Offshore News Digest for Week of June 12, 2006

GLOBAL LIVING & BUSINESS

MARGARITA ISLAND: A WOMAN’S POINT OF VIEW

This island is beautiful-warm and inviting like the people. The Margaritans genuinely care about our perception of their island and are wonderfully welcoming and hospitable. We have been look after by both natives and fellow adventurers and whilst this place is not for everyone, everyone is welcome. The other “transplants” we have met come from all over the world, all walks of life. Many are here to retire with a better lifestyle, others seek excitement or business opportunities. Some have escaped a war torn homeland. But what they all share is a love of the island and an understanding of the need to protect a simpler way of life.

I have been able to find anything I have needed here on the island. The prices vary greatly and the quality may not be the same as you are used to, but if you need it, it is here. Clothing is one of the great passions, so if you need to wear the most trendy, up-to-date clothes, you are gonna love this place! Shoes are also an obsession – every style, color, and whimsy can be found. Believe it or not I was greatly disappointed by all of this. I had expected more of a minimalist approach to clothing … shorts, t-shirt and bathing suits. Although this is fine, people actually dress to impress when away from the beach!

There is a strong Italian influence on the island and you will find this a constant theme throughout the food. Seafood is not as abundant as I had hoped and it pretty expensive. One would think that with ten bazillion fishing villages shrimp and/or lobster would be plentiful and practically free for the taking. Oh well, life goes on. Other things though are very cheap to buy or even make. The “typical” food dishes are like most Caribbean countries … beans, rice, plantains, salad, and an entrée (chicken, meat, or fish).

House prices here are still very low. Because of the vast unpopulated, or scarcely populated areas, I do not see the prices getting out of hand like Costa Rica. At least not anytime soon. There are so many places that remain untouched that it will be quite some time before the island is “filled to capacity.” During the tourist seasons the beaches are packed and rooms are difficult to find. If you plan to come to rent a room long term, make sure it is well before the high season and that the price is fixed. We are renting a condo and took a six month lease just to be sure to have a place during the busy time, but we hope to find a house well before then. There seem to be two schools of thought concerning housing. Some people are pro condo while others are pro single-family residences. The main argument is security, the theory being that in a condo you are more secure and have a better view. Well I have not seen any evidence of that. If you take normal precautions you are no more or less safe in a condo than a single family home.

There is not as much emphasis on the human body as I expected. I guess I thought perfect people with perfect bodies all 20 years old … wrong! There is every size, shape and age you can imagine. This is not where the Latin starlets hang out! With regard to personal safety, well, one of our friends said if you would not do it in your hometown do not do it here. Simple, but true. People in Margarita are just like the people in every neighborhood in America. There are good ones and bad ones, some who are kind, considerate, and loving. This is a great place full of great people. Yes there are one or two that I would not want to meet in a dark ally, so I will not go there. Overall, I think with a sense of adventure and tolerance you will have a blast!

QUALITY OF LIFE AND COST OF LIVING IN BOGOTA, COLUMBIA

When I retired a few years ago I discovered that for the most part, old people in the U.S. are forced into doing old people things, generally with other old people. I knew I wanted more than that. I had lived for the previous 15 years on a beautifully wooded ranch in a pretty rural area near Houston in Texas, but by the time I stopped work, it was surrounded by upscale subdivisions, shopping malls and Walmart.

Prior to my retirement, I had traveled much of Europe, Central and South America, and was always evaluating potential retirement locations. When I realized that my company was going to force me into retirement, I spent a great deal of time surfing the net, reading articles, and trying to determine the real cost of living in various countries. It really is impossible unless you actually go to these places, and stay for at least three weeks. I went to Panama, Chile (which I really liked), Costa Rica, Mexico (the colonial towns), Guatamala (yuk!), Spain, and Canada. My eventual selection was based on family situation and climate. I am married to a Colombian and came to know Bogota really well. Although the city has a reputation for crime, drugs and violence, I felt that it was an exaggerated perception. There are many population centers in the U.S. that suffer just as much from these afflictions.

Bogota, also has, for me, the nicest weather. I had always hated the heat in Texas, along with the massive electricity bills that came with air conditioning. Bogota’s climate is spring-like every day of the year. Daytime temperatures average 68ºF (19ºC), and at night it drops on to about 50ºF (10ºC). Perpetual fall, perfect for me. The city is at an elevation of approximately 9,000 feet and close to the equator. It sits in a large fertile valley with the Andes rising to the east. It is very green and covered with lush plants, flowers, and trees, mostly eucalyptus. The city itself has a cosmopolitan nature, equal, in my view to London, Toronto or Paris. Only a two hour drive to the west of Bogota is Medellin, known as Colombia’s most beautiful city, a vibrant and modern center again with a comfortable climate. While we may be looking for a place we can live more cheaply, most of us are not looking to reduce our creature comforts, nor the availability of the kind of things we enjoy doing. Bogota and Medellin have it all and generally at very affordable prices.

Big difference? The cultural attitude toward older people. Certainly, while there are good and bad people everywhere, those here tend to be noticeably more friendly and helpful. I believe I have made more friends here in a couple of years than I made my whole life in the U.S. We of the older generation are considered to be productive members of society. Parties and other social occasions include young and old and everything in between. People in Bogota tend to be well educated. In some ways, from a university stand point, it reminds me of Boston.

There is of course a lot of poverty here, as in many other South American countries, and indeed the rest of the world, but it seems to be more visible here. But there is also a very large middle class; the average income for professionals (engineers, accountants, lawyers, etc) is about $10,000 a year. It would appear that they live comfortably on that income, and while I am sure they have the same wants and needs as anybody, I get the impression that they live less stressful lives than their American counterparts earning five times the money. For some strange reason there seems to be much more value for the rental dollar than the housing purchase dollar. I would not recommend any expatriot purchase a home anywhere until they have lived there at least a year.

IBM CHIEF CALLS FOR END TO “COLONIAL” COMPANIES

Sam Palmisano, head of IBM, called on multinationals to evolve into a new type of corporation if they are to avoid an anti-globalization backlash that leads to the election of governments hostile to the interests of big business. In a rare public intervention, Big Blue’s chairman and chief executive writes that traditional multinational companies need to abandon their almost colonial approach to operations outside their home country. He cites as examples of this old-style method the way GM, Ford and his own company built factories in Europe and Asia but kept all the research and development in the U.S.

Instead, he argues they need to move towards full global integration of their operations so as to stop the current unease about the forces of globalization turning into an all-out assault on big business. The danger for multi-nationals that fail to change their thinking is that countries will elect political leaders who impose draconian labor regulations or try to constrain free trade.

His views could upset many U.S. anti-globalization campaigners who see offshoring as a threat to U.S. jobs. But to them, Mr. Palmisano replies, “These decisions are not simply a matter of offloading non-core activities, nor are they mere labor arbitrage – that is, shifting work to low-wage regions.” The IBM chief’s decision to go on the offensive comes less than a week after he announced plans to invest $6 billion in India, highlighting the latest step in IBM’s efforts to shed its multinational structure. Last year, it overhauled its European operations to reduce its strict focus on country-level operations, and executives said last week that the move to a global management approach could produce productivity improvements of 3% a year. He says traditional multi-national companies were designed to deal with the “protection and nationalism” that held sway in the 20th century. The modern company, Mr. Palmisano writes, spreads its strategies, production capacity and management around the world in order to be close to markets and customers.

STRONG INVESTMENT PROPELLING BAHAMAS ECONOMY

The Bahamas is set to maintain strong rates of economic growth in the next two years, Perry Christie, the Prime Minister and Finance Minister of the Bahamas, announced in his recent budget statement. Christie told parliament last week that his government’s policies are responsible for the jurisdiction’s current economic success, with the IMF forecasting economic growth this year to hit 5.8%, up from 4.7% in 2004/5. According to the IMF, the future for the country also looks bright, with GDP growth set to continue in the fiscal years 2006/7 and 2007/8 at rates of 6.5% and 6.7%.

Christie claimed that the strong economy can be attributed to “unprecedented” levels of inward investment, particularly in the area of tourism, with virtually every major island of the Bahamas attracting productive investment. The PM also pointed out that international ratings agencies continue to assign some of the highest investment ratings in the region to the Bahamas.

CURAÇAO AND ST. MAARTEN MAY OPT FOR JOINT CENTRAL BANK, MONETARY SYSTEM

Political agreement has been reached between Commissioners of Constitutional Affairs Mike Franco of Curaçao and Sarah Wescot-Williams of St. Maarten on one Central Bank and monetary system for the two islands after they obtain their desired country status within the Kingdom. Wescot-Williams said it had been agreed that the two islands would go back to their respective Island Councils to put the proposal for a joint Central Bank and monetary system on the table.

A proponent of one Central Bank and a joint Court of Justice, St. Maarten does not consider it feasible to have one police force, Wescot-Williams reiterated. The island would also like to have its own Prosecutor’s Office. The Dutch Government stated in a so-called “non-paper” presented a little over a week ago that it would like to see one Central Bank, one police force, one Court and one Prosecutor’s Office for the islands. Wescot-Williams said the islands could disregard some of the undertone of that document, considering that it was a non-paper. Instead, the islands could now focus on the topics in the document. That document, she added, contained some “serious no-no’s” as well as some “ambiguities,” especially where it concerned financial supervision and the interest charges norm. As for the talks with the smaller islands, Wescot-Williams said eventually Curaçao and St. Maarten would have to sit down with them to discuss concrete cooperation.

“The problem with one monetary system for two different entities was that if one of the entities made a mess out of its public finances it would affect the monetary reserves of the other entity at the same Central Bank. But the way the Dutch Government explained the introduction of an interest charge norm and the supervision on compliance with this norm, it’s impossible for an entity to borrow more money that it has,” Franco said, adding that one monetary system would also entail benefits for the commercial sector, because money transfer between Curaçao and St. Maarten would be free of charge, as it would fall under the same monetary system.

FITCH REVISES ARUBA’S OUTLOOK TO STABLE

According to Shelly Shetty, Fitch Senior Director and lead sovereign analyst for Aruba, “The government’s efforts to consolidate public finances in 2005 and measures taken to strengthen the financial viability of the universal health scheme are the key factors behind the revision of the Rating Outlook.” In 2005, the fiscal deficit declined to 3.8% of GDP (on an accrual basis) from 6% of GDP in 2004, and the budget for 2006 is targeting a further reduction to 1.7%. In 2006, the health care scheme (AZV) increased health premiums by two percentage points, which should help in eliminating losses at the AZV. The government has also reformed the public sector pension system for new employees, which should limit the increase in future pension liabilities. The government appears committed to further reducing the fiscal deficit by exercising more expenditure restraint and increasing revenue collection through tax administrative measures and, possibly, a package of tax increases. With these, and even with some slowdown in GDP growth, Fitch expects public debt to begin declining relative to GDP this year.

Aruba’s investment-grade status is well-supported by its relatively high per capita income of over $20,000, which is well above the “BBB” median. Aruba’s market-friendly institutional environment based on a well-functioning legal system, rule of law and legally protected rights, distinguish it from some other similarly rated sovereigns. Aruba’s social and political stability and broad macroeconomic stability since gaining status aparte in 1986 also contrasts with some other “BBB” rated sovereigns. The rating also incorporates Aruba’s strong links and the implicit support this implies for the island from the “AAA”-rated Dutch government.

Aruba’s rating weaknesses include structural weaknesses in its public finances and its small, narrow economy. Financial management capabilities also appear inferior to many other “BBB” sovereigns because the 2006 budget has not yet been passed and the government relies on arrears to suppliers and the broader public sector to finance its deficit. The government is currently preparing a tax reform involving the introduction of a consumption-based sales tax, which would increase the contribution of indirect taxes to total revenue. The reform is intended to increase tax collection by 2% of GDP even though this package may entail tax relief on direct income taxes.

The government and the private sector appear to be in favor of moving towards higher-value-added tourism, and some hotels have already begun renovating their facilities to provide even more upscale services that will allow them to command a high premium on their rooms. Some of the other possible niches for diversification include healthcare and education, which would require a lowering of the higher marginal tax rates and making immigration laws more flexible. Higher growth is essential if Aruba is to improve its debt dynamics and the living standards of its residents. Finally, it is important for Aruba to maintain a strong foreign reserves cushion as it has a pegged exchange rate regime and Fitch views reserve declines in recent years with concern.

WORLD BANK SUPPORTS INNOVATIVE COSTA RICA FORESTRY PROGRAM

The World Bank is co-financing with Costa Rica a $80 million project to experiment with new market-based approaches to sustainable financing of environmental management under the country’s well-regarded Payment for Environmental Services (PSA) program. The project, entitled “The Mainstreaming Market-Based Instruments for Environmental Management Project” enhances the provision of environmental services significant at the national and global levels. There are three project components. Component 1 develops new sustainable financing mechanisms for the PSA Program through a water tariff, a Conservation Trust Fund, carbon sequestration, and voluntary markets for biodiversity conservation. Component 2 supports the National Forestry Financing Fund in implementing an expanded PSA Program through institutional strengthening and payments to participating land users. Component 3 support the National Forestry Financing Fund’s efforts to remove barriers for medium- and small-holder participation in the PSA Program, through technical assistance, capacity building, and secure land rights.

The World Bank says that Costa Rica is at the forefront of biodiversity conservation and natural resources management. Despite being small – 51,100 square kilometers – the Central American country is one of the most biodiversity-rich countries in the world. Because of its location between the Atlantic and Pacific oceans and its various geographic and climatic systems, it has more than 500,000 plant and animal species, a number of which are endemic or near-endemic.

In addition, says the Bank, Costa Rica is one of the world’s leaders in the development and application of market-based instruments for environmental management. Once known as having one of the world’s highest deforestation rates, Costa Rica achieved net reforestation in the early 2000s. This is due in part to the PSA program, which over the past decade has supported forest conservation on privately-owned lands in priority watersheds and key areas within Costa Rica’s portion of the Mesoamerican Biological Corridor. The project seeks to further this effort by putting into practice the lessons of this decade of experimentation.

The central principles of the Payment for Environmental Services approach are that those who provide environmental services should be compensated for doing so, and that those who receive the services should pay for their provision. The PES approach works by establishing a mechanism to connect service users (e.g., water users) to service providers (e.g., landholders), thus internalizing what had been externalities. Properly implemented, PES mechanisms can be highly sustainable, as they do not depend on the whim of donors or government decisionmakers but rather on the self-interest of those who wish to secure or improve their access to services and of landholders who are contracted to provide those services. Costa Rica’s PSA Program is widely considered the most successful application of the environmental services approach worldwide.

CANADA’S SCOTIABANK TO BUY LARGEST COSTA RICAN PRIVATE BANK

Bank of Nova Scotia, Canada’s 3rd-largest bank, agreed to buy Corporacion Interfin SA, owner of Costa Rica’s largest private bank, for C$293.5 million in stock in order to double its branches in the country. The purchase will add 24 offices and 950 employees to Scotiabank’s Costa Rican business, according to the Toronto-based bank. The combined assets will rise to $1.6 billion.

Scotiabank has invested more than C$1 billion since 2000 to expand abroad, primarily in Latin American countries such as Peru, Mexico and El Salvador. Profit from international banking rose 44% in the second quarter, to a record C$270 million. CEO Richard Waugh has said the bank will continue to invest in international markets where it already has a presence, to offset slower growth in Canada. “I think the pipeline of potential acquisitions remains full,” Waugh said in a telephone interview. “Latin America is probably our major emphasis right now.” The bank will have a 13% market share for loans in the country once the purchase closes in about two months, Scotiabank said.

Scotiabank completed a C$390 million purchase of two banks in Peru in March to create the 3rd-biggest bank in that country. The lender also owns Grupo Scotiabank, the 6th-largest bank in Mexico.

LAND VALUE IN URUGUAY SOARS 127% IN FOUR YEARS

Price of land in Uruguay has soared in the two last years with the average going price for a plot of good grazing selling in the range of $1,400 US dollars a hectare (1 hectare = 100 acres), according to the latest report from the Uruguayan Landholdings Institute. Uruguay has an estimated 16 million hectares of good farmland and in the first quarter of 2006 a total of 78,000 changed hands, 40% of which for forestry development. The 2006 first quarter average hectare price was 25% higher than in the same period a year ago. The report also indicates that if, as expected, the pulp industry takes root in Uruguay in spite of the controversy with Argentina, values can be forecasted to further increase.

According to the Institute the average price for a hectare of grazing land increased 16-17% in 2005 over the previous year. This means that the average hectare last year was selling at $1,115 which in real value is among the highest in history in U.S. currency. Land in Uruguay dropped to a historic minimum in 2002 following the Argentine financial crisis and outbreaks of foot and mouth disease, but since then have rocketed to the current values which represent an average jump of 127%. As in non-subsidized agriculture countries, value of land in Uruguay is highly vulnerable closely linked to the international price of farm commodities and taxes on land and crops.

MAURITIUS RETOOLING ECONOMY TO ATTRACT FOREIGN INVESTMENT

The creation of jobs, promotion of employment and return to growth by securing the transition to a globally competitive economy were the main priorities of the 2006-2007 Mauritius government budget, which was presented on June 9 by the Deputy Prime Minister and Minister of Finance and Economic Development, Mr. Rama Sithanen. The budget comprises 40 major reform measures aimed at opening the economy to foreign investors and attracting foreign talent by simplifying business procedures. The government expects these reforms to improve the country’s standing as an investment destination by attracting foreign investors, knowledge-based industries and technology to develop new economic pillars and stimulate job creation.

Other important measures include a major restructuring of Income Tax, the introduction of a National Residential Property Tax and the gradual raising of retirement age from 60 at present to 65 in 2018. Mr. Sithanen also underscored the need to address the fundamental weaknesses in tax and expenditure policies, in fiscal administration and expenditure procedures and in debt management.

IRELAND RATING AT RISK FROM AGEING POPULATION

The ageing Irish population is threatening to put severe pressure on the country’s public finances and its AAA credit rating, Standard & Poor’s warned. The warning, which comes as a number of industrialised countries grapple with pensions crises, underlines the growing importance of age-related spending when judging the creditworthiness of government debt. S&P said Ireland needed to put into effect concerted policy and fiscal reforms to avoid a deterioration of its public finances stemming from rises in age-related spending. Without them, Ireland’s credit rating could head into the “junk” or sub-investment grade in the next couple of decades. Trevor Cullinan, credit analyst at S&P, said that without further reforms, total age-related public expenditures in Ireland would rise to 20.9% of GDP in 2050, up from 11.2% in 2005.

The potential fiscal deterioration would mean that Irelands credit rating would fall from AAA into the AA category after 2015, dropping further into the A and BBB categories by 2020 and 2025 respectively. In 2030, Ireland’s debt would be more typical of that associated with speculative-grade-rated sovereigns. But S&P said such a scenario was not a prediction and pointed out that it was “highly unlikely” that governments would allow debt and deficit burdens to spiral out of control.

EU FINANCE MINISTERS ENDORSE SLOVENIA’S EURO SWITCH

EU finance ministers, including Slovenia’s Andrej Bajuk, gave Slovenia the go-ahead to become the 13th member of the eurozone on 1 January 2007. The approved euro changeover was the consequence of Slovenia’s “focused policies and its attempts to understand the criteria it needed to meet. A broad consensus was reached in the country, allowing us to suitably change the monetary and fiscal policies,” Bajuk said.

Yet all was not rosy at the meeting, as Slovenia was also issued some warnings regarding the need to keep inflation under control and to retain financial discipline, he revealed. The EU’s warnings also touched upon the stability of the public finance system, largely connected, Bajuk believes, to Slovenia’s low birth rate. However, such issues can be resolved if the country achieves the necessary consensus, he added. At the same meeting the ministers did not endorse Lithuania’s entry into the eurozone. Bajuk labelled that decision as expected, as the rules were known in advance and all candidate countries were treated in the same way. He observed that changes to the conditions for eurozone entry should be discussed. Slovenia has tried to open the issue during the drafting of the European constitutional treaty, yet was not listened to, he said.

TAXES

LONG-DISTANCE CALLERS CAN CLAIM TAX REFUND

It may be time for big talkers to start pulling out their phone records. An obscure federal tax on long-distance telephone service, imposed in the late 1800s to fund the Spanish-American War, is finally being phased out because of court challenges. The result? Millions of customers are due refunds for taxes that they have paid in the last three years. “Everybody is going to have an interest in this,” said Eric Smith, a spokesman for the IRS. “Anyone who has paid for long distance services would be due a refund.”

For people who do not spend a lot of time gabbing on the phone, the refunds could be minimal – anywhere from $20 to $50 a person. But for those who regularly pay substantial bills for long-distance and cellular service, the amounts may be well worth documenting. “We had a charge of $3.79 last month. You add that up and it’s $147” over a little more than three years, Bill Hardekopf, chief executive of SaveOnPhone.com, a Birmingham, Alabama-based phone discount comparison service, said, referring to his small company’s phone bill. “That’s worth pulling records for.”

Virtually anyone who has paid for long-distance or cellular phone service in the last three years is entitled to a refund. But nothing is automatic. You will need to file a refund claim when you file your 2006 federal income tax return, Smith said. Even people who do not need to file 1040 forms because they do not earn enough to pay taxes may want to file next year simply to claim this refund, he added. The federal excise tax was levied on telephone services in 1898 as a temporary measure to help pay for the Spanish-American War. Like many taxes in those days, it was meant to hit only the wealthiest Americans. The telephone was a rarity then, having been invented only 22 years earlier. The war was short, lasting a mere eight months, but the tax was never repealed.

The IRS is trying to figure out how to handle more than 100 million expected refund claims, many of which are likely to be for small amounts. The agency said all refund requests should be made on 2006 returns, which cannot be filed until January. The agency is working to add a line to the commonly used tax forms – the 1040, 1040A and 1040EZ – to provide a simple way to make a claim. It also is considering creating new forms for people who do not normally file returns, because they do not earn enough to owe tax, so they can file an excise tax refund claim with minimal hassle. The tax amounted to 3% of “toll” or “bundled” charges. Consequently, a consumer who paid $250 a month in such charges since February 28, 2003, would be filing a claim for about $300 in overpaid taxes.

U.K. SOCIETY OF TRUST & ESTATE PRACTITIONERS WELCOMES REVERSE ON TRUST TAX TREATMENT

Following strong representations from STEP and other professional bodies, the UK government has returned to the pre-Budget position for spouses safeguarded by trusts in wills, it emerged last week. As a result, spouses will not be in danger of losing their family home, and Muslim families can still make Islamic wills. However, the new regime creates a series of different choices for families that may make their existing wills unsuitable.

John Riches, Chair of STEP’s Technical Committee, announced that, “STEP is delighted that the government has listened to us and has returned to the pre-Budget position for spouse exemptions. This change means that people in second marriages will still be able to use trusts in their wills to protect both their spouse and the children of their first marriage without incurring a tax charge. Muslim families will still be able to use trusts to comply with Sharia law.”

The changes also go some way towards allaying fears that irresponsibility would be encouraged by making children receive capital from a trust at age 18. Now, there is the option to leave children the capital on trusts on terms broadly similar to pre-Budget accumulation and maintenance trusts where they must receive their capital by age 25. In this case, the trusts will not become subject to the 6% regime until the child attains age 18 – the additional premium to be paid for leaving the capital in trust for 7 years after age 18 is 4.2%.

EU MAY ALLOW PAN-EUROPEAN TRANSFER PRICING COMPARABILITY

The EU Transfer Pricing Forum has accepted as an official submission a Deloitte Touche Tohmatsu (DTT) economic analysis which concluded that pan-European transfer pricing documentation was more reliable in many cases than a country-by-country approach. The analysis responds to a growing debate over the selection of comparables in using the transactional net margin method. Many practitioners now believe that a pan-European set of comparable companies provides a more reliable measure of an arm’s length result than the use of comparables from only the country where the tested party resides.

U.S. SENATE FALLS A FEW VOTES SHORT OF REPEALING ESTATE TAX

The U.S. Senate had a golden opportunity to repeal the federal estate tax last week, but fell a few votes short. I fear that vote might represent the high-water mark in the movement to get rid of this destructive tax once and for all. Fortunately, estate taxes no longer devour 60% of some individuals’ wealth when they die. Congress passed legislation in 2001 that reduced estate tax rates and increased the amount of assets exempt from the tax. Yet Congress has been unable to abolish the estate tax altogether, and due to a political compromise the old rates will be back in effect come 2011 unless Congress acts first.

The estate tax raises very little money. In fact, even at its height the estate tax accounted for only a little more than 1% of federal revenues. A congressional Joint Economic committee report estimates that Americans spend as much avoiding estate taxes – paying attorneys and accountants – as they do paying estate taxes. A study by a Stanford professor concluded that “True revenues associated with estate taxation may well have been near zero, or even negative.” It is no longer a matter of tax policy or economics – the arguments in favor of the estate tax have all been demolished. Instead, the estate tax survives purely because of politics.

The real motivation behind the estate tax is a deep-seated hostility to property rights, and a misguided fear of family dynasties. But people do not keep money in mattresses anymore. Money inherited from an estate is either spent, saved, or invested – all of which are better for the economy than sending it to Washington, where bureaucratic overhead consumes at least 50 cents of every dollar. If you truly own your property, you have the right to dispose of it any way you wish. You can sell it, give it away, or direct who will receive it when you die. This control is the essence of property rights. If you cannot control what happens to your property, you do not really own it.

As William Beach at the Heritage Foundation summarizes, the estate tax does four things – all of which are bad for the economy and frankly un-American:

First, it discourages savings and investment.
Second, it undermines job creation and wage growth.
Third, it stifles investment.
Forth, it contradicts a central premise of American life, namely, building wealth and “getting ahead.”

For all of these reasons, it is time to get rid of the estate tax once and for all.

ACADEMIC RESEARCH BACKS LOW TAX JURISDICTIONS

The Center for Freedom and Prosperity Foundation (CFP) has published research showing that tax competition between nations benefits the global economy, leading to better economic performance. The CFP released a research paper, entitled “Tax Havens, Tax Competition and Economic Performance”, which finds, through a review of the recent scholarly literature, that low-tax jurisdictions promote global economic growth. The study presents evidence that so-called tax havens provide a tax-efficient platform for cross-border investment, help boost capital formation, and also encourage pro-growth tax policies in non-tax haven countries – all of which boost economic performance. The paper also points out that the U.S. is the world’s largest beneficiary of tax havens and tax competition, both because the U.S. is a tax haven for foreigners and because tax havens facilitate the flow of capital to the American economy.

Andrew Quinlan of the CFP said, “This thoroughly researched study demonstrates that low-tax jurisdictions play a vital role in boosting capital formation and thus promoting global economic growth. The U.S. is a disproportionate beneficiary of this process, since America is the world’s largest tax haven.”

Daniel Mitchell, of The Heritage Foundation said, “So-called tax havens have played an important role in the global shift to lower tax rates. But equally important, they provide a refuge for investors and thus minimize the destructive economic impact of anti-savings, anti-investment tax policy in high-tax nations.”

SOUTH AFRICA RELAXES BUSINESS TAX AMNESTY TERMS

The South African government has decided to improve the terms of a tax amnesty aimed at small businesses, after listening to the concerns of small business owners regarding the original proposals. Finance Minister Trevor Manuel announced at a press briefing earlier this week that an incremental levy will be imposed on income declared under the amnesty up to a maximum level of 5%. This replaces the original plan to impose a 10% flat rate of tax on the previously undeclared income.

Under the new proposal a 2% rate will be applied to taxable income of R35,000-R100,000, 3% on income of R100,000-R250,000, 4% on income of R250,000-R500,000, and 5% on income of R500,000 or above. An additional change will mean that the levy will be based on taxable income for the 2005/6 tax year rather than the the 2004/5 year, as initially proposed. The amnesty will begin on August 1, 2006 and will remain in place until May 31, 2007.

SOUTH KOREA SEEKS INFO PACTS WITH TAX HAVENS. COOPERATION UNLIKELY TO COME EASILY

The government is planning to try and obtain agreements with Bermuda, Cayman Islands, the British Virgin Islands, and other tax havens to exchange financial transaction and tax record information of foreign investors. Exchanges of this financial and tax-related information is essential for the government to levy taxes on gains made there by foreign investors based in tax havens. However, the tax havens are expected to be uncooperative in exchanging these data, as they need to protect their foreign clients’ privacy rights. Still, the government plans to press ahead with the plans to try to secure evidence for collecting taxes from foreign investment funds investing in South Korea via offices located in those tax havens that have not yet clinched double-taxation avoidance treaties with Korea.

JERSEY REPORTS EUROPEAN SAVINGS TAX DIRECTIVE COLLECTIONS

Jersey’s Comptroller of Income Tax has reported that £13 million has been collected in withholding tax revenues from bank deposits in the first six months of the European Savings Tax Directive. Under the terms of the agreements with individual EU member states, which went into effect on July 1, 2005, 25% of the amount collected is retained by the collecting authority. Accordingly the EU Member States will receive some £10 million and the Jersey Exchequer will receive some £3 million. According to the Jersey government, this is in line with the initial estimates.

Individuals who reside in an EU Member State with relevant savings income arising in Jersey can opt for information on the savings income received to be exchanged with their domestic tax authority rather than be liable to the retention tax. It is estimated that approximately 30% have chosen this option, but the Jersey authorities expect this pecentage to increase with time. (The retention tax will eventually increase to 35% under the terms of agreements).

IRS COMMISSIONER SPEAKS BEFORE SENATE ON BUSINESS COMPLIANCE ISSUES

Rapid global expansion, complexity of tax code cited as making administration complicated.

IRS Commissioner Mark Everson appeared before the Senate Finance Committee to discuss compliance issues in relation to large and mid-size businesses. He started by explaining that the IRS Large and Mid-Size Business Division’s taxpayer base, though small in number relative to the overall taxpayer population, consists of the largest businesses in the U.S., including corporations, sub-chapter S corporations, and partnerships with assets greater than $10 million, including over 6,100 publicly traded companies. LMSB taxpayers most recently filed approximately 176,000 income tax returns, and while the overall large business population base remains relatively stable in number, the IRS continues to see an increase in complex business structures and pass-through return filings.

“LMSB taxpayers are sophisticated, well-capitalized, well-organized, and adept at planning. Particularly in the case of public companies, they are driven to show high after-tax profitability to shareholders in a very competitive and complex economic environment. They have the resources and willingness to aggressively defend and contest tax positions,” he stated. “Those factors and others influence the results that appear when we attempt to capture the portion of the tax gap attributable to these businesses. [Estimated underreporting] non-compliance by larger corporations in 2001 [is] $25 billion. The estimate for all corporations is $30 billion.”

Everson warned that tax administration is complicated by (1) The rapid pace at which businesses are continuing to expand globally. (2) The Internal Revenue Code continues to expand, becoming more complex and challenging to administer. (3) Large businesses are increasingly engaging in sophisticated transactions for both non-tax purposes and tax purposes, resulting in complex relationships with multiple filing requirements. And (4) companies strive to reflect the highest possible after-tax profits on their financial statements while at the same time being incentivized to report the lowest possible taxable income and tax liability.

“We have taken a proactive approach to dealing with the challenges of effective tax administration in the environment described above. Overall, our strategy depends on making compliance checks as much as possible on a real-time or near-real-time basis, being as current in our examinations as possible, and having as much transparency to book-tax differences and other indicators of risk as possible. To that end, we have initiated several programs that foster transparency, currency, pre-filing compliance opportunities, and improved efficiencies in issue and risk identification.”

U.S. HOUSE LAWMAKERS BLOCK PRIVATE TAX DEBT COLLECTION

The U.S. House of Representatives has approved legislation that will result in a cut to the IRS’s funding request and block a controversial measure to allow private collection companies to collect outstanding taxes. In a 406-22 vote, the House approved a $10.5 billion 2007 fiscal year budget for the IRS budget which fell $104.5 million short of the funding request in President George W. Bush’s budget. The IRS budget is part of a $139.6 billion spending bill for the Treasury, Transportation and other agencies. The Senate has yet to draft its own version of the bill.

The outcome of the vote attracted criticism from IRS Commissioner Mark Everson, who has warned that the budget cut will lead to job losses within the agency. He also condemned the move to block plans to introduce private companies to collect delinquent taxes which, he argued, would improve tax collection while saving the IRS money. However, this was an argument rejected by Rep. Steve Rothman (D-New Jersey), sponsor of the appropriations bill blocking the use of private collection agencies. The Rothman Amendment survived a major hurdle in the House when a Republican attempt to strike the amendment on a technicality failed and a counter-amendment threatened by Rep. Bill Thomas (R-California) was not offered at the last minute. Rothman says that not only does the private collection scheme have a large start-up cost of $56 million, but also lets private debt collection agencies charge 25 cents for every dollar collected while additional IRS employees will only cost the government 3 cents for every dollar collected.

COULD A HUGE TAX BREAK BE BEHIND PAULSON’S WILLINGNESS TO BE TREASURER?

Henry M. Paulson, Jr., who has been nominated for the secretary of the U.S. Treasury and a member of President George W. Bush’s cabinet, is selling the idea that he has given up a $38 million annual salary as the CEO and chairman of Goldman Sachs Group to take a $183,500 job as a humble public servant. This is pure claptrap. Paulson did not rise to the top of that shark tank that is arguably the finest Wall Street investment bank on the planet by being a dupe. If the Senate approves Mr. Paulson’s nomination – as is expected – he will receive a job perk that is only given to the privileged few. He will have the opportunity to take advantage of a tax loophole that will save him roughly $100 million. And, when I say save $100 million, I do not mean tax-deferred until a later date. I mean actually keep the $100 million in his pocket.

In 1989, then-President George H.W. Bush signed a bill that would grant a tax-exemption to individuals required to liquidate all or part of their stock holdings in order to accept a position in the West Wing. The purpose of this tax loophole is to allow government officials to defer capital gains taxes on assets they have to sell to avoid a conflict of interest. The proceeds, though, have to be reinvested in government securities, like U.S. Treasury bills and notes, or a broad array of mutual funds approved by the government. Once the proceeds are diversified within the approved investments, the capital gains taxes are deferred until the holder decides to sell the securities at a later date. Think of it like a temporary tax-deferred IRA with no penalty for early withdrawal. To make the exemption official, a cabinet nominee would need to obtain a “certificate of divestiture” from the Office of Government Ethics within 60 days of the sale of the assets. This, however, is a piece of cake considering a long list of approved options is available for investment.

If the government official receives the “certificate of divestiture” and allocates their holdings into a government approved list of securities, thus deferring any capital gains taxes, and then dies, the official will forever escape the tax. What a deal! Paulson owns 3.23 million shares of Goldman Sachs stock, worth an estimated $484 million. He also has a truckload more in restricted stock and options worth another $200+ million. If he were to sell his Goldman holdings, he would be staring at a tax bill well over $100 million dollars, according to a top tax and accounting analyst. Once his nomination is approved, Paulson will most likely take advantage of the tax break, but he will also be thinking of these holdings for the rest of his life. Paulson is only 60 years of age, and will have a rare opportunity to offer his heirs a tax break of colossal proportions.

One has to wonder how much this tax break played into Paulson’s decision into taking President Bush up on his offer for the U.S. Treasury job. After all, Paulson had originally turned the president down, only to change his mind a week later. One must wonder if his former colleague, Mr. Rubin, took him out to lunch and suggest he take advantage of this legal policy while he has the chance. Who knows?

TAX GOUGING: THE REAL PROBLEM

The single most important tax reform of the 1980s was the indexation of the federal income tax to inflation and the reduction of the number of federal income tax brackets from 15 to 3. Prior to that, ordinary middle class workers were pushed up into higher and higher tax brackets by simply receiving cost-of-living pay increases. The result was that a couple of years of cost-of-living increases actually reduced your standard of living by diminishing your overall take-home pay after taxes while enriching the state. Under this corrupt scheme the Federal Reserve would print excessive amounts of money, which created inflation. The inflation led to cost-of-living increases that in turn led to “bracket creep” and higher tax payments. The federal government’s budget became bloated while the taxpayers suffered.

The federal government is no longer capable of plundering middle-class taxpayers in this particular way, thanks to indexation. But state and local governments do through the vehicle of property taxation. The Fed’s expansionary monetary policy over the past decade has caused artificially low interest rates, which have fueled the real estate boom (or bubble, as some would say). Along with extraordinary increases in property values has come equally extraordinary property tax increases all across America. In my own state of Maryland, local governments in the Baltimore area alone collect about 35% more in property tax revenues than they did in 2000. Are Baltimore’s schools 35% better? Are the police 35% more efficient? Are citizens getting a third more services from City Hall? Of course not. They are simply paying that much more for the same crappy “services”.

State and local politicians are reveling in “budget surpluses”, which should be more appropriately named undeserved windfall “profits”. These revenue increases are the result of an extreme form of price gouging by the state which is, after all, a monopoly in all that it does. On top of higher property taxes, many homeowners who have sold their homes have also been snared by capital gains taxes, not to mention the confiscatory “property transfer tax” in some states, which gives the government its percentage “take” of every real estate transaction, not unlike how the Tony Soprano gang of HBO fame goes about its business of making “collections” from local merchants.

The property tax bonanza that is being enjoyed by state and local governmental bureaucracies creates yet another evil. Whenever state and local governments experience windfalls such as this they use the money to appease more and more special interest groups by starting up myriad new programs. Then when the real estate market cools, or the economy in general slows down, the programs all remain in place while revenues shrink, creating a “deficit crisis” – which in turn leads to calls for even more tax increases, which impose further harm on the local economy. There is never any mention of making government more efficient because government cannot be made more efficient any more than a cat can be taught to bark like a dog. Thus, property tax increases today inevitably lead to even more increases in the future, while impoverishing taxpayers more and more and damaging local economies.

During the early 1990s, after the last big real estate boom (of the 1980s), states that had experienced more modest revenue growth were in the best financial condition because they were limited in their ability to go on wild spending binges. State and local politicians are monopolistic price gougers. Every one of them should be thrown out of office this fall, just for the fun of it.

ASSET PROTECTION / LEGAL STRUCTURES

HOW TO EARN $164,800 EACH YEAR, TAX-FREE, BY LIVING ABROAD

If you are a U.S. citizen living offshore, you can save big on income taxes on your earned income – up to $82,400/year if you are single and $164,800 if you are married and your spouse accompanies you abroad. You can obtain additional tax credits for your housing expenses. Living offshore makes it much easier to operate an offshore business and legally defer taxes on the profits. To qualify for this “foreign earned income exclusion”, or FEIE, you must pass one of two tests established in the U.S. Tax Code.

(1) Bona fide residence test. If you have established legal residency in another country for an uninterrupted period of at least one year, you qualify under this test. (2) Physical presence test. You qualify under this test if you are physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months. You must also be able to prove that you have a new “tax home” outside the U.S., although there is no requirement that you live in a country that imposes an income tax. For instance, you can live in a country without an income tax, such as The Bahamas, and not be subject to any tax on the first $80,000 of your earned income. Or, in a country like Panama, that taxes only domestic income, and all your earned income derives from non-Panamanian sources, not subject to any Panamanian tax.

To qualify for this tax savings, you must continue to file U.S. tax returns, and attach IRS Form 2555 each year with your return. And if you live in a country that imposes income taxes, you must pay them-although you may credit any foreign income taxes paid against income tax you owe in the U.S. You are also required to still pay U.S. tax on unearned income – interest, dividends, royalties, etc. You must also continue to pay Social Security taxes if you are working for a U.S. employer or if the country you are living in has a “totalization agreement” in force with the U.S. (fortunately, most countries do not).

Without the FEIE, U.S. citizens living abroad would be subject in many cases to double taxation-both by the United States and their new country of residence. That would make companies that employ U.S. citizens abroad uncompetitive in the global marketplace. Unfortunately, Congress is having second thoughts about providing this benefit. The $70 billion tax cut recently passed by Congress including several “revenue enhancing” measures-including some important new restrictions to the FEIE. Among the most severe was limiting the ability of employers to offer tax-free housing to U.S. employees working abroad. In addition, the amount of foreign earned income that surpasses the level of exemptions will be taxed as though the income was earned in the U.S., at a much higher rate. Further, income from foreign retirement accounts can in certain cases now be taxed. Still, even with these new limitations, short of giving up their U.S. citizenship, the FEIE is the best deal that Americans living offshore have to reduce their U.S. tax liability.

IDENTITY THIEVES MOVE FROM PHISHING INTO PHARMING

In a world where millions of online transactions are conducted every day, it did not take long for most Internet users to become aware of phishing scams and avoid the phoney emails from crooks looking to steal personal information and clean out bank accounts. But even the most savvy surfer might be fooled by the next generation of fraudsters that have developed a more devious way of tricking consumers known as pharming. This new form of fraud does not require any clicking of external links. Rather, it redirects the browser to a phoney site even when the proper URL is entered.

With phishing, criminal networks send out mass emails made to look like they are from legitimate companies to people who may not even have an account with the actual organization. These emails are easy to spot with a suspicious eye as they usually have spelling mistakes, do not have the customer’s name attached and ask for information a bank would not ask for online. Pharming is much harder to spot. Hackers set up phoney web sites to look exactly like the real deal, redirect the users’ browser to their site and steal any personal information that is provided. Although there have been no large-scale cases of pharming yet, the fact that users could enter what they think is a genuine URL and unwittingly submit personal information makes for a scary scenario.

Pharming has been around for some time. Also known as framing or domain name spoofing, the latest technique is known as domain name system (DNS) poisoning. The URL for a website is linked to a numeric IP address and that address is what brings users to the proper web site. Hackers can crack the DNS and change the address linked to the URL. “They generally have the look and feel of the real sites. I’ve seen some very sophisticated fraudulent sites,” said Shelley Jones, a trademark specialist. One high profile case of suspected pharming happened in January 2005 when someone hacked into Panix.com, a New York State-based Internet provider, and re-routed users before it could be shut down a few days later. In 2004, Ebay’s German domain Ebay.de was targeted. Popular phishing sites like retailers and banks are also on high alert.

So how do users and companies protect themselves? Ms. Jones sees new firewalls and security certificate software becoming more important in the future to keep these predators out. Some companies are also looking into creating holograms or other optical cues for their websites that can not be duplicated, much like security features on a banknote.

BANKRUPTCY FILINGS RISE AFTER “REFORMS”

The 2005 bankruptcy reform law was pushed through Congress by banks and credit card companies that sought to prevent abuse by individuals trying to wipe their financial slates clean from runaway debt. By making it more difficult to file for personal bankruptcy, the companies reasoned that consumers would be more likely to negotiate a repayment plan. “I think the law so far is working as it was intended,” said James Chessen, chief economist for the American Bankers Association.

But credit card companies and banks are keeping an eye on the recent increase in filings. The law took effect on October 17, 2005, prompting a surge of 619,322 personal bankruptcy filings for that month as debt-laden consumers rushed to court. New cases plunged to 13,758 in November, and have been steadily rising since, to 49,977 in March.

U.K. SOCIETY OF TRUST & ESTATE PRACTITIONERS SAYS U.S. STATES UNDERMINING TRANSPARENCY

STEP has argued that U.S. states are undermining an initiative by the OECD to track global financial data. By continuing to incorporate anonymously-owned U.S. companies for foreigners, the states are ignoring new international “transparency” standards even while their government demands that other countries adopt them, the Society argued. The OECD’s recently issued report, “Tax-Cooperation: Towards a Level Playing Field”, looked at how 82 countries collect and exchange tax information. The report was undertaken following complaints from small finance centers about OECD countries demanding onerous data tracking obligations they were unwilling to implement at home.

According to STEP, the OECD report showed that most small countries with international finance centers have put in place mechanisms which enhance transparency and exchange of information for tax purposes. But U.S. states such as Delaware, Nevada and Wyoming still fall far short of what the OECD is demanding of small countries in terms of transparency and exchange of information. In April 2006, a report by the U.S. Senate’s General Accounting Office (GAO) stated, “Most states do not require ownership information at the time a company is formed and while most states require corporations and limited liability companies to file annual or biennial reports, few states require ownership information on these reports.” The report also noted that most law enforcement officials interviewed by the GAO had said they had closed cases “that reached dead ends because of the lack of U.S. company ownership information”.

NEW DUBAI TRUST LAW TO FACILITATE REITS

The Dubai Financial Services Authority (DFSA), the independent regulator of Dubai International Financial Center (DIFC), is moving ahead with legislative enhancements to introduce Real Estate Investment Trusts within the DIFC jurisdiction. Analysts view REITS as the the next big asset class in the offing that will make Dubai’s booming real estate sector more liquid and accessible to the international investors. REITs offer the benefits of being a landlord while avoiding many of the hassles, and offering a more liquid investment option than directly owning a property. The downsides are that the investor will have no control over when the company will sell its holdings or how it will manage them. REITs are a rather conservative investment, with long-term returns lower than common stocks of other industries. This is because rental revenues do not usually vary as much as revenues at a manufacturing or service firm. The region’s fast growing interest in Islamic investment market makes REITs an investment option that has great potential in the Middle East. Muslim investors strongly prefer real estate as an asset class.

BANK OF IRELAND WARNS SSIA HOLDERS AGAINST “GET RICH QUICK” SCHEMES

Bank of Ireland last week congratulated the first batch of maturing SSIA holders, and also issued a warning to all SSIA customers with matured funds to be wary of “Get Rich Quick” schemes which may be offered to them by fraudsters. The Bank published details of some of the more common types of fraud which may be awaiting those with newly matured plans.

“It is expected that con-artists will do their utmost to capitalize on the surplus money that will enter the economy. Many bogus investments are presented as offering short term, low risk, and high value returns. The reality turns out to be long term, high risk and no value returns. There is substantial risk involved and we would advise all SSIA holders to ensure that they don’t become victims of such frauds,” explained Gerry Gibson, Manager of the Group Fraud Prevention Unit with BoI. “It is virtually impossible to put a figure on the amount of money taken annually by fraudsters. However, anecdotal evidence would suggest it is on the increase and it is very likely that fraudsters will be keen to target maturing SSIA funds.”

According to BoI, six of the more common types of fraud are:

• Pyramid schemes
• Investment schemes offering a range of options
• “Boiler room” stock broking scams
• Lottery scams
• Free holiday offers
• Charity frauds

PRIVACY

THE GREAT NO-ID AIRPORT CHALLENGE

Jim Harper left his hotel early Thursday at 5:30 a.m. to give himself more than two hours to clear security at San Francisco International Airport. It was not that he was worried the security line would be long, but because he accepted a dare from civil liberties rabble-rouser John Gilmore to test whether he could actually fly without showing identification. Gilmore issued the challenge at last week’s meeting of the Department of Homeland Security’s privacy advisory committee in San Francisco, which otherwise lacked much in the way of controversy. An entrepreneur and co-founder of the Electronic Frontier Foundation, Gilmore recently lost a court battle seeking to unmask the government’s secret regulations asking passengers to show identification when flying, and to have those rules declared unconstitutional. Scolding the DHS committee for dithering over small matters, Gilmore said that it should be investigating the NSA’s eavesdropping program and that the committee’s real job was to “protect the homeland from mean-spirited officials.” Gilmore then dared committee members to place their driver’s licenses in the envelopes he had passed out, mail them to their home addresses and then attempt to fly home without identification.

While signs in the airport and on the Transportation Security Administration website insist that showing ID is mandatory, the official policy, as revealed by the judges’ decision (PDF file) in Gilmore’s case, is that “airline passengers either present identification or be subjected to a more extensive search.” But Gilmore said that is not what really happens in an airport when one refuses to provide identification. “You will find out what the real rules are,” Gilmore said. “Are you afraid to? You have good reason.”

At the meeting’s close, Harper, a committee member, said he would take the challenge so long as he could hand his envelope to a reporter who accompanied him to the airport. He also challenged the other members to join him. None of the other committee members volunteered. At 6 a.m. the next morning, Harper handed this reporter a green, self-addressed stamped envelope and entered the checkpoint line, which even at that early hour was filled with travelers facing a 20-minute crawl to the magnetometers. Harper told the identification checker he had no ID, and the attendant quickly wrote “No ID” with a red marker on his ticket and shunted him off to an extra screening line – generously allowing him to bypass the longer queue of card-carrying passengers. There Harper was directed into the belly of a machine that shot bits of air at his suit in order to see if he had been handling explosives. TSA employees wearing baby blue surgical gloves then swiped his Sidekick and his laptop for traces of explosives and searched through his carry-on, while a supervisor took his ticket, conferred with other employees and made a phone call.

The TSA supervisor asked Harper why he did not have identification and to where he was traveling. But she was satisfied enough with his answer – that he had mailed his driver’s license home to Washington D.C. – that she allowed him to pass. At 6:30 a.m., standing 50 yards away on the other side of the glass screen, Harper phoned to say he now had two hours to kill, having gotten through screening perhaps even faster than he would have if he had shown ID. He guessed he was able to get through without much hassle by being polite and dressing well.

Why did he take the challenge? “Part of it was my concern with the growing use of identification checks to control access to society, such as buildings, stadiums and air travel,” Harper said, referring to issues that are central to his recently published book called Identity Crisis. And will he do it again? “Yeah, I’m inclined to do it more and more and hopefully more people will follow my lead and it will become a clear option to not show government ID to fly. My identity has nothing to do with the real risk. In fact, today, I’m the safest guy on the plane.”

SEAGATE’S NEW HARD DISK DRIVE FOR LAPTOPS ENCRYPTS DATA

Seagate Technology has introduced its new HDD for mobile computers that can automatically encrypt the data stored on it. Even though modern laptops can provide pretty advanced access protection mechanisms, for those, who want to get unauthorized access to something they are not supposed to see, there many possibilities. Momentus 5400.2 FDE eliminates one of them.

Seagate said that lost or stolen notebook PCs can cost companies millions of dollars in compromised trade secrets and intellectual property and threaten consumers with the high cost of identify theft. Momentus 5400.2 FDE performs all cryptographic operations and key management within the drive. For users, only a password is needed to self-authenticate for full drive access, which greatly simplifies the ownership of a computer featuring the technology. The new hard drive carries a special chip that performs 128-bit AES encryption at the speed, which matches the bandwidth of HDD’s interface, e.g., Serial ATA 150Mb/s. Given that the chip is specially tailored for encryption operations, it provides higher energy efficiency compared to software-based approaches, which require the power of the central processing unit.

WHO HAS BEEN READING YOUR EMAIL?

According to a new report by Forrester Consulting, companies estimate that around one in every five outgoing emails contains unacceptable content, with “adult, obscene or potentially offensive” material the most commonplace. As a result, almost a third of companies have fired an employee for violating email policies in the past year. Seven out of 10 UK firms and more than half of those in the U.S. have also disciplined an employee for violating email policies over the past 12 months.

The study found that 38% of U.S. and UK companies with 1,000 or more employees hire staff to read or analyze outbound email, with companies employing more than 20,000 workers even more likely to do so. But companies do appear to have good reason to worry. More than half of UK firms and one in three of those in the U.S. have investigated leaks of confidential or proprietary information in the past year and over a third have dealt with violations of privacy or data protection regulations. Around a third of the firms surveyed admitted that their business has been impacted by the exposure of sensitive or embarrassing information. One in five U.S. firms and one in seven of those in the UK have suffered the improper exposure or theft of customer information, while 15% of firms on both sides of the Atlantic have fallen victim to the theft of intellectual property.

The study also found that other communications channels, such as blogs and instant messaging, are increasingly emerging as sources of risk for companies. In particular, more than one in five firms said that they have disciplined an employee for violating blog or message board policies in the past 12 months with some 7% of U.S. firms and 4% of those in the UK going as far as to sack an employee over the same infraction. More than one in 10 public companies also found themselves having to investigate the exposure of material financial information via a blog or message board posting in the past year.

REACH OUT AND TAP SOMEONE

The NSA has been tracking the calls of millions of Americans and constructing the “largest database ever assembled in the world,” USA Today revealed on May 10. The nation’s biggest telephone companies have apparently turned over masses of personal records to the feds, allowing Uncle Sam to build up a database of the phone numbers of incoming and outgoing calls of Americans. The revelations blew to smithereens the Bush administration’s story that only international calls were being tapped without a warrant as part of its so-called “terrorist-surveillance program”. Bush announced on the day the story came out, “The intelligence activities I authorized are lawful.” However, this may be the result of Cheney logic – that the Supreme Commander has the right to do whatever he feels necessary to protect the public. (The New York Times noted that Cheney and his top aides had been the most aggressive advocates of warrantless wiretaps and rounding up Americans’ phone data.)

In his weekly radio address two days later, Bush sought to quell the controversy, saying “This week, new claims have been made about other ways we are tracking down al-Qaeda to prevent attacks on America.” Yet unless one considers every American presumptively an al-Qaeda accomplice, the domestic phone intercepts have nothing to do with tracking down al-Qaeda. Bush also declared, “We are not trolling through the personal lives of millions of innocent Americans.” Unless the vast majority of Americans are guilty, there is no way to assert that the feds are not trolling through millions of innocent people’s lives.

The Bush team is counting on the “national security” invocation to provide a get-out-of-jail card for any abuses. The feds are basically saying that no one could ever go to court to stop illegal surveillance so long as they claim it is for national security. It leaves them completely unaccountable and leaves the communications companies that are colluding with them unaccountable. It is amusing to see Republican stalwarts and media stooges pooh-pooh concerns about the feds tracking each citizen’s phone calls. But how would the White House react if someone acquired and published all the records of incoming and outgoing calls to Karl Rove? Creating a database of all the phone calls made and taken by members of Congress could be helpful in future bribery and corruption scandals. Yet there is no chance in Hades that representatives and senators would ever permit other Americans to see such personal data – while many congressmen sneer at citizens who do not want the feds to have such data on them.

Unfortunately, most Americans seem incapable of recognizing the danger of permitting politicians and government agents to compile dossiers on their personal lives. According to a poll taken just after the USA Today revelation, 63% of Americans said they found the NSA program to be an acceptable way to investigate terrorism, including 44% who strongly endorsed the effort. 66% said they would not be bothered if NSA collected records of personal calls they had made. If Americans acquiesce to the feds warehousing their phone-call data, this will simply encourage the seizure of far more personal information. (The NSA indicated that the calling data is being shared with other federal agencies.) The media reaction has been short and relatively mild. This is appalling, considering that the FBI appears to be using National Security Letter subpoenas (authorized by the Patriot Act) to round up the calling data of journalists suspected of having received leaks on CIA abuses.

The latest revelations are not the end of the story. Instead, they are simply one in a series of revelations of the feds ignoring both the statute book and the Constitution. Former NSA intelligence officer Russ Tice warned that people “are only seeing the tip of the iceberg” of domestic-surveillance abuses. Seymour Hersh reports in the new issue of The New Yorker that a government consultant informed him that “tens of thousands have had their calls monitored in one way or the other,” including the use of computers to listen for key words in their conversations.

The roundup of domestic calling records is part of a pattern of aggressive seizures of information by the Bush administration, which successfully pressured America Online and MSN to turn over the records of how millions of people had used their computer search engines. Google resisted similar federal demands, but the feds recently turned up the heat. The combination of the phone-call data and the online-search records would go a long way to creating Total Information Awareness (TIA). When the Bush administration first pushed TIA as a ticket to safety in 2002, a public uproar awoke Congress and forced the administration to formally shelve efforts to track almost every area of people’s lives. But the feds apparently ignored any congressional orders to cease and desist.

The terrorist surveillance program is the result of a personal edict issued by the president. What other National Security Presidential Directives might Bush have issued? How many laws must be violated before citizens recognize that the government is fundamentally lawless?

LAW

U.S. HOUSE JUDICIARY COMMITTEE PASSES ANTI-GAMBLING BILLS

The U.S. House of Representatives Judiciary Committee recently voted 25 to 11 in favor of the bill that would update the 1961 Wire Act by adding an “enforcement mechanism” to address the situation where a gambling business is located offshore but the gambling business uses bank accounts in the U.S. “Offshore online gambling Web sites are cash cows and the greed that propels these companies leads them to solicit bettors in the United States despite the fact that the Department of Justice already believes this activity is illegal,” said bill sponsor Rep. Bob Goodlatte (R-Virginia) said in a statement after the vote.

Submissions to the Committee included one from the U.S. Chamber of Commerce which highlighted its concerns over the substantial burdens the Bill would place on the banking industry, and one from the Government of Antigua and Barbuda, which is locked in an unequal struggle with the U.S. over the jurisdiction’s gambling industry. The U.S. and Antigua and Barbuda last week asked the World Trade Organization’s Dispute Settlement Body to establish a compliance panel to determine whether the U.S. remains out of compliance with a WTO ruling last year which appeared to favour the tiny offshore nation. The Committee also passed by voice vote a bill from Rep. Jim Leach (R-Iowa) that would prohibit the use of credit cards and checks to make Internet gambling payments.

Although the two bills are not likely to make it onto the statute book in this Congress, given that they have to pass the House, go to the Senate and then be reconciled before mid-term elections this fall, the Committee’s vote makes the eventual strengthening of the Wire Act more likely. “The approval by the Judiciary Committee of the [two bills] represents a troubling about-turn by an important arm of the US Government in response to the crystal-clear recommendations and rulings of the Dispute Settlement Body of the [WTO],” said Antigua and Barbuda’s Minister of Finance and the Economy, Dr Errol Cort. Dr. Cort said recently that if the WTO finds that the U.S. is failing to comply with last year’s ruling (and it has pointedly refused to do anything to change its laws or practices in response) then his government reserves the right to request authorization to suspend concessions or other obligations under the relevant WTO provisions. This could, for instance, include the suspension of intellectual property conventions, allowing Antigua and Barbuda to manufacture and distribute pirate goods and services with impunity.

The U.S. has successfully used the Wire Act, which prohibits the use of telecommunications to make wagers across state lines or internationally, to attack the U.S. operators of offshore casinos. U.S. punters are estimated to be behind up to half of the $12 billion a year wagered in cyber casinos. Antigua-based operators are thought to account for 25% of this turnover.

Alderney appoints senior e-gambling executive.

Alderney, part of the UK’s Channel Islands, has appointed a prominent e-commerce executive to head up the jurisdiction’s already successful e-gambling sector. The Alderney Government (known as the States of Alderney and regarded as being globally at the forefront of eGambling regulation), announced that they had appointed Robin Le Prevost to drive their burgeoning eGambling Industry forward.

David Jeremiah, Chief Executive of the States of Alderney commented, “We are extremely pleased with what Alderney has achieved to date and we are increasingly confident that we can grow from here to be a major force in the eGambling industry. Considering the quality of our regulatory framework and existing operators, Alderney has established a solid foundation from which to attract further operators who share our belief in a well-regulated industry. Appointing Robin to head up the next stage of our development will bring a new level of expertise to the promotion of Alderney.”

Jersey set to license online casino and gambling sites.

The Government of Jersey, a sovereign state in the Channel Islands, has announced is plans to become the latest state in the region to issue online gambling licenses, following the success of its neighbor, Alderney. Numerous online gambling sites currently have offices in Jersey. Some just use the Island for tax benefits, while others run part of their operations from there. Jersey will now take another step into the market as plans are in place to issue online gambling licenses.

A three member Gambling Commission has been set up with the mandate to issue regulations that operators will be required to adhere to. The move is seen as positive. A spokesperson for an e-commerce company based on the Island commented that he was aware of many gambling companies who have displayed interest in using the island as a licensed jurisdiction, but were concerned that no regulatory framework was in place. Alderney, widely regarded as one of the most stringently regulated offshore gambling jurisdictions, has licensed some of the largest online gambling brands and has proven that it is a lucrative income earner for its government. A license in Alderney comes at a cost of £75,000.

CHILLING EFFECTS SITE DEFENDS ONLINE FREEDOM OF EXPRESSION

Chilling Effects is a resource site for online freedom of expression in the U.S. Founded by Wendy Seltzer, currently a visiting assistant professor at Brooklyn Law School, the site is supported by the Electronic Frontier Foundation and more than half a dozen law schools, including Harvard and Stanford. The site exists to document attempts to stifle free speech online, and to provide general legal advice for those faced with such attempts. During its five years of operation, Chilling Effects has become one of the major Web resources on its subject.

The site takes its name from a piece of American legal jargon. “‘Chilling effects’ refers to a doctrine in First Amendment Law,” Seltzer explains, which suggests that, when examining laws, courts should look at “not just what speech is clearly prohibited by the law, but what speech may be silenced because people are afraid of violating the law.” By extension, a chilling effect is a use of the threat of legal action to suppress free speech. Seltzer began the site after she noticed that cease and desist orders were being increasingly used as chilling effects to intimidate site owners into removing material. Often, she suspected, these claims were questionable. Such “nastygrams” often work because of the public’s ignorance of the law and the intricacy of the laws surrounding issues about freedom of expression.

The site’s largest resource is a database of cease and desist orders contributed by their recipients. Each of these letters is annotated with links to the site’s FAQs on related topics. Recent orders are featured in a column on the front page, and users can search the site for earlier ones. Breaking news on related subjects and resources on other sites are also available from the site. After the database, probably the most important resource on Chilling Effects is the series of legal primers on common topics connected with freedom of expression. Many of these introductory pieces are written by professors at the law schools associated with the site. Simply reading the list of topics is enough to freeze the heart of civil libertarians. In addition to expected topics, such as the Digital Millennium Copyright Law (DMCA), patents, and the right to anonymity, they include protest, parody and criticism, and fan fiction (amateur works, often written by teenagers, that use published writers’ characters and backgrounds such as from Star Trek and Harry Potter). Just the fact that such legal or innocuous material is being targeted is enough to explain the need for the site.

Some of the reason for the apparent rise in chilling effects, according to Seltzer, is that the application of a few legal aspects such as copyright to online material is sometimes uncertain under American law. But the main reason, she believes, is the greater accessibility of online documents. For instance, if you post a site critical of a particular company, “the search engines can find it and someone doing a daily search on the company name is going to come across your criticism page more quickly … .” The Chilling Effects site exists to give ordinary people the information they need to fight back – or, sometimes, to know when they need to back down. Seltzer is especially pleased with Google’s use of the site. When Google removes a link, its policy is to send the cease and desist letter to Chilling Effects, and to note at the bottom of the search results that links are missing.

N.Y. HIGH COURT FINDS STATE COMMERCIAL DISPUTE JURISDICTION REACHES INTO INTERNET

New York’s traditionally elastic interpretation of its long-arm jurisdiction in commercial disputes was extended to e-mails and instant messages for the first time in a bellwether opinion by the Court of Appeals. In a unanimous decision, the court said that commercial entities’ use of e-mail and instant messaging to “project themselves into New York to conduct business transactions” is covered by the long-arm provisions in the Civil Practice Law and Rules in the same way and for the same reasons that telephonic negotiations are covered.

“[W]hen the requirements of due process are met … a sophisticated institutional trader knowingly entering our state – whether electronically or otherwise – to negotiate and conclude a substantial transaction is within the embrace of the New York long-arm statute,” Chief Judge Judith S. Kaye wrote in Deutsche Bank Securities Inc. v. Montana Board of Investments, 71. The Deutsche Bank case is essentially a breach of contract case involving a bond transaction between a Manhattan-based bank and a Montana state agency that manages its state’s public retirement system and other assets. All seven judges of the Court of Appeals agreed that the electronic communication established long-arm jurisdiction, and that New York had no need to yield to a Montana statute that would vest exclusive jurisdiction in that state’s district courts.

OPINION & ANALYSIS

INVITING FREEDOM: RELEASING THE “INNER LIBERTARIAN”

Has this ever happened to you? You are discussing liberty with someone, and you say something like, “The government should not take care of the poor.” The response you get is, “Oh yeah? Well then who would take care of the poor?” Ah, you reply, there will be more charities and job opportunities and everyone cares about the poor since everyone asks the same question and besides the government is not helping the poor now anyway and so on and so on. And as you speak, the recipient of your wisdom asks endless skeptical questions until you end up having to prove the value of everything from the gold standard to getting rid of the minimum wage. I would like to offer a solution to the problem of defending liberty in the face of skepticism. …

THE SOVIETIZING OF AMERICA

Yesterday I got back to Mexico after visiting Washington for a week. Returning to the United States at long intervals is like watching a flower wilt in time-lapse photography. As with the slow but inexorable growth of a tumor, the changes leap out if seen infrequently. Though in historical terms the rot goes fast, very fast, it is not easily noticed day to day. Perhaps the decay is the inevitable destination of mass democracies.

In Washington the stage-managed paranoia leaps to one’s attention, the tightening embrace of government of all things. Washington’s subway illustrates the point. Admonition is constant, typically in a scolding female voice from the loudspeakers. “Children! Do not run … play … or sit on the escalators. Hold your parents’ hand ….” Parents are not to care for their offspring. Mother Metro will do it. Or “Stand Back! Doors are closing!” in a calculatedly bossy tone of voice as the train prepares to pull out of the station. Over and over and over, at every stop. Sometimes the doors could not close for some reason and for minutes the hostile voice repeated its idiot warning. Is there not somewhere in the country a woman who speaks pleasantly? The recorded hectoring is very different from a laconic and practical “Doors closing” from the driver. We are now herded by automated nannies. “Please listen carefully because the menu options have changed.” Anything to save a buck.

Between stops come the warnings to watch other passengers, to report any strange behavior immediately to Metro. Oh. Report strange behavior on an urban subway at midnight. Now, that’s a good idea. Does this mean the para-schiz arguing with the little voices? The dark brooding men talking in unknown languages? The bag ladies with those suspicious bundles? The Arabs speaking in, of all things, Arabic? The last time I was in the city, Metro had removed trash cans from the stations because someone might put a bomb in one. Now, I am told, they have special explosion-absorbent trash cans. Presumably this mummery is fear management to drum up support for an unpopular war. The fact is that you could leave a steamer trunk of TNT on the car and no one would notice.

The Sovietizing of America runs apace. It is not imaginary. The Department of Homeland Security? KGB stands for Committee for State Security. Driving south and then west toward Laredo, Texas we passed through Athens, Alabama, where I lived for a couple of years around 1957. My father was a mathematician working for the Army Ballistic Missile Agency in Huntsville. Athens was then a different America, and to an extent still is. I had not seen the town since I was 11. After 50 years it had changed remarkably little in its center, though it was surrounded by the usual hideous malls and strip development that blight the country today. The philosophy of unrestricted rapine, whether denominated free enterprise or capitalism or communism, is utterly without esthetic sensitivity. So it was in the Soviet Union. The differences between Russia and America are small, and much fewer than those between France and America.

The Limestone Drugstore was still on the square. I once passed a slow summery infinity of afternoons there, reading comic books and drinking ice cream floats. The owner at the time, Mr. Chandler (universally called Coochie, perhaps 70 then) liked little boys, and kept a rack of comic books on the principle of a bird feeder. Today, liking little boys would be considered prima facie evidence of what would be called a “pederasty problem”, and the comic books would doubtless have to carry warnings. In a less admonished age, Coochie just liked little boys. I doubt that the Limestone ever sold a comic book. It was not why they were there. Today some green eyeshade at corporate would notice that those books cost 20 bucks a month, and demand that they be kept in a locked glass case. But the Limestone was not a chain, so Coochie was corporate, and ran his store as he pleased. Freedom, you might call it. The inside of the store had been expanded and looked like most drug stores, but … lo! … the soda fountain was as it had been these many years ago! No comics were in evidence, and, of course no BB guns. These, like everything, would today be illegal.

I ordered an ice cream float in memory of the splendid, variegated, and free country that I had been born into, and that somehow disappeared, and then we got in the car and headed for Mexico, still free.

THE PRICE OF MADNESS, THE ROT WITHIN

On 9-11, one of my colleagues and I were watching videotape of the planes hitting the World Trade Center earlier that day. He asked my response to this surreal atrocity. My concern, I replied, was twofold. (1) Americans were now going to have to do some very deep soul-searching to discover why so many people in the world have such an intense hatred for America that they could do this, and (2) I despaired of what the long-term implications of this would be. The attack was of such horrific dimensions that when I turned on my television that morning – not knowing what had happened – my first reaction was that I was viewing a clip from a forthcoming catastrophe film, complete with amazing special effects. Since some one-third of television “news” consists of Hollywood gossip and movie promotions, there was a sound basis for my response. When I switched to another channel and saw the same ghastliness, I knew that reality was outdoing Irwin Allen.

As we approach the fifth anniversary of this act of horror, my initial concerns have proven themselves valid. To this day, most Americans – be they for or against the invasion of Iraq, Democrat or Republican, “conservative” or “liberal” – show no disposition to confront the deeper implications of all this. Depth analysis takes a commitment of moral and intellectual energy, and most of us are more comfortable inquiring into such superficial matters as missing teenagers, spousal murders, or sexual predators.

In the language of “chaos” theory, America – if not all of Western civilization – is in a state of turbulence of such intensity that efforts to restore order by recourse to traditional systems and policies will be to no avail. On the contrary, it is our insistence upon established practices that has led us to our plight. Only a fundamental, creative change in our thinking and behavior can extricate us from the destructive consequences of our prior assumptions. Just as the western segment of the Roman empire was no longer able to sustain itself, so, too, the western franchise of Western civilization is finished, no more capable of rehabilitation than would have been the case with Jeffrey Dahmer.

How did an America of H.L. Mencken, Mark Twain, Thomas Edison, James J. Hill, Henry David Thoreau, and Anne Hutchinson, manage to become a nation of Bill O’Reilly, Rush Limbaugh, Dick Cheney, Donald Rumsfeld, Halliburton, and Condoleezza Rice? How did the spiritual voice of a Ralph Waldo Emerson get replaced by Pat Robertson? What epidemic of pests has eaten away at the timbers of the White House since the days of Thomas Jefferson, producing an infestation of such anti-social insects as the Clintons and the Bushes? How was Tom Paine toppled as the all-time best-selling author by the likes of such scrawlers as Al Franken and Ann Coulter?

The shallow-minded among us will be quick to accuse television, Hollywood, rock music, drugs, the “liberal” establishment, a “right-wing conspiracy”, or any of a number of equally irrelevant culprits. The reality is that the decay arose from within, not within some amorphous collectivity called “America”, but within the minds and souls of individuals who comprise society. We live in a country ruled by dangerous and foolish people – sociopaths who are prepared to engage in the planned killing of hundreds of thousands of innocent men, women, and children, for no other purpose than to satisfy their insatiable appetites for power. But what is far worse than this is the fact that we live in a country whose residents either value such traits or, at the very least, are unable – or unwilling – to recognize and condemn them. The ruling class and its coterie offers the most specious rationalizations for their practices to a public largely reduced to flag-waving.

It is a dreadful mistake to blame political leaders, the media, or corporate-state structuring for our problems. By default – if not enthusiasm – we have been the authors of our own madness. Our contradictory thinking – unchecked by our inner standards of conduct – allows us to internalize institutionalized insanity as acceptable behavior, turning us into a society of the “normally neurotic”. This madness is destroying our sense of what it means to be a human being, including our relationships with other people.

The war in Iraq provides a microcosmic, time-lapse record of the moral collapse of a once decent society. The war itself was grounded in lies, deceit, forged documents, a propagandizing media, and other dishonest tactics. Yet few Americans raised any objections. To make any fundamental challenge to such wholesale political wrongdoing requires a resource that most Americans gladly abandoned long ago: a set of clear and focused transcendent principles. If one is to live a centered life – free of contradictions and paralyzing conflicts – one must have an inner-directed, intuitive sense of behavior that is appropriate for living among others in the world. In my conversations with others, I rarely find people who regard an appeal to a clearly-enunciated philosophic principle as a sufficient answer to a question.

In an age in which a collective mindset is expected to drown out the voice of the individual, philosophic principles have been replaced by public opinion polls. I do not know how often my opinions on some matter have been met by the response “most people do not agree with you.” There is a price we will pay for abandoning what the late Joseph Campbell referred to as our “invisible means of support.” Richard Weaver reminded us that “ideas have consequences.” So, too, does the absence of ideas, as well as the narrow circumscribing of what it is important for us to think about. We live in a dying culture, the demise of which most of us shall not recognize until there is a total collapse of all that we value: our material wealth. Goethe’s Faust should remind us, moral principles can be traded for, but only with consequences that most would fail to calculate in advance.