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(Especially noteworthy articles’ headings highlighted in gold.)
3 ASSET PROTECTION SCAMS EXPOSED
At least once a week, someone contacts me to announce a new asset protection scheme, and with near-religious intensity, implores me to promote it. The schemes usually promise significant tax benefits and investment returns of 100% or more annually! In 20 years of studying asset protection methods, I have never found one of these schemes effective. Indeed, the vast majority of these “plans” are worse than worthless. Some of these “asset protection plans” not only help you lose your “protected” assets, but can also land you in prison. Or help the IRS, rather than your creditors, seize your assets. Year after year, the schemes never really change. Only their names change. Some of the scams originated more than 80 years ago and are still going strong!
That is not to say there is not a crying need to protect assets. The U.S. is by far the world’s most litigious society, with more than 50,000 lawsuits filed each week. But if an asset protection promoter tells you one or more of the following things, run away:
The most commonly encountered asset protection scams?
PANAMA: INVESTMENT AND REAL ESTATE UPDATE
You have heard the talk. Panama is investor friendly. Open for business. Economically ripe and growing so quickly that it has generated tremendous interest in business, investment, and real estate opportunities. To this day I continue to receive frequent questions about these topics from an article I wrote over a year ago … and what a difference a year makes. Both the real estate market and overall investment climate in Panama have changed significantly over the past year, and since interest level is so high, I felt compelled to make a few comments.
The first thing to know about investing in Panama is that the moneymaking opportunities abound to a staggering degree. Think 19th century Chicago swallowing up the prairies and birthing the biggest and best meatpacking industries, lumber yards, skyscrapers, public transportation system, department store businesses and futures trading. Better yet, think of the American Wild West – a place where anyone with a bit of cash and a lot of tenacity could become very successful.
The second thing to know about investing in Panama is that you are not the only one thinking about investing in Panama. In fact, if you have never been there, you are about two years behind. Don’t worry, there is still plenty of opportunity available, but you need to use your head. Americans have made so much money in real estate over the past several years – legions of agents, analysts, bankers, brokers, developers, gurus, and guys on TV in Hawaiian shirts all perpetuated cheap money loans in irrationally explosive markets. It was so easy to make huge returns, and now that the boom is over, real estate investors are looking elsewhere to sustain the money machine.
Welcome to Panama, where the cost of living is cheap, the economy is booming, and the government supports business and foreign investment. The country is posting such tremendous growth numbers in real GDP, per capita income, foreign investment, tourism that Panama is becoming the envy of the developing world. The main city is elegant and sophisticated with daring skyscrapers and an oceanfront, international flavor. In April of this year when Donald Trump announced his quarter-billion dollar luxury development in Panama, he essentially put to rest any argument about systemic emerging market risk. Add to that the looming approval for a $5.3 billion Canal expansion project and you will see why the investment floodgates have opened.
Real estate developers have been the first to profit – demand has been so high in the last 12 months that prices have doubled in many parts of the city. Buyers are rushing down to Panama, desperate to speculate on new condo projects, and there are plenty of developers happily willing to sell properties to international buyers who do not do their homework. But long-term success of Panama depends on precise, thoughtful investment strategies across markets, not some condo flipping fad. There is still money to be made in Panama City condos, but the days of being able to purchase an oceanfront penthouse for $80,000 are gone. Today that same condo will set you back a cool 300 grand.
For those of you who are even more intrepid, the serious money in Panama is far beyond real estate – business ventures and other financial opportunities are waiting for bold investors and entrepreneurs with expertise and determination. Overall, the economy is still at the beginning of a high-growth phase. But profiting from it takes research and careful analysis, regardless of the market – real estate, equities, bonds, or small business. Don’t simply rely on “instinct” unless you pick stocks by having your dog lick parts of the WSJ. There are still plenty of deals and great opportunities out there for smart investors who do their homework.Link here.
Panama tops International Living’s Retirement Index for the 6th consecutive year. Uraguay moves up to 4th place.
Panama was judged to be the best retirement location this year after International Living reviewed eight key factors – real estate prices, special benefits for retirees, cost of living, safety and stability, health care, climate, culture & entertainment, and infrastructure. “It is quite clear why this country is so appealing for North American retirees,” observed International Living, a media and events company which provides information on living, retiring or investing overseas. “Panama boasts the world’s most generous program of special benefits for retirees, it offers easy access from the U.S., its cost of living is low, the landscapes and coastlines are beautiful, its population is friendly and warmly welcomes foreign residents and investors, and its capital, Panama City, is without peer in the region.”
Just behind Panama were Malta, New Zealand, Uruguay, and Mexico. France, Romania, Argentina, Malaysia, and Ecuador rounded out the top 10. In the case of Malta and its twin island of Gozo, the guide noted, “Steeped in history and tradition, these small islands, with near-perfect climates year-round, offer a simple, relaxed lifestyle, an affordable cost of living, and permanent foreign residents can take advantage of a 15% tax rate. Plus, property taxes don’t exist in Malta, and crime too is practically non-existent.”
International Living also gave special mention to Uruguay, which has moved up the league table from 9th in 2005 to 4th this year. “This tiny country, the size of Missouri, has the lowest poverty level in Latin America, the longest life expectancy, and the second lowest level of corruption. Plus, the literacy rate in Uruguay is an astounding 98%.”Link here.
EU TAX MEN CHASE INVESTORS TO ASIA
EU Commissioner for Taxation, Laszlo Kovacs, is reportedly seeking to bring Asian financial centers within the ambit of the European Savings Tax Directive. According to a report in the Financial Times, Kovacs yesterday asked EU tax specialists how the scope of the directive can be extended to include investments held by EU residents in the Asian financial centres, including Hong Kong and Singapore, and possibly Macao. Kovacs is also seeking the backing of European finance ministers for talks with Asian governments later this year concerning the extension of the directive.
The move comes amid growing evidence that European investors have easily outwitted EU tax collectors by shifting their assets to locations not covered by the directive. The legislation, which extends to a number of “third countries” such as Switzerland, the Channel Islands and Caribbean offshore territories, was introduced in July 2005. It facilitates the exchange of information between EU tax authorities on certain types of savings and investments held by EU residents in their territory so that interest earned can be taxed in the resident investor's home state. The legislation also allows some jurisdictions to apply a withholding tax, currently 15%, instead of exchanging information. However, these jurisdictions have reported relatively paltry withholding tax revenues, prompting the EU to take action to plug the directive’s many loopholes.
Although there are several ways for investors to escape the directive, such as switching assets to vehicles not covered by the legislation, perhaps the most obvious avoidance strategy is for investors to simply shift their money to more tax-friendly jurisdictions. Anecdotal evidence suggests that Dubai, Hong Kong and Singapore have been major beneficiaries. Asian governments have been playing down the extent to which their private banking and asset management industries have benefited from the outflow of money from Europe and will likely oppose requests to exchange information with the EU. However, the FT reports that the EU might attempt to impose the directive on a substantial bloc of Asia as part of a proposed trade agreement with ASEAN, whose membership includes Singapore, but not Hong Kong.Links here and here.
HOW DELAFIELD FUND PROSPERS FROM BUYING UNLOVED STOCKS
Say “capital preservation” and most folks would think of investments in U.S. Treasurys. Or perhaps blue chips. But knocked-down stocks? Well, the guys running the Delafield Fund prove that you can make big money pursuing what they charitably call “special situations” – the battered and bruised – and still limit your risk. Longtime partners and New Yorkers J. Dennis Delafield and Vincent Sellecchia have successfully piloted the $425 million (assets) Delafield Fund to its second appearance on the Forbes Honor Roll. What immediately catches the eye is the A+ grade we reckon their fund deserves for its performance during down markets, along with a solid B grade in bull markets. Only one other 2006 Honor Roll member, Bruce Fund, earns an A+ from us for its showing during bearish times.
Since it was launched 13 years ago, Delafield has had only two years where the returns were in negative territory – rocky 1998 and 2002. And while Delafield lost 7.5% in 2002, the S&P 500 lost 22.1%. Delafield and Sellecchia want improving balance sheets, steady earnings growth, copious free cash flow. They also want cost-cutting managers, skilled capital allocators who can smartly deploy that free cash. They find the most opportunity among small and midcap stocks. Since early 1994 Delafield Fund has produced a tidy 14% annualized total return, vs. the S&P 500’s 10%. A $10,000 investment in the fund 12½ years ago is now worth $43,400 after considering expenses and taxes. Had you put ten grand into the cheap Vanguard 500 Index Fund back then, you would have only $30,200 today. So far this year, in a range-bound market, Delafield is up 6%, a bit ahead of the S&P 500.
While the below-the-radar Delafield Fund has a certain, almost famous aura – marketing is not exactly a priority – there are boldface connections going way back. Dennis Delafield, 70, was the private money manager for the Ziffs (of publishing fame and Forbes 400 renown) for 23 years starting in 1967. Then in 1990 the enterprising Ziff children decided to take over the $900 million pile they had with Delafield and set up a family office. While the parting was amicable, Delafield Asset Management shrank overnight.
From Dennis Delafield’s paper-strewn Fifth Avenue office at Rockefeller Center, Delafield and Sellecchia, 54, explain their value investment strategy. Maybe there has been a missed earnings forecast, a botched acquisition, a screwed-up business unit. If the company’s valuation makes sense, they buy. And the world often comes around to their way of thinking.Link here.
LIECHTENSTEIN AND THE EU SAVINGS TAX DIRECTIVE
Liechtenstein has come to an agreement with the EU on the EU Savings Tax and will therefore retain the same withholding tax as Switzerland. As everybody expected, the Liechtenstein deal developed within the framework that Switzerland had already worked out. Therefore a short look to what has happened in Switzerland is important to understand the treaty and the differences with Switzerland. Switzerland has finished its negotiations on the nine treaties called “Bilaterals II”. This article will only focus on the cooperation pertaining to the EU savings tax – the tax on interest of savings accounts of physical persons living in the European Community.
Instead of an automatic exchange of information between national tax authorities within the EU and relevant states participant to the directive, Switzerland will withhold a 15% tax on interest for 3 years. This percentage will be increased to 20% for another 3 years, and after this period to 35%. This tax is due thereafter for any interest payments by a so-called paying agent to a physical person with tax relevant domicile in the EU. 75% of the retained tax will be distributed by Switzerland to the EU member states. Liechtenstein will accept these percentages. However it is still not clear, either in the EU or in Liechtenstein, what exactly a paying agent is. There is much interpretative room left.
It is highly probable that the return on such a savings tax is smaller than the EU expects. Switzerland has for all intents and purposes practically given up bank secrecy with regards to indirect taxes like subsidies, duties, VAT, and excise tax on tobacco, alcohol or mineral oils. Switzerland already disclosed information before this treaty and has co-operated whenever there has been a fraud or falsification of documents involved. Court rulings in Switzerland or in Liechtenstein have shown that attempts to avoid indirect taxation was usually accompanied with fraud or falsification, which led to co-operation with the foreign authority and remittance of documents abroad. However Swiss – and especially Liechtenstein - privacy laws do not accept that foreign tax authorities can move in freely on bank accounts of physical or juridical persons, leaving it to the person to decide upon the moment to disclose transactions. It is fully understood that the taxable person reports income and balances fully and accurately. Liechtenstein is bound to a customs treaty with Switzerland since 1923, and therefore many aspects of indirect taxation and co-operation stipulated by Switzerland have direct consequences on Liechtenstein as well.
Switzerland has amongst others received the right to benefit from the EU directive on interest and licences and the parent-subsidiary directive. Liechtenstein cannot benefit from these two directives. In return, Switzerland has accepted the need to improve its bilateral treaties with the EU step by step which leads to the fact that the administrative assistance between competent authorities on tax fraud and similar facts will be extended beyond the clauses in the treaty on EU savings tax. As Liechtenstein has not signed similar treaties, there will be no administrative assistance in the same direction.
It is clear that the EU will request a certain level of assistance from Liechtenstein relating to the EU savings withholding tax. As Liechtenstein only knows legal assistance in criminal matters which involves the court and excludes taxes – apart from that mentioned above – this kind of legal assistance will be subject to Liechtenstein internal regulations which means that has also to be a criminal offence in Liechtenstein and that the information is supplied with specific “limitations on use”. Any information or evidence obtained under the treaty may not be used in any investigation, prosecution, or proceeding other than that described in the request without prior written consent. Whatever the contractual arrangements, the Liechtenstein internal law must be respected.Link here.
“NIFONGING” THE STANDARDS OF JUSTICE
For the past four months, I have played a very small role in the dissemination of information about the infamous Duke non-rape case, and I am happy to have been part of what I see as a blogging revolution regarding how people are informed about controversial legal cases. But while the other bloggers and I have been part of an assault upon the way “news” traditionally has been distributed, there has been another assault upon standards of justice that have been the bedrock for our legal system for hundreds of years.
The judicial proceedings that have happened in Durham, North Carolina, since the first accusations that three Duke University lacrosse players raped a stripper/prostitute at a wild party last March have been widely criticized in these pages and elsewhere. However, the problem lies not just with the massive legal misconduct on behalf of District Attorney Michael Nifong and the Durham police. Nifong and his supporters are hell-bent upon destroying the legal standard of “guilty beyond a reasonable doubt,” and if they succeed, the last support of the system of laws upon which this country has rested will have fallen. Yes, the Duke case is that important.
Nifong and his supporters increasingly are trying to force the burden of proof upon the defense to demonstrate (1) that these young men did not rape the accuser, and (2) that the individuals she did accuse could not have committed this alleged crime, even had it occurred. In short, the prosecution is trying to win its case upon the dubious prospect of attempting to prove a negative, something that absolutely has been forbidden in the historical annals of American and English law.
Nifong is trying to turn the very standards of justice upon their heads, and the New York Times stands firmly with him. He and a number of people in Durham and elsewhere are demanding that the standard for not convicting these young men be something that would be impossible to attain. Nifong declared early in this case that DNA and toxicology tests would prove that a rape occurred, and that the young men who are charged committed it. However, when his evidence went south, Nifong then changed the standards to being that as long as any probability – however small – existed that the tests were wrong, then one must assume that the tests prove that the people charged are guilty. Furthermore, if Nifong actually gains a conviction using these tactics – and given the pre-trial comments from potential jurors in Durham, conviction remains a real possibility – then literally no one in this country is safe from prosecution, no matter what proof they can give of their innocence.
On any given day, one can read on the NYT editorial page that the Bush Administration is endangering the rights of Americans (a correct analysis, in my view). Yet, on that same editorial page, not to mention its news sections, the Times is willing to throw out all pretense of innocence and completely destroy the foundations of justice, all to encourage a politically-correct conviction of people who clearly did not commit the crimes for which they are charged. Furthermore, there seems to be a long list of people who are in hearty agreement with the Times editors, not to mention the Michael Nifongs and Mark Gottliebs who have defined this travesty from the beginning. The next time any of these people tell you they believe in rights and justice and the like, remember that they are liars. That is correct. They are liars.Link here.
GEEZER INVESTING IS THE SUBJECT AT HARD ASSETS CONFERENCE
It is not unusual to hear about the virtues of hard money and the evils of the paper variety at a gold conference. However, Austrian business cycle theory is rarely cited given the audience is only interested in hot stock tips. But at the Las Vegas Hard Assets investment conference held last week, the Austrians were mentioned prominently in two separate presentations. Keynote speaker John Dizard, columnist for the Financial Times, told the gold crowd that Austrian economists believe in “free markets and evidently, bow ties.” He admitted that he was initially skeptical of the Austrian argument but has since come around. Austrian business cycle theory is based on intertemporal misallocation of resources. Excessive credit creation lowers interest rates below the natural rate, spurring malinvestment. Dizard believes the effects of the misdeeds of the worlds central bankers are about ready to be felt. No financial crisis since 1994 has been allowed to run its course without central bank intervention. These crises are needed in order to liquidate malinvestments.
The FT columnist believes Fed Chair Ben Bernanke has read the Austrians and knows deep down that they are right. But, the Fed will inflate away a portion of the massive debt build-up leading to an increase in the price of gold. However not right away. Dizard said the gold price will head up six to nine months from now and he has even delayed the release of his forthcoming book entitled Gold Now to coincide with that prediction. A couple hours after Dizard’s presentation, newsletter writer Jay Taylor made the case that John Maynard Keynes and Milton Friedman were wrong and that Ludwig von Mises was right. Inflation and depression are caused by excessive credit creation. The Austrians advocate for a gold standard while bankers and politicians hate gold.
Of course conference attendees are gold fans, but judging by the attendance our legions are not growing despite the ongoing bull market. The original gold and uranium bug James Dines described attendance as “sparse” and remembered the days when it was standing room only. “The show is not as zippy as I thought it would be,” silver guru David Morgan said during his presentation. Only a small portion of a huge hall was curtained off for Hard Assets presentations, and often speakers were forced to compete with the rumble of forklifts operating just a few feet away.
Investing in natural resources and the companies that mine the stuff has clearly not caught on with young people. One presenter referred to investing in hard assets as “geezer investing”. Investment newsletter legend and author Howard Ruff made a comeback at the conference promoting his new book, Ruff’s Little Book of Big Fortunes in Gold & Silver: A Middle Class License to Print Money. Ruff is most famous for recommending the purchase of gold at $120/oz in 1975 and more importantly recommending that people sell the yellow metal near its peak of $850/oz in 1980. “I’m a has-been that’s here now,” Ruff said, and believes that investors will earn 500% to 1,000% in gold over the next eight years, twice that in silver and a multiple of that in the right mining shares.
Virtually every speaker was positive on the precious metals and commodities markets. Although, technical analyst Ian McAvity sees the potential for a meltdown in the stock market that would take all other markets with it. Broker Ben Johnson cautioned in his workshop session that newsletter writers have to be bullish, because if they do not have any stocks to recommend they are out of business. Global Resources Investments Chairman Rick Rule said investors have a choice between being contrarians or victims. Rule sees financial services and intellectual capital for the mining industry as cheap, as well as, profitable alternative energy, micro-cap Canadian natural gas producers, and mining companies with perceived political risk. “The Congo exhibits no more political risk than California does,” Rule quipped. His company’s head office is located in Carlsbad, California.
Numerous small mining companies were at the conference to make slick PowerPoint presentations full of drill results, maps, and slides of guys in hard hats standing in front of holes in the ground in the middle of nowhere. More than a few conferees wisely used these stock hustling presentations for napping. Much more of last week’s conference was devoted to oil than in the past. Craig R. Smith, co-author of Black Gold Stranglehold was a keynote speaker and also shared the stage with University of Houston professor Dr. Michael Economides for a panel on energy’s future. Smith does not believe decaying dinosaurs created oil and gas. He thinks they are being created constantly and is brought to attainable depths by the centrifugal forces of the earth’s rotation. Refining capacity is another thing however. It has been 29 years since the last refinery was built in the U.S. Dr. Economides told the crowd that ethanol is the biggest scam ever, that it takes 1.6 gallons of gas to produce just a gallon of ethanol. He called it the dotcom of the energy business.
But the primary theme of the conference was the pitiful state of the overleveraged world economies, and the coming weakness in paper currencies. Goldmoney.com’s James Turk stressed that gold is not going up in price so much as the dollar is going down in value. Because of central banking chicanery, Turk predicts the dollar will collapse leading to $8,000 per ounce gold and $400 per ounce silver. “We are being lured into a massive debt pyramid that will eventually collapse,” Gary North wrote back in 2002, “either into deflationary depression or, more likely, into what Mises called the crack-up boom, in which the nation’s currency is destroyed by the central bank.”
It was Mises who predicted both the Great Depression and the fall of communism. Now, while but only a few notice, the Fed continues to set the stage for another of his predictions to come true: the crack-up boom and the destruction of the dollar.Link here.
TYCOON PLEADS GUILTY TO OFFSHORE TAX EVASION CHARGES
A U.S. telecoms industry entrepreneur has pleaded guilty in U.S. District Court for the District of Columbia in what is believed to be America’s largest ever case of personal tax evasion. Walter Anderson, who formed Mid-Atlantic Telecom when the industry was being deregulated in the 1980s, is accused of two counts of tax evasion and one count of failing to report $365 million in personal income in 1998 and 1999.
Anderson was arrested in February 2005 at Washington Dulles airport while stepping off of a plane from London after an investigation unraveled a complex set of offshore entities, bank accounts, and transactions designed to conceal income earned from his interest in companies he owned. According to the Department of Justice, in October 1992, Anderson allegedly formed an offshore corporation named Gold & Appel Transfer in the British Virgin Islands (BVI) and hired a trust company to serve as Gold & Appel’s registered agent and sole director. Gold & Appel was said to be owned by another BVI company, Icomnet, previously formed by Anderson.
Prosecutors believe that Anderson granted himself an exclusive option to purchase Gold & Appel shares for a nominal sum, insuring that no one else could own these remaining shares. By forming the corporations in that manner, neither the option nor Anderson’s name was recorded in the BVI’s public records. As a result, the indictment alleged that Anderson hid his ownership of the corporations that held these assets, but was still able to maintain complete control. After other merger activity with telecommunications companies he owned, Anderson further obscured his ownership of Gold & Appel, by using an alias and forming another offshore corporation – Iceberg Transport, S.A. – in Panama. To disguise his ownership of this company, the DoJ said that Iceberg was created as a “bearer share” company, meaning that, unlike U.S. corporations, there was no central registry information on the company. Therefore, whoever had physical control over the actual share certificates was considered the owner.
Anderson allegedly received the shares, using his alias, in a mailbox drop in Amsterdam. Once he set up Iceberg, Anderson was then said to have directed the transfer of shares of Gold & Appel to Iceberg, and represented that Iceberg owned Gold & Appel. Anderson then hired a trust company and its employees to serve as registered agent for the company and as officers and directors of Iceberg, ensuring that he had complete control over it.
Prosecutors allege that between October 1992 and July 1996, Anderson transferred his ownership interests in three telecommunications companies to Gold & Appel and Iceberg. In this way, when appreciated stock was sold – or other taxable events occurred – Gold & Appel and Iceberg would appear to be the taxpayer, as opposed to Anderson. Between 1995 and 1999, Anderson used the assets of Gold & Appel and Iceberg, which included the profits realized from these three telecommunication corporations, to invest in other business ventures. This generated more than $450 million in earnings for Gold & Appel and Iceberg during this period.
Anderson is also charged with evading taxes in D.C. and has claimed residency in the state of Florida, which does not levy income tax. Anderson initially faced an 80-year prison term, but will serve up to 10 years under the terms of his plea agreement. He must also pay restitution to both the federal government and D.C. Among the taxes allegedly owed to Washington are use taxes – equivalent to sales taxes – on art, jewelry and wine. The indictment alleges Anderson bought a paintings by Salvador Dali and Rene Magritte, an 18-karat gold bracelet, and more than $47,000 in fine wines, then had them shipped to a Virginia address to avoid Washington taxes.
Court documents say Anderson could be linked to at least seven aliases. Officials seized from his apartment forged identification and manuals detailing ways to create fake identification and hide from authorities, ammong them Poof! How to Disappear and Create a New Identity and The ID Forger: Homemade Birth Certificates and Other Documents Explained.Links here and here.
PURSUING THE ELUSIVE EURO
I am going to tell you how I entered the underworld, and became a money launderer, and international drug wallah, and remorseless criminal, just like Carlo Gambino or Bin Laden or Condoleezza Rice. Yes. I am now of one blood with Pablo Escobar. It is a service of the Anglo-Irish Bank. I imagine that my picture can be seen on wanted posters in European post offices.
How did I come to this frightful pass? I decided a while back to get such money as I have out of dollars. Where to put my minute shriveled pittance, all that is left to me of a misspent life? Europe appealed, redolent as it is of stability, solemnity, and stuffy reliability. A couple of years before a shill from the Anglo-Irish Bank of Dublin had come through my Mexican town, which is full of expatriate money. Ireland, I thought. Just the thing.
I duly, and foolishly, sent the bank a deposit, along with copies of my passport, Mexican residency papers, driver’s license, dog’s paw prints, grandmother’s DNA, and all the other dry foliage of my life that the bank required. This was enough, I thought, to identify several people. But no. The bank was darkly suspicious. It suspected me of Laundering Money. (I wish it suspected me of having money.) The multitudinous requirements sprang, I presumed, from international law intended to discourage honest people from putting money in banks. Crooks have ways around these requirements, and also have more money.
Now, any bank’s protestations that it wants to avoid the laundering of money constitute pious fraud. Criminal enterprise reaps immense sums, being unhampered by governmental regulation. Do you think any bank whatever does not get weak-kneed at the thought of billions in poppy lucre? The drug trade is a valued part of the world’s economy. But all right. I sent this stuff off to Dublin, FedEx and $45. I emphasized, please communicate with me by email, as the Mexican mails are casual about things like arrival. Please, email. Many weeks later, my check to AIB having cleared, I assumed that I had a properly constituted account. Then Violeta discovered a sodden envelope in a muddy spot in the road near our house. This missive turned out to be from AIB. Perhaps the bank had an eccentric conception of email. In it I discovered that the bank, in the person of a Mr. David Milne, was not happy with the documentation from my bank here, Lloyd.
Since this column is read by expatriates around the world, suggesting that they have too much time on their hands, I explained to the Mr. Milne that I was a journalist, and asked what would have happened had I not found his email in the mud hole in front of my house. Would my money have been confiscated by some august governmental body given to thievery? What was AIB’s objection to Mexican banks? Did his majesty know something I did not? He declined to answer. The rub was that he wanted some document from my Mexican bank imprinted with the bank’s stamp. But Lloyd’s does not have a stamp. It is not how things are done here. Anyway, my patient account manager at Lloyd’s, composed a letter testifying that I existed and so on, had it translated into English, and sent it to the his Excellency. $45 more for FedEx, which began setting up a branch office to handle my correspondence.
This did not work either. Nothing does. I have sent document after document. I wondered why the good baron did not simply email Lloyd’s, which would remove all doubt about whatever it was that he doubted. With this much trouble getting money into the bank, I assumed that there could be no earthly hope of getting it out. In fact AIB seemed to regard depositors with resentment, as annoyances having nothing to do with its line of work. On and on it went, and goes. I do not know whether I will live long enough to see my funds, orphaned and sorrowing in some cold account. They probably will not even recognize me.Link here.
THE HP PHONE RECORDS THEFT SCANDAL IS A WAKE-UP CALL ON A TOLERATED CRIME
Four years ago this month, my own phone records were stolen, and in exactly the same way that the phone records of various HP board members were stolen earlier this year. Private investigators used the Internet and fake e-mail addresses to jive AT&T into handing them over. These days, the practice is known as “pretexting” – a nice, sanitizing word that masks the criminal scheming behind it. Whatever word one uses to describe it, the skullduggery still amounts to stealing. And with the war on terror increasingly benumbing Americans to the relentless erosion of their civil liberties, the organized theft of telephone records has become one of the fastest growing and least prosecuted crimes in cyberspace.
Now, the spreading furor over HP’s apparent involvement in pretexting offers a wake-up call for everyone as to just how widespread – and tolerated – the practice has become. Documents obtained by investigators for a congressional committee probing the pretexting industry this summer show that many of America’s largest corporations routinely use private investigators to obtain the phone records of individuals they are trying to gather information on.
The documents show that the private eyes typically rely on companies known as data brokers to perform the dirty work of stealing the phone records for their corporate clients. Often, the corporations simply cut the private eye middlemen out of the action entirely and deal directly with the data brokers themselves. Committee documents show that in 2005, Wachovia Bank spent more than $456,000 for purloined phone records from Global Information Group, a Florida data broker that was recently shut down by state officials. Global’s clients included Wells Fargo, Chase, Citicorp, HSBC, Ford Motor, and Enterprise Rent-a-Car. Global’s corporate customers collectively spent more than $2 million last year for pretexting services from Global alone, paying $45 to obtain a month’s worth of anybody’s land-line phone records and $55 if the calls were made using a cell phone.
To obtain the phone records, the data brokers typically bring in yet another level of even seedier subcontractors. This group’s mission is to engage in whatever ruse or impersonation will convince the phone company to hand over a customer’s phone records. Documents subpoenaed in the congressional probe include scripts of suggested lies the subcontractors can try, as well as e-mail between the data brokers and their contractors regarding how to proceed when a particular come-on fails to work. Typical advice? Try again.
Amazingly, none of this outrageous behavior is sanctioned under federal criminal law, leaving it to prosecutors to decide for themselves whether to file cases charging offenses under more general statutes such as criminal conspiracy and wire fraud, for which the standards of proof are challenging. To date, no federal cases have been brought anywhere on pretexting, and only a smattering have been pursued in state courts. One reason may be the embarrassment that could result. The U.S. Drug Enforcement Agency, the U.S. Marshals Service and the Department of Homeland Security routinely turn to data brokers to speed up the process of getting phone records illegally when obtaining court authorization first would take too much time.
My own case is one of the many that have thus suffered, ignored by all concerned even though documents on file at both the Department of Justice and the S.E.C. show plainly that the theft occurred and that the man behind it was a stock market swindler and con man. The case file showed how my records had been stolen by someone who phoned AT&T’s customer service center over 50 times, each time claiming to be me and asking for a copy of my phone records for the late summer and early autumn of 2002. Finally, the impersonator hit pay dirt, winding up on the phone with a service rep of an AT&T subcontractor named Aegis Communications Corp. who swallowed the imposter’s bait and read out the details of more than 60 phone calls, line by line, in a conversation that took more than a hour. Later, AT&T claimed it had been unable to trace the call.Link here.
CHAIRMAN OF ONLINE CASINO ARRESTED IN NEW YORK
In an escalation of the American attack on Internet casinos, law enforcement officers in New York arrested Peter Dicks, chairman of the board of SportingBet, an online sports book that is publicly traded on the London Stock market. Legal experts with knowledge of the case said Mr. Dicks had been detained at Kennedy Airport based on a warrant issued by the state of Louisiana. Louisiana state police were unavailable for comment. George Hudson, a spokesman for SportingBet, declined to comment. The arrest led the company to halt trading on its stock.
The arrest of Mr. Dicks comes seven weeks after federal law enforcement officials arrested the chief executive of a competing Internet sports book, BetOnSports, when he was on a flight layover at the Dallas airport. The executive, David Carruthers, and his company, which also trades on the London Stock Exchange, were charged with taking bets illegally over the Internet.
The federal government, and some states, assert it is illegal to operate an Internet casino. But their position puts them at odds with the policies for licensing license and regulating online betting parlors in many countries, including Costa Rica and Antigua, where many casinos base their operations. It also puts the states and federal government in conflict with millions of Americans who place bets online, using their home computers to wager on sporting events and games like blackjack and poker. After the arrest of Mr. Carruthers, legal experts and industry analysts and executives, said they presumed that the American law enforcement effort was aimed at one company, BetOnSports. But that presumption has changed.
Sue Schneider, the publisher of Interactive Gaming News, an online magazine that focuses on the Internet casino industry, echoing the sentiments of other industry analysts, had said the one obvious lesson after the arrest of Mr. Carruthers was that executives of online casinos should not visit the U.S. and risk arrest. She and other analysts and legal experts said it was mind-boggling that Mr. Dicks had visited anyway. “It’s absolutely amazing,” said I. Nelson Rose, a professor and Internet gambling expert at Whittier Law School in Costa Mesa, California. Mr. Rose speculated of Mr. Dicks – “Apparently he convinced himself this all involved Carruthers and BetOnSports.”
Shares of other offshore casinos plunged following the arrest. But some analysts said the offshore casinos cannot be undone by the lengthening arm of American law enforcement. “Online gaming will not end unless they prosecute every one of the 50 million Americans who bet online every year,” said Andrew P. Lee, a London-based online gaming analyst at Dresdner Kleinwort. “But from an investor’s perspective this becomes a very difficult sector to invest in.” The high demand from consumers means that a U.S. ban will likely do little to stop the growth of online gambling, Mr. Lee said. “The U.S. accomplishes nothing by prohibiting online gaming. In the end, they will be about as successful as prohibition was in banning alcohol.”Link here.
TRAITORS TO THE AMERICAN REVOLUTION
The American Revolution was waged against a highly centralized, nationalistic governmental tyranny run by a king, namely, the British Empire. The king enriched himself and his regime through the economic institution of mercantilism, defined by Murray Rothbard as “a system of statism which employed economic fallacy to build up a structure of imperial state power, as well as special subsidy and monopolistic privilege to individuals or groups favored by the state.” This system impoverished the average Englishman but was a perpetual source of power and riches for the king and his political allies. That is why the system lasted so long (at least 200 years) despite the fact that it was so harmful to the average citizen.
After the Seven Years War with France the king of England needed to pay off his war debts, so he stepped up the application of the corrupt mercantilist system to the American colonists. He did so with numerous taxes and interferences with international trade that benefited British businesses and the British state while treating the colonists like tax serfs. The “train of abuses” delineated in the Declaration of Independence were mostly abuses of the colonists for the purpose of plundering them with the British mercantilist system.
There was always a group of men in American politics who were not opposed to the evil mercantilist system in principle. They recognized it as a wonderful system for accumulating power and wealth as long as they could be in charge of it. Being victimized by it was another matter. These men, led by Alexander Hamilton and his fellow Federalists, strived to implement an American version of British mercantilism as soon as the Revolution was over. In doing so they were traitors to the American Revolution and the worst kind of corrupt, power-seeking political scoundrels.Link here.
WHY BOTHER INVESTING OFFSHORE?
If you are new to offshore investment, you may not know all the advantages of creating an offshore “nest egg”.
So, what are you waiting for? Right now is a great time to make your first offshore investment, because the U.S. dollar has temporarily strengthened. And you never know when you might be targeted for a lawsuit or civil forfeiture.Link here.
OLD-AND-COLD DOES NOT MEAN SAFE FOR 20-YEAR OLD OFFSHORE TRUSTS
An asset protection trust trainwreck contains several lessons.
A U.S. District Court ordered the repatriation of assets in two Bahamas trusts that had existed for over 20 years in order to satisfy the beneficiaries’ federal income tax liabilities, ruling that the beneficiaries’ ability to replace trustees means that they also have the ability to change the trustees to a U.S. trustee who will then satisfy creditors.
Husband and Wife self-settled and funded two foreign trusts – one in Bermuda and the other in Jersey – in 1983 and 1984. Husband was the settlor of one of the trusts for Wife’s benefit, and Wife was the settlor of the other trust for Husband’s benefit. As settlors of the respective trusts, Husband and Wife were given powers in the trust documents to replace trustees. In the event that one of them died, the other spouse would gain the power to replace trustees “anywhere in the world” for both trusts. The trusts were also drafted so that if one spouse died, the other spouse would become the beneficiary of both trusts.
Two decades later, in 2003, Husband and Wife were hit with a $36 million final judgment for unpaid federal income tax liabilities for tax years 1991 and 1993. As part of its collection efforts, the DoJ moved the court to order the repatriation of the offshore trust assets to satisfy the judgment. Husband died in early 2005, and Wife thus became the beneficiary of both trusts and obtained the ability to replace trustees. Wife argued that the repatriation order violated the laws of the jurisdiction where the trusts were located, and that she did not wish to either repatriate the funds or order the replacement of the foreign trustees. The court then looked to the trust document, which gave Wife the “unreviewable discretion” to replace trustees, and rejected Wife’s contention that because she had the complete discretion to replace trustees, she could simply refuse to replace the trustee. The court also ruled that it was totally irrelevant that the trusts were funded a decade before the tax liability even arose.
The court held that since Wife clearly had the power to replace trustees, the court could order her to replace the foreign trustees with a court-appointed U.S. trustee who could marshal assets to satisfy creditors. The court additionally held that despite the language of the trust documents giving her only discretionary distributions, her requests for distributions had never been denied and so therefore it appeared that she had apparent authority – backed up by her power to replace trustees – to require that distributions be made to her.
In some ways, this decision is just another in what has become a long and relatively consistent line of offshore trust failures – a line that has grown so long that cases such as these have started to become unremarkable. Could the trusts have been better structured? Probably. Would it have made a difference? Who knows? What we do know is that there are some important points that can and should be gleaned from this latest asset protection trust trainwreck. The first point is that the mere fact that a trust is “old and cold” does not mean that it is immune from repatriation orders. In fact, older trusts are possibly more dangerous than recently-funded trusts because they probably have not been updated to reflect changes in creditor-debtor law.
The second point is that one should not start thinking that an asset protection trust is no longer subject to challenge after the limitations period for fraudulent transfers runs after the initial funding. In entering repatriation orders, courts have not given more than passing thoughts to whether the funding was a fraudulent transfer under either U.S. or foreign law. What the court wants to know is whether the creator or beneficiary of the trust has a current ability to bring trust assets back now, not what happened when the trust was formed. This should especially be true with the 10-year clawback provision for self-settled trusts (both foreign and domestic) in the recent bankruptcy act.
The third point is that if somebody wants to have even a chance of an asset protection trust working, they must actually give up all control of the trust and the assets. A common theme in all of the asset protection trust disasters is that of hidden control, meaning that the settlor has attempted to retain some sort of strings over the assets supposedly given away. No matter how creatively planners have tried to paint these strings, when the court finds them the arrangement usually comes to grief.
Finally, we are back to the entire concept of the self-settled spendthrift trusts. There is a long line of cases that demonstrate that self-settled trusts do not work, and very few decisions that even suggest that they might work even in ideal circumstances. Although Husband and Wife attempted to cross-settle trusts for each other, it seems like the court treated Husband and Wife as effectively one unit (certainly this was the case after Husband died) and essentially presumed from the outset that logically the assets should be returned to satisfy the creditor. This does not bode well for the new, and totally untested, domestic asset protection trusts either.Link here (scroll down to U.S. v. Grant, U.S.Dist.Ct. So.Fla. case description).
MONTEVIDEO, URUGUAY: DIARY OF AN EX-PAT
First, a few facts. Uruguay is on the Atlantic Ocean south of Brazil and North of Argentina. Uruguay is about the size of Washington State, and a bit smaller than England and Scotland combined. It has a population of approximatelly 3.5 million, which is a bit smaller than Costa Rica. More than two thirds of the people live in Montevideo and the Atlantic littoral. The rest are thinly scattered through the rest of the country, which is largely agricultural. The language is Spanish, but with Portuguese and Italian influences. One interesting fact is that Uruguay has the second greatest reserves of water, per capita, in the world, after Canada.
After living in the West Indies, former Yugoslavia and Costa Rica, Uruguay seems normal. Montevideo is a city of about 1.5 million people. It is a combination of old and new, rather like Florida’s St. Augustine. It is at the same relative latitude as the North Carolina Capes – the climate is perfect for me. On average it goes below freezing about 2.5 days per year and above 90ºF/32ºC only 6 days per year. The entire city of Montevideo is bordered on the south by beautiful wide white beaches.
The two dogs and I landed at Carrasco International Airport in Montevideo after an 8.5 hour nonstop flight from Miami. The airport was pretty modern, but with few bridges directly to planes. Immigration did not ask me any questions, but did welcome me to Uruguay. The veterinary official looked at the dogs’ health papers and cleared them both in less than a minute. Customs opened one bag – with my desktop computer – and then waved me through. All of that was accomplished within 45 minutes of the plane touching down. Contrary to my impressions from afar, a high percentage of people speak some English. If things get sticky, I break out my PDA with its Spanish-English dictionary and work my way through it.
The trip to the hotel only took 15 minutes, but it gave me my first view of Montevideo’s wide, well-kept and tre–lined streets. The hotel room was $70 a night including breakfast. The room was small, in the European style, but was well appointed and the bathroom was of a goodly size. Buenos Aires in neighboring Argentina is a big city with about 13 million people in the metropolitan area. It is 45 minutes by commuter plane, or 3 hours by fast Ferry, from Montevideo. As far as I can tell, the relationship between Buenos Aires and Montevideo is roughly similar to that of New York City and New Jersey. After 4 nights in the hotel, Copperhead, my business partner, and I moved into the new house only two blocks away and just across the road from the beach.
We had our first real taste of customer service in a semi-emergency. It was pouring rain when the main circuit breaker shut off – and nothing we could do would make it turn back on. So we got out the yellow pages and called the very first electrician listed at 11:00 p.m. on Friday night. Carlos answered. Carlos told Copperhead that undoubtedly there was a major short circuit on one of the three additional circuit boxes that was not letting the main breaker come back on. We found these, turned them off and sure enough the main breaker functioned normally. We followed instructions and found the bad circuit, but still had intermittent problems. The cost, thus far? Nothing. Carlos visited us. It appears that some of the outside wiring is very bad. As we are not seriously disrupted by one circuit being off, Carlos will email us a proposal to fix everything, and will detail the cost, so we can get it approved by the landlord. The cost after his visit? Still nothing. I am impressed. This is the kind of problem that always turned into an expensive nightmare in Costa Rica – I guess they have not figured out how to “sock it to the gringos” yet. Maybe their culture is such that they never will. Too easy – too normal. I am waiting for the other shoe to drop. …
Two weeks ago today I landed in Montevideo. Since that time Copperhead, my business partner, and I have leased a house, installed phone lines, acquired cell phones and had broadband internet installed. Business bank accounts are in the works as well. In sharp contradistinction to Costa Rica, this has all been done without an attorney or notary or the expense connected thereto. Nothing took more than a passport and money. Another difference is the attitude towards time. After living in the West Indies for a while I learned the system there – whatever time frame was promised would really happen in the next higher time unit. 1 minute is really 1 hour, 1 hour is really 1 day, 1 day is really one week, etc. I also figured out the time rules in Costa Rica. There are none! If someone is really considerate, they will ring you 45 minutes after they were supposed to arrive to cancel or postpone. If they are from the government telecoms, they will set an appointment and never show up. Time here seems to be understood in an Italianate mode. They try to be on time, but sometimes things happen, and when things happen they are very, very sorry and will do better next time. And they do. Thus far, nothing has slipped more than a day – which amazes me. I waited weeks for telephones in Costa Rica and months for broadband. …
Living here keeps on being … dare I say it … normal. Yesterday we paid the quarterly property tax bill. Since the landlord lives in Buenos Aires, our agreement is that we pay it and deduct it from the rent. Paying the bill was very simple. In the local business district is a privately operated bill paying shop, hardly more than a kiosk. Copperhead took the tax bill in, they scanned the barcode on it, took his money, gave him a receipt, and thanked him. Three minutes flat in and out the door. (In a certain Central American Republic, which shall remain nameless, but the initials of which are CR, that would have taken half the morning.)
Today, we paid our corporate tax bill for our 1 year old Uruguay company. That set us back a whopping $7.50 - we already had some extra money on deposit with the accountant, so that did not even take any more effort than sending and receiving emails. Lastly, we come to the post office – the bane of most people’s existence in the “development challenged” world. I had ordered 4 books online from Amazon.com. They shipped them by post to me here. It took only 9 days from the U.S. The postman left notices in the mailbox, which I signed. Copperhead took them to the local post office, presented the signed notices, showed them his passport, collected the boxes and came home. No duty, no endless forms, just “gracias señor” and back into the street “immediamente”. (In that previously unnamed Central American Republic it took 4 hours and 4 trips between the customs office and FedEx to collect 2 used golf shirts: total duty – $2.00, total taxi fare – $75,00. In that same country the post office simply refused and returned a package of winter clothes I had left behind in Serbia-Montenegro.)
Let me see, we dealt with property tax, corporate income tax and the post office in two days without even causing me to curse. Gee, I miss America.Link here.
NSA BILL PERFORMS A PATRIOT ACT
A bill radically redefining and expanding the government’s ability to eavesdrop and search the houses of U.S. citizens without court approval passed a key Senate committee last Wednesday, and may be voted on by the full Senate as early as this week. By a 10-8 vote, the Senate Judiciary Committee approved SB2453, the National Security Surveillance Act (PDF file), which was co-written by committee’s chairman Sen. Arlen Specter (R-Pennsylvania) in concert with the White House.
The committee also passed two other surveillance measures, including one from Sen. Dianne Feinstein (D-California), one of the few senators to be briefed on the National Security Agency program. Feinstein’s bill, which Specter co-sponsored before submitting another bill, rebuffs the administration’s legal arguments and all but declares the warrantless wiretapping illegal. In contrast, Specter’s bill concedes the government’s right to wiretap Americans without warrants, and allows the U.S. Attorney General to authorize, on his own, dragnet surveillance of Americans so long as the stated purpose of the surveillance is to monitor suspected terrorists or spies.
Lisa Graves, senior legislative counsel for the American Civil Liberties Union, called the bill “stunning”. “The administration has taken their illegal conduct in wiretapping Americans without court orders, in violation of the Foreign Intelligence Surveillance Act and the Constitution, and used it as springboard to not only get FISA changed to allow the Terrorist Surveillance Program, but to actually, going forward, not give protections to Americans’ privacy rights,” Graves said.
Jim Dempsey, the policy director for the more moderate Center for Democracy and Technology, described the bill’s passage out of committee as “light years or miles beyond the Patriot Act. … What started out as Sen. Specter wanting to rein in the president’s program has turned on its head and is now not just a legislative ratification of the program, but an expansion of warrantless wiretapping of Americans. It would allow the NSA to turn its vacuum cleaners on even domestic phone calls and e-mails of citizens. They do all of this in Alice in Wonderland fashion by defining all kinds of categories of surveillance to be not surveillance.”
Specter has moved to have his bill voted upon next week by voice vote, called a unanimous consent motion, according to the ACLU’s Graves. Such a procedure would leave no record of who voted for or against the bill.Link here.
OECD TAX CHIEFS PLEDGE TO CONQUER INTERNATIONAL TAX EVASION
The tax collectors of the 30 members of the OECD said they will unite in a bid to crack down on cross border tax evasion. The “Seoul Declaration”, signed by the heads of national revenue authorities following the OECD’s 3rd Forum on Tax Administration in South Korea last week, calls for increasing cooperation between tax authorities to detect, deter and respond to international tax noncompliance. “We are committed to using national, regional and multilateral initiatives to achieve better compliance with tax laws working within the existing framework of bilateral agreements,” a joint statement issued by the tax agency chiefs said.
The taxmen agreed to conduct a joint study by 2007 into how accountants, lawyers and tax advisors were promoting illegal tax evasion and “unacceptable tax minimization arrangements”. They also agreed to complete “a directory of aggressive tax planning schemes so as to identify trends and measures to counter such schemes.” And they promised cooperation on training tax officials regarding international taxation issues, while expanding OECD corporate governance guidelines to remind companies that paying tax is inevitably linked to good governance, which brings financial and economic benefits.
The declaration also seeks to establish a cross-border taxation cooperation system to crack down on abuse of tax treaties. Meeting chairman, IRS Commissioner Mark Everson, noted that enforcement of tax laws has become more difficult as liberalisation and modern communications have opened financial markets to more taxpayers. In a speech closing the conference, Everson stated that, “The tax forum represents an important milestone in improving practical cooperation between tax authorities around the world.” Nine non-member countries, including China, India, and Malaysia also participated in the meeting.Links here and here.
“HE GOT OFF ON A TECHNICALITY”
Good for him!, I say, even if he is guilty.
There are technicalities of all sorts in our justice system. Known as “procedural” justice, these technicalities include not just rules governing arrests of crime suspects, and rules of evidence, but also fiddly rules of procedure – how soon you must respond officially when someone initiates a lawsuit against you, what issues you should discuss and when, and even how documents should look. “Substantive” justice and rules, by contrast, refer to the underlying merits of legal actions – the reasons a person pursues legal action, or is charged with a crime, in the first place. Substantive justice is that which examines whether one person wronged another and is liable, or whether it is a crime to steal.
Most cases are won or lost on purely procedural issues – usually, because one attorney or party did not follow the rules carefully enough. Said another way, most cases are decided without regard to their merits, without regard to who done whom wrong. What is good about that? Procedural rules, as arcane, complex, arbitrary, and frustrating as they are, in every case are an attempt to get justice accomplished. Some rules exist to give parties a fair chance to prepare for each others’ arguments. Other rules exist to strike a balance between “perfect”, or error-free, justice and actually getting the work done. (“Perfect” justice for a single complicated case could consume lifetimes.)
Lawyers wrote all these rules, and frankly, lawyers are not all bad people. To keep their licenses, lawyers have to stay out of trouble, avoid personal debt problems of the sort that most Americans have today, avoid bringing frivolous lawsuits. Some even have to do a week or two of work for free every year. Yes, the fact that some civil awards are huge, with lawyers taking a big cut, attracts ambulance chasers to the business. They are not the bulk of the profession, and lawyering is not the only profession with slimy practitioners. And since lawyers on both sides of civil cases developed the rules, it should not be surprising that rules of civil procedure are intended to make the whole process as fair as possible.
“Getting off on a technicality” happens in criminal, as opposed to civil, law. In criminal law the accused is presumed innocent. The standard of proof of guilt is high, and every doubtable fact is assumed in favor of the accused. These things were written into the structure of our criminal justice system by the framers who, though misguided in their assumption that forcible government should resume after the Revolution, were at least well apprised of the dangers of a criminal justice system biased in favor of the all-powerful government. Given their invalid fundamental assumption, the framers did a respectable job.
As we go about finding ways to shrink government, we might as well be informed as to exactly what we need to be rid of. In the complete absence of forcible government, it might be surprising to see which traditions and conventions remain in the free market. Some traditions we have learned to associate with government – such as procedural justice – actually predate our government, and will remain after it has faded away.Link here.
THE REAL ART OF ASSET PROTECTION
Summary. A couple made transfers of property to a trust at a time that they had no current creditors, for the stated purpose of protecting their assets against the claims of future unknown creditors. When later they had incurred a federal tax liability, the court held that the fact that they had done asset protection planning to defeat the claims of future unknown creditors was enough to satisfy the actual intent element of the Washington fraudulent transfer laws as to the IRS. The court also held that the trust to which the couple transferred their assets was in fact their nominee and alter ego, where the couple made no rent payments to the trust while continuing to live in the home that had been transferred, and where the affairs of the trust and the couple were so liquid and intertwined as to be indistinguishable.
The Townleys had owned their personal residence since 1977. In 1990, the couple borrowed against the equity in their personal residence to purchase an interest in investment property. In 1995, the Townleys created the Beaver Valley Trust and conveyed their personal residence and interest in the investment property into this new trust. Although the Beaver Valley Trust has an independent trustee and their children were the beneficiaries, the Townleys were made the “Trust Managers” for an indefinite period and given the power to handle all trust affairs. Of course, they still lived in their personal residence, but did not pay any rent to the trust or even make the utility payments. By 2000, the Townley had gotten themselves into tax trouble and had been assessed nearly $175,000 in unpaid taxes, interest and penalties.
In 2001, the Townleys filed for bankruptcy to attempt to wash out their federal tax liability. Although the Townleys’ objection to the IRS’s claim was denied, the Townleys were given a discharge and the bankruptcy trustee reported that there was no unsecured property available for distribution. The IRS then filed suit in U.S. District Court to reduce the federal tax assessments to judgment, set aside the transfers to the Beaver Valley Trust as fraudulent, and to foreclose on the federal tax liens. The Townleys claimed that they did not make the transfers to defraud the IRS, since the IRS was not even their creditor at the time. Instead, they created and transferred property into the Beaver Valley trust to protect their assets from unknown future creditors.
The District Court held that since the Townleys transferred their property to the Beaver Valley Trust before the IRS became a creditor, they would be considered a future creditor of the Townleys under Washington law. Far from exculpating the Townleys from a fraudulent transfer, the District Court held that their admission that they made the transfers to protect against unknown future creditors was a veritable confession of their actual intent to hinder, delay or defraud all creditors, including the IRS. The District Court then noted that in addition to satisfying the actual intent test, the “Badges of Fraud” that constructively prove the Townleys’ intent to defraud creditors were also satisfied by their admissions. The District Court further held that a trust may be considered an “insider” for purposes of a Badges of Fraud analysis, and additionally a trust may be considered an “insider” where it for the benefit of the debtors’ children, since children would be considered an insider as well.
The court found other factors that indicated that the transfers were fraudulent. The Townleys had also retained possession and control of their personal residence by continuing to live in it after the ostensible transfer, but did not make any rent payments or pay the utilities. The Townleys had transferred substantially all of their assets to the trusts (thus not giving them the ability to pay their tax bills as they came due). Finally, the Townleys had received no consideration for the transfer of their properties when they gifted them to the trusts. The District Court also adopted an alternate theory – the trust amounted to the nominees of the Townleys, and thus its assets were available to satisfy their creditors under a nominee or alter ego theory.
Based on all the foregoing, the District Court entered an order granting the IRS summary judgment and allowing them to directly foreclose upon those assets.
A myth has persisted in the asset protection world that as long as you do planning when there are no creditors around, it will ipso facto be safe. If you do planning with the intent to defeat the rights of any future creditors who may later appear, regardless of who they are, then that intent will be applied to set aside the transfer as to any particular creditor who does in fact appear later. Thus, there is nothing in the nature of a safe harbor simply because the planning was done when no creditors were present IF the planning was done with the intent to defeat any creditors, including future unknown creditors.
Planning must be done for non-asset protection reasons. Except for recognized homestead and statutory exemption planning, and some business entity planning and spendthrift trust planning, you should not conduct asset protection in its own name. As this case shows, that the clients engaged in transfers to protect assets from unforeseen future creditors had the practical effect of a sworn confession that they had the intent to fraudulently transfer assets as to all creditors who came later. You cannot make this confession, which means that you cannot admit to engaging in planning for the purpose of defeating ANY creditors of any kind. If a creditor gets possession of any documents that talk about asset protection, that will be evidence of actual intent to hinder, delay or defraud creditors, even if the creditor who does appear later was totally unforeseen.
There is nothing in the law that authorizes asset protection planning generally, except as allowed by some statutes. But there is plenty that prevents it, including primarily the fraudulent transfer laws. By and large, the legislatures and the courts want to see creditors get paid on their judgments and they have not given unconditional approval to planning that has as its stated purpose the shielding of assets from creditors. If one cannot stand up and give a straight-faced reason why the planning was done for legitimate other purposes than to lessen the rights of creditors, that planning will be in grave danger until the fradulent transfer laws Statute of Limitations have run.
The court repeatedly focused on the fact that the Townleys had transferred their home to the trust, but had continued to live in it while paying no rent or even the utility payments. This fact was important in determining that the trust was really just a nominee of the Townleys or their alter ego. The upshot of this is obvious. If you expect to put a personal residence into a trust have it respect for creditor-debtor purposes, it is critically important that the clients make regular rent payments to the trust and make all the utility payments. Not paying rent or utilities may work from a tax treatment standard but that does not mean that the civil courts will respect the arrangement – to the contrary, to the civil law courts the arrangement will look like a sham.
We also see in this case where alter ego law is once again being expanded to set aside an obvious asset protection scheme, where the debtors claimed that they transferred assets but continued to enjoy and control them. You simply cannot have it all ways. If you expect the trust to be treated as a legally independent entity, then you must treat it as a legally independent entity. That means an arm’s-length relationships between those benefitting from the use of trust assets and the trust must exist at all times. You cannot treat a trust like the family piggy bank and think that it will still be respected for creditor-debtor purposes.
The fraudulent transfer laws are primarily aimed at transactions that are without “reasonably equivalent value”. Why? If the debtor does not get back something of value from the transferee, there is nothing available for the creditor to satisfy the judgment. Gifts are inherently without “reasonably equivalent value” – there is no consideration for a gift. If asset protection is an issue then gifts should be avoided because they are easy for creditors to set aside.
In summary, asset protection is a very difficult planning area. There is no “safe harbor” simply because the planning was done at a peaceful time when there were no creditors on the horizon. That is a myth and one that is now exploded. You cannot do asset protection planning in its own name and expect it to survive scrutiny. Either the asset protection will be explainable for legitimate, non-creditor reasons, or it will probably fail. And, as with business entities, you must respect trusts as separate stand-alone legal entities. This includes paying rent when a home is in the trust. Finally, you must avoid making gifts where asset protection is a concern, because gifts are inherently weak forms of transfers for creditor-debtor purposes.
The real art of asset protection apparently involves creating a fundamentally sound plan that has a solid asset-protective effect, but does not appear to be an asset protection plan at all.Link here.
GOT WHAT IT TAKES TO BE AN ISLANDER?
The act of moving to an island is a bit like falling head over heels in love. We are swept away by beauty, a sense of otherworldliness, and a natural high that really rattles the endorphins. In such a state, we feel blessed, joyous, excited, thrilled even. Just like love, if it is real we learn to love things about the other person (or island) that are deeper than surface appearances and the relationship puts down roots, blossoms, and endures for a long time. Living on an island is like being with someone you are madly in love with. It is important to pay attention to reality while we are floating on the pink cloud that will, inevitably, evaporate and bring us back to earth.
So you have found your perfect island paradise, far from the freeways, shopping malls and general madness we call civilization? Before you pack, there are several lessons that I would like to share learned from more than 15 years of living on islands – St. Thomas, U.S. Virgin Islands and Vashon Island, Washington. Although both islands are part of the U.S. (St. Thomas is a U.S. possession) and share a common currency, they are as different as, say, Duluth, Minnesota and Tippo, Mississippi. But they have something else in common as islands with all the quirks and delights that make island life fascinating and challenging. They demonstrate that becoming an islander is as much a state of mind as it is a physical address.
Despite the familiar eye-popping photos of the Virgin Islands with ice clear waters, snow white beaches, and gently swaying palm leaves, do not be fooled about St. Thomas. It is a bustling, throbbing hub of frenetic life that never rests. True, there are serene beaches, such as Magen’s Bay, not too far from Charlotte Amalie, where cruise ships from all over the world regularly visit. In terms of serenity, St. John with its protected national park status is probably the gold standard in the American Virgins. St. Croix, just a short seaplane ride from Charlotte Amalie, is large, mostly flat, and agricultural.
Thus, lesson number one is to be prepared for the unexpected when relocating to an island. There is a powerfully seductive force that islands exert on mainlanders so powerful at times that it can overwhelm what is sometimes referred to as “reason” in otherwise rational folks. Real estate agents, of course, are familiar with this giddy vulnerability which is why it is probably a good idea to rent somewhere before buying, particularly if you have not already spent a lot of time visiting your island destination.
Having made that Serious Point, I must confess that when I arrived by ferry at Vashon Island after a mere 15 minute ride from Seattle, I was so captivated by its lush greenery and peacefulness, I muttered to my wife as we approached the dock: “We’re home.” Then we proceeded to buy a house on a cliff overlooking Puget Sound after just one day of scouting island properties. I certainly have not regretted my decision, but if I had made such a sudden move in my days as a reporter on the Virgin Islands and bought property on St. Thomas, I would have lived to regret it.
One reality that I have found to be true in both my island experiences is the stigma attached to newcomers. When our heads are in the clouds, or the hibiscus, we may well be oblivious to this at first. But when I moved to St. Thomas as a white “continental”, I was in a racial and cultural minority. It was definitely eye opening to be in a barely tolerated racial minority for the first time. And when I moved to Vashon Island years later, I was stigmatized because I came from California. There lingers a resentment against Californians who cash in their Golden State mortgages and use their ill-gotten gains to buy expensive island properties thus inflating the local economy and making life tougher for the struggling natives. I solved the problem of discrimination in the case of St. Thomas by moving back to the states with my wife and infant daughter, and chalking my Caribbean venture up to “experience”. I have coped with the California stigma by simply hanging in and becoming a part of the community long enough to be accepted.
Moving to an island, we confront a strange duality in our natures. The same need that impels us to seek solitude, serenity, and the peaceful healing we imagine an island will provide, also produces isolation. If you are a monk, you have pretty much made a vow that holy isolation is your chosen path. If you are just another frenzied American who wants to get away from the rat race, you need to be prepared to deal with isolation – some of it consciously chosen and some that results from xenophobia. Isolation can be nurturing for the soul or drive us mad, depending on how we handle it. That is why it is a good thing to consider before making your move what kind of community or support network you would like to develop on the island. You will need your support system as much, or more, after making your move.
Since you wanted an adventure in moving to an island, don’t freak out when unexpected “adventures” occur. It is important to develop a Zen way of dealing with daily life. And then there is the business of “island time” versus mainland time. Since everyone else moves on island time, the newcomer needs to become quickly familiar with this unique island characteristic. Although it will eventually dawn on you if you live on any island long enough, it is helpful to know when you arrive that while the island may be a quaint paradise to you, to the natives it is their home.Link here.
FOR U.S. WORKERS ABROAD, TAX BILL PROVES A HANDICAP
For Americans overseas, one subject just will not die down these days. Taxes. In May, President George W. Bush signed a bill passed by Congress that sharply raises tax rates for overseas citizens with salaries plus taxable benefits totaling $93,000 a year or more. The biggest effect so far has been on businesses. The new law taxes much more of the rent assistance provided by companies for employees abroad. The U.S. is the only developed country that taxes its citizens while they are overseas, so nationals of countries like Canada, Britain, Australia and New Zealand can often afford to work for less and do not need to ask employers for costly tax assistance.
Americans living overseas, particularly those facing high taxes on employer-provided benefits like housing assistance and tuition for children in school, are wondering not only whether they can afford to stay, but also whether their employers will try to transfer them home. Tax experts said that in poring over the two main changes enacted in May – higher marginal tax rates and higher taxes on housing assistance – they had found several features that were not obvious at first. Many companies demand that Americans become employees of their overseas subsidiaries and give up their expatriate benefits, including tax assistance, if they settle down and stop moving to another city every several years.
Another wrinkle coming to light is that the tax increase also applies to non-Americans who carry green cards, which allow them to work in the U.S. Green card holders must pay American taxes even when they live and work outside the U.S. Tax experts urge them to reconsider whether it makes sense to retain the cards. And Americans living in fairly high-tax countries in Western Europe may find that they are no longer paying enough taxes overseas to avoid owing taxes in the U.S. as well. Many foreign tax codes may have higher marginal tax rates than the U.S. but allow more deductions and exemptions.
The interaction of the increased effective tax rates and the higher taxes on housing assistance will have the sharpest effect on the tax bills of overseas Americans who earn less than $500,000 a year, especially those with corporate benefits worth nearly as much as their salaries. Overseas families receiving free flights home for leave, generous medical benefits and subsidies for American-size apartments and houses suddenly find themselves facing federal tax rates as high as 35% on these benefits.
Until this year, the first $80,000 earned overseas was excluded from taxation in the U.S., with the next dollar earned overseas treated as though it were the first dollar of income and scarcely taxed. The new law increases the exclusion to $82,400, but the next dollar of income is now being taxed as though it were the 82,401st dollar of income. Until this year as well, only the first $11,894 in housing assistance was taxed, even if a company was providing more than $100,000 in rent assistance, as has been common in financial centers like Hong Kong, Tokyo and London. Under the new law, the first $13,184 a year of housing assistance is taxed, the next $11,536 is not, and any further housing assistance is taxed. It is common for housing assistance to be provided in costly cities not only to bankers and top executives but also to teachers at international schools, sales managers, and U.S. newspapers’ foreign correspondents.Link here.
TWEAKED FIREFOX LETS YOU SURF INTERNET WITHOUT A TRACE
A tweaked version of Firefox that makes Web browsing anonymous has been released by a group of privacy-minded coders. Every few minutes, the Torpark browser causes a computer’s IP address to appear to change. IP addresses are numeric identifier given to computers on the Internet. The number can be used along with other data to potentially track down a user, as many Web sites keep track of IP addresses.
Torpark’s creators, a group of computer security gurus and privacy experts named Hactivismo, said they want to expand privacy rights on the Internet as new technologies increasingly collect online data. The browser is free to download here. It is a modified version of Firefox Portable, an optimized version of the browser that can be run off a USB memory stick on a computer. The Torpark browser uses encryption to send data over The Onion Router, a worldwide network of servers nicknamed “Tor” set up to transfer data to one another in a random, obscure fashion. Internet traffic, such as Web site requests, carries information on where it came from and where it is going. But that is muddled using Tor, which has been endorsed by the Electronic Frontier Foundation, and is hard to trace back to a source.
One minor downside is that surfing with Torpark is slower than with a typical browser over the same connection. Torpark’s user interface appears similar to Firefox with a few changes. It shows the current IP address that would be seen by Web sites in the lower right hand corner, and features a special “Flush Tor” button to reset a new, random server connection.Link here.
FORMER SENIOR CARIBBEAN DIPLOMAT WARNS CARIBBEAN STATES AGAINST EU
Sir Ronald Sanders said that Governments and financial sector authorities in the Caribbean should be very watchful of the EU’s attempt to broaden the scope of the Savings Tax Directive. Earlier this month it was reported that EU Commissioner for Taxation, Laszlo Kovacs, is seeking to extend the Directive to Hong Kong, Singapore, Japan, Macao, Bahrain, Dubai, Canada and the Bahamas.
The move comes amid growing evidence that European investors have easily outwitted EU tax collectors by shifting their assets to locations not covered by the directive. The legislation, which extends to a number of “third countries” such as Switzerland, the Channel Islands and Caribbean offshore territories, was introduced in July 2005. It facilitates the exchange of information between EU tax authorities on certain types of savings and investments held by EU residents in their territory so that interest earned can be taxed in the resident investor’s home state. The legislation also allows some jurisdictions to apply a withholding tax, currently 15%, instead of exchanging information. However, these jurisdictions have reported relatively paltry withholding tax revenues, prompting the EU to take action to plug the directive’s many loopholes.
Although there are several ways for investors to escape the directive, such as switching assets to vehicles not covered by the legislation, perhaps the most obvious avoidance strategy is for investors to simply shift their money to more tax-friendly jurisdictions. Anecdotal evidence suggests that Dubai, Hong Kong and Singapore have been major beneficiaries. Sir Ronald says that the Bahamas is named because, apart from Cayman and the BVI, which are already captured in the EUSD, it has the most financial institutions in the region. He recalls the campaign waged by the OECD against Caribbean jurisdictions prior to the introduction of the Directive, saying that its “naming and shaming” campaign did great harm to several Caribbean countries which lost both earnings and employment as many financial institutions closed their doors. Indeed, Sir Ronald himself played a prominent part in the defence mounted, more or less successfully, against the OECD’s campaign.
Now he says, “Caribbean countries should be alert to the need to guard their financial services sector against further unnecessary erosion at a time when many of their economies are reeling from the loss of preferential access to the EU market for their exports such as bananas and sugar.”Link here.
NETHERLAND ANTILLES BREAK UP MAY BEGIN IN JULY 2007
The transition process towards the dismantling of the Netherland Antilles could begin in July 2007, according to the Dutch Council of State. However, acknowledging that the target date is only 10 months away, the Council, or RvSt, has warned the constituent islands against too much optimism about the date. The RvSt stated, “There are great risks to a de facto dismantled Netherlands Antilles without having the legal and organisational structures in place. A decent and multi-annual transition plan is vital.”
The current process has its origins in a constitutional crisis which erupted in 2004 due to irreconcilable differences between the constituent islands, and a joint Commission appointed by the Netherlands and the local government concluded that the jurisdiction should be broken up, with the islands of Curacao and St. Maarten becoming autonomous countries alongside the Netherlands and the Caribbean island of Aruba, while the remaining three islands – Saba, Bonaire and St. Eustatius – should be brought under the direct control of the Dutch government in The Hague. This was approved by the Dutch cabinet in December 2004.
The RvSt is also proposing a “Legislation Bank” of the Netherlands Antilles, and the five island territories which would facilitate a complete overview of all laws that are applicable on July 1, 2007. From this date, Dutch laws for the three smaller islands will begin to be implemented. However, the council warned that achieving country status for Curacao and St. Maarten, and direct ties for the other islands, would be a “considerable, complicated and lengthy operation,” with both national debt and individual island debts to consider. The jurisdiction’s total debt, which stands at NAF5 billion ($2.8 billion) will be restructured with the assistance of the Dutch government, according to the 2005 Roundtable Agreement.Link here.
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