Wealth International, Limited

Offshore News Digest for Week of July 9, 2007

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

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Do you want to move to Mexico? Maybe you want to retire, work, or are just interested in hanging out for a while. If you are, you need to listen to this and do so with the utmost attention.

What you will find in Mexico is that foreigners, especially Americans, move to one of two areas. Traditionally, they have ended up in long-established gringo enclaves in cities where the locals have learned to adapt in order to serve the Americans and where the locals speak English. Cities that come to mind are Puerto Vallarta and San Miguel de Allende. There are many more but these seem to be the most popular. In these cities, the locals speak English on a massive scale. Moving to these cities is not much different than moving to another state in America with a large Hispanic population. These cities, mind you, largely depend on the presence of the Americans for their bread and butter.

The second thing that gringos do is move to areas of Mexico that do not depend on the presence of Americans for their livelihood. Gringos are just now becoming attracted to these areas for one reason – the cheap cost of living. Housing, medicine, doctor’s office visits, food, entertainment, and other cost-of-living items are still very reasonable. These gringo wannebees are being priced out of the market in Puerto Vallarta and San Miguel de Allende because the established gringo presence there has driven prices to the level where middle-class retirees can no longer afford to live there. This is driving the potential expats to areas where everything is as it was in San Miguel, for example, 20 years ago.

The problem that most gringos are not considering is that these cities and towns have not depended on the American dollar for their existence, their livelihood, and are not as gringo friendly as the enclave towns.. Towns like Dolores Hidalgo, Zacatecas, Patzcuaro, and others are just now beginning to receive gringos into their midst. The locals do not know what to do with this new phenomenon.

Gringos are coming into these towns and sizing them up as potential places to live. Unfortunately, many do not speak Spanish. Nor do they have a clue as to how to integrate into the local community and end up, in the long run, creating gringo enclaves. This is so spooky. They essentially make an American town within a Mexican town. It is like two different realities or dimensions existing at the same time in one place. How is the gringo going to be perceived and received in a town whose economic livelihood is not, nor ever has been, dependent on the Americans?

A perfect example is a comparison between San Miguel de Allende and the city of Guanajuato. In one town, you have the locals who know on which side of their bread gets the most butter and in the other you have Mexicans who, (1) are happy you are here, (2) could not care less whether you are here or not, and (3) would really prefer you do not come to town at all. Gringos, in my view, generally do not get that at all! I believe that is because all of the expat guidebooks present a gushing, sugar and spice and everything nice picture about living in Mexico. The poor potential expat is left to discover on his or her own the bugaboos of living in a place that might or might not be gringo friendly at all.

If expatriation is learning the language and assimilating into the culture you have chosen in which to live, then what does “cultural assimilation” actually mean? I suggest that expatriation is the process by which an intense integration occurs whereby the individual of another culture is eventually absorbed into the new culture. This includes absorption into the new culture’s language, celebration of holidays, observation of local events, politics, if allowed by law, in the new country. Also, it would include the development of intense interpersonal relationships with neighbors in the new country.

Going about creating little Americas, American enclaves, or American sectors is not expatriation. These people are not Expatriates, but Fakepatriates. Which do you want to be?

Link here.

Serious about learning Spanish? Have fun doing it, in Argentina.

Before I left England in order to prepare myself for life in Latin America I enrolled for private tuition to learn Spanish. At a fee of £20 ($40) per hour the cost soon became prohibitive and I abandoned class after only 2 weeks. Undeterred I purchased a set of “Teach Yourself Spanish” CDs vowing to devote at least an hour a day to mastering the language. The CDs came in very useful, as coffee mats, and so when I boarded the plane heading for South America my Spanish was still at the “hello, how are you” stage.

I figured I would pick it up as I went along and to some degree I did. But I was sharply reminded of how awful my grasp was when I had to call on my 7 year old daughter to translate a relatively simple request to the local electricity company. The customer service person behind the desk did not understand my “Gringospeak”. I knew the right words but my pronunciation let me down badly. Why did she understand my daughter and not me? Simple. I had mercilessly thrown my daughter in to a totally Spanish speaking school and within a few short months she was not only fluent but sounded like a local and could understand and be understood. Lesson learned. The most effective method of learning another language is to be immersed in the right environment, expose yourself to the language, listen, repeat and practice conversation.

During my recent visit to the western Argentinian town of General Alvear I had the pleasure of meeting Nora Oller, professor and director of the Bethel Institute, an English Language school located there. I was very pleased to learn that the school also takes English speakers and turns them into proficient Spanish speakers either by weekly lessons or intensive courses.

Alvear embraces you the moment you set foot there. The locals are courteously curious towards foreigners and ask lots of questions – another reason to kick yourself for not having better Spanish as you realize you miss countless opportunities for endless interesting conversation. Nora told me that she knew of locals who would be willing to open their homes to foreign students enrolled for intensive Spanish courses at the institute. Integrating in to the community in this way would doubtless enhance the experience and speed up the process for the learner. For students not wanting to be this intensive there are alternative places to stay.

A two weeks intensive course of around 20-25 hours per week would see you to a good proficient conversational level. A month would be better and enable you to engage in more in depth conversation and read and write to a reasonable standard. “Of course, it all depends on the individual student” Nora explained. The American expat who introduced her to Nora told me that she is particularly skillful in recognizing when you are “just not getting it” and then explaining things in a different way. He also told me that she is willing to conduct lessons “out in the field”, the local ice cream parlour being one of the favored locations.

I need to improve my Spanish as I intend to live in Latin America for the foreseeable future. Being able to speak the language of the country you are in will save you endless frustration and most likely, money, as you are better placed to negotiate costs or at least understand when you are being overcharged and enable you to question it. Who knows, it might even save a life if you need to call for emergency assistance.

Link here.


Last summer, while the dictator who has ruled for almost half a century lay hospitalized with intestinal problems, two men at the University of Miami started planning for the post-Castro era. Jorge Piñon, a former BP executive, and Jaime Suchlicki, former director of the university’s Research Institute for Cuban Studies, created the Cuba Business Roundtable to provide U.S. businesses with information they will need should America end its now 46-year-old embargo against the Castro regime. The group has 24 unidentified member companies. “We are telling people this will not be like eastern Europe,” Suchlicki says of a postembargo Cuba. “It is going to be gradual change.”

Prior to the 1961 embargo 80% of Cuba’s trade was with the U.S. Today the Netherlands and Canada are the two biggest recipients of Cuban exports (mostly metal ore, sugar and tobacco). Cuba imports petroleum, grain and electrical equipment from Venezuela and China. The U.S. is the only country that bars its citizens from doing business in Cuba and with Cuban entities.

With 11 million people Cuba is smaller than communist Vietnam, with 85 million people, and, of course, China, with 1.3 billion. And Cubans are too poor to buy most imported goods, limiting any initial postembargo market for consumer products. The per capita gross domestic product in 2006 was $3,900, according to U.S. government figures. “You are not going to have 20 Home Depots and 20 Wal-Marts,” Piñon says.

It is the location and natural resources that attract. Cuba gets 2 million visitors a year and will appeal to hotel companies and cruise operators, as well as to corporate farmers in need of equatorial sunshine. As for its resources, joint ventures in Cuba with the nickel and cobalt industries brought in $1.3 billion in 2005, while estimates of offshore oil reserves are at 5 billion barrels and of natural gas reserves at 10 trillion cubic feet.

Thomas J. Herzfeld started his Herzfeld Caribbean Basin Fund (NASDAQ: CUBA) in 1994, with the ticker CUBA (no coincidence). He put up $10 million and underwrote it through his brokerage firm. Nasdaq-listed shares of the closed-end fund, whose investments are primarily in U.S. stocks and companies in Mexico, the Cayman Islands and Panama, are down 11% this year to date but up 17% a year since inception. Morgan Stanley Capital International’s EAFE Index of foreign stocks shows has gained 12% a year since Herzfeld launched his fund. With $16 million in assets this tiny fund sells at a steep 36% premium to net assets. That alone makes it a bad buy; 3.4% in annual expenses is another reason to stay away.

But you can knock off the fund’s positions. The biggest: (1) Florida East Coast Industries (NYSE: FLA) is a holding company with interests in real estate and railroads. (2) Consolidated Water, a seawater-desalination plant operator. (3) Seaboard Corp. (AMEX: SEB), a pork and shipping firm. (4) Watsco (AMEX: WSO.B) sells air-conditioning, heating and refrigeration equipment. And (5) Royal Caribbean is a cruise line. Herzfeld tells investors that a postembargo Cuba is all about the ABCs: “A” for aircraft, air-conditioning, autos and agriculture; “B” for boats, buildings, boatyards and banking; and “C” for cigars, casinos and cement.

Florida East Coast fits none of those categories. Herzfeld likes it because it runs the main freight railroad between Jacksonville and Miami, a likely key line for goods in a postembargo Cuba. He thinks the company would operate a rail barge to and from Cuba, whose railroad gauge is the same as in the U.S. This stock sells for an expensive 57 times its Thomson IBES 2007 consensus earnings forecast.

Seaboard operates most of the container ships in the Caribbean and has a hand in the food business, so it is already positioned to take advantage of any increase in trade in the region. Herzfeld’s fund holds positions in two cruise companies: Royal Caribbean and Carnival. Roughly half the revenue of each operator comes from the Caribbean. Herzfeld says that revenue would double once access to Cuba was granted. Another holding, Trailer Bridge (NASDAQ: TRBR), is a trucking and marine-freight company that just won a deal to ship Ford vehicles to Puerto Rico. Trailer Bridge has only $112 million in latest 12-month revenues, but Herzfeld likes it because its ships have shallow drafts. Only 3 of Cuba’s 14 ports have water at least 65 feet deep.

While America sits on the sidelines, there are 258 foreign joint ventures and 115 cooperative production contracts currently in Cuba. Among these are Canada’s Sherritt International, which has invested more than $500 million in onshore oil and gas exploration. Oil companies from Spain, India, Malaysia and Norway, as well as Sherritt, now hold 16 offshore deepwater blocks off Cuba. Lloyd’s of London has been in the reinsurance business in Cuba, while Telecom Italia is a shareholder in Etecsa, Cuba’s national phone company.

“We are seeing the post-Castro era unfold right before our eyes,” says Kirby Jones, founder and president of the U.S. Cuba Trade Association. Its economy is a wreck, but Cuba’s location and resources have great potential.

Link here.


U.S. Treasury Secretary Henry Paulson has announced a new proposal to increase investment in infrastructure projects in Latin America and the Caribbean. The U.S. will partner with the International Finance Corporation (IFC), the private sector arm of the World Bank Group, to create a program to catalyze private investment in infrastructure in Latin America. The initial $17.5 million infrastructure project development program will include a $4.6 million U.S. contribution, and a $1.9 million contribution from Brazil.

“The United States’ interest in the Americas is strong. We are committed to helping the region reduce poverty, fight corruption, build a middle class, and generate more opportunities, including for those who currently feel excluded from the region’s growing prosperity,” stated Paulson. “The Americas face another serious constraint to economic growth – that is a lack of critical infrastructure. Latin America, for example, currently spends less than 2% of GDP on infrastructure annually. Under investment in electricity, transport, and potable water hamstring the region’s entrepreneurs and citizens. I am pleased to announce a new initiative aimed at addressing this constraint.”

The program, to be managed by the IFC, will help to identify productive infrastructure projects suitable for private participation, make information about these projects publicly available, and provide technical assistance on structuring projects, tendering concessions, and improving regulatory regimes. Project proposals can be made to the program by sovereign governments, sub-sovereign governments (including municipal governments), or private sponsors. Once a project reaches contractual closure, the investor will reimburse the program through a cost-recovery fee.

The IFC estimates that the program’s impact could be as much as $800 million to $1 billion in the creation of new investments and $300 to $400 million in fiscal savings to local governments. President Bush called for this program in 2005 at the Summit of the Americas.

Link here.



Senator Chuck Grassley, ranking Republican on the Senate Finance Committee, has disputed claims that an investigation into the “carried interest” earned by some fund managers is an attempt by Congress to raise taxes and attack the investor class. Grassley stated that the ongoing enquiry is attempting to clarify the application of the tax code to certain limited partnerships, and was not motivated by “envy” of the large sums being earned by some fund managers.

“Contrary to the claims of some press reports, lobbyists, and politicians, our inquiry, and any proposal that it may produce, is not about raising taxes on capital income. It is not an attack on the investor class. It is about the definition of capital income versus labor income,” he said.

The current partnership tax rules were introduced into the US tax code in 1954. Under these rules a partnership itself is not subject to tax, unlike a corporation. Instead, the income, and the character of that income flows through to its partners. If a partnership realizes ordinary income, then the partners are taxed on that income at ordinary tax rates, currently 35%. But if the partnership realizes capital gains, then the partners are taxed as capital gains at the much lower rate of 15%. This has led to calls from some that highly remunerated fund partners should be taxed at ordinary income tax rates in the interest of fairness.

Grassley went on to point out that during his tenure as Chairman and now ranking member of the Finance Committee, he has never overseen legislative measures with the sole intent of raising taxes, and he explained that the current investigation was more about closing loopholes than raising revenue. “As a Republican who supports lower capital gains rates, I am concerned that to the extent we permit the dilution of the investment concept, we risk undermining the arguments we have made for the lower rates, and also making it more expensive to extend them,” he remarked.

Link here.


House Democrats’ promise to permanently protect millions of middle-class families from a tax increase most do not know is coming is faltering before the plan is even unveiled. Senate Democrats are instead pressing a Band-Aid approach to delay for a year or two the AMT from adding an average $2,000 more in taxes to families with incomes between $100,000 and $200,000 a year. Many Democrats appear comfortable with a temporary fix rather than forcing a politically risky vote to raise taxes when the idea is not going anywhere in the Senate.

The threat facing taxpayers is very real. More than one-third of taxpayers making between $75,000 and $100,000 a year face an AMT hit of almost $1,000 next April filing season if the tax code is not fixed, either permanently or with another patch. One factor complicating Democrats’ task is the unusual dynamic involving the minimum tax. Most people do not know they may be facing the tax, so there is hardly a grass-roots outcry for AMT reform. At the same time, those facing tax increases are sure to rebel. Leading that column, according to Republicans, will be small businesses that file as individuals.

Link here.


Measure would also restrict funding of private tax debt collection program.

A Senate appropriations subcommittee has approved a $21.8 billion spending bill that involves another increase in funding for the IRS and the agency’s enforcement initiatives. The Senate Financial Services and General Government Appropriations Subcommittee approved fiscal 2008 legislation that would give the IRS a budget of $11.1 billion, $544.5 million over the FY 2007 enacted level, and $112.5 million over President Bush’s budget request.

The subcommittee also approved a further $6.8 billion to bolster the IRS’s enforcement budget, which it said would be used to identify unreported, underreported, and unpaid taxes owed, crack down on tax cheats through criminal investigations, conduct audits, and collect delinquent taxes. This was equal to the President’s budget request. A further $282 million has been granted to the IRS Business Systems Modernization effort, $69.4 million above FY 2007, to progress toward migrating to state-of-the-art information technology and enhance overall efficiency at the IRS.

A more controversial measure sees the bill attempting to restrict funding of the IRS’s private tax debt collection program by imposing a $1 million limit on new funding for the program in FY 2008. A similar proposal was removed from the House version of the IRS budget after a procedural challenge from Republicans.

Link here.


Britain’s new Trade and Industry Minister Sir Digby Jones has promised “not to take any prisoners” in his pursuit of a simpler and lower tax corporate tax regime for business operating in the UK. In one of his first interviews since his surprise appointment by Prime Minister Gordon Brown, Sir Digby said, “If I am overseas, banging the drum for Britain, and they tell me they are worried about our rate of tax, I can promise you as soon as the wheels hit the tarmac in the UK I will be over to Number 11 to tell (Chancellor of the Exchequer) Alistair Darling.”

The appointment of Jones to the Labour government has raised many eyebrows, since he was a frequent and outspoken critic of Gordon Brown’s tax and economic policies in his former role as director general of the Confederation of British Industry, when Brown was Chancellor. He also accused former Prime Minister Tony Blair’s government of being “in thrall to the unions.” Nevertheless Jones, having accepted a Labour peerage, will take a seat in the House of Lords and has been given the task of overseeing government’s buisness and tax polices.

Jones has not become a member of the Labour Party itself, and has even refused to reveal whether he would vote for the Labour Party in the next election, telling BBC Radio that, “How I vote is going to be my business, in private. ... What I do know is I will take the Labour whip in the House of Lords. I am delighted to get the chance to put business, wealth creation and job creation right in the middle of the decision-making and policy formulation of the Government.”

While Jones’s comments are unlikely to make him many friends in Whitehall, he believes that his unique perspective as an outsider while serving in the government will enable him not to get bogged down by party politics in putting across his arguments. “I won’t be taking any prisoners in this new role,” he said.

One area of tax policy that Jones said he would be keen to see changes in was local tax breaks granted by Regional Development Agencies (RDAs) to foreign companies, a policy he derided as “tax bungs” with little economic benefit. Another priority for Jones is to ensure that the UK’s flexible labour market is maintained, and he pledged to be relentless in the pursuit of cutting red tape, particularly for high value-added industries which have become a significant pillar upon which the UK economy now rests.

Link here.


Almost 200,000 Britons have shopped their friends, family and colleagues to the tax man in the year since HM Revenue and Customs set up a confidential hotline for taxpayers to inform on those they suspect of dodging their taxes. HMRC told The Times newspaper in response to a request made under the Freedom of Information Act that it had received 155,000 telephone calls to its tax evasion hotline. In addition, the department received almost 18,000 emails, 12,000 letters and faxes, and more than 3,800 referrals from the Customs hotline, which was set up in 2005.

However, it is difficult to gauge the effectiveness of the HMRC initiative, as the Treasury reportedly refused to divulge to the Times how many successful prosecutions had resulted from such informants, nor how much extra tax had been brought in. Unlike the U.S. or Australia, informants in the UK receive no monetary rewards for shopping tax evaders.

In February 2007, HMRC stepped up its enforcement campaign by urging workers who suspect that their employer is not paying tax and National Insurance to ring the Tax Evasion Hotline and report them. HMRC’s Director of Risk & Intelligence, Stuart Hartlib explained at the time, “Employees can tell us about rogue employers who do not correctly apply and account for Pay As You Earn and National Insurance contributions. They are being cheated by their employer. If National Insurance contributions are not paid employees could lose out not only on their State Pension but also other workers’ benefits such as incapacity benefit and contribution-based Jobseekers Allowance.”

However, HMRC has said that it needs additional powers and deterrents to extract money from non-payers, in order to reduce the cost and effort of pursuing around 200,000 people through the court system every year. In a consultation document released last month, HMRC proposed taking money directly from people’s bank accounts if other methods of collection failed to clear their debts. The consultation document also asks for views on whether it should be allowed to demand cash from the sale of land or property, including homes, if people do not pay up.

Link here.


The EC formally requested that Luxembourg amend its tax legislation on savings income paid in the form of interest to individuals resident in Luxembourg. In 2005, Luxembourg introduced an act which provides for deduction at source of 10% of the interest paid by a paying agent (bank, stock exchange, etc.) established in Luxembourg. This provision does not apply to interest paid by paying agents established in other Member States of the EU, which is subject to the general rate of (Luxembourg) income tax, and is added to the taxpayer’s other income, as a result of which the tax rate is usually more than 10%.

According to the Commission, the effect of this provision is to dissuade taxpayers resident in Luxembourg from placing their savings with paying agents established in other Member States. It therefore restricts the freedom of paying agents to establish themselves in another Member State. In addition, it restricts the scope for paying agents established in other Member States to provide their services to taxpayers in Luxembourg.

The Commission therefore considers that the legislation breaches the EC Treaty, as it constitutes an obstacle both to the free movement of capital and to freedom to provide services. If Luxembourg does not provide a satisfactory reply to this reasoned opinion within two months, the EC may refer the matter to the Court of Justice of the European Communities.

Link here.


French Finance Minister Christine Lagarde has presented an €13.6 billion package of tax cuts to the national assembly, measures which President Nicolas Sarkozy says will help spark an economic “shock” and get the economy growing. The measures, which will cost up to €11 billion in 2008 alone, include the removal of taxes on overtime, reducing taxes on inheritances, capping income tax at 50% and the introduction of tax deductibility on some mortgages. Sarkozy’s new government also wants to make the labor market more flexible, and the centerpiece of these reforms could see the scrapping of the 35 hour week.

The package places much emphasis on reducing taxes on the wealthy, a measure sure to spark debate that the government is putting the interests of the rich before looking after its more vulnerable citizens. Lagarde however, argued that such measures are vital if France is to be a place of wealth creation. Lagarde predicted that if approved, the measures would add an extra 0.5% to French GDP in 2008.

However, it remains unclear from the government’s plans whether some or all of the cost of the tax cuts will be recouped with tax increases or spending cuts elsewhere. The proposals could also raise eyebrows in Brussels with the EC and national finance ministers expressing concern over the French budget deficit, which Sarkozy estimates will touch 2.4% of GDP this year.

Link here.


Lower rates would be partially offset by restricting offshore loan interest deductions.

German lawmakers have given their approval to a key corporate tax reform that will reduce the overall corporate tax burden on companies in Germany by almost 10%, placing the country in the middle of the European corporate tax league table. The legislation, due to go into effect in 2008, was approved last week by the majority of the upper house of parliament, which is controlled by Chancellor Angela Merkel’s grand coalition parties. The bill was passed in the lower house, or Bundestag, in May.

In urging the lawmakers to approve the bill, Peer Steinbrueck, German Finance Minister, noted that with the reforms, Germany will “finally get into the midfield of tax burdens compared with other European countries.” Germany currently has one of the highest corporate tax burdens in the world, and the business community has long called for rates to be reduced to help breathe life into Germany’s stagnating economy. The new law effectively cuts the corporate tax rate from the current 38.65% to 29.83%. This is to be done through a cut in the headline corporate tax rate paid by large companies to 12.5% from 25%, with regional corporate taxes, which average about 13%, remaining unchanged.

The reforms are expected to cost €5 billion ($6.85 billion) in the first year and €30 billion overall, but €25 billion of this will be clawed back through efforts to widen the tax base. One offsetting measure is the controversial decision to restrict the amount of interest that German companies can deduct from loans received from overseas units. Many business leaders worry that this measure will restrict companies’ ability to invest.

Link here.


The Cypriot government plans to raise income tax thresholds, slash the rate of value added tax on certain goods, and increase spending on pensions as part of a social cohesion package announced ahead of Cyprus’s imminent entry into the single European currency. The announcement of the tax and spending package worth more than CYP100 million (€172 million) came just days before European Finance Ministers are expected to rubber stamp Cyprus’s adoption of the euro, but the government has assured that the measures will not affect its budget status, a crucial pre-condition for entry into the eurozone.

Under the measures, VAT on a large number of goods and services will be cut to 5% from 15%, although EU approval is needed for this to become fully effective. The income tax free threshold will be raised to CYP10,750 from CYP10,000 in 2007, and raised again to CYP11,350 in 2008, which is expected to cost the government CYP35 million (€60 million).

According to Finance Minister Michalis Sarris, the package will not affect the budget, and he said that the government had achieved the fiscal criteria need to adopt the euro. In May 2007, the EC confirmed that Cyprus had achieved a “high degree of sustainable economic convergence” with the euro area member states and that it fulfilled the necessary conditions to adopt the euro. To become part of the euro area, an EU country must satisfy multiple criteria set out in the EU Treaty regarding the government budgetary position, price stability, exchange rate stability and convergence of long-term interest rates.

Link here.


Moscow’s Higher Court of Arbitration has partly upheld an appeal by audit firm PricewaterhouseCoopers, which stands accused of evading Russian taxes. While the court upheld charges that PwC failed to pay 8 million rubles worth of tax on auditing services, it sent back to the lower courts an additional charge that it underpaid taxes on the hiring of expatriate workers. PwC has denied allegations by the Russian tax authorities that it evaded 243 million rubles in tax by falsely declaring the employment of foreign workers and under-reporting auditing services for non-residents.

The judgment comes a fortnight after PwC announced the withdrawal of its audits of the oil firm Yukos, after apparently learning that the bankrupt company had withheld certain information that it said should have come to light earlier. The timing of PwC’s announcement has aroused suspicion that political pressure was brought to bear on the company, as the government prepares fresh money laundering charges against former Yukos chief executive Mikhail Khodorkovsky, who is serving an 8-year prison term.

PwC’s involvement with Yukos has already landed it in hot water with the Russian authorities, and in March 2007 it was fined 16.8 million rubles ($647,000) because of supposed irregularities in its audits of company between 2002 and 2004, when it supposedly completed two separate audit reports – one intended for the oil firm’s shareholders, and another allegedly for internal use, warning of illegal actions undertaken by Yukos. PwC vehemently denies those charges.

Link here.


Case involves business presence, transfer pricing, considerations.

India’s Supreme Court has said that outsourcing activities carried out by a unit of Morgan Stanley in India are not liable for Indian taxes, in a case that was being keenly watched by other major multinationals with operations in India. The Supreme Court was of the opinion that Morgan Stanley Advantage Services (MSAS) was not liable for tax in India since it was a back office processing unit, and did not constitute a permanent establishment in the country.

“There was no agency PE as the PE in India had no authority to enter into or conclude the contracts. The contracts would be entered in the U.S. The implementation of those contracts only to the extent of back office functions would be carried out in India,” the judgment stated. However, the court also said that the parent company would have to pay an appropriate “arms length” price to the Indian subsidiary, otherwise tax could be imposed.

The ruling is likely to be viewed with some relief by the numerous other multinational companies which have outsourced their back office and administrative functions to India. The outsourcing industry has been a boom sector for the Indian economy in recent years, but the tax authorities have been unsure on the tax status of such companies, known as “BPOs” (Business Process Outsourcing firms). Tax uncertainty was heightened when the Indian government notified firms in 2003 that a BPO would be liable for income tax on earnings which related to their parent company’s core business. The BPOs opposed the move, arguing that the services being provided were sold to foreign customers, and that therefore foreign firms should be liable for tax.

Link here.



Possibly inconsistent rulings discovered concerning where trust beneficiaries have a say in distributions.

The IRS has announced that it is reconsidering a series of private letter rulings (PLRs) issued by the Office of the Associate Chief Counsel, Passthroughs and Special Industries. The PLRs address, in part, the gift tax consequences under sections 2511 and 2514 of the Internal Revenue Code of trusts that utilize a distribution committee consisting of trust beneficiaries who direct distributions of trust income and corpus. The conclusions in the PLRs regarding the application of section 2514 may not be consistent with a number of revenue rulings. Accordingly, the Office of Chief Counsel is requesting comments as to whether the conclusions in these PLRs can be reconciled with the revenue rulings.

These PLRs involve a situation in which trust distributions are made at the unanimous consent of a distribution committee that consists of trust beneficiaries, or at the discretion of an individual committee member with the consent of the grantor. If a distribution committee member resigns or dies, the committee member is replaced with another person. The PLRs conclude that the distribution committee members have substantial adverse interests to each other for purposes of section 2514. Therefore, they do not possess general powers of appointment over the trust. Accordingly, distributions from the trust will not be subject to gift tax with respect to the distribution committee members.

However, the holdings in Rev. Rul. 76-503 and Rev. Rul. 77-158 indicate that because the committee members are replaced if they resign or die, they would be treated as possessing general powers of appointment over the trust corpus. It has been suggested that the facts presented in the PLRs are distinguishable from the revenue rulings because in the PLRs, the grantor’s gift to the trust is incomplete since the grantor retains a testamentary special power of appointment.

Before the Office of Chief Counsel takes any action with respect to the PLRs, comments regarding the question of whether the distribution committee members possess general powers of appointment under section 2514 are being requested. The comments could also include suggestions for a substantially similar trust structure that would achieve the intended income, gift, and estate tax objectives of the transactions described in the PLRs.

Link here.


According to a report in the Observer, HM Revenue and Customs said that some 112,000 claimed “non-dom” status in the UK during the 2004-05 tax year, 74% more than in 2002. However, the report predicted that these numbers are set to soar to 200,000 by the self-assessment deadline for the 2006-07 tax year.

The paper claimed that the upsurge in non-dom claims is being fuelled by the government’s ever-harder line on tax avoidance, particularly of the offshore variety, as evidenced by the recent offshore tax amnesty. The registration date for those wishing to avail of the amnesty terms passed last month, and those who failed to take HMRC’s carrot now face the possibility of investigations and penalties of up to 100% of tax due. “People are telling the Revenue that they meant to sign non-dom forms – that not filling them in was an oversight. The amnesty is pushing people further offshore,” one tax expert told the Observer. By claiming non-dom tax status, expats living in the UK are excused tax on their foreign earnings, including interest in overseas bank accounts.

It is also thought that the booming London property market is helping to drive the surge in non-dom claims, since the status allows them to remain exempt from capital gains tax and stamp duty. The issue of non-domiciled tax status is a delicate one for the government, which has had to fend off criticism that the rules benefit a relatively minor number of very wealthy individuals doing business in the UK. While the Treasury has in the past hinted that it may change the rules surrounding non-dom tax status, it is also very conscious of upsetting the City and appearing to be hostile towards those creating wealth for the UK.

In 2004, the then Inland Revenue set up five regional offices to collect personal details of non-domiciled workers, including names and national insurance numbers. It also sent out letters to around 6,500 employees asking for information on “inward expatriate employees who are non-domiciled”. Then, in 2005, it was reported that a large number of City financial firms were threatening to pull out of London as the Treasury looked into the whole area of non-dom taxation and dual contracts, which benefit the employees of UK-based foreign firms who are resident in Britain, but who spend a large part of their working life overseas.

The review, which is ongoing, has yet to lead to any changes in the rules, and one fund manager summarized just why the government may be reluctant to tinker with the system, despite the fact that making rich non-doms pay more tax would be popular with most of the electorate. “It has seen as one reason why London has continued to be successful as a venue for high-value employees who can be located anywhere in the world,” the manager observed. “[T]here is a strong sense that if it was to be removed an element of the [City’s] attractiveness would lessen.”

Link here.


CFTC claims fund is hiding behind Swiss “bank secrecy” laws.

The U.S. Commodities And Futures Trading Commission (CFTC) has filed a contempt of court motion against the Bermuda-registered Lake Shore Asset Management Limited (LAM) in response to its refusal to allow CFTC staff investigate the fund’s accounts, on the grounds of bank secrecy rules. The CFTC’s motion was issued in response to LAM’s violation of an ex parte statutory restraining order (SRO) freezing the fund’s assets and prohibiting LAM from destroying or altering records, or refusing CFTC inspector’s access to its books.

LAM, incorporated in Bermuda but with a Chicago office, is registered as a Commodity Pool Operator (CPO) and Commodity Trading Advisor (CTA). The CFTC’s initial complaint alleges that LAM’s Director, Laurence Rosenberg, told the National Futures Association (NFA) that none of LAM’s business is conducted in Bermuda, and that all telephone calls to the Bermuda office are forwarded to an office in Toronto, Canada, where all trading is done and all books and records are maintained. However, according to the CFTC, the Toronto address is only a mail drop, not a business address.

The complaint further alleges that that LAM managed substantially less than claimed by Rosenberg. According to Rosenberg, LAM managed approximately 250 accounts and operated several commodity pools, with total assets of approximately $1 billion. Rosenberg initially provided the NFA with access to LAM’s protected web pages, but then blocked access after receiving advice from its lawyers that revealing the information could breach secrecy laws in Switzerland, where many clients are based. The NFA managed to find $466,710,761 in assets for all commodity pools and managed accounts, but the CFTC says that LAM has neither allowed CFTC staff to inspect and copy its books and records, nor has it produced the requested documents to the CFTC, as mandated by the court’s order. Because LAM is a registered CTA and CPO, the CFTC argues that it is entitled to inspect all of LAM’s books and records, not simply selected documents.

“LAM continues to hide behind unspecified Swiss ‘bank secrecy’ laws and has only produced minimal and selective documents to CFTC staff,” the Commission stated. LAM said last week that it has only one U.S. client who has invested $1 million into the fund, and that it would not reveal any details about its other clients.

The complaint also alleges that LAM’s principals, including Rosenberg, have made several inconsistent statements concerning assets in the pools and managed accounts, LAM’s ownership, U.S. investors in the pools, and the location of its books and records. The FT reported that LAM admitted giving inaccurate statements, but that this was a mistake. The matter is set for a status hearing on July 11.

Link here.


Transition from bearer to non-bearer share companies to be simplified.

The BVI Financial Services Commission has announced that several amendments are being readied to the new Business Companies Act that will, among other things, establish new, simplified provisions for the transitioning of bearer share companies to non-bearer share companies. Provisions for transitioning bearer share companies to non-bearer share companies were originally enacted for IBCs in 2003. These provisions were carried forward to Schedule 2 of the BVIBCA.

The existing transitional provisions require companies to fully immobilise their shares by December 31, 2010. However, the BVI FSC explained it had become aware of industry concerns that compliance with the transitional arrangements would place a huge burden on the sector, given the recent introduction of new companies legislation and a new online companies registry. “Perhaps even more important, it would cause considerable inconvenience to the directors and owners of former IBCs who will have to pass resolutions amending their memoranda of association,” the FSC observed. “The BVIBCA and the IBC Act before it were designed to provide a legal mechanism for incorporating companies without unnecessary administrative burdens. The effort that would be required to comply with the existing transitional provisions is not consistent with this underlying philosophy,” the Commission noted.

The FSC said that it has tried to find a workable solution that will achieve the immobilization of all bearer shares before 2010, but which will impose the minimum administration on BVI companies. An Order by the Executive Council attempts to achieve this by deeming that the memorandum of every former IBC will be amended with effect from the transition date to prohibit the issue of bearer shares, unless the company elects that the deeming provision should not apply; and by abolishing the staged increases in annual fees between 2008 and the transition date. The FSC announced that, given this will make the transitioning of most bearer share companies to non-bearer share companies a straightforward process, the transition date has been brought forward one year from 31 December 2010 to 31 December 2009.

During the years 2008 and 2009, a former IBC that is a bearer share company will pay the same fee as a non-bearer share company. On December 31, 2009, the memorandum of a bearer share former IBC will be deemed to be amended to prohibit the issue of bearer shares, and the company will become a non-bearer share company. It will be open to any bearer share former IBC to elect to disapply this deeming provision. As a consequence, the vast majority of former IBCs need to do nothing.

Link here.



Patrick Peterson spent a year obsessively pursuing the criminals behind a giant spam attack. He never found them, but he learned a lot about fighting spam.

Patrick Peterson was at home in San Francisco on Memorial Day 2006, idly checking work e-mail, when he received an alarming message on his Palm Treo. Peterson heads technology at IronPort, which makes hardware and software that can block spam and virus-carrying e-mail before it hits corporate networks. The e-mail said that IronPort’s operations center was seeing spam activity like it never had before. The surge went on for two more weeks and turned out to be a single, coordinated blast – 20 billion messages in all – designed to drive gullible buyers to 14 e-commerce sites, like MyCanadianPharmacy.info and ExclusiveCaviarOnline.com, hawking fake Viagra, Rolexes and Russian caviar.

Peterson, who has been in Internet security for 7 years, figured it had to be the largest spam attack in history, likely the work of an organized crime ring out of eastern Europe. Estimates based partly on typical consumer response rates to spam offers peg this ring’s annual revenue at $100 million. “This was an entirely new level of sophistication,” says Peterson.

He started to obsess about who could produce such a spam onslaught without being detected. Then he dug a little. Then more. Then even more. So began the strangest and most frustrating year of Peterson’s 39-year-long life. In the course of his spam hunt he broke several laws, engaged the help of shadowy hackers, hid months of activity from his wife and boss, neglected work and ended up losing half his annual bonus. He contacted 20 agents in nine government agencies in the U.S., China, and India but failed to engage any of them in a serious quest for the culprits. In the end he never found out who did it. The only tangible evidence from his dive into the spammer’s world are 17 piles of paper on his office floor and an envelope stuffed with fake Viagra pills shipped from phony addresses in India and China.

Peterson joined the security industry wanting to be a hero. “In security, you can have big impact,” he says. His recent hunt was not a total waste of time. IronPort, which was acquired last month by Cisco for $830 million, has used tricks derived from his research to reinforce its filters against organized spam attacks. Peterson says knowing how the enemy operates makes him a better spam fighter.

It was unclear a few hours into that attack whether this particular barrage was coming from a bunch of different spammers using similar techniques, or a single spammer. One clue that made it feel like one hulking missive, was that most of the messages were sprinkled with lines from J.R.R. Tolkien’s The Hobbit. This helps them pass through spam filters designed to block e-mails populated with words like “Viagra” and “Cialis” or variations such as “V!agra” or “Ci@lis”. Peterson was stunned at how rapidly the spam in this attack was mutating. Peterson wanted to see if all these iterations were being generated by the same automated software program. He had IronPort’s bank of 100 servers start running dozens of “cluster analyses”, or scans that look for frequently used combinations of letters and symbols among millions of messages. It turned out the proliferating varieties shared a similar vocabulary. Every message had one or more of these triplets: AMB, VAL, GRA, NAX, MER and LEV.

Peterson presumed the spam was, like most spam nowadays, coming from a botnet, a ring of hacked PCs and servers co-opted into churning out e-mails, with their owners unaware. Some 11% of all PCs are botnet zombies. Every computer that sends an e-mail has to reveal its 32-bit Internet Protocol Address (IPA), which indicates geographic location. Peterson found 28,756 unique IPAs that were trying to flood IronPort’s customers. The network he mapped rivaled a large company’s in scale – 110,000 computers connected in 119 countries. He had never seen an operation this massive.

Then Peterson began clicking on the Web links advertised in the e-mails. Using a software program called Traceroute, he timed how long it took to load each phony-pill-selling Web site. Typically such requests take 50 milliseconds and make about 15 stops along the Internet. But the requests going to sites like MyCanadianPharmacy took more than 200 milliseconds and were making 43 stops, some of them unidentifiable, before reaching the final server. The spammers had set up an elaborate ricochet to cover their tracks and disabled the protocol that lets outsiders identify the final destination.

In early June Peterson spent a week trolling hundreds of the phony spamvertised Web sites, looking up their registration information in the “Whois” database. Every new Web site has to provide a name, address and phone number to this database. He thought he might find the repetition of a name or number that could yield a clue. No luck. His criminals had filled the entries for 2,100 Web addresses with gobbledygook, essentially thumbing their noses at one of the few ways the Web aims to keep track of who owns what site.

By now Peterson was spending half his workday on the spam hunt. “I kept thinking, ‘I need to get back to my real job,’ but then I’d get one more thread,” he says. One promising lead came the afternoon he ran a simple test to see if the phony pharmacy Web sites were filling orders or just stealing credit card numbers. Using a bogus credit card number, he placed orders on Pharmashop, a site that looked as though it ran on a server in Hungary, and MyCanadianPharmacy, which seemed to be run out of China.

Bingo. Although the sites looked different and were run by machines at opposite ends of the world, he got identical customer service e-mails, seconds apart, telling him to try another card. And both e-mails originated from a server at a hosting outfit called InterCage in Concord, California, 40 miles east of IronPort’s offices. Peterson had an assistant drive there, but the address was just a post office box. InterCage had been accused in chat rooms and blog posts of hosting lots of spam-related sites. So Peterson called the San Francisco office of the FBI. The next day an agent was in Peterson’s office taking detailed notes on the InterCage link. InterCage’s president, Emil Kacperski, says that like any Internet provider, InterCage might unwittingly be allowing spam to pass through. InterCage has cooperated with subpoenas before, says Kacperski.

Peterson felt a sense of validation. But the agent was soon transferred to another division and thus went the first in a string of disappointing attempts to enlist law enforcement. “No one is approaching this from both the technical- and physical-world angles,” says Peterson. “That is why the bad guys continue to get away with it.”

In mid-June Peterson ran out of leads and, feeling frustrated, made a buy on MyCanadianPharmacy. Now, Americans are forbidden to import prescription drugs, but a three-month supply exception is permitted. To buy the pills, he created a one-time-use MasterCard number tied to his wife’s account and spent $85 for 10 pills of something called Viagra Professional. Within seconds he got a confirmation e-mail from E-Commerce Processing Systems, a discount code for future buys and a request to rate his customer experience. “I had never seen cybercrime like this. It acts like a huge business,” says Peterson. A London address appeared at the bottom of one message. Peterson had an IronPort employee there visit the building. It housed several offices, but a receptionist had never heard of the Web company. The address for the world headquarters of MyCanadianPharmacy is an empty parking lot in Toronto.

Peterson’s credit card was charged to an account in Russia. He called MasterCard for more details, but, without a subpoena, the card company could reveal only the merchant’s account name, #Pharmacyclient1.com, and asked him if he had a complaint. He said he did not, but a few weeks later his card was mysteriously reimbursed for the full charge. MasterCard has ceased processing transactions for 500 fake pharma Web sites over the past three years. But the sites close and reopen with another bank under a totally different name. “It is a game of Whack-a-Mole,” says Joshua L. Peirez, a security and policy chief at MasterCard.

By August Peterson was getting so frustrated that he was considering breaking into some of the spammers’ botnet machines. Then he got a phone call from a man in Canada who identified himself only by his online handles “Spam Killrz” or “SiL” (as in “Spam is Lame”). SiL had heard Peterson speaking about the spam attack on the radio and, as it turned out, was tracking the same criminals, but with less-than-savory tactics. SiL told Peterson that MyCanadianPharmacy and Pharmashop were linked to a dozen other sites selling illegal drugs, watches and caviar. SiL also remotely dissected a server at a Greek university that had been tallying pill orders at the rate of one every 30 minutes.

In late August Peterson’s Viagra order arrived, wrapped in a long, thin envelope with a Mumbai return address on the back. He paid investigators in India $3,000 to snoop around. They visited the address but turned up nothing. In October lab results from Ohio’s Toxicology Associates proved that Peterson’s pills were filler. (Forbes duplicated Peterson’s order and got pills from Shanghai that contained the honest-to-God sildenafil used in real Viagra. But Pfizer says the pills are counterfeit.)

At work, Peterson was perpetually distracted. He flunked his 2006 performance review; his boss, IronPort’s marketing chief gave him a bonus of 10% of salary instead of the usual 20%. IronPort executives in March told Peterson to stop wasting time on the pill chase and refused his request to rope in other staffers. So Peterson began hiding his sleuthing at work and sneaking onto his home computer after his wife had gone to bed.

Peterson made another online drug buy in April with a Wells Fargo gift card. The transactions were charged to odd-sounding Web domains like “drugs99.com” and “sopharmacy9.com”. One package came from a suburb of Shanghai. His order for the muscle relaxant Soma, a controlled substance, has still not arrived. Recently he has been getting “404” error messages when he points his work PC at MyCanadianPharmacy. He did not think much of it because the spammers are bouncing traffic through so many stolen machines. Then he got a call from SiL. IronPort’s IPA was now intentionally blocked from that Web site, as are IPAs at the FBI, FDA and MasterCard. “It was a victory of sorts,” said Peterson.

The greater victory was learning – the hard way – how large spam networks operate. IronPort now regularly checks traffic lags between its computers and the computers sending spam mail. A delay probably means the computer trying to send the e-mail is hijacked. Now those machines, and the URLs promoted within spam, get flagged in IronPort’s system. Then it tries to tell if that zombie computer is communicating with others that should also be flagged.

IronPort also scans data on newly registered Web domains. There it looks for clusters of attributes like shady registrars, and repetitive names and ZIP codes in the Whois database. Peterson’s engineers update customers’ spam filters every 2 minutes instead of every 5 because of the rapid morphing he witnessed last June. “If I can’t find them, at least I can make their lives harder,” he says.

Link here.


In “A Race to the Bottom: Privacy Ranking of Internet Service Companies”, Privacy International spray-paints the façades of landmark companies that line today’s Main Street on the Web. The painted colors are assessments of each company’s performance on privacy issues. Though the rankings are colorful, what they say is not pretty.

Nobody in the “interim rankings” (PDF) gets the top (green) mark for “Privacy-friendly and privacy enhancing”. The bottom (black) mark, for “Comprehensive consumer surveillance & entrenched hostility to privacy”, goes to just one company: Google. Here is the color-band system by which each service is rated:

Privacy-friendly and privacy enhancing
Generally privacy-aware but in need of improvement
Generally aware of privacy rights, but demonstrate some notable lapses
Serious lapses in privacy practices
Substantial and comprehensive privacy threats
Comprehensive consumer surveillance & entrenched hostility to privacy

None of the ranked companies were spared rebuke. As mentioned, no one earned a green mark. BBC, eBay, LastFM and Wikipedia were award blue marks. Yellow marks were awarded to Bebo, Amazon, Friendster, LinkedIn, LiveJournal, MySpace (“A mixed bag, with some strong protections and lot of ambiguities.”) and Skype (“Lack of contact details is problematic. Lack of openness about software capabilities is problematic.”). Orange, “Serious lapses in privacy practices”, mark companies included Microsoft (“Have embedded privacy into many product and service designs, but terrible track record ...”), Orkut, Xanga and You Tube (“Considering the size of YouTube and its owners, the vague information about sharing of personal information with affiliated companies leaves much to be desired.”)

Even further down the rankings, with red marks, were AOL, Apple, FaceBook, Hi5, Reunion.com (“Data sharing is dangerously vague. ... Historical ethics problems.”), Windows Live Spaces (“Uses almost every means identify users and track movements.”) and Yahoo (“Lack of information on search and IP data is problematic. Poor track record.”). In singling out Google for a black mark, PI comments, “Track history of ignoring privacy concerns. Every corporate announcement involves some new practice involving surveillance. Privacy officer tries to reach out but no indication that this has any effect on product and service design or delivery.”

Privacy International says, “We are increasingly concerned about the recent dynamics in the marketplace. While a number of companies have demonstrated integrity in handling personal information (and we have been surprised by the number of ‘social networking’ sites which are taking some of these issues quite seriously), we are witnessing an increased ‘race to the bottom’ in corporate surveillance of customers. Some companies are leading the charge through abusive and invasive profiling of their customers’ data. This trend is seen by even the most privacy friendly companies as creating competitive disadvantage to those who do not follow that trend, and in some cases to find new and more innovative ways to become even more surveillance-intensive.”

The idea here is not just to expose shortcomings, but to put pressure on these services. But one wonders ... why would all these companies suck so badly at respecting privacy? I believe there are two reasons: (1) Growth in adoption of advertising-based revenue model that Google pioneered, and now provides for millions of companies, and (2) Absence of privacy (or any) control on the user’s side other than refusal to cooperate. There is a failure of imagination around business models other than retailing and advertising. Especially advertising. There is a pile of money in advertising. Google is moving toward a de facto monopoly on the business, if it is not there already, with a market share of just under 50% and rising. Making advertising of this sort work best requires maximizing intelligence about users.

The second problem is that online privacy as we know it today is almost entirely at the grace of the vendors we deal with. The terms are theirs. We accept them or not, but that is about it. We cannot, for example, make a global assertion of anonymity to the world, and then selectively reveal pieces of identity information to vendors, on a private and need-to-know basis that we determine. For the most part we have those privileges when we shop at stores in the physical world. But in the online world we can be tagged and tracked like animals and never know it.

These conditions will stay out of our control as long as we continue to believe that markets are about supply chasing down and “capturing” demand. There has to be a better way – one that serves demand at least as well as it serves supply. Whatever that better way is, advertising is part of the problem, not the solution. Even as Google and others put millions more of us into business, it is still the advertising business. And that business is driven entirely by its supply side. Follow the money.

We cannot leave privacy solutions entirely up to large suppliers. We can only solve privacy problems by equipping individuals with better ways to control and reveal private information while also finding what they want in the networked world. Until we do that, Privacy International will still be ranking sites with colors other than green.

Editor: The larger issue here goes well beyond vendors becoming progressively more effective at targeting us with sales pitches. Once a service provider has your personal data in its possession, who knows where the data will end up? Identity thieves and other criminals certainly would be interested in it. How well your provider protects your data is crucial here. And, of course, any government agent could obtain any person-specific or general set of data from any service provider with almost no effort at all these days (as we have reported in these pages ad infinitum) – no matter how stringent the data gatherer’s privacy policy might be. The instant (usually) benefits obtained from supplying your personal data come at a cost. Everyone would do well to consider those actual and potential costs.

Link here.


Ever find yourself with too many passwords to remember and no idea where to keep them so that only you can find the password list? Creating a password.txt file in your root directory is out of the question, as is a password-protected OpenOffice.org file. A piece of paper hidden somewhere is not a good idea, because after you forget where did you put it, someone else will find it and abuse it. Instead of these approaches, consider using steganography, a method for hiding sensitive information inside some other object, typically a JPEG picture or a sound file.

With steganography, a plain text file is merged with a picture or sound file. The resulting file looks and sounds the same – only the size of the file is slightly changed. For extra security, you can encrypt the text file before you merge it.

Here is a look at some useful tools that you can use to hide and unveil sensitive information inside an object. Most of these programs and tools are available in package repositories for different Linux distributions. Some have Windows versions.

Link here.


London-style surveillance system that would be the first in the U.S.

By the end of this year, police officials say, more than 100 cameras will have begun monitoring cars moving through Lower Manhattan. The “Lower Manhattan Security Initiative” will resemble London’s so-called Ring of Steel, an extensive web of cameras and roadblocks designed to detect, track and deter terrorists. British officials said images captured by the cameras helped track suspects after the London subway bombings in 2005 and the car bomb plots last month.

If the program is fully financed, it will include not only license plate readers but also 3,000 public and private security cameras below Canal Street, as well as a center staffed by the police and private security officers, and movable roadblocks. “This area is very critical to the economic lifeblood of this nation,” New York City’s police commissioner, Raymond W. Kelly, said in an interview last week. “We want to make it less vulnerable.” But critics question the plan’s efficacy and cost, as well as the implications of having such heavy surveillance over such a broad swath of the city.

The license plate readers would check the plates’ numbers and send out alerts if suspect vehicles were detected. The city is already seeking state approval to charge drivers a fee to enter Manhattan below 86th Street, which would require the use of license plate readers. If the plan is approved, the police will most likely collect information from those readers too, Mr. Kelly said.

But the downtown security plan involves much more than keeping track of license plates. 3,000 surveillance cameras would be installed below Canal Street by the end of 2008, about two-thirds of them owned by downtown companies. Some of those are already in place. Pivoting gates would be installed at critical intersections. They would swing out to block traffic or a suspect car at the push of a button.

Civil liberties advocates said they were worried about misuse of technology that tracks the movement of thousands of cars and people. “This program marks a whole new level of police monitoring of New Yorkers and is being done without any public input, outside oversight, or privacy protections for the hundreds of thousands of people who will end up in N.Y.P.D. computers,” Christopher Dunn, a lawyer with the New York Civil Liberties Union, wrote in an e-mail message. He said he worried about what would happen to the images once they were archived, how they would be used by the police and who else would have access to them.

There are questions about whether such surveillance devices indeed serve their purpose. There is little evidence to suggest that security cameras deter crime or terrorists, said James J. Carafano, a senior fellow for homeland security at the Heritage Foundation, a conservative research group in Washington. For all its comprehensiveness, London’s Ring of Steel, which was built in the early 1990s to deter Irish Republican Army attacks, did not prevent the July 7, 2005, subway bombings or the attempted car bombings in London last month. But the British authorities said the cameras did prove useful in retracing the paths of the suspects’ cars last month, leading to several arrests.

While having 3,000 cameras whirring at the same time means loads of information will be captured, it also means there will be a lot of useless data to sift through. “The more hay you have, the harder it is to find the needle,” said Mr. Carafano.

Link here.



Rules the ACLU et al had no standing to bring the suit.

A federal appeals court removed a serious legal challenge to the Bush administration’s warrantless wiretapping program last week, overruling the only judge who held that a controversial surveillance initiative by the NSA was unconstitutional. Two members of a three-judge panel of the U.S. Court of Appeals in Cincinnati ordered the dismissal of a major lawsuit that challenged the wiretapping, which President Bush secretly authorized to eavesdrop on communications involving potential terrorists shortly after the 9-11 attacks.

The court did not rule on the spying program’s legality. Instead, the decision found that the American Civil Liberties Union, academics, lawyers and journalists who brought the case did not have standing to sue because they could not demonstrate that they had been direct targets of the clandestine surveillance. The decision vacates a ruling in the case in August by a U.S. District Court judge in Detroit who found that the administration’s program to monitor private communications violated the Bill of Rights and a 1970s federal law.

The eavesdropping program – first revealed by news accounts in late 2005 and the subject of intense political wrangling since then – is one aspect of a broad assertion of presidential power Bush has invoked in the past six years to justify policies intended to deter terrorism domestically and abroad. As first devised, the Terrorist Surveillance Program allowed the NSA to intercept telephone calls and e-mail between the U.S. and overseas, in which at least one party was suspected to be affiliated with al Qaeda or related groups, without the court approval typically required for government wiretaps, according to administration officials.

ACLU legal director Steven Shapiro said the organization was examining its legal options, including the possibility of an appeal to the Supreme Court. The ruling leaves two other challenges to the surveillance program alive and awaiting an August 15 hearing by the U.S. Court of Appeals in San Francisco. One suit is a class action by customers of AT&T, who say the company illegally turned over their telephone and e-mail records to the NSA. The second suit was filed in Oregon by a now-defunct Muslim charity, the al-Haramain Islamic Foundation, which – unlike any other plaintiff in the surveillance suits – says it has documents showing its communications were monitored.

Link here.


In 2001, a 19-year-old was an innocent man caught in the wrong place at the wrong time. Now he is telling his story.

Fifteen American soldiers watched over a man, shackled to a seat in the cargo bay of a C-17 Globemaster – the Air Force workhorse that usually moves Abrams tanks, Chinook helicopters or infantry vehicles. Wearing goggles that shut out all light, a soundproof headset and a mask that covered his mouth so he could not speak, spit or bite, the prisoner arrived at Ramstein Air Force Base in Kaiserslautern, Germany, under the tightest security. The plane had burned through 36,000 gallons of jet fuel and had refueled in flight. During the seventeen-hour ride, the prisoner was provided with neither food nor water. Nor was he allowed to stretch his legs or relieve himself.

This was how the U.S. in 2001 repatriated an innocent man who had never represented a security threat. Murat Kurnaz was 19 when he was taken off a bus in Peshawar, Pakistan. He had, as many first- or second-generation Muslims in Europe do, turned to a religion his family had abandoned when they emigrated from their native land. His religious awakening put him in proximity to Islamic fundamentalists – sufficient justification for detention by American forces, after the terrorist attacks of 9-11, as a supposed member of Al Qaeda.

Kurnaz was 24 and had been the last European held at the American prison camp in Cuba when the Globemaster touched down in Kaiserslautern in August 2006. He did not know he had been returned home to Germany until an American enlisted man removed his goggles and he saw three German policemen standing outside the airplane.

Murat Kurnaz, German born of Turkish parents, could be an expert witness and fact witness for any legislative or judicial procedure that would cast a cold eye on the transgressions of law, the Constitution or the fundamental precepts of human rights perpetrated by George Bush’s terror warriors. Pick your amendment. Fifth: one is not compelled to be a witness against oneself, or deprived of life, liberty or property, without due process of law. Eighth: protection against cruel and unusual punishment. Fourteenth: the state cannot deprive someone of life, liberty or property without due process. The habeas corpus statute? For innocent detainees caught up in sweeps, there is no legitimate legal process that can be resorted to. No legal cause of action against the U.S. government. Not even an apology, if you are released.

Kurnaz represents a secondary problem related to the human rights violations occurring in the prison system Donald Rumsfeld situated 90 miles from Key West, beyond the reach of American law. After a prisoner has been subjected to “enhanced interrogation” (a phrase in U.S. military manuals and memos that is a direct translation of verschärfte Vernehmung, a euphemism for torture the Gestapo coined in 1937), you do not want him returning home to tell his story. But that is precisely what Murat Kurnaz has done. His Fünf Jahre meines Lebens: Ein Bericht aus Guantánamo (Five Years of My Life: A Report from Guantánamo), is a straightforward account of his rendition, torture, detention and interrogation by American forces--torture that continued in Guantánamo. It even identifies a few of his tormentors, whose name tags were visible until Major General Geoffrey Miller took command and ordered all American personnel to remove anything that might identify them.

Kurnaz is beginning to appear in public to promote his book, described in the June 7 issue of The Economist as “a Swiftian tale” of a man who “survived by brawn and brains.” On June 19 he was a guest on the TV show Beckmann, Germany’s equivalent of PBS’s Charlie Rose. On the same day in Washington, George Bush’s nomination for the CIA’s general counsel, John Rizzo, spent an hour equivocating before the Senate Intelligence Committee regarding one subject with which Kurnaz has experience: torture.

For one man torture was abstract and theoretical. For the other, it was concrete and immediate. CIA counsel nominee Rizzo said in response to one question, “I’m trying to be responsive ... without getting into a detailed explanation. We believed then and we have believed throughout this process that the CIA program, as it was conceived, when taken in toto, justifies the conclusion that the program was, from the outset, and remains conducted in a humane fashion.”

Murat Kurnaz was more direct. “In Kandahar,” he said, “they hanged me by my hands.”

Link here.
Bush’s mafia whacks the republic – link.
On being perplexed by anyone who still hates Clinton more than Bush – link.


How much justice do you want to pay for?

What is the penalty for a train or airline passenger who is late? Often $50 or more. What is the penalty for a company when a train or airplane is late? Nothing. How can that be fair? It is not. But this imbalance, and many others you can probably recite by heart, can be blamed in part on the proliferation of one-sided contractual relationships called “contracts of adhesion.”

A contract of adhesion sounds like something you might catch by using the wrong public toilet or dancing too closely to someone in the wrong disco. It actually can be something even worse – small print. Every one of us finds ourselves in contracts of adhesion every day, with virtually every consumer product we buy. Contracts of adhesion are pacts between two entities that are not equal, a David and Goliath agreement, where Goliath offers the deal on take-it-or-leave-it terms. Nothing can be negotiated. Buying a car? You have to sign a piece of paper that says you will never sue the dealer. All auto dealers require these one-sided terms, so consumers either abdicate their right to sue, or do not drive.

Recently, I was late for my train. I was actually at the gate at precisely 8:10 a.m. for my 8:10 a.m. train, but the gate agent would not let me board. Pointing to the digital clock above her head – which read 8:10 – did me no good. So I was sent off to the ticket counter to exchange my ticket, and pay my inevitable penalty. I was offered the option to board another train in just a few minutes, at 8:45! But I had to pay another $29. I quickly paid and hustled back toward the gate. But as I walked away from the ticket counter, I saw on the departures screen: “8:45 a.m. train – DELAYED.” I had just paid $29 extra for a ticket on a train that I was told would leave in 10 minutes. That was a lie from the moment the agent made the offer. It would be nearly an hour before my train actually pulled away from the station. Did anyone offer to refund me that $29? You laugh. But why? If I faced a penalty for being late, why not Amtrak? The answer, of course, is in the small print.

In general, contracts in the U.S. are only valid when they are negotiated between two equal parties. That makes sense. Only people on equal footing can engage in fair, arm’s-length negotiations. Consumer contracts do not fit this bill. They are almost always take-it-or-leave-it, non-negotiated contracts. It is these kids of arrangements that are called contracts of adhesion. Standard “boilerplate” language, often laden with booby traps, is a part of life now. To prevent abuses, courts have held repeatedly that contracts of adhesion fall into a special category. Despite what you might have heard, unfair provisions inserted into such contracts are not legally enforceable – even if you signed the piece of paper. Such provisions are given the drastic legal term “unconscionable”. A judge who finds a provision of a contract of adhesion to be unconscionable will void that provision.

But absent activist government intervention, everything is legal until someone sues. Long ago, companies noticed this and began pushing the boundaries on contracts of adhesion. As long as no one drags them to court, anything goes. Since no one will ever sue over the cost of a train ticket or a few text messages, cell phone companies and train companies can make up whatever one-sided terms they want. If you quit your cell phone company early, you will have to pay $200. But if your cell phone company goes out of business, or their service suddenly stinks, will someone pay you $200?

Of course, no one really wants a refund when they are halfway through a trip to Hawaii or Europe. We all just want to get where we are going for a fair price. But why does the idea of refunds for late service sound so crazy to our American ears? Particularly when we, as consumers, must so often cough up the dough for a late fee? In Spain, the remarkable high-speed Ave train makes a promise that sounds insane to us Americans. If the train is more than 5 minutes late, passengers are entitled to a full refund. Nothing unconscionable about that contract. Not surprisingly, refunds are rarely issued.

Link here.


When Bob Dylan sang, “To live outside the law you must be honest,” he probably was not thinking of 17th-century pirate captains. Nonetheless, his dictum seems to apply to them. While pirates were certainly cruel and violent criminals, pirate ships were hardly the floating tyrannies of popular imagination. As a fascinating new paper (PDF) by Peter Leeson, an economist at George Mason University, and The Republic of Pirates, a new book by Colin Woodard, make clear, pirate ships limited the power of captains and guaranteed crew members a say in the ship’s affairs. The surprising thing is that, even with this untraditional power structure, pirates were, in Leeson’s words, among “the most sophisticated and successful criminal organizations in history.”

Leeson is fascinated by pirates because they flourished outside the state, and therefore outside the law. They could not count on higher authorities to insure that people would live up to promises or obey rules. Unlike the Mafia, pirates were not bound by ethnic or family ties. Crews were as remarkably diverse as in the Pirates of the Caribbean films. Nor were they held together primarily by violence. While pirates did conscript some crew members, many volunteered. More strikingly, pirate ships were governed by what amounted to simple constitutions that, in greater or lesser detail, laid out the rights and duties of crewmen, rules for the handling of disputes, and incentive and insurance payments to insure that crewmen would act bravely in battle. (The rules that governed a ship that the buccaneer John Exquemelin sailed on, for instance, provided that 600 pieces of eight would go to a man who lost his right arm.) The Pirates’ Code mentioned in the Caribbean series was not, in that sense, a myth, although in effect each ship had its own code.

But rules alone did not suffice. Pirates also needed to limit the risk that their leaders would put individual interests ahead of the interests of the ship. Most economists today would call this problem “self-dealing”. Leeson uses the term “captain predation”. Some pirates had turned to buccaneering after fleeing naval and merchant vessels, where the captain was essentially a dictator. Royal Navy and merchant captains guaranteed themselves full rations while their men went hungry, beat crew members at their whim, and treated dissent as mutinous. So pirates were familiar with the perils of autocracy.

As a result, Leeson argues, pirate ships developed models that in many ways anticipated those of later Western democracies. First, pirates adopted a system of divided and limited power. Captains had total authority during battle, when debate and disagreement were likely to be both inefficient and dangerous. Outside of battle, the quartermaster, not the captain, was in charge – responsible for food rations, discipline, and the allocation of plunder. On most ships, the distribution of booty was set down in writing, and it was relatively equal. The most powerful check on captains and quartermasters was that they did not hold their positions by natural right or blood or success in combat. The crew elected them and could depose them. And when questions arose about the rules that governed behavior on board, interpretation was left not to the captain but to a jury of crewmen.

Leeson’s analysis of pirate governance focuses mainly on the way in which this system deterred self-dealing. But the pirate system was also based on an important insight: leaders who are great in a battle or some other crisis are not necessarily great managers, and concentrating power in one pair of hands often leads to bad decision-making. Interestingly, although many law firms and Wall Street partnerships have taken this insight to heart, most corporations since the mid-19th century have behaved more like the Royal Navy.

There is an abiding fear among executives and management theorists alike that moving too far beyond traditional top-down models, or putting too many restrictions on C.E.O. authority, will ultimately lead to inefficiencies and chaos. In that sense, pirate governance, peculiar as it may sound, offers an intriguing example of how limits on executive power can actually make an enterprise more successful and, because workers are convinced they are being treated fairly, can deepen their commitment. It may be only a matter of time before someone publishes “The Management Lessons of Captain Kidd”. I would read it.

Link here.



America is being destroyed. Many Americans are unaware, others are indifferent, and some intend it. The destruction is across the board – the political and constitutional system, the economy, social institutions including the family itself, citizenship, and the character and morality of the American people.

Those who rely on the Internet for information are aware that the Bush regime has successfully assaulted the separation of powers and civil liberty. Both Bush and Cheney claim that they are not bound by laws that impinge on their freedom of action or that interfere with their ideas of the power of their offices. Bush has issued presidential directives that permit him to make himself a dictator by declaring a national emergency. Cheney asserts that his handling of secret documents is not subject to oversight or investigation or bound by a presidential order governing the protection of classified information.

The foundation of social organization – marriage, family, and parental control over children – is disintegrating. Mass unassimilated and illegal immigration has destroyed the meaning of American citizenship and forced large numbers of Americans into unemployment. Americans, whose ethical behavior toward others was once reinforced by having to look oneself in the mirror, now have a different ethos. Many cannot look themselves in the mirror unless they have pulled a fast one and advanced themselves at someone else’s expense. It is not only crooked prosecutors, such as Michael Nifong, who get their jollies from destroying their fellow citizens.

A Google search will call up enough information to make the case for these points many times over. However, the destruction of the U.S. economy, though far advanced, is still largely unknown. The problem is that middle class jobs, both in manufacturing and in professional occupations such as engineering, are being offshored as corporations replace their American workforces with foreigners. The latest bombshell is that even those professional jobs that remain located in America are not safe. There is a vast industry of immigration law firms that enable American corporations to replace their American workers with foreigners brought in on work visas.

With the ladders of upward mobility for Americans dismantled by offshoring and work visas, with the very real problems in mortgage and housing markets, with the very real stress put on the U.S. dollar’s reserve currency role by Bush’s trillion dollar war that is financed by foreigners, with the downward revisions in U.S. GDP and productivity growth that are now mandatory, and with a variety of other problems that I have not the space to deal with, the fabled U.S. economy is a thing of the past. Just like America’s prestige. Just like the world’s goodwill toward America. Just like American liberty.

The eyes of all peoples are still upon us, only for different reasons. Whom will we attack next? When will we be bankrupt? What good is the American consumer market when the mass of the people are employed in Third World jobs? How much longer will those trillions of dollars held by foreign governments be worth anything? How long before Americans will be knocking on European doors claiming political asylum?

Link here.

Exploding accounting costs: Where are the free traders?

A Washington Post piece reports how pay for accountants is exploding, with entry level positions paying $50,000 to $70,000. If the proponents of NAFTA and other recent trade agreements had put as much effort into standardizing rules on accounting and eliminating barriers to a free flow of accountants as they did to eliminating barriers to trade in manufactured goods, we would be paying much less for accounting services.

My guess is that the “free traders” are more likely to have friends and relatives who are accountants than they are to have friends or relatives who are auto workers or textile workers. Hence the trade deals are explicitly designed to put the auto workers and taxtiles workers into direct competition with low paid workers in the developing world, while the accountants remain largely protected.

Link here.


Gigantism and the U.S. government.

Evolution has produced some pretty large animals, and it seems offhand that very large organisms would have evolutionary advantages. They are intimidating and hard to kill because their organs are a long way from their skins. But there are upper limits to the size of animals on earth, and it is hard not to notice that the very biggest animals – mammoths, elephants whales, rhinoceri – are extinct or endangered. And obviously, very large organisms are at all times vastly more rare than very small ones.

A 2000 academic paper from a Swiss zoologist summarizes the reasons that this should be so. With increasing size come “viability costs ... due to predation, parasitism, or starvation because of reduced agility, increased detectability, higher energy requirements, heat stress, and/or intrinsic costs of reproduction.” For precisely these reasons, a state with trillion-dollar budgets and massive military might is in a precarious condition, and a good candidate for extinction.

Consider the military posture of the U.S. government. American Iraq policy has been characterized by sluggishness. Think of it as the time it takes for a message to get from the extremities to the central nervous system and then for the response to return to the limb. While Rumsfeld and company spent years hemming and hawing over whether there was an insurgency or a civil war going on, the situation on the ground continued to change, radically, day by day. The supply chain is impossibly vast.

You can still be successful if you are fighting another behemoth military. But an al-Qaeda cell is autonomous, nimble, flexible, and completely committed. It responds instantly to a threat, and plans and prosecutes an attack in a matter of hours. If it attacks an American military target, it attacks an opponent without the ability to respond in kind, to say the least. The target sits there, subject to predation, parasitism, or starvation because of reduced agility. Astonishingly enough, the larger and more powerful a military establishment, the more vulnerable it is, and any band of brigands armed with slingshots can outwit the Pentagon, like stinging flies on an elephant.

That is a lesson that Alexander the Great and the Soviet Union learned in Afghanistan, that the Romans learned at the hands of Visigoths and Huns, that the U.S. learned in Vietnam and on 9-11. Once you get hold of a plane, it is hard to miss the World Trade Center. As the old axiom goes, a terrorist can effect terror by succeeding in only a fraction of his attempts. The country fighting terrorism needs to be perfect. The example of border enforcement admits of similar logic. Each immigrant is a nimble center of decision-making. In the long run, they will always outwit a bureaucracy. Same goes for the drug war. No overarching act of Congress will ever effectively quell the small, creative, profit-driven moxie of an individual drug supplier.

It is hard to miss the irony of our gigantism. We started out by outmaneuvering the British – not hard considering that the decision-making power was impossibly remote from the action, that the British forces were governed by a set of rules and conventions that inhibited their flexibility, and that, already, British forces were engaged all over the world. The group of agrarian republics envisioned by a Jefferson or a John Taylor was designed to create local centers of decision, a group of agile, loosely-associated organisms responding to local conditions. The tragedy of America is the story of how it mutated into an empire, both internally and externally, and hence outgrew viability. Here is hoping the U.S. government returns to the decentralized principles of its founding, lest it go the way of the dinosaur.

Link here.


Human nature is one of those things that everybody talks about but no one can define precisely. Every time we fall in love, fight with our spouse, get upset about the influx of immigrants into our country, or go to church, we are, in part, behaving as a human animal with our own unique evolved nature – human nature.

This means two things. First, our thoughts, feelings, and behavior are produced not only by our individual experiences and environment in our own lifetime but also by what happened to our ancestors millions of years ago. Second, our thoughts, feelings, and behavior are shared, to a large extent, by all men or women, despite seemingly large cultural differences.

Human behavior is a product both of our innate human nature and of our individual experience and environment. In this article, however, we emphasize biological influences on human behavior, because most social scientists explain human behavior as if evolution stops at the neck and as if our behavior is a product almost entirely of environment and socialization. In contrast, evolutionary psychologists see human nature as a collection of psychological adaptations that often operate beneath conscious thinking to solve problems of survival and reproduction by predisposing us to think or feel in certain ways. Our preference for sweets and fats is an evolved psychological mechanism. We do not consciously choose to like sweets and fats – they just taste good to us.

The implications of some of the ideas in this article may seem immoral, contrary to our ideals, or offensive. We state them because they are true, supported by documented scientific evidence. Like it or not, human nature is simply not politically correct.

  1. Men like blond bombshells (and women want to look like them).
  2. Humans are naturally polygamous.
  3. Most women benefit from polygyny (the marriage of one man to many women), while most men benefit from monogamy.
  4. Most suicide bombers are Muslim.
  5. Having sons reduces the likelihood of divorce, and this effect tends to be stronger among wealthy families.
  6. Beautiful people have more daughters.
  7. What Bill Gates and Paul McCartney have in common with criminals: They hit their peaks, creative or criminal, in early adulthood, and quickly decline thereafter.
  8. The midlife crisis is a myth – sort of.
  9. It is natural for politicians to risk everything for an affair (but only if they are male).
  10. Men sexually harass women because they are not sexist. (They treat fellow female workers just as roughly as other males.)
Link here.
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