Offshore News Digest for Week of January 22, 2007

GLOBAL LIVING & BUSINESS

“SMALLEST COUNTRY” FOR SALE – SEA VIEWS INCLUDED, LAND EXTRA

It is not every day you see a real estate listing advertising “the possibility to have your own country. ... something exclusive to a very few lucky people.” But that is one current offer from the InmoNaranja agency in Motril, Spain. The “country” in question, Sealand, is said to come with its own citizens, government, money, stamps, flag, national anthem, and other trappings of nationhood – all for about $1 billion. And you get to be royalty.

It may sound like a bargain, but it does not necessarily look like one. The “Principality of Sealand” is a rusting 5,920-square-foot (500-square-meter) platform perched on two concrete pillars in the North Sea off eastern England. It is one of many so-called micro-nations – curious places where, if they actually exist, the chief export seems to be hyperbole. Sealand, a former British naval fort built during World War II, is offered for sale on behalf of “Prince Michael,” aka Michael Bates – son of Paddy Roy Bates, a retired army major turned fisher turned pirate radio station operator.

The elder Bates appropriated the abandoned sea fort, called Roughs Tower, from another pirate-radio operator in the mid-1960s. Having been convicted of breaking U.K. broadcasting law from another sea platform in 1966, Paddy Roy Bates aimed to restart BBMS (his Britain’s Better Music Station) from the farther-out tower—though he never did. Instead, Prince Roy of Sealand, as he called himself, declared Roughs Tower an independent country in 1967—making this year the 40th anniversary of “probably the smallest country in the world,” according to Inmonaranja.

Bates’s sovereignty claim received a boost in 1975 after he repelled a British Navy assault by firing warning shots from his principality. U.K. courts ruled that the platform – located 6 miles off the county of Suffolk was outside British jurisdiction. At the time, the border of U.K. territorial waters was set at 3 miles from the coast. But in 1987 the British government extended its territorial waters to 12 miles from the coast.

Sealand’s Web site claims “long-standing membership of the international community of States.” But the U.K. government says it does not recognize Sealand, and neither do other nations. German and U.S. court rulings have both rejected its claims to independence. Other current micro-nations include the Gay and Lesbian Kingdom on islands in Australia’s Coral Sea – formed by a group of gay-rights activists in Queensland – and the Hutt River Province Principality, established in 1970 by farmers in the state of Western Australia in protest of changes to government agricultural policy. But, as with Sealand, you will not find their names on the map. Widely recognized pocket-size states include Vatican City (the Catholic city-state covers 0.2 square miles), Andorra in the Pyrenees mountains, San Marino within Italy, and the Mediterranean Principality of Monaco.

Things are not always clear-cut, said David Miller, a senior map editor with the National Geographic Society in Washington, D.C. There are gray areas where “sovereignty is disputed or yet to be resolved,” such as Somaliland in northern Somalia. “Somaliland has been a state since 1991, when the country fell into chaos with fighting among warlords” and Somalia’s government all but dissolved, he said. Somaliland is not generally recognized as a state, partly because its borders remain blurry in places due to the Somaliland authorities’ inability to secure the frontier from neighboring warlords in Somalia.

But Sealand has no claim to statehood “whatsoever,” Miller said. “It’s a platform. They don’t have land. They might claim the platform but the land underneath, or control of the land, is just not there. And of course there’s no international recognition.” Miller also points out that, since 1987, Roughs Tower has been within U.K. territorial waters. “It is by all intents and purposes under the sovereignty of the United Kingdom. There just hasn’t been a specific court challenge in the U.K. that tests ownership of the platform.”

So far the U.K. government has yet to assert its authority over the Sealand. That could explain why potential buyers do not seem put off by Sealand's tenuous status. Sealand, in keeping with its pirate-broadcasting tradition, is being marketed as a “digital paradise”, attracting interest from Web companies that might prefer to operate outside established copyright laws. Sealand’s latest suitors include The Pirate Bay, which allows Web users to download pirated movies and music. But British legal experts say that, since the platform stands in U.K. waters, U.K. laws should apply.

Prince Michael of Sealand, though, also has a more traditional sales pitch. “The neighbors are very quiet,” he told BBC Radio. “There is a good sea view.”

Start (or buy) your own country.

“What is wrong with just starting your own country?” my late good friend Bob Kephart used to ask rhetorically in his geopolitically reflective moments. Bob, a staunch libertarian and the founder of The Sovereign Society, was a strong believer in minimalist government. (Actually he was a quasi-anarchist who disliked all government.) As a self-made man, he used his wealth to promote liberty and freedom in every way possible. (See An Extraordinary Man.)

I thought of Bob’s suggestion because of the announcement last week that Sealand was up for sale. Sealand, which was built as a wartime fort in 1941, is a steel platform perched on two concrete towers. Accessible only by helicopter and boat, it sits seven miles off the coast of Harwich in Essex. In 1967, Paddy Roy Bates, a former English army major, settled there with his family. He proclaimed the island his own state and gave himself the title of prince. A judge ruled that Sealand lay beyond the 3-mile limit of Britain’s territorial waters. So he was, therefore, outside government control.

Sealand delighted Bob and he even joked about seeking citizenship from Prince Roy. Here was a free British citizen declaring himself to be outside London’s control and thumbing his nose at Her Majesty’s mighty government. A 2004 article in Harper’s magazine set forth, with some tongue in cheek, the several alternatives U.S. citizens or resident aliens have when they decide to say “bye bye” to America. It even addressed the gaggle of self-appointed “nations” that always fascinated Bob, including “Sealand” and the floating “country” of ResidentSea. Harper’s suggested correctly that Americans have a legal right to “expatriate” – to formally end their U.S. citizenship. But I warn you not to contemplate such a move unless and until you have acquired a new, second citizenship in another nation.

The Harper’s article spoke about instant economic citizenship in two Caribbean nations that costs big bucks and they discussed the risk of becoming a man without a country. But what they do not tell you how to move offshore and achieve eventual freedom from U.S. taxation with complete expatriation. It is legal, but long and complex. Meanwhile you may want to check out this ad. To heck with Charles ... you too can be a prince!

SIGNS OF NEVIS AND ST. KITTS RAPPROCHEMENT APPEAR

After a period of some years during which the Nevis administration pursued a secessionist policy in relation to its federation partner St. Kitts, there are signs of rapprochement between the two islands. Nevis Premier Joseph Parry recently told an audience including the Prime Minister of St. Kitts and Nevis, Dr. Denzil Douglas, “I can definitely say that the Nevis Island Government is working very closely with the Federal Government to make sure the people of Nevis and the people of St Kitts have mutual benefit.”

Mr. Perry’s Reformation Party took power last year after rival party the CCM had been in power in Nevis for the past 14 years, and had pursued secession. Nevis came close to seceding in a 1998 referendum, falling just short of the required two-thirds majority. Other signs of mutual cooperation include plans for the construction of a bridge linking the two islands and the imminent opening of a car-ferry link.

The opening of the Caribbean Single Market and Economy (CSME) is also pushing the two islands towards a more cooperative arrangement. Under the CSME regional firms will have the right of establishment in both St. Kitts and Nevis. Dr Douglas called for consultation and collaboration between the two governments on the issue of business licences, which he said ought to apply on both islands.

NEW YORK LOSING CAPITAL MARKETS THRONE

New York is losing its competitive edge and could give up its place as the financial capital of the world in as little as 10 years, a study has found. The study was commissioned by Mayor Michael Bloomberg and Sen. Charles Schumer, who have been concerned about what they say is a growing threat to New York’s position as an international leader.

Bloomberg, a Republican and former CEO, and Schumer, a Democrat, outlined the report’s findings and recommendations, which include some changes specific to an anti-fraud law, known as the Sarbanes-Oxley Act, enacted in 2002 amid a spate of corporate scandals. According to the study, by the consulting group McKinsey & Company, New York and other U.S. cities are falling behind in financial services while cities including London, Dubai, Hong Kong and Tokyo are surging ahead.

It concludes that the U.S. is losing its advantage because of three main factors: (1) The American regulatory framework, particularly Sarbanes-Oxley, is “a thicket of complicated rules, rather than a streamlined set of commonly understood principles, as is the case in the United Kingdom and elsewhere.” (2) While New York offers a promising talent pool for its financial services work force, “we are at risk of falling behind in attracting qualified American and foreign workers.” (3) The legal environments in other nations “far more effectively discourage frivolous litigation.”

One in nine New York jobs is in financial services, which contributes more than a third of business income tax revenues to New York’s economy. Nationwide, financial services is the third-largest sector of the economy, contributing 8% of GDP, behind only manufacturing and real estate. Bloomberg spent years on Wall Street and built his multibillion-dollar fortune from the financial information company Bloomberg LP, which he founded in the early 1980s. “The financial services industry is one reason that the 20th century was the American century and that New York became the world’s capital,” he said.

The S.E.C. agreed last month to ease some rules within Sarbanes-Oxley, but the McKinsey report suggested the S.E.C. should go further and consider exempting foreign companies from certain parts of the act, “provided they already comply with sophisticated, S.E.C.-approved foreign regulators.”

Bloomberg and Schumer were joined by New York’s new governor, Eliot Spitzer, who acknowledged that his presence and endorsement of the report might raise eyebrows considering his pursuit of major Wall Street investment firms and mutual fund companies when he was the state’s attorney general. Spitzer said Sarbanes-Oxley was “a necessary response at a moment in time when the integrity of the capital market was being questioned,” but he said he supports changing sections that are burdensome and that could potentially scare off business. The report suggests creation of a “international financial services zone” in New York, where tax breaks and other incentives could be used to lure new foreign firms.

To reach its findings, the McKinsey team interviewed more than 50 CEOs and business leaders, and gathered information through surveys of more than 300 other leaders and senior executives.

ASIAN CENTRAL BANKERS CALL FOR PROTECTION FROM CAPITAL INFLOWS

Asian nations need better protection to prevent “massive” capital inflows from damaging their economies, according to central bank governors from the region. “In order to increase the ability to absorb external shocks from massive capital flows, the priority seems to be to strengthen the function of foreign exchange and financial markets in the region,” Bank of Japan Governor Toshihiko Fukui told a conference in Tokyo.

Thailand last month imposed currency controls and the Philippines is examining its foreign-exchange rules as inflows into Asian asset and financial markets raise concern among central banks. Capital outflows a decade ago sparked the 1997-98 financial crisis, which pummeled the region’s currencies and economies, the topic of discussion at the conference. “There are better ways to stem exchange rate volatility,” said Shane Oliver, chief economist and head of investment strategy at AMP Capital Investors in Sydney, which manages $78 billion of assets. “We don’t have the same bubble-like conditions of the mid 90s.”

Nations in Asia and the Pacific have more than $3.1 trillion of foreign-currency reserves, more than 60% of the total globally. China’s reserves swelled to more than $1 trillion last year, while Thailand, Indonesia and the Philippines have seen theirs increase by over a fifth in 2006. Asia’s foreign exchange reserves provide the region with a “cushion” against the potentially damaging impact of capital flows, Bank Indonesia Governor Burhanuddin Abdullah told the conference. Indonesia’s foreign-exchange reserves have risen 23% in the 12 months to December to $42.6 billion, helped by a surge in exports and an increase in overseas investment in Indonesian assets.

Risks from unpredictable money flows have risen since the crisis that hit Asia in 1997-98, IMF Managing Director Rodorigo de Rato told the Tokyo conference. “In the last decade, the global integration of capital markets has become even deeper,” de Rato said. “As a result, both the benefits of free trade and free capital flows and the risks associated with volatile capital movements have increased.” De Rato said further flexibility in China’s currency would help to solve the problem of global imbalances. China ended a peg to the U.S. dollar in July 2005, revalued the yuan by 2.1% and allowed it to trade against a basket of currencies. Since then, the yuan gained about 4% against the dollar.

A non-conventional approach to addressing global imbalances and capital inflows pushing Asian currencies higher may be required, said Bank of Thailand Governor Tarisa Watanagase. Since mid-December, the central bank has imposed penalties on investors withdrawing funds within a year and issued measures to boost money leaving the country. Markets tend to find ways to circumvent restrictions on inflows, de Rato said.

Asia’s growing economies are attracting more money from investors and companies who want to benefit from a rise in expenditure as loans growth and higher wages encourage people to spend on property and other big-ticket items. Stock markets in China, Hong Kong, Singapore, India and Indonesia set new highs in December, and Asian shares are expected to extend their longest winning streak in almost two decades this year as consumer spending picks up. “Investors are attracted to fundamentals and markets are fairly cheap so it made a lot of sense to put money in the region,” Oliver said. Increasing capital inflows are driving the appreciation of the region’s currencies. The Thai baht gained 10.5% in the past year and the Philippine peso strengthened 7.3%, the two biggest rises out of 15 Asia-Pacific currencies tracked by Bloomberg.

China’s “blind optimism” spurs stock bubble concern.

China’s stock market has become the most expensive in Asia, leading strategists at Citigroup, HSBC Holdings and UBS AG to warn investors to stay away. Shares traded on mainland Chinese exchanges cost twice as much relative to earnings as they did 18 months ago, and double the average for emerging markets, after extending last year’s 121% rally in the Shanghai and Shenzhen 300 Index. The surge sent their value above $1 trillion for the first time and prompted the government to caution shareholders that “blind optimism” is driving gains.

China Life Insurance Co., the nation’s largest insurer, has more than doubled since trading began in Shanghai on January 9. The debut followed a stock sale in which investors ordered 49 times the available shares. Industrial & Commercial Bank of China, the #1 bank, has gained 70% since selling shares in October in the biggest-ever IPO. Demand for ICBC shares from individuals in China was five times that of institutional investors, according to bankers managing the sale. “It’s a warning sign every time you see retail investors in long queues for initial offers,” said Lau Wing Tat, who oversees $8 billion as CEO of DBS Asset Management in Singapore. “Retail investors don’t set the trend and instead pile in when they think there’s money to be made, often near the end of the rally.”

China’s policy makers are trying to stem the boom. Banks were urged to stop lending money for stock investments and to recall outstanding loans. The People’s Bank of China, the central bank, ordered banks to boost reserves four times in the past year to reduce money available for investment. Banks now must set aside 9.5% of deposits after a half-percentage-point increase on January 5. Chinese leaders’ concerns have not shaken Mark Mobius, who oversees $30 billion in emerging-market equities at Templeton Asset Management in Singapore. Prospects for rising consumer demand make China attractive, Mobius said in a December interview.

Central bank decision speaks volumes about dominance of Old Guard in Japan.

In a stunning blow to central bank independence, the Bank of Japan seriously bumbled its January 18 policy decision. After setting up the markets for the second installment of a “normalization-focused” monetary tightening, the BoJ buckled under political pressure and passed – electing, instead, to keep its policy rate unchanged at 0.25%. While this may end up being nothing more than a painful detour on the road to normalization, the incident speaks volumes about the Old Guard political dominance of Japan’s deeply entrenched LDP ruling party. It is a major credibility blow, with potentially lasting damage to the New-Economy image of a revitalized post-deflation Japanese economy.

Ironically, it is not as if the BoJ did the wrong thing insofar as the policy decision itself was concerned, in light of the recent shakiness of private consumption demand. It may well be that a glacial pace of monetary policy normalization is the correct choice for a still very fragile post-deflationary Japanese economy. The problem is that BoJ Governor Toshihiko Fukui had been direct and adamant for quite some time in offering his own take on policy wisdom – in effect, leaving the distinct impression that a rate hike was all but inevitable in January. At the same time, the ruling LDP leadership has been equally explicit in warning against a premature hike – fearing the risk of a deflationary relapse. In our and in the eyes of most market participants, the politically-independent central bank should prevail in any such dispute. Obviously, we were wrong. Sadly, Governor Fukui’s flinch says it all – BoJ independence can now be drawn into serious question. The BoJ made a communications blunder of epic proportions.

The consequences go well beyond the BoJ’s image problem. With Japanese short-term interest rates remaining near rock-bottom lows and now expected to do so for longer than previously thought, there is little to stop a continuation of the so-called yen carry trade – borrowing cheaply in Japan and reinvesting in higher-yielding assets nearly anywhere else in the world. With the steepness of the Japanese yield curve likely to remain an important source of excess global liquidity, this can only perpetuate the increasingly worrisome bubbles in risky assets, such as corporate credit and emerging-market debt. Moreover, once again, the yen is headed the “wrong way” for a Japanese economy in recovery. This paints the yen into the corner as perhaps the most mis-priced major currency in the world today – underscoring the potential for wrenching adjustments in foreign exchange markets as well as the possibility of an escalation of external political pressure on Japanese currency policy.

In the end, there may well be an even deeper meaning to all of this. This incident has as much to say about the heavy-handed role of the Japanese government as it does about the BoJ. A Japan that lapses back into its old ways is an unmistakable triumph for the Old Guard. That could also prove to be a huge disappointment for Asia and for the broader global economy.

CAN INDIA SUSTAIN ITS RAPID ECONOMIC GROWTH?

More than a decade of reform has shifted India’s long-term economic growth rate to a higher level. With that, analysts agree. Where they disagree, is in deciding what that higher rate is. Over the last three years, growth has averaged about 8% and the government is shooting for an average of 9% over the next five years. That is a big jump from trend growth of about 6% in the two prior decades and would move the economy’s momentum closer to neighboring China which is sustaining growth of about 10%.

While the central bank is not sure if 9% growth is so rapid the economy will overheat, analysts are convinced trend growth has shifted to a higher gear, leaving debate to dwell on what growth rate is sustainable. Goldman Sachs analyst Tushar Poddar reckons trend growth is now 8%, driven by productivity gains. Other analysts say it is closer to 6.5%, as a lack of infrastructure and skilled workers will eventually limit the economy’s ability to expand.

ISLAMIC BANKING AN OPPORTUNITY OR A THREAT?

Islamic banking, which implies the avoidance of interest, has become a substantial industry during the last four decades. One obvious question is whether its emergence further segregates Muslims from Western values and norms, creating a financial ghetto. An alternative view is that as increasing numbers of people in the West are dissatisfied or skeptical about the banking services they receive, and see them as exploitative or even unethical, the emergence of Islamic banking with its own distinctive morality results in Islam projecting a much more positive face.

Many Western bankers view Islamic finance as a curiosity, and perhaps even a business opportunity, but seldom as a threat comparable to that from Muslim extremism. Indeed, Islamic banking and finance can be regarded as a gentler aspect of Islam, and one that lends itself to dialogue between Westerners and Muslims. Islamic retail financial institutions are now well established in a number of Western countries. The leading international banks all offer Islamic deposits and sharia-compliant financing facilities.

There has been much dialogue between the Western bankers working in these institutions and the sharia scholars who advise what is, and what is not, permissible. This dialogue extends to insurance, where Islamic takaful companies have become increasingly active, their distinguishing feature being that they do not hold conventional interest-yielding bonds, and that shareholder funds and premiums paid by policy holders cannot be comingled, which could result in the former exploiting the latter’s misfortune.

As sharia is about universal, divinely inspired principles rather than national laws, leading international law firms have also become involved in Islamic banking and finance, as contracts need to be drafted under English or American law in a way that is consistent with sharia. Islamic banking and finance can point the way forward, towards extending choice rather than restricting options. As each institution has its own sharia board, sharia compliance is effectively privatized, rather than being a matter of national law. Indeed, each sharia board passes its own fatwas, or religious rulings, which further extends choice in the marketplace for religious ideas. Religion flourishes under competitive conditions and Islam is no exception, whereas when it is nationalized, its adherents soon become alienated.

The Islamic Republic of Iran can be regarded as an example of how not to encourage the development of Islamic banking and finance. There, all banking has been sharia-compliant since 1983. The banks, however are state-owned and have little autonomy, even in determining what deposit and financing products to offer. Banking development has been slow, there is little financial innovation, and most Iranians do not have bank accounts. In contrast, on the Arab side of the Gulf and in Malaysia, where Islamic and conventional banks compete, Islamic banks have attractive products on offer and an growing client base.

Islamic banking is here to stay, is an opportunity rather than a threat, and has an exciting future. Gaps remain – there is no Islamic bank in Israel for example to serve its Muslim population. But if the Central Bank of Israel licensed such an entity it could create much goodwill. It might also encourage the Jewish population living there to question whether the operations of their own banks are compatible with religious teaching in Leviticus and Deuteronomy. Ultimately Islamic banking and finance is about the emergence of a distinctively Islamic form of capitalism that may coexist and interact with any other capitalism. Such a development should be welcomed and facilitated, and not hindered or suppressed.

London becoming Islamic banking hub.

Two landmark financing facilities closed in London last week based on the Murabaha (cost-plus financing) and Musharaka (equity participation) contracts, in another sign of the continuing importance of London as one of the premier international centers for structuring and arranging Islamic finance.

Dubai Islamic Bank launches Sharia-compliant protected Islamic note.

DIB has announced the launch of a Sharia compliant 3-year Capital Protected Global Diversified Note. The 3-year Note will have a minimum investment of $10,000 and will offer investors protection on their capital while participating in a diversified basket of global equities, currencies, commodities and real estate. DIB will offer a maximum potential return of 7% per annum in the first year.

Naveed Ahmad, Head of Investments – Wealth Management, DIB, said, “Our first product for 2007 meets all the requirements of retail investors. It provides capital protection, guaranteed 7% return in the first year, as well as the geographical diversification into four key asset classes – stocks, currencies, commodities and real estate. All of these features coexist through a uniquely designed Shari’a-compliant mechanism. Thus, for a retail investor, there are four diversified assets in one solid fund.”

CZECH REPUBLIC ATTRACTING RECORD INWARD INVESTMENT

In 2006, CzechInvest mediated for the Czech Republic a total of 176 investment projects, worth $4.6 billion (€3.6 billion) – the largest inflow of foreign investment into the country in the government business and development agency’s 15-year existence. “In the Czech Republic, foreign investors find a highly skilled workforce, advantageous geographic location and favorable operating costs. Of course, all of these advantages are particularly beneficial for domestic companies that are gradually becoming significant players in the global market," announced Tomas Hruda, CEO of CzechInvest. “Among the received projects, there is a very large number of projects with high added value,” adding that the agency intends to focus on attracting these sophisticated investments in the years ahead.

Most of the investment projects and the largest volume of investment ($2.2 billion) were directed to the Moravia-Silesia region, in the country’s industrial northeast. The second most attractive location was the Usti region, which borders Germany in the north, with a total volume of $0.6 billion. The Moravia-Silesia and Usti regions are among the areas worst affected by structural problems.

The largest investment project in 2006 was that of South Korea’s Hyundai Motor Company, which invested over $1.2 billion into a plant in the Moravia-Silesia region, creating 3,000 jobs. Three Japanese companies were among the top five investors, represented by IPS Alpha Technology and Hitachi, manufacturers of electronic devices, and AGC, a glass maker. All were in the Usti region.

In a bid to boost inward investment still further, the Czech government has been exploring a flat tax system, an idea that has caught on fast in the investment-hungry countries of the former eastern-bloc. Earlier this year, a center-right coalition of three parties dusted off plans for a single rate of income tax which were abandoned by last year’s minority government in the face of opposition from the Social Democrats. Corporate tax in the Czech Republic was reduced to 24% last year, and personal income tax rates are levied at progressive rates between 15% and 32%. The standard rate of VAT is 19% for most goods and services, with a 5% discounted rate for certain specified goods.

TAXES

CANADA’S TRUSTS LOOK TO CORPORATE STATUS AFTER TAX DECISION

True Energy Trust, a mid-sized exploration and production trust based in Calgary, has announced that it will be converting into a corporation following Finance Minister Jim Flaherty’s controversial decision to impose a new tax on the income trust sector. True said that it has been investigating a number of restructuring alternatives subsequent to the Federal Government’s October 31, 2006 announcement on tax policy regarding income trusts and announed, “Based on this review of the alternatives, conversion back to a corporation before 2011 has been determined by management and the board of directors as the best opportunity to enhance unit and asset value over time.” True said that it will also consider any new clarification of the tax legislation in regard to its plans.

The Canadian government has decided to tax income trusts in an attempt to tackle what it considers a “growing trend toward corporate tax avoidance” caused by the vehicle’s more favorable tax treatment compared with the more conventional company structure. Flaherty has said that his “Tax Fairness Plan for Canadians” aims to “restore balance and fairness to the federal tax system” by creating a level playing field between income trusts and corporations. The changes have been prompted by a string of income trust conversions by top Canadian companies, such as Telus Corporation, Canada’s second-largest telecommunications company.

The government claims that the short-term tax breaks created are causing “an economic distortion that is threatening Canada’s long-term economic growth and shifting any future tax burden onto hardworking individuals and families.” There was more than C$70 billion (US$61.8 billion) worth of income trust announcements last year and the sector is said to total C$200 billion – a situation Flaherty said was “not right and not fair.”

Under the tax plan, a “Distribution Tax” will be applied beginning 2007 to distributions from publicly traded income trusts and limited partnerships set up after the October 31 announcement. Trusts formed prior to this date will benefit from a four-year transition period. The new tax, which was devised largely without consultation and announced without warning, has caused consternation in Canada’s business and investment sector. Several corporations with well-advanced plans towards converting to trust status have been forced to rethink their strategies in the wake of the announcement.

SENATORS LOOK TO TAX REFORM TO CLOSE U.S. “TAX GAP”

Senate Budget Committee Chairman Kent Conrad (D - North Dakota) has called upon fellow lawmakers to explore ways in which the tax code can be simplified in order to reduce the “tax gap” – the measure of the difference between what is legitimately owed by taxpayers and what is actually paid. According to Conrad, the need for specific proposals to tackle the tax gap has become “absolutely urgent” and he has called for the creation of a Senate working group to recommend how this could be achieved.

Noting that the 2001 tax gap, at an estimated $345 billion, was $100 billion more than the federal deficit for 2006, Conrad stated in his opening remarks at a budget committee hearing that more could be done to tackle the problem of non-compliance “without resorting to draconian or intrusive measures.” Conrad referred to testimony before the committee by IRS Commissioner Mark Everson that the tax gap could be closed by as much as $100 billion “without changing the way the government interacts with its citizenry.”

In a report released by the Government Accountability Office this week, tax reform or simplification was also identified as one of the methods by which the tax gap could be narrowed. However, the GAO report stressed that a “multiple approach” was needed to address the problem such as providing the IRS more enforcement tools, and devoting additional resources to enforcement. Nonetheless, the GAO estimated that simplifying the tax code or fundamental tax reform has the potential to reduce the tax gap by billions of dollars. The IRS has estimated that errors in claiming tax credits and deductions for tax year 2001 contributed $32 billion to the tax gap.

The GAO suggested that withholding and information reporting are “particularly powerful tools” to reduce the tax gap, although it conceded that designing additional withholding and information reporting requirements may be challenging given that many types of income are already subject to reporting, underreporting exists in many forms, and withholding and reporting requirements impose costs on third parties. Additional enforcement has the potential to narrow the tax gap by another several billion dollars said the GAO, but it conceded that such results would depend on how efficiently the IRS used its resources. “Providing quality services to taxpayers also is a necessary foundation for voluntary compliance,” the GAO said.

SWISS CANTONS AIM TO SQUEEZE MORE FROM RICH

Formula 1’s top drivers have long been taking advantage of Switzerland’s generous taxation system, which allows them to get away with paying taxes based on the value of their property rather than their income. Different cantons are currently allowed to choose their own taxation rates but the average tax is around five times the rental value of the residence, with a minimum tax bill of around $60,000. This generates a great deal of money for the more generous cantons while also adding to their image as glamorous places to live – which suits the cantons fine.

There are now arguments, however, that the system is discriminatory as wealthy native Swiss are paying much more than the foreigners. The finance ministers of the 26 Swiss cantons discussed a proposal to double the tax rates, but decided on a more cautious approach and delayed the decision for six months in order to look at the comparative systems employed in other tax havens such as Ireland, Luxembourg and Monaco. The thought, however, is that an increase in the taxes will not result in the loss of any of the super-rich as they can afford the price hike.

HONG KONG MAY CUT TAX RATES

Pressure is growing on Hong Kong’s Financial Secretary Henry Tang Ying-yen to announce tax cuts in next month’s budget speech, given an expected mammoth budget surplus of up to US$4 billion. Both the Taxation Institute of Hong Kong and a prominent HSBC economist have said in the last few days that the government should cut corporate taxes, possibly by giving incentives to incoming businesses. HSBC expects the economy to grow by 5.3% this year. The surplus for this year was originally forecast to be less than US$1 billion, but robust markets will have delivered more than US$3.5 billion profit from the Exchange Fund, while stamp duty and income tax revenues have also performed well. HSBC argues for a 0.5% cut in the headline corporate tax rate of 17.5%, while the Taxation Institute suggests that incoming companies could be offered a reduced rate of 10% for a period of time.

Hong Kong is booming partly as a result of the Mainland’s stunning economic success. China grew 10.5% in 2006, and is expected to grow by 8% this year. Mainland tax revenues are also sky-high. Chinese Tax Commissioner Xie Xuren confirmed that the country’s tax revenues jumped by 22% in 2006 to 3.7 trillion yuan (about US$480 billion), due to a crackdown on tax evasion alongside booming exports and securities trading.

ROLL UP FOR THE GREAT BRITISH INHERITANCE TAX GIVEAWAY!

Gifting and transferring wealth into trusts are among strategies considered to avoid large death taxes.

As more Britons are caught out by inheritance tax than ever before, due to increased wealth and rising house prices, new research has revealed that £103 billion ($203 billion) will be given away to friends and family to avoid huge death tax bills. The study, commissioned by YouGov Plc for pensions and investments firm Scottish Widows, shows that 41%, or 10 million households, now have an estate liable for a 40% tax bill on their death – up from 34% last year.

Of those people, 43% have taken, or plan to take, steps to mitigate this bill, with 44%, or 1.2 million people, planning on giving away either a lifetime gift, or an annual gift to friends and relatives. The average amount people are prepared to gift is £86,000. 47% said they would like their gift to be used to help their relatives buy property, 20% want their beneficiaries to use the gift for their own retirement, 22% would like recipients to save it for their own children, and 22% would like the benefactors to use it to pay off their debts.

“IHT is a tax that affects almost half of the country and it is really important that people prepare for the possibility of leaving a huge tax bill on their death,” says Anne Young, tax expert at Scottish Widows. Gifting is becoming an increasingly recognised way to avoid IHT, but few gifts are totally exempt. You can give £250 away to an unlimited number of people as well as up to £3,000 per tax year without tax consequences. And if the donor lives for seven years after making any other absolute gift, that too will be exempt.

Trusts are also a viable option for those wishing to protect their assets, and Scottish Widows finds that four in 10 people who intend to take, or have already taken, steps to reduce their inheritance tax bill have looked at the option of a discretionary will trust or a life assurance policy written under trust. However, for the majority that have not considered this option, 29% admit to not knowing enough about them, and one in 10 has never heard of trusts. Notably, 24% say that they are now wary of putting money into trusts, and 6% has no faith in these products since the Government introduced the Finance Act 2006 which changed the way trusts are taxed.

“People want to leave their family with as much of their assets as possible, and although people are making headway in recognizing this, they could still be facing a major problem,” Anne Young continues. “Trusts should be more popular than they are. Although people may be unsure how they work, they are a relatively straightforward way of helping to reduce, or perhaps set aside a fund to pay for, an IHT bill. People should not automatically dismiss this option, but rather seek professional advice and get a better understanding of the way trusts can help.”

The Scottish Widows research found the most popular actions people have taken to mitigate against inheritance tax are making a will (62%), setting up a discretionary will trust (32%), visiting a financial adviser (28%), changing joint ownership of the home to tenants in common (28%), giving an annual gift up to £3,000 (23%), and making a lifetime gift to friends/relatives/charity/trust (21%).

HM Revenue & Customs urges contractors to prepare for new tax and witholding scheme.

HMRC is urging contractors in the UK to be ready for the introduction of the Construction Industry Scheme (CIS) in April, and is providing them with an information pack to this end. The tax authority has argued that the new CIS will create a “level playing field” for those working in the sector.

Under the new CIS, a new verification system will be introduced to ensure that when a contractor first engages and pays a subcontractor, the contractor is told whether to pay the subcontractor in full or make a deduction from the payment. If the subcontractor is not registered, the contractor will be told to make a deduction at the higher rate. Contractors must also satisfy themselves that the terms of any contract they have with their subcontractors are those of self-employment.

ASSET PROTECTION / LEGAL STRUCTURES

MAJOR INVESTMENT BANK ISSUES WARNING ON STRIKE AGAINST IRAN

Warning that investors might be “in for a shock,” a major investment bank has told the financial community that a preemptive strike by Israel with American backing could hit Iran’s nuclear program. The banking division of ING Group released a memo on January 9 entitled “Attacking Iran: The market impact of a surprise Israeli strike on its nuclear facilities.” ING is a global financial services company of Dutch origin that includes banking, insurance, and other divisions. The report’s author, Charles Robertson, also authored an update in ING’s daily update that further underscored the bank’s perception of the risks of an attack.

Robertson admitted that an attack on Iran was “high impact, if low probability,” but explained some of the reasons why a strike might go forward. The January 9 dispatch describes Israel as “not prepared to accept the same doctrine of ‘mutually assured destruction’ that kept the peace during the Cold War. Israel is adamant that this is not an option for such a geographically small country. ... So if Israel is convinced Iran is aiming to develop a nuclear weapon, it must presumably act at some point.” Sketching out the time line for an attack, Robertson says that “we can be fairly sure that if Israel is going to act, it will be keen to do so while Bush and Cheney are in the White House.”

Robertson suggests a February-March 2007 timeframe for several reasons. First, there is a comparable situation to Israel’s strike on Iraq’s nuclear program in 1981, including Prime Minister Ehud Olmert’s political troubles within Israel. Second, late February will see Iran’s deadline to comply with UN Security Council Resolution 1737, and Israel could use a failure of Iran and the UN to follow through as justification for a strike. Finally, greater U.S. military presence in the region at that time could be seen by Israel as the protection from retaliation that it needs. In his January 15 update, Robertson points to a political reason that could make the assault more likely – personnel changes in the Bush administration may have sidelined opponents of attacking Iran.

FOUR IDEAS TO GET YOUR ESTATE IN ORDER

“The superior man, when resting in safety, does not forget that danger may come.” ~~ Confucius

In the event of your unexpected death, your family also must cope with the mess of the unplanned estate you left behind on top of their grief. Assuming your business and other assets (or your “gross estate”) are worth more than $2,000,000, your family will be stuck with a considerable tax burden. In fact, your family could have to hand over 80% of your total estate just to pay income and estate taxes. Quite a chunk.

The IRS considers your entire gross estate to include “cash and securities, real estate, insurance, trusts, annuities, business interests and other assets.” There are few exempt assets that can be subtracted. For the most part, your estate includes nearly every asset you own. The IRS is dropping the taxable limit back down to $1,000,000 in 2011. As Forbes recently wrote “You don’t have to be fantastically rich to concern yourself with estate planning issues.” So the best way to plan for your estate is to simply prepare now, so you can move on with the rest of your life.

And if you are already planning your estate, consider an offshore solution. By taking your estate offshore, the assets you leave to your heirs will enjoy the same protection as other offshore assets. Your estate assets will enjoy greater protection from creditors and lawsuits and remain as confidential as possible. Plus, an offshore planning solution will help you pass your assets onto your heirs with as little hassle as possible when the time comes. Here are a few offshore ideas to consider.

1. Trusts. If you choose a trust-friendly offshore jurisdiction, a simple trust can significantly reduce your estate taxes for your spouse. Some trusts can also allow maximum use of gift tax exemptions through something called “planned giving”. You can also set up your trust to provide your spouse with an income after you are gone.
2. Family Foundation. This unique offshore solution allows you to manage your estate for the benefit of children, parents, grandparents, or other relatives. In time, the assets you safeguard in your family foundation, will be managed by your heirs. This can go on for generations.
3. Variable Annuity. An offshore annuity can be completely separate from your ordinary estate. Upon your death your beneficiaries can immediately access the funds in your annuity.
4. Life Insurance. An offshore life insurance policy allows for freedom from ALL estate taxes, and also provides a number of additional benefits including tax-free build-up of cash value, tax-free receipt of the death benefit, and access to a wide-range of global investments.

OFFSHORE ANNUITIES A LAST LINE OF DEFENSE AGAINST BANKRUPTCY, LAWSUITS, CREDITORS

You may have heard that if you buy U.S. insurance or annuity contracts in states like Florida or Texas, then these assets are protected from your creditors. But, regardless of what domestic laws promise, real asset protection can only be found abroad. It is simple. If you protect your assets in a jurisdiction where a U.S. judge has no authority, then U.S. creditors will not be able to reach them.

The most effective and strongest asset protection can be achieved by investing through policies in Switzerland and Liechtenstein. Once you have set up your policy correctly, a U.S., Canadian, or other foreign judge can order that your policy to be seized and still your policy remains protected. Both Switzerland and Liechtenstein have laws in place that will protect your policy regardless of what a foreign judge says. I have previously commented on how the policies need to be established and about fraudulent conveyance rules. So today, I want to share with you some real life examples of how an annuity could work. The following stories were experienced by two of our clients.

• In the early 1990s, a very successful CPA from Florida came to our office and purchased a Swiss Annuity. In 1995, the CPA decided to retire, but he kept advising some of his largest and most affluent clients. Disaster struck in the late 1990s when the CPA gave incorrect counsel to one of his clients. It was entirely his fault and he was certainly negligible since he had failed to keep abreast of legal changes in his profession. The client took him to court and the retired CPA lost his assets in the suit that followed. Of course, creditors also tried to seize his Swiss annuity. Tried ... and failed to liquidate and seize the assets safely housed in his annuity policy. To this day, the CPA lives off the income from his intact annuity policy.
• In the late 1990s, we had a client domiciled in Canada. This client was a wealthy woman, who owned several hotels. Unfortunately, at a certain point, her business turned sour and she had to file for bankruptcy. The Canadian judge decided that her Swiss policy was part of the bankruptcy estate. So the Swiss insurer was informed and asked to immediately liquidate the policy.

  Even though the policy document was appropriately presented, the Swiss insurer did not divulge any information. The insurance company fully protected the hotel owner’s privacy and responded to inquiries only in generic form. The creditors were informed that the insurer was not allowed to give out any information to third parties, to the point of not even confirming that a person bearing this name or title was a client at the insurance company. The insurer subsequently wrote that in the event of policy owner’s bankruptcy, Swiss law fully protects the policy because ownership was transferred to the beneficiaries automatically as documented in the accord. Any instructions from the original policy owner subsequently forced upon her could no longer be recognized. Only her beneficiaries, as the new owners of the policy, could give instructions to the insurance company.

If you are looking for solid asset protection, you must go abroad. Swiss and Liechtenstein policies provide utmost asset protection, as long as you set up your plan correctly. Even under duress, insurers will not liquidate your policy for creditors. Creditors usually drop their attacks on your wealth once they discover how little foreign insurance companies will do for them. Most stop their witch hunts. But if a creditor relentlessly continues to pursue your wealth, he will have to file with the local Liechtenstein or Swiss court. And then the court will tell him the policy is not a seize-able asset.

Remember, you must plan early. Your policy may NOT be protected, if you file for bankruptcy or your creditors try to seize your wealth within 12 months after you establish your policy. The key is to act now.

YOU CAN STILL DEPEND ON SWITZERLAND

What is it with the rest of Europe, (or the world, for that matter), when it comes to Switzerland? The European Union, in particular, just will not leave the Swiss alone, especially when it comes to taxes. Swiss leftist politicians, a definite minority in a nation where the conservative Swiss Peoples Party got the largest percentage in the last elections, love to join with leftist foreigners demanding higher taxes. And keep in mind that Switzerland is not even a member of the EU. Swiss voters have rejected that unhappy notion repeatedly.

So this week comes news reports that the minority Swiss left, parroting complaints from the EU, is trying to abolish a system that, for over half a century, has attracted wealthy foreigners to make their home in Switzerland in return for a special tax deal, called a “forfeit”. That deal is currently available to 3,600 foreigners who pay an average CHF75,000 ($60,050) each in tax, earning Switzerland CHF300 million ($240.2 million) per year. The system allows foreign citizens living there to negotiate a fixed tax rate based on their Swiss property factors, excluding income earned outside Switzerland. (Many nations entice foreigners as individual or corporate residents by exempting them from all or most taxes, including the U.K., Monaco, Luxembourg, Austria and Ireland.)

Only last month EU bureaucrats were attacking Switzerland, claiming low corporate tax rates in the Swiss cantons are a subsidy. A Swiss official got to the core of the issue by explaining that low tax rates are not a subsidy and Switzerland would not raise corporate taxes to satisfy the tax hungry EU.

Three years ago the big EU anti-Swiss campaign was a demand that banking secrecy, written into Swiss law in 1934, be abolished. The French and German governments even went so far as to call for a financial boycott of Switzerland unless they surrendered on bank secrecy. The Swiss said “no” and they meant it. When they finally agreed to collect taxes under the “EU tax directive,” it was without revealing the names of any foreign person with a Swiss bank account. The EU’s own members, Austria, Belgium and Luxembourg, supported Switzerland’s stance by taking the same position in defense of their own bank secrecy laws.

Truth be told, Switzerland has resisted, valiantly, pressures that other, less resolute nations, could never have withstood. Much of that owes to the nature and independence of the modern day descendants of the original Helvetian tribes – and their inherited financial DNA. But another, and a most important reason, is that Switzerland controls trillions of dollars, euros, Swiss francs – probably more than one third of all the world’s assets – and money does more than talk. Quietly and successfully that kind of wealth can and does resist the likes of EU bureaucrats.

I can predict with confidence that the Swiss forfeit tax deal will not be repealed and Swiss corporate taxes will not be revised to satisfy the EU. The important point here is the unyielding determination of the Swiss not to be dictated to by the EU Brussels bureaucrats. For years they have stood by their guns under a barrage of attacks from the EU, the OECD and other assorted leftists. That says something about the Swiss, and about both the nation’s past and future as an asset protection and offshore financial haven. We continue to rank Switzerland as the world’s foremost all-around financial haven.

MONACO INTRODUCES NEW COMPANY FORMAT, ORIENTED TOWARDS SMALLER ENTREPRENEURS

The Principality has issued a new law on companies which introduces a new corporate vehicle known as the SARL (société à resposibilité limitée). Prior to the new law Monaco had only three business forms. The SNC, and the SCS are effectively partnerships with unlimited liability for the partners, while the SAM is a limited liability company, but with fairly rigid operational constraints including a minimum share capital of E150,000. The new SARL is intended to provide a limited liability vehicle to enable smaller entrepreneurs based in the Principality to operate more flexibly and at a lower cost. The minimum share capital to be fixed by sovereign order is expected to be €15,000.

Flexibility will be provided by an easier method of registration of corporate documents (cutting out the requirement for expensive notarial deeds), and by allowing only one director. The audit requirement which exists for the SAM will be extended to all corporate forms, but now depending on turnover, net assets, and number of employee, hence providing further regulatory control of the existing business forms. The law also introduces a maximum delay of 3 months within which the government must respond to a request for authorisation for a new business.

PRIVACY

BLOGGERS WHO CRITICIZE GOVERNMENT MAY FACE PRISON

You would be forgiven for thinking that it was some new restriction on free speech in Communist China. The U.S. Government wants to force bloggers and online grassroots activists to register and regularly report their activities to Congress in the latest astounding attack on the internet and the First Amendment. Richard A. Viguerie, Chairman of GrassrootsFreedom.com, a website dedicated to fighting efforts to silence grassroots movements, states:

“Section 220 of S. 1, the lobbying reform bill currently before the Senate, would require grassroots causes, even bloggers, who communicate to 500 or more members of the public on policy matters, to register and report quarterly to Congress the same as the big K Street lobbyists. Section 220 would amend existing lobbying reporting law by creating the most expansive intrusion on First Amendment rights ever. For the first time in history, critics of Congress will need to register and report with Congress itself.”

In other words Nancy Pelosi and the Democrats may redefine the meaning of lobbying in order that political communications to and even between citizens falls under the same legislation. Under current law any “lobbyist” who “knowingly and willingly fails to file or report” quarterly to the government faces criminal charges including a possible jail term of up to one year. The amendment is currently on hold.

In recent months, a chorus of propaganda intended to demonize the Internet and further lead it down a path of strict control has spewed forth from numerous establishment organs. Make no mistake, the internet, one of the greatest outposts of free speech ever created is under constant attack by powerful people who cannot operate within a society where information flows freely and unhindered. All these moves mimic stories we hear every week out of State Controlled Communist China, where the internet is strictly regulated and virtually exists as its own entity away from the rest of the web. The phrases “Chinese government” and “Mao Zedong” have even been censored on China’s official Web sites because they are “Sensitive phrases”.

Under section 220 of the lobbying reform bill, Infowars.net could be required to seek a license in order to bring this information to you. IF we were granted a license we would then have to report our activities to the government four times per year in order to bring you this information. Does that sound more like free speech or more like totalitarianism? As well as calling the Senate you should go to GrassrootsFreedom.com which has a petition that you can sign against Section 220 of S. 1, the lobbying reform bill.

CHINESE COMMUNIST PARTY CHIEF HU VOWS TO “PURIFY” THE INTERNET

“Ensure that one hand grasps development while one hand grasps administration.”

Hu Jintao made the comments as the ruling party’s Politburo – its 24-member leading council – was studying China’s Internet, which claimed 137 million registered users at the end of 2006. Hu, a strait-laced communist with little sympathy for cultural relaxation, did not directly mention censorship. But he made it clear that the Communist Party was looking to ensure it keeps control of China’s Internet users, often more interested in salacious pictures, bloodthirsty games and political scandal than Marxist lessons.

The party had to “strengthen administration and development of our country’s Internet culture,” Hu told the meeting. “Maintain the initiative in opinion on the Internet and raise the level of guidance online. We must promote civilized running and use of the Internet and purify the Internet environment.”

In 2006, China’s Internet users grew by 26 million, or 23.4%, to reach 10.5% of the total population, the China Internet Network Information Center said. The vast majority of those users have no access to overseas Chinese Web sites offering uncensored opinion and news critical of the ruling party. But even in heavily monitored China, news of official misdeeds and dissident opinion has been able to travel through online bulletin boards and blogs. Hu told officials to intensify control even as they seek to release the Internet’s economic potential. “Ensure that one hand grasps development while one hand grasps administration,” he said.

TIME TO REPEAL U.S. NATIONAL ID CARD LAW

In 2005, President Bush signed the “Real ID Act”, passed quietly by Congress without hearings or debate. It is little wonder our congressional solons did not want the American people to know much about this law. For the first time in U.S. history, this law has created a national identification card.

The legislation (hidden in a bill authorizing funding for the Iraq war) did not call for a national ID card. Instead, it created one through the back door by requiring state driver’s licenses to contain standardized information that is machine-readable and linked to a central database maintained by the federal government. In the event an upstart state refuses to comply with the standards, the Act declares that such a state’s driver’s license will not be acceptable for admission to “federal facilities”, including airports, government offices, etc. Yet, some states have resisted implementing these requirements, primarily because of the huge costs involved.

Now, a few lawmakers are beginning to question whether this law belongs in a free society. Senators Daniel Akaka (D-Hawaii) and John Sununu (R-New Hampshire) have introduced legislation that would cancel most of the standardization that would create a de facto national ID card, require encryption of any personal data on driver’s licenses, and prohibit the use of ID data by third parties. A national ID card has no place in a nation founded on the principles of liberty.

WARRANTLESS WIRETAPS, SMOKE AND MIRRORS

In 2005, The New York Times revealed that President Bush had signed a secret executive order in 2002 giving the super-secret National Security Administration authority to monitor international phone calls and e-mails to or from the U.S. involving people suspected of having terrorist links. This “Terrorist Surveillance Program” bypassed the legal requirement of obtaining a national security wiretap order, as a law called the Foreign Intelligence Surveillance Act requires. The Program is plainly illegal under the FISA statute. Bush claimed FISA does not apply in national emergency type situations, and that he has the “inherent presidential authority” to override any statute if the U.S. national interest requires that he do so.

But the Bush administration has now said that it would suspend this “Terrorist Surveillance Program” and once again process all national security wiretapping requests through the legal mechanism FISA requires. While there is no doubt this is movement in the right direction – after all, the administration is no longer blatantly ignoring the law – will it have any real effect on the eavesdropping program? That appears unlikely. The FISA-authorized Foreign Intelligence Surveillance Court rarely turns down a government request. For instance, in 2005, of the 2,072 wiretap requests made by the Bush administration, the court approved 2,070-and the other two were withdrawn. Essentially, the court is a rubber stamp for surveillance.

And just who might be a terrorist target? Genuine terror suspects, of course, but also many other people who have little or no connection to terrorism. For instance, information released pursuant to Freedom of Information requests indicates the FBI considers peace activists, investigative journalists and even “militant vegetarians” to be potential terrorists. It is hardly a stretch to postulate that the international communications of such individuals might be wiretapped, particularly since amendments to FISA no longer require that national security be the “primary purpose” of a wiretap, but only a “significant purpose” of it.

Most Americans, though, will no doubt be reassured by the appearance of due process in the national security wiretapping apparatus. But in my view, it is mostly smoke and mirrors, form over substance, and the Bush administration will go on wiretapping whoever it pleases, albeit with the connivance of the FISA court.

CIA GETS IN YOUR FACE(BOOK)

If you are a Facebook member, a career as a government spook is only a click away. Since December 2006, the CIA has been using Facebook.com, the popular social networking site, to recruit potential employees into its National Clandestine Service. It marks the first time the CIA has ventured into social networking to hire new personnel.

The CIA’s Facebook page (login required) provides an overview of what the NCS is looking for in a recruit, along with a 30-second promotional YouTube video aimed at potential college-aged applicants. U.S. citizens with a GPA above 3.0 can apply. “It’s an invaluable tool when it comes to peer-to-peer marketing,” says Michele Neff, a CIA spokeswoman. The NCS, one of the four directorates of the CIA, was established following 9-11 to gather intelligence from sources both domestic and abroad. In 2004, President Bush directed the CIA to increase the “human intelligence capabilities” of the agency and hire more officers that can “blend more easily in foreign cities.”

The search for better spies led the NCS to set up shop on Facebook, which is used primarily by college students. Every Facebook user has her or his own page, and users can choose to join Facebook “groups”, which can be created by individuals or sponsored by companies as paid promotions. The NCS-sponsored Facebook group was launched on December 19, 2006 and will stay active for two months. The group currently has over 2,100 members, up from around 200 one week after its debut.

Scores of companies and organizations have set up shop on Facebook, using the site’s interactive tools like chat, video and personal messaging to establish relationships with potential hires. However, compared to most recruitment pages, the CIA’s page is remarkably light on interactive content. Like many corporations or nonprofit organizations, the CIA has long turned to colleges with diverse and intelligent student bodies when hiring. But its foray into social networks is a new strategy not yet adopted by other agencies, because the CIA is less encumbered by bureaucratic recruitment procedures.

Government agencies may be forced to turn to social networks and other web-based means for recruitment in the future. Hundreds of thousands of government workers are set to retire in the coming years, and new talent can increasingly be found on websites like Facebook and LinkedIn. However, dealings between social networks and the government may raise the hackles of citizens concerned about their privacy online. “If (the CIA) knows about Facebook, and they have a page on Facebook, it would be surprising if they weren’t using it in other ways,” says Nicole Ozer, civil liberties and technology policy director for the ACLU of Northern California.

Facebook’s privacy policy states that outside companies sponsoring groups do not have access to personal information or profiles. However, it does say that information may be shared with “other companies, lawyers, agents or government agencies,” in order to comply with the law. But, “The CIA has no direct access to any user’s profile,” says Facebook’s director of marketing Melanie Deitch. “They adhere to the same rules as all of our advertisers. We do not publish or disseminate our users’ information to any advertiser.” Ozer says that there is no way we can be sure what the CIA is up to online.

U.K. SPEED CAMERA WRECKED FOR A 6TH TIME

Britain’s most vandalized speed camera has been wrecked for a SIXTH time. The hated machine had only been back in action for a week when it was targeted again and torched. In three years the device near Bristol, has been set alight four times, knocked down, and rammed. Each time it costs £30,000 to replace. The boss of Motorists Against Detection claimed responsibility.

Nicknamed Captain Gatso, he said, “We have repeatedly targeted this stretch and this one has been taken out more than any other. Police claim the camera is for safety – but we say 30 m.p.h. is too fast with lots of children around. But at 3 a.m. motorists should be able to do up to 60 m.p.h. We have 200 members and we’re terrorizing these cash machines.”

The group claims to have destroyed more than 1,000 cameras.

LAW

GONZALES QUESTIONS HABEAS CORPUS

In one of the most chilling public statements ever made by a U.S. Attorney General, Alberto Gonzales questioned whether the U.S. Constitution grants habeas corpus rights of a fair trial to every American. Responding to questions from Sen. Arlen Specter at a Senate Judiciary Committee hearing on January 18, Gonzales argued that the Constitution does not explicitly bestow habeas corpus rights. It merely says when the so-called Great Writ can be suspended. “There is no expressed grant of habeas in the Constitution; there’s a prohibition against taking it away,” Gonzales said.

Gonzales’s remark left Specter, the committee’s ranking Republican, stammering. “Wait a minute,” Specter interjected. “The Constitution says you can’t take it away except in case of rebellion or invasion. Doesn’t that mean you have the right of habeas corpus unless there’s a rebellion or invasion?”

Gonzales continued, “The Constitution doesn’t say every individual in the United States or citizen is hereby granted or assured the right of habeas corpus. It doesn’t say that. It simply says the right shall not be suspended” except in cases of rebellion or invasion.

While Gonzales’s statement has a measure of quibbling precision to it, his logic is troubling because it would suggest that many other fundamental rights that Americans hold dear also do not exist because the Constitution often spells out those rights in the negative. Applying Gonzales’s reasoning, one could argue that the First Amendment does not explicitly say Americans have the right to worship as they choose, speak as they wish or assemble peacefully. The amendment simply bars the government, i.e., Congress, from passing laws that would impinge on these rights.

Many of the legal features attributed to habeas corpus are delineated in a positive way in the Sixth Amendment. Gonzales’s statement suggests that he is still seeking reasons to make habeas corpus optional, subordinate to George W. Bush’s executive powers that Bush’s neoconservative legal advisers claim are virtually unlimited during “a time of war,” even one as vaguely defined as the “war on terror” which may last forever.

In the final weeks of the Republican-controlled Congress, the Bush administration pushed through the Military Commissions Act of 2006 that effectively eliminated habeas corpus for non-citizens, including legal resident aliens. Some language in the new law also suggests that “any person,” presumably including American citizens, could be swept up into indefinite detention if they are suspected of having aided and abetted terrorists. Another provision in the law seems to target American citizens by stating that “any person subject to this chapter who, in breach of an allegiance or duty to the United States, knowingly and intentionally aids an enemy of the United States ...” Who has such an allegiance or duty if not an American citizen?

Besides allowing “any person” to be swallowed up by Bush’s system, the law prohibits detainees once inside from appealing to the traditional American courts until after prosecution and sentencing, which could translate into an indefinite imprisonment since there are no timetables for Bush’s tribunal process to play out. That court-stripping provision – barring “any claim or cause of action whatsoever” – would seem to deny American citizens habeas corpus rights just as it does for non-citizens. Other constitutional protections in the Bill of Rights – such as a speedy trial, the right to reasonable bail and the ban on cruel and unusual punishment – would seem to be beyond a detainee’s reach as well.

In effect, what the new law appears to do is to create a parallel “star chamber” system for the prosecution, imprisonment and possible execution of enemies of the state, whether those enemies are foreign or domestic. Under the cloak of setting up military tribunals to try al-Qaeda suspects and other so-called “unlawful enemy combatants”, Bush and the Republican-controlled Congress effectively created a parallel legal system for “any person” – American citizen or otherwise – who crosses some ill-defined line.

There are a multitude of reasons to think that Bush and advisers will interpret every legal ambiguity in the new law in their favor, thus granting Bush the broadest possible powers over people he identifies as enemies. As further evidence of that, the American people now know that Attorney General Gonzales does not even believe that the Constitution grants them habeas corpus rights to a fair trial.

JOURNALISTS, UNDER FIRE TODAY BY THE BUSH WHITE HOUSE, HAVE BEEN THE ENEMY BEFORE

In the more than half a century I have been a reporter, there has never been as systematic an operation to intimidate and then silence the press as is now taking place under the Bush-Cheney-Gonzales administration. Along with a sharp increase in subpoenas for reporters’ notes and telephone records, there are threats of prosecution under the Espionage Act of 1917 for reporting such classified information as the president’s secret authorization of the NSA’s warrantless secret authorization of the NSA’s warrantless eavesdropping on us.

Adding to the shroud of secrecy, Alberto Gonzales’s Justice Department has convinced a number of judges to close down cases before they are heard in a courtroom, lest “state secrets” concerning national security be revealed by the press to the public. Paul McMasters, the First Amendment Center’s ombudsman, makes the necessary point that “while the First Amendment protects the press from overt government censorship, it can’t fully protect the press from full-time government hostility or part-time citizen apathy.” Nor can the First Amendment prevent certain corporate owners of newspapers, radio and television networks, and other media from ordering reporters and editors to give up the information the government wants. Those who refuse are left to find other legal aid, and possibly other jobs.

A number of us staunchly pledge that we will go to prison rather than betray our sources and become agents for the government, but there are always – as some reporters have found out – enough cells to accommodate principled followers of James Madison. It is time to remind the citizenry and Congress – and the press – of a crucial Supreme Court case, decided in wartime, that makes unmistakably clear how and why the First Amendment to the Constitution mandates that there “shall [be] no law ... abridging freedom of speech, or of the press.”

Usually referred to as the 1971 “Pentagon Papers” case – in the law books, it is formally known as New York Times Company v. United Sates because the Times, despite enormous pressure from the Nixon administration, decided – after a fierce internal debate at the paper involving the Times’ lawyers – to print a more-than-top-secret study commissioned by Defense Secretary Robert McNamara. Stolen by a former Defense Department and RAND Corporation officer, Daniel Ellsberg, a patriotic constitutionalist, the study revealed that vital decisions about the war in Vietnam had been made at the highest levels in ways that deliberately deceived the American people.

The Washington Post had also been given a set of the “Pentagon Papers”, and Attorney General John Mitchell – the Dick Cheney of the Nixon administration – warned the Post’s owner, Katharine Graham, that she would get “her tit caught in a big fat wringer” if she violated national security in time of war by printing the classified report. Katharine Graham was not intimidated. The Times, however, had hesitated. I was then writing what was essentially a press column for the Village Voice and got a call from someone I knew at the Times.

“I know you don’t run blind items,” the person said, “but this is very important. Somewhere in your next column, just say that “a secret debate is going on at the Times in an undisclosed hotel room. I can’t tell you any more than that.” I ran the blind item. I am convinced Times publisher Arthur Sulzberger would have anyway fired the paper’s lawyers for objecting to publication, as he did, and gone ahead to publish the classified report had the blind item never appeared. He knew the historic importance of the First Amendment test he was facing. All the Voice did was speed up the printing on June 13, 1971, of the front-page story of what Ellsberg had revealed about the government’s lies.

COURT: FBI MIGHT HAVE VIOLATED LAW IN EFFORTS TO TAKE CONSPIRACY FILM OFF INTERNET

But it also rules that perpetrators are immune from lawsuit.

An effort by the FBI and federal prosecutors to remove a short fictional film about a military takeover of New York City from the Internet may have violated the First Amendment, a federal appeals court said last week. But the 2nd U.S. Circuit Court of Appeals in Manhattan said a lower court was still correct to toss out a lawsuit brought against an FBI agent and a federal prosecutor by a Web hosting service operator and Michael Zieper, who wrote, directed and produced the film.

The appeals court said in a written opinion that the FBI agent, Joseph Metzinger, and the assistant U.S. attorney, Lisa Korologos, were immune from the lawsuit because it would not have been clear to a reasonable officer in their position that they were doing anything wrong. Metzinger and Korologos got involved in Novomber 1999, when the New York Police Department faxed information to the FBI’s Joint Terrorism Task Force about the film, Military Takeover of New York City.

The film includes various shots of Times Square as an unseen narrator who purports to be a military officer briefs other members of the military about plans for a military takeover of Times Square on New Year’s Eve 1999. The appeals court said Metzinger and Korologos were free to ask filmmaker Zieper and Web site operator Mark Wieger to take the film down – but Metzinger went too far when he said that FBI agents were heading to Zieper’s home and he could not stop them. “A reasonable juror could conclude that some of the defendants’ actions here did cross the sometimes fine line between an attempt to convince and an attempt to coerce,” the appeals court wrote.

While Metzinger spoke in a polite and non-threatening tone, and did not refer to criminal statutes or legal consequences, he never made it clear that Zieper’s actions were lawful or that he would not face consequences for making the video public, the court said. It cautioned public officials “to make sure that the totality of their actions do not convey a threat even when their words do not.” Metzinger told Wieger he was worried the film could incite a riot. Wieger blocked web access to the film beginning Nov. 15, 1999, but restored it 11 days later. A spokeswoman for federal prosecutors in New York, said the government had no comment.

NETELLER TARGETED BY U.S. IN MULTI-BILLION DOLLAR INTERNET GAMING PROBE

Two senior figures connected with the payment services company Neteller have been arrested by U.S. authorities over allegations that they transferred billions of dollars in illegal internet gambling proceeds out of the U.S. According to two criminal complaints unsealed last week, Stephen Lawrence and John Lefebvre, both Canadian citizens, were arrested in connection with the creation and operation of a company that facilitated the transfer of billions of dollars of allegedly illegal gambling proceeds from U.S. citizens to the owners of various internet gambling companies located overseas.

Neteller PLC, formerly known as Neteller, Inc., is an internet payment services company that was founded by Lawrence and Lefebvre in 1999. Neteller is based in the Isle of Man and is publicly traded in the United Kingdom. Neteller began processing internet gambling transactions in approximately July 2000. Internet payment services companies, like Neteller, allow gambling companies to transfer money collected from U.S. customers to bank accounts outside the U.S. According to Neteller’s 2005 annual report, Lawrence and Lefebvre, through Neteller, provided payment services to more than 80% of worldwide gaming merchants.

Both defendants have held senior positions within Neteller. The complaint also noted that the defendants held significant ownership interests in Neteller. Lawrence was the company’s largest shareholder, owning 22% of its outstanding shares at the end of 2004, and Lefebvre was the second-largest shareholder with a 13.4% stake. The complaint alleges that the defendants knew they were risking prosecution by the government of the U.S. under existing or future federal laws when they took the company public, and that this was acknowledged in its offering documents. U.S. law at that time prohibited persons from promoting certain forms of gambling, including internet gambling, and transmitting funds that are known to have been derived from criminal activity or are intended to promote criminal activity.

In 2005, it is said that Neteller processed over $7.3 billion in financial transactions. According to reports issued by Neteller, 95% of its revenue was derived from money transfers involving internet gambling companies. As charged in the complaint, approximately 85% of Neteller’s revenue during that period derived from individuals in North America, and 75% of its North American revenue was generated in the U.S. Lawrence and Lefebvre are both charged with conspiring to transfer funds with the intent to promote illegal gambling. If convicted, both defendants face a maximum sentence of 20 years’ imprisonment. Lawrence was arrested in the U.S. Virgin Islands and appeared in a federal court in St. Thomas last week. Lefebvre, who resides in the Bahamas, was arrested in California.

The prosecution is part of the U.S. Justice Department’s initiative against unlawful internet gambling through, among other things, the implementation of the federal anti-money laundering statutes. Other recent examples of the DoJ’s efforts in this regard include the indictments of two offshore internet gambling companies – Worldwide Telesports, Inc., and BetonSports, PLC, a publicly traded holding company that owns a number of Internet sportsbooks and casinos, and its founder, Gary Kaplan.

Additionally, in July 2003, one of Neteller’s competitors, PayPal, and PayPal’s parent eBay, entered into a civil settlement agreement with the U.S. to settle allegations it aided in illegal offshore and on-line gambling activities. PayPal agreed to forfeit $10 million, representing proceeds derived by PayPal from the processing of illegal gambling transactions. Laws in this area were stiffened last year with the passing of the Unlawful Internet Gambling Enforcement Act, which effectively banned all international and interstate online gaming, by making it illegal for banks and credit card firms to make payments to such internet operations.

Neteller announces U.S. pull-out.

Following the arrest of two of the company’s founders last week, Neteller has announced that the group will cease processing online transactions related to gambling for the U.S. market. As of January 18, U.S. customers were no longer able to transfer funds using its services to or from any online gambling site. The company’s board made this decision in the light of the passing of the Unlawful Internet Gaming Enforcement Act of 2006 (UIGEA) by Congress last year, and the attendant uncertainties and likely delays relating to the drafting and implementing of regulations.

Neteller said that customer funds, including those of U.S. residents, are held in “fully secure” segregated trust accounts and will be available for withdrawal by customers on demand. U.S. customers continue to be able to use their “e-wallet” accounts for non-gambling transactions. According to Neteller, this move will allow the group to focus on opportunities available in the growing markets of Europe, Asia and the Americas outside of the U.S.

On 16 January, shares in the company were temporarily suspended pending clarification of the situation surrounding the detention, by U.S. authorities, of two founder shareholders and former directors of the company. Neteller stated that the group is “actively assessing” what further steps it may take in light of the two arrests. Meanwhile, the company’s shares, which are listed on the London Stock Exchange, will remain suspended.

U.K. PUBLISHES NEW MONEY LAUNDERING REGULATIONS

Rules’ reach extended and intensified in several areas, reduced regulatory burdens in low risk areas.

Economic Secretary, Ed Balls, published the draft money laundering regulations for consultation, alongside his speech to the FSA financial crime conference. The regulations are designed to ensure the UK response to money laundering at home and abroad is effective, proportionate and engages with all key stakeholders.

The proposals include: (1) Extended supervision so that all businesses in the regulated sector comply with money laundering requirements, including estate agents, trust and company service providers and unsecured lenders. (2) Strict tests to ensure people running money services businesses and those who help set up trusts and companies are fit and proper. (3) Extra checks on customers that firms identify as posing a high risk of money laundering. (4) A requirement to establish the source of wealth for those in high risk situations, for example those involving deals with high ranking public officials overseas. (5) A strengthened and risk-based regime in casinos, in line with, but stricter than, international standards.

The measures announced will also reduce regulatory burdens in low risk areas. E.g., firms will be able to make fewer checks in low risk situations such as employer led pension funds and child trust fund administration, the number of identity checks will be reduced with firms being able to rely upon checks of other firms in certain situations, and greater flexibility will be introduced to record keeping rules so that firms can keep important details rather than whole documents.

OPINION & ANALYSIS

ROGUE STATE AMERICA

What exactly are we doing in the Horn of Africa, where we have encouraged the Christian government of Ethiopia to invade Somalia and replace its Islamic government? As far as I can tell, we have violated international law, committed war crimes, helped Al Qaeda recruit new members, and involved ourselves in a guerrilla war that could last decades. It is Iraq writ small. And it cannot be blamed on Donald Rumsfeld.

There is an old principle of international law, going back to the 17th century, against one nation violating the sovereignty of another. It was often breached, but, after two world wars, it was enshrined in the United Nations charter. We criticized the Soviet invasions of Hungary and Czechoslovakia and justified the first Gulf war on these grounds. The purpose of this principle has been to prevent wars that could arise if more powerful countries simply took it into their hands to dominate smaller, less powerful ones.

Of course, when one nation attacks another, the other can respond. The U.S. invasion of Afghanistan, and the overthrow of the Taliban regime, was justified on those grounds. The Taliban were not simply sheltering Al Qaeda. They were in league with them and had become dependent upon them. To justify its invasion of Iraq, the Bush administration invented an imminent threat from Saddam Hussein’s regime. It was pure artifice – remember the drones bearing nuclear weapons headed for our shores – but the very fact that the Bush administration felt it had to resort to deception meant that it understood that a certain principle of international relations was at stake.

But, last month, the Bush administration actively supported Ethiopia’s invasion of Somalia. And there was no justification for Ethiopia’s invasion. It was a clear violation of the U.N. charter. The neighboring people have been feuding for centuries, but Ethiopia’s Christian government could not cite a significant provocation for its attack on the Muslim country and its Islamic government. If anything, Ethiopia’s invasion closely resembled Iraq’s invasion in August 1990 of Kuwait. But, instead of criticizing the Ethiopians, the U.S. applauded and aided them. The administration claimed that, in supporting Ethiopia, it was fighting the ubiquitous “war on terrorism”.

The Bush administration often claims that it is encouraging democracy, but the invasion itself probably represents a net loss of freedom – and that is a hard calculation to make among these governments. In Somalia, the Islamic Courts replaced a weak transitional regime that was unable to control the warlords, who, since 1991, have turned the countryside into a Hobbesian jungle. The new government had brought a harsh Islamic justice and order to Somalia, which, for all its own injustice, was preferable to the chaos that had prevailed. With the ouster of the Courts, the warlords are likely to return to power. Somalia will probably be plunged into another guerrilla war, as the Islamists try to retake power. And the U.S. will once again ally with these warlords and with a weak, corrupt regime. And who will benefit from American intervention? Al Qaeda, which will be able to draw up another recruiting poster from the American-sponsored invasion of a Muslim country.

In the 1990s, foreign policy experts, eager to identify a new enemy, hit upon the concept of a “rogue state” – a state operated outside the bounds of international norms and had to be restrained. The obvious candidates at the time were Libya, Iraq, and North Korea. But the Bush administration has turned the United States itself into a rogue state. Tough-minded conservatives, flexing their “muscular” inclinations from comfortable sinecures in Washington, may dismiss concerns about international law and war crimes as inventions of silly panty-waist liberals. But these inventions were meant to protect Americans as well as other peoples from the wars and the inhumanity that prevailed for thousands of years. We ignore them at their peril.

Manual of martial affairs for nations yearning to copy the American way of war.

Being a military thinker of the profoundest sort, I offer the following manual. Read it carefully. Great clarity will result. The steps limned below will facilitate disaster without imposing the burden of reinventing it. The Pentagon may print copies for distribution.

1. Underestimate the enemy. Fortunately this is easy when a technologically advanced power prepares to attack an underdeveloped nation.
2. Avoid learning anything about the enemy – his culture, religion, language, history, or response to past invasions. Knowledge would only make the enlisted ranks restive, and confuse the officer corps. Blank ignorance of the language is especially desirable (as well as virtually guaranteed). For one thing, it will allow your troops to be seen as brutal invaders having nothing in common with the population. For another, it will allow English-speaking officials of the puppet government to vet such information about the country as they permit you to have.
3. Explain the invasion to the American public in simple moral terms suitable for middle-school children at an evangelical summer camp. The public can then feel a sense of unappreciated virtue when the primitives resist. Sententious moralism should always trump reason.
4. A misunderstanding of military reality helps. Besides, comprehension would only lead to depression. Pay no attention to tactics, which are boring.
5. Do not forget that a military’s reason for existence is to close with the enemy and destroy him. An army is not in the social-services business. It is better to be feared than loved. Be sure the embassy has a helipad.
6. Intellectual insularity should be a primary goal, as it avoids distraction. This salubrious condition can be achieved by having officers read Tom Clancy instead of history. Remember that doctrine and optimism should always outweigh history and common sense. Encourage the belief that other countries have lost wars by being inferior to the United States. “The French lost in Viet Nam? What else would you expect from the French? Never happen to us.”
7. Keep up to date with the latest nostrums and silver bullets. Organize your military as a lean, mean, high-tech force characterized by lightning mobility, enormous firepower, and extraordinary unsuitability for the kind of wars it will actually have to fight. Flacks from the PR department of Lockheed will help in this.
8. It is a good idea to bracket your exposure. Be ready for wars past and future, but not present. The Pentagon does this well. Note that the current military, an advanced version of the WWII force, is ready should the Imperial Japanese Navy return. It also has phenomenally advanced weaponry in the pipeline to take on a space-age enemy, perhaps from Mars, should one appear. It is only the present for which the US is not prepared.
9. View things in a large context. People who have little comprehension of the military tend to focus exclusively on winning wars, missing the greater importance of the Pentagon as an economic flywheel. It is essential to spend as much money as possible on advanced weapons that have no current use, and none in sight, but produce jobs in congressional districts.
10. Insist that the U.S. military never loses wars. Instead, it is betrayed, stabbed in the back, and brought low by treason. For example, argue furiously that the U.S. did not lose in Viet Nam. The withdrawal was due to the treachery of Democrats, Jews, hippies, the press, most of the military, and a majority of the general population, all of whom were traitors. This avoids the unpleasantness of learning anything from defeat.
11. Avoid institutional memory. Not having lost of course means that there is nothing to remember. Instead, read stirring novels and cultivate a cheerful, can-do attitude unintimidated by primitives in sand-lot countries, who are probably genetically stupid.
12. Do it all again next time.