Wealth International, Limited

Offshore News Digest for Week of May 7, 2007

Note:  This week’s Finance Digest may be found here.

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We remember when we came to Panama in 1997. In those days Panama already showed a lot of positive signs. It was clear to us even then that by locating our offices in Panama that we had a much better chance of success than if we opened our office in the USA. There was excellent offshore corporate structures in Panama, excellent banking options, good telecommunications, low prices, good employees available for hire and low office rents. Panama was open for business in 1997, and we wanted to conduct business in a nation that still valued Laissez Faire Capitalism as Jefferson viewed it, and Privacy, underlined, and with a capital “P”. These were two attributes that were no longer available in the U.S. even then, and today they are but a sad memory. Back in 1997 we looked closely before we leapt, we liked what Panama had to offer, and we leapt.

Time has certainly proved to us that our decision was the right one. We now have 25 full time employees, are among the top 7,000 websites in the world and we are absolutely assured that we owe our early, and ongoing success to having located in Panama. We are not sure how much innovative genius there was in our decision, as we were also considering Belize, and if Belize would have had better telecommunications it might have been Belize that we chose rather than Panama.

In 1999 we wrote about what we felt were Belize’s failings in a report. After giving Belize high marks in most categories, such as ecology, banking, environment, its unique polyglot society, its offshore corporate structures, location, language, low prices and so on, we told readers where we thought Belize was falling down, and that was in its inability to provide freedom for competitive internet access. Its telecommunications access was then being hampered by the idiocy of the government-subsidized Belize Telecommunications Limited (BTL), which was at that time somewhere back in the 19th century mentally. It was clear to us that there was no way to run a website-based media company from a nation that was willing to strangle access to the internet. Belize at the time looked better to us than Panama if only because of its very open and laid back culture. When we first wrote about it in 1996 you could buy an island in Belize for $20,000! (Today in Belize the sum of $20,000 will only buy you a quarter acre lot on one of the islands that our early readers bought back then.)

Some of our staff recently returned to Panama City after several months in South America. They were quick to point out that the Panama City they had returned to was much transformed from the Panama City they had departed. New skyscrapers had sprung up on the waterfront, and more were springing up as they watched. They commented that Panama was looking more and more like a sophisticated Miami with each passing day. If the current boomtown landrush into Panama was inevitable with or without us, we are also pleased ... either way we picked the right spot. Tomas A. Cabal, the ABC TV media man in Panama City agreed to write an article for us on the recent changes in Panama. He is a Panamanian with a international perspective on his own country.

Panama is rapidly becoming the new boomtown in the Americas. Like when gold was discovered in California, American and European companies, investors, expats and baby boomers have discovered the joys of living and doing business in this small central american republic. The approval in a national referendum of plans to expand the Panama Canal with the construction of a third set of locks that will permit the transit of larger vessels, has triggered an investment boom that will be felt in the real estate market, residential tourism and the maritime sector. More than $10 billion will change Panama City’s skyline.

Donald Trump is one of the investors that has discovered Panama’s potential. With a Panamanian partner he is building a 60-story luxury condominium that will include all the amenities with a casino, yacht club and marina with daily hydrofoil trips to the nearby Pacific islands. The $5.25 billion canal expansion will provide the fill for the construction of a parallel causeway fronting Balboa Avenue that will completly renovate the land facing the bay of Panama. Foreign investors are busy buying up real estate in the vicinity to construct new buildings that will attract American and European retirees. Panama, with its very liberal and attractive retirement and pension laws is a magnet for baby boomers looking to retire in a warm climate. The Panamanian government offers all kinds of incentives for people settling in Panama or buying a retirement home.

The real estate boom which started 5 years ago when baby boomers discovered Bocas del Toro province on the Caribbean and Boquete in Chiriqui province mountain country has already attracted more the 15,000 retirees. The arrival of new immigrants has fueled real estate projects catering to the well heeled investor. Gated communities and luxury villas are springing up all over Bocas del Toro and Chiriqui province. Other projects nearer Panama City in the Sora highland region and on the Pacific coast are also attracting foreign investors.

Modern communications, excellent health services, a well developed banking center, the largest free zone in the Americas and ease of air travel make Panama the hottest boom town in the Americas. Panamanians are friendly, bilingual and eager to participate in joint ventures with foreign investors. Economists calculate that the canal expansion and the real estate boom will add another 2% growth to the already robust 7% annual GNP. New ports have sprung up on the Pacific and Atlantic terminus of the Panama Canal. The panamanian government will construct another port on the Pacific side at a cost of $500 million dollars to take advantage of the growing trade with the Far East.

The expansion of Panama´s maritime sector has attracted cruise ship lines that bring into the country some 350,000 visitors. Upon discovering Panama, many of them decide to invest or live in the country. Tourism is now Panama’s largest industry surpasing the income generated by the Panama Canal. New hotels dot the countryside with foreign investors exploiting the natural beauty of the isthmus. Tropical rainforest, breathtaking highlands and pristine beaches provide a majestic backdrop for first class hotels that cater to visitors and businessmen exploring investment opportunities.

The canal expansion project begins in 2007 and will take seven years to complete. Now is the time to invest in Panama, so if you are planning a trip, come on down and share in Central America’s best kept secret or simply say, “Panama here I come.”

Link here.


The modern bus slowed from the cruising speed we had been enjoying along the Pan American highway, south of Cali. Craning to see out the window, I could just make out the four machete-bearing Colombians dragging a freshly-cut tree across the road, stopping us in our tracks, while a handful of men dressed in camouflage emerged from the bush. Most of them waited outside, while the two who had boarded indicated silently with their machine-gun barrels that we should get off. As we exited, the women were corralled into a tight group while the men were lined up against the side of the bus. “Manos arriba,” our handler said quietly, and we obediently raised our arms.

Once again, something less than the perfect retirement haven, I thought. But as it turned out, these were the good guys. After a brief check to make sure we were not carrying any weapons, we reboarded the bus and continued on our way – the incident quickly over, but not forgotten, a shadow on this otherwise-magnificent country.

Located at the tip of South America, Colombia is where the Pacific and the Caribbean collide with the Andes and the Amazon. It is a country that is more beautiful, dramatic, and diverse than any you are likely to see – from its sparkling colonial cities in the highlands to its homey residential towns to the world famous (and safe) resorts along the Caribbean.

Founded in 1537, Pasto is not as spectacular as the highway that takes you there, but I found it a comfortable, pleasant, and inexpensive place to live. When we arrived in town, we checked into the Hotel Oro Verde, where we were quoted a rate of just $14 per night for a double room. During my month-long stay in Pasto, I came to appreciate the routine of the locals. Most mornings, I enjoyed a cup of Colombian coffee and two buñuelos (doughnuts) fresh out of the cooker for a total of 26 cents.

While the churches in Pasto are impressive colonial structures, much of the rest of the city is not – after a couple of earthquakes the colonial-style was often neglected in the rebuild. But the large town square is friendly and bustling and surrounded by all types of commercial establishments, from banks and restaurants, to markets and even a couple of modern shopping malls. On the real estate front, we looked at an apartment of 1,150 square feet, with three bedrooms, two bathrooms, a study, and two balconies. It was located on the small river that runs through town (with a river view) and was selling for $60,800. In a neighboring building, a new unit of 1,350 square feet had an asking price of $82,600. The least expensive listing in a nice neighborhood was a two bedroom older apartment selling for $26,000. If you are renting, expect to pay at least $100 to $200 per month for a 2-, or small 3-bedroom apartment.

Popayán is without a doubt the most livable and beautiful colonial city that I have seen in all my Latin America travels. I say that without hesitation. This town of 300,000 people is clean, tasteful, and elegant, not only for a few blocks around the square, but throughout the entire centro historico. Expanding outward from its tree-lined central plaza, all of the commercial buildings are bright white, with any signs being restricted to a burnished gold color. No dangling electric wires, garish cell phone billboards, or restaurant signs to be seen anywhere. Founded in 1537, Popayán was populated by wealthy Spanish families from Cali seeking a better climate.

The lifestyle here is calm and relaxed, and the city feels safe and secure. We spent several lazy afternoons enjoying the many coffee shops, sampling the offerings of the bakeries, and trying out the numerous fine restaurants. This is a city that is geared towards tourism, but one that sees almost no foreign tourists, including North Americans. It was refreshing to see that the Colombians keep Popayán so beautiful because it is their own colonial treasure, not because they are after the international tourist dollar.

Prices in Popayán tended to be a bit higher than those in Pasto – a small price to pay for its colonial charm. We had dinner at what was reported to be Popayán’s nicest restaurant – six wonderful courses and a glass of wine for $14.75 each. A room in a nice hotel with a window overlooking the park costs $35 per night. On the property market, there is a casa antigua, with an interior courtyard and two commercial locations on offer for $86,900. An apartment overlooking Parque Mosquera with three bedrooms, three bathrooms, and a garage has an asking price of $32,600. A modest apartment in Villamercedes (not downtown) is going for $10,870. A new apartment of 1,000 square feet in a restored colonial with a view of the courtyard was selling for $41,700. On the rental market, we looked at a nice apartment with three bedrooms, three bathrooms, and a community pool in Santa Ana. They were asking $180 per month.

Link here.


The U.S. decision last week to withdraw from one of its WTO commitments after it finally lost its battle with Antigua and Barbuda over on-line gaming has evoked a storm of outrage and concern. “We did not intend and do not intend to have gambling as part of our services agreement,” said Deputy U.S. Trade Representative John K. Veroneau. “What we are doing is just clarifying our commitments.”

The WTO treaty allows a country to withdraw commitments to open its services market to foreign investors, but since the treaty was originally negotiated multilaterally (as with all WTO treaties) the U.S. will now have to negotiate with any of the other 149 member countries that objects to the move and wants to renegotiate any of their own commitments in return. To call this opening Pandora’s box must surely be an understatement. Adjectives used by commentators over the weekend to describe the U.S. action included “absurd” and “disingenuous”. Said one anonymous spokesman, “This action is more surprising to me than had President Bush announced he was coming out of the closet today regarding his sexual preference.”

“I am disappointed to see our country lead a degradation of the system,” said James Jochum, a partner at the law firm of Mayer, Brown, Rowe & Maw LLP in Washington and former Bush administration official. Jochum represents the Antigua Online Gaming Association. “The implications are so serious because of the precedent it sets.”

Senior officials in Antigua and Barbuda were taken aback by the decision. “It is almost incomprehensible that the United States would take such an action in the face of an adverse dispute resolution ruling. This is going to have very severe consequences for the global free trade movement,” said Dr Errol Cort, Antigua’s Minister for Finance and the Economy.

Mark Mendel, Antigua’s lead counsel in the WTO proceedings, said that the U.S. was wrong to say that it did not intend to include gaming in its services commitments, “There is simply no basis for such a statement. When the schedules were drawn up over ten years ago, there was extensive debate, proposal and counterproposal from all WTO members in determining what commitments would be made. More than a dozen countries were able to expressly exclude gambling from their commitments, and many dozens more excluded the commitment in other ways. For the United States to say this was a mistake is just not true.”

The U.S. action comes at a crucial moment in the WTO Doha Round negotiations. What will now be in the minds of its negotiating partners among the dozens of economically weak developing countries who rely on the rule of law to hold their own in the trading ring against such Titans as the U.S. and China?

In its recent ruling against the U.S. over Antigua’s complaint that the US was unlawfully banning payments to offshore gaming web-sites, a WTO Dispute Resolution Panel noted that the 2006 legislation (which post-dated both Antigua’s original complaint and the first WTO ruling in its favour) confirmed the lack of conformity of U.S. law with its obligations under the GATS. In its minutely argued report, the Panel comprehensively dismissed all attempts by the U.S. to wriggle out of the need to bring its laws into conformity with the GATS, either by banning equivalent domestic betting transactions, or by allowing parity for overseas transactions.

Link here.


According to a new World Bank report, high rates of crime in the Caribbean are not only threatening human welfare, and impeding social development, but also impacting business, impeding investment and ultimately undermining the region’s economic growth. The report, published last week by the World Bank and the U.N. Office on Drugs and Crime (UNODC), said that in many countries, as crime increases, access to financing declines, spending on formal and informal security measures increases, and worker productivity declines.

Estimates suggest that reducing the homicide rate in the Caribbean by one third from its current level could more than double the region’s rate of per capita economic growth. According to the report “Crime, Violence and Development: Trends, Costs and Policy Options in the Caribbean”, murder rates in the Caribbean are higher than in any other region of the world, and assault rates are significantly above the world average. Narcotics trafficking is at the core of these high rates.

“The report clearly shows that crime and violence are development issues. Donors and OECD countries need to work together with Caribbean countries to reduce the current levels in the region,” said Caroline Anstey, World Bank Director for the Caribbean. “Some of the factors that make the Caribbean most vulnerable to crime and violence, mainly the drug trade and trafficking of weapons, require a response that transcends national and even regional boundaries.”

Among its recommendations, the report argues that in general, there is an over-reliance on the criminal justice system to reduce crime in the region, although it acknowledged that some types of crime – such as organized crime, drug and firearms trafficking – are generally impervious to prevention initiatives. The report also noted that many of the issues facing the Caribbean require a coordinated regional and international response. Demand for drugs emanates from Europe and the U.S. Deportees are sent back to the region from the U.S., the U.K., and Canad. And many weapons that are trafficked are brought from the U.S.

Link here.


The World Trade Organisation announced that it has completed its latest Trade Policy Review (TPR) of Costa Rica. According to the WTO, since its last trade policy review in 2001, Costa Rica has experienced solid economic growth while continuing to modernize and simplify its generally liberal trade and investment regime. Applied tariffs have remained largely unchanged and the use of non-tariff trade barriers has been limited. Costa Rica has carried out an export promotion strategy which may well have encouraged investment but affected resource allocation. In this regard, reforms are planned in the free zone regime to bring it into line with WTO rules.

With regard to services, the WTO observed that the historical lack of competition in sectors such as insurance and telecommunications has hampered development and choice for consumers. Reforms are planned in these sectors and it would be important to bind them multilaterally to give greater predictability to the trade and investment regime, according to the report.

The WTO review observed, “Costa Rica’s annual economic growth averaged around 4.9% during 2001-05, and is estimated to have been almost 6% in 2006. Growth has been particularly strong since 2003, reflecting mostly the strong performance of investment and exports.

“GDP per capita was slightly above $4,600 in 2005. The fiscal deficit has been decreasing since 2003, but achieving and maintaining a balanced fiscal position remains a challenge especially considering high pension and other specific payments mandated by law as well as the relatively heavy public debt (55% of GDP). ... The main trading partner of Costa Rica is the United States, which accounts for some 40% of Costa Rica’s total trade.”

Commenting on the Costa Rican trade and investment policy framework, the WTO commented, “Costa Rica has an open investment regime but with certain important exceptions. The State has exclusive rights in the importation, refining and distribution of crude oil and related refined products; insurance services; railways; maritime ports and airports; and some postal services. The State also maintains the only concessions to provide certain key electricity and telecommunications services.”

Link here.


The Cayman economy is expected to continue its strong growth in the next financial year (July 2007 to June 2008), according to Financial Secretary Kenneth Jefferson. Delivering the estimates of revenue and expenditure for the coming year, Jefferson forecast a 3.5% growth in GDP, inflation also at 3.5%, and unemployment at 3.6%. The 2007-8 GDP figure compares favourably to that expected at the end of the current financial year, which is projected to be 4.2%. The forecast slight drop in the next financial year’s GDP indicates that post-Hurricane Ivan, intense reconstruction activity is almost over and the economy is settling, Jefferson said.

“The Cayman Islands economy is expected to remain robust due to the continued recovery of the tourism sector, the near completion of construction efforts and the continued expansion of the financial services sector,” Jefferson said. In an address entitled “Shaping Our Future”, he revealed estimates for operating expenses of $469.2 million, interest payments on debt of $12.4 million, and operating revenue of $499.1 million, producing an operating profit of $17.5 million. He said that assets at 30 June 2008 will stand at $990 million, compared to $504.7 million in total liabilities, meaning that the government’s net worth will be $485.3 million.

Further supporting his view that the Cayman Islands is on a path of sound growth, the Financial Secretary referred to an August 2006 report by Moody's Investors Services, in which Cayman’s ratings were raised to Aaa and Aa3.

Link here.


Legislators in the BVI have unanimously passed the final draft of the Virgin Islands Constitution Order 2007 following a motion moved by Chief Minister Dr. D. Orlando Smith. Legislators on both sides agreed, however, that their full acceptance of the new constitution was contingent on the receipt of a satisfactory letter of entrustment from the British Government, which would delegate responsibility in some matters of external affairs to the local Government. A letter of entrustment will give general authority to the BVI Government to commence negotiations and conclude agreements, whether bilateral or multilateral, in some areas of external affairs.

The Constitutional Commission’s establishment stemmed from a 2001 decision by the British Government to invite UK Overseas Territories to appoint local commissioners to review and make recommendations on the advancement of their respective constitutions. During the debate this week, most of the legislators expressed their pride and satisfaction that the Territory will attain constitutional advancement. Several members also agreed that the new constitution will invest greater responsibility and authority in the locally elected officials, as well as the collective responsibility for the people of the Virgin Islands for their own self-determination.

The draft constitution will be now sent to the Privy Council in London for ratification. Once the Privy Council gives its approval, the Virgin Islands Constitution Order 2007 will take effect upon the next dissolution of the Territory’s Legislative Council, no later than July 10, 2007.

Link here.


The International Monetary Fund announced that it has concluded its visit to Dominica as part of its Article IV Consultation with that country. Goohoon Kwon, chief of the IMF’s mission to Dominica, observe that, “Dominica’s economic performance has been strong and its short-term outlook is largely positive. The economy grew by an estimated 4 percent last year, the strongest in nearly two decades, while inflation was below 2 percent.”

According to Mr. Kwon, “Discussions centered on fiscal and financial sector policies and structural reforms that are crucial for sustaining macroeconomic stability and fostering continued strong growth while reducing poverty. The mission discussed with the authorities challenges on the fiscal front, in particular the prospects for aid and its management as well as tax and expenditure policies.

“The mission welcomed the authorities’ intention to target a primary surplus of 3 percent of GDP under their Growth and Social Protection Strategy. Given upcoming wage increases, fiscal flexibility is constrained for the next year and hence a delicate balance needs to be struck between tax reductions or exemptions, on the one hand, and investment spending on the other.

“As regards the financial sector, the recent pace of credit expansion, while anticipated from the successful fiscal consolidation, may require further enhanced supervision, including on-site inspection. In addition, further progress is needed in establishing a regulatory and supervisory system over nonbank financial intermediaries. The mission also discussed key areas that could help reduce costs of doing business, including reforms of public entities, utilities, the judiciary, and customs.”

Link here.


Israel has a very good chance of being voted into the Organization for Economic Co-operation and Development next week. The finance ministers of the 30 OECD countries are meeting next week in Paris and are expected to vote in favor of the proposal. Washington for one has expressed its support.

The list of candidates seeking to join the OECD includes Chile, Brazil, Russia, China, India, South Africa, Cyprus, and European countries that have recently joined the European Union. The organization last expanded its membership in 1995. Oded Brook, senior deputy director and General Head of International Affairs at the Finance Ministry, says that acceptance would be a coup for Israel, both economically and diplomatically.

In the past New Zealand objected to Israel joining the organization, because of human-rights issues, Brook said. But it has rescinded its objection. Whether its ranks should be extended, and if so how, is in dispute within the OECD. The EU countries seek to accept all of the new members of the union, including the Baltic countries, Slovenia, Cyprus and Malta, though not all meet the criteria for acceptance. However, OECD members such as Canada, Australia and the U.S., object, saying the OECD will become a European organization.

If accepted, Israel will officially join a group of the most developed countries in the world, and be a part of all that this entails economically, both internally and externally. OECD membership is a bona fide stamp of quality for investment houses, foreign investors, international credit rating firms, economic organizations and companies. Membership in the group will require Israel (and already does) to follow international rules and standards, and will help the treasury in promoting economic reforms. The Israeli capital market will be among the first to benefit. Raising capital, both by companies and the government, will cost less. Investment banks, pension funds and other economic bodies that have stayed away from Israel up until now, will start investing in the country.

Link here.



The government of St. Vincent and the Grenadines has said that the new value-added tax system, which went into effect on May 1, will broaden the tax base while creating more neutrality, equity and fairness in the current tax system. The introduction of VAT in the jurisdiction means the abolition and replacement of five different consumption taxes, which were charged at rates of up to 55%, with one tax at a standard rate of 15%. The government said it has been able to introduce VAT at a lower rate because the tax base has been widened to include most goods and services, some of which were beyond the scope of the previous tax system.

The government said that exported goods will become more competitive as exporters receive credit for their inputs and VAT on exports will be zero-rated. “The VAT Implementation Unit seeks to broaden the tax base, providing neutrality, equity and fairness in the current tax system for the development of St. Vincent and the Grenadines,” said the government. A number of items are zero-rated under the VAT system, including food, petrol and diesel, exercise books and newspapers, computer hardware and accessories, and certain medical supplies.

Link here.


The New Zealand government rejected an international report on the economy that called for raising the pension age and major tax reforms. The annual survey of the OECD said New Zealand had “one of the most flexible and resilient economies in the world,” but living standards had remained 16% below the membership’s median for several years. It cited a large overseas debt, low savings rate, poor productivity and rising inflation as particular areas of concern.

The OECD said New Zealand may struggle to meet the retirement costs of its ageing population and should look at raising the pension age from 65. Finance Minister Michael Cullen immediately ruled out an increase in the pension age, saying it was not on the Labour-led coalition government’s agenda.

The report advocated cutting the top rates of income tax, raising the goods and services tax from its current 12.5% to compensate, and introducing a capital gains tax. These measures were also ruled out by Cullen’s deputy Trevor Mallard telling Radio New Zealand, “They have raised a number of things which are just not acceptable.” Mallard dismissed parts of the report as reading “like a National Party manifesto”, referring to the main opposition conservative party, which campaigned unsuccessfully on comprehensive tax cuts at the last election in 2005. He said the government had posted large budgetary surpluses over recent years and introduced a superannuation fund and new national savings scheme to ensure future pension requirements would be met.

Link here.
OECD survey urges tax reforms in New Zealand – link.


Amendments to the tax treaty between India and the United Arab Emirates could result in institutional investors in the UAE routing more money into India via Mauritius to take advantage of lower rates of tax, it has been reported. Under the amendments, gains arising from the sale of listed securities within one year of purchase will be subject to tax at 10%. Long-term capital gains arising from sale of capital assets other than listed securities are subject to tax at 20%. And short-term capital gains arising from the sale of shares other than listed securities will be taxed at 30% for individuals and 40% for companies.

Fund managers expect that the changes will have little effect on the flow of investments to India from individuals because banks are already deducting 10% capital gains tax at source before funds are credited into clients’ accounts, and also UAE-based investors are currently getting good rates of return on their Indian investments. However, managers say that the new tax treaty structure could negatively affect institutional investors, leading to a substantial amount of these funds to be routed through Mauritius which has a more favorable tax treaty in place with India.

The Indo-Mauritius DTAA has been a long-time source of friction between the two governments. The Indian tax authorities have believed for years that Indian investors “round-trip” through Mauritius in order to escape capital gains tax on stock market investments. But their attempts to reinterpret the treaty through the courts have largely failed. Indian tax officials, with perhaps only lukewarm support from their government, hope that Mauritius will stiffen the requirements for tax exemptions under the DTAA.

In response to Indian pressure to change the treaty, the Mauritian government has expressed a willingness to cooperate with New Delhi, but only if an amended tax treaty does not erode the jurisdiction’s competitiveness.

Link here.

Mauritius resists move to check tax ducking.

Mauritius is discussing various ways and means through which the misuse of a Double Taxation Avoidance Agreement (DTAA) between itself and India two nations can be avoided, although Mauritius is not keen on a solution suggested by India on grounds that the measures aimed at tracking offshore companies based in the island could hurt genuine firms in Mauritius.

India has proposed source-based taxation of capital gains available for firms based in Mauritius as a possible solution to the problem arising from abuse of the bilateral treaty. The Mauritian government is not willing to consider this solution as in their view, this would adversely affect their offshore financial services sector, which contributes almost 11% of their GDP, and would hurt even the genuine companies of Mauritius.

The problem has arisen because of “round tripping” or “treaty shopping” by Indian entities moving money out of the country and then getting it back into India through what is known as GBC 1 companies incorporated in Mauritius, in the process gaining from capital gains exemptions available for companies based in the island. A GBC 1 company is an entity, which undertakes any of the 12 categories of business (which include aircraft financing and leasing, asset management, financial services and pension funds) and carries out business from within Mauritius by employing persons all of whom are resident outside Mauritius.

Round-tripping refers to routing of investments by a resident of one country through the other country back to his own country. For example, a resident of India investing directly in shares of an Indian company would be taxable on capital gains arising from transfer of shares. However, if the same resident routes his investments through Mauritius to buy the shares of an Indian company and claims that these investments were made through a resident Mauritius entity, then the taxes can be avoided under the DTAA.

Link here.


Finance Minister Jim Flaherty is retreating from a controversial budget tax measure that would have prevented Canadian companies from deducting the interest costs on loans to finance foreign takeovers or expansions. Companies will still be allowed to deduct the interest costs, but only once, Flaherty said, claiming the measure was not aimed at eliminating the deduction but at corporations who were using offshore tax havens to claim the deduction twice – in Canada and in a foreign country.

The March 19 budget proposal was to eliminate the deductibility of interest incurred to invest in business operations. “It is basically a complete reversal of the budget announcement,” said Trent Henry, leader of the international tax practice with Ernst and Young.

But the retreat threatens to add to the complexity of already complex tax system, and in turn compliance costs for businesses, while failing to address the real concern of the use of offshore tax havens to avoid paying tax in Canada, Henry said. Business leaders and tax analysts have been warning that the proposal would make Canadian companies less competitive and cost them up to $2-billion a year. Flaherty, meanwhile, blamed the controversy on a misunderstanding of the proposal by the business community.

Flaherty was unclear how the government would go about monitoring Canadian companies to ensure they do not get a second tax deduction in other countries. Henry questioned why the Canadian government is even concerned whether a Canadian business can get a tax deduction in another country which will reduce their costs and make them more internationally competitive. “If anything, you want Canadian companies to be able to get a deduction in a foreign jurisdiction ... because it enhances their ability to compete,” he said.

Jack Mintz, another tax specialist, said the objectives of the tax proposal are not clear. It sounds like Flaherty may be planning to refine his budget proposal so it targets only companies that are using offshore tax havens, like Barbados, to get a double deduction on the interest on their foreign investment loans, he said, adding that it is not easy to trace such offshore tax avoidance schemes.

Links here and here.


Details anti-offshore tax evasion initiatives.

Treasury Acting International Tax Counsel, John Harrington last week spoke before the Senate Finance Committee with regard to international tax compliance. He told the Committee members, “From the standpoint of tax administration, offshore tax evasion historically has been a very difficult area to address. Questionable use of low- or no-tax jurisdictions has been an issue for decades. Globalization, however, has made foreign investment and foreign activities common, with overseas markets becoming an increasingly important source of income for U.S. individuals and businesses.

“Individuals invest in foreign entities for a variety of reasons. In most instances, these investments represent legitimate business transactions, using foreign entities in ways that are typical for international commerce. At times, however, foreign entities can be used for tax evasion. For example, some individuals invest through a jurisdiction with a reputation for secrecy and opaqueness, hoping to stymie the IRS in its administration of the Internal Revenue Code. Others try to hide income from the IRS by setting up elaborate business structures and financial arrangements, some components of which are located offshore.

“These varied scenarios make it clear that a one-size-fits-all approach will not work to stop offshore tax abuse while continuing to permit legitimate cross-border transactions, which are vital to the United States’s participation in the global economy. This is why the Treasury Department has undertaken a multi-faceted approach to deal with the problem of offshore tax evasion.”

Mr. Harrington then went on to describe the actions taken by the Treasury to combat tax evading activity by U.S. taxpayers offshore. He announced that, “As part of our overall effort to improve compliance, the Treasury Department and the IRS have taken a number of important steps on the administrative front and are continuing to work on other avenues to address offshore tax abuses. Although determined tax evaders may flaunt the tax rules, some taxpayers opportunistically seek to take advantage of ambiguous or outdated tax rules. Accordingly, we modify or update U.S. tax rules when we determine that they are being used to perpetrate such abuse. Recent published guidance projects that will improve compliance and that target potential areas of abuse include:

The IRS has also undertaken several compliance initiatives, including the Offshore Voluntary Compliance Initiative, aimed at taxpayers who used offshore payment cards or other offshore financial arrangements to hide their income, and the Offshore Credit Card Program, designed to identify taxpayers who use offshore bank accounts to hide income and offshore credit cards issued by secrecy jurisdiction banks to repatriate the unreported income. The IRS is continually monitoring this area for opportunities to implement new programs that will stop abusive transactions and improve compliance."

Tax enforcement requires obtaining information from other countries, regardless of their “confidentiality laws”.

Speaking with regard to the need for obtaining information from other countries, the Treasury official told the Committee, “In today’s global economy, countries must be able to obtain and exchange the information needed to enforce their domestic tax laws. A key element of U.S. tax treaties, therefore, is the provision for exchange of information between the tax authorities. Under tax treaties, the competent authority (i.e., the tax authorities designated under the tax treaty) of one country may request from the other competent authority such information as may be relevant for the proper enforcement of the first country’s tax laws. The information provided by the other country is subject to the strict domestic confidentiality protections that generally apply to taxpayer information. Because access to information from other countries is critically important to the full and fair enforcement of the U.S. tax laws, information exchange is a priority for the United States in its tax treaty program.

“A tax treaty is not feasible or appropriate in all cases, however. In some cases, there simply may not be the type of cross-border tax issues between the United States and the foreign country that are best resolved by treaty. For example, in the case of a country that does not impose significant income taxes, there may be little possibility of the double taxation of income that tax treaties are designed to address. In cases where a full tax treaty is not appropriate or feasible, the Treasury Department seeks to provide for the bilateral exchange of tax information by entering into a tax information exchange agreement (TIEA) with the other country.

“Compared to tax treaties, TIEAs are a more recent phenomenon. ... There are several items that are essential to the United States when negotiating a TIEA. First, the TIEA must provide for the exchange of information on request for both criminal and civil tax matters. Many jurisdictions are more willing to exchange information with respect to criminal tax matters, but such a restriction would greatly limit the utility of a TIEA from a U.S. standpoint. Second, the TIEA must provide for the exchange of information even if such information relates to a person who is not a resident or national of the United States or the TIEA partner. We may be more interested in the beneficial owner of an entity formed under the jurisdiction of the TIEA partner than we are in the entity itself. Finally, the TIEA must provide for the disclosure of information regardless of local ‘confidentiality’ laws that may prohibit such disclosure, including laws relating to bank secrecy or bearer shares. Indeed, such laws may be one of the principal attractions for offshore tax evaders.

“Many of our TIEA partners have small tax administrations, and the TIEAs acknowledge this reality. Accordingly, a TIEA often will specify the details that a request for information under the TIEA should contain and also require the IRS to explain why it is making the request. Although each TIEA partner is usually expected to bear the routine costs of fulfilling its obligations under the agreement, TIEAs often require the requesting party to bear ‘extraordinary costs’. This type of feature is often necessary to induce a small jurisdiction to agree to a TIEA.

“The IRS has been actively involved in the development of several multilateral information exchange programs. The Joint International Tax Shelter Information Center (JITSIC) was formed by tax authorities in the United States, the United Kingdom, Canada, and Australia. The objectives of JITSIC are to deter promotion of and investment in abusive tax schemes, particularly through information exchange and knowledge sharing. ... In addition to JITSIC, in January 2006 the IRS and the tax administrations of nine other countries agreed to the establishment of the so-called ‘Leeds Castle’ Group. ... By providing additional opportunities to share information and experience, these organizations are a significant tool in combating offshore evasion.

“It is also important to remember that information exchange is inherently voluntary. We cannot force any country to agree to exchange tax information. Sometimes negotiations on this issue are very difficult. The treaty or TIEA partner may be required to repeal or modify domestic law. In addition, signing a tax treaty or a TIEA is only the first step in the process. ... [I]f a treaty or TIEA partner believes that the information exchange relationship is not respected or appreciated by the United States, this may have a chilling effect on exchange of information on request or, particularly, on spontaneous exchange of information.

“We have more to do in this area. Nonetheless, we have made great strides in recent years. Several new TIEAs have entered into force with jurisdictions that have figured prominently in previously documented accounts of offshore tax evasion. Within the last two years alone, TIEAs have fully entered into force with the Cayman Islands, the British Virgin Islands, the Bahamas, the Netherlands Antilles, Jersey, Guernsey, and the Isle of Man. We also recently signed a TIEA with Brazil, and the newly signed tax treaty with Belgium provides greater information exchange than we have previously been able to achieve with that country.

“As both Secretary Paulson and Assistant Secretary Solomon stated in recent testimony before this Committee, the Treasury Department is committed to improving tax compliance without unduly burdening honest taxpayers who currently meet their tax obligations. Tax compliance with respect to offshore transactions is an important aspect of that endeavor. By focusing on information exchange, we seek to reduce offshore tax evasion while achieving these goals.”

Link here.

New reports undermine Senate anti-“offshore” program.

While the Democrat-controlled U.S. Senate continues its attack on “offshore” – called “empty political theater” by the Center for Freedom and Prosperity – a new report from the Commonwealth Secretariat shows that large onshore countries such as the U.S. and the UK have no moral or legal edge over offshore financial centers.

Commenting on the report, “Assessing the Playing Field – International Cooperation in Tax Information Exchange”, a study published recently by the Commonwealth Secretariat, Malcolm Couch, Deputy Chair of the International Trade and Investment Organization stated, “It’s time to stop treating small countries with finance centers as different.” Crouch said that the conclusions of the report come as no surprise since the IMF has already acknowledged that compliance levels for offshore centers, on average, tend to be more favorable than those onshore.

Another new report issued last week tells the same story. Entitled “Tax Havens: Myth Versus Reality”, the Prosperitas study points out that many nations belonging to the OECD are tax havens according to the definition concocted by the Paris-based bureaucracy. Moreover, the just-released IMF study, for instance, identified the UK as a tax haven. Austria, Belgium, and the Netherlands, says the study, also are tax havens since they have bank secrecy and/or other provisions that make them a magnet for financial capital. And the U.S. is perhaps the world’s foremost tax haven. In an exercise of gross hypocrisy, the OECD does not blacklist its own member nations.

Andrew F Quinlan of the Center for Freedom and Prosperity points out that last week’s Senate hearing included not a single person representing the interests of taxpayers, and was designed to blame so-called tax havens for the tax gap. Offshore jurisdictions are routinely vilified, he says, largely because they are perceived as a threat by politicians, leftist organizations, and other advocates of bigger government and high tax rates. In almost all cases, however, attacks on these low-tax jurisdictions are either baseless or distorted. “The Finance Committee’s one-sided hearing is designed for all intents and purposes to create momentum for policies that will harm American competitiveness,” says Quinlan. “If lawmakers genuinely wanted to reduce tax evasion they would lower tax rates.”

Link here.


While Senate Finance Committee Chairman Max Baucus (D-Montana) has expressed concern that hedge fund and private equity fund managers are manipulating the U.S. tax code to reduce their tax bills, he has stated that new legislation to rectify this is a long way off. He said that Senate tax writers were “nowhere close” to drafting new legislation to ensure that hedge funds and buy-out firms pay what he considers to be an appropriate amount of tax that tallies more closely with their income. “My view is, first I want the facts. I want to know what is going on here,” he said.

Senate Finance Committee staff are currently examining this area of taxation after a closed-door hearing heard from a number of experts on the subject, including University of Colorado law professor Victor Fleischer, who has written a study of the tax implications of hedge-fund managers’ pay, and IRS officials.

One major area of concern for some lawmakers in both House and Senate is the issue of “carried interest”, the standard hedge fund industry pay structure whereby fund managers take 20% of the fund’s profits, plus a 2% management fee. This can enable them to pay capital gains tax instead of income tax. Many in Congress are of the view that this remuneration should be treated as income, not capital gains, and therefore taxed more proportionately. “The different rate between capital gains and ordinary income puts a lot of strain on the code,” Baucus said.

Another concern for some in Congress is the pending IPO by Blackstone, the multi-billion dollar U.S. private equity group. Blackstone plans to raise $4 billion by selling a 10% stake to investors, but a controversial proposal in the company’s prospectus will see it listing as a partnership, and therefore not subject to corporate income tax. However, Blackstone’s prospectus warned investors that tax law could be changed to force the company to be treated as a corporation.

Link here.


HM Revenue and Customs will launch its clampdown on undisclosed tax liabilities in offshore accounts on July 9 – just 16 days after the June 22 notification deadline under its new offshore amnesty facility, warns tax advisory firm Chiltern Plc.

According to Steve Besford, head of tax investigations at tax adviser Chiltern, those with undisclosed tax liabilities connected with an offshore account who do not notify by June 22 could well find themselves under investigation any time after July 9 By contrast, people who notify their intention to make a disclosure before the deadline of June 22 can be assured that HMRC will not raise any enquiry into their affairs prior to the disclosure deadline of November 26, he claims.

Chiltern says it is known that the offshore account information in HMRC’s possession has already been “risk assessed” using a central resource. Cases for investigation will be distributed to local offices, Civil Investigation of Fraud Offices and Special Civil Investigation Offices immediately after July 9. Mr. Besford added, “If additional tax is found to be due as a result of these enquiries, HMRC will seek considerably higher penalties than the 10% on offer under the amnesty and may even launch criminal investigations.”

In April, HM Revenue and Customs announced arrangements enabling investors with offshore accounts to disclose to HMRC any income and gains not previously included in their tax returns. HMRC said it has recently obtained information about holders of offshore accounts from a number of banks and has obtained similar details through the European Savings Directive. The banks in question are thought to include Barclays, HSBC, HBOS, Royal Bank of Scotland and Lloyds TSB, according to reports.

For a limited period, the amnesty will allow taxpayers to come forward and make a full disclosure of all undeclared liabilities, not just those connected with an offshore account. Personal disclosures or those made on behalf of others will also be accepted under the terms of the Offshore Disclosure Facility.

Link here.



Individuals sometimes take extremely wrong measures to protect their assets. Take Stephen Jay Lawrence, for instance. Back in 1999, Lawrence got caught with inadequate margins in his brokerage account. The brokerage liquidated the account and applied the proceeds to the debt. But Lawrence still owed millions of dollars to the brokerage. To allegedly avoid paying it, he transferred about 90% of his liquid assets to an offshore trust. A little later, he filed for bankruptcy. Big mistake.

Not surprisingly, the bankruptcy judge was not amused. He ordered Lawrence to repatriate the assets. When Lawrence failed to do so, the judge held him to be in contempt of court and incarcerated him. While Lawrence wound up spending only two days in jail, the case was one of the first where a person using an offshore structure was jailed for allegedly using it to defraud a known creditor.

You do not need to take such extreme measures to protect your assets. Asset protection is respected by the law as long as you set up structures to protect your assets with completely “clean hands”. That means you protect your assets for legal purposes. You cannot set up asset protection plans to hide from creditors, the IRS or lawyers after you are already involved in a lawsuit. By then, it is already too late.

So when you do set up an asset protection plan, make sure your plan does not “hinder, delay or defraud” known or reasonably foreseeable creditors. If you do that, you make the transfer of assets a voidable “fraudulent conveyance” in the eyes of the law. Learn from Lawrence’s mistakes. Protect your assets now, so you can be prepared for any storms in the future.

Link here (scroll down).


A scammer who boasted that consumers could earn a 6-figure income if they purchased and used his $10,000 “asset protection service” business program, is banned for life from telemarketing and from selling any type of business program in the future. The Federal Trade Commission previously charged that the scam artist failed to disclose that his company’s “references” were paid to give favorable reviews. An FTC order entered in 1997 barred those deceptive practices, but the scammer has violated the order by using the same deceptive business practices in his most recent scheme. In addition, he failed to disclose significant facts to consumers, especially his time spent in federal prison for money laundering and wire fraud.

Richard C. Neiswonger, based in Las Vegas, Nevada, his business partner, William S. Reed, and their firm, Asset Protection Group, Inc., told consumers with no sales experience that by purchasing their “APG Program” they would become well-paid business consultants selling APG’s “asset protection” services. For $9,800, consumers received training materials, a one-day training session, and a business affiliation with APG, which defendants claimed would provide consumers with carefully-screened “qualified prospective clients”.

Consumers were supposed to make money by selling APG’s asset protection services to clients who wanted financial privacy and wanted to make their assets less obvious to potential litigants or creditors. These services involved guidance on forming Nevada corporations and creating offshore corporations. The company provided references that consumers could call who would back up their claims – references who were actually paid to deliver positive reviews of their experience.

Instead, consumers paid thousands of dollars for cold call lists, rather than pre-screened clients. Not only were they unable to achieve 6-figure incomes, according to the receiver appointed to oversee the business, approximately 94% of the consultants failed to earn back their initial purchase fee for the program. The 1997 order required that Neiswonger provide written proof to the FTC of a $100,000 performance bond before marketing any program, which he failed to do while continuing to market his business opportunity program.

Link here.


Several weeks ago, I described a proposal in the “Small Business and Work Opportunity Act” to impose an exit tax on U.S. persons who give up U.S. citizenship or long-term residence if they have unrealized capital gains that exceed $600,000. On April 20, House and Senate committees reached an agreement on the bill. They stripped the exit tax from the bill. The revised package is part of the Iraq supplemental spending bill that is now before President Bush.

While Bush is almost certain to veto this bill, due to the timetable it includes for withdrawal of U.S. combat forces from Iraq, he has indicated his willingness to sign the tax legislation. It is my guess that when he does so, the tax legislation will be submitted separately, again without the exit tax.

I will keep you posted as to the ultimate fate of this ill-conceived legislation. It is not realistic to expect that the exit tax is dead, because it has been introduced in some form in nearly every congressional session since 1995. But the chances look very good that it is dead for at least another year.

Why might a U.S. citizen want to give up their nationality? Primarily because the U.S., alone among major countries, imposes income, capital gains, gift and estate taxes based on citizenship, rather than residence. Giving up U.S. citizenship is the only way to eliminate this onerous tax liability.

Link here (scroll down).


A foreign exchange trader has been arrested by the Japanese authorities after allegedly attempting to conceal trading income in a foreign bank account using an offshore company. Akihiko Kodama, 64, was arrested after being accused of concealing ¥760 million ($6.3 million) over two years up to 2005. He is the second individual forex margin trader to have been subject to such charges in recent weeks.

According to Japanese media reports, Kodama is alleged to have set up two bank accounts in Singapore, one in his own name and the other in the name of a paper company registered in the British Virgin Islands. He then used both accounts to deposit an inheritance, and invested it by trading foreign exchange and oil futures contracts. Kodama is said to have made gains of ¥270 million yen from his own account, and a further ¥500 million yen from the BVI company account. He stands accused of evading about ¥270 million in taxes.

Kodama denies the charges, arguing that profits made in the company account could not be attributed to him. Last month, another forex margin trader was indicted for evading ¥140 million in tax from ¥400 million in trading income.

Link here.


In the fall of 2003, as evidence mounted that Vioxx could cause fatal heart attacks, Local 68 of the International Union of Operating Engineers sprang into action. The New Jersey union did not tell its members to stop taking Vioxx. No, instead it sued the drug’s maker, Merck for consumer fraud. The claim? The union’s health plan would not have paid for the drug had it known the side effects. “The marketing was, if you pay 800% more for the drug, you will pay less for stomach bleeds, which was false,” says Local 68’s lawyer, Christopher Seeger. A New Jersey judge certified the case as a class action on behalf of virtually every private health plan in the country, seeking some $20 billion in damages. The New Jersey Supreme Court heard arguments on Merck’s appeal in March.

The case is the latest and maybe biggest manifestation of what defense lawyers dub the “harm-less” tort. Yes, thousands of individuals may have legitimate claims that Vioxx injured them. But that is not what this suit is about – nor are many others. Most rely on broadly written consumer-protection laws that do not require plaintiffs to prove they were injured, or, in some states, even misled by the company they are suing. It is a lot easier than having to find physical damages. “You have just seen the ad, you bought the product, nothing else has to be proved,” says Michael Greve, a fellow at the American Enterprise Institute and author of Harm-Less Lawsuits?, a book critical of consumer-fraud cases.

Unhappy with that nose job? The Kansas Supreme Court recently held that doctors can be sued under that state’s consumer protection law, as a kind of end run around traditional malpractice suits. In this case, a malpractice claim against a spine surgeon was dismissed, but the patient had also filed under a law against misleading consumers.

For sheer chutzpah few cases exceed the attempted class actions against Coca-Cola and PepsiCo for selling fountain drinks that contained small amounts of saccharin instead of aspartame sweetener. Chicago lawyer Robert J. Stein, who once sued General Motors for discontinuing the Oldsmobile brand name, filed the first such suit in 1999. Others filed copycat cases in at least five states, even after the government took saccharin off its list of suspected carcinogens in 2000.

Who were the victims? One plaintiff was Carol Oshana, an employment lawyer. Oshana admits she joined the case after hearing about the saccharin switcheroo from fellow lawyers but denies this is lawyer-driven litigation. “I have my own mind,” Oshana says. “I think [Coke and Pepsi] deceived the public.” Despite her outrage, Oshana settled for $650. Then her lawyers submitted the bill: $948,699 in fees and another $152,000 in costs. Federal Magistrate Sidney I. Schenkier rejected the request in a March recommendation, calling it “so far from reasonable, and reflects such overreaching, that the reasonable award here is zero.”

The lodestar case for plaintiff lawyers is one Toshiba settled in plaintiff-friendly Beaumont, Texas in 1999 for $2.1 billion – plus $147 million in fees. Lawyer Wayne Reaud alleged Toshiba laptop computers had a flaw that could cause computing errors, although he never came up with any victims. The same judge later dismissed a similar case against Compaq, but “the Toshiba case became a template,” says Greve.

Plaintiff lawyers argue they are doing a public service by enforcing laws against false advertising and other unfair trade practices. But there is a crucial difference between government attorneys and their private counterparts. Discretion. Lawyers in search of a fee can find a case virtually anywhere. Witness the long-running lawsuit against Robert’s American Gourmet, manufacturer of Pirate’s Booty snacks. Soon after Good Housekeeping published an article suggesting Pirate’s Booty had 147 calories per serving instead of the labeled 120, Robert’s was deluged with lawsuits. The company tried to buy off the lawyers with a quick settlement in New York, under which it would distribute $3.5 million in coupons and pay plaintiff lawyers $790,000 in cash. That angered lawyer David Jaroslawicz, who had his own case pending and persuaded a New York appeals court to throw out the settlement and move the action to his home court in Manhattan. No mention of a fee. Yet.

Link here.



DAVIS, California – DHS officials got an earful during a webcast town-hall-style meeting on the controversial Real ID initiative – a federal government plan to standardize state-issued ID cards and link identification databases nationwide. States and civil liberties groups have been bristling at the requirements of the Real ID Act, which would require states, starting in 2008, to revalidate citizens’ birth certificates, store copies of the documents, and interconnect their databases to prevent duplicate licenses. Current holders of driver’s licenses would have to return to their state motor vehicle departments with certified source documents to re-up their licenses as part of the proposed upgrade, which DHS estimates will cost states and citizens $20 billion.

DHS Assistant Secretary Richard Barth, along with other federal officials sitting on the stage in Freeborn Hall at the University of California at Davis, heard personally from transgender activists, anti-domestic-violence workers and ordinary citizens worried about Real ID’s privacy impact, and the burden of increased bureaucracy. John Pinfield, an attorney for California’s tax authority, said he took the day off work at the last minute to come register his concerns, which he said cost him $500 and some finagling with his boss.

For its part, DHS made its case with little subtlety. “A fraudulent ID card in the hands of a terrorist is a weapon,” said Barth, sitting under a projection of 9/11 terrorist Mohamed Atta’s Florida driver’s license. Barth signaled that DHS was still open to changing the rules based on comments, but he seemed exasperated with the criticism. “We are trying to make sure no state is the weakest link in letting people do things they shouldn’t do, whether that is boarding an airplane, or any other activity we want to prevent,” he said. “This is not a national ID card.”

The sparsely attended meeting, which was the only public forum on Real ID planned by DHS, was announced only eight days earlier. Members of the Coalition for a Secure Driver’s License, an advocacy group founded after 9-11, provided almost all of the citizen support for the rules. “We live in the 21st century in a time of terrorism,” said Neil Berro, the group’s executive director. “The driver’s license is our linchpin identification and has been for decades.” Lenny Goldberg, who has lobbied for the California-based Privacy Rights Clearinghouse, countered that state motor vehicle departments are in no condition to be part of the national security apparatus.

State legislatures have been bristling at the requirements of the Real ID Act, which would force states to comply with the regulations or face having their citizens unable to enter an airport security line, or any federal building or courthouse, with their state-issued identification. Maine and Montana have passed laws banning the states from complying with the rules, decrying them as damaging to privacy and impinging upon states’ rights.

Link here.



The principal owners of e-gold Ltd., an online payment system where users convert currency assets into equivalent amounts of precious metals, were indicted last week for allegedly allowing the service to be used by criminals engaged in financial scams and child pornography. The indictment names the company’s co-founders – Douglas L. Jackson, of Satellite Beach, Florida, and Barry K. Downey, of Woodbine, Maryland, as well as Reid A. Jackson, of Melbourne, Florida. They are charged with conspiracy, money laundering and operating an unlicensed money transfer business.

The company has offices in Melbourne, but is incorporated in the Caribbean island of Nevis. “The advent of new electronic currency systems increases the risk that criminals, and possibly terrorists, will exploit these systems to launder money and transfer funds globally to avoid law enforcement scrutiny and circumvent banking regulations and reporting,” said James E. Finch, of the FBI’s Cyber Division.

Founded in 1996, e-gold is a unique take on Internet-based payment systems. Its 4 million registered users deposit funds into an e-gold account and those funds are converted into equivalent amounts of gold and silver that is stored in banks in Europe and the Middle East. The company’s business was designed to appeal to persons engaged in cross-border financial transactions, particularly for persons who prefer the relative stability of precious metals to fluctuations in the value of national currencies. Over the past 24 hours, the system processed a little more than $3.4 million in transactions, according to the e-gold Web site.

The government charged e-gold and its parent, Gold & Silver Exchange, with operating an unlicensed money transmitting business under federal law and one count of money transmission without a license under D.C. law. The indictment follows a 2 1/2 year investigation by the FBI, the U.S. Secret Service and the IRS into e-gold’s operations. In December 2005, the Secret Service and FBI raided the company’s headquarters and seized roughly $800,000 in assets. On April 27, the government seized another $1.5 million in company assets, according to Jackson. The assets seized last week were in the form of e-gold deposits.

At the heart of the government’s case are allegations that e-gold executives turned a blind eye to illegal activity on its networks, activity that allegedly ranged from the transfer of proceeds garnered from pyramid and investment scams to credit-card fraud and payments for child pornography materials. The indictment alleges that the company’s directors monitored their users and were actively aware of which accounts were engaged in illegal activity, but that company officials did little to stop transactions to and from these accounts. The government also noted that e-gold does not include any statement in its user agreement prohibiting the use of its services for criminal activity. The government also charges that e-gold assigned only a single employee with no relevant experience to monitor hundreds of thousands of accounts for criminal activity, and that it encouraged users whose criminal activity had been discovered to transfer funds to other e-gold accounts.

Jackson strongly refuted the government’s claims. He said that over the past three years his company had turned over information on more than 3,000 accounts that were used for either buying or selling child pornography, and also turned over information on more than 2,000 accounts thought to be connected to credit-card fraud. He also asserted that his company has been working with the U.S. Postal Investigative Service and other law enforcement agencies to track hundreds of problematic accounts and that e-gold was repeatedly asked not to block transactions to and from many of the accounts as it would interfere with ongoing federal investigations into credit-card fraud and child pornography rings.

“Quite frankly, the saddest element of all this is that because they designated us the bad guys, a lot of the worst criminals are still out there, when we could have helped haul them in,” Jackson said. “Their decision to close ranks has directly resulted in a gross misallocation of resources, with the result that vicious criminals who might have been brought to justice remain at large.”

Richard Field, an attorney and consultant in payment systems law, called the government’s investigation of E-Gold “unusually intense”. “I haven’t seen this level of focus or attention on other payment systems before,” Field said. “This aggressive action against e-gold appears to be intended to send a signal to others as well that you are responsible for setting up your system in a way that does not enable this kind of activity.”

Experts say the global market for child pornography online is lucrative and thriving. Ernie Allen, president of the National Center for Missing & Exploited Children, said the demand for child pornography has fueled a multi-billion-dollar-a-year business that is increasingly Web-based.

The government strongly hinted that it plans to monitor online payment systems as part of a larger effort to crack down on child pornography. The FBI’s Lynch said the agency “will continue to work closely with the Department of Justice and our federal and international law enforcement partners to aggressively investigate and prosecute any, and all, persons or organizations that use these systems to facilitate child pornography distribution, to support organized crime, and to perpetrate financial crimes.”

Link here.


The U.S. Departments of Treasury, Justice, and Homeland Security last week joined together in issuing the 2007 National Money Laundering Strategy, a report detailing continued efforts to dismantle money laundering and terrorist financing networks. Assistant Attorney General Alice S. Fisher, of the Justice Department’s Criminal Division stated, “Implementation of this strategy will greatly assist in efforts to seize and forfeit millions in illegal proceeds that flow through the international financial system.”

The 2007 Strategy addresses the priority threats and vulnerabilities identified by the Money Laundering Threat Assessment released in 2006. The Assessment – the first government-wide analysis of its kind – brought together the expertise of regulatory, law enforcement, and investigative officials from across the government, culminating in a comprehensive analysis of specific money laundering methods, patterns of abuse, geographical concentrations, and the associated legal and regulatory regimes.

“In every type of case, from human smuggling and drug trafficking to intellectual property rights violations and illegal alien employment schemes, the need to hide and move ill-gotten gains is a constant. ICE’s anti-money laundering initiatives are at the forefront of attacking existing and emerging money laundering threats” observed Julie L. Myers, Assistant Secretary for Immigration and Customs Enforcement at the Department of Homeland Security. “ICE’s trade transparency unit, bulk cash smuggling initiative and programs targeting illegal money service businesses and stored value card schemes are making it less profitable to commit these crimes.”

Additionally, the 2007 Strategy focuses on “leveling the playing field internationally,” according to the U.S. Treasury, by “helping to ensure U.S. financial institutions are not disadvantaged through the implementation of controls and standards to combat money laundering and terrorist financing. ... Indeed, money laundering is a global threat the United States is working to address through international bodies, including the Financial Action Task Force (FATF), and through direct private sector outreach in regions around the world.”

Link here.


A Virginia training manual used to help state employees recognize terrorists lists anti-government and property rights activists as terrorists and includes binoculars, video cameras, pads and notebooks in a compendium of terrorist tools. The manual, discovered by the Virginia News Source, is keen to emphasize that terrorists are not only Middle Eastern in scope and the main focus is afforded to domestic terrorism.

Included with Hamas, Al-Qaeda and Islamic Jihad, the following groups are identified as terrorist organizations. “Domestic terrorist organizations” include:

What are the terrorists after? According to the manual, they want to “create an atmosphere of anxiety amongst the public”, “undermine confidence in the government”, “influence governmnet or social policy”. [Ed: Does this make lobbyists terrorists?]

Presumably, tourists, journalists, hikers, bird-watchers, scuba divers, artists, painters, and anyone who takes a photograph is also now a terrorists according to the official list of terrorist paraphernalia provided:

Reading further into the manual, associations between domestic terrorists and the supporting the American Revolution are subtly made. In Alex Jones’s 2001 documentary 9/11: The Road To Tyranny, FEMA officials give a seminar in which they identify George Washington, Thomas Jefferson and other founding fathers as terrorists.

The manual encourages people to report any suspicious activity to an authority figure. Presumably, if property rights activism is deemed suspicious then anyone protesting or communicating about the recent eminent domain issue will be reported and investigated on grounds of terrorism. The manual concludes by encouraging state employees to seek more information from FEMA and Homeland Security.

Shortly after 9-11 a Phoenix FBI manual that was disseminated amongst federal employees at the end of the Clinton term caused waves on the Internet after it was revealed that potential terrorists included, “defenders of the U.S. Constitution against federal government and the UN”, and individuals who “make numerous references to the U.S. Constitution.”

This manual is another surreal and frightening reminder that government officials are being trained to embrace a Gestapo like mentality whereby any political activism or even individualistic outdoor leisure activity is deemed to be suspicious and a possible indication of terrorism.

Link here.



Ten years ago, Colombian writer Plinio Apuleyo Mendoza, Cuban writer Carlos Alberto Montaner, and I wrote Guide to the Perfect Latin American Idiot, a book criticizing opinion and political leaders who clung to ill-conceived political myths despite evidence to the contrary. The “Idiot” species, we suggested, bore responsibility for Latin America’s underdevelopment. Its beliefs – revolution, economic nationalism, hatred of the U.S., faith in the government as an agent of social justice, a passion for strongman rule over the rule of law – derived, in our opinion, from an inferiority complex. In the late 1990s, it seemed as if the Idiot were finally retreating. But the retreat was short lived. Today, the species is back in force in the form of populist heads of state who are reenacting the failed policies of the past, opinion leaders from around the world who are lending new credence to them, and supporters who are giving new life to ideas that seemed extinct.

Because of the inexorable passing of time, today’s young Latin American Idiots prefer Shakira’s pop ballads to Pérez Prado’s mambos and no longer sing leftist anthems like “The Internationale” or “Until Always Comandante”. But they are still descendants of rural migrants, middle class, and deeply resentful of the frivolous lives of the wealthy displayed in the glossy magazines they discreetly leaf through on street corners. State-run universities provide them with a class-based view of society that argues that wealth is something that needs to be retaken from those who have stolen it. For these young Idiots, Latin America’s condition is the result of Spanish and Portuguese colonialism, followed by U.S. imperialism. These basic beliefs provide a safety valve for their grievances against a society that offers scant opportunity for social mobility. Freud might say they have deficient egos that are unable to mediate between their instincts and their idea of morality. Instead, they suppress the notion that predation and vindictiveness are wrong and rationalize their aggressiveness with elementary notions of Marxism.

The Idiot’s worldview, in turn, finds an echo among distinguished intellectuals in Europe and the U.S. These pontificators assuage their troubled consciences by espousing exotic causes in developing nations. Their opinions attract fans among First-World youngsters for whom globalization phobia provides the perfect opportunity to find spiritual satisfaction in the populist jeremiad of the Latin American Idiot against the wicked West.

There is nothing original about First-World intellectuals’ projecting their utopias onto Latin America. The tendency to use the Americas as an escape valve for frustration with the insufferable comfort and cornucopia of Western civilization has been around for centuries. By the 1960s and 70s, when Latin America was riddled with Marxist terrorist organizations, these violent groups enjoyed massive support in Europe and the U.S. among people who never would have accepted Castro-style totalitarian rule at home. The current revival of the Latin American Idiot has precipitated the return of his counterparts, the patronizing American and European Idiots. Once again, important academics and writers are projecting their idealism, guilty consciences, or grievances against their own societies onto the Latin American scene, lending their names to nefarious populist causes. This intellectual lapse would be quite innocuous if it did not have consequences. But, to the extent that it legitimizes the type of government that is actually at the heart of Latin America’s political and economic underdevelopment, it constitutes a form of intellectual treason.

Foreign observers are missing an essential point. Latin American populism has nothing to do with social justice. It began as a reaction against the oligarchic state of the 19th century in the form of mass movements led by caudillos who blamed rich nations for Latin America’s plight. These movements based their legitimacy on voluntarism, protectionism, and massive wealth redistribution. The result, throughout the 20th century, was bloated government, stifling bureaucracy, the subservience of judicial institutions to political authority, and parasitic economies. The legacy is clear. Nearly half the population of Latin America is poor, with more than 20% living on $2 or less per day. And 1 to 2 million migrants flock to the U.S. and Europe every year in search of a better life.

Even in Latin America, part of the left is making its transition away from Idiocy – similar to the kind of mental transition that the European left, from Spain to Scandinavia, went through a few decades ago when it grudgingly embraced liberal democracy and a market economy. In Latin America, one can speak of a “vegetarian left” and a “carnivorous left”. The vegetarian left is represented by leaders such as Brazilian President Luiz Inacio “Lula” da Silva, Uruguayan President Tabaré Vazquez, and Costa Rican President Oscar Arias. Despite the occasional meaty rhetoric, these leaders have avoided the mistakes of the old left, such as raucous confrontations with the developed world and monetary and fiscal profligacy. They have settled into social-democratic conformity and are proving unwilling to engage in major reform – but they signify a positive development in the struggle for modernizing the left.

By contrast, the “carnivorous” left is represented by Fidel Castro, Hugo Chavez, Bolivia’s Evo Morales, and Ecuador’s Rafael Correa. The gastronomy of Argentina’s Kirchner is ambiguous. Oddly, many European and American “vegetarians” support the “carnivores” in Latin America. For instance, Joseph Stiglitz has defended various nationalization programs in Morales’s Bolivia and Chavez’s Venezuela. He seems unaware that, south of the Rio Grande, nationalizations are at the heart of the disastrous populist experiences of the past. Stiglitz also ignores the fact that in Latin America, there is no real separation between the state’s institutions and the administration in charge, so government companies quickly become conduits for political patronage and corruption.

A cultural struggle is under way in Latin America – between those who want to place the region in the global firmament and see it emerge as a major contributor to the Western culture to which its destiny has been attached for five centuries, and those who cannot reconcile themselves to the idea and resist it. Latin America’s annual GDP growth has averaged 2.8% in the past three decades – against Southeast Asia’s 5.5%, or the world average of 3.6%. This sluggish performance explains why about 45% of the population is still poor and why, after a quarter century of democratic rule, regional surveys betray a profound dissatisfaction with democratic institutions and traditional parties. Until the Latin American Idiot is confined to the archives – something that will be difficult to achieve while so many condescending spirits in the developed world continue to lend him support – that will not change.

Link here.


The greatest obstacle to sound economic policy is not entrenched special interests or rampant lobbying, but the popular misconceptions, irrational beliefs, and personal biases held by ordinary voters. This is economist Bryan Caplan’s sobering assessment in this provocative and eye-opening book. Caplan argues that voters continually elect politicians who either share their biases or else pretend to, resulting in bad policies winning again and again by popular demand.

Boldly calling into question our most basic assumptions about American politics, Caplan contends that democracy fails precisely because it does what voters want. Through an analysis of American’q voting behavior and opinions on a range of economic issues, he makes the convincing case that noneconomists suffer from four prevailing biases: they underestimate the wisdom of the market mechanism, distrust foreigners, undervalue the benefits of conserving labor, and pessimistically believe the economy is going from bad to worse. Caplan lays out several bold ways to make democratic government work better – for example, urging economic educators to focus on correcting popular misconceptions and recommending that democracies do less and let markets take up the slack.

The Myth of the Rational Voter takes an unflinching look at how people who vote under the influence of false beliefs ultimately end up with government that delivers lousy results. With the upcoming presidential election season drawing nearer, this thought-provoking book is sure to spark a long-overdue reappraisal of our elective system.

Link here.


The theory and practice of oligarchical “conservatism”.

The Iraq war and the inquiry into its origins has provoked interest in a number of subjects formerly considered obscure, the discussion of which was once limited to the rarified aeries of academia and specialty journals. Some examples are neoconservatism, just war theory, and, most surprisingly, the theories of Leo Strauss, the philosophical avatar of a cynical Machiavellianism that promotes the idea of the “noble lie”. As the disaster in Iraq unfolded, subjects once considered abstruse were introduced into the pages of the popular press, so that, at one point, we were treated to a long explanation of the doctrines of Strauss in the pages of the New York Times.

As Jeet Heer put it in the Boston Globe,

“Odd as this may sound, we live in a world increasingly shaped by Leo Strauss, a controversial philosopher who died in 1973. Although generally unknown to the wider population, Strauss has been one of the two or three most important intellectual influences on the conservative worldview now ascendant in George W. Bush’s Washington. Eager to get the lowdown on White House thinking, editors at the New York Times and Le Monde have had journalists pore over Strauss’s work and trace his disciples’ affiliations. The New Yorker has even found a contingent of Straussians doing intelligence work for the Pentagon.”

This sudden interest was due to the unusual number of Straussians who had found their way into close proximity to the centers of power in Washington – an extraordinary number of Strauss’s students (or students of his leading followers) were employed in and around the Bush administration, particularly at key points in the national security bureaucracy, including then-Deputy Defense Secretary Paul Wolfowitz, Abram Shulsky of the Pentagon’s Office of Special Plans, Richard Perle of the Pentagon advisory board, Elliott Abrams of the National Security Council, and the writers Robert Kagan and William Kristol.

One can easily see how the concept of the “noble lie” fits neatly into the neoconservative scheme of things, and the run-up to the Iraq war is surely a textbook example of the Straussian method in action: An enlightened elite deceives the public into an action that must be taken, after all, for their own good.

Since we are now permanently at war, the ideal atmosphere for a Straussian (or any authoritarian) to theorize in, this is the time for the War Party to come out in the open with its theory of government, which, in normal times, is dressed up as “peace through strength”, and now comes out of the closet as “peace through dictatorship”. The prominent Straussian Harvey Mansfield, a professor of government at Harvard, demonstrates his usefulness as a promoter of the regime’s authority, and specifically the supremacy of the executive branch of government in wartime. Mansfield makes “The Case for the Strong Executive” in the pages of the Wall Street Journal, and it is an argument that constitutes a vital part of the intellectual blueprint for the dictatorship.

Mansfield starts out with a paean to the incorrect and unfortunately near-universal conception of the Constitution as a “flexible” document, and the resulting reference to “the living Constitution” is one of those cliches that no one ever thinks to challenge – except when it is too late. When the tanks are already rolling through the streets, that is ... There is nothing “flexible” about the Constitution. It means precisely what it says, and its language is not in any way obscure or complex. Yet, examining Mansfield’s case for an executive dictatorship – and that is surely the intent of his piece – we see at work the old Straussian method of “reinterpreting” an author’s clear intent to mean its exact opposite.

“A free government” avers Mansfield, “should show its respect for freedom even when it has to take it away.” This little aphorism, worthy of being carved in stone on the gravestone of the American republic, just about sums up the tone and content of Mansfield’s paean to the “greatness” of the presidential office, and its necessary “expansion” in time of war – which means, in the neocon lexicon, from now on. Rights are not inherent, in the Mansfieldian-Straussian universe, but purely conditional, and our condition today is one that cannot afford such luxuries.

In the Bizarro-Mansfieldian world of perfect “freedom”, where “a free government should show its respect for freedom even when it has to take it away,” there is no right to free speech, no right to assemble, nor, really, any rights at all, including the right to hold property. All of these are merely temporary privileges, and are particularly ethereal in wartime. Inalienable rights? Not if the President says otherwise. This is nothing less than a rationalization for a dictatorship.

John T. Flynn was a liberal-turned-“Old Right” opponent of the New Deal. He wrote As We Go Marching (PDF), an indictment of a postwar America that had fought national socialism – and was beginning to fight Soviet totalitarianism as the book was published – but, he feared, would lose the fight against incipient authoritarianism on the home front. “First let us state our definition of fascism,” he writes,

“It is, put briefly, a system of social organization in which the political state is a dictatorship supported by a political elite and in which the economic society is an autarchic capitalism, enclosed and planned, in which the government assumes responsibility for creating adequate purchasing power through the instrumentality of national debt and in which militarism is adopted as a great economic project for creating work as well as a great romantic project in the service of the imperialist state.”

What a near-perfect anticipation of our present state! He must have seen it in a dream. As an unpopular war reaches its horrific crescendo, and the President upholds his “right” to wage it in defiance of Congress and the popular will, the theoreticians of the new fascism are given ample space on the editorial page of the War Street Journal to make their case. Are the masses growing increasingly discontented with the “wisdom” of their rulers, who are, after all, by definition, their betters? Well then, let us endow the President with kingly powers, so he can disregard the “temporary delusions” of the people, as Mansfield puts it – such as, for example, the “delusion” that we cannot win the war in Iraq, and should not have gone there in the first place – and let our glorious Leader and Commander-in-chief get on with the job. This, Mansfield avers, is true “greatness”.

The legislative basis of the new authoritarianism – the “Patriot Act”, the Military Commissions Ac, the growth of the national surveillance state – is underpinned by the Mansfieldian theory of presidential supremacy and the concept of the “unitary presidency” – in short, the Leader Principle, which is the foundation stone of the modern fascist edifice. Centered around imperialism and the push to expand its system over all or most of the earth, this ideology employs the administrative and economic centralism that is the hallmark of modern American “liberalism”, and the militarism and imperialism that is the hallmark of the modern “conservative”, in a perfect synthesis of “left” and “right” that satisfies everyone and leaves the dissidents in the “far left” and “far right” margins. This is how our modern fascists can, with some justification, call themselves “centrists”, and even “moderates”.

In the Bizarro World we seem to have fallen into, post-9/11, who will dispute their self-characterization? After all, in Bizarro World, up is down, truth is a lie, and “democracy” means rule by a self-appointed elite. A Straussian is perfectly comfortable with this universal inversion. As for the rest of us, we will just have to get used to it.

Link here.
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