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I LOVE PANAMA
When I first decided I wanted to visit Panama, I was sitting on an Amtrak train heading to New York City and the baby next to me had just puked on my leg. He was propped up against his mother’s shoulder and was looking at me with a crooked smile – a look, that I now realize was meant to say I know something you don’t. I turned to pull out my Mickey Mouse pen when, with all the stealth and slyness of a fox, the devil baby made a muted gurgling sound, which led to this miserable cascading gush of Gerber yellows and greens. The Panama guidebook that I was reading was also damaged in the incident and to this day, I have no way of finding a decent restaurant in the Cocle Province.
Panama has been good to me over the past year. I came down to Central America as a young, seemingly knowledge-less kid from Jersey, who wanted to do anything but “work”. The 9 to 5 job was something I had nightmares about. I did not think I could handle the terror of that sort of job and there was certainly no decent company in the States who would want to hire someone with a fear of filing cabinets.
I am nothing by trade. After a great stint in Costa Rica, I tagged Panama as my next victim, following the advice of many friends and my tendencies to migrate towards the equator. I moved down with the intention of making some money, meeting new people, and most of all, having some fun. The opportunities that have presented themselves to me, from the second I landed in Panama, have been overwhelming. Take for example, the baggage carrousel in PTY that broke while I was waiting for my suitcase: “I know how to fix it” I told one of the men. Bam. Job opportunity numero uno.
The immigration laws in Panama are relatively strict and make starting a business for a gringo like myself a bit tricky. Every new business must have a Panamanian owner. A foreigner must provide a new skill that a Panamanian is not capable of performing. Though I only picked up a tourist visa, allowing me 90 days in the country, I wanted to be a citizen the second I met Panama City. In my first few weeks I gave myself a crash course in the country.
First thing that hit me? The low cost of living. In all my travels, I had never before stumbled upon a $.25 beer or a $3 replica soccer jersey. My apartment rents at $200 a month and the meals I eat cost no more than a Gatorade. I am now of the firm belief, that when you are paying less for living you have less guilt and less worries. This was what I was in search of – forgetting the debts, the fears and the exorbitant cost of living that are so common at home. I consult for several tourism and real estate companies now and have been enjoying watching Panama grow almost every day.
They are preparing to expand the canal – a subject that has its supporters and its opponents – which could be good or bad for the country. Donald Trump is stamping his name on a waterfront project. Things seem to be going well for Panama and I intend to explore every nook of this country before the real crowds hit. Every nook except the Cocle restaurant scene that is.Link here.
MACAU DETHRONES LAS VEGAS AS THE WORLD’S BIGGEST CASINO CENTER
It is a typical Friday evening in Macau and three women are singing on stage at the Las Vegas Sands Casino in front of an audience of thousands. But no one is listening. Everyone is jammed around the 800 tables. Opened in May 2004 with 360 tables, the casino has been expanding ever since and is now the largest under one roof in the world. It is just one of many new casinos in Macau. In September another Las Vegas operator, Steve Wynn, opened a casino aimed at a slightly wealthier clientele. It was followed in October by the Galaxy, intended for a less affluent crowd. According to figures released this week, Macau’s gambling receipts increased by 22% in 2006 to reach 55.9 billion patacas ($6.95 billion), placing Macau just ahead of the Las Vegas strip, previously the global leader.
The customers, primarily from mainland China but also from Hong Kong and South-East Asia, show some clear preferences. They like clean, new facilities. The no-smoking room at the Sands is overflowing. They like to take part, not just watch. Macau has only half as many visitors as Las Vegas. They also like to shop and eat well. In the lobby of the Wynn Casino there is a long queue at the Louis Vuitton store (its bags are said to bring luck) and the elegant Chinese restaurant is full.
All of this is bad news for Macau’s old casinos. Until 2002, gambling was the monopoly of Stanley Ho, a politically connected Hong Kong tycoon who continues to dominate the market with 17 casinos. But at the Palace, a floating casino in an ideal spot near the ferry from Hong Kong, the carpet is worn, the grimy dining room is empty and on the gambling floors upstairs there is not a single punter. Not far away at the Lucky Dragon, a casino Mr. Ho carved out of an office building in 2005 to compete with the new arrivals from Las Vegas, a few people sit listlessly on stools around an electronic roulette wheel. Mr. Ho is no fool. His business model is already changing. A vast casino, the Grand Lisboa, is taking shape behind his current Lisboa flagship. Meanwhile, Mr Wynn will double the size of his casino in July.
The number of visitors to Macau has grown from 10 million in 2003 to 22 million in 2006. Goldman Sachs estimates the number will reach 45 million by 2009. Yet the boom has put pressure on wages and new competition is coming from Singapore and perhaps from Hong Kong. Fragile balance sheets and heavy investment demands prompted Standard & Poor’s to place negative credit outlooks on Sands in May and Galaxy in December. Any other industry would worry, but casinos are not for the nervous. “We describe this as spitting on the floor,”says William Weidner, Sands’s president. “You can’t miss.”Link here.
PROTECTIONIST THREATS: THEN AND NOW
America has been down this road before. In many respects, the Japan bashing of the late 1980s has an eerie, but encouraging, similarity with the China bashing of today. Most believe that the outcome of nearly 20 years ago is emblematic of what can be expected today – a lot of bluster, but trade frictions that stopped far short of protectionism. That may be giving rise to a false sense of security. Unfortunately, some important complicating factors may draw this conclusion into serious question.
First of all, there is a major scale problem that raises a red flag for the protectionists. As of Q3 2006, the U.S. current account deficit stood at -6.8% of GDP – double the -3.5% shortfall hit in Q4 1986 when the external imbalance was at its worst in that earlier period. In both cases, the trade deficits were dominated by large bilateral imbalances with two major trading partners. Japan accounted for 37% of the peak U.S. merchandise trade deficit in 1987 whereas the Chinese share is about 29% today. While the concentration factor was worse for Japan back in the 1980s, China’s bilateral imbalance is currently about -1.9% of U.S. GDP vs. the peak -1.2% share of Japan back then.
This apparently comforting calculation means little when it gets in the hands of xenophobic politicians. Fixating on China as the culprit behind America’s trade deficit – the imbalance that is widely identified in political circles as the source of pressures bearing down on American workers – misses two key points. First, a saving-short U.S. economy must import surplus saving from abroad in order to grow – and run massive current account and trade deficits in order to attract the foreign capital. By sourcing the largest piece of the deficit with China, the U.S. has access to low-cost, high-quality products. A substitution of higher-cost producers for the Chinese piece would result in the functional equivalent of a tax on the American consumer. Second, a surprisingly small proportion of the goods shipped from China to the U.S. reflect value added inside of China. It turns out that China is more of an assembler than a manufacturer. While it may send a disproportionate share of its finished goods exports to the U.S., that is more a reflection of China being the final point in the assembly line than anything else.
Nevertheless, there can be no mistaking the intensity of the angst bearing down on the American workforce. I suspect something else may be at work here. There is an extraordinary disparity between the capital and labor shares of U.S. national income, with profits’ share currently at a 50-year high of 12.4% vs. labor compensation’s 56.3% – back to levels last seen on a sustained basis in the late 1960s. During the Japan bashing of the late 1980s, the shares of both capital and labor were under pressure. The profits share of about 7% was well below the 10% reading hit a decade earlier whereas the labor compensation share of about 58% was down markedly from the 60% reading hit in the early 1980s. In the late 1980s, many of the once proud icons of Corporate America were fighting for competitive survival at the same time that U.S. workers were feeling the heat of global competition. The pain was, in effect, balanced. Today, U.S. companies are thriving as never before while the American workforce is increasingly isolated in its competitive squeeze. In essence, capital and labor are working very much at cross purposes in the current climate, whereas back in the late 1980s they were both in the same boat.
As well, back in the late 1980s, the perceived adversary, Japan, was a wealthy developed country that paid its workers wage rates comparable to those in the U.S. Today, the fixation is over a poor developing country, China, where manufacturing workers are paid at about 3% the hourly rate of those in America. The competitive pressures then were the slow-moving variety bearing down on the manufacturing sector. Today, courtesy of IT-enabled outsourcing, the threat is intensifying at hyper-speed, while at the same time, spreading from manufacturing to once nontradable services. It is really not that difficult to understand why the fear factor of U.S. workers is far more exaggerated today than it was during the late 1980s.
All this, of course, feeds into the political backlash that is now bubbling over in the new U.S. Congress. Pro-labor Democrats have heard the message loud and clear. Middle-class American workers feel isolated as never before. Consequently, in this climate, it pays to take the threat of protectionism far more seriously than was the case during the late 1980s.
For those with a keen sense of the lessons of history, protectionism seems almost unimaginable. Think again.Link here.
W.T.O. RULES AGAINST U.S. IN INTERNET GAMBLING CASE
The U.S. has suffered a setback in a World Trade Organization case that accuses the country of protectionism against international online gambling companies. The U.S. admitted that the WTO had ruled against it in the latest stage of a long-running dispute with the tiny Caribbean island of Antigua over whether U.S. laws allow online gambling on horse racing, but unfairly forbid international companies from competing in the market.
The ruling is the latest step on a path which could eventually see the EU take on the U.S. over its treatment of the European internet gambling industry. Several leading online gambling companies have been hit by prosecutions from the U.S. in recent months. The final ruling on the case is expected in a few weeks after which the Antigua will be able to introduce sanctions although the U.S. still has the right to appeal. Officially, the U.S. government considers online gambling to be illegal, although there appear to be loopholes excluding horseracing, some state lotteries, and intrastate online gambling. Antigua would be the smallest country ever to win a WTO case.
Mark Mendel, Antigua’s lead counsel in the case, would not comment on the panel’s findings, but said that “America’s prohibition in the provision of gambling services from other countries violates the U.S. commitments to the WTO.” The existing U.S. online gambling industry, which lawmakers tolerated, was worth billions of dollars, he said. A victory for Antigua at the WTO would mean the country would be allowed to take retaliatory trade measures against the U.S., such as tariffs on imports. Such a route is thought unlikely to sway U.S. lawmakers, however, given the small size of the Antiguan economy, which is substantially dependent on the U.S. for trade. A greater threat is that success at the WTO for Antigua could pave the way for the EU to pursue a fair trade case against the U.S. over online gambling, which the U.S. might have to take more seriously. The EU has previously said that it was an “interested party” in the case.Link here.
European Commissioner labels U.S. gaming rules “protectionist”.
Charlie McCreevy, European Commissioner for Internal Market and Services, said that the U.S. rules against processing of international on-line gaming transactions were a prima facie case of protectionism and that the WTO was a possible venue for tackling them. But he said that while negotiations were continuing over the WTO’s Doha Round, he would not rush to file a complaint. “It’s not something of major momentum,” McCreevy said.
He told the European Parliament’s ECON Committee, “In order to protect, I’d say, their own business, their industry there, they have de facto prevented foreigners from online betting into the United States. In my view it is probably a restrictive practice and we might take it up in another forum.” McCreevy said he had not discussed the issue in any depth with Peter Mandelson, the EU trade commissioner, who would front any EU attempt to challenge the U.S. legislation. It was reported last week that the WTO’s Dispute Settlement Body’s panel on the spat between United States and Antigua and Barbuda over e-gaming is likely to rule against the U.S.
Since the WTO’ initial ruling in Antigua’s favor, the U.S. has passed the Unlawful Internet Gambling Enforcement Act of 2006, the legislation referred to by Mr. McCreevy, which while expanding domestic opportunities for legal gaming, effectively bans all international and interstate online gaming, by making it illegal for banks and credit card firms to make payments to such internet operations.Link here.
IMF CONCLUDES CONSULTATION WITH ANTIGUA AND BARBUDA
Country’s economy improving despite U.S. war on offshore gaming.
The Executive Board of the IMF announced last week that on January 17, it concluded its 2006 Article IV consultation with Antigua and Barbuda. The Board observed that the government of Antigua and Barbuda had adopted an ambitious reform program in its endeavor to pull the economy from decades of fiscal weakness-characterized by persistent fiscal deficits, a triple-digit debt burden, endemic arrears, and a large civil service – and declining growth rates.
The reform agenda included comprehensive tax reforms, civil service downsizing, measures to improve the investment climate, plans to reform the ailing social security system, and an impending strategy to regularize relations with creditors. Successful implementation of the ongoing and planned reforms could mark a watershed for Antigua and Barbuda’s economic prospects, the IMF officials suggested.
The reform drive has benefited from an upswing in recent economic activity. The economy is experiencing its third consecutive year of high growth, driven by a construction boom in hotels and housing, as well as projects related to the 2007 Cricket World Cup. Growth in 2006 is expected to reach 8%, among the highest in the region. Growth is expected to slow as the construction boom winds down. Inflation has remained low, largely reflecting the stability provided by the regional quasi-currency board arrangement. The external current account deficit increased to 15% of GDP in 2005 and is projected to widen further to 20% of GDP in 2006, but will be fully financed by foreign direct investment.Link here.
BELIZE BOND SWAP OFFER A SUCCESS
The Belizean government has announced that 93% of its bondholders have taken up the $500 million debt swap it offered in December to replace existing commercial foreign debt with new instruments maturing in 2029. Principal repayments on the new bonds will start in 2019. The bonds will bear interest in the first three years after issuance at a fixed per annum rate of 4.25%. In years four to five, the rate will step up to 6.00%, and thereafter through the maturity of the bonds the interest rate will level off at 8.50% per annum. The exchange offer was preceded by four months of intensive consultations with the affected creditors by the Belizean authorities.
“On its existing terms,” explained Belizean Prime Minister Said Musa in December, “Belize’s stock of external commercial debt is visibly unsustainable. Through this transaction, Belize will have consolidated the debt into a single new series of bonds, improved liquidity for the creditors, stretched out maturities and significantly lowered the average rate of interest on the debt. Over the next five years, this transaction will save an estimated $301 million in debt service costs for Belize in comparison with existing terms.”
Prior to the swap, Belize bonds were trading at 72 cents on the dollar, and bond yields on the 9.75% coupon bond due in 2015 had reached nearly 16%. Standard & Poor’s had lowered Belize’s sovereign credit rating from CCC- to CC.Link here.
CARICOM COUNTRIES LAUNCH “SINGLE DOMESTIC SPACE”
The 10 countries belonging to the Caribbean Community (CARICOM) this week introduced the “Single Domestic Space”. Established to facilitate easy movement during the ICC Cricket World Cup 2007, persons belonging to the single domestic space will be able to move from country to country without having their passports stamped, but must present their completed forms to immigration officials. Passports will still be required for identification purposes and immigration officers will retain the right to conduct an in depth interview if deemed necessary.
When moving from one country to another, individuals will be issued with a secured CARICOM wristband to facilitate hassle free movement. This will serve to identify those persons who are moving throughout the single domestic space. The 10 countries comprising the single domestic space are Antigua and Barbuda, Barbados, Dominica, Grenada, Guyana, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, and Trinidad and Tobago. According to Barbados’s Chief Immigration Officer, Gilbert Greaves, the requisite staff had been deployed at the air and sea ports and all desks at these ports of entry are expected to be fully manned, especially during peak periods, so as to better facilitate the efficient and speedy movement of persons.Link here.
IRELAND REVAMPS IMMIGRATION RULES TO FILL SKILLS GAP
New economic migration and employment permit arrangements for workers outside of the European Economic Area will come into effect in Ireland starting February 1. Minister for Enterprise, Trade and Employment, Micheal Martin said that the changes are designed to ensure that Ireland continues to have a skilled workforce to meet its future employment needs. The four categories of permits that have been introduced include (1) the Green Card Scheme, (2) the Work Permit, (3) the Intra Company Transfer Permit, and (4) Spousal and Dependant Permits.
The Green Card scheme, introduced for the first time in Ireland, is aimed at occupations where the country has “strategically important high level skills shortages,” such as in the Information and Communications Technology, Health Care, Construction, Engineering, Financial Services and Research sectors. The scheme is available for an extensive list of occupations with annual salaries of €60,000 ($77,630) and above, and for a specified list of occupations with salaries between €30 to €60,000. No labor market test is required for the Green Card applications. Green Cards will be issued for two years initially and will normally lead to the granting of permanent or long-term residence after that. Green Card holders will also be permitted to bring their spouses and families to join them immediately.
The new Work Permit is mainly for non-Green Card occupations in the €30 to €60,000 annual salary range. It will only be granted in exceptional circumstances for occupations with salaries below €30,000. In order to establish that vacancies which are the subject of Work Permit applications cannot be filled by Irish or other European nationals, as required by EU “Community preference” rules, they will be the subject of a “rigorous” labor market needs test.
The new Intra-Company transfer scheme is aimed at trans-national senior management, key personnel and trainees, and will allow multi-national companies to transfer these types of staff between branches in different countries, or to transfer staff with particular skills, knowledge and expertise to Ireland on a temporary basis in a start-up situation. These permits will only be available for those with annual salaries above €40,000 who can clearly show that they fit into one of these three categories and who have been with the sending company for one year. No labour market needs test will be required in respect of Intra-Company Transfer applications.
The new Spousal/Dependant Work Permit which will allow the spouses and dependants of Employment Permit holders who are entitled to apply for Work Permits. This will allow the spouses and dependants of work permit holders to help support their families. These applications will not require a labor market needs test and may be in respect of any occupation in the labor market.
The new immigration rules will also allow graduates from non-European Economic Area (EEA) countries who studied in Ireland to apply to remain in Ireland for six months after they have received their examination results. This will allow them time to seek employment and to apply for a Green Card or Work Permit. “There is no doubt that we have great diversity in our labour force with 9% of our workers coming from abroad. These workers have helped develop our economy by filling short term high skill gaps," Martin commented. “It is important that we now adapt our procedures for the future. What we are introducing is a system that can respond quickly to the needs of the Irish economy.”Link here.
HONG KONG TO REAP FINANCIAL DIVIDENDS OF INCREASED LINKS WITH CHINA
But unification “is not an option, at least for the foreseeable future”.
Linking the financial markets of Hong Kong and mainland China would bring considerable benefits to the territory’s economy and finance centre, according to Hong Kong Monetary Authority Chief Executive Joseph Yam. Yam said the wider and deeper the market, the more liquid it is, and the more efficient the price-discovery process. Less market concentration a common feature of big markets, also means less scope for market manipulation, he wrote. “By contrast, the situation of smaller, open markets is less benign,” Yam stated.
Noting that bigger markets have considerable advantages over smaller markets, and that there is an overlap in the instruments traded in Mainland and Hong Kong markets, Yam added there would be obvious benefits for the country as a whole in linking the two. He continued, “It is clear, at least to me, that there would be big advantages if the two markets for these instruments were linked ... Let me make it clear that I am not talking about unification – that is not an option, at least for the foreseeable future – but rather the creation of a channel between the two markets that will allow them to function as one and enjoy the benefits of one, much larger market.”Link here.
Beware Of Emerging Markets – including us – Hong Kong Securities and Futures Commission cautions.
Although Hong Kong is a relatively mature market in Asia, it still possesses some of the characteristics of an emerging market, and the Hang Seng Index generally has higher volatility than New York’s or London’s indices, the Hong Kong SFC has warned. In its latest Dr. Wise column, the Commission observed that the city carries an increasing number of listed companies from emerging economies, with many of the emerging market’s risks.
One of the most prominent risks at the moment is the exposure of listed companies to changes in the Mainland’s economic policies, where the recent tightening of the collection of land appreciation taxes is a case in point. The commission said there are some causes for volatility in emerging markets such as unexpected market events, government intervention and speculative investment behavior.
The Commission concluded by suggesting that as many emerging markets are still in the process of building accountability within the system, their legal and reporting framework may be either too lax or too zealous, and individual companies or industries may still be reliant on government support.Link here.
INTERNET TV SHOWCASES VANUATU TO GLOBAL AUDIENCE
Two expats living in Vanuatu have launched a pioneering new internet television station known as “Vanuatu TV” dedicated to bringing the south Pacific country’s customs, tourism and business to a global audience. According to Grant Abbott, CEO of Vanuatu TV, “My brother Chris and I decided to create Vanuatu TV because after holidaying here in 2006 we could only find web sites on Vanuatu filled with pages and pages of words and pictures. Having spent over eight years developing TV programs for the net we decided to use our skills to showcase Vanuatu, the happiest place on earth and our home.
“So now with a simple mouse click in www.vanuatu.tv you have all of Vanuatu at your fingertips. So if you want to know where to eat, stay, play, visit or invest in Vanuatu before you get here, Vanuatu TV has dedicated TV programs featuring Vanuatu tour activities, accommodation, restaurants, business and real estate, all produced by experienced TV professionals and with seasoned TV presenters.”
The Abbotts said that Vanuatu TV is especially a “win-win” for all those involved in the Vanuatu tourism industry as local tourism operators get to show off their businesses to the world in a new and pioneering format. Vanuatu TV says that it plans to add more programs and refresh those currently on the site on a regular basis.Link here.
DUBAI’S RULES FOR INVESTMENT FUNDS ARE FORCING OTHER OFFSHORE JURISDICTIONS TO RETHINK
The Dubai International Finance Centre (DIFC) was set up in 2004 with the aim of harnessing the enormous regional capital and investment potential in the Gulf. However, the rules for the new regime in Dubai with respect to collective investment funds and financial services present issues for promoters and distributors of funds and for offshore jurisdictions generally.
The Dubai Financial Services Authority (DFSA) is responsible for developing the financial services regulatory framework in Dubai. It is also responsible for authorizing and licensing collective investment funds – whether these are set up in Dubai or they are foreign funds already set up in other offshore jurisdictions and seeking a market in Dubai. The DFSA also has a role in investigation and enforcement within the DIFC. It has, for instance, already imposed the first “enforceable undertaking” in relation to an investment adviser who was providing financial services without a DIFC licence.
Clearly the new regulatory regime will present new trusts, funds and financial services issues to all offshore institutions marketing and working in the Gulf region – and it intends to make its mark. Dubai is a very lucrative market for targeting sophisticated and institutional investors as well as high-net-worth individuals. This includes the distribution of all types of fund products, but particularly sharia-related collective investment funds. Jersey has seen a great number of these over the last 10 years. However, Dubai may in future be in an enviable position in relation to sharia funds because of its position as a developing Middle East finance center and may begin to compete on sophisticated investor funds.Link here.
HEDGE FUNDS FLEE VIRGIN ISLANDS, HOUNDED BY IRS
At the Deep End Bar, a poolside grill in St. Croix, a handful of money managers and investors sip rum from a local distillery and reach for complimentary bug repellent as dusk brings out the no-see-ums. Warren Mosler, who opened a hedge fund firm in St. Croix five years ago, is having what has become the usual conversation with people who were lured to the U.S. Virgin Islands in 2001 by the prospect of legally cutting their tax bill by 90%. Almost half of the 49 funds that set up shop in the islands have fled in the past two years.
Mosler complains that hedge funds were chased away by federal tax law changes and an IRS that says it suspects rampant fraud by those that signed up for the tax incentive. “It’s kind of like what happens to a community when a big company or an army base pulls out but on a smaller scale,” says Mosler, a founding member and manager of the III Funds, which manages $3.5 billion. He now advises the fund in Christiansted, one of two Danish colonial settlements on St. Croix. He is surveying the sparse happy-hour crowd. “Unfortunately, the fear is causing a case of running away from the police when you are not guilty,” he says.
Mosler, 57, and two other hedge fund managers bought and renovated the Tamarind Reef Hotel four years ago in anticipation of an influx of Wall Street money managers to the island, which is 1,100 miles southeast of Miami. The boom never came. Instead, the U.S. Treasury Department and U.S. Senator Charles Grassley of Iowa, the Republican chairman of the Senate Finance Committee from 2001 to 2006, knocked it out with a combination punch of regulation and legislation, Mosler says.
The U.S. government became alarmed in 2003 when someone sent the Treasury Department an anonymous letter that included marketing materials advertising the territory’s economic program as a tax dodge, Grassley says. “Before our reforms, we had people living in the United States and claiming Virgin Islands residency to dodge their federal income taxes,” Grassley says. “It took a long time to corral that horse and put it in the barn.” That sales pitch was followed by the conviction of a Massachusetts life insurance executive in February 2004 on tax evasion charges in St. Croix. The events prompted Grassley to conclude the Treasury Department was not acting swiftly enough to combat fraud. The insurance executive had claimed tax benefits without living in the territory.
The fund managers who remain say they face a fight with tax examiners, who are using a new IRS form that requires details about their lives – where they own a home, where their children attend school, where their cars are registered, where they attend religious services and what civic associations they have joined. The Grassley legislation imposed a 6-month residency requirement and clarified that the territory’s tax benefits apply only to income earned exclusively in the islands. U.S.V.I. officials have been waiting for two years for specific guidance on its tax program from the U.S. Treasury Department. Since the new law was adopted, 23 of the 49 hedge funds have either halted their activities temporarily or withdrawn from the islands.
“Treasury essentially treated the possessions with benign neglect, perhaps too much so in hindsight,” says Carl Dubert, who was deputy international tax counsel at the Treasury Department from 2002 to 2004 is now a senior manager at PricewaterhouseCoopers. “The issue is, you have to sell your house in Greenwich or the Hamptons or whatever and actually move down there. As long as you do it right and you actually have your business down there, it works.”
The territorial government designed the tax breaks to attract new industries in a bid to broaden an economy dependent on tourism, which accounts for 60% of the islands’ companies. The three principal U.S. Virgin Islands – St. Croix, St. John and St. Thomas – have a population of 108,605. Per capita income in the territory is $18,652, less than half the average in the continental U.S. and $7,000 less than in Mississippi, the poorest state. The islands, especially St. Croix, have struggled to recover from Hurricane Hugo in 1989. Hugo and Hurricane Marilyn in 1995 decimated thousands of St. Croix houses, as well as resorts, many of which have never been rebuilt.
To qualify for the tax incentives, firms must invest at least $100,000 in the territory, buy products such as office supplies and computers in the U.S.V.I., contribute to area charities and hire at least 10 people, 80% of whom must be natives of the islands. Company owners must live in the U.S.V.I. for at least half of the year, under federal requirements. They have to undergo five examinations a year by the Economic Development Authority. Michael Masters, principal at and founder of hedge fund firm Masters Capital Management LLC, says the 2004 law and the IRS clampdown have had a chilling effect. “Witch hunts aren’t good for anybody, including the government,” he says. “It’s a waste of resources.”Link here.
RETIREMENT TAX WILL HIT U.S. EXECUTIVES
Democrats launch first attack on excessive executive compensation.
U.S. corporate executives face drastic reductions in their retirement nest-eggs under proposed tax legislation that would also hit Wall Street banks and other large companies. The measures, likely to be approved by the Senate this week and expected to become law in the next few months, are part of a drive by the new Democratic Congress to fund promised tax relief for the middle class and businesses by closing loopholes and increasing the costs of corporate wrongdoing.
The new tax legislation, which could add more than $800 million to the collective tax bill of U.S. executives in the next decade, is also the first attack by the new Congress leadership on excessive executive compensation. The issue has risen to the top of the corporate governance agenda following investor protests at pay awards for U.S. chief executives. The new rules to be considered by the Senate are part of the measures aimed at offsetting the costs of more than $8 billion of tax relief for small businesses hit by a proposed rise in the minimum wage. For the bill to become law, it will have to be approved by the House of Representatives.
The proposals would cap the amount of compensation that executives can defer until retirement – a common method used to minimize taxes. Executives would be allowed to defer up to $1 million a year or the average of the previous five years’ taxable salary, whichever is lower. Any sum above that would incur taxes and a 20% penalty. The measures have been attacked by business organisations and executive pay consultants, who argue they will prompt companies to pay higher salaries and bonuses upfront to compensate for higher taxes.Link here.
GLOBAL BUSINESSES’ TAX LIABILITY MANAGEMENT BEING HELD UP TO GREATER SCRUTINY
Four global trends are combining to force companies to improve the management of their tax functions, or face unexpected financial and reputational penalties, according to Big Four accounting firm KPMG. Loughlin Hickey, Head of KPMG’s Global Tax practice, said that companies that embrace the change can generate value for investors and enhance their reputations by demonstrating a clear strategy on tax planning, good financial control, and sustainable results through good compliance.
Speaking in Sweden, Hickey told an audience of business leaders that tax competition between countries, new regulatory pressures, the modernization of tax administrations, and growing public interest mean that companies everywhere are being measured against new standards of transparency in tax. “In a competitive world, tax is a lever that governments have used to attract or retain investment,” he said. “But they still need to fund increasingly expensive social spending. This means that any shortfall in budgeted tax revenues has to be made up by a shift towards indirect taxes and greater vigilance on the amount of tax paid by corporate taxpayers operating in the country – often through more aggressive tax policing, particularly in relation to transfer pricing.”
Hickey went on to note that the drive for greater transparency is reflected in greater media interest in tax governance issues, and a renewed interest in tax among analysts. “The analyst community accepts that it does not specialize in tax, but what concerns them is that sometimes the companies they speak to do not seem to instill confidence that tax is under control and is adding value wherever appropriate,” said Hickey. “Tax policy now encompasses far more than headline corporate tax. It includes indirect and employment taxes, and it is not enough just to get things right in the country of the head office.”
Hickey argued that one of the most effective ways to discourage excessive prescriptive regulation around accountability and disclosure could be voluntarily to adopt a more open and better communicated approach to tax. “Some will not move until there is a crisis, within the company, the country or the industry,” he said. “Rather than wait for the crisis, I want to highlight signs that tax and corporate governance is an emerging issue, it is a global issue, and it is likely to set new standards for transparency in tax across the whole world.”Link here.
TAXPAYERS CLAIMING “IMPROPER” PHONE TAX REFUNDS, SAYS IRS
The IRS said last week that early filings show some individual taxpayers have requested “large and apparently improper” amounts for the special telephone tax refund. The IRS is investigating potential abuses in this area and the agency has pledged to take “prompt action” against taxpayers who claim improper refund amounts and the return preparers who help them.
“While the vast majority of taxpayers are claiming the telephone tax refund correctly, we are seeing some clear abuse involving overstated refund requests,” observed IRS Commissioner Mark W. Everson. “People requesting an inflated amount will likely see their refund frozen, may have their entire tax return audited and even face criminal prosecution where warranted.”
The government stopped collecting the long-distance excise tax last August after several federal court decisions held that the tax does not apply to long-distance service as it is billed today. Federal officials also authorized a one-time refund of tax collected on service billed during the previous 41 months, stretching from the beginning of March 2003 to the end of July 2006. The tax continues to apply to local-only phone service.
The IRS checked a sample of returns filed through mid-January and found that some individual taxpayers requested telephone tax refunds that appear to be excessive. In some cases, the IRS said that taxpayers appear to be requesting a refund of the entire amount of their phone bills, rather than just the 3% tax on long-distance and bundled service that they are entitled to. According to the agency, some individuals are making requests for thousands of dollars, indicating that they had phone bills topping $100,000 – an amount exceeding their income. The IRS also noted that some tax preparers appear to be helping their clients file apparently improper requests. Based on research and contacts with telephone service providers, the IRS believes that the standard refund amounts, ranging from $30 to $60 based on the number of exemptions claimed on a tax return, would approximate the eligible amount for most taxpayers.Link here.
U.S. HOUSE BILL TO AXE INTERNET TAXES “PERMANENTLY” PROPOSED
Legislation has been introduced into the House of Representatives to permanently extend the moratorium on internet access taxes and duplicative and discriminatory taxes on internet commerce. “Americans across the country utilize the Internet for communication, commerce, business, education and research,” observed Congresswoman Anna G. Eshoo (D-California), who introduced the Permanent Internet Tax Freedom Act of 2007. “Because of the tremendous value it brings to all aspects of our lives, we need to encourage its usage and do everything we can to ensure that Internet access is universal.”
Congress first instituted the temporary moratorium in 1998 to encourage growth of online commerce. In 2004, Congress extended the moratorium for an additional three years, which is scheduled to expire in November of this year. According to Eshoo, a 2006 report by the Pew Internet and American Life Project demonstrated that 73% of those polled were Internet users, up from 66% in a similar 2005 survey, while in 2006 alone, online retail exceeded $100 billion, increasing 24% over 2005. However, Internet usage still lags behind in rural and lower income areas of the U.S., and the country has fallen from 4th to 16th in broadband penetration worldwide since 2001.
“In order to reverse this trend, we need to ensure that access costs are kept to a minimum. Prohibiting unnecessary access taxes will help accomplish this goal,” Eshoo told the House. “We also need to allow unfettered access to the products and new services that are only available through the Internet and prevent multiple layers of state and local taxes. Otherwise, we will open the door to a myriad of barriers to Internet commerce that will drive consumers from a web-based marketplace and stifle innovation.”Link here.
IRS OVERSIGHT BOARD REPORT COMMENDS AGENCY, BUT URGES MORE ACTION ON “TAX GAP”
The IRS made steady progress last year towards transforming itself into a modern institution that provides efficient and effective tax administration services to America’s taxpayers, according to the IRS Oversight Board’s 2006 Annual Report. However, Board Chairman Paul Jones commented upon the release of the report that, “The IRS must still meet a number of challenges before it can achieve the vision of a 21st Century tax administration agency described in the IRS Restructuring and Reform Act of 1998.”
The Board credited the agency for delivering some noteworthy gains in the past year, such as an increase in enforcement activity and stable customer service levels. A survey commissioned by the Board in 2006 found that taxpayers also increasingly recognize that the IRS provides good quality service through a variety of channels. But, the Oversight Board’s stressed that its foremost concern remains the tax gap – the difference between what taxpayers legally owe and what is actually collected. The IRS’s most recent estimate for the annual net tax gap is $290 billion, based on 2001 tax returns.
“The tax gap is an injustice to honest taxpayers who ultimately bear the burden of tax cheating. It deprives the government of much needed revenue for important programs. And it undermines confidence in the fairness of our tax administration system and contributes to non-compliance,” observed Jones. The Board expressed the belief that reducing the tax gap requires “a comprehensive set of broad strategies” that balance prevention and correction – from a simpler tax code and more complete information reporting to more IRS audit and collection personnel and quality customer service.Link here.
Senators demand answers from IRS on U.S. tax gap.
U.S. Senators Max Baucus (D-Montona) and Chuck Grassley (R-Iowa), Chairman and Ranking Member, respectively, of the Senate committee with jurisdiction over tax, have paid a visit to the IRS headquarters to ask senior executives at the agency what they will do this year to close the $345 billion tax gap. Baucus and Grassley have identified the tax gap – the gulf between taxes legally owed and taxes actually collected in a timely fashion – as a drain on the U.S. economy and as a source of revenue to pay for U.S. priorities. The Senators met with IRS Commissioner Mark W. Everson and more than a dozen other senior IRS staff.
Grassley stated, “The tax gap isn’t new. In spite of the IRS’s efforts to improve taxpayer compliance, the rate of voluntary, timely payment has ranged from around 81% to around 84% over the past 30 years. That’s why it is disturbing that some members of Congress and maybe even some IRS employees are trying to stifle the private debt collection program before it has had a chance to succeed. We use private contractors to help with other government functions. With a $345 billion tax gap, we need every tool available. And Senator Baucus and I built in extensive oversight and protections of taxpayer rights.”Link here.
CANADA’S MINISTER OF FINANCE STANDS BY DECISION TO TAX INCOME TRUSTS
Before a special hearing of the House of Commons Standing Committee on Finance Jim Flaherty, Minister of Finance, stated that Canada’s government intends to proceed with his controversial “Tax Fairness Plan”, despite widespread opposition to a new tax on income trusts. “I am not prepared to sacrifice the interests of millions of hard-working Canadians who pay their taxes and play by the rules so that a select group of special interests can enjoy a tax holiday,” he remarked.
Under the tax plan, a “Distribution Tax” will be applied beginning in 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 4-year transition period. 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. However, the new tax, which was devised largely without consultation and announced without warning, has caused consternation in Canada’s business and investment sector. The tax plan has also provoked strong criticism from opposition parties including the Liberals and Bloc Quebecois, both of which called for the parliamentary committee hearing to examine the legislation.
Flaherty noted that provincial and territorial governments unanimously supported the Tax Fairness Plan at the December 2006 meeting of federal-provincial-territorial finance ministers in Vancouver, given the negative impact of income trusts on provincial revenues and their economies. “It is regrettable that some investors suffered financial losses,” he said. “Although it was a very difficult decision, it was an absolutely necessary decision for the country and for future generations of Canadians, our children and grandchildren.”Link here.
THE OFFSHORE MYTH
The general misconception is that anyone who moves money offshore is a criminal, as the headlines about money laundering with offshore havens would lead one to conclude. Since the majority of people receive their news in 30-second blips or from short 30–word news articles like the one on MSNB’s website, most will probably never take the time to research the true benefits of offshore assets protection, worldwide business formation and international investing.
It is the position of the IRS that you may take any and every legal means – and are encouraged to do so – to pay the absolute least tax due. There are many articles on the IRS website, showing that the same legal structures that are employed for asset protection and estate planning can also be used to avoid overpaying taxes. The site also shows that there are legal methods to invest capital in foreign jurisdictions which can create less of a tax burden and at the same time create a sound, secure financial portfolio.
An article entitled “The Dirty Dozen” appears on the IRS website. Number one in the dirty dozen is “misuse of trusts”, and number four is “Offshore Transactions”. If you do not read exactly what they are talking about you may erroneously conclude that any offshore transaction is illegal and that private trusts are instruments to defraud the government. Nothing could be further from the truth. George W. Bush has offshore trusts set up in the Cayman Islands for his two daughters. This is disclosed in his financial disclosures papers required for his running for the office of president.Link here.
With no federal oversight, the states are helping to shelter crooks, money launderers and, possibly, terrorists.
Shawqi Omar has been cooling his heels in a U.S. military brig in Iraq since he was arrested in Baghdad in October 2004. The 44-year-old Kuwaiti native with American and Jordanian citizenship was charged with being part of an aborted plot to mount a chemical attack on the Jordanian intelligence agency. The FBI has also taken an interest. Five of Omar’s relatives have been charged with using U.S. shell companies in Utah and California to commit bank fraud and money laundering and possibly to fund terrorist activities in the Middle East. One defendant has copped a plea to accusations of fraud and money laundering and awaits sentencing. Three others have pleaded not guilty, and one was dismissed for medical reasons. “The fact that U.S. shell corporations can be used to commit criminal activity is increasingly a major weakness in our system,” says Gregory Bretzing, supervisor of the FBI’s joint terrorism task force in Salt Lake City.
Once ideal vehicles for tax evasion, shell companies – corporations with no operations, no employees and no physical assets – have lately become shelters for far more nefarious criminal activities, says Stuart Nash, an associate deputy attorney general at the Justice Department. Crooks benefit in several ways. A U.S. company address lends credibility in global trade and painless access to American bank accounts. And thanks to loose laws of incorporation in many states, it is easy for offenders to remain anonymous – and to elude the authorities. Unlike publicly held companies, private entities are not obliged to reveal ownership. And without such information the police come to a dead end, unless they can tease the information they need out of bank records.
How widespread is the problem? No one really knows for sure because the states “have no idea who is behind the companies they have incorporated,” says Senator Carl Levin (D – Michigan), who is trying to force the states to insist on greater transparency. The Financial Crimes Enforcement Network, the U.S. Treasury bureau investigating money laundering, says roughly $14 billion worth of suspicious transactions involving private U.S. shells and overseas bank accounts came in from banks from 2004 to 2005, the latest data available. Now, estimates the FBI, anonymously held U.S. shell companies have laundered $36 billion to date just from the former Soviet Union.
State governments provide plenty of cover for bad guys. Every year they incorporate 1.9 million or so private companies, but no state verifies or records the identities of owners, much less screens ownership information against criminal watch lists, according to a study by the Government Accountability Office. In many cases the documents of incorporation require only a company name, an address where official notices can be sent and the names and signatures of folks handling the paperwork – not of the owner or controlling shareholder. You can submit the forms in person, by mail or, increasingly, via the Web in a process that takes from 5 minutes to 60 days, depending on the state. The median fee is $95. A network of registration agents here and abroad help set up a vast number of shells each year. Once the minimal work is complete, the corporation, a perfectly legal entity, can conduct business and, in many cases, open a bank account. Why doesn’t Delaware crack down on anonymous incorporation? The crooks would just take their business to Nevada. Also note that chartering out-of-state corporations is a big industry in an itty-bitty state.
Given the paucity of information, nailing criminals means relying on bank records. That is what happened in the Omar case. Sometimes it us a foreign investigator who gets stonewalled. They almost always came away empty-handed. The situation has made a mockery of American demands that other nations do more to stop financial crimes.
Incorporation agents are not shy about promoting the privacy offered by U.S. laws. Atrium Incorporators of London promotes Delaware on its Web site as “an offshore tax haven for non-U.S. residents.” Advantages? “Owners’ names are not disclosed to the state," and "the company is not required to report any assets.” Another Web site, corp95.com, promises that for as little as $69, plus filing fees, it can set up a corporation in Nevada, which “may provide for anonymous ownership and bearer shares.” The site also offers “shelf” corporations, already incorporated businesses that have sat dormant but have some operating history.
“The systemic vulnerability we face in the United States from shell companies can only be addressed by Congress through legislation to specifically regulate shell companies,” says Dennis M. Lormel, senior vice president of Corporate Risk International and former chief of the financial crimes section in the FBI. If the states do not fix the problem themselves, Senator Levin says he will have to introduce legislation seeking a uniform standard. His solution would require states to force owners of companies they incorporate to disclose the owners’ names on state incorporation forms. But there seems to be little urgency among his peers.Link here.
U.S. BABY BOOMERS’ BIG INHERITANCE: IS IT ENOUGH?
A historic transfer of wealth is coming, but it will not make up for small nest eggs.
The coming cycle of inheritances is billed as the greatest wealth transfer in U.S. history. But do not expect it to finance the retirement of baby boomers or their children. The reality, according to one new survey, is that when people do receive an inheritance, it is typically well under $100,000. And most people will receive no inheritance at all.
U.S. households may be richer than ever, thanks largely to a boom in home prices which has raised net worths across the income spectrum. But even as the pool of wealth has risen, the cost of retirement has been rising. Longer life spans, coupled with the rising cost of medical care, mean that many older Americans will use their wealth rather than pass it on to children. “In many cases, because of increasing longevity ... it goes the other way. Instead of inheriting wealth the children wind up having to spend considerable wealth taking care of their parents,” says Zvi Bodie, an expert on personal finance at Boston University.
This does not mean inheritances are a thing of the past. But it does amplify the notion that today’s working Americans need to focus on saving for their own retirements – even as they also devote resources to caring for their parents and their own children. The inheritance factor is just one reason. For years, corporations have been shifting from promising a guaranteed pension toward offering largely do-it-yourself savings plans. And government programs for older Americans – Social Security and Medicare – could soon face some belt-tightening. Federal Reserve Chairman Ben Bernanke recently issued a blunt warning to Congress that the burgeoning costs of these entitlement programs, if untamed, could harm the U.S. economy. Any “fixes” that evolve may not be dramatic, but benefits could become a bit less generous in the process.
Given all this, perhaps it is not surprising that only 1/3 of adult Americans feel confident about being financially ready for retirement, according to the results of a nationwide poll just released by Putnam Investments in Boston. “It’s true that there will be trillions of dollars transferred” among generations, says Beth Segers, director of market planning for Putnam. But “we cannot count on inheritance as the panacea to address the inadequate discipline of saving.”
“Only about 20 percent of households receive inheritances of any note,” says Edward Wolff, a New York University economist who studies the distribution of wealth. “It may rise over time, but “it’s still going to be a minority of households.” On that score, the Putnam survey suggests that Americans may be pretty realistic. Just 24% of adults in the survey expect an inheritance, and relatively few expect it to make a big difference in their retirement.
What is the best course for baby boomers and other working-age Americans? Focus harder on saving now, and prepare to work more later in life. Dr. Bodie recommends that people better manage their “human capital” – upgrading your employable skills – which typically outweighs their financial assets. “Work is an asset throughout your lifetime,” he says. And increasingly, work will extend into retirements that are a mix of work and leisure. “Retirement is not going to be a date, it’s going to be a process.”Link here.
NO WAY IN – NO WAY OUT
I have no desire to get embroiled in the current tangled debate on immigration, either legal or illegal. However, I have watched with interest the intense campaign for President Bush first to intervene in the trial of two border patrol agents accused of shooting a suspected Mexican drug dealer as he fled, and then to pardon the agents for the crime after they were convicted. The agents, Ignacio Ramos and Jose Alonso Compean, entered prison last week amid shrieks of injustice. They were convicted not only of shooting Osvaldo Aldrete, who was unarmed and running away, but of destroying evidence, covering up a crime scene and filing false reports concerning the circumstances.
Right-wing pundits and politicians on both sides of the aisle seeking political gain are clamoring for Bush to pardon Ramos and Compean for their “act of courage” and to ignore the laws they broke and the crimes they committed. It seems likely the emotions over illegal immigration will get uglier and more intense if this administration continues to nod and wink at securing the border between the U.S. and Mexico. If there is a policy other than to give no-bid contracts to Halliburton to build a network of detention camps where immigrants will be held indefinitely, I am not aware of it. I find it difficult to believe that these camps are cheaper and more humane than simply closing the border to illegal entry.
Those who cry that the border between Mexico and the U.S. stretches for 2,000 miles and is all but impossible to control apparently are unaware of the new passport requirements that have gone into effect. Air travelers going to or from the U.S., Canada, Mexico, the Carribbean and Bermuda must have passports. Those who have no problem with them coming for air travelers should know that as early as January 2008, they are coming back for the rest of us. According to just the basics, “All persons – including U.S. citizens – traveling between the U.S. and Canada, Mexico, Central and South America, the Caribbean, and Bermuda by land or sea (including ferries), may be required to present a valid passport or other documents as determined by the Department of Homeland Security.”
Americans who cherish freedom would do well to stop stumbling around in the trees and forests of the illegal immigration debate and see that the Bush administration is well on its way to closing the borders of the entire nation, not only to people trying to get in, but to citizens trying to get out. For the millions who do not travel, it is probably no big deal – they long for the tranquility of servitude and do not recognize shouts coming from the rest of us as a desperate rattling of chains. Unfortunately, securing the homeland is a two-edged sword that the Bush administration and military establishment profiteers are holding firmly over our heads. It is time Americans realized that we are in danger of being herded into a national detention camp in which there are no pardons, and from which there is no escape.Link here.
MAINE REJECTS REAL ID ACT
Both chambers of the Maine legislature approved a resolution saying the state flatly “refuses” to force its citizens to use driver’s licenses that comply with digital ID standards, which were established under the 2005 Real ID Act. It asks the U.S. Congress to repeal the law. The vote represents a rebuke to the U.S. Department of Homeland Security and Republicans in Washington, D.C., which have argued that nationalized ID cards for all Americans would help in the fight against terrorists.
“I have faith that the Democrats in Congress will hear this from many states and will find a way to repeal or amend this in the coming months,” House Majority Leader Hannah Pingree, a Democrat, said in a telephone interview after the vote. “It’s not only a huge federal mandate, but it’s a huge mandate from the federal government asking us to do something we don’t have any interest in doing.”
The Real ID Act says that, starting around May 2008, Americans will need a federally approved ID card – a U.S. passport will also qualify – to travel on an airplane, open a bank account, collect Social Security payments or take advantage of nearly any government service. States will have to conduct checks of their citizens’ identification papers, and driver’s licenses likely will be reissued to comply with Homeland Security requirements. In addition, the national ID cards must be “machine-readable”, with details left up to Homeland Security, which has not yet released final regulations. That could end up being a magnetic strip, an enhanced bar code or radio frequency identification (RFID) chips.
The votes in Maine on the resolution were nonpartisan. It was approved by a 34-to-0 vote in the state Senate and by a 137-to-4 vote in the House of Representa is one of the strongest. The legislature held a hearing on a bill that says “The state of Montana will not participate in the implementation of the Real ID Act of 2005” and directs the state motor vehicle department “not to implement the provisions.”
Barry Steinhardt, director of the ACLU’s Technology and Liberty Project, said he thinks Maine’s vote will “break the logjam, and other states are going to follow.” (The American Civil Liberties Union has set up an anti-Real ID Web site called Real Nightmare).Link here.
FBI TURNS TO BROAD NEW WIRETAP METHOD
“Wiretap first, filter later.”
A technique broader and potentially more intrusive than the FBI’s Carnivore surveillance system, later renamed DCS1000, raises concerns similar to those stirred by widespread Internet monitoring that the NSA is said to have done, according to documents that have surfaced in one federal lawsuit, and may stretch the bounds of what is legally permissible.
Call it the vacuum-cleaner approach. It is employed when police have obtained a court order and an Internet service provider cannot “isolate the particular person or IP address” because of technical constraints, says Paul Ohm, a former trial attorney at the Justice Department’s Computer Crime and Intellectual Property Section. That kind of full-pipe surveillance can record all Internet traffic, including Web browsing – or, optionally, only certain subsets such as all email messages flowing through the network. Interception typically takes place inside an Internet provider’s network at the junction point of a router or network switch.
The technique came to light at the Search & Seizure in the Digital Age symposium held at Stanford University’s law school on last week. Ohm, who is now a law professor at the University of Colorado at Boulder, and Richard Downing, a CCIPS assistant deputy chief, discussed it during the symposium. In a telephone conversation afterward, Ohm said that full-pipe recording has become federal agents’ default method for Internet surveillance. “You collect wherever you can on the (network) segment,” he said. “If it happens to be the segment that has a lot of IP addresses, you do not throw away the other IP addresses. You do that after the fact. ... You intercept first and you use whatever filtering, data mining to get at the information about the person you are trying to monitor.”
“What they are doing is even worse than Carnivore,” said Kevin Bankston, a staff attorney at the Electronic Frontier Foundation who attended the Stanford event. “What they are doing is intercepting everyone and then choosing their targets.” When the FBI announced two years ago it had abandoned Carnivore, news reports said that the bureau would increasingly rely on Internet providers to conduct the surveillance and reimburse them for costs. While Carnivore was the subject of congressional scrutiny and outside audits, the FBI’s current Internet eavesdropping techniques have received little attention.Link here.
A COST ANALYSIS OF WINDOWS VISTA CONTENT PROTECTION
Windows Vista includes an extensive reworking of core OS elements in order to provide content protection for so-called “premium content”, typically HD data from Blu-Ray and HD-DVD sources. Providing this protection incurs considerable costs in terms of system performance, system stability, technical support overhead, and hardware and software cost. These issues affect not only users of Vista but the entire PC industry, since the effects of the protection measures extend to cover all hardware and software that will ever come into contact with Vista, even if it is not used directly with Vista, e.g., hardware in a Macintosh computer or on a Linux server. This document analyses the cost involved in Vista’s content protection, and the collateral damage that this incurs throughout the computer industry.
(Jumping to the conclusion ...) At the end of all this, the question remains: Why is Microsoft going to this much trouble? The only reason I can imagine why Microsoft would put its programmers, device vendors, third-party developers, and ultimately its customers, through this much pain is because once this copy protection is entrenched, Microsoft will completely own the distribution channel. In the same way that Apple has managed to acquire a monopolistic lock-in on their music distribution channel, so Microsoft will totally control the premium-content distribution channel. In fact examples of this Windows content lock-in are already becoming apparent as people move to Vista and find that their legally-purchased content will not play any more under Vista. (The example given in the link is particularly scary because the content actually includes a self-destruct after which it will not play any more.) It is obvious why this type of business model makes the pain of pushing content protection onto consumers so worthwhile for Microsoft since it practically constitutes a license to print money.
So not only will Microsoft be able to lock out any competitors, but because they will then represent the only available distribution channel they will be able to dictate terms back to the content providers whose needs they are nominally serving in the same way that Apple has already dictated terms back to the music industry: Play by Apple’s rules, or we will not carry your content. They will also be able to dictate terms to consumers in order to ensure a continual revenue flow. The result will be a technologically enforced monopoly that makes their current de facto Windows monopoly seem like a velvet glove in comparison.
The sheer obnoxiousness of Vista’s content protection may end up being the biggest incentive to piracy yet created. Perhaps Hollywood should heed the advice given in one of their most famous productions: “The more you tighten your grip, the more systems will slip through your fingers.”Link here.
THE HOUSE OF DEATH
“The individual has a soul, but the State is a soulless machine. It can never be weaned from the violence to which it owes its very existence.” – Mahatma Gandhi
Luis Padilla, 29, father of three, was kidnapped, driven across the Mexican border from El Paso, Texas, to a house in Ciudad Juarez, the lawless city ruled by drug lords that lies across the Rio Grande. As his wife tried frantically to locate him, he was being stripped, tortured and buried in a mass grave in the garden – what the people of Juarez call a narco-fossa, a narco-smugglers’ tomb.
Just another casualty of Mexico’s drug wars? Perhaps. But Padilla had no connection with the drugs trade. He seems to have been the victim of a case of mistaken identity. Now, as a result of documents disclosed in three separate court cases, it is becoming clear that his murder, along with at least 11 further brutal killings, at the Juarez “House of Death”, is part of a gruesome scandal, a web of connivance and cover-up stretching from the wild Texas borderland to top Washington officials close to President Bush.
These documents, which form a dossier several inches thick, are the main source for the facts in this article. They suggest that while the eyes of the world have been largely averted, America’s “war on drugs” has moved to a new phase of cynicism and amorality, in which the loss of human life has lost all importance – especially if the victims are Hispanic. The U.S. agencies and officials in this saga – all of which refused to comment, citing pending lawsuits – appear to have thought it more important to get information about drugs trafficking than to stop its perpetrators killing people.Link here.
EMINENT EXTORTION: LAW AND DUE PROCESS IN THE U.S.A., CA. 2007
In June 2005, the property rights case of Kelo v. New London dramatically altered the legislative landscape of the U.S. The Supreme Court ruled that under the law of eminent domain, private property can now be taken from Americans, not only for public purposes, e.g., roads and schools, but also for corporate use. In other words, your town could theoretically take your house and put a Wal-Mart in its place. Think it cannot happen to you? Think again.
From June 2005 to June 2006, the Institute for Justice, a libertarian public interest law firm, counted 5,700 cases nationwide of property seizure for private development. And there is no end in sight. In the contrary, land-hungry developers and tax-hungry cities have recently been driving the eminent farce to ever new heights. The East Coast – especially New Jersey – seems to be home to the most notorious land grabbers.
One of the most reported cases has been that of Vera Coking, an elderly widow from Atlantic City, New Jersey, who almost lost her house to Donald Trump so he could build a limousine parking lot for his customers. Another is the City of Long Branch, New Jersey, which is planning to demolish a charming and well-kept neighborhood with middle-class beachfront homes to make way for upscale condominiums. The official reason for doing so? Urban blight. “[The] definition of ‘blight’ has become so broad and unprincipled that governments regularly target perfectly fine homes in ordinary neighborhoods for the wrecking ball,” complains the Institute for Justice. “Nice homes with spectacular oceanfront views in vibrant neighborhoods can be condemned for reasons like ‘diversity of ownership,’ meaning that each home is owned by a separate family ... If owning your own home means your house is blighted, whose house isn’t blighted?”
The most shocking recent incident, however, is what can only be called “eminent extortion”. Entrepreneur Bart Didden and his business partner were planning to build a CVS drugstore on their property in Port Chester, New York. Developer Greg Wasser, backed by the town and interested in building a Walgreen’s in the same place, approached Didden and demanded $800,000 or an unearned 50% stake in the CVS development to make him “go away” – otherwise he would tell the town elders to seize Didden’s property. When Didden refused, the Village of Port Chester condemned his land for private use the very next day. The 2nd U.S. Circuit Court of Appeals upheld the decision. Didden, who says it took him years of hard work to buy the property and pay off the mortgage, states that his case “is about payoffs and government run amok.”
Dana Berliner, a senior attorney at the Institute for Justice, who represents Didden in the case, commented, “Essentially, the courts have ruled Kelo turns a redevelopment zone into a Constitution-free zone for property owners confronted by politically connected developers. We want the Supreme Court to rule that the Constitution does not permit governments or citizens acting on their behalf to demand money in exchange for allowing property owners to keep what is rightfully theirs. The very fact that we have to ask the highest court in the land for such a ruling underscores how precarious and threatening things are getting for ordinary American landowners.” But according to latest news, the Supreme Court refused to hear Didden’s case.Link here.
OFFSHORE MONEY LAUDERING PROBE LEADS TO FINE FOR BANK OF AMERICA UNIT
Last summer, Bank of America faced congressional heat for its handling of offshore accounts at the center of an alleged tax shelter scheme. Now the bank is paying a $3 million penalty for violating money-laundering rules in connection to the accounts. The NASD said it was fining a BofA unit for failing to obtain customer information for certain high-risk accounts and for poor communication with its parent over the filing of suspicious activities reports. It is the biggest money-laundering-related fine by a securities regulator.
The NASD, formerly known as the National Association of Securities Dealers, said Banc of America Investment Services failed to obtain customer information about 34 accounts involving trust and private investment corporations based in the Isle of Man. Anti-money-laundering provisions in the Patriot Act require banks to gather such information. The firm “fundamentally failed to meet its obligations with these high risk accounts by failing to adequately investigate and pursue red flags,” James Shorris, the NASD’s head of enforcement, said in a statement.
According to the NASD, the suspicous accounts held as much as $93 million in assets and engaged in multimillion-dollar international wire transfers. The NASD said the accounts were apparently affiliated with one family, but it did not provide further details. This summer, however, the Senate’s Permanent Subcommittee on Investigations said it thought the accounts were controlled by two billionaire Texas brothers, Sam and Charles Wyly. As part of a 375-page report on offshore tax havens, the committee said the brothers, who helped build craft retailer Michael Stores Inc., used the accounts to shield stock option gains from taxes. The Wylys say they did not control the entities.Link here.
U.S. COURT REINSTATES MOST SERIOUS CHARGE AGAINST JOSE PADILLA
A U.S. appeals court reinstated the most serious charge against alleged al Qaeda operative Jose Padilla this week, reviving a murder-conspiracy charge that could imprison the former “enemy combatant” for life. A federal judge in Miami had dismissed the charge on grounds that it duplicated two others pending against him, and therefore violated the constitutional ban on trying someone twice for the same offense. The government appealed and the 11th U.S. Circuit Court of Appeals in Atlanta reversed the ruling.
It said that since Padilla theoretically could have committed one of the alleged offenses without committing the other, the charges were not duplicative. The government-accused Padilla, a U.S. citizen held incommunicado in a military brig for 3 1/2 years, with being part of a North American support cell for global Islamic extremism. The reinstated charge accused Padilla, 36, of conspiring to murder, kidnap and maim people in a foreign country and carries a penalty of life imprisonment. The other two charges against him are conspiracy and aiding terrorists abroad. Padilla was transferred to civilian custody last year and is scheduled to go to trial in April.Link here.
FROM LOCAL POLICE TO OCCUPYING ARMY
There are Peacekeepers deployed in U.S. cities, but they are not under UN command. They are armored personnel carriers supplied to “local” police agencies for little or no cost through the Pentagon’s Law Enforcement Support Office (LESO), established in 1995 as part of the Defense Logistics Agency. Since that time, the LESO has made huge amounts of military hardware – from boots to helmets to ammo to helicopters and the “Peacekeeper” APCs – available to local and state police agencies, often at little or no cost.
If you are interested in watching the Pentagon’s promotional video for the LESO’s campaign to militarize “local” police, go to this page maintained by the DLA. At the bottom of the links you will find one leading to “LESO Get With The Program Video”. Follow that link, and – assuming you can withstand the barrage of whitebread canned pseudo-funk music – you will have the entire program explained to you.
Fred Baille, a boileplater-spewing spokesdrone for the DLA’s Distribution Realization Policy Directorate (a suitably Soviet title for a police-state agency), explains that through the LESO program, “local” law enforcement agencies can receive “excess” military gear of practically any description “as if they were a DoD organization.” Your local police has the same access to military hardware as any branch of the armed services. In everything but brand name, they are domestic appendages of the Pentagon. The “Get With The Program” video demonstrates how easy it is for police agencies to snag the swag. Simply call up the LESO website, fill out a form “justifying” the order, and send it in. And getting “surplus” Pentagon equipment is depicted as a civic-minded thing to do, since getting the federally subsidized military gear actually helps keep taxes low.
Not discussed in the video are hidden costs of that subsidy. The monetary costs are borne by taxpayers nation-wide. But a much larger price is paid when communities no longer control their own police agencies. When local police are supported by local tax funds, they are locally accountable. When those police are materially and financially supported by Washington – to any extent – the locus of control and accountability shifts there. That is the principle recognized in the Supreme Court’s 1942 Wickard v. Filburn decision.
The Bush Regime is trying to expand that principle in the case of Joshua Wolf a videoblogger imprisoned on federal contempt charges last fall for refusing to surrender videotape sought by federal prosecutors. The Feds claimed that Wolf’s video contained footage of an attack by rioters on a San Francisco Police Department squad car during a July 2005 protest. Wolf maintained that under California’s shield law, he did not have to surrender the tape. The Feds countered that because the SFPD receives federal subsidies (for counter-narcotics and “homeland security” efforts, among other things), the damaged squad car is federal property, and so the matter belongs in federal court, where California’s shield law does not apply. That claim has yet to be resolved in the courts, but given that claims of this sort have been consistently vindicated since, oh, about 1937, the suspense is not exactly killing me.
Which leaves us here: Any police agency that receives so much as a particle of federal aid is no longer a local police force. It is, in principle, a federal army of occupation. Yes, most policemen are decent and honorable people who honestly believe that they are serving and protecting their communities. But the people who fund and control them are neither decent, nor honorable, and at a time of their choosing they can execute Order 66 and turn that army against us.
For decades, since the Kennedy administration unveiled its Freedom From War program for UN-administered “general and complete disarmament,” many observers have wondered when the blue helmets of the UN “Peace Force” would be dispatched to disarm Americans and put down patriotic resistance. It may happen, but people who focus on the UN as the source of the immediate threat, however, are preoccupied with the wrong threat vector.Link here.
FROM THE ARCHIVES: VICIOUS TIBETAN MONKS ARRESTED IN SWAT TEAM ACTION
Tibetan monks on a peace mission in Omaha, Nebraska were raided by immigration officials in riot gear. They have since bonded out of jail, but the monks hoped to clear up any misunderstandings and return to their native land. The monks come from a land of rich tradition, but a poor economy. Their leader, Kharnang Vangtul Rinpoche, said the monks came to the U.S. on a church-sponsored mission of world peace, hoping to share the plight of Tibetan people and never intending to cause trouble.
The group was previously in Arizona. Their church sponsor abandoned them when the monks refused to recognize the sponsor’s leader as the reincarnation of Jesus Christ and Buddha. So the monks traveled to Omaha, not realizing that their immigration visas had been revoked. The next thing they knew, immigration officials showed up at their door with a SWAT team and arrested them.Link here.
WHAT IF OSAMA BIN LADEN DIES?
One of these days, Osama bin Laden will die. What then? Will the war on terror wind down? We know with 100% certainty the answer. The war on terror will continue, and it will continue indefinitely until its costs to our leaders and their associates outweigh its benefits. At that point, our leaders will undeclare the war on terror.
There is every reason to conclude that the war on terrorism does not aim to eliminate terrorism. That is a pretext. What are these reasons? (1) Terrorism cannot be eliminated. (2) Terrorism is not a large problem. (3) The costs of fighting wars in Iraq and Afghanistan are huge, at least $1 trillion, compared to the costs imposed by terrorism. (4) The U.S. has caused more terrorism by starting two wars. (5) The U.S. has made no effort against terrorism in many parts of the globe. (6) The U.S. has made no significant effort to reduce its own political, military, and economic presence in foreign countries that entangles the U.S. in local power struggles. (7) Worldwide terrorism has risen since the U.S. began the war on terrorism.
This does not say that the U.S. will not kill terrorists when it has the chance or will not devote resources to catching them. It will do both. But these activities do not centrally explain the war on terrorism. There was no compelling reason stemming from terrorism to attack either Afghanistan or Iraq. We know this all too well concerning Iraq. As for Afghanistan, the U.S. had been heavily involved there for almost 30 years. There was no reason to depose the Taliban regime and replace it with the standard set of Afghan warlords. If the war had been fought to get bin Laden, why has he not been caught?
The calculus that brought on the war on terror is not a Republican or a Democrat calculus, since both parties support the war wholeheartedly. They disagree on how to prosecute the war, but both want it and show no signs of undeclaring it. It is a political calculus, a complex and hidden weighing of various costs and benefits that we can discern. We cannot know how much each factor contributed to the final declaration of this war, but we can see the factors.
On the cost side, our political leadership is entirely reckless. They do not bear the costs. Americans at large do. The Congress will vote to absorb huge amounts of resources from Americans because it has the power to do so and because Americans have not yet cried out “Stop!”
On the benefit side, the war on terror provides important benefits to: (1) The state. It is the occasion of state power-grabs. In particular, President Bush prefers that the president be Caesar, garbed with dictatorial powers over both the rest of the government and the lives of Americans. In addition, the war on terror seeks to make the state’s image of protection indispensable to every American as well as a long-running affair. (2) The military-industrial complex. The contractors gaining from fat war contracts are well-known. Some of these link directly to key administration officials. But most of them contribute to both political parties. (3) The state’s bureaucracies. The Department of Homeland Security is a prime beneficiary. Other beneficiaries are the many officials who make up Washington’s bureaucratic apparatus in other departments and agencies. (4) The Israel lobby. This administration and both parties are larded with pro-Israel figures who had no little influence in instigating the war on terror.
The benefits reach to many others, such as various power-hungry intellectuals who champion internationalism. They reach to Americans who obtain the psychic benefits of flag-waving, cheering, blood-lust, phony patriotism, displays of U.S. military might. They reach to banking and oil interests. But I believe that the prime impelling motive or motives behind the war on terror are much deeper than any of the benefits listed above. The analysis of these motives is complex. They are summed up in one word: imperialism, a drive of one nation to expand and dominate other nations.
Throughout history, again and again, political units seek to expand. It is almost as if their survival depended on it, that if they did not expand, then they were doomed to be subjugated by others. In fact, those who fear subjugation the most might well be the ones most inclined to subjugate others. But imperialism goes beyond such a psychological explanation. It has economic, political, and ideological motives, all operating together, and all three do operate in the American case.
American imperialism ranges from soft to hard. Being run by the state, it is inept (soft or hard) and causes more problems than it solves. My own emphasis is upon the political and, in particular, the security aspects as conceived by those in power. I emphasize the geopolitical factor as a prime motivating factor, and it is its rationality that needs to be assessed as well as its effectiveness. In the case of the war on terror, why have Iraq and Afghanistan been targets? They surround Iran, another nation the U.S. seeks to dominate. More broadly, the idea held by our leadership is influence, control, or domination of Central Asia and the regions lying south. These regions include countries formerly in the Soviet Union, which form a large abutment against Russia and China, the other major powers in the world. They are also rich in undeveloped resources.
The fact that NATO is in Afghanistan is significant. It is the first such operation outside of its traditional European-Atlantic theatre. The European states in NATO view this region as critical to their interests too, although they characteristically have slower trigger-fingers than the U.S. Russia is not dead as a world power. The Russian state is reverting to form as it once again centralizes power, conducts overseas assassinations, and attempts to pressure Belarus and the Ukraine. The U.S., China, and Europe all are still engaged in a containment strategy against Russia as well as against one another. Having seen central European states and central Asian states peel off, they want to maintain and solidify this situation. Europe needs to stop radical Islam from regaining strength.
What if Osama bin Laden dies? What will change? My answer is ... nothing.Link here.
FOUNDATIONS OF VERTICAL POWER SYSTEMS CONTINUE TO CRUMBLE
Hardly a day passes without some people-pusher emerging to propose yet another intrusion upon the liberties of people to control their own lives. A California legislator has proposed legislation that would make spanking a child under three years of age a crime, subject to a $1,000 fine or one year in prison. This measure follows in the trail of such offerings as prohibitions upon smoking, the criminalization of parents who allow their children to get sun-burned, the banning of trans fats in food preparation, the regulation of eating habits to prevent obesity, penalizing motorists who express anger while driving, and, well, the pattern is doubtless already familiar to you. Not to be left out of the collective mania, the mayor of a Texas town has now proposed making it a misdemeanor to utter a racial slur.
Such statist programs have elicited the expected responses from rational minds – they intrude upon matters which, whether one approves of the targeted actions or not, are best left to the determination of individuals or families. That these efforts violate the free speech, liberties, and/or property rights of people – interests that government officials took an oath to defend but now scurry to violate in the most detailed manners – is beyond question. But there is a deeper meaning to these intrusions that is overlooked, the implications of which portend the continuing collapse of vertically-structured institutional systems.
It is part of the nature of conscious beings to focus attention on events that are immediately before us, and to overlook the more distant consequences of our actions. In a lesson long since lost on modern minds, Frédéric Bastiat informed his readers of how the immediate benefits of a government program masked adverse consequences that get lost in the allure of the moment. Thus, do we now understand how minimum wage laws increase unemployment, the prohibition of alcohol and drug usage generate more consumption of the banned substances, and the coercive nature of American foreign policies have produced the reactions of “terrorist” groups that the institutional order tries to explain away as nothing more than hatred of our virtues and lifestyles.
It is becoming increasingly evident from the study of complexity that what our dualistic minds have learned to separate into mutually exclusive categories conceals an “interrelatedness” essential to the well-being of each. Thus does the police system depend upon criminals, just as lawyers require disputes, the morally self-righteous need sinners, and orthodontists need overbites. Such interconnected relationships, I believe, help to explain the current frenzy to have the state micromanage every conceivable expression of human behavior.
The institutionally-structured world we have been conditioned to regard as essential to both our individual and social well-being, has been in a state of collapse for a number of decades. The unexpected end of the Soviet Union has been, perhaps, the most dramatic example of this centrifugation of authority. But the decentralization of social systems has also found expression in such areas as the education of children, alternative health care practices, and the development of technologies that place more decision making in the hands of individuals. The Internet now threatens the influence – if not the very existence – of the long-established “mainstream media”. Broadcast and print journalism – premised upon the top-down model in which an authoritative few communicate to the rest of mankind what it is in their interests to have others believe – now face a horizontal system in which hundreds of millions of people exchange information over tens of thousands of independent websites, such as the one you are now reading.
All of this foreshadows what appears to be the breakdown of traditional social systems that operate on the pyramidal model of the vertical and bureaucratic direction of mankind. The presumed capacity of those at the top of the pyramid to gather information imagined to be otherwise unavailable to ordinary people and to promulgate policies and practices that would lead to predictable and favorable results, has been the central article of faith in society. The premise is virtually synonymous with all forms of political behavior, but also finds itself generally expressed throughout the business community, organized religions, and school systems.
As institutional authority continues to collapse into decentralized networks of autonomous individuals, those whose conditioned mindset is unable to imagine a world functioning without formal direction and control experience a chilling fear. To such people, social systems that run themselves without superintendence is not only disturbing to their ambitions for power, but a form of fanciful thinking. I have often used the metaphor of a chicken that has just had its head chopped off. It reflexively flails about in a wild, noisy, and bloody display, but its fate is sealed. Such, I believe, helps to explain the reactive mindset of modern people-pushers who see their world of vertical power-structures being enervated by life forces over which they are losing control.
Those who wish to criminalize the spanking of children, or the uttering of racial slurs, or eating the wrong foods, are being driven by the same energy that now leads the U.S. into an obsession with conducting wars. As we have learned so painfully since 9-11, war itself has become decentralized. American soldiers – whose behaviors and modes of organization represent the centralized order as much as did the British “redcoats” during the Revolutionary War – continue to die at increasing rates at the hands of decentralized Iraqi “insurgency” forces. The interests of the American political establishment are grounded in the perpetuation of the dying model. The statists need the problems they seek to overcome in order to rationalize their appetites for authority over others. If such “problems” were to disappear, new ones – such as fattening foods or parents who spank – will have to be fabricated.
Both President Bush as well as those who want to send parents to prison for swatting their children’s behinds, are each seeking to reconfirm the validity of an antiquated system that no longer satisfies people’s expectations. Such statists are trying to ride the same dying horse, whose failure to respond, they believe, can only be overcome by a stronger whip.Link here.
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