Wealth International, Limited

Offshore News Digest for Week of August 6, 2007

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


Considering the U.S. economy’s future, Crash Proof offers steps to avoid diminishing your standard of living.

CNBC often lives up to what its critics call it – “Tout TV”. All of the guests seemingly are singing from the same hymnal – “buy and hold stocks,” “inflation is low,” “economic growth is strong,” “the Federal Reserve has everything under control.” Blah, blah, blah. But occasionally the network offers another point of view. A point of view built on an education of the Austrian Business Cycle Theory. Those in the Austrian school believe that business cycles are caused by the central bank intervention in the economy. In America, the Federal Reserve creates too much money, a boom is engendered, characterized by malinvestment in stocks or real estate or commodities or fine art or whatever. But, a bust ultimately follows, wreaking havoc on the economy.

Although he is no academic, Peter Schiff, President of Euro Pacific Capital, faces off against mainstream economists like Diane Swonk and Mark Zandi frequently, articulating the case that the U.S. economy is a house of cards built on excess money creation from the Fed, and that while all looks well for the moment, economic disaster is just around the corner. Schiff recently discussed the themes of his new book, Crash Proof: How to Profit from the Coming Economic Collapse.

The book is an easy-to-read crash course on what is wrong with the American economy, why it will crash, and how to protect your assets. Point by point, the author debunks the common wisdom spewed forth by Wall Street talking heads. The large trade deficit is not a sign of our credit-worthy economy. It reflects a country that under-produces and over-consumes, ultimately leading to disaster. Inflation is not under control. The real inflation rate is much higher than what is being reported. There are no real productivity gains, like ex-Fed chief Alan Greenspan and current Fed head Ben Bernanke tell us there are. And the GDP numbers are full of fluff and aren’t an accurate measure of this country’s economic health and growth.

As the federal government goes into hock, so has the U.S. consumer. Ultimately, these debt problems will catch up to us, according to Schiff, with the result being a substantial reduction in the American standard of living. Except for those following Schiff’s advice laid out in three steps that are the last three chapters of Crash Proof.

The first step is to “rethink your stock portfolio.” Given a falling dollar, Schiff believes U.S. investors should trade in their U.S. shares for investments in foreign companies. U.S. stocks are overvalued, while many foreign stocks are not. Plus, investors will get the tailwind benefit of rising currency values with stocks denominated in foreign currencies. Schiff offers a number of tips for investing in foreign stocks, with the primary one being to use his firm to execute these trades.

Step two is to begin investing in gold. Schiff believes the price of the yellow metal may go to $5,000 per ounce. Why? Private citizens will reinstitute a gold standard on their own. Troubled currencies may tie to gold rather than dollars. Central banks are becoming buyers of gold, instead of sellers. Mining companies are buying back short positions, which will cause gold to rise. Wall Street will rediscover gold. And there is much more paper money to be created by central banks to pay for wars and expanded entitlement programs such as Social Security and Medicare.

The last step is to stay liquid and turn adjustable-rate loans into fixed-rate ones.

So when is the manure going to hit the fan? Schiff does not know, but “when the bubble is this big, there are just so many potential pins that it is impossible to guess which one it will find first.” Ignore Mr. Schiff at your financial peril.

Link here.


“I hope you had a proper survey done,” emailed my concerned poppa (aged 89), when he learned that Gary and I had bought a house in southern Chile. I told him that you cannot really find surveyors here, but as our house sits at the foot of one of the 10 most active volcanoes in the world, it is probably a moot point. I do not think it was the response he was hoping for.

Gary and I chucked in our executive city jobs and accompanying northern hemisphere lifestyles and incomes last October to move to Chile. Why Chile? The process of deciding was a long one, involving many spreadsheets and bottles of red wine, but overall it was time to find a place where we could live a real life, get off the merry-go-round, buy some land, plant some trees, breathe. To me, the south of Chile feels like a cross between Spain and New Zealand. It apparently has the largest land space in national parks and is the “most sustainable country in Latin America” for long term development. It is divine, relatively unspoilt, still has native forest, still has rivers you can drink out of. And as it is fairly affordable. It is a place where you can make a difference and put your money where your mouth is.

Deciding to do just that, we arrived with a detailed eco-tourism concept mapped out, bought a pickup and started driving around the south of Chile to see all the places that looked good on paper. Having now been in the country for seven months, we have learned that finding the right piece of land will take some time. Meanwhile we bought our house in Pucón, as living out of the pickup was taking its toll on our relationship and we figured that in our 30s we should probably stop sleeping in cars. Pucón feels like my old home town Queenstown, New Zealand, 20 years ago, though the belching volcano dominates the landscape here. It has mountains, lake, rivers and trees, where people play and go rafting, hiking, kayaking, fishing. It has a really positive energy and attracts interesting, and luckily like-minded, people.

Buying our house and developing it into “Chalet Pucón” has been great practice for the Chilean property and tourism markets and a lesson in bureaucracy. Used to doing business in a professional English environment, the Chilean manner of things is taking some adjustment (on both sides). Add to that the fact that, while Gary is fluent in Spanish, I am limited to the present and simple past, and you can start to understand some of the everyday challenges and constant embarrassment I am up against.

We are still passionate about the sustainable eco-tourism concept but the old project management adage, that everything takes twice as long and costs twice as much as expected, stands true. This is not because Chile is corrupt (at 17th in the world it is listed as equal with the U.S. for corruption), but more because it is bureaucratic and no one wants to cause a fuss. This is partly because they are such nice people, and I think partly a legacy of the Pinochet years.

We must have seen 50 campos by now in our search for the perfect site. Everyone knows someone selling some land and being entrepreneurial types they are all keen to help out. Even at the butchers the other day, the butcher said “What else? You want some bones for your dog, yes? And some land, yes?” I left the butchers with half a cow, bones for the dog, and a promise to visit his hectare next week. That is one of the constants about this part of Chile: strange things happen.

At this stage we are still looking at several properties every week and have come really close to the ideal land. Meanwhile, we continue to rent out Chalet Pucón. I have got plenty of studying to get on with, the dog needs to go for a run by the lake, and it is not long till winter when we can snowboard the smoking volcano ...

Link here.


If you ask the average American what they know about Panama, they will usually mention the Panama Canal and Noriega. Noriega was the military boss of the country until 1989 when the first President George Bush ordered American military forces to invade and depose him. In the ensuing brief battle, hundreds of innocent people died. And Noriega was carted off to Miami, where he was tried, convicted and sentenced on drug and other charges by the U.S. government. Now, after 17 years in prison, he is to be released on September 9th. One local Panama blogger writes, “One of our biggest challenges over the last five years has been in overcoming the negative perception people have about the country and much of it was caused by the past dictator and convicted drug dealer.”

Where will Noriega go? Panama has requested that he be returned there to face his conviction in absentia of assorted crimes, including murder. The U.S. wants to send him to France where he has been convicted of using illegal drug profits to buy French property worth more than $3 million. Panamanian Foreign Minister Samuel Lewis says his government expects its extradition request to be honored.

The New York Times reports, “If Manuel Noriega, the deposed dictator, ever returns to Panama, Winston Spadafora, a justice on the country’s Supreme Court, has a question for him. ‘I’d like to ask him,’ Justice Spadafora said in a recent interview in his chambers, ‘what he did with my brother’s head.’” The Times contintues, “There are criminal convictions against him, including one for the beheading of Justice Spadafora’s brother, Hugo, a leading opposition figure, in 1985. And there is a sense among the population that despite his years in prison in the United States, he has not fully paid for all the rough years he put everyone here through.”

As one who often visited Panama in the 1970’s under the dictatorships of the late Omar Torrijos and Noriega, I can attest that Panama is a very different place today. Most Panamanians have no use for another dictatorship and little use for Noriega. For most Panamanians, Noriega was a bad dream and none of them I know ever want to return to a military dictatorship. The chances of that happening here again soon are slim to none. It is to Panama’s advantage that they suffered this painful experience in recent history. It will take a long time for people to forget how awful it was.

I think I can say with assurance that whether Noriega is returned to Panama or sent to France matters not at all to Panama’s future, which at this point looks very bright.

Link here.


S&P Ratings Services has announced that it has revised its outlook on its long-term sovereign credit rating on the Bahamas to positive from stable, reflecting the jurisdiction’s macroeconomic stability, prudent fiscal policies, and steady monetary stance. “The island’s currency peg to the U.S. dollar, in effect since 1973, ensures low inflation, while generally disciplined fiscal management has led to only moderate accumulation of government debt,” said credit analyst Olga Kalinina. “The Bahamas’ political environment is stable, and its standard of living is high. Public sector external debt is low and declining, with net external assets at 8% of current account receipts in 2007.”

According to S&P, a massive influx of investment into tourism related projects will ensure that economic growth will stabilize at about 4% over the next three to five years. With revenues growing and expenditure in check, S&P anticipates that the government debt will have fallen by 3% to 35% of GDP in 2010. However, the agency said that the open nature of the Bahamas economy means that these projections remain vulnerable to external economic shocks and extreme weather events.

“An upgrade will be considered as the first signs of a positive, sustainable trickle-down effect of these new investments emerge in the fiscal and external accounts. On the other hand, should such improvement be hindered either externally ... or domestically (e.g., relaxation of the policy stance or a slower-than-expected pace of project implementation), the outlook will be revised back to stable,” she concluded.

Link here.


Cook Islands Foreign Affairs and Immigration Minister, Wilkie Rassmussen, has announced that the next Permanent Residency ceremony will be held in December of this year. This will give the Ministry time to notify PR holders living outside the Cook Islands that they need to respond, or they will have their PRs revoked, the government has announced.

According to the Minister, PR holders who have lived outside the country for more than three years are liable to lose their permanent residency rights. The Ministry must also ascertain the numbers who have passed on since being awarded their PR. The Minister explained that the Government, since the 1970s, had set the limit to 500 PRs to be granted. So far, 425 have been issued and 75 certificates remain to be issued. There are about 120 current applications that require the Ministry to use the “priority system”. Rassmussen said that PRs would be awarded to those married to, or in relationships with, Cook Islanders who have been living in the country for over five years.

Link here.


The self-proclaimed “Principality of Sealand” opened what it claims is the first ever national online casino. The Sealand Casino is located on a decommissioned military fort 6 miles off the east coast of Great Britain. The self-proclaimed world’s smallest state claims to operate under its own sovereign jurisdiction. Sealand Casino’s opening coincides with the “state’s” upcoming 40th year anniversary on September 2.

Sealand proclaims its own constitution and has adopted its own national flag, anthem and stamps, as well as gold and silver coins denoting the Sealand Dollar. To commemorate the national casino opening, the Principality of Sealand is offering to match 100% of all first deposits or provide new players with a £100 sign-up bonus.

“The Royal Family of Sealand’s high regard for the loyalty of its subjects is extended towards all Sealand Casino users, with players gaining Loyalty Points each time they place a bet. These can then be redeemed for credits in the casino or cashed out as required. Tax-free winnings will be privately transferred in any currency to any account in the world,” Sealand said in a statement. The latest Principality of Sealand developments can be found at its official newspaper, Sealand News.

Link here.


The Isle of Man has been named on the UK government’s e-gaming “white list”, which will allow e-gaming companies based in the Isle of Man to market their services in the UK. “This is fantastic news and a real boon for the Isle of Man; reflecting the UK’s recognition of the Island as a quality jurisdiction,” commented Garth Kimber, head of e-Gaming development at the Isle of Man Department of Trade & Industry (DTI).

He continued, “The UK white list is a crucial benefit to the Isle of Man. The UK’s Gambling Act 2005, implemented next month, will ban companies based outside the EU from marketing into the UK. Having been added to the white list, companies licensed in the Isle of Man will now be excluded from this restriction and will be able to advertise into the UK for both the terrestrial and remote markets.”

Link here.


Land prices in parts of central Tokyo last year reached comparable levels to 1991, when nationwide land prices peaked, indicating the possibility of a “mini bubble”, Mizuho Research Institute said in a report. Mizuho estimated that the most expensive 5% of land in Tokyo’s 23 wards averaged ¥33.7 million ($283,861) per square meter in 2006, after adjusting prices to eliminate the effects of interest rates and the economic growth rate. That was greater than the average of ¥31 million per square meter in 1991, the institute said.

Real estate prices collapsed in 1991 at the end of Japan’s “bubble economy”, leaving banks with trillions of dollars in bad loans, many backed by land as collateral. Average land prices rose 8.6% last year, a National Tax Agency report showed. The top 10% of land in Tokyo’s five most expensive wards reached ¥34.4 million per square meter in 2006, based on adjusted prices, exceeding ¥34.2 million per square meter in 1991. Adjusted land prices nationwide last year averaged ¥5.3 million per square meter, about 38% lower than the average land price in 1991.

Link here.


Germany, which last week became the first European country to be infected by the woes in the American mortgage market, suffered another blow on Monday when an asset management firm in Frankfurt closed a fund to temporarily halt withdrawals by rattled investors. The management firm, Frankfurt-Trust, said the withdrawals from the fund, FT ABS-Plus, reflected jitters about the subprime lending market in the U.S., even though the fund had only minor exposure to that market.

Investors have become nervous in recent weeks as worries about credit problems that started in subprime mortgages in the U.S. have spread to Europe and Asia. The stock markets have swung wildly of late, reflecting uncertainty about the outlook for the market and the risks to the economy. “We had to close the fund because we got a lot of demands from people to get their money out,” Rainer Gogel, the fund’s manager, said. “We did it because we wanted to protect the investors.”

Mr. Gogel said he did not know when the fund, which is currently worth €160 million ($219 million), would reopen. He suggested that the market turbulence might persist for a while. “We had excesses in the market,” he said. “All those excesses are being dealt with at once.” Last week, a German bank, IKB Deutsche Industriebank, roiled the markets when it disclosed deteriorating subprime investments. A government-backed group agreed to bail out the bank. Two other asset-backed securities funds with exposure to subprime mortgages in the U.S. – run by Union Investment and HSBC Investments Deutschland – were closed last week.

Since then, German officials, central bankers and the heads of private banks have appealed for calm. Some have pointed out that the mortgage mayhem in the U.S. need not destabilize European markets, especially at a time when Europe’s economies are showing considerable vigor. Investors need to keep their “sang-froid”, Jean-Claude Trichet, the president of the European Central Bank, said. Yet fund managers and credit analysts said they feared more unpleasant disclosures from German banks and mutual funds, several of which appear to have been enthusiastic gamblers in this risky market.

To be sure, several of Germany’s largest financial institutions have played down their exposure to the subprime market. Deutsche Bank even profited from the chaos by selling mortgage loans with derivatives contracts that appreciated as the United States housing market slumped. Commerzbank said its exposure to the subprime market accounted for a tiny fraction of its balance sheet, as did three of German’qs largest insurers: Allianz, Munich Re and Hannover Re. The problems, analysts said, are likely to crop up in smaller, less well-known institutions, like IKB, which until last week operated in comparative obscurity as a lender to midsize, privately owned German companies.

“The general impression was that they were quite a conservative bank,” said Simon Adamson, a banking analyst at CreditSights, a research firm in London. “The mistake they made was they thought they were safe investing in high-grade paper. They did not reckon on the huge difference between the view of the ratings agencies and the value in the market.” Mr. Adamson said he would not be surprised to see more IKBs – banks that, because they have little experience in these markets, rely heavily on credit-rating agencies. Fund managers are also vulnerable, he said, because the banks packaged and sold subprime investments to them.

Link here.


Dubai Electricity and Water Authority (DEWA) has hit back at claims that it is unable to keep up with demand for power and water during the city-state’s real estate boom, which is expected to see $300 billion of property investment in new projects during the next 10 years. Local blogs are full of stories that DEWA is behind schedule with infrastructure, causing delays to projects, and there are anecdotal reports of power and water cuts during peak periods.

A spokesperson at DEWA said the claims were just speculation by developers. “DEWA has so far been able to provide power for all the years that Dubai has been under development proving it can meet the challenges,” the spokesperson added. The UAE is planning to invest $61.2 billion in additional power and water capacity by 2011, boosting supply by around 60% from the 2006 level of 14.8 Gigawatts.

DEWA says that power and water demands in the Emirate are rising at annual rates of 20% and 15%. The population of Dubai is expected to grow by more than 30% to 2 million people by 2010, and these are not low-consuming “guest workers”, they are business workers demanding air-conditioned apartments, offices and play-spaces.

It has to be said that no country has done more to support business and property development that Dubai, whose leaders have single-mindedly set out to create a world-class business and financial hub in the desert, unfettered by financial or administrative constraints. Most developers agree that DEWA is doing everything it can, but has been overcome by the completely unexpected level of demand, so successful has been the Emirate’s development plan.

Link here.


The U.S. Treasury Department and the IRS have released an IRS report, “Reducing the Federal Tax Gap: A Report on Improving Voluntary Compliance,” which details steps currently being taken by the IRS, as well as those under development, to address key elements of the “tax gap”. The report builds on the seven components of the “Comprehensive Strategy for Reducing the Tax Gap”, which the Treasury Department released in September 2006. Those components are:

  1. Reducing Opportunities for Evasion
  2. Making a Multi-Year Commitment to Research
  3. Continuing Improvements in Information Technology
  4. Improving Compliance Activities
  5. Enhancing Taxpayer Service
  6. Reforming and Simplifying the Tax Law
  7. Coordinating with Partners and Stakeholders

Detailed information is provided on each step currently being taken to reduce opportunities for tax evasion, leverage technology, and support legislative proposals that, as implemented, will improve compliance. At the same time, the report reaffirms that taxpayer rights must be respected and burdens on compliant taxpayers must be minimized. The report also presents an outreach approach to ensure all taxpayers understand their tax obligations.

For the 2001 tax year, the IRS estimates that over 86% of tax liabilities were collected, after factoring in late payments and recoveries from IRS enforcement activities. The gross tax gap was estimated to be $345 billion in 2001. After enforcement effects and late payments, this number was reduced to a net tax gap of approximately $290 billion.

Link here.
Senator Baucus “encouraged” by Treasury tax gap plan – link.


The Treasury Department and the IRS have issued new proposed regulations for employee benefit plans under Section 125 of the Internal Revenue Code. The plans, called “cafeteria plans”, allow employees to make a choice between receiving taxable cash compensation or tax-free employee benefits, such as health care, dependent care, and other fringe benefits.

The new proposed regulations generally preserve the rules of the existing proposed regulations, while adding clarifications relating to statutory changes and administrative guidance changes since the previous regulations were published. The new regulations also address many issues on which the IRS has previously provided informal guidance, and are intended to assist employers, employees, and plan administrators in utilizing cafeteria plans.

Link here.


IRS employees ignored security rules and turned over sensitive computer information to a caller posing as a technical support person, according to a government study. 61 of the 102 people who got the test calls, including managers and a contractor, complied with a request that the employee provide his or her user name and temporarily change his or her password to one the caller suggested, according to the Treasury Inspector General for Tax Administration, an office that does oversight of Internal Revenue Service. The caller asked for assistance to correct a computer problem.

The report said that by failing to question the identity of the caller the employees were putting the IRS at risk of providing unauthorized people access to taxpayer data that could be used for identity theft and other fraudulent schemes. “This is especially disturbing because the IRS has taken many steps to raise employee awareness of the importance of protecting their computers and passwords,” said Inspector General J. Russell George. Only eight of the 102 employees contacted either the inspector general’s office or IRS security offices to validate the legitimacy of the caller.

The report said the IRS took measures to improve security after two similar test telephone calls in 2001 and 2004. “However, the corrective actions have not been effective,” it said. The IRS has nearly 100,000 employees and contractors with access to tax return information processed on about 240 computer systems and more than 1,500 databases.

Link here.

Senate Finance Committee Chairman expresses concern over IRS computer security lapses.

Senate Finance Committee Chairman Max Baucus (D-Montana) has expressed serious concern regarding a report which uncovered major lapses in computer security at the IRS. The audit conducted by the Office of the Treasury Inspector General for Tax Administration (TIGTA) discovered that IRS employees, including managers, are not complying with the basic computer security practice of protecting their passwords.

TIGTA conducted a sting operation, convincing 61 out of 102 IRS employees contacted by telephone to disclose their usernames and temporarily change their passwords to ones TIGTA suggested. The audit was initiated as part of TIGTA’s statutory requirement to annually review the adequacy and security of IRS technology. Applying TIGTA’s “success” rate of 60%, Baucus said that almost 60,000 of the IRS’s 100,000 employees and contractors are susceptible to computer hackers, putting untold amounts of personal taxpayer information at risk for unauthorized disclosure, theft and fraud.

“Despite repeated warnings, IRS workers continue to show reckless disregard for computer security,” Baucus remarked. “The IRS must take this problem more seriously and take aggressive steps to ensure that all employees understand and carry out security requirements.”

Link here.


The Bulgarian government has revealed plans for a flat tax on personal incomes as a way to simplify the tax system and increase compliance rates. The government said that the 10% flat tax will be introduced in October. It will replace a system within which income tax rates vary from 20% to 24%, but which also contains many concessions. “The introduction of the flat tax is expected to generate bigger financial resources for the budget,” Prime Minister Sergei Stanishev said.

“The philosophy of taxation is either charging a high tax rate accompanied by numerous concessions and preferences or a low tax rate without any tax-free minimums or deduction of inherent expenses from the taxable amount,” Finance Minister Plamen Oresharski told the Trud daily in an interview. Oresharski added that the flat tax is expected to have no impact on the government’s budget, nor lead to any loss of revenues. However, excise taxes on alcohol, cigarettes and fuels are set to increase from next year.

Bulgaria has already set about lowering its corporate tax rate in its quest for investment, which was cut to 10% last year as the country entered the EU. Economy Minister Petar Dimitrov has told a daily newspaper that additional corporate tax reform aimed at further simplifying the system could go into place in 2008 to help increase corporate compliance rates. It is said that about one third of all company income goes unreported in Bulgaria.

Link here.


President Nicolas Sarkozy’s plans for an overhaul of the French tax system to make it more attractive to business and investment have won approval in parliament. Chief among Sarkozy’s reforms are measures creating more exemptions to France’s wealth tax, which has often been cited as a key reason why France lags behind its competitors in terms of investment and economic growth, and a 50% cap on individual income tax, down from 60%.

The reforms would also cut tax on overtime – encouraging more French workers to work beyond the previously politically sacred 35 hour week, part of plans to make the domestic labor market more flexible and business-friendly – and tax cuts on mortgage interest payments. According to Finance Minister Christine Lagarde, the tax measures, which are said to be worth about €13.8 billion ($18.9 billion) overall, could add as much as 0.5% to French GDP growth in 2008.

The hope is that Sarkozy’s tax and economic reforms will tempt back the hundreds of thousands of French citizens who have left the country seeking less punitive tax regimes. Popular destinations for the estimated 500,000 French tax exiles include Belgium, Switzerland, the UK and the U.S.

The wealth tax issue was a key battleground during the recently contested presidential election, won by Sarkozy, and has never been very far from the headlines since veteran rock star Johnny Hallyday, fed up with French taxes, cut a deal with the Swiss canton of Gstaad last year. According to the Swiss tabloid Blick, Hallyday will pay CHF300,000 ($242,000) on his reported earnings of about CHF10 million, provided that he spends more than six months and one day per year there. In France, Hallyday complained that he paid around 70% of his income to the government in taxes. However, studies show that it is not just the rich and famous who have seemingly grown weary with France’s high taxes, with families and investors fleeing in increasing numbers.

Link here.


Will “fine tune” rather than overhaul current system.

A new income tax code is due to be introduced into parliament in December 2007, although this is unlikely to lead to a radical overhaul of India’s taxation system, according to Finance Minister Palaniappan Chidambaram. The new code will represent a simplified version of the current Income Tax Act, which has been in force since 1961. However, Chidambaram has sought to dampen speculation that the changes will lead to lower rates or drastic reform, revealing that the amendments will “fine tune” the current system and widen the tax base.

When asked by reporters whether he thought there was room for cuts in income tax, Chidambaram replied that he thought current income tax rates were about right, and that his focus was on widening the tax base and improving rates of compliance.

In India, individual income tax is charged at progressive rates to 30%, and a 10% surcharge applies on tax payable by individuals whose income is above R1 million ($24,750). A 2% educational excess also applies. The effective top rate of tax is 33.66%. On the subject of indirect taxation, the Minster explained that there would be little additional change in the foreseeable future.

Consumption taxes in India have been undergoing a major overhaul. A value-added tax system replaced service taxes in most states in April 2005, while Chidambaram has called for the country’s central value-added tax (CENVAT) and service tax to be harmonized. Chidambaram was criticised by the investment industry after his 2007 budget increased dividend distribution tax from 12.5% to 15%, and placed a a 25% dividend distribution tax on money market mutual funds. Meanwhile, the scope of the unpopular Fringe Benefit Tax was expanded to include employee stock option plans.

Link here.


A few years ago, I read Christopher Reich’s massive novel, Numbered Account, billed as an inside look at the “anonymous” world of offshore banking. While the book is definitely a page turner, it is not a particularly accurate portrayal of the Swiss banking industry. The book portrays Switzerland as place that provides dictators, narcotics kingpins, and terrorists completely anonymous access to global financial markets and electronic funds transfer networks.

One of the book’s biggest faults – and of most works in this genre – is that that it blurs the distinction between an anonymous account and a numbered account. An anonymous account is exactly that. The bank that holds the account has no identity for the customer. While it was once possible to open truly anonymous accounts using attorneys or other intermediaries in Switzerland, Liechtenstein and other offshore centers, no major financial center still offers them. Switzerland, for instance, abolished anonymous accounts in 1991. Liechtenstein and Austria did so in 2000.

Unlike an anonymous account, with a numbered account, you must disclose your identity to a bank, and fully comply with the bank’s due diligence and know-your-customer requirements. However, only a few officers at the bank know your real name. All other bank employees know you only by a number or a code word. Transactions are carried out in your pseudonym or number plus a password, not your real name. Bank statements show only your pseudonym or number. Even your personal banking representative does not know your real name.

The main benefit of a numbered account is that it avoids the possibility that a lower level bank employee might be coerced or bribed by an outside party to reveal information about your account. These techniques are well known to kidnappers, for instance. Another advantage is that bank statements will not actually contain your name. No one can prove with a stolen bank statement that the account actually belongs to you.

Numbered accounts are available in a number of offshore banking centers, including Austria, Liechtenstein and Switzerland. Because administrating a numbered account is more expensive than dealing with an ordinary account, the charges are often several times higher. Only you can decide if the privacy and security advantages are worth the additional costs.

Link here (scroll down).


Tax havens will cease to exist due to international scrutiny and reputational pressures on companies, according to Gibraltar’s chief minister, Peter Caruana. The leader of a jurisdiction that less than a decade ago was still classified as a harmful tax haven by the OECD. Caruana said the centers were “not sustainable” if they did not reform and become more transparent.

The chief minister added that international companies would shun territories that failed to become more transparent, as there was greater public and regulatory scrutiny on the tax affairs of business. Gibraltar has taken steps to reform its tax system, but is still regard as a tax haven. Several companies are located there for tax reasons. Online gaming companies favor its regulatory and tax position.

Caruana’s claims were treated with scepticism by tax campaigners. Richard Murphy, who has bitterly criticised Jersey’s tax arrangements in particular, said tax havens were ducking information arrangements rather than falling prey to them. “Tax havens are far from dead and buried. Steps taken by the OECD and international community to close them down have centered around information exchange, but tax havens have made sure that the information is not there to be found,” he said.

U.S. politicians, including presidential candidate Barack Obama, are currently hiking up the pressure on havens. The small centers routinely offer 0% rates and provide limited transparency. Tackling them is seen as a key priority by the OECD in particular. But the problem has seemed intractable, with difficulties of sovereignty arising. The European Savings Directive proved less than successful due to loopholes on trusts.

Link here.

Marshall Islands no longer a “harmful” tax haven.

The Marshall Islands have been removed from the OECD’s list of harmful tax havens after the jurisdiction committed itself to improving transparency and establishing exchange of tax information. The pledge from the Marshall Islands means that the OECD now only lists three regions – Andorra, Liechtenstein and Monaco – as uncooperative tax havens.

“The OECD’s work in this area is designed to enable countries to enforce their tax laws fully and fairly, notably by ensuring that they can obtain from other countries relevant information when needed,” the OECD said in a statement. The OECD has made transparency and exchange of tax information one of its key priorities, and although it believes that it has made significant progress in achieving this aim it recognizes that “further progress is still needed in some countries.”

Links here and here.


Bear Stearns’s decision to liquidate two bankrupt hedge funds in the Cayman Islands instead of New York may limit creditors’ and investors’ ability to get their money back. While most of their assets are in New York, the funds filed for bankruptcy protection July 31 in a court in the Caymans, where they are incorporated. The bank also used a 2005 bankruptcy law to ask a U.S. judge in Manhattan to block all lawsuits against the funds and protect their U.S. assets during the Caymans proceedings.

The Bear Stearns cases may establish a precedent that would let other failed hedge funds liquidate in the Caymans, where judges have a track record of favoring management. The local monetary authority estimates that three out of four hedge funds globally are incorporated in the Caymans. “This is definitely going to be closely watched,” said Evan Flaschen, a lawyer with Bracewell & Giuliani in New York, who has represented companies and creditors in international bankruptcy cases. “Other hedge funds might do the same thing.”

The funds, which invested in securities tied to home mortgages, collapsed amid rising defaults on subprime loans, made to people with weak credit. Creditors and investors in the two funds are likely to get back “a pittance on the dollar” and will attack Bear Stearns’s bankruptcy tactics in court, said Bill Brandt, president of Chicago-based Development Specialists Inc. His firm advises hedge fund Ritchie Capital Management Ltd. in the bankruptcies of its two life insurance funds in New York.

Filing the funds’ bankruptcy in the Caymans, a banking center, “is a nice little stunt, and it may work for a while,” Brandt said. “Bear Stearns is trying to put a wall between themselves and these so-called rogue funds.”

Chapter 15 of the U.S. bankruptcy code, a new international law passed by Congress in 2005, lets U.S. bankruptcy judges assist courts in other countries with liquidations. The measure shields the company in bankruptcy and its assets in the U.S. from lawsuits and other collection attempts. Distributions to creditors are handled by the foreign court. Creditors may argue that the main case should proceed in the U.S. To do so they must show the U.S. bankruptcy judge that the hedge funds had their “center of main interests” in the U.S, said Robin Phelan, of Haynes & Boone, who represented hedge fund InverWorld Inc. in its 1999 liquidation in the Caymans.

Because the two hedge funds were incorporated in the Cayman Islands, that is presumed to be the center of main interests, according to Phelan. “That’s going to be an issue,” he said, noting that the new bankruptcy law “has not really been tested.” The Caymans “ought to be irrelevant” because the funds’ assets are in the U.S., according to their bankruptcy filings, Westbrook said. “If a company is basically managed out of New York, then the case should be in New York,” he said.

Link here.

Legal action begins over Bear Sterns hedge funds.

After Bear Sterns filed bankruptcy petitions for its two devastated hedge funds in the U.S. and the Cayman Islands last week, court papers began to throw light on the sequence of events that led to the funds’ demise.

It has emerged that most of the assets of the two shuttered funds had been repossessed by secured creditors, including Merrill Lynch and Bear Sterns itself, during the period before their bankruptcy. Last week, Bear Sterns also suspended redemptions in a third fund, the $900 million Bear Stearns Asset-Backed Securities Fund, although Bear Sterns said that the fund had only a tiny exposure to the sub-prime mortgage market.

Also last week, some investors in the two bankrupt funds began legal action against Bear Sterns. Law firms Zamansky & Associates and Rich & Intelisano filed an arbitration claim with the National Association of Securities Dealers alleging that Bear Stearns misled investors about its exposure to the funds. Attorney Jake Zamansky said, “This case underscores the need for transparency in hedge funds, and possible regulation. Bear Stearns said they had a sophisticated surveillance system to monitor risk in these investments, and someone was asleep at the wheel.”

Link here.


It is almost impossible to avoid spam. Your email address is precious to you. Anyone who gets their hands on it can use or abuse it. Every time you give your email address to someone, you run the risk of being spammed. Every time you post to a newsgroup, or use a discussion board, the same applies. And, once you get onto a spammer’s list, it is very hard to get off. You cannot just keep your email address a secret either. What is the point of having email if nobody can write to you?

mailexpire is designed to help you keep your inbox spam-free. The system allows you to create a free email alias. For a period you choose, from 12 hours to 3 months, anything sent to this email alias will be forwarded on to you at your actual email address. You can then give the alias to that party you are not sure of. If you get appropriate email from him, great. If you start receiving spam, you know where it came from, and you only have to put up with it until your alias expires. YOu have the option to extend your mailexpire alias, or kill it instantly.

Link here.


Cell phones today are much more sophisticated than those manufactured only a few years ago. Using them to make telephone calls is only the beginning. You can also use them to send and receive e-mail, browse the Internet, take photos, etc. All these functions leave a trail that may be difficult to securely erase. What is more, the legal status of these records is, to put it mildly, uncertain. At the very least, these records carry less legal protection than the content of cellular conversations themselves. It is not uncommon for police to seize cell phones and retrieve email messages, photos, text messages, etc., all without a search warrant.

Ask yourself, what information in your cell phon–rs memory would you prefer not to be in the hands of police? Of a business competitor? Or, for that matter, of your spouse or partner? If the answer is “plenty”, then you need to take steps to securely delete information from your cell phone’s internal memory. If the information you need to do so is not in your cell phone’s operating manual, check out a free service from wirelessrecycling.com. This website lets you choose the brand and model number of your cell phone, and then displays the exact commands you need to delete every piece of data from it.

When you replace your cell phone, repeat this process. Also, remove the phone’s SIM card, if it has one. Your SIM card is uniquely tied to you, and if ends up in the wrong hands, you could be falsely tied to a crime committed by someone else. Once you have deleted the data in your phone and removed the SIM card, double-check to make sure your address book, call logs, and other data stores really are empty. Then you can sell your old phone on eBay, or donate it to a charity, with confidence that any information on it cannot come back to haunt you.

Link here (scroll down).


When you make a search on Google, your IP address (IPA), the time, and what you searched for is stored in their database forever and this information can be used in a court of law against you. Google will willingly allow authorities to consult their database. They already have.

When you search on Google through Googlonymous, it is Googlonymous that goes on Google and does the search for you, the only IPA that Google will see, is the IPA of the server of Googlonymous. Googlonymous does not keep any record who searched for what. So this way, it is completely impossible to retrieve your identity. You can search for whatever you want anonymously.

Link here.


A German security researcher who demonstrated last year that he could clone the computer chip in an electronic passport has revealed additional vulnerabilities in the design of the new documents and the inspection systems used to read them.

Lukas Grunwald, an RFID expert who has served as an e-passport consultant to the German parliament, says the security flaws allow someone to seize and clone the fingerprint image stored on the biometric e-passport, and to create a specially coded chip that attacks e-passport readers that attempt to scan it. Grunwald says he has succeeded in sabotaging two passport readers made by different vendors by cloning a passport chip, then modifying the JPEG2000 image file containing the passport photo. Reading the modified image crashed the readers, which suggests they could be vulnerable to a code-injection exploit that might, for example, reprogram a reader to approve expired or forged passports. “If you are able to crash something you are most likely able to exploit it,” says Grunwald.

E-passports contain radio frequency ID, or RFID, chips that are supposed to help thwart document forgery and speed processing of travelers at U.S. entry points. The U.S. led the charge for global e-passports because authorities said the chip, which is digitally signed by each issuing country, would help distinguish official documents from forged ones. But Grunwald demonstrated last year at the BlackHat security conference how he could extract the data on a passport chip, which is read-only, and clone it to a read-write chip that appears the same to an e-passport reader. Now Grunwald says he was able to add data to the cloned chip that would allow someone to attack the passport reader.

He conducted the attack by embedding a buffer-overrun exploit inside the JPEG2000 file on the cloned chip that contains the passport photo. Grunwald says he tested his exploit on two passport readers that were on display at a security conference he attended. Buffer-overrun vulnerabilities occur when coding errors in software allow an attacker to overflow a section of memory dedicated to storing a fixed amount of data. Carefully exploited, they often permit the hacker to execute his own instructions on the vulnerable computer, essentially taking over the device – although Grunwald has not attempted that level of compromise on e-passport readers.

Grunwald will not name the vendors that make the readers he crashed, but says the readers are currently in use at some airport entry points. He says there is no reason to believe that readers made by other vendors would be any more secure. “I predict that most of the vendors are using off-the-shelf (software) libraries for decoding the JPEG2000 images (on passports),” which means they would all be vulnerable to exploit in a similar manner. A second vulnerability in the design of the passport chip would allow someone to access and clone a passport holder’s fingerprint.

The International Civil Aviation Organization, the U.N. body that developed the standards for e-passports, opted to store travelers’ fingerprints as a digital photo, no different than if you were to press the tabs of your fingers against a flatbed scanner. As a result, it is possible to seize the image and use it to impersonate a passport holder by essentially hijacking their fingerprints. Japanese researchers several years ago demonstrated the ability to make false fingerprints using gelatin material that could be placed over a finger.

Link here.


The wiretapping bill passed by Congress allows the attorney general to make surveillance decisions – something Congress is investigating him for.

Cowardly chumps. That is the best description I can muster for the Democratic Congress, which just passed an expansion of the Bush administration’s ability to wiretap within the U.S. In passing the bill, Congress once again proved itself to be unable or unwilling to stand up to the bullying of the White House to provide necessary oversight.

At issue was a change in the nation’s Foreign Intelligence Surveillance Act (FISA) law. FISA limits the government’s ability to wiretap American citizens, normally permitting such a wiretap only after the government provides a special court proof that there is reason to believe the intended target of the wiretap has ties to crime or terrorism. The law was first written in 1978, at a time when wiretaps were literally just that – taps of the analog waves traversing a wire. But the advent of digital communication requires the interception of data itself. And so the government, with the apparent cooperation of major telecommunication companies, intercepts the switches to access the data it needs to observe potential threats. Ordinarily, to access that data, if it involves a person in the U.S., the government must still go to the FISA court and ask permission.

In recent years, more and more international telecommunications traffic has gone through U.S. networks. Normally, the government does not have to go before FISA to tap international communications. But what to do about this international traffic traversing the U.S.? For example, should the government be able to tap a phone call that starts in Malaysia and connects to Pakistan, but passes through the U.S. telecommunications network? Does it fall under FISA, or not?

According to news reports, the administration had been largely bypassing FISA to access this data between 9-11 and early this year, based on an executive order signed by Bush. This was the part of the larger domestic eavesdropping programme that President Bush confirmed in December 2005, after the New York Times revealed it. Earlier this year, the administration announced it would continue the program under the existing FISA court. Yet shortly thereafter, a judge refused one of the subpoenas, reportedly arguing that unless the government could prove that both parties were overseas, it could not tap this communication.

The administration’s solution? To take virtually all oversight out of the hands of the FISA judges. But the law just passed by Congress, far from establishing a judicial process to address the difficulties of distinguishing between domestic and international travel, effectively just lets the administration make such a determination.

But the bill went further. It eliminated previous rules that limited such wiretaps to persons with suspected connections to al-Qaida. Under the new bill, the government can wiretap communications of anyone as long as it asserts that the purpose is “in significant part” for intelligence purposes, and as long as one person involved in that communications is reasonably believed to be outside of the U.S. But the biggest outrage is that the bill takes oversight out of the hands of the court and puts that “oversight” in the hands of ... Alberto Gonzales.

Think of the absurdity! Even as the Democrats – and a growing number of Republicans – are making credible arguments that Gonzales perjured himself about this program specifically, they have changed the program such that if the administration wants to tap someone, they just have to have Gonzales give his word that the administration is using the program appropriately. At a time when Representative Jay Inslee (D-Washington) will submit a resolution to begin an impeachment inquiry on Gonzales, Democrats just acquiesced to administration demands that Gonzales be given new, unprecedented powers.

A viable Democratic party interested in restoring the rule of law in this country would have insisted that Bush fire Gonzales before considering any change in the FISA laws. Certainly, it would have refused to vest the attorney general with the power to authorize wiretaps on Americans based solely on his word. But this Democratic Party just got played for chumps. And with it, they have dealt our civil liberties a serious blow.

Link here.

They can hear you now.

When you talk to your mother on the phone, do you have a reasonable expectation of privacy? I thought I did, but apparently I do not. At least, not anymore, because my mother lives in Jerusalem. Under the inaptly named Protect America Act of 2007, which President Bush has signed into law, the federal government no longer needs a warrant to eavesdrop on phone calls or read email messages between people in the U.S. and people in other countries. Unless the courts overturn this law or Congress declines to renew it when it expires in six months, Americans will have no legally enforceable privacy rights that protect the content of their international communications.

Congress rushed to pass the law, which amends the Foreign Intelligence Surveillance Act (FISA), because the Bush administration said it was urgently needed in light of a secret ruling earlier this year by the Foreign Intelligence Surveillance Court. The court concluded that FISA requires warrants to monitor phone calls and email messages routed through U.S. switches, even when both parties to the communication are outside the country. The ruling created an arbitrary restriction on monitoring of foreign-to-foreign transmissions, which ordinarily does not require a warrant. But in addition to fixing this problem, Congress gave the executive branch the unilateral authority to approve surveillance of international communications involving people on U.S. soil.

Such spying is not limited to investigations of Al Qaeda or other terrorist groups. The government need only assert that obtaining “foreign intelligence information” is “a significant purpose” of the surveillance. It is also supposed to adopt “reasonable procedures” for determining that the information it seeks “concerns persons reasonably believed to be located outside the United States.”

Although the law charges the FISA court with reviewing those general procedures, no one outside the executive branch has to sign off on the selection of targets or of communications to be monitored, even after the fact. Those decisions are left to the director of national intelligence and the attorney general, a man whom several members of the Senate Judiciary Committee, including the ranking Republican, recently accused of deliberately misleading Congress, stopping just short of calling him a liar.

In response to criticism from civil libertarians, the Bush administration sounds a familiar refrain: Don’t worry ... you can trust us. White House spokesman Tony Fratto said the law was not intended “to affect in any way the legitimate privacy rights” of Americans. The whole point of judicial review, of course, is to avoid having to put all our trust in the competence, integrity, and good intentions of executive branch officials. If the Fourth Amendment’s protection against “unreasonable searches and seizures” means anything, it means that the people doing the searches and seizures do not get to decide which privacy rights are legitimate.

Now that Congress has given its blessing to warrantless surveillance of international communications involving people in the U.S., legalizing what the NSA did without statutory authority for five years after 9-11, the courts may have a chance to address the status of such eavesdropping under the Fourth Amendment. However the courts resolve that issue, do you want every communication you have with someone in another country to be fair game for the government’s snooping, based on nothing more than untested suspicion? Attorney General Alberto Gonzales claimed the administration had to violate FISA because a Republican-controlled Congress in the immediate aftermath of 9-11 would not have agreed to the changes that a Democrat-controlled Congress has approved by a comfortable margin six years later. These are the same people who want you to trust them with your privacy.

Link here.


Do you, by the act of opening this box of software, agree to the terms and conditions set forth on the 62-page legal document enclosed in this box and also available on our website, so help you God? Since 1996, the answer has been, “Yes, I do, whether I want to or not.” That is when the influential appeals court Judge Frank H. Easterbrook ruled that an end-user licensing agreement, or EULA, stopped one Matthew Zeidenberg from copying and reselling a telephone directory he had purchased on CD. At its simplest, the court ruled, contract law binds parties to make good on their mutual promises. So if a customer manifests her agreement to a sales proposal by opening a box and failing to return the product – after she has had the opportunity to see what the vendor expects she will and will not do – then she is legally required to keep her word, no matter how onerous the contract’s demands.

In the past month, however, two new court rulings suggest that judges are developing a more sophisticated sense of how corporations conduct online and technology transactions with their customers. The EULAs or terms-of-service agreements are long and legalistic, the deals are offered on a take-it-or-leave-it basis and the terms are often oppressive and one-sided. As a result, the legal hegemony of the EULA is cracking. This is a good development for consumers, who would otherwise be saddled by oppressive terms they have neither the legal sophistication to understand nor the bargaining power to avoid, and for the public interest, which suffers when customers are forced to waive rights that capitalist democracies rely on for innovation and accountability.

In Gatton v. T-Mobile, the California Court of Appeal struck down a provision in the mobile phone company’s EULA requiring consumers to go through arbitration to challenge termination fees or the practice of selling locked handsets that cannot switch carriers with the customer. The court held that both the way customers entered into the EULA contract, and the arbitration terms of that contract, were unconscionable, and therefore the provision would not be enforced.

The reasons the court gave for holding the EULA procedurally unconscionable apply to most EULAs. Even though the arbitration term was fully disclosed to consumers, the contract was one of “adhesion”, i.e., an agreement imposed and drafted by the party with superior bargaining strength, which gave the consumer only the opportunity to accept or reject the contract, not to freely negotiate it. As a result, the customer’s unequal bargaining power results in an absence of meaningful choice. The fact that the customers could choose a different carrier may mitigate, but not cure, the procedural unconscionability. Next, the court ruled that the substance of the arbitration term, which denied consumers the right to bring a class action, was unconscionable because that form of litigation is often the only means of stopping and punishing corporate wrongdoing.

Gatton is an important case because it recognizes that every clickwrap, shrink-wrap, browsewrap and box-wrap contract has an element of procedural unconscionability that requires the court to consider whether the challenged term of the contract is overly harsh or one-sided.

Link here.


The dark side of “legitimate” eminent domain.

With a lack of fanfare that could only be described as typical, the Los Angeles Unified School District last week finally detailed 50 Echo Park homes that had the bad manners to be standing where LAUSD planners want to build a perhaps-unnecessary elementary school.

Though a judge stayed the execution temporarily, it is all over but the flattening. The little houses and bungalow courtyards – affordable housing in an area where sales prices have doubled over the last four years – are already empty, with the largely immigrant and elderly population scattered to the wind. Before reading any further, go look at the photos of the abandoned properties here, to see what the well-kept little lots looked like when people still thought they might fend off the heavy hand of the LAUSD’s eminent domain authority.

There is a reason to linger at some length at this human scale of eminent domain’s effects. As City Council President Eric Garcetti (in whose district the school will sit) once told the L.A. Times’s Editorial Board in another context, eminent domain is like J.R.R. Tolkien’s “ring of power” – awesomely powerful and tempting, indispensable in a pinch but ultimately corrupting and to be avoided when possible. Most of the brouhaha about local eminent domain usage in recent years has centered on fallout from the Supreme Court’s 2005 Kelo vs. New London decision, which expanded government power to seize non-blighted private property merely for the purpose of flipping it to a new private owner who promised to generate more tax revenue. The wave of subsequent anti-Kelo legislation, and surrounding media coverage, has focused on private-to-private transfers.

But as Southern Californians know better than most, the perfectly “legitimate” uses of eminent domain can be frequently outrageous and painful in their application too, falling disproportionately on the shoulders of the poor. The Century Freeway ripped a gash through southern Los Angeles County that still has largely not healed, and the homeowners displaced by the Chavez Ravine outrage of the 1950s (which, if you recall, was justified by a never-fulfilled promise of new public housing stock) were hardly what you would describe as rich.

What makes Echo Park’s School Site 9A different from the more than 100 other new facilities being built as part of the LAUSD’s $19-billion construction spree? The fact that we have heard anything about it. Echo Park and adjacent Silver Lake (where I live) are filled with writers, so they write about their neighbors’ losses. But take a tour of Bernard Parks’ District 8 in South L.A. and you will see a handful of wiped-out neighborhoods you have never heard of, as well as some that were spared by timely intervention from the councilman. Indeed, when you move up from the scale of individual suffering and take a satellite view, the school district’s property seizures seem to be a sensible pile of bland statistics.

From the April edition of School Planning and Management magazine: “As a public entity, the school district has the power to use eminent domain to seize private property to build the school. Wanting to be good neighbors, the district uses this only as a last resort. Land acquisition means more than the purchase of the site; it also means the relocation of the occupants. So far, more than 1,200 parcels of land have been acquired, and approximately 2,200 households and businesses have been relocated.”

I can only look on at such faith in government with envy. It would be odd indeed for a district that in so many other areas is infamous for its miraculous powers of mismanagement to achieve the civic ideal of good neighborliness and a “last resort” ethic in this specific instance. In fact, a look at Echo Park itself tells a different story.

The school building boom continues apace, despite declining enrollment and families fleeing from the public school system. Before we decide to raze another neighborhood in order to educate it, we need to ask whether the ring of power was really necessary this time, or if it is turning us toward the dark side.

Link here.


American Express greed to pay $65 million for failing to detect drug-related money transactions laundered through a subsidiary over several years, U.S. authorities said. The unit, American Express Bank International (AEBI), entered into a deferred prosecution agreement with the Department of Justice to resolve a charge that it failed to maintain an effective anti-money laundering program.

The AEBI’s anti-money laundering program “had serious and systemic deficiencies,” the U.S. Federal Reserve said in a cease-desist order, citing findings from a Justice Department investigation. The Justice Department found specific instances of suspicious or illicit activity in drug-related money laundering transactions, moved through “Black Market Peso Exchange” wire transfers which were part of an undercover law enforcement operation, according to the Fed’s order. “Its transaction monitoring system and internal controls were inadequate to detect, identify, and report money laundering activity,” the Fed statement said.

U.S. authorities said the Miami-based bank, which offers traditional private banking services mainly to wealthy customers in Latin America, acknowledged the lapses. The bank’s action allows the Justice Department to dismiss the charge for 12 months as long as the bank fully implements a “significant” anti-laundering program, they said.

Financial institutions such as banks, credit unions and casinos are required to establish effective anti-money laundering programs under the Bank Secrecy Act (BSA). The BSA also requires institutions to report any transactions bank employees deem suspicious and report movements of money involving at least $10,000.

Link here.


We will soon see what it is like, as foreign central banks start buying equities.

The state-salaried bureaucrats who oversee the Chinese government’s $300 billion investment fund in June bought 9.9% of the Blackstone Group hedge fund for $3 billion. Within a month, this investment had fallen by $540 million. In 1999, Great Britain’s Chancellor of the Exchequer, Gordon Brown, instructed the Bank of England to sell half of its gold reserves. The Bank complied over the next three years. The sale was at market, which at the time was under $300 per ounce. That decision has cost the government over $5 billion, since gold soon climbed to well above $600/oz. Mr. Brown is now Prime Minister. The British voting public has forgotten all about it. In fact, most voters probably never understood what all the fuss was about. They do not understand gold, central banking, or the commodities markets.

The London Sunday Times did try to revive the story earlier this year. In an April 15, 2007 article, “Goldfinger Brown’s £2 billion blunder in the bullion market”, we read of the Times’ attempt to get access to official papers regarding the gold sale. In its last response to requests by the Times, the Treasury stated, “We have decided that it is not in the public interest to release further information.” This is a government agency, and it can thumb its collective nose at the Sunday Times. Mr. Brown is now Prime Minister. He can do the same. And will.

What is the difference between Kenneth Lay of Enron and Gordon Brown of Great Britain? Lay died in disgrace for not knowing what was going on, while Brown was elected Prime Minister for not letting the press find out what was going on. How could this be? Simple. Brown is a government official. Lay was the head of a publicly traded corporation. Mises saw the problem over eight decades ago. The socialist, who he called an etatist (statist), “refuses to see in those who guide the company anything except officials, for the etatist wants to think of the whole world as inhabited only by officials.”

The statist sees the ideal world as a gigantic Post Office. He thinks it is possible to create unlimited wealth by printing up stamps. The problem for this view of the world is that everything keeps changing – including the price of stamps (upward, always upward). There are specialists who forecast these changes and then plan for them. We call them entrepreneurs. They put their own money or investors’ money at risk (technically, at uncertainty). Mises built his economic theory on entrepreneurship – men’s quest for profit and the avoidance of loss.

Only a free market in capital goods offers entrepreneurs a way to do their crucial work of matching future consumers’ demand with future producers’ supply. But socialists deny the legitimacy of a free market in capital goods. The State should own the means of production, they insist. This creates a problem for socialist economic planners. Dealing with change. The problem for democracies is that socialism is the economic policy of the crowd, of the masses, remote from insight into the nature of economic activity.

Socialism has now fallen out of favor. This is not because the academic world ever accepted Mises’s view of capital markets. Most of them never heard of Mises. Even free market economists almost universally denied his theory, which he presented in 1920 and extended in 1922 in his book, Socialism. The intellectuals abandoned socialism because the Soviet Union went bankrupt in 1991, officially closing up shop – Enron on a vast scale. In short, the commies stabbed the academic liberals in the back. They have never quite gotten over this.

This has left the central banks and the governments’ treasury departments as the senior agencies in charge of the temple of government of intervention, “Our Lady of Perpetual Debt”. While the image of a scientific socialist planner, slide rule in hand, has faded in popularity, intellectuals and politicians still retain faith in rooms full of Ph.D.-holding economists, faces in front of glowing computer monitors. These experts are not quite the best and the brightest. They are the ex-graduate students who were not quite sharp enough to make it into the research departments of multinational banks in New York City. “These people know what they are doing!” we are assured by former B-average sociology majors, who write government press releases, and also by non-partnership level lawyers who got elected to Congress.

The heart of entrepreneurship is not who certified you at age 25, but rather what profits you have produced and for how long. When investors turn over their money to someone, they do not care about the diploma on his wall. They care about his track record. Central bankers studied economics at universities that hire and fire professors based on their ability to write unreadable and unread articles that get published in academic journals reviewed by other college professors. None of these people has started a billion-dollar company or managed a large investment fund. When two Nobel Prize-winning economists did provide the theoretical basis of such a company, Long-Term Capital Management, Ltd., it went bust owing billions of dollars. It was a lot more limited than its investors had suspected.

The university educational system is the ancient Chinese Mandarin system in action. The Mandarin screening system for government officials was a written test in classical poetry. The modern mandarin system is based on writing term papers. Making above-market returns has nothing to do with formal academic certification, here or in China. The investors of the Chinese government’s funds are graduates of Western university programs in economics and business.

The Chinese central bank is like all of the other national central banks. It is staffed by the not-quite best and brightest. These people do not invest their own money. They have no experience as entrepreneurs. They are babes in the leveraged woods. So, the first investment they made was to buy 9.9% interest in a company that peaked in value on the day it went public, a week later. Then its share price fell by over 20% in less than a month. This is the wave of the future.

Investors of last resort.

Central banks have always been lenders of last resort. They have always bought their own governments’ debts. This is why governments originally granted the monopoly of money creation to central banks. Next, central banks buy the debts of major foreign governments. They prefer to buy debts of those governments whose economies are trading partners. Why? Because most governments are heavily influenced by exporting firms. These firms want to keep their prices low, compared to foreign firms. So, by purchasing the currencies of trading partners and then buying foreign governments’ debt certificates, a central bank pleases domestic exporters and foreign governments. It does not please foreign exporters. But how much influence do they have in domestic politics?

This policy is also detrimental to domestic consumers, who must pay more for imports and also pay more for domestic goods because exporters have shipped production abroad. But domestic consumers are unaware of economic cause and effect. This is why they vote for politicians who vote to raise tariffs (sales taxes). Voters understand almost nothing about central banking, currency markets, and the nature of fiat money.

So, as foreign central banks load up on the promises to pay issued by the U.S. Treasury, central bankers begin to think twice about investing in American debt. Maybe it is better to invest in American equities. But how? “Buy shares of the Blackstone Group.” As this policy spreads over the next few decades, the ownership of the equity markets will shift from domestic pension to Asian central banks. This will not happen overnight, but it is the wave of the future.

As ownership moves from private hands to central bank hands, managers of corporations will have to pay attention to what central bankers expect. They will have to listen to central bankers. If this does not happen, then managers will not have to listen to anyone. The public will have sold their shares to central banks. This is what a negative savings rate means: the sale of assets.

Who is buying corporate assets? These days, fund managers. But if the American payments deficit continues at 5% to 6% of the domestic economy, foreigners – mainly central banks – will wind up with even more legal claims on future income. Long-term, would you rather have ownership of a diversified portfolio of American corporations or a pile of IOU’s issued by the U.S. Treasury?

The problem with this is that the new owners are central banks. They are salaried bureaucrats. Senior managers of a privately owned firm compete in a free market for capital. These managers can be replaced by investors, usually through a corporate take-over. In contrast, the public cannot fire central bankers. Rarely does any government fire them. So, they seek their own interests. They are immune to sanctions from outside the central bank.

We are seeing the dawning of a new era. This era will be marked by central banks as equity owners. The era of the central bank portfolio of nothing but gold bullion and government IOU’s is coming to an end. The trumpet blast of the new era was the Chinese investment fund’s loss of $540 million in less than 30 days.

Think of the capital markets run as extensions of the post office. The good news is that investors have more money than central banks do. The bad news is that, at the margin, central bankers will be able to manipulate the equity markets the way they manipulate government debt markets. This is very bad news, indeed.

Link here.
Academics without academia – link.


Thomas DiLorenzo rips away the benevolent façade of President Lincoln.

One might think that, having published a 2002 book called The Real Lincoln: A New Look at Abraham Lincoln, His Agenda, and an Unnecessary War, Thomas DiLorenzo would’ve gotten everything off his chest on the question of whether or not the Great Emancipator was even halfway decent. Well, it turns out the professor of economics at Loyola College in Maryland was only getting warmed up. Lincoln was an absolute tyrant.

Last month, DiLorenzo discussed highlights from his most recent book, Lincoln Unmasked: What You’re Not Supposed To Know about Dishonest Abe. For longtime Libertarians, his research is no shocker. Of his blistering critique of Abe, arguably America’s most iconic president, DiLorenzo practically profiled the 16th President a child rapist. Indeed, DiLorenzo opened by articulating Lincoln’s promotion and support of the Corwin Amendment, a Congressional effort to extend slavery to the degree that even “personal liberty laws” in Northern states would have been rendered null and void. That Lincoln asked New York Sen. William Seward to propose the Corwin Amendment shortly after being elected speaks volumes about his two-facedness. The Amendment was defeated, and Seward would go on to become Lincoln’s Secretary of State. And now Harriet Miers and Alberto Gonzalez almost seem like OK folks by comparison. Almost.

Then, according to DiLorenzo, there is the issue of double taxation. In his inaugural address, Lincoln spoke in support of the Corwin Amendment. He promised to keep slavery intact, to not invade the South, and to not collect a double tariff. Once the South seceded, of course, he needed to collect federal taxes, and so Lincoln ended up breaking all his promises, despite his ongoing support of the racist institution of slavery. It is clear that he only emancipated the slaves to enable the North to maintain control of the Southern economy, and not for any moral reasons. It was for the usual purpose – power.

In another of the book’s chapters, “The Truth About States’ Rights”, he articulates how the Founding Fathers considered states to be different countries, or a confederation of sovereign states. In their view, the federal government served as a compact of free and independent states. The biggest lie is the notion that states were never sovereign according to the Constitution. It was Alexander Hamilton, chief brains behind the Federalist Party, who put forth the idea that a president enjoyed veto power against all state legislation, and that individuals, rather than states, had signed the Declaration of Independence. Sure, the Declaration begins with “We the people,” but the fuller sentence is “We the people of the states ...” In fact, the King of England did not sign a treaty with the United States. He signed it with the states. The purpose of such a lie, though, is to realize Hamilton’s dream of a powerful centralized government.

In a chapter called “The Politics of the Lincoln Cult”, DiLorenzo outlines the political uses of the legend, and how both political parties rely on Lincoln as an excuse for bad behavior. DiLorenzo pointed to the work of another scholar, Frank Meyer, who made the case that Lincoln made possible the further trashing of the Constitution, and even established such trashing as a precedent. Almost makes Dick Cheney look like a truthful soul. Almost.

In any case, Lincoln Unmasked sounds and looks like a book that anybody who cares about real American history – not the effluvia served up in public schools – should have on their bookshelf. Indeed, the deification of the president began with Lincoln. Ever since, the president has exerted godlike powers. Time for those powers to be curtailed.

Link here.


Let us take a trip to a parallel universe. Two thinkers are born in Denmark and Holland, instead of the highly influential – in our history line – France and Germany. We are talking about Jean-Jacques Rousseau and Karl Marx. Being born in less influential countries, they did not have as big an impact as they did in our world. What could be the result of that simple change?

Quite astounding. Nobody would be involuntarily poor. We would have a world of wealthy countries, where no country would be poor because of state intervention (forcibly making them poor). Is this seemingly fantastic outcome possible at all? We think it is. Poverty could be eradicated worldwide in less than two generations if the ideas that Rousseau and Marx popularized were defeated and replaced with a proper understanding of means and ends, the creation of wealth, and realizing what exchange is all about.

But there were other, lesser thinkers also. John Maynard Keynes, although of tremendous importance in the West, would not have been able to hamper the wealth creation process with his ideas if the 400 million people that the anti-life, anti-market, Marxist Soviet Union isolated in our world had never happened. Moreover, we contend that social-democratic regimes such as Nehru’s in India, and all CEPAL-oriented governments in Latin America and other parts of the underdeveloped world, would not have been as devastating had Rousseau and Marx not provided the foundation for “mixed economy” policies that has haunted those countries for a hundred years. “We are socialists,” Hitler once said, and as a socialist he extended his socialism to include state management of body ownership, with catastrophic results.

What about corruption and decay? Sure, the natural tendency of states to grow and cripple economic life would still be present if Adam Smith or even Ludwig von Mises had become the dominant intellectual figures for mankind. But then it could have been possible for people to rally against such things in the same spirit that led the American revolutionaries against state aggression. With the Rousseaunian-Marxist consensus in place in our universe, a big part of our societies is actually working against itself. If what they hope to achieve is prosperity and peace, the means are erroneous and will only bring about poverty and misery. The state reduces the amount of wealth because it extracts resources from private producers and re-allocates it in manners which are less efficient (or not efficient at all). It is not a coincidence that the greater the state intervention, the worse off that people are.

And finally, let us not forget that some professions have prospered from the fact that there are poor people in the world. Stiglitz, Chomsky, and a myriad of ThirdWorldists – the intellectual current that sees other’s wealth as the main cause of poverty and not as an opportunity – along with dozens of paternalistic regimes in the world, need poor people or will surely loose their support. Will they ever allow the marvel that capitalism is, to be replicated worldwide?

It is time to completely abandon the malevolent “social contract” ideology where we surrender our humanity. While we are at it, let’s just say WORKERS OF ALL LANDS BE FREE! And to the followers of baby Jean-Jacques and baby Karl: Grow up!

Link here.


The war in Iraq is about to get worse. Much worse. The Democrats’ decision to let the war run its course, while they frantically wash their hands of responsibility, means that it will sputter and stagger forward until the mission collapses. This will be sudden. The security of the Green Zone, our imperial city, will be increasingly breached. Command and control will disintegrate. And we will back out of Iraq humiliated and defeated. But this will not be the end of the conflict. It will, in fact, signal a phase of the war far deadlier and more dangerous to American interests.

Iraq no longer exists as a unified country. The experiment that was Iraq, the cobbling together of disparate and antagonistic patches of the Ottoman Empire by the victorious powers in the wake of World War I, belongs to the history books. It will never come back. The Kurds have set up a de facto state in the north, the Shiites control most of the south and the center of the country is a battleground. There are 2 million Iraqis who have fled their homes and are internally displaced. Another 2 million have left the country, most to Syria and Jordan, which now has the largest number of refugees per capita of any country on Earth. An Oxfam report estimates that one in three Iraqis are in need of emergency aid, but the chaos and violence is so widespread that assistance is impossible. Iraq is in a state of anarchy. The American occupation forces are one more source of terror tossed into the caldron of suicide bombings, mercenary armies, militias, massive explosions, ambushes, kidnappings and mass executions. But wait until we leave.

It was not supposed to turn out like this. Remember all those visions of a democratic Iraq, visions peddled by the White House and fatuous pundits like Thomas Friedman and the gravel-voiced morons who pollute our airwaves on CNN and Fox News? They assured us that the war would be a cakewalk. We would be greeted as liberators. Democracy would seep out over the borders of Iraq to usher in a new Middle East. There are probably about 10,000 Arabists in the U.S. – people who have lived for prolonged periods in the Middle East and speak Arabic. At the inception of the war you could not have rounded up more than about a dozen who thought this was a good idea. And I include all the Arabists in the State Department, the Pentagon and the intelligence community. The war was not doomed because Donald Rumsfeld and Paul Wolfowitz did not do sufficient planning for the occupation. The war was doomed, period. This is not to deny the stupidity of the occupation. But Iraq would not have held together even if we had been spared the gross incompetence of the Bush administration. Saddam Hussein, like Josip Broz Tito in the former Yugoslavia, understood that the glue that held the country together was the secret police.

Iraq, however, is different from Yugoslavia. Iraq has oil. Lots of it. It also has water in a part of the world that is running out of water. And the dismemberment of Iraq will unleash a mad scramble for dwindling resources that will include the involvement of neighboring states. The Kurds, like the Shiites and the Sunnis, know that if they do not get their hands on water resources and oil they cannot survive. But Turkey, Syria and Iran have no intention of allowing the Kurds to create a viable enclave. A functioning Kurdistan in northern Iraq means rebellion by the repressed Kurdish minorities in these countries. The Kurds, orphans of the 20th century who have been repeatedly sold out by every ally they ever had, including the U.S., will be crushed. The possibility that Iraq will become a Shiite state, run by clerics allied with Iran, terrifies the Arab world. Turkey, as well as Saudi Arabia, the U.S. and Israel, would most likely keep the conflict going by arming Sunni militias. This anarchy could end with foreign forces, including Iran and Turkey, carving up the battered carcass of Iraq. No matter what happens, many, many Iraqis are going to die. And it is our fault.

The neoconservatives – and the liberal interventionists, who still serve as the neocons’ useful idiots when it comes to Iran – have learned nothing. They talk about hitting Iran and maybe even Pakistan with airstrikes. Strikes on Iran would ensure a regional conflict. The occupation of Iraq, along with the Afghanistan occupation, has only furthered the spread of failed states and increased authoritarianism, savage violence, instability and anarchy. It has swelled the ranks of our real enemies – the Islamic terrorists – and opened up voids of lawlessness where they can operate and plot against us. It has scuttled the art of diplomacy. It has left us an outlaw state intent on creating more outlaw states. It has empowered Iran, as well as Russia and China, which sit on the sidelines gleefully watching our self-immolation. This is what George W. Bush and all those “reluctant hawks” who supported him have bequeathed us.

What is terrifying is not that the architects and numerous apologists of the Iraq war have learned nothing, but that they may not yet be finished.

Link here.


There is no anti-depressant that will cure a depression that’s spiritually based, for the malaise doesn’t originate from brain dysfunction, but from an accurate response to the desecration of life.” ~~ David R. Hawkins, Power Vs. Force

I recently read a news report stating that loneliness has become a serious health problem for millions of Americans. According to this report, we see emerging the paradox of an exploding population, and increased social isolation for many of us. The average American now has only two friends in whom to confide on important matters, and roughly a quarter of us have no such friend at all. The United States may still be perceived as the Land of Opportunity, but it is also increasingly the land of the depressed and alone.

The obvious irony is that more and more of us are isolated despite the total pervasiveness of electronic “communication”. Cell phones, text messaging, email, and internet chat rooms have resoundingly failed as substitutes for actual human contact.

Why are we alone? Of course, the necessity of work, familial obligations, and the endless distractions of “entertainment” rob us of time that could be spent on socialization. But a more fundamental problem may be driving many of us into private worlds deprived of love and friendship.

From my perspective, depression and loneliness amongst Americans may be as inevitable as lung cancer for smokers. No culture that devalues life, love, and meaning as profoundly as ours can produce a happy or unified populace. From the day we are born, our ability to love our selves and connect with others is subverted by a thousand barriers emplaced by cultural conditioning.

We all know what our culture values and rewards: physical attractiveness, stature, wealth, and power. Media so pervasive as to be almost unavoidable pummels us with images of “very special people” – physically gorgeous actors, singers, models, and athletes. We are trained to value in our selves and others only that which is impermanent, transient, not helpful, and not loving. The individual thought system that arises from these collective “values” could only be egotism. The proof of this is everywhere.

The problems with rampant egotism as I see them are (1) the ego cannot makes “judgments” based on truth, and (2) the ego has no ability to love or be loved. The most an ego can ever hope for is to be an object of vicarious empowerment for other egos. Look at the way we worship professional athletes. When an athlete performs well, his fans experience an increased sense of self. When the athlete performs poorly, these same fans curse his name and go searching for another idol. For whom is that “loving”, or even remotely satisfying? These horrific judgments we place on our selves and others are driving us into isolation and depression. Increasingly, we only want for our selves the impermanent surface qualities that the world defines as “special”. And these are the only qualities we find desirable in others.

This pathological need for “specialness” is far more destructive than mere vanity or superficiality. It is the taproot of much of the mayhem, madness, and murder we see on the nightly news. The need for religious, racial, or nationalistic “specialness” has led to more death than any other force in history. Jews who hate Muslims and Muslims who hate Jews are both victims of the same pathology. Just like the person who has been programmed only to value physical attractiveness, religious and racial “warriors” cannot experience any true connection or love with another human being. Love has been strangled by judgments that are totally illusory and conditioned by culture.

But TRUE connection – both with others, and with one’s own true nature – is possible, and it can be surprisingly easy. All one need do is recognize that he or she is totally insane, and choose not to accept the validity of his or her habitual judgments. This action is advised by all of history’s great spiritual teachers. Jesus taught that one must love his neighbor as himself, and to love one’s enemies and pray for those who persecute him. Buddha taught that perception can only see illusion, and thus all judgments must be fallacious. It is clearly not possible to really SEE another person from a position of judgment, which always arises from the ego.

I would not be writing this essay if I had not walked a country mile with sadness by my side. I am sad more often than I am happy. I yearn for connection with others more than anything on Earth. And I feel nothing but compassion for my many brothers and sisters who have lost the ability to love and loved. But I am hopeful because I have recognized that critical first step we all must take before real connection is possible.

I will never again be so foolish as to judge another – or myself – based on my habits of perception. I know very little, but one thing I do know is that all of God’s creation is worthy of love. We habitually condemn others based on what we see on the surface, but all we CAN see is the impermanent body/brain/ego machinery that has been defiled and debased by cultural programming. That is not who a person really is. It is not who I am.

If I look into your eyes and really see you, I will only see myself reflected back. I love you. Whomever you are, whatever your story, no matter what. I have wasted years of my life trying the alternative, and it is too painful for me to bear any longer. We can be friends again. We can end all suffering and sadness and violence and death. We can go home. Just take one little step. The first step. The final step.


Link here.
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