee-producing town of 18,000, has been ranked among the best places in the world to retire by Modern Maturity and International Living magazines.
Those who eschew the gated-community ethic have other options. Erland Hinsch is building a home with his Panamanian wife. Hinsch is hooked on the town’s tranquil setting. He drives his 1985 Land Rover over the bumpy dirt road just as a drizzling rain begins to fall in Boquete. Called bajareques, these daily refreshing rains cleanse the town and leave it looking like a living, breathing postcard of pristine mountaintops rising into the low-lying clouds. “You can live well here for $1,000 a month. You can have maids, cars, a house – you can’t even blink for that in the United States,” Hinsch says. Hinsch is supervising construction of a two-story, 2,800-square-foot home, contracting Panamanians for the construction. The cost? About $45,000. Of the gated communities, he says, “It is just way too American. You don’t come down here to live like an American; you adapt to Panama’s culture.”Link here.
Panama’s geography spawns a “global shopping mall”.
It is not just a canal. It is a “cluster”. Panama’s pivotal geography has given rise to many variations on the floatage or portage trade routes that existed even before Columbus. It has spawned a “global shopping mall”, the Colon Free Zone, said Raul Moreira, Colon Free Zone director of planning and finance. International businessmen and women fly in daily, ordering wholesale merchandise ranging from canned meat to women’s underwear that arrives days later at their businesses throughout the Americas. Though merchandise is tax-free, the Free Zone earns Panama about $20 million per year through rents and administrative fees and employs 18,000, Moreira said.
Herstel Levy, a fabric store owner, said the Free Zone offers shoppers convenience. “I sell textiles but they don’t need me,” said Levy, an Iranian Jew who has lived in Panama for 32 years. “They can go to China. I give them accessibility. I fly to China, go to the factories, speak Chinese, and I can do in three days what takes them a month.”
If Colon’s Free Zone is the canal’s economic offspring on the Atlantic side, its Pacific equivalent is the IBC: Panama’s International Banking Center. Housing branches of banks whose home offices range from Argentina to the Netherlands, attracted here by Panama’s stable, dollarized economy and convenient banking secrecy laws, the Manhattan-type skyline is visible from most of Panama City.Link here.
Panama’s colorful crafts preserve culture.
Migdalia Preciado sits on a wooden bench across from her home with a palm-thatched roof. It is among 200 houses crammed onto an island the size of two football fields off Panama’s Caribbean coast. Her blouse is two finely embroidered panels sewn front and back. These multilayered appliqués, known as molas, are Panama’s most famous native craft. Molas take weeks to complete. Although prices average about $15, they enable Kuna women to be the primary cash earners in this matriarchal society. The Kuna are one of seven recognized native groups comprising the ethnic culture of a country that most Americans probably do not realize is anything other than home to a canal. The Kuna were the first to enter the cash economy, when builders of the canal started buying their molas during the early 1900s. Today, every indigenous community in Panama is trying to do the same, yet retain its identity.
Although indigenous groups comprise about 6$ of Panama’s 3 million inhabitants, their reservations cover 22% of the country. Magdalina Jimenez models a traditional Ngöbe dress to women learning how to make money with handicrafts. Preciado’s reservation, Kuna Yala, extends along Panama’s eastern Caribbean seacoast toward the border with Colombia. It includes the San Blas Archipelago – 365 islands, 49 inhabited – and part of the mainland. Kuna men fish, snorkel for lobster and hunt iguana, tapir, and collared peccary, known in Arizona as javelina. They grow sugar cane, corn, bananas, rice, and tropical fruits. Because Kuna Yala is autonomous, its members can trade with a foreign nation without Panamanian intervention. In exchange for coconuts, Colombian ships leave goods such as coffee and machetes. Their autonomy dates to 1925, when the Kuna rose up against occupying Panamanian police, killing 22 of them but losing many of their own as well. A truce negotiated by the U.S. military led to Kuna self-rule, and February marked the 80th anniversary of the victory.Link here.
OPPORTUNITIES CREATED FOR WESTERN BANKS BY GROWTH IN ISLAMIC BANKING
With the growing understanding of Islamic Banking and the needs of the global communities who use these services, what is the role of Islam in banking? Following the 9/11 attacks in America, many changes occurred in how we view and treat the needs of Muslim communities in the banking industry. On the one hand, the U.S. introduced legislation to regulate the Hawala method of transferring money between American immigrants and their families in Asia and the Middle East. On the other, the UK government decided to endorse the opening of Europe’s first fully-compliant Islamic bank with a local mandate. So what are the implications of the Islamic faith in banking, and what are banks doing to exploit the opportunities these create?
Before discussing the implications, it is worth explaining how the markets we are going to discuss operate. First, there is Hawala – an ancient method of transferring money between people in Asia. Today, it is a method of transferring money overseas that does not involve complex payment infrastructures and processes, but more of a trust with traditional ways of doing business. Second, there is the growth of Islamic banking in the “Western” world. Mainstream Western financial instruments that are interest-bearing, such as a mortgage, credit card, loan or savings account, are forbidden. Interest, as with usury in traditional Christian and Catholic traditions, is considered to be evil and under the Quran, interest – or riba – is specifically prohibited. Therefore, other ways to buy a car or own a house are used in Islamic banking. So, two systems – one official, Islamic Banking, and one unofficial, Hawala – that work closely in line to allow the free flow of funds between global Muslim communities. So what?
Well, what is interesting is that we now see Western financial providers muscling in on the Islamic financial markets. These offerings are likely to grow. After all, few banks can afford to ignore a market that is under-served and offers great opportunity. The opportunity is an industry with over $230 billion of assets that is growing by more than 15% per annum. Western interest in Islamic Banking as a growth market is a new phenomena, but is one that will become significant in those markets over the next decade.Link here.
IRS TO AUDIT MORE S CORPORATIONS
The IRS will boost the number audits it performs of Subchapter S corporations, according to the Associated Press. The IRS plans to examine later this year 5,000 randomly selected S corporation returns from the 2003 and 2004 tax years. The agency expects to finish the audits within two to three years. An S corporation tax status is favorable for small businesses since, while it allows for the same liability as more traditional C corporations, it enables companies to avoid double taxation, the situation in which both the company and its shareholders are taxed. Instead, income is passed directly through to the stockholders, who alone are taxed on it. What is more, shareholders can offset business losses incurred by the corporation against their own income.
An IRS spokesperson told AP that S corporations will have to show their financial records to IRS examiners, who will decide whether income and expenses were accurately reported and the correct tax paid. There is no difference, he said, between such audits and those of other business types. The government plans to take the data and analyze it to gauge how compliant companies are with tax law. From there, it will determine if changes need to be made in tax policy or the Internal Revenue Code.Link here.
JET LAG SNARES A TAX HAVEN TOUT’S DOCUMENTS CONTAINING LOTS OF INTERESTING ADVICE
When Philip Egglishaw last visited Sydney and Melbourne, he left behind a who’s who and how-to guide to tax avoidance. John Garnaut reports. Philip Egglishaw, chartered accountant and international tax planning man of mystery, visited his well-to-do Sydney clients at the Sheraton on the Park in November 2003. He must have been jet-lagged by the punishing global travel program, for he left behind what have become key documents for Operation Wickenby, Australia’s largest and most ambitious tax evasion crackdown.
The first document is headed Trusts: A Simple Concept. It tells how to establish an effective “blind” and “mobile” trust – one which is instantly transferable between tax havens and where the trustees act on instructions from beneficiaries without recording or disclosing any link. Their advantages are described in unusually candid terms: “Trusts are typically used to avoid the following forms of taxation: income tax; capital gains tax; death duties; gift taxes; wealth taxes.” Especially, it seems, when coupled with financial and tax advice from Egglishaw’s firm.
The second Strachans document is Tax Planning and Offshore Administration. This how-to document says little about international tax laws but much about avoiding disclosure of company directors, shareholders and trust beneficiaries. It says: “Although it is far from adequate to rely solely upon secrecy as a basis of tax planning, it does form a natural concomitant to skilful tax planning arrangements. The required level of secrecy will be dependent upon the sensitivity of the client and the proposed type and location of the activities.” The third promotional document, Choosing the Right Jurisdiction: an Objective View, assesses the merits and pitfalls of the world’s premier tax havens. When it comes down to sheer regulatory impenetrability, it is hard to overlook the British Virgin Islands, the document claims.Link here.
HACKING BIOMETRICS IS NOT AS HARD AS YOU MIGHT THINK
The talk “Attacking Biometric Access Control Systems” was given by Zamboni, a man who looked nothing like a real zamboni. What it described were the nine places to attack a biometric control system, and a little on how to do it. The grand scheme of it all is that there are several places to attack, the sensor, the feature extractor, the storage computer and the comparison unit. You can also attack communication between these points, be they traces on a circuit board or a network link.
The process is supposed to work like this: you enroll in the system, which usually means you put your finger in the sensor, and it takes pictures of the fingerprint until the gizmo gets enough information to do its job. This is then sent to the feature extractor, where a mathematical model is built in a way that the computer understands. That is then passed along to the storage point where it sits and waits. When you come in and place your finger on the sensor, it takes a picture and passes it to the extractor. A new model is made there, and that is sent to the comparison unit. If it thinks you are a reasonable but not absolute match for the stored template, it authorizes you.
There are several problems with this, and each point is vulnerable to an attack or several types of attack. Most systems have a common part or two, there are only a few fingerprint sensor makers out there, and they get repackaged a lot. Know the protocols used, most are publicly available to one extent or another on the web. If they are not, you can get most of the pieces on eBay for not all that much money. A little experimentation, and you are off to the races and through the intensive biometric security at the gate with nothing more than a smile, some donuts, a gummy finger and a little hacking when no one is looking. Biometrics are not anywhere near as secure as you think.Link here.
U.S. NATIONAL ID’S IN NEED OF A FIX
Without any real Senate debate, the Real ID Act of 2005 was passed by Congress in May and promptly signed into law by President Bush. It got no debate because it was tacked onto an emergency spending bill needed for U.S. troops in the Middle East – no congressperson was going to vote against it. Politically underhanded tactics aside, if you are not philosophically opposed to the concept of a national identity card, the law is not a disaster. However, it leaves a few too many unanswered questions that could turn it into one. At a minimum, regardless of how those questions are answered, you and I will have to pay more for a driver’s license – which will double as the national ID – and we will have to wait longer to get one.
Although some critics have decried the very existence of a national ID card in the U.S., pointing out that we have opted against creating one numerous times in our history, driver’s licenses and Social Security cards have functioned much as national ID cards do in other countries. The more significant changes occur behind the scenes, and they affect your privacy. The new driver’s license will differ from the old one in three major ways. First, the databases that house the data – your name, address, phone number, Social Security number, and the like – will no longer be isolated in the state where you live, but rather will all be linked together. Second, the license must incorporate “machine-readable” technology that will be uniform throughout the nation. Previously, states chose their own technology without reference to national standards. Third, the DMV must check your information with several sources (including a new check on your immigration/citizenship status) prior to issuing you a license.
The law offers very little guidance on the privacy and security measures that states must take to safeguard this new, nationwide database of information on driving-age adults. Alarmingly, the law makes no exceptions for people who have previously been allowed to keep their real address off their driver’s licenses, such as battered women or judges in sensitive positions.Link here.
I HAVE SEEN BIG BROTHER – AND HE IS US
Having been recently appointed Anti-Money Laundering Officer at my investment firm, I now have the official, government-sanctioned power to scrutinize our clients’ account activity and report almost anything I deem “suspicious activity” to the federal government. Be worried, friends – be very worried – since every bank, every brokerage house, every financial institution in the U.S. is required by the Patriot Act to appoint an AML Officer, enact procedures to combat money-laundering, and file Suspicious Activity Reports on U.S. citizens. (You can view the 4-page SAR-SF form here.)
The Act’s definition of a financial institution is disturbingly broad. It includes dealers in precious metals, stones, or jewels, pawnbrokers, loan or finance companies, insurance companies, travel agencies, telegraph companies, sellers of vehicles, including automobiles, airplanes, and boats. Essentially, it means your financial transactions are subject to investigation if you purchase an engagement ring, insure your home, take a vacation or buy a car. According to the statute, if I simply should have become aware of suspicious activity and fail to report it, I may have broken the law. So, if I have a head cold one day and miss a $5,000 wire transfer on a client’s brokerage statement – which is clearly suspicious activity since this client is a 90-year-old widow living on fixed-income investments, who has never made a wire transfer in ten years – I could be in trouble. This applies not just to the AML Officer, but to every employee in a financial organization in a position to view client transactions. So, if you make an unusually large deposit at the bank one day, your teller must report this potential “suspicious activity” to higher ups or face possible sanctions.
As AML Officer, I am required to report a client’s activity as suspicious if it merely fails to make business sense or appears to be without economic purpose. By the way, as AML Officer I am safe-harbored against violations of privacy laws I may be forced to commit while adhering to the regulations of the Patriot Act. I find this situation repulsive in the extreme. It is 1984, slightly delayed. It will result in a paranoia explosion reminiscent of Nazi-era Germany. I am already an unpaid tax collector for the federal government, since I prepare my firm’s payroll, and now, without my consent, I am also its unpaid law enforcement agent and informant. I can only wonder, fearfully, what comes next.Link here.
BUSH CHENEY REGIME COMPELS U.S. EXPATRIATION
U.S. citizens are expatriating in record numbers, writes political-economic analyst Al Martin in his column “The Bush Cheney Regime’s Asset Confiscation Policy: A Review” (www.almartinraw.com). People are moving to Eastern European countries like Czechoslovakia, Bulgaria, and Estonia for asset protection, writes Martin because “despite the 40% decline in the U.S. dollar under the scourge of Bushonomics that has occurred under the regime, these are countries where the U.S. dollar still has buying power.
“Many people, particularly middle-class retirees, constitute the second largest group of expatriates from the United States. The top 10% of the nation, the Smart Republican Money Crowd, has consistently been the number-one expatriate group. But now we are seeing a record number of middle class citizens expatriating. This is particularly true among retirees and small business people.
“People who are frequent travelers abroad understand the situation. The economies of the Czech Republic, Bulgaria and Estonia are booming.”Link here.
HUSBANDS FOR SALE IN CUBA
A wedding is a big occasion in any society, but in Cuba it can also be big business. Many Cuban women see a foreign husband as a ticket out of the country - a passport, possibly, to new prosperity. The other day I bumped into a Cuban friend of mine in a shoe shop in Havana. She was buying a pair of white slippers. It turned out my friend was taking part in what is a small, but booming market in Cuba – the purchase of foreign husbands. Usually arranged through intermediaries, many Cuban women consider it by far the best way to leave this country. But it is not cheap. My friend paid $5,000 for her Mexican groom. That, I am told, is also the going rate for American, Canadian, and European husbands. A Costa Rican man can apparently be persuaded to tie the knot for around $2,000. Peruvian men, for some reason, are currently particularly good value. Just $800 will secure one.
A few days after meeting my friend, I went to her wedding. Often the line between what is real and what is not is somewhat blurred in Cuba, but this really was an extreme example. The bride’s family had showed up in force. And none seemed happier than her mother, decked out in an extravagant 1960s flowery outfit. Some children, from a previous marriage, were also there, along with aunts and uncles from all over Havana. All seemed delighted with their new purchase. Pepe, the husband, whom they had only met a few hours before, was a jolly, retired engineer in his late 50s, who seemed quite prepared to go along with this theatre as far, and probably beyond, as was required.
Many Cubans do not have to go to these lengths, or expense, in order to leave this island on the arm of a lonely foreigner. Cuba, after all, was once likened by Graham Greene to a factory producing human beauty. Outside the grand neoclassical villas which house many of the embassies here, you will see queues of young, often beautiful, Cuban women, waiting to convince embassy staff that their acquaintances with tourists they recently met look set to be long term. The queue beside the Italian Embassy is usually the longest. Plenty of these relationships do continue happily outside Cuba. But plenty do not.Link here.
THE ROUGHER SIDE OF BOCAS REAL ESTATE
First-time visitors to Panama often find themselves in one of the mid-priced restaurants along Via Argentina in the Cangrejo district of Panama City. Before their meal arrives they often get a cartooned placemat map of the country. Over Panama City there is usually something to do with the old fort at Panama Vieja. Over the Darien there is usually a reference to the indigenous population. And over the Bocas del Toro region there are banana trees, which is appropriate on several levels – the real estate market there has gone completely bananas. Marred with scandal after scandal after scandal, Bocas del Toro province is slowly making its way down the list of retirement destinations in Panama. The truly beautiful archipelago has been through more than its fair share of title problems and fraud cases, and now it has taken a turn for the worse.
There are two sides clashing in Bocas these days: farmers who were given land by former dictator Omar Torrijos or had occupied land up to several decades before, and the holders of titles that often date back to when Panama was part of Colombia. Bocas del Toro was the location of a huge banana boom throughout the early 20th century, but in 1914 a plague began to strike the crops, and by the mid 1930s there wasn’t much left, including inhabitants. In the middle of the 20th century settlers began to come in from other regions to farm the still rich soil, and then in the 1970s Torrijos began granting small to medium plots of the presumed abandoned land to underprivileged individuals who could farm it.
Fast forward to the late 90s. Foreign investors “discover” the beauty, tranquillity, and, most of all, financial opportunity of the region. Land values shoot up much faster than restaurants or hotels. Old titles no longer represent just jungle and spent farmland. They are potential resorts, hotels, or, more than anything, retirement or vacation homes for wealthy investors “looking for the next Costa Rica,” as the often repeated saying goes.Link here.
HOW LONG CAN PANAMA HOLD OUT FOR A FREE TRADE AGREEMENT THAT REFLECTS ITS OWN NATIONAL INTERESTS?
In the wake of the U.S. Congress’s recent approval of the Dominican Republic-Central American Free Trade Agreement (DR-CAFTA), another U.S. free trade agreement with Panama, an oft-overlooked trade partner, simmers on the back burner. Panama, conspicuously absent from the DR-CAFTA negotiations, has been involved in a separate set of free trade discussions with the U.S. since April 2003. The U.S.-Panama Free Trade Agreement (FTA) has undergone eight rounds of negotiations thus far without showing any potential for compromise in the near future. The backlash from U.S. special interest groups angered by the passage of DR-CAFTA is likely to stiffen U.S. obstinacy when it comes to protecting its agricultural subsidies, thwarting hopes that a U.S.-Panama FTA might set a precedent for a fairer template for free trade in the Americas.
While it may seem that Panama would not have much bargaining leverage with an economic giant like the United States, the isthmian country is not a novice to free trade negotiations. Within a short time span, Panama has opened up the second largest duty-free zone in the world, the Colón Free Zone (CFZ), formed free trade alliances with two Asian powerhouses, Singapore and Taiwan, and accepted an offer to become an associate member of MERCOSUR, South America’s regional trading partnership. Panama’s CFZ, the largest duty-free trade area in the Americas and the second largest in the world, after Hong Kong, has drawn the interest of many international market players to Panama as a potentially explosive trading partner. More than 2,000 companies and 25 banks operate within Panama’s trade zone. Its market is larger than the country’s entire internal market, with transactions totaling $12.2 billion in 2003. The majority of the trade flowing through the CFZ is between Asia and Latin America, suggesting yet another reason why the U.S. may be interested in an FTA with Panama – to regain the markets it has slowly ceded to its most vigorous economic competitors. The U.S. currently accounts for about 4.3% of exports transactions and 9.3% of imports to the CFZ. The CFZ has proved extremely lucrative for Panama, generating $22 million a year in direct revenue for the Panamanian government. In addition, the zone employs 19,000 workers in a country with a perpetually high unemployment rate.
Panama may hold increasing value for the United States as a link to MERCOSUR, South America’s premier regional free trade bloc. Those serving as Panama’s trade representatives see an FTA as a potentially “tremendous opportunity” for their underdeveloped country, which already uses the U.S. dollar as its currency but struggles with high poverty and unemployment rates. In addition, appearing to take concerted action to stimulate the Panamanian economy could win public favor for an administration already deeply mired in corruption allegations and a scandal over no-show diplomas at the University of Panama. As U.S.-Panama FTA talks wear on, Panamanian taxpayers are becoming increasingly alarmed over the daily cost of the negotiations. The question remains whether the U.S. will use its colossal economic clout to allow Panama to fully benefit from the virtues of reciprocal free trade that is not only free, but fair.Link here.
RENEWING THE POLICE STATE
So the USA Patriot Act was reauthorized by the junior tyrants in Congress again. But fearing that it was unconstitutional, the House put in a 10-year sunset clause, which begs one to point out, if the Act’s powers were constitutional, there would be no need for a sunset clause. But since it is unconstitutional, why not abolish it? Because these great leaders of the people, the people’s representatives, are cowards. So what powers did the regime, on its own authority, grant to itself? How does the “Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism” Act endanger the liberty of Americans? Let us take a look.
Section 206 permits “roving wire-taps” (whether these are actually conducted by Karl Rove is still unclear). This allows government agents to tap any telephone or computer a suspect might use, i.e., any public phone in your neighborhood area. This allows the government to spy on and record the conversations of anyone who uses a public phone, not just those who are the subject of a current investigation. Beware of what you say when you use a public phone or even the phone in a business. You could be prosecuted for idle conversation (perhaps derogatory remarks about a certain politician, or “hate speech”). You could be confronted with your own words on tape.
Section 213 changes the standards that used to govern obtaining search warrants. It allows so-called “sneak and peek” searches in any investigation. And instead of serving the suspect with the warrant in person, the federal agent can snoop first and let you know he let himself in and rifled through your stuff, and probably raided your fridge, sometime later. Like perhaps, years later. Section 214 allows the government to track your incoming and outgoing phone calls without a warrant and even without probable cause, all by simply uttering the magic phrase “It’s relevant to a terrorist investigation.” Unchecked police spying? Why … that only happens in grubby despotisms like Mexico or Russia. Surely not in America? Section 215 allows the FBI to obtain a subpoena from its pet judiciary, the Foreign Intelligence Surveillance Courts, for your personal records from your bank, bookstore, library, church, video store, and other businesses, and all without proving probable cause. Not only that, the subpoena cannot be challenged in court and it is illegal for you to even be told about it!
Section 216 allows, with only the approval of a judge, federal agents to collect data on the online activities of suspects in any criminal investigation. Section 218 allows secret searches of homes and businesses, based on the authorization of secret courts when the federal agents allege they possess classified information obtained from foreign sources. And this secretly obtained “evidence” can be used against a suspect in U.S. courts, including the allegations of these secretive foreign sources. Section 220 curtails judicial oversight of roving wire-taps, giving the state an unchecked, rather than a cursory rubberstamp power, to eavesdrop on unsuspecting and innocent Americans for possible future extortions … er, I mean, prosecutions.
After more than nine hours of tedious and often ridiculous “debate” that largely consisted of fear mongering and other general insults to the intelligence of the average person, the House renewed the Patriot Act 257 votes for it and 171 against it. The 257 votes included 214 brown shirted Republicans and 43 quisling Democrats. House Republicans cast the law in apocalyptic terms and most Democrats echoed their support, but added tepid concerns about civil liberties. Way to be courageous. Some opposition. What was that old “mee-tooism” appeal of FDR-era Republicans? “The same, but better.” I guess today’s Democrats offer Americans “the same, but less.”Link here.
DUE DILIGENCE RESOURCES FOR OFFSHORE INVESTORS
Over the years, I have noticed that a great many individual investors have a pre-occupation with wanting “hot tips” from newsletter writers and seminar speakers. At investment seminars where I have been invited as a speaker (usually about taxes), I see the attendees eagerly writing down the ticker symbols of companies mentioned by the other speakers. Hopefully, these investors do not rush to call their brokers based purely on such hot tips, but I suspect that many do.
Con artists are rarely able to cheat someone is free of greed or fear. Greed is the emotion that leads us to want something for nothing or to seek high returns on investments with claims of little risk. Greed gives us the motive to be willing to take advantage of another person. Someone once said that “You can’t con an honest man.” The word “honest” could be substituted for “someone who is not greedy”. Your single best defense against any potential scam or scheme is to be willing to walk away from the perceived “opportunity”. When you know that professional investment managers rarely make more than the returns achieved by the various market averages, you should be instantly suspicious of any offer that alleges to give you the opportunity to get results far greater than those obtained by professional investors. When the rate of return for a home mortgage is at 7% per year, it does not make sense that you can make 10% a month on any kind of investment.
The second emotion that causes many people to lose money is fear. Nearly every con game or scam tries to encourage a sense of urgency or you lose the opportunity. You have to move fast, to be decisive, say the hustlers and promoters. The fear of losing an opportunity to get something for nothing causes people to invest without investigating first. Greed causes investors to buy at the top of a rising market and fear causes them to sell at the bottom. Greed causes otherwise sane people to give their life savings to a total stranger who is offering the allure of a “special opportunity” to get high returns without risk or effort. Fear often prevents them from even seeking help to recover their money. Greed causes people to buy trust packages that allege they can magically move money between a number of trusts (like the carnival shell game) and end up not owing taxes on their income.
Due diligence is the process of investigating a potential investment. Failing to undertake basic “due diligence” (or vetting, as they call it outside the U.S.) can be financial folly in the offshore investment game, where financial information about companies (or the people behind them) is much harder to secure and far more costly when it is available.Link here.
THE NEW HONG KONG
Hong Kong is all-enveloping. The city that defines the word is crowded, polluted and expensive. And it is also celebrating. After some tough years marred by economic collapse and the threat of SARS, the tourists are back. The buzz and building work is everywhere. In the old fishing villages out of town, government-owned tower blocks climb into the smog, and underground lines extend further and further beneath delicate yellow landscapes. The city is opening its arms outwards, littering skyscrapers and shopping malls in its wake. The old 1960s buildings still standing as a testament to British rule may well have expiry dates stamped on their bottoms. Even though this expansion is threatening the very last breathing spaces of the city, the Identikit buildings never seem to alter Hong Kong’s character: despite 156 years of British rule, the city is palpably Chinese.
The scenery is a sideline for visitors, expats and wealthy natives, all intent on spending money. They drop dollars at the malls that fight for air space on the crowded skyline, over expensive meals with ringside seats for the daily harbour-view light show, and at extravagant, champagne-fuelled nights out in some of the best bars and clubs in the world. It is impossible not to get caught up in the glamorous whirl – so buy now and hide the credit-card statement later.Link here.
How Hong Kong can help you unlock China’s treasure chest.
You may have seen the film National Treasure, in which Nicolas Cage has to unlock a multi-layered puzzle to find a vast treasure. China is like that for many investors – a virtually limitless treasure chest with an enormous number of investment opportunities, if only you can find the darned key. It is certainly worth the effort. Within China, one will find many doors and boxes guarding different fortunes for manufacturers seeking low cost production, traders sourcing inexpensive products, companies with unique products they want to sell to the 100+ million consumers with relatively high disposable income, and pure investors who want to play the real property market or invest in non-performing loans or China “B” shares.
Finding the correct keys to access China’s treasures is no easy task. The good news is that Hong Kong is not only the gateway to China, it holds the golden key to China’s many treasure chests. And once you know the keys that Hong Kong offers, we will look at the treasures that can be unlocked in China.Link here.
9/11 REVISIONISM, REVISITED – THE MYSTERY OF “ABLE DANGER”
As we approach the fourth anniversary of the 9/11 terrorist attacks, the official story of what happened that day, and how it happened, is beginning to unravel in a spectacular manner. The official version is that the 19 conspirators, acting alone and without the foreknowledge or even the suspicion of any outside agency, pulled off a complex series of operations involving at least four separate airplanes, all carried out within minutes of each other, pirouetting in the sky in perfect synchronicity before barreling down on their targets nearly simultaneously. This fiery moment was the climax of years – as many as 5 years – of plotting, preparations, and a largely subterranean existence lived by the conspirators, until they emerged, on that fateful day, like avenging angels of darkness coming down from the sky.
We are supposed to believe that, if only we had passed the PATRIOT Act before 9/11, and subjected ourselves to a regime of total surveillance, giving up such remnants of our civil liberties as still existed, we might have escaped the wiles of Bin Laden and his fellow Islamist supermen. Now, according to this all-too-familiar refrain, we will just have to get used to having our email read, our phones tapped, and our every movement kept under close surveillance by our beneficent and all-knowing government. The only alternative is living at the mercy of terrorists. As we are beginning to learn, however, that is lie, and a rather self-serving one to boot. It was not the lack of information, or an inability to detect the death cultists in our midst, that prevented us from stopping the plot dead in its tracks. Rather, it was a persistent obstructionism coming from some quarters.
I can hear the skeptics now: It’s a “conspiracy theory”! Yikes! But what explanation for how and why 9/11 happened is not a “conspiracy theory”, after all? Atta & Co. certainly did not advertise their plans. The question is, will we accept the Official Conspiracy Theory, or an alternative one that comports with all the known facts?Link here.
DOMINICA: A ROLE MODEL FOR SUSTAINABLE TOURISM DEVELOPMENT
Caribbean destination Dominica was featured as a role model for sustainable tourism development, at the First International Conference on Environmental and Sustainable Development held in Santo Domingo, Dominican Republic, August 10-12, 2005. In a presentation entitled “Adopting Geotourism Strategies for Sustainable Tourism Development,” Deirdre Shurland, Director of the Caribbean Alliance for Sustainable Tourism (CAST), analyzed the case of Dominica, which is currently pursuing destination certification under the Green Globe 21 Community standard and as reported in a 2003 study funded by USAID and conducted by PA Consulting Group.
She highlighted the challenges faced by the island, and the opportunities presented by this certification. Shurland then brought to light some of the challenges faced by Caribbean destinations around the region and emphasized the necessity for committed leadership to drive the charge for tourism sustainability. “Green Globe 21 destination certification can offer critical opportunities for Dominica to reverse the declining trend in visitor arrivals since 1999. Everyone should assist, wherever possible, to ensure that Dominica successfully attains its objective,” says Shurland.Link here.
SHOULD YOU MOVE TO A FREE COUNTRY?
I get hordes of mail (though I am not sure how many emails in a horde) saying “Dear Fred, I too am sick of my job, the country, dumb-ass wars, the creeping mommy-state, and the hyper-regulation of practically everything, and I too want to live in paradise with a dusky maiden and sip funny drinks with lots of tequila in them and maybe die of cirrhosis but everybody has to anyway and it is more dignified than a car crash on the Fourteenth Street Bridge. How?” This is my nickel guide for people thinking about expatriation to Mexico. It may bore most people, but it is supposed to be useful instead of scintillating. (Utility is a new departure for this column.)
Mexico is not for everybody. Lots love it. Lots do not. As a very rough rule, there are two types of gringos here: Those who do not like Mexico but want good weather and cheap maids, and those who are adventurous, self-starting, and independent. Some of the latter are married couples, or at least couples. If you are really interested, spend a grand and come down for a week. (For how, see below.) Then you will not have to wonder. If you do not want to stay, call it a vacation. For what it’s worth, the country seems to appeal powerfully to those who want to be left the hell alone. The U.S. tries to control your every move, thought, and minute. Here in Mexico, unless you break a major law or do something awesomely stupid, the government is not much interested in you. This lack of interest is perhaps government’s greatest virtue.
To begin with, the Mexican government is perfectly gringo-friendly and, no, you will not be used for a piñata by the Federales. Crime is not much of a problem unless you go to bad neighborhoods or look filthy rich in Mexico City. You will not die of exotic diseases, or even mundane ones. Now, where in Mexico? In central Mexico, the only part I know well, you have several choices, depending on who and what you are.
Laboring as I have done in the vineyards of journalism, I know that foreign countries and war zones always sound more forbidding from outside than they do from within. I have watched friends fall in love with Mexico. Of course, my friends may not be quite normal, but maybe you are not either. If the darkening clouds over the U.S. bother you, the regulation and regimentation and surveillance, think about giving Messico a shot. A lot of people have, and they seem content – funny drinks, dusky maidens, empty beaches, and all.Link here.
CREATIVE STOCK SCAMS – WHAT WE NOW KNOW
Stock scams have been around since, well, probably about five minutes after the invention of stocks. Over the years, their variety has been limited only by the collective ingenuity of the scammers. The classic scam of our time is the pump-and-dump, recently popularized on TV in The Sopranos, and in films such as Boiler Room. In the pump-and-dump, a semi-legit “brokerage office” quietly buys up a block of stock in a company that is selling cheap and has not moved for a while. Then a team of “agents” cold calls prospective buyers from one of the lists of investors that are readily available, and touts the stock as being just about to make an explosive move (based on “insider information” of course). The buyer is badgered mercilessly, while being told that he or she needs to get in on the action immediately, or miss out. When enough suckers have bought, driving up the price, the scammers sell out and close down their office, leaving their victims holding the bag when the stock’s value plunges back to its real worth. The Internet has made a variation of the pump-and-dump even easier.
Another fraud involves a creative use of coin tossing, while one of the latest and cleverest of these is the “wrong number” scam. No doubt this is not the last word in stock scams. Future advances in technology will surely spawn schemes yet undreamed of. But for now investors would be wise, as always, to be wary. The old saw – if it sounds too good to be true, it probably is – is as applicable as ever. And if you do think you have been contacted by a scammer, the SEC wants to hear from you. It asks investors “who receive these kinds of calls to let them know the company being touted, the exact date and time the call was received, the number called, and the number from which the call was made, if available. E-mail the information to Enforcement@sec.gov, or call the SEC at 1-800-SEC-0330.”Link here.
U.S. COURT OF APPEALS OVERTURNS EMAIL TAPPING CASE
The U.S. Court of Appeals for the First Circuit overturned a landmark ruling that it was not a violation of criminal wiretap laws for the provider of an email service to monitor the content of users’ incoming messages without their consent. Privacy groups had argued that, unless reversed, the ruling would have a serious effect on email privacy in the U.S.
The case was brought by the Justice Department against Bradford Councilman, a seller of rare and used books. His company, Interloc, of which he was vice-president, provided an email service to certain book dealer customers. However, Councilman had configured the mail processing software so that all incoming email sent to dealers from Interloc’s biggest competitor, Amazon.com, was copied and sent to Councilman’s mailbox as well as to the intended recipient’s.
To the great alarm of privacy activists, in July 2004 a three judge panel of the Massachusetts First Circuit Court of Appeals upheld the ruling of a lower court, concluding that there was no breach of the Act, because the tapping took place while the messages were stored on Councilman’s computer, rather than being continuously in motion, as is the case with traditional telephone calls. The indictment against Councilman was therefore dismissed. The U.S. Justice Department requested an appeal of the ruling before the entire First Circuit Court of Appeals, warning that the decision could allow for the monitoring of email and other electronic communications by ISPs or even criminals.Link here.
THE FCC’S INVITE TO BIG BROTHER
It is cheaper and easier than ever to make phone calls over the Internet, thanks to innovative gadgets like a Wi-Fi handset from ZyXel. With the ZyXel phone, you can make phone calls wherever there is an accessible Wi-Fi connection. But if the federal government has its way, you will be tracked wherever you go. Buried in the convoluted 91-page legalese of a recent FCC release on voice over Internet Protocol (VoIP) is a proposal with worrisome privacy implications. In it, the FCC suggests ways to “automatically identify the location” of all VoIP callers with handsets that connect to the telephone network.
The justification for those regulations sounds reasonable enough: to let emergency services identify an Internet caller’s location when he or she dials 911. It is part of an ongoing proceeding in which the FCC gave VoIP operators until October to route 911 calls to the geographically appropriate call center. It is easy enough to identify the location of office VoIP phones that stay in one spot. But the FCC is worried about the arrival of mobile VoIP phones such as ZyXel’s, as well as business travelers taking a Vonage-like wired handset on the road.
The FCC’s proposal raises a number of questions: Who will have access to the location data stored by VoIP handsets? What rules will govern police monitoring of your moment-to-moment location? Should the federal government really be in the business of compiling a database of every wireless or wired access point in the country? And once such a database is created, what is to stop the Feds from saying that computer users also must have their locations registered? The Internet is not the telephone network, and it is not wise to copy regulations crafted for analog phone networks and apply them to a packet-switched universe.Link here.
“INORDINATE FEAR” REVISITED
During the Cold War, some of the greatest believers in communism were anti-communists. When in 1957 the Soviet ruler, Nikita Khrushchev, boasted, “We will bury you,” he was believed by many of the same Americans who usually insisted that communism could never work. That same year, the Soviets launched the first satellite into outer space, Sputnik I, and Americans panicked. Obviously Soviet education and science were far superior to our own. We had a lot of catching up to do! In due course we calmed down. Communism was a shabby system, based on basic errors about human nature, and all we really had to do was wait for it to collapse. Sometimes I think it lasted as long as it did chiefly because the West believed in it. We overestimated its efficiency, its military power, and its popular appeal around the world. President Jimmy Carter later deprecated our “inordinate fear of communism.” I was one of many conservative pundits who mocked him for this at the time, but he was quite right. You could hardly hate communism too much, but we certainly feared it too much.
Osama bin Laden can match Khrushchev in bold bluster, but it is highly likely that he has his own frustrations. Only a small fraction of the world’s Muslims are responding to his summons to sacrifice and martyrdom. After a spectacular debut on the global stage – his Sputnik I, you might say - his movement looks pretty feeble. Some of his agents are being arrested and have started singing to the London police. Not exactly an airtight operation of iron-willed fanatics. We understandably began by overestimating our enemies again, and Bush has tried hard to sustain the apocalyptic note. But there comes a time when it sinks in, however gradually, that most of us are in no danger – and never were. We have spent billions on everything from airport security to duct tape. We are still wasting other billions on the space program that originated in our previous inordinate fear.Link here.
A DEATH KNELL FOR TAX HAVENS?
The retiring Supreme Court Justice Sandra Day O’Connor wrote an opinion in the famous John Doe summons case, acknowledging that the Court had “sounded the death knell for Boyd,” which Justice Brandeis had said was a case that “will be remembered as long as civil liberties live in the United States.” The case of Boyd v. United States in 1885, struck down a tax law that forced taxpayers to bring in their records for examination. Said the Court, “And any compulsory discovery by extorting a party’s oath, or compelling the production of his private books and papers … is contrary to the principles of a free government. It is abhorrent to the instincts of an Englishman; it is abhorrent to the instincts of an American. It may suit the purposes of despotic power; but it cannot abide the pure atmosphere of political liberty and personal freedom.”
Not only has the Court sounded the death knell for Boyd, so has our generation. Every generation has the right and does, throw out many of the beliefs of the generations that went before. We fully accept the right of the government to snoop into all our affairs, especially our financial affairs. Governments today see no problem with the destruction of the right of privacy in your financial affairs. They use an innocuous name for this, “transparency”, like when the Oklahoma City bombers called murder “collateral damage”. The above quote from Boyd makes it clear that the “instincts” of an American or an Englishman, were with another generation. We have no such instincts today.
Today the OECD is on a world-wide campaign to destroy financial privacy everywhere by blackballing the tax havens and their banking privacy. Their policy is to ban them from using the banking systems of Europe like the U.S. embargo on Cuban cigars. Seems tax havens are the infidels in the modern world of high taxes. Any country with unduly low taxes, or no taxes, is suspect as having harmful tax practices if it maintains banking privacy for its customers. It has been believed until the OECD gave us a new definition of “harmful taxes” – that harmful tax practices were taxes that were too high, driving businesses and people to move to lower tax realms, like so many businesses that have left California for Nevada and other states with lower taxes. Or, many of Europe’s great athletes or actors who have moved to tax havens in Monaco, the Bahamas and elsewhere. Now the OECD’s philosophy would seems to say, that Nevada and other states are engaged in harmful tax practices, by enticing businesses to come and operate in a lower tax environment. So, which is it? It was once believed that high taxes were a threat to liberty, like when Thomas Paine extolled the virtues of America, as a “Land of liberty because it was a land of low taxes.”
The days may be gone when you could simply waltz into any number of tax havens and enjoy privacy from the world. Today you will have to work at it. You need not engage in great complexity, just a certain amount of common intelligence should enable you to have financial privacy and no or low taxes. The days of financial privacy are not over. And when the world wakes up and sees what the OECD has done, like a death knell for financial privacy, there will be a demand for the old days, when a man’s castle was beyond the surveillance of the king.Link here.
SITTING PRETTY IN SHANGHAI
Frank Rexach, who runs the Asia operations for Haworth Furniture, likes to keep things light and mobile. Rexach does not have his own office at his home base in Shanghai. He simply uses whatever cubicle is available and brings his computer and files in a piece of rolling luggage. Fluent in Mandarin, Rexach likes to chat with everybody on the staff. “As a leader, you have to be seen as locally integrated in your local organization. They really look to see if you are on an expat assignment and just enjoying the perks,” he explains. “Some staff call me an egg – white on the outside, yellow on the inside.”
Unconventional approaches are working well for Rexach – and especially well for Haworth, a $1.4 billion Holland, Michigan-based maker of office furniture. The family-owned company has seen its Middle Kingdom sales grow 50% annually for the past three years. What is particularly impressive is that Haworth is beating many Chinese manufacturers at their own game – and doing it on the locals’ turf. For the past five years, U.S. furniture makers have been under siege from Chinese imports. Hundreds of U.S. furniture factories have shut, unable to compete with high-quality Chinese-made furniture costing 30% to 40% less. Few U.S. furniture makers have even contemplated taking the fight to China by manufacturing there and selling to the domestic market.
Haworth’s secret? In short, recognizing that the China market is fast becoming just as sophisticated and demanding as those of the U.S. and Europe. As in the West, corporations in China are growing more concerned about keeping and motivating talent. As a result, they are willing to pay more for quality and extra service, rather than make decisions only on price. Haworth was not always so successful in China. Four years ago, its Shanghai factory was operating at 20% capacity. The turnaround happened after Haworth brought its more modern business model to China.Link here.
DEBTORS IN RUSH TO BANKRUPTCY AS CHANGE NEARS
Rushing to beat an October deadline when the biggest overhaul of the bankruptcy law in a quarter century goes into effect, rising numbers of Americans have filed for protection in the four months since the law was changed, seeking to have their debts erased. Since President Bush signed the new law in April, bankruptcy filings have jumped, particularly in the heartland. Filings in the four months through July are up 17% this year over last in Cleveland, 14% in Milwaukee and 22% in northern Iowa, according to court filings, matching similar patterns in the Midwest and parts of the South and rural West. Nationwide, bankruptcy filings for April, May and June were up by 12% over the same period last year, according to LexisNexis, the data collection service, which tracks filings ahead of the quarterly reporting done by the federal courts. The rise is coming after bankruptcy had leveled off and even started a slight decline last year.
Under the revised law, debtors who earn more than the median income in their state and who can repay at least $6,000 of their debt over five years will no longer be able to have their debts wiped out for a fresh start under the more generous provisions of Chapter 7 of the bankruptcy code. Instead, they will have to seek protection under Chapter 13, which requires a repayment schedule. In addition, under the new provisions, they will have to enroll in a court-supervised financial counseling program.
The rise, which lawyers and bankruptcy experts say is driven in large part by people who say they fear that it will become much more difficult to escape debt and seek a clean slate under the new law, appears to have caught some bankers and lawyers by surprise. When the new bankruptcy bill was passed by Congress last spring, bankers predicted it would turn many people away from the protection of the courts by making it harder to extinguish debt. That may still turn out to be the case. But thus far, it has been a rush to the courts in many places.
Bankruptcy filings rose eightfold over the last 30 years, from 200,000 in 1978 to 1.6 million last year. Although filings vary from month to month, the pace for this year, if it holds up, projects to about 1.8 million bankruptcies. The overwhelming majority of them are personal, not business. Economists say bankruptcy has become more likely as household debt has continued to rise while the savings rate has fallen precipitously. The Federal Reserve reported that household debt hit a record high last year, relative to disposable income.Link here.
SELECT YOUR OFFSHORE TRUST COMPANY CAREFULLY
Having an offshore trust is a far more complicated matter than in the past where everyone simply opened a blind offshore trust in a tax haven. Tony Barrett, regional manager at BJM Private Client Services who has lived and worked in the Channel Islands says that since the tightening on money laundering internationally no reputable trust company will accept blind trusts where the beneficiaries remain unidentified. However there is still place for an offshore trust, depending on an investor’s specific requirement. “It is unfortunate that because the issue has become more complicated many financial advisors are steering away from offshore trusts yet they can offer huge benefits in certain circumstances,” says Barrett.
For example an offshore inheritance paid into an offshore trust is the ideal way to preserve the inheritance, draw an income and avoid estate duty. “By foreign executors paying the money directly into an offshore trust, the funds do not accrue to you or your estate and any amount of the initial capital from the inheritance that you draw down from the trust is tax free,” says Barrett.
Although you will pay tax in South Africa on any income or capital gains that is distributed to you as a beneficiary, if you are drawing down the initial capital to supplement your income locally, this will be seen as a capital distribution from the trust which is not taxable. Barrett says for this reason it becomes extremely important to have an expert trustee who keeps reliable records. The trustee must be able to prove to the receiver of revenue what portion of your distribution from the trust is made up of capital, interest or capital gains.
Barrett says when selecting a trust company you need to make sure you are getting value for money. “Be careful of simply going for the cheapest because it could end up costing you far more if the trustees are not keeping proper records in order to cut cost.” He adds that when choosing a trust company you need to find out who is making the investment decisions. A trustee is not necessarily an investment expert; you need to make sure your investment decisions are being made by the person with the right qualifications.”Link here.
FOUR AMENDMENTS AND A FUNERAL
A month inside the house of horrors that is Congress.
It was a fairy-tale political season for George W. Bush, and it seemed like no one in the world noticed. Amid bombs in London, bloodshed in Iraq, a missing blonde in Aruba, and a scandal curling up on the doorstep of Karl Rove, Bush’s Republican Party quietly celebrated a massacre on Capitol Hill. Two of the most long-awaited legislative wet dreams of the Washington Insiders Club – an energy bill and a much-delayed highway bill – breezed into law. One mildly nervous evening was all it took to pass through the House the Central American Free Trade Agreement (CAFTA), for years now a primary strategic focus of the battle-in-Seattle activist scene. And accompanied by scarcely a whimper from the Democratic opposition, a second version of the notorious USA Patriot Act passed triumphantly through both houses of Congress, with most of the law being made permanent this time.
Bush’s summer bills were extraordinary pieces of legislation, broad in scope, transparently brazen and audaciously indulgent. They gave an energy industry drowning in the most obscene profits in its history billions of dollars in subsidies and tax breaks, including $2.9 billion for the coal industry. The highway bill set new standards for monstrous and indefensibly wasteful spending, with Congress allocating $100,000 for a single traffic light in Canoga Park, California, and $223 million for the construction of a bridge linking the mainland an Alaskan island with a population of just 50.
It was a veritable bonfire of public money, and it raged with all the brilliance of an Alabama book-burning. And what fueled it all were the little details you never heard about. The energy bill alone was 1,724 pages long. By the time the newspapers reduced this Tolstoyan monster to the size of a single headline announcing its passage, only a very few Americans understood that it was an ambitious giveaway to energy interests. But the drama of the legislative process is never in the broad strokes but in the bloody skirmishes and power plays that happen behind the scenes.
To understand the breadth of Bush’s summer sweep, you had to watch the hand-fighting at close range. You had to watch opposition gambits die slow deaths in afternoon committee hearings, listen as members fell on their swords in exchange for favors and be there to see hordes of lobbyists rush in to reverse key votes at the last minute. All of these things I did – with the help of a tour guide.
“Nobody knows how this place is run,” says Rep. Bernie Sanders. “If they did, they’d go nuts.” After a month of watching him and other members, I get the strong impression that even the idealists in Congress have learned to accept the body on its own terms. Congress is not the steady assembly line of consensus policy ideas it is sold as, but a kind of permanent emergency in which a majority of members work day and night to burgle the national treasure and burn the Constitution. A largely castrated minority tries, Alamo-style, to slow them down – but in the end spends most of its time beating calculated retreats and making loose plans to fight another day. Taken all together, the whole thing is an ingenious system for inhibiting progress and the popular will. The deck is stacked just enough to make sure that nothing ever changes. But just enough is left to chance to make sure that hope never completely dies out. And who knows, maybe it evolved that way for a reason.Link here.
ID THEFT SPYWARE SCAM UNCOVERED
Security firm Sunbelt Software said it stumbled across a US-based server storing megabytes of data stolen from compromised computers while researching spyware infections. The server held passwords for online accounts from 50 banks, Ebay and Paypal logins, hundreds of credit card numbers and reams of personal data. The FBI has reportedly now started investigating the ring of ID thieves.
The bug that has stolen all the data is thought to be a variant of a family of trojans known as Dumaru or Nibu that exploit a vulnerability in Microsoft’s Internet Explorer browser. The trojan, a malicious piece of code, automatically downloaded itself on computers when people visited sites harboring the program. What made this bug so effective was its ability to grab text stored on the clipboard and by Internet Explorer, said Eric Sites, vice president of research and development at Sunbelt Software. IE has a feature, called AutoComplete, that automatically populates boxes on web forms where people typically fill in names, addresses, e-mail addresses, credit card numbers and other biographical details. The feature is supposed to make filling in forms on websites less of a chore. In this case, said Mr. Sites, it helped the ID thieves get hold of enormously valuable data.
Typically a keylogger produces a file containing an unbroken string of characters, said Mr. Sites. “It’s usually very hard to take that and do anything with it,” he said. By contrast, AutoComplete data is already labeled and sorted because the browser has to know where to put each item. “The way the data is laid out, the quality of it, i’qs very easy to go through and use it for nefarious purposes. This is about getting money and stealing.”
The BBC News website was shown the server and some of the files containing personal data that it was storing. Each file was full of login names, e-mail addresses, credit card details and everything needed to steal someon’qs identity or simply empty their bank account. Mr. Sites said that, so far, the trojan had been found on porn sites and websites offering cracks for pirated software. But, he said, the trojan was likely to be on many other websites as it had managed to infect so many users. Sunbelt believes the trojan has been circulating for about three weeks and in that time has probably infected thousands of victims.Link here.
A USELESS, INTRUSIVE P.R. DISPLAY
The U.S. response to the July 7 terrorist bombings of the London tube system has been predictable: more hasty security measures. On July 21, police began conducting random searches of bags and packages carried by people on the New York city subway. Those who refuse to be searched are not allowed to ride. According to Mayor Michael Bloomberg, “These kinds of security measures are necessary.” But any security measure must pass two litmus tests. First, it must be proven to be effective. Second, it must not violate constitutional rights. Mayor Bloomberg’s “necessary” security falls down on both counts.
The odds of catching a would-be subway bomber are not very good. New York’s subways carry about 4.5 million passengers on the average weekday, according to the MTA. If on any given day there were a single terrorist riding the subway, and half the passengers were carrying some sort of bag, the probability of finding him or her during any particular search using a truly random search pattern would be about one in 2.25 million. Such odds are only slightly better than winning New York’s Mega Millions lottery (about one in 175 million). Even multiplied by thousands of intrusive searches that is a poor bet – and that assumes terrorists are too dim to adapt by, say, strapping bombs to their bodies.
Random searches on the subway are as useless as random searches of airline passengers at the gate – a practice that fortunately has been eliminated by the Transportation Security Agency after TSA administrator James M. Loy decided it was a “stupid rule”. The spectacle of security personnel patting down grandmothers and toddlers deserved the ample ridicule it generated. Furthermore, the procedure netted exactly zero terrorists. It is also rather telling that British authorities are not instituting random searches on the London tube system – a testament to the fact that doing so would be ineffective and cripple a transportation system that moves seven million people daily.
Aside from the futility of random searches, Bloomberg’s panacea ought to be rejected because the Fourth Amendment of the U.S. Constitution guarantees the right of the people to be “secure in their persons, houses, papers, and effects against unreasonable searches and seizures.” Without probable cause – such as someone fitting the physical description of a suspected terrorist – a random search of subway passengers is the antithesis of the Fourth Amendment. That amendment is already in the intensive care unit thanks to the numerous exceptions made in the name of the war on drugs, as well as some of the provisions of the USA PATRIOT Act. If Mayor Bloomberg’s measures are adopted nationwide, the prohibition against unreasonable searches will be in danger of expiring entirely.Link here.
HEAVY CLOUDS, NO RAIN
“Because the market has not dropped sharply, it will not drop sharply.” If there is one thought that will cost investors billions in the near future, it is this one. The price action of the major U.S. indices over the last year appears to have anesthetized investors into a lethargic state making it improbable that they will prepare their investments before the next major move. I am not talking about hundred point moves on the Dow, but thousand point moves. Why is this happening? Why is this lethargy so instinctive in our behavior?
First, let us start with the human brain and how we are wired as human beings. We actually have three connected minds: primal, emotional, and rational. The basal ganglia controls the brain functions that are instinctive, such as the desire for security, the reaction to fear, the desire to acquire, the desire for pleasure, being accepted in our social circles, and even choosing our leaders. More pertinently, this area of the brain controls behaviors such as flocking, schooling, and herding. The limbic system is the seat of emotions and guides behavior required for self preservation. It operates independent of our reasoning capabilities, and therefore, has the capacity to generate out-of-context, affective feelings of conviction that we attach to our beliefs regardless of whether they are true or false. These feelings are not isolated to the small, naïve investor, but affect the vast majority of professionals as well.
The neocortex is involved in processing ideas and using reason. However, it is trumped by the limbic system in that the limbic system is faster, controls the amplitude, or intensity of emotions, and unfortunately has no concept of time nor learns from experience. Truly, for the afore mentioned reasons, we are not hard wired to make good investment decisions. Since herding is a natural instinct, and money decisions are one of the most emotional charged areas to handle, then it only makes since that, without understanding the power of these instincts, investors are not even aware of their incapacity to take action to prepare for a sharply declining market.
Traditional asset allocation models deal with portfolio fluctuations only within two to three standard deviations. Traditional economic models hold that for an event to occur within a deviation of two means it occurs 95% of the time while a deviation of three would reflect events that occur 98% of the time. Historical record shows that changes of more than five deviations happened 2,000 times more often than expected. Under normal rules such an event should occur only once every 7,000 years. In fact, it happens once every 3 or 4 years. Statisticians call this a “fat tail” … and it means the standard model of finance is wrong. The Crash of ‘87 one-day event took markets to a deviation of 22 – standard asset allocation models only address 2 to 3 deviations.
Are we as investors condemned to be blind sided by these “Noah Effects”? Is the safest way to invest in these periods to follow the crowd and buy an index or basket of indices? History and science does not support this “random walk” mentality. If there are hundreds of logical arguments for the Noah Effect occurring in the markets today, why is it so hard to make changes now to address this issue? With the millions of marketing dollars spent on teaching advisors how to help their clients “feel comfortable”, is it any wonder that so many investors and advisors, surrounded by the emotional comfort of the herd and blinded by what we want to see, would ignore all the warning signs of a Noah effect until after the event costs them dearly?
In our current placid market environment, it may be tempting to dismiss this article for its “extreme views”. However, a study of history and science suggests that the longer things move within a stable range, the more violent the breakout will be when it occurs. As you put down this article and go back to your day-to-day life, I hope you will force yourself to override your emotions and logically consider your surroundings. Make sure you are thinking and preparing for future events and not rationalizing your ways to the “comfortable” music emanating from the Wall Street and Washington rhetoric.Link here.
CROATIA’S BEAUTY SHINES THROUGH
Ten years after the end of a bloody civil war, tourists are flocking back to the Dalmatian Coast and its gems – Dubrovnik, Split, and Hvar.
“The best time to walk the wall is just before the sun sets,” our tour guide had told us earlier. And so, as the town is bathed in a vivid golden glow, we find ourselves atop the massive, 2-kilometer-long stone wall that surrounds the Old City of Dubrovnik. On one side, laundry flutters outside shuttered apartment windows, kittens nap on rose-coloured tile roofs, and, some 20 meters below us, white marble alleyways display a treasure trove of Gothic and Renaissance churches, monasteries, Venetian palaces and ornately carved fountains, all crammed together with hole-in-the-wall boutiques and outdoor cafes. On the other side of the wall, laughing youths dive off the rocks at the wall’s base into the cobalt-blue sea. Beyond, yachts and sailboats bobbing in a marina point the way to a picture-perfect beach.
“Those who seek paradise on Earth should come to Dubrovnik,” playwright George Bernard Shaw raved when visiting the city in 1929. To that, I would add, “Come to Croatia”. Dubrovnik may be the country’s medieval showplace city. But the whole southern Dalmatian Coast of Croatia is sprinkled with fascinating medieval walled towns – as well as idyllic offshore islands and parks. Now, 10 years after the end of a bloody civil war that devastated much of Croatia, the country has recently been rediscovered as an off-the-radar haven by the international celebrity set and their media-camp followers.
In May, Croatia, a scythe-shaped country that sits astride the star-crossed, blood-drenched Balkans, was named the world’s hottest travel destination in the new edition of the Lonely Planet Guide to Croatia, which cited its “rich diversity of attractions,” accessibility and “relative affordability” (its currency, the kuna, is far friendlier to the dollar than the euro is) as well as its “stunning beaches and islands” and “magnificent food”. The easiest and most comfortable way to visit is by small cruise ship (indeed, most ports of call are so small, they cannot accommodate the large cruise ships). The calm protected waters off the Croatian coast also make for ideal cruising grounds.Link here.
Croatia – the Insiders Choice for Residence and Yachting in Europe
Croatia is a relatively small country, but it has a spectacular 6,000 km coastline on the Adriatic Sea with more than 1,100 islands, of which only 66 are inhabited. This coast is considered to be the most beautiful in Europe with innumerable bays, inlets, coves and beaches. There are also many historic places such as Pula, Split, Korcula, Hvar, Trogir, Dubrovnik. On the Adriatic coast alone there are four historic places which are listed as World Heritage sites by UNESCO.
Most islands receive more than 2,600 hours of sun a year. Croatia is divided between the Latin-influenced coast and an interior which is more Central European. The official language is Croatian, although English is spoken widely, particularly in larger cities. The capital is Zagreb with about 800,000 inhabitants. Croatia is generally a high-tax country. In 1997, the World Bank ranked it third in the world in its overall tax burden. However, Croatian tax laws offer unique advantages for persons who receive certain foreign income or a foreign pension. Croatia also offers important tax advantages to yacht owners. As these advantages are not well known, Croatia offers the interesting possibility of establishing tax-free residence in a high-tax country.Link here.
CZECH PRESIDENT WARNS AGAINST “SUBSTITUTE IDEOLOGIES OF SOCIALISM”
The most impressive speech during the recent Regional Meeting of the Mont Pelerin Society was undoubtedly Czech President Václav Klaus’s “View from a Post-Communist Country in a Predominantly Post-Democratic Europe”. Klaus has been an MPS member since 1990 and likes to attend the MPS meetings. Though his political obligations (as Prime Minister from 1992 to 1997 and President since 2002) do not always allow him to attend, he combined his presence at the MPS meeting in Reykjavik with an official visit to the Republic of Iceland.
President Klaus warned of the new “substitute ideologies of socialism” such as “Europeanism” and “NGOism”. These “isms” are currently threatening Europe. “In the first decade of the 21st century we should not concentrate exclusively on socialism,” he said. “There is a well-known saying that we should not fight the old, already non-existent battles. I find this point worth stressing even if I do not want to say that socialism is definitely over. There are, I believe, at least two arguments, which justify looking at other ideologies as well. The first is the difference between the hard and soft version of socialism and the second is the emergence of new ‘isms’ based on similar illiberal or antiliberal views.”
Though communism, the “hard version of socialism” is probably over this has not automatically led “to a system we would like to have and live in,” he said. “Fifteen years after the collapse of communism. I am afraid more than at the beginning of its softer (or weaker) version, of social-democratism, which has become – under different names, e.g. the welfare state or the soziale Marktwirtschaft – the dominant model of the economic and social system of current Western civilization. It is based on big and patronizing government, on extensive regulating of human behavior, and on large-scale income redistribution.”
He urged the MPS members and all freedom loving Europeans “to understand this contemporary version of world-wide socialism, because our old concepts may omit some of the crucial features of what is around us just now. We may even find out that the continuous use of the term socialism can be misleading.” … “Illiberal ideas are becoming to be formulated, spread and preached under the name of ideologies or “isms”, which have – at least formally and nominally – nothing in common with the old-style, explicit socialism. These ideas are, however, in many respects similar to it. There is always a limiting (or constraining) of human freedom, there is always ambitious social engineering, there is always an immodest ‘enforcement of a good’ by those who are anointed (T. Sowell) on others against their will, there is always the crowding out of standard democratic methods by alternative political procedures, and there is always the feeling of superiority of intellectuals and of their ambitions.”Link here.
ARE YOU READY FOR THIS DRIVER LICENSE RENEWAL NIGHTMARE?
Not to say we told you so, but we did. Last May, a few days before Congress passed the Real I.D. Act, we warned about the coming confusion. Now state officials are sounding the alarm. The new law, which takes effect in 2008, might better be termed the No Document Left Behind Act. It sets out what paperwork the states must require of people trying to obtain or renew a driver’s license. If this law stands, getting a license will become a frustrating several-day affair. And a darn sight more expensive.
First, as is already the case, applicants will need proof of their date of birth, in most cases a birth certificate. They will also need to prove they live where they say they live. Fine. The new requirements include official proof of applicants’ Social Security numbers, or proof that they do not need Social Security numbers. The law also says everyone will have to produce some sort of photo ID, or some other impressive I.D. with the person’s full name and date of birth. That likely means a passport. And people will need to prove they are U.S. citizens or that they are in the country legally. The law stipulates that no foreign documents can be used for any of these purposes, except a passport.
Once an applicant presents all the papers, the law says the examiner must verify them. That means calling embassies to check on foreign passports. It means checking the places where applicants were born. It means matching Social Security numbers with federal records. It means double-checking U.S. passports and green cards and naturalization certificates. It means chaos. Already, N.H. Emergency Services Director Bruce Cheney is recommending that all residents of New Hampshire get passports and birth certificates right away. If you wait until 2008, the delays could be horrendous, and many people would not be able to drive in the interim.
Oh, and the law says the state must make copies of each document presented in support of a driver’s license application and keep those copies filed away digitally for 10 years. That will put all our personal information in one neat database for identity thieves to find. And, if credit-card companies cannot protect such things, how well do you suppose our state government will do?
Although the law imposes consequences if a state refuses to adopt these procedures – its drivers will not be able to use their licenses as identification when they board airplanes or visit nuclear plants – those would be less onerous than the law itself. Other states have already taken note of this. In Montana, the Legislature has expressed its intention to opt out. The real I.D. Act is an economic outrage and a civil-liberties nightmare. One way or another, the Live Free or Die state should join the rebellion.Link here.
THE HISTORICAL DEVELOPMENT AND APPLICATION OF TRUSTS IN THE UNITED STATES
There is a popular saying regarding Trusts which is that “the limit of trusts is the imagination”, given its known flexibility and application in terms of contracts and its success, brought about by the practical experience obtained from its development throughout history. This has led to the conclusion that this instrument, which is becoming more commonplace every day, is clearly useful in any activity, provided that these activities are legal and it is applicable to an infinite series of objectives, whether individual or collective, all for the common good.
One may say that the Trust Contract is extremely peculiar, not only for the characteristics and modality which it displays, but also this affirmation, for the greater part, becomes more meaningful if we examine its origins which date back to ancient Rome up until it passes into Common Law, which will be analyzed later. To give an idea of the general way in which trusts function, we will define the three essential elements at work: the settlor, who is the owner of the goods and rights that form part of the trust; the trustee, who is responsible for administering the equity in the trust; and the beneficiary of the trust. The flexibility of trusts, as previously mentioned, is based on the fact that it covers all types of goods and rights so that any item may become the object of a trust. This explains the importance that this type of contract is gaining, because the real element of the contract, specifically the entrusted goods, are without limits, except those established by the law and by the owner of the goods.
It is interesting to quickly analyze what is mentioned in article 634 of our Commercial Code which refers to the goods that form part of the trust as autonomous equity set aside for the purpose of the trust. This matter of autonomous equity has been criticized and there have been many questions asked with regards to the idea that the equity entrusted can in no way be autonomous because it is a real element of the contract and must necessarily have an owner. Actually, the majority are of the opinion that all the goods and rights that are entrusted to the trustee should be registered. This is what makes it attractive, if we examine it from another perspective. Once the goods are handed over to the trustee, they cease to be the equity of the settlor and can not be pursued by third parties.
“Trust” implies confidence, the reason being that the trustee should play the role of a good father and he is prohibited from profiting from the goods of the “trust”. In Anglo-Saxon Law, there is nothing that prohibits the beneficiary from also being the trustee and vice versa, but there can not be only one beneficiary in the trust who is also the only trustee, for the simple reason that this person would have absolute control of the goods.Link here.
HOW NEW ORLEANS WAS LOST
There were not enough helicopters to repair the breached levees and rescue people trapped by rising water. Nor are there enough Louisiana National Guardsmen available to help with rescue efforts and to patrol against looting. The situation is the same in Mississippi. The National Guard and helicopters are off on a fool’s mission in Iraq.
The National Guard is in Iraq because fanatical neoconservatives in the Bush administration were determined to invade the Middle East and because incompetent Secretary of Defense Rumsfeld refused to listen to the generals, who told him there were not enough regular troops available to do the job. After the invasion, the arrogant Rumsfeld found out that the generals were right. The National Guard was called up to fill in the gaping gaps. Now the Guardsmen, trapped in the Iraqi quagmire, are watching on TV the families they left behind trapped by rising waters and wondering if the floating bodies are family members. None know where their dislocated families are, but, shades of Fallujah, they do see their destroyed homes.
The mayor of New Orleans was counting on helicopters to put in place massive sandbags to repair the levee. However, someone called the few helicopters away to rescue people from rooftops. The rising water overwhelmed the massive pumping stations, and New Orleans disappeared under deep water. What a terrible casualty of the Iraqi war – one of our oldest and most beautiful cities, a famous city, a historic city. Distracted by its phony war on terrorism, the U.S. government had made no preparations in the event Hurricane Katrina brought catastrophe to New Orleans. No contingency plan existed. Only now after the disaster are FEMA and the Corps of Engineers trying to assemble the material and equipment to save New Orleans from the fate of Atlantis.
Even worse, articles in the New Orleans Times-Picayune and public statements by emergency management chiefs in New Orleans make it clear that the Bush administration slashed the funding for the Corps of Engineers’ projects to strengthen and raise the New Orleans levees and diverted the money to the Iraq war. How can the Bush administration be so incompetent as to expose Americans at home to dire risks by exhausting American resources in foolish foreign adventures? What kind of “homeland security” is this?Link here.
THE U.S. COLLAPSES: A SCENARIO
With the science of psychohistory we can predict the future. We can map out the next 1000 years in detail, and the next 30,000 in outline. Equipped with mathematical models of mass behavior, psychohistorians such as Hari Seldon, of Streeling University, can predict the fate of nations. But neither psychohistory nor Seldon is real. They were invented by Isaac Asimov in his famous Foundation series, which describes the fluctuating fortunes of the Galactic Empire. Now, however, a real-life Hari Seldon has developed his form of psychohistory. In September, ecologist Peter Turchin, of the University of Connecticut, publishes War and Peace and War, a book in which he explains much of pre-industrial world history with his bold and controversial theory of the rise and fall of empires, using the same kind of mathematics that Turchin has used to study ecosystems.
Turchin believes history can be a science, with laws as inexorable as the law of gravity. He claims to have found the general mechanisms that cause empires to wax and wane – laws as true today as they were during the Roman Empire. So the world order is in a state of perpetual change and the global powers today will inevitably be replaced. Turchin’s theory is anathema to some historians. Some regarded his assumptions about human behaviour as simplistic. “Social theory is a minefield, even for those experienced in it,” said Joseph Tainter, a U.S. historian who has studied the collapse of civilizations. Others are opposed to the idea that history has rules analogous to those in science, and that the historian’s aim is to discover them. “History is our interpretation of past thoughts that happened to be written down or otherwise preserved,” says historian Niall Ferguson.
In the second century BC, the Greek writer Polybius proposed that societies are like organisms, which are born, grow, age and die, leading him to predict the decline of the Roman Empire 600 years before the event. The idea of a mechanical science of history became popular in the 18th century, and by the 19th century was held by most “progressive” thinkers. Turchin’s title alludes to Tolstoy’s speculations in War and Peace that history is deterministic, directed by “forces" such as those invoked by Isaac Newton. And Karl Marx echoed Polybius’s belief in cyclic history in his economic theory of why a proletarian revolution was inevitable. But others deplored this reduction of the richness and complexity of history to a clockwork caricature. Turchin knows he is entering a battleground. But his experience in the mathematical modeling of animal populations, such as voles, has given him confidence that the complex processes of human interactions can be captured by such methods too.
War and Peace and War attempts to explain some of history’s grand narratives: the rise and fall of Rome, the expansion of medieval European powers, the Russian conquest of Siberia. Turchin believes these empires were the product of one factor: social cohesion, the willingness of groups to co-operate against opponents. He calls this “asabiya”, an Arabic word denoting “mutual affection and willingness to fight and die for each other”. Using modern understanding of how co-operative behaviour develops in groups of organisms, Turchin’s models suggest that asabiya becomes particularly strong on the frontiers of empires, where two civilisations confront one another. This, he says, was how a small group of Cossacks was able to defeat a much larger army of Tatars in Siberia in 1582. Thus, the “meta-ethnic faultlines” between civilisations are “asabiya incubators” from which new empires spring. Here, either you unite or you die.
The U.S. has all the hallmarks of an empire, Turchin says, and it is one in which asabiya is showing its dark side in nationalism and xenophobia. “Today the most violent clash of civilizations occurs on the meta-ethnic frontiers of Islam with the Western, Orthodox, Hindu and Sinic civilisations,” says Turchin. But if his theory is right, it will be in these conflict zones, such as the borders of Europe, that the next great empires will arise.Link here.
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