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THE SHODDIEST EXPORT
For years, Americans have been able to pay for enormous trade deficits by exchanging IOU’s for imported consumer goods. Unfortunately for foreign creditors, a substantial percentage of those IOU’s have recently taken the form of mortgaged backed securities. Sporting higher yields than Treasury bonds, investment grade ratings from reputable agencies, and juicy commissions for the investment banks that packaged them, these structured mortgage bonds have quickly become America’s greatest export. Ironically, amid all the recent hoopla about defective Chinese exports, America has proved that when it comes to flooding the world with shoddy merchandise, nobody beats the good old USA.
Last week, several of Wall Street’s best foreign customers announced staggering losses on the American mortgaged backed securities (MBSs) they had been sold. The fundamental issue underlying these losses is that Americans borrowed more money than they can afford to repay. As initially low teaser rates expire and mortgage defaults increase, foreign lenders are discovering that the residential properties that collateralize the mortgage bonds are not worth anywhere near the loan amounts.
It will not be long before American borrowers come to a similar realization. When they do they will be faced with the shocking reality that all of their home equity is gone – having disappeared just as quickly as did the paper profits of the Internet stock mania. However, this time around the situation is more dire. Although paper profits have vanished much as they did in 2001, all the mortgage debt, much of it about to get much more expensive to service, still remains.
When American homeowners come to grips with their diminished net worth, the excess consumption that has been the rule over much of the past decade will grind to a halt. If any money is left after making higher ARM payments, homeowners may actually decide to save some to repair their personal balance sheets. As consumer spending collapses, the U.S. economy will plunge into a severe recession, compounding the problems in the housing market and exacerbating the recession.
The last straw will be the value of the U.S. dollar. Already teetering on a precipice, a recession will push it over the edge. As the dollar falls, interest rates and consumer prices will rise even more sharply, compounding the problems for both housing and the economy. In fact, the fear of further dollar declines has been the most important factor in restraining the Fed’s ability to cut interest rates. Rather than admit its concern over the dollar, the Fed justifies current policy with assurances that the economy is strong and is not in need of stimulative rate cuts. In Jack Nicholson fashion, since Bernanke feels investors cannot handle the truth he feeds them a lie instead.
As more of our nation’s creditors finally realize that they have been duped, the credit well fueling American consumption will run dry. Foreign lenders will simply refuse to accept our IOU’s as payment for their merchandise. Lacking in savings and productive capacity, we will be forced to accept dramatic reductions in our standard of living as a result. Though our creditors will finally be forced to realize some losses on their prior investments, they will no longer bear the burden of subsidizing the U.S. economy. With diminished competition from Americans, foreign consumers will finally gain the upper hand. Goods previously too expensive for citizens of non-dollar economies will suddenly become affordable. Savings currently squandered on American consumption will be freed up to finance productive investment at home.
Though these positive aspects may be lost in the recent synchronized selloff in global stocks, foreign markets will soon diverge from ours. As the American caboose is decoupled from the global economic gravy train, the rest of the cars will move that much faster without all that dead weight slowing them down.Link here.
ARE BANKS WORRIED ABOUT YOU? HOW ABOUT THE REVERSE?
There is an unspoken “mutual respect clause” among lawyers and judges. Courtroom opponents must live with each other both on the job and after work, on the golf links and in the country club. They belong to the same club. That is also true of Wall Street bankers, the friends Jim Cramer anguished about during his recent tirade on CNBC. These guys are under big pressure, trying to remain members of the club even as they obscure the extent of their losses from each other. This paragraph alone has given more thought to them than they have given to investors like you.
A New York Times article about “pack mentality among hedge funds,” similarly describes a “good old boy” network among top Wall Street hedge fund managers. “These guys all know each other, and they all have the same strategies. They came from the same schools, and they get together for drinks after work.”
You watched the subprime contagion spread from the bottom to the very top of financial strata and around the world. Central banks injected rescue liquidity. Investment banks on the hook for deals estimated at $300 billion, cannot sell them to investors. Seven million people in the U.S. may lose their homes as mortgage rates reset. This process is still unfolding.
As an individual investor, I worry about keeping my savings in local banks that are heavily invested in real estate owned by debt-laden consumers addicted to easy credit. As real estate and the loan-packaging + reselling CDO scheme continues to unravel, smaller banks will eventually come under pressure. What happens to my deposits? Bob Prechter’s 2002 book, Conquer the Crash describes the situation:
Why do banks fail? For nearly 200 years, the courts have sanctioned an interpretation of the term “deposits” to mean not funds that you deliver for safekeeping but a loan to your bank. Your bank balance, then, is an IOU from the bank to you, even though there is no loan contract and no required interest payment. Thus, legally speaking, you have a claim on your money deposited in a bank, but practically speaking, you have a claim only on the loans that the bank makes with your money. If a large portion of those loans default, your claim is compromised. A bank failure simply means that the bank has reneged on its promise to pay you back. The bottom line is that your money is only as safe as the bank’s loans.
In boom times, banks become imprudent and lend to almost anyone. In busts, they cannot get much of that money back due to widespread defaults. If the bank’s portfolio collapses in value, say, like those of the Savings & Loan institutions in the U.S. in the late 1980s and early 1990s, the bank is broke, and its depositors’ savings are gone.
Because U.S. banks are no longer required to hold any of their deposits in reserve, many banks keep on hand just the bare minimum amount of cash needed for everyday transactions. Others keep a bit more. According to the latest Fed figures, the net loan-to-deposit ratio at U.S. commercial banks is 90%. This figure omits loans considered “securities” such as corporate, municipal and mortgage-backed bonds, which from my point of view are just as dangerous as everyday bank loans. The true loan-to-deposit ratio, then, is 125% and rising. Banks are not just lent to the hilt; they are past it.
Hedge fund investors did not expect their assets to be frozen, and most investors do not expect trouble in local banks. If the credit contraction spreads to a bank that holds your “deposits”, who will worry about you? You need to take care of yourself.Link here.
SHOCKER OF THE MONTH: NEW STUDY SAYS EXPATS CHASING SUN, CHEAP LIVING
Middle East emerging as expat hotspot.
A new study from Alliance & Leicester International (ALIL), the Isle of Man savings bank, reveals that the main reason British expatriates are leaving the UK is to start a completely new life (40%), whereas around a third (32%) moved abroad because they were seconded as part of their job.
Given the poor UK weather conditions this summer, it is no surprise that when asked what other factors were taken into consideration when making the decision to move abroad, 40% of those questioned said the weather. But an even bigger factor that the survey uncovered was that half (52%) are choosing to escape Britain’s high cost of living, with the move designed to improve their standard of living.
When it comes to deciding on a destination, the desert sunshine and bustling economy of the Middle East is an emerging expat hotspot, with over a fifth (21%) of people choosing to move there. Australia and the USA also remain popular destinations for expatriates to set up home, with Spain and France first choice in Europe.
Simon Hull, Managing Director of Alliance & Leicester International comments, “For the many people in a hurry to start a new life abroad, it is important to properly prepare for relocation. Moving country is not just a case of buying a house and packing your bags, it involves a lot of organization. ... Those considering a move need to think about their financial arrangements, legal rights and other practicalities before waving goodbye to Britain. Often those tasks that appear most daunting, such as sorting out savings, are actually very straightforward.”
ALIL has put together its top 10 suggestions for things to consider when moving abroad:
ALIL adds that opening an offshore savings account can be as straightforward as packing a suitcase.Link here.
BUENOS AIRES: THE PARIS OF SOUTH AMERICA
Do not be fooled by the ambrosial pastries, the omnipresent bottle of red wine, and the hordes of impossibly slim women sipping an espresso and cradling their Louis Vuitton. French is not the language of Buenos Aires. Those who love the “Paris of South America” know that although its broad avenues, stylish inhabitants, and mouthwatering cuisine may look to Europe for inspiration, its unique charm can only be described as 100% Argentine.
The birthplace of tango and the heir of gaucho (Latin cowboy) endurance and pride, Buenos Aires enjoys worldwide fame – and rightly so – for its exquisite leather goods, superb Malbec wines, savory steaks, inexpensive plastic surgery and (draw your own conclusions) beautiful women. However, those are only a few of the reasons travelers are suddenly flocking to Argentina ... and in some cases, never going home.
Spaniard Pedro de Mendoza founded Buenos Aires in 1536, and it became a thriving port, inspiring the nickname Porteños for the residents of the growing city. By the 1920s, it was a favored destination for European immigrants, who were mostly Spanish and Italian, but also German, Irish, Portuguese, Polish, Irish, French, Croatian, English, and Arab, all seeking a fresh start in the city of “Good Air”. My own motivation for heading to Argentina was the desire to immerse myself in the language and culture. After minimal research, I arrived in the city I would soon affectionately refer to as “B.A.” with a vocabulary almost as miniscule as my budget. Of the 13 million residents, I knew not a soul.
Sipping a glass of wine in San Telmo on my second day, I received an unexpected invitation to join a nearby Argentine couple. “Buenos Aires – and wine – must be shared with friends,” they insisted. Instead of reminding them that we were not friends, and that in fact, I was a lowly American with a horrific accent and an embarrassing dislike for cow intestines (a delicacy in Argentina), I gratefully accepted. Five hours later, after sharing several bottles of wine, a delectable dinner, and a leisurely boat ride along the Rio de la Plata, I realized why Buenos Aires is experiencing a tourism renaissance.
It is not the enticing new restaurants, the exceptional shopping, the stimulating art scene, or even the swinging nightlife. It is the manner in which Argentines go out of their way to share their culture with foreign visitors. In Buenos Aires, even complete strangers are treated like old friends.
Buenos Aires is about more than bacchanalian delights. A vibrant cultural scene permeates the city. Begin with the remarkable MALBA, which showcases a menagerie of Latin-American art, before heading to the lovely Decorative Arts museum, housed in the former mansion of the prominent Alvear family. Gallery fiends will encounter plenty of alluring spaces to peruse, and antique lovers will adore the narrow streets of San Telmo, which are a veritable treasure cove, especially on Sundays.
Sophisticated sports fans can don their whites for a day of equestrian delights at the Hippodrome or an outing to watch polo – the national sport, as well as an elite social event. However, for a glimpse of insight into mainstream South American mentality, a visit to one of the hallowed fútbol (soccer) fields is a must. Boca Juniors and River Plate are the two main rival teams, and a match between them combines all the elements of a carnival and a street fight, with the results affecting the national psyche to an alarming degree.
Before flying home, discerning shoppers should spend a day in Palermo. This hip neighborhood began as an inexpensive bohemian enclave, and has now become the in vogue place to find everything from homemade paper to designer clothes, with a sprinkling of alluring restaurants and chic corner cafes nestled in between. Since the financial crisis of 2001, prices have plummeted, meaning that you can revamp your wardrobe without having to refinance your house. (Of course, by the end of your trip you may be ready to sell your house altogether and relocate to Buenos Aires ...)
If you do have more than a long weekend, the rest of the country is a wonderland of natural attractions – from the Salt Flats in the North to the wilds of Patagonia in the South. From the verdant Mendocino vineyards to the vast traditional estancias (ranches). From the most spectacular glacier in the world (the Perito Moreno) to the magnificent lguazú Falls. You will not find the Eiffel Tower in Argentina ... but after your first unabashedly epicurean evening of Malbec wine and tango, you probably would not feel like climbing all those steps anyway.Link here.
INVESTING FOR OVERSEAS LIVING, PART I
If you plan to move overseas for any period of time, at some point you will probably be faced with the need or desire to invest your money in your new home country. Or, barring that, to change your investments that you have already to something more suitable to the new lifestyle you have overseas. In general, economic growth tends to be higher in developing countries than it is in rich, developed countries. Higher growth does not always translate to higher asset prices or higher returns, but the two often go hand in hand. As a developing country becomes richer, many new industries are formed, many new opportunities arise. If you live in such a country, you will probably be far more informed of such opportunities than someone who only reads the papers or financial press in another country.
If you move to another country, you may notice many investment opportunities which would be hard to duplicate in the States. There are a number of ways of participating in the local economy of your new overseas home – the local stock market, being a passive investor in local businesses, operating a local business, buying income property (houses, apartments, retail, farm land, hotels), and import/export, among others. Most, but not necessarily all, of these sorts of investments are available to you as an expatriate, even if you are not a resident.
One of your most important assignments as a foreign investor would be to find out which investments you are allowed to make as an expatriate, and which you are restricted from making. This will vary from one country to another. There is no way to make a blanket statement, so you just have to find out what the case is locally. This article is geared toward people who have some investment experience, but who do not have a long experience of owning and managing investments in other countries. I will not be writing about hedge funds, numbered bank accounts and the like, but will instead offer sound advice for those who would like to expand their investment horizons.
For And Against Investing Overseas
If you only feels safe with CDs or government bonds, and do not want to worry about anything, maybe you should not invest overseas at all. Local conditions in many parts of the world make it difficult to know what will happen in the future, and in many places it can be difficult to find accurate information about investments.
If you are a gambler, who plunges into things without thinking or worrying too much, maybe you should think hard about investing overseas as well. As a foreigner you will not have access to all of the information a local would have, and it is a lot easier for you to get your clock cleaned. You will not have the same legal protections you would have in the States. If you end up in a legal dispute with a local who ripped you off, there is a high probability that you will lose – just because you are a foreigner. Or even if you are treated fairly, court cases in some countries can take years, if not decades [just like the U.S.]. And then collecting on a court judgement is another matter altogether.
If you fall somewhere in between, have some skill at evaluating risks, and do not mind taking a chance if you have got good information and good projections, then it might be wise for you to consider investing in your new country. In general, if you have experience in a certain kind of investment, like in stocks or real estate, you may want to start out in that kind of investment overseas. Of course things in any given investment market will probably work a little differently in another country, but houses involve rent and plumbing, stocks involve liquidity and earnings, etc. Play to your strengths.
If you do not have time to spend in the country, you might shy away from real estate investments or local business ownership that requires a lot of management. Sure you can find a manager, but you still have to ride hard on them to be sure they do their job properly. You might come back after a long absence, and find your manager has fired all the really competent employees and hired all his relatives. Ouch.
It is also wise to choose an investment vehicle that matches your lifestyle and tolerance for risk. If you have a lifestyle that requires a regular cash flow, find a business that provides one. If you have a low-stress lifestyle that requires a fair amount of leisure time, choose a low-management investment.
Americans in general are underexposed to overseas investing, and seem to have an exaggerated idea of the risks involved. You can run into all sorts of problems, mostly from ignorance or from trusting the wrong people, but many risks are no greater than they are in the States. Currency risk was a real factor in many developing countries until recently – but now many developing countries have huge reserves of U.S. dollars, plenty to weather a currency crisis. In most countries your liability exposure in any business is very low, due to the lack of punitive damages. In most countries the tax authorities do not have nearly the power the IRS has.
One of the first steps in evaluating risk would be to get an idea of the level of corruption in a country. Transparency International publishes an index of corruption levels in most countries. If a country has a high level of corruption, it does not mean that you cannot make money. It is just that things do not always go by the rules, and that some officials may have their hands out from time to time. Or it could mean that the cost to get anything done is astronomical.
When investing in stocks it is usually not necessary to visit a country, but for everything else it is mandatory. There is no substitute for seeing all the rooms of the hotel you are interested in, or the vehicles of the tour company you want to buy, or meeting the partner who wants you to invest with him (and checking out his lifestyle, family, house, etc.). Every dollar you spend on checking things thoroughly will save you many times that amount later on. In many parts of the world it is hard to get bonds for employees or some types of insurance or to even sue people if you have been rooked, so you have to check out all the people and properties involved beforehand.
The downside of risk in overseas investments is that you can lose your whole investment if you do not know what you are doing or trust the wrong people. The upside is that you can sometimes make more than you could in the States if you know what you are doing and trust the right people. Or if you do not make more, you can enjoy it a lot more - a business you like running in a place you love, dealing with people who are mostly happy to be there. A slight risk in some countries is expropriation. The government takes your property, and pays you ... or in a few cases does not pay you. Very rare, but it does happen in some places.
In some countries different groups of people have different businesses staked out. People from India do small-scale money lending in Panama, many Lebanese and Indian merchants handle much of the retail trade in many African countries. A key step in evaluating risk would be to find out whether any particular ethnic or business group dominates the type of business you want to buy or start. If you just want to buy a hole-in-the wall hotel it may not be so important, but it would be important to know for a larger business. If a group of people dominates a business, they may resent your intrusion into their little empire, and may make things tough on you. In lots of places things are accomplished through relationships, and money may not always smooth the way.
Risk can come in many forms, and it is important to recognize the unique types of risk which are native to the country you are investing in, and to the particular business you are considering. Many of these risks may not exist at all in the States, and many risks in the States may not exist there.
An odd fact that few people are probably aware of is that return on investment is higher in sub-Saharan Africa than almost anywhere else in the world. Why? Perhaps there is a lack of capital, and so returns on the capital that is there are much higher. It can be tough to start there, but it does go to show that things are not always what they seem in international investing.
Return takes two main forms – operating income from ongoing operations, and income from sale, when the business or property is sold. With stocks the equivalent would of course be dividends and sale proceeds. Different people have a different take on things, but in my opinion a business or piece of real estate without a cash flow is not a business. At best it is a speculation, at worst it is an expensive hobby. In the States there is a very liquid market for real estate, an extremely liquid market for stocks, and a semi-liquid market for businesses. It is extremely easy to sell stocks, fairly easy to sell real estate, and harder to sell a business.
These facts will help you in making decisions about overseas investments. You can bail out of a stock a lot easier than bailing out of a dud piece of real estate or business. In many countries it will be that much harder to sell than in the U.S., since only a very small percentage of people may have the money to buy your business or real estate – and locals will often have very high expectations of return on investment. When you buy investment real estate, cash flow will be hugely important. You do not know exactly when you can sell, so in the meantime you have to get a return. With real estate, many people overestimate the income, and underestimate the expenses – a positive cash flow turns into a negative due to optimism and ignorance.
A basic income projection for a hotel would be gross income less the expenses of payment taxes, insurance gas (bottle or pipeline), metered water, bottled water, electricity, payroll, payroll taxes, cleaning supplies, linens, and a maintenance allowance. You may want to hire an accountant for a projected income statement, especially if you feel they would have a better handle on the expenses.
If you are buying or starting a business not involving real estate, cash flow will be the only thing you can depend on. You cannot really depend on selling the business down the road – even in the states it can take years to sell a small business. So figure on getting your money out of the business via cash flow, and if you can sell it down the road, then that is a bonus.
Buying An Existing Business Or Starting A Business
If you want to own a business and there is nothing there you want to buy or can buy, you will have to start your own. Some people are probably better off starting a business anyway, since they like doing things their own way, and want to build their own system. Buying an existing business can be a good way to go for many people, since you are starting with an existing cash flow, established customers, existing and trained employees. If the seller is not a crook and the business is being run properly, you can step in and start making money right away.
If you have the time and money to spend, an excellent course on purchasing an existing business is “How To Buy A Good Business At A Great Price”, available here. The price is from $99.95 to $179.95, depending on the media (download, CD, or print). This course is geared toward buying an existing business in the U.S., but you can find a lot of valuable info that could be used to buy a business just about anywhere. Buying an existing business can be a can of worms if you do not know what you are doing, anybody with a serious interest in buying one should consider this course or a similar one. I found more information in one place than I have found elsewhere. In the States it is usual to pay more to buy an existing business than to start one from scratch, but this may or may not be the case where you are.
Operating A Local Business
The first thing to find out would be whether a foreigner is permitted to operate a local business, and whether or not you have to have residency or a special visa. Some countries will allow you to run a business with just a tourist card or your passport, provided you jump through all the other hoops. In some countries the easiest way is to find a reliable local partner.
In many developing countries the majority of businesses operate illegally, or at least without registering with the government. You may hear advice on doing this yourself, but this is a judgement call. If things do not work out it could cost you a lot of money later on, and you may be treated much differently than a local. If you talk to a lot of other business-owning expatriates and nobody registers with the government, fine, but at least know what you are getting into. In some countries foreigners are allowed to operate certain businesses, but are prohibited from operating others.
There are probably lots of locals who would be glad to take your money, but you really have to know everything before you plunk down a dime. In the States we do not have much of a culture of people going overseas and starting or buying a business. We have always had people come to the U.S. to start a business, but not the other way around.
Among the issues you will need to research are local labor laws (minimum wage, required paid holidays, social tax contribution, etc.), local methods of payment (all cash, bank transfer, credit card, etc.), and local requirements to register a business. If you can find a reliable local accountant or lawyer, this is probably the best way to go. Some fellow expatriates may have some of this info, but better to go straight to an expert and pay a few bucks. Hearsay – which is what a lot of information from fellow expatriates is – is a poor foundation to base your investment decisions on.
It is also important to know what the penalties are if you break small rules inadvertently. In some countries, there would be no penalty at all. In other countries, a large fine. Some places, they might yank your permits or licenses to do certain things. It is hard to do everything right all the time, so it is best to know ahead of time what could happen. Keep in mind that as a foreigner they may (or may not) treat you more harshly than a local.
One common mistake many business owners make is to fall in love with the property or the location or whatever, and neglect to understand how much real work a business can be to run. Fall in love with the cash flow, fall in love with the lifestyle it offers you if you have to fall in love with something. Love comes and goes, but then what remains is the day to day work.Link here. (Part II will follow next week.)
1000 OFFSHORE GAMBLING WEBSITES FACE U.K. MARKETING BAN
A crackdown by the UK government on gambling adverts from places that do not meet the country’s strict new regulatory standards will lead to about 1000 gambling websites based in offshore jurisidctions being banned from advertising in the UK, the Department for Culture, Media and Sport has warned. Regulations laid in Parliament on August 9 use new powers contained in the Gambling Act 2005 to ban gambling adverts from companies operating outside the European Economic Area (EEA). The EEA comprises all member states of the EU plus Iceland, Liechtenstein and Norway. In this case, it also includes Gibraltar.
Independent research suggests there are around 2,300 gambling websites worldwide. Antigua is considered to have the largest number with around 537 sites, followed by Costa Rica (474), Kahnawake (Canadian Reservation) (401) and the Netherlands Antilles (343). Jurisdictions which wanted to be exempt from the ad ban had to pass a stringent assessment of their regulatory standards, including the ability to demonstrate that they adhere to fair tax principles, in particular, openness, equal availability and equal treatment.
The Secretary of State for Culture, Media and Sport, James Purnell, has rejected applications to join the exempted “white list” from Alexander (Canadian Reservation), the Netherland Antilles and Tasmania. Applications from Kahnawake and Antigua are still being considered. Gambling operators in jurisdictions that did not apply to be white-listed are also automatically banned from 1st September. These include major online gambling centers such as Costa Rica and Belize. Sites such as Betfred Casino and Poker, Interpoker.com and Littlewoodscasino.com are all currently based in the Netherland Antilles, a non-white listed jurisdiction, according to the UK government.
Only the Channel Island of Alderney and the Isle of Man were able to demonstrate that they had in place a rigorous licensing regime designed to stop children gambling, protect vulnerable people, keep games fair and keep out crime. Countries in the EEA however did not have to apply to be white-listed.
The ban will apply to all forms of gambling advertising from excluded jurisdictions including TV, radio, newspapers, magazines, taxis, buses, the tube and some websites. If operators, publishers, broadcasters and advertising companies break the rules, they could face fines or even imprisonment.
Figures recently published by the Gambling Commission found that over the trailing year through June, 8.6% of the 8,000 adults surveyed had participated in at least one form of remote gambling in the previous month. If those only playing the National Lottery remotely are excluded, 5.9% of respondents had participated in remote gambling.Link here.
U.K. to introduce remote gaming duty in September.
HM Revenue and Customs has announced that a tax will be introduced on the gaming profits of remote gaming operators on September 1, 2007, to coincide with the full implementation of the Gambling Act 2005. HMRC confirmed that the remote gaming duty will be 15% of a remote gaming provider’s profits at the end of each accounting period. This is the difference between stakes and payments due for participating in remote gaming, less amounts that the operator has paid out as winnings during the accounting period.
Remote gaming, according to HMRC, means playing a game of chance for a prize through any kind of remote communication, for example via the internet, telephone or interactive TV. All remote gaming providers with an operating licence issued by the Gambling Commission are liable to pay remote gaming duty on all the profits from gaming unless the remote gaming is already liable to another UK gambling duty, or is specifically exempted from another UK gambling duty. Remote gaming duty is also chargeable on the illegal provision of remote gaming in the UK, for example, where the provider is not licensed to provide such gaming (in Great Britain) or where the provision of remote gaming is prohibited (in Northern Ireland). The provision of remote gaming is exempt from VAT.Link here.
U.K. e-gaming white list will be good for Gibraltar.
Gibraltar is set to benefit from tough new regulatory standards due to come into force in the UK for e-gaming websites, with at least two major gambling companies reportedly moving or considering moving their operations to the jurisdiction. William Hill Casino is in the process of transferring its online business to an approved jurisdiction meeting the new UK standards, while reports have suggested that Betfred has already applied for a licence to operate from Gibraltar.
Up to one thousand online gaming companies based outside of the European Economic Area (EEA) will be unable to market their services in the UK unless they relocate to a territory within the EEA, or one elsewhere which automatically meets the rigorous new licensing regime designed to stop children gambling, protect vulnerable people, keep games fair and keep out crime. The EEA comprises all member states of the EU plus Iceland, Liechtenstein and Norway. It also includes Gibraltar, which is already a well established e-gaming domicile, and home to the likes of of 888.com and PartyGaming.
While the UK is still considering whether Antigua should be included on the “white list”, the other jurisdictions have been effectively blacklisted, meaning that Gibraltar could see an influx of companies anxious to be located within the EEA. The only other offshore territories to have made the white list are the Isle of Man and Alderney.Link here.
Antigua and Barbuda hoping to make U.K. e-gaming white list.
Antigua and Barbuda’s Minister of Finance and the Economy, Dr. Errol Cort, remains confident that Antigua and Barbuda’s e-gaming regulatory regime will achieve the UK’s “white list”, allowing firms based in the Caribbean jurisdiction to market in the UK.
In a statement issued by the Antiguan government last week, Cort said that the jurisdiction will receive approval in due course given that Antigua and Barbuda’s regulatory and licensing objectives are parallel to the UK’s intended remote gaming regulatory regime which promotes the prevention of underage gaming, protection of the vulnerable, fairness in all games and the combating of illicit activities and financial crimes.Link here.
GROWING FUND MANAGEMENT INDUSTRY TO BENEFIT HONG KONG
Attracting fund managers will boost the development of Hong Kong’s financial services, encouraging the industry to develop new and exciting portfolios and products to entice fund managers to invest their clients’ capital, according to Secretary for Financial Services and the Treasury Professor KC Chan. In the latest FSTB & You article, Prof Chan said these fund managers will also identify new investment vehicles, expanding the scope of financing activities and strengthening Hong Kong’s position as an international financial center.
“Hong Kong offers many unique advantages for fund houses establishing headquarters or regional offices in Asia. Undoubtedly, one of our most important advantages is our close relationship with the Mainland,” he said. “China’s booming economy has led to a rise in personal savings that has generated demand for investment products and wealth management services. Our cultural and linguistic links and our expertise in dealing with the Mainland means that Hong Kong is best placed to serve as the preferred asset management center for the Mainland in the long run.”
By the end of last year, Hong Kong's combined fund management business amounted to HK$6.154 trillion (US$786.6 billion), up 40% on 2005, and an aggregate growth of more than 70% on the past two years. It was equivalent to 4.2 times Hong Kong’s GDP in 2006, compared to 3.3 times in 2005.Link here.
U.S. SENATOR SCHUMER BILL PROPOSES TO RAISE TAX ON ALL INVESTMENT PARTNERSHIPS
Not just on private equity and hedge funds.
Sen. Charles Schumer (D-New York) is drafting legislation that will tax as ordinary income the carried interest earned by all investment partnerships – not just private equity and hedge funds, as currently proposed in the Senate.
A spokesman for Schumer told the Wall Street Journal that Schumer, a member of the Senate Finance Committee, is in favor of extending current proposals drawn up by committee chairman Max Baucus and ranking Republican Chuck Grassley, because they represent a “fairer and broader approach” to the issue. “He favors taxing carried interest as ordinary income because this will generate more revenue and can be applied equally across all industries.”
As a result, other types of investment partnerships, such as real estate, timber, and oil and gas funds would see their carried interest taxed at ordinary income tax rates up to 35% – instead of capital gains tax rates of 15% – if such a bill is approved. While the Baucus and Grassley bill also addresses the issue of the tax treatment of carried interest, its main focus is to stop publicly traded limited partnerships from benefiting from a corporate tax exemption unavailable to most other types of company.
Treasury Secretary Henry Paulson has attacked tax plans in both House and Senate for narrowly targeting certain industries, but the Bush administration has expressed unease at any tax proposal that could inhibit the raising of capital for investment. Congress has held a number of hearings on the taxation of private equity and hedge fund partnerships, and more are scheduled to take place when lawmakers reconvene after the summer recess.
Testifying before the Senate Finance Committee last month, Kate Mitchell, a National Venture Capital Association (NVCA) board member and managing director of Scale Venture Partners, asserted that carried interest paid to venture capitalists has always been consistent with capital gains tax philosophy, and should continue to be recognized as such.Link here.
SENATOR GRASSLEY URGES IRS TO SIMPLIFY TAX FILING FOR SOLE PROPRIETORS
Sen. Chuck Grassley (R-Iowa) has urged the IRS to simplify the tax filing process for U.S. sole proprietorships, in response to a report which said that the majority of sole proprietors under-report their income. “Compliance with federal tax laws is already a major expense and headache for America’s small businesses. So, the burden is on the IRS to streamline filing processes and demonstrate better use of information it has already about compliance problems before sole proprietors are asked to do more,” Grassley commented in a statement.
The remarks of the Senate Finance Committee’s ranking Republican were made after the publication of a report by the Government Accountability Office (GAO) which showed that 6 out of 10 sole proprietors under-reported their income. However, the report concluded that only a small percentage of this group was responsible for the bulk of this tax loss. According to Grassley, the report highlighted the need for the IRS to help sole proprietors to file correctly, by making the process much more simple.Link here.
IRS ISSUES GUIDANCE ON CERTAIN “TRANSACTIONS OF INTEREST”
Trying to nip potential “abusive” transactions in the bud.
The U.S. Treasury Department and the IRS have issued two notices that identify as transactions of interest certain transactions involving “toggling” grantor trusts, and certain transactions involving the contributions of a successor member interest in a limited liability company. Recently released final regulations regarding the disclosure of reportable transactions include the new “transaction of interest” category as one of the reportable transactions subject to disclosure.
“Toggling” grantor trust transactions are utilized by grantors of these trusts in an attempt to avoid recognizing gain, or to claim a tax loss greater than any actual economic loss by purportedly terminating and then reestablishing the grantor status of the trust. These grantor trust transactions usually occur within a short period of time (typically within 30 days).
Transactions involving contributions of a successor member interest are utilized by persons to claim charitable contributions that may be excessive. These transactions arise when a taxpayer acquires a successor member interest, directly or indirectly, in real property, transfers the interest to a tax-exempt organization, and claims a charitable contribution deduction that is significantly higher than the amount that the taxpayer paid for the interest.
In designating both transactions as transactions of interest, Treasury and the IRS are expressing the belief that both transactions have the potential for abuse, but they lack sufficient information to determine whether the transactions should be identified specifically as tax avoidance transactions. The Treasury and the IRS may take one or more future actions, including designating the transactions as listed transactions, or providing a new category of reportable transaction. The notices also alert persons involved with these transactions of interest to certain responsibilities that may arise from their involvement.Link here.
FLAT TAX A SUCCESS IN ICELAND
The Center for Freedom and Prosperity Foundation last week released a report on the dramatic flat tax and supply-side reforms that have taken place in Iceland, boosting growth, efficiency, and competitiveness. Entitled “The Iceland Tax System – Key Features and Lessons for Policy Makers”, found that the flat tax, a low-rate 18% corporate income tax, a 10% flat tax on capital income, and repeal of the wealth tax have dramatically boosted Iceland’s economy, reversing the stagnation and instability that plagued the nation in the 1980s.
The reforms in Iceland have yielded big dividends. Iceland is a rich and successful nation. A third reform was an intermediate-rate flat tax on labor income. The authors find considerable evidence that the low-rate flat taxes on corporate and capital income have been very successful. Indeed, they also find it is quite likely that the government collects more revenue at the lower tax rates.
Andrew Quinlan of the CFPF, said, “The CF&P Foundation study illustrates the wisdom of good tax policy. Iceland has slashed tax rates on productive activity and its economy is booming. The Center has undertaken this project reviewing the tax system of other countries in hopes that policy makers learn from the important tax changes that are taking place around the world.”
Daniel Mitchell, of The Cato Institute, said, “Iceland’s supply-side reforms are further evidence that lower tax rates boost economic performance and create economic opportunity. If policy makers can build upon this success by further lowering tax rates and reducing the burden of government spending, there is every reason to suspect that Iceland will be one of the world’s most prosperous nations.”
Over the next few months, the CF&P Foundation will release several more papers reviewing the tax systems of selected countries. The next study will examine the tax system of Russia. There are plans to issue studies on the tax regimes of Ireland, France, and the U.K. The four previous published papers in the series were on the tax systems of Sweden, Slovakia, Switzerland and Hong Kong.Link here.
POPE BENEDICT TO CONDEMN TAX HAVENS
Pope Benedict XVI is reportedly working on a doctrine that strongly condemns the use of tax havens and offshore bank accounts by wealthy individuals. The UK daily The Times reports that in his second encyclical, which is the most authoritative statement a pope can issue, the Pope will argue that tax avoidance and evasion is morally unjust since it prevents governments from collecting revenues to help society’s least fortunate people.
The Pontiff’s statement is expected to follow on from encyclical Populorum Progressio (On the Development of Peoples), issued by Pope Paul VI four decades ago by calling for the world’s economic and trade system to be regulated in such a way as to avoid “further injustice and discrimination,” the Times reported.
The Pope’s statement is likely to be music to the ears of Italian Prime Minister Romano Prodi, who has made the tackling of tax evasion, widespread in Italy, a high priority. Prodi, a devout catholic, has previously called for the Catholic church to take a moral stand on the issue of tax evasion. “If memory serves, St Paul exhorted the faithful to obey authority,” he told Catholic magazine Famiglia Cristiana.
Prodi recently suggested that tax evasion is “the main reason why we have both overly high taxes for honest people and a heavy deficit in the state’s balance.” According to the Italian government, the so-called “black economy” is equal to about 27% of Italy’s GDP, although it claims to have made great strides in tackling evasion, claiming a €12 billion haul in unpaid taxes last year.Link here.
AUSTRALIA MAKES PROGRESS IN OFFSHORE CRACKDOWN
Australia’s Treasurer, Peter Costello, and Minister for Justice and Customs, David Johnston, announced that the government’s offshore crackdown, known as Project Wickenby, has made significant progress on a number of fronts. According to the officials, there is early evidence of a significant improvement (nearly 70%) in the net tax payable by individuals and companies identified as part of Project Wickenby. In addition, the Australian Taxation Office has raised more than A$50 million (US$42 million) in liabilities from finalizing tax assessments, penalties and interest, and from taxpayers making voluntary disclosures.
Project Wickenby is a multi-agency taskforce investigating and prosecuting internationally-promoted schemes to avoid or evade Australian taxes and launder money. The Australian Crime Commission, the Australian Federal Police and the Australian Securities and Investments Commission (ASIC) have 20 criminal investigations in progress. One investigation recently led to the conviction and sentencing of a high-profile Australian for three offences, including defrauding the Commonwealth. More than 100 additional civil and criminal inquiries are currently in progress.
As part of the 2006-07 Budget, the Government announced funding of more than $300 million over seven years for Project Wickenby. Costello and Johnston said that the Taskforce has increased the capability of the Commonwealth to respond to threats to revenue, including threats instigated offshore. Amendments to tax secrecy provisions that were enacted in April 2007 allow the Commissioner of Taxation to share information more effectively with other government agencies, to facilitate law enforcement activities for Project Wickenby. This has assisted Taskforce agencies to work cooperatively in the detection and prosecution of fraud, money laundering and international tax avoidance and evasion, according to the government.
Project Wickenby has also led to the signing of Tax and Information Exchange Agreements (TIEAs) between Australia and offshore jurisdictions, including Antigua and Barbuda, Bermuda and the Netherland Antilles.Link here.
NEW YORK COURT BARS “TAX TERMINATION SCHEME”
Prohibits promoting strategies based on “fringe opinons of known tax protestors.”
A federal court in Binghamton, New York, has permanently barred Robert L. Schulz and his organizations, the “We the People Congress” and “We the People Foundation”, from promoting a tax scheme that helped employers and employees improperly stop tax withholding from wages, the Justice Department has announced.
In his decision entering the civil injunction order, U.S. District Judge Thomas J. McAvoy, found that Schulz “knew or had reason to know” that his statements in promoting the scheme were false. The court said that in promoting the scheme, dubbed the “Tax Termination Package”, Schulz and the We the People organizations “relied on fringe opinions of known tax protestors whose theories have repeatedly been rejected by courts across the country.” The court further noted that several of those tax protestors have been convicted of tax crimes.
The court said that promotion of the Tax Termination Package caused an estimated harm to the U.S. Treasury of more than $4 million, and ordered Schulz to give a copy of the court order to all people who bought or otherwise obtained the tax scheme materials. Schulz must also give the Justice Department a list of the names, addresses, telephone numbers, and Social Security numbers of all people and businesses to whom Schulz and his organizations distributed the tax scheme materials.
The government’s complaint, filed this past April, alleged that Schulz has used the two We the People entities to market the nationwide tax fraud scheme to employers and employees. According to the complaint, the Tax Termination Package included We the People forms, which the defendants falsely told customers can be used to replace forms the IRS requires employers and employees must use in connection with federal tax withholding from wages. The suit stated that Schulz and the We the People entities falsely suggested that use of the replacement forms would allow customers to legally stop tax withholding. These schemes are on the IRS’s 2007 list of the “Dirty Dozen” tax scams.
“People who sell tax scams are asking for trouble for themselves and their customers who participate in them,” warned Eileen J. O’Connor, Assistant Attorney General for the Justice Department’s Tax Division. Since 2001, the Justice Department has obtained more than 230 injunctions to stop the promotion of tax fraud schemes and the preparation of fraudulent returns.Link here.
CHINA ENACTING A HIGH-TECH PLAN TO TRACK PEOPLE
At least 20,000 police surveillance cameras are being installed along streets here in southern China and will soon be guided by sophisticated computer software from an American-financed company to recognize automatically the faces of police suspects and detect unusual activity.
Starting this month in a port neighborhood and then spreading across Shenzhen, a city of 12.4 million people, residency cards fitted with powerful computer chips programmed by the same company will be issued to most citizens. Data on the chip will include not just the citizen’s name and address but also work history, educational background, religion, ethnicity, police record, medical insurance status and landlord’s phone number. Even personal reproductive history will be included, for enforcement of China’s controversial “one child” policy. Plans are being studied to add credit histories, subway travel payments and small purchases charged to the card.
Security experts describe China’s plans as the world’s largest effort to meld cutting-edge computer technology with police work to track the activities of a population and fight crime. But they say the technology can be used to violate civil rights.
The Chinese government has ordered all large cities to apply technology to police work and to issue high-tech residency cards to 150 million people who have moved to a city but not yet acquired permanent residency. Both steps are officially aimed at fighting crime and developing better controls on an increasingly mobile population, including the nearly 10 million peasants who move to big cities each year. But they could also help the Communist Party retain power by maintaining tight controls on an increasingly prosperous population at a time when street protests are becoming more common.
“If they do not get the permanent card, they cannot live here, they cannot get government benefits, and that is a way for the government to control the population in the future,” said Michael Lin, the vice president for investor relations at China Public Security Technology, the company providing the technology. Incorporated in Florida, China Public Security has raised much of the money to develop its technology from two investment funds in Plano, Texas, Pinnacle Fund and Pinnacle China Fund. Three investment banks helped raise the money.
Shenzhen, a computer manufacturing center next to Hong Kong, is the first Chinese city to introduce the new residency cards. It is also taking the lead in China in the large-scale use of law enforcement surveillance cameras – a tactic that would have drawn international criticism in the years after the Tiananmen Square killings in 1989. But rising fears of terrorism have lessened public hostility to surveillance cameras in the West. This has been particularly true in Britain, where the police already install the cameras widely on lamp poles and in subway stations and are developing face recognition software as well.
Shenzhen already has 180,000 indoor and outdoor closed-circuit television cameras owned by businesses and government agencies, and the police will have the right to link them on request into the same system as the 20,000 police cameras, according to China Public Security. Some civil rights activists contend that the cameras in China and Britain are a violation of the right of privacy contained in the International Covenant on Civil and Political Rights. Large-scale surveillance in China is more threatening than surveillance in Britain, they said when told of Shenzhen’s plans.
The role of American companies in helping Chinese security forces has periodically been controversial in the United States. Executives from Yahoo, Google, Microsoft and Cisco Systems testified in February 2006 at a Congressional hearing called to review whether they had deliberately designed their systems to help the Chinese state muzzle dissidents on the Internet. They denied having done so.
All Chinese citizens are required to carry national identity cards with very simple computer chips embedded, providing little more than the citizen’s name and date of birth. Since imperial times, a principal technique of social control has been for local government agencies to keep detailed records on every resident. The system worked as long as most people spent their entire lives in their hometowns. But as ever more Chinese move in search of work, the system has eroded. This has made it easier for criminals and dissidents alike to hide from police, and it has raised questions about whether dissatisfied migrant workers could organize political protests without the knowledge of police.
Little more than a collection of duck and rice farms until the late 1970s, Shenzhen now has 10.6 million migrants from elsewhere in China, who will receive the new cards, and 1.9 million permanent residents, who will not receive cards because local agencies already have files on them. Shenzhen’s red-light districts have a nationwide reputation for murders and other crimes.Link here.
HOW SEARCH ENGINES RATE ON PRIVACY
But it is been difficult to make direct comparisons, in part because privacy policies tend to be written by lawyers for lawyers. So CNET News.com did some of the work for you by surveying the five leading search companies. We asked them eight questions, including how long they retain search data, how they eventually dispose of it, whether they engage in behavioral targeting, and whether they use information they have from user sign-ups to guide which ads are displayed. We asked follow-ups where necessary for clarification. The verbatim results of the survey are posted in an accompanying story.
The answers suggest that, based on the questions we asked, Ask.com was the most protective of user privacy. In fact, only Ask.com said it would not record what users type into its search engine. (Smaller search engines, including ixquick, said this as well, but we limited our survey to the five largest engines.) Ask.com also said it did not engage in behavioral targeting, which refers to the practice of offering advertisements based on previous searches.
And the rest? Results were mixed. Google avoids behavioral targeting, but after 18 months it performs a partial anonymization of users’ Internet Protocol Addresses (IPAs) – an action that is not terribly privacy protective. Google dominates the search market, with a 53% share of U.S. Web searches in June, according to Nielsen/NetRatings. Microsoft is better on the anonymization front. Peter Cullen, the company’s chief privacy strategist, said users’ IPAs and cookie values are “permanently and irreversibly” disassociated from the search terms after 18 months. But Microsoft does engage in behavioral targeting, while Google does not. Yahoo and AOL were similarly mixed.
These were, nevertheless, remarkable improvements. Google, Microsoft and Yahoo told News.com, in response to an earlier survey we did in February 2006, that they kept search records for as long as the data prove useful. Now they have set expiration dates, and Ask.com went further by promising to stop recording user search histories starting later this year. Google also has shortened the lifespan of its cookies from expiring in 2038 to expiring two years from the last visit.
Search privacy is important because our searching provides a unique glimpse into our personalities and private lives. Search terms have been used to convict a wireless hacker and lock up a man charged with killing his wife. Search engine activity is also a fertile growth area for nosy divorce lawyers and employment disputes. One relatively simple way to protect your privacy when using search engines is to configure your browser to not permit them to place cookies on your computer. (Here is an FAQ on the topic.) Another way is to route all your connections through a proxy server such as Anonymizer, Tor or Black Box Search.Link here.
NSA WIRETAPPING TRIAL BEGINS
It is hard – often impossible – to prove that secret government wiretapping in the name of national security is violating one’s privacy rights. The evidence itself usually is top secret. But one rather obscure case could pull back the veil on a surveillance program that is at the heart of the U.S. fight against terror. In the federal appeals court in San Francisco, lawyers for a Saudi charity accused of helping Al Qaeda will argue that their clients, including two American attorneys, were illegally spied on without the required court warrant.
How do they know? Treasury Department officials inadvertently provided them with National Security Agency (NSA) call logs stamped “top secret”. By the time federal agents had retrieved the logs of recorded calls six weeks later, the information had been shared with five other lawyers, two officials of the Al-Haramain Islamic Foundation’s U.S. branch in southern Oregon, and a reporter with The Washington Post. Because the government took back copies of the call logs, federal judges at the district-court level agreed to let those who saw them rely on their memory of what they saw as evidence. The judges also said that they have “standing” in federal courts – that they have enough of a case to sue the federal government.
If the appeals court agrees with the lower court, the U.S. Supreme Court is likely to become involved. The case could have broader significance as well since it deals with presidential power during wartime. “The difficulty in challenging any secret program is in proving that you were a victim of it,” says Jon Eisenberg, a lawyer in Oakland, California, who represents the now-defunct U.S. arm of the Islamic charitable foundation. “We have that proof, and that makes us unique.”
In recent days, the American Civil Liberties Union and the Center for Constitutional Rights have issued new challenges to the federal government’s domestic spying program. In another case at federal district court in San Francisco last week, the CCR, which represents hundreds of “enemy combatants” at Guantánamo Bay, Cuba, argued that the NSA’s program of warrantless surveillance is unconstitutional. “It is virtually certain that the NSA spied on our confidential communications with our clients as well as conversations with other American attorneys outside of the U.S.,” says Vincent Warren, CCR executive director.
Meanwhile, the ACLU last week filed legal papers with the Foreign Intelligence Surveillance Court (FISC) – the special court set up to decide whether such wiretaps are lawful and can be implemented – seeking the legal opinions upon which that court bases its decisions. ACLU attorneys argue that the only thing known about those opinions has come from administration officials, and that those officials are not disinterested parties in a debate about the appropriate reach of executive branch surveillance. “The public has a right to firsthand information about what the court permitted and what it disallowed,” says Jameel Jaffer, director of the ACLU’s national security project. (Over the years, the secretive FISC has rarely denied wiretap requests.)
Just before they scattered for their August break, members of Congress made it easier for government agencies to eavesdrop on Americans in the name of fighting terrorism, raising once again the issue of domestic surveillance without a court warrant. Since the new law has a six-month sunset provision, civil liberties advocates will be pushing Congress to enact greater safeguards – including judicial oversight – when lawmakers return to Washington next month.
Meanwhile, the Oregon wiretapping case to be heard before the Ninth U.S. Circuit Court of Appeals this week may well reveal details directly related to the legality of domestic surveillance. The government alleges that the Oregon-based chapter of the Saudi charity laundered $150,000 in donations to help Islamic fighters in Chechnya with ties to al Qaeda. Attorneys for the group vigorously deny that charge. And they claim they were illegally spied upon, saying they have seen the government’s own proof of that in the form of NSA phone logs.
Treasury and Justice Department officials refuse to comment on the case. But in court documents urging dismissal, administration officials wrote, “Whether plaintiffs were subjected to surveillance is a state secret, and information tending to confirm or deny that fact is privileged.”Link here.
PATRIOT ACT USED TO SEARCH FOR EVIDENCE IN COCKFIGHTING CASE
Just after midnight on May 13, 2004, a small team of FBI agents crept into the legendary Del Rio Cockfighting Pit in Cocke County, Tennessee. The illegal gambling arena was closed at the time, and agents were able to copy a computer hard drive before slipping away. They did not notify the property’s then-owner, Michael Maynard of Hot Springs, North Carolina, of the search for another three months.
Acting under the authority of the Patriot Act, the agents had obtained a search warrant that allowed them to clandestinely enter the property, search for evidence and not tell anyone about it until the government or a judge was ready to let the owners know they had been there. Originally touted as a tool in the struggle against terrorism, the Patriot Act now was being used in the hills of East Tennessee as part of a shadowy war that had been going on for decades, a struggle that pitted the federal government against a homespun Appalachian culture that had churned out generation after generation of proud outlaws.
The use of delayed-notice search warrants, which also are called “sneak-and-peek” warrants, is very rare, according to the most recent figures from the federal government. Such warrants were not a new tool that was created by the Patriot Act. The ability to conduct such searches had been upheld by the courts for many years, but the 2001 Patriot Act codified how they are to be used and, according to critics, greatly expanded the conditions under which they can be sought.
To Joe Baker, an attorney who represents alleged Del Rio pit employee Gerald David Allen II, the use of the Patriot Act in domestic investigations is problematic because it was touted as a tool to fight international terrorism. While Baker said “it would be inappropriate to comment” specifically on his client’s case, he said the use of Patriot Act provisions in cases with no ties to terrorism is questionable. U.S. Attorney Russ Dedrick, who oversees federal prosecutions in East Tennessee, declined to comment for this story because of pending criminal cases.
The Del Rio search was part of the “Rose Thorn” probe, a massive investigation into public corruption and organized crime in Cocke County. Based on what federal authorities had heard by the time of the search, the stakes could hardly have been higher, according to court records. Then-Sheriff D.C. Ramsey and several relatives allegedly were milking the Del Rio pit and other illegal gambling operations for cash. The FBI also was looking into drug smuggling and auto theft rings.
When FBI Special Agent Thomas Farrow sought the warrant, he cited the dangers that prompt disclosure might pose to those who were secretly cooperating with federal authorities as well as to the investigation as a whole. But the use of such warrants poses thorny issues about privacy and the constitutional right to be free of unreasonable searches or seizures, according to the American Civil Liberties Union, which has been critical both of the use of sneak-and-peek warrants and how the federal law was changed in 2001.
“This is one of the few provisions of the Patriot Act that was sneaked into the Patriot Act in the middle of the night so that no one knew it was there,” said Michelle Richardson, a legislative consultant for the ACLU’s Washington, D.C., Legislative Office. “It was passed without everyone knowing about it.” Prior to the Patriot Act, she said, federal courts had held that agents could conduct secret searches and defer notifying the targets for short periods of time in very limited circumstances, such as when someone’s life might be in danger. “But this broadens it to include (the risk of) interference with an investigation, and this creates a sort of catch-all for law enforcement when it’s inconvenient for them to follow the rules.”
A spokesman for the Justice Department’s National Security Division said he could not discuss particulars of the Del Rio search but did explain the department’s stance on delayed-notification warrants. “Delayed-notification search warrants are a long-existing crime-fighting tool upheld by courts nationwide for decades in organized crime, drug cases and child pornography,” said spokesman Dean Boyd. Federal authorities still must convince a federal judge of the necessity of such a search, and judges must periodically review the case to ensure that keeping the warrant secret is required.Link here.
GONZALES COULD GET SAY IN STATES’ EXECUTIONS
Proposed rules would let the attorney general sign off on “fast tracking” death penalty appeals.
The Justice Department is putting the final touches on regulations that could give Attorney General Alberto R. Gonzales important new sway over death penalty cases in California and other states, including the power to shorten the time that death row inmates have to appeal convictions to federal courts. The rules implement a little-noticed provision in last year’s reauthorization of the Patriot Act that gives the AG the power to decide whether individual states are providing adequate counsel for defendants in death penalty cases. The authority has been held by federal judges.
Under the rules now being prepared, if a state requested it and Gonzales agreed, prosecutors could use “fast track” procedures that could shave years off the time that a death row inmate has to appeal to the federal courts after conviction in a state court. The move to shorten the appeals process and effectively speed up executions comes at a time of growing national concern about the fairness of the death penalty, underscored by the use of DNA testing to establish the innocence of more than a dozen death row inmates in recent years.
Amid the public debate, the number of people executed in the U.S. has declined steadily since the mid-1990s. California and several other states have moratoriums on lethal injections, stemming from legal challenges. Opponents say the way the states administer a 3-drug lethal cocktail unnecessarily risks excessive pain for the inmate and therefore violates the constitutional bar against cruel and unusual punishment.
Prosecutors say many death penalty cases take far too long to resolve even when the issue of guilt is clear. Especially in the West, where the U.S. 9th Circuit Court of Appeals in San Francisco has blocked many executions, cases can take decades to wind through the courts. In its most recent term, the U.S. Supreme Court restored the death penalty in three cases in which the 9th Circuit had reversed the sentence.
On the other side, advocates for death row inmates and some legal experts say the rules would make a bad system worse. “It is another means by which people are determined to shut the federal courts down to meaningful review of death penalty cases,” said Elisabeth Semel, director of the Death Penalty Clinic at the UC Berkeley law school. “The inevitable result of speeding them up is to miss profound legal errors that are made. Lawyers will not see them. Courts will not address them.”
“This is the Bush administration throwing down the gauntlet and saying, ‘We are going to speed up executions,’” said Kathryn Kase, a Houston lawyer and co-chair of the death-penalty committee for the National Association of Criminal Defense Lawyers. About 3,350 people are on death row in the U.S., including more than 600 in California. Most were sentenced in state courts, but death cases almost always end up being reviewed by federal judges too.
Critics also say there is a major conflict of interest for the nation’s top law enforcement officer to judge the qualifications of lawyers defending people whom government officials are seeking to put to death. Others have doubts about giving Gonzales in particular more power. Death penalty foes say his record on the issue inspires no confidence that the rules will be administered fairly. As legal advisor to then-Texas Governor George Bush in the 1990s, he gave what many saw as cursory treatment of clemency petitions of capital defendants whom the state subsequently put to death.
“It is almost a cruel joke for Congress to have said, ‘What we would like to do is improve the way states handle these’ ... and then put it in the hands of, all people, the attorney general,” said Lawrence Fox, a Philadelphia lawyer who teaches legal ethics at the University of Pennsylvania Law School. “It really is quite extraordinary. He is the chief prosecutor of the United States. He couldn’t possibly be unbiased.” Fox said he would have problems with any attorney general wielding that power.Link here.
THE MERCENARY REVOLUTION
If you think the U.S. has only 160,000 troops in Iraq, think again. With almost no congressional oversight and even less public awareness, the Bush administration has more than doubled the size of the U.S. occupation through the use of private war companies. There are now almost 200,000 private “contractors” deployed in Iraq by Washington.
This means that U.S. military forces in Iraq are now outsized by a coalition of billing corporations whose actions go largely unmonitored and whose crimes are virtually unpunished. In essence, the Bush administration has created a shadow army that can be used to wage wars unpopular with the American public but extremely profitable for a few unaccountable private companies.
Since the launch of the “global war on terror”, the administration has systematically funneled billions of dollars in public money to corporations like Blackwater USA , DynCorp, Triple Canopy, Erinys and ArmorGroup. They have in turn used their lucrative government pay-outs to build up the infrastructure and reach of private armies so powerful that they rival or outgun some nation’s militaries. “I think it’s extraordinarily dangerous when a nation begins to outsource its monopoly on the use of force and the use of violence in support of its foreign policy or national security objectives,” says veteran U.S. Diplomat Joe Wilson, who served as the last U.S. ambassador to Iraq before the 1991 Gulf War.
The billions of dollars being doled out to these companies, Wilson argues, “makes of them a very powerful interest group within the American body politic and an interest group that is in fact armed. And the question will arise at some time: to whom do they owe their loyalty?”
Precise data on the extent of U.S. spending on mercenary services is nearly impossible to obtain – by both journalists and elected officials – but some in Congress estimate that up to 40 cents of every tax dollar spent on the war goes to corporate war contractors. At present, the U.S. spends about $2 billion a week on its Iraq operations. While much has been made of the Bush administration’s “failure” to build international consensus for the invasion of Iraq, perhaps that was never the intention. When U.S. tanks rolled into Iraq in March 2003, they brought with them the largest army of “private contractors” ever deployed in a war. The White House substituted international diplomacy with lucrative war contracts and a coalition of willing nations who provided token forces with a coalition of billing corporations that supplied the brigades of contractors.
Empowered by their new found prominence, mercenary forces are increasing their presence on other battlefields. In Latin America, DynCorp International is operating in Colombia, Bolivia and other countries under the guise of the “war on drugs”. U.S. defense contractors are receiving nearly half the $630 million in U.S. military aid for Colombia. In Africa, mercenaries are deploying in Somalia, Congo and Sudan and increasingly have their sights set on tapping into the hefty U.N. peacekeeping budget (this has been true since at least the early 1990s and probably much earlier). Heavily armed mercenaries were deployed to New Orleans in the aftermath of Hurricane Katrina, while proposals are being considered to privatize the U.S. border patrol.
This unprecedented funding of such enterprises, primarily by the U.S. and U.K. governments, means that powers once the exclusive realm of nations are now in the hands of private companies with loyalty only to profits, CEOs and, in the case of public companies, shareholders. And, of course, their client, whoever that may be. CIA-type services, special operations, covert actions and small-scale military and paramilitary forces are now on the world market in a way not seen in modern history. This could allow corporations or nations with cash to spend but no real military power to hire squadrons of heavily armed and well-trained commandos.
“It raises very important issues about state and about the very power of state. The one thing the people think of as being in the purview of the government – wholly run and owned by – is the use of military power,” says Rep. Jan Schakowsky. “Suddenly you’ve got a for-profit corporation going around the world that is more powerful than states, can effect regime possibly where they may want to go, that seems to have all the support that it needs from this administration that is also pretty adventurous around the world and operating under the cover of darkness.
“It raises questions about democracies, about states, about who influences policy around the globe, about relationships among some countries. Maybe it’s their goal to render state coalitions like NATO irrelevant in the future, that they will be the ones and open to the highest bidder. Who really does determine war and peace around the world?”Link here.
HOW THE DEMOCRATS BLEW IT IN ONLY EIGHT MONTHS
Led by Democrats since the start of this year, Congress now has a “confidence” rating of 14%, the lowest since Gallup started asking the question in 1973 and five points lower than Republicans scored last year.
The voters put the Democrats in to end the war, and it is escalating. The Democrats voted the money for the surge and the money for the next $459.6 billion military budget. Their latest achievement was to provide enough votes in support of Bush to legalize warrantless wiretapping for “foreign suspects whose communications pass through the United States.” Enough Democrats joined Republicans to make this a 227-183 victory for Bush. The Democrats control the House. Speaker Nancy Pelosi could have stopped the bill in its tracks if she had wanted to. But she did not. The Democrats’ game is to go along with the White House agenda while stirring up dust storms to blind the base to their failure to bring the troops home or restore constitutional government.
The row over the U.S. Attorneys and the conduct of Attorney General Alberto Gonzales has always been something of a typhoon in a teaspoon. The Democrats love it, since they imagine it portrays them to the public as resolute guardians of the impartial administration of justice, a concept whose credibility most Americans sensibly deride. The Democrats now plan to track Gonzales’s firing of the U.S. Attorneys back to that comic opera villain of the Bush era, Karl Rove, another great provoker of dust storms.
The one Democrat acting on principle in the Gonzales affair has been Senator Russ Feingold. He at least tried to dig into the visit of chief White House counsel Gonzales, as he then was, to the bedside of Attorney General John Ashcroft, to get him to sign off on the illegal wiretaps. And how did the Democrat-controlled Congress deal with Feingold’s efforts to nail Gonzales for his efforts to undermine the Constitution and for his prevarications under oath? It promptly legalized the eavesdropping.
Just as the Democrats work tirelessly to demonstrate to the voters that it makes zero difference which party controls Congress, the political establishment forces all candidates for the presidential nomination to sever any compromising ties to sanity and common sense. Right now they are hosing down Barack Obama because he said he would be prepared to meet with Kim Jong Il, Hugo Chávez, Mahmoud Ahmadinejad and Fidel Castro to hash over problems face to face. The pundits whacked him for demonstrating “inexperience.” Experienced leaders order the CIA to murder such men.Link here.
THE COLDEST MONSTER, THE CRUELEST SLAVEMASTER
It is not that often that we can say with perfect confidence that a judicial ruling will lead directly to the needless agonizing deaths of innocent people. The U.S. Court of Appeals for Washington, D.C. handed down just such a ruling (PDF) in a case brought against the FDA by the Abigail Alliance for Better Access to Developmental Drugs.
Bobbing in the porridge of intellectual perversity served by the court is this particularly unpalatable morsel: “[C]reating constitutional rights to be free from regulation based solely upon a prior lack of regulation would undermine much of the modern administrative state, which, like drug regulation, has increased in scope as changing conditions have warranted.” From this single observation we can extract the logic (if that word can be tortured into applying here) of the entire ruling:
Not surprisingly, the court tried to buttress this argument by invoking that all-purpose exterminator of liberties, the “War on Drugs”. If there is a “deeply rooted” right to experimental drugs and other treatment, the court sneers, should there not likewise be a “deeply rooted” right to use marijuana and other narcotics, which were not subject to federal regulation until 1937? Well, now that you mention it, the constitutional case for regulating drugs of any kind is thin enough to make Keira Knightley look zaftig by comparison. Operating on such a slender pretext, the State has grown obese and murderous. And the war on narcotics, predictably, has expanded into a war on non-sanctioned medical treatment.
For the D.C. Appeals Court, the default setting is “paternalistic authoritarianism”, which is why sees nothing amiss in decanting lines such as this: “A prior lack of regulation suggests that we must exercise care in evaluating the untested assertions of a constitutional right to be free from new regulation.” The only way this can make sense is if one assumes, – contrary to the text and history of the Constitution (particularly the Ninth Amendment), the commentaries of those who drafted it, the recorded debates of those who ratified it, and the common sense invested in each of us by our Creator – that individual rights, rather than grants of government power, must be specifically enumerated.
In that mental universe, it is freedom, rather than power, that must be justified. The candor with which the court emits such collectivist nostrums is amazing. And undergirding them is the tacit but unmistakable understanding that from the court’s perspective, the State owns each of us, and as slaves, we must defer to the State’s power to do as it sees fit – no matter what needless cruelty results.
In a dissent that is as intellectually taut as the majority opinion is flaccid, Judge Judith Rogers italicizes the obvious – namely, that the “right of a person to save [his] own life,” which was entirely ignored in the decision, is the fundamental human liberty. An illustration of the court’s alienation from reality is found in the fact that Rogers considered it necessary to fortify this “Well, duh” proposition by supplying quotes from Blackstone and Samuel Adams on the subject.Link here.
PUT THE MONSTER IN THE CORNFIELD
An old and rather famous Twilight Zone episode is about a small rural town in Ohio, a town every single bit as Norman Rockwell as the early 1960s in which it fictitiously existed. A serene, peaceful, sleepy place to live.
Until the monster came to town. The monster took away the electricity, the telephones, the automobiles – everything mechanical or technological. Because these things displeased him. He isolated the town from the outside world, creating an acutely finite island of existence in which there were few creature comforts left, and from which there was no escape. And he could read the thoughts of the townspeople. Everyone did their best to think only happy thoughts, do happy things. To displease the monster was to risk being sent to the cornfield, you see. And the cornfield was death.
The episode in question was “It’s A Good Life”, and the “monster” was a 6-year-old boy, Anthony Fremont. Anthony has been born with a very special and terrible gift: He can make anything at all reality, simply by using his mind. Because of this, the adults in town are stricken with fear by his very presence. They go to any length to keep him appeased. Knowing this, Anthony governs them like a child king, an utterly irresponsible, unaccountable tyrant who has no sense of consequence whatever for his actions. His abilities have endowed him with a means by which to entirely subvert and abdicate the natural process of maturation. As a result, the unspoken implication among the adult townsfolk is that – barring Anthony’s own demise – in due course, he will cause them all to die. However, in order to forestall the inevitable, the adult population are constantly reminding Anthony, no matter how egregious one of his acts, that “Why, it’s good you did that Anthony! Real good!” And, “Everyone here loves you, Anthony! We love you, son!”
Twilight Zone creator Rod Serling often used his program to convey political and social messages which, at the time (perhaps even today, in many cases) would never have otherwise made it past network censors. As he said himself, “I can have a Martian say what Republicans and Democrats could never get away with.” My feeling is that “It’s A Good Life” makes one of the most powerful commentaries about government and its insane relationship to society ever.
The townsfolk fear Anthony greatly, even hate him, though they are afraid to admit this (or even think it too loud), much less take action against him. His own mother and father still harbor feelings of parental devotion – albeit they know their son is a walking, breathing nightmare. He is tolerated and co-existed with only on account of the damage he can do, and what everyone feels they still have to lose. Indeed, the one person who rebels during the episode, after getting drunk on brandy during a birthday party held at the Fremont household in his honor, points ominously at little Anthony and states, “You. You monster. You murderer. You go ahead and think about me, Anthony. Think real hard.” And then, his unsober, frantic eyes sweeping the room, he continues, “And maybe some man in this room, someone with the guts, someone who’s sick to death of living in a place like this ... maybe that someone will come up behind you and lay something heavy across your skull.” But no one flinches. In the end, even after screaming, “Won’t somebody pick up a bottle or a lamp or SOMETHING and END THIS ONCE AND FOR ALL!”, Anthony turns the offending party into a grotesque jack-in-the-box, and at his father’s pleading, wishes it “away into the cornfield.” The revolt is thus crushed, and the darkness of Anthony’s rule continues.
The allegory to the “real” world is in overt evidence. Let us take it a step further, though. While government is widely reviled at many levels by people across the political and philosophical spectrums, I hold that it is only the libertarian anarchist whose denunciation is at once consistent, moral, and logical. As examples, the leftist may detest the Drug War, yet when the State levies taxes by force to redistribute as welfare, he is the first to exclaim that it is good that Anthony did that. Real good. Likewise, the right-winger may loathe gun confiscation, but when American forces are sent abroad adventuristically – to plunder, kill, and impose their will on another people – he is proud to proclaim that he loves Anthony. We all love you, son. Neither realizes that there is either liberty (no State) or tyranny (a State, any State). There is and can be no “reasonable” compromise, no “middle ground”.
Neither realizes that there is no such thing as half a monster. And that unless we put that monster there first, likewise, the cornfield awaits us all.Link here.
THE SOUL IS SOFTWARE
The need for love and freedom cannot be programmed away.
What is the soul? It is not a supernatural construct. I see the soul as one’s personality, including deeper levels that are typically beyond conscious awareness. The soul is embodied within us as software, running on the hardware of our brains and bodies.
That last is difficult for some to accept, but we have to be some type of thing, and the type of thing we are is software. This does not negate or diminish characteristics that make us human, such as compassion, love, wonder, or deep feeling generally, any more than other knowledge about ourselves diminishes us. Knowing that we are software merely provides another level of understanding about human nature. Given the present dire circumstances of the human condition, we need all the understanding we can get.
Science fiction and science itself both tell us that we are software entities. A half-century ago, SF writers and a few scientists were talking about the possibility of someday downloading human personalities into computers. This understanding of the soul as software (or, if you prefer, as an ongoing result of the running of software) is more entrenched and even better supported today. It does not take modern science to see that the soul, the inner person, the personality – call it what you will – is a process of some kind. Software is what makes that process possible. The soul comes into being as a process enabled and guided by software, with:
To use a modern and simplified analogy, you – as a person, meaning as both a body and a soul – are the MP3 Player, the MP3 music files, and the programs that handle and play the music files. Regardless of the platform, programming language, and other variables involved, stored and retrievable information, including stored data and/or instructions for various actions, is the essence of software.
Note that the purpose of software is ultimately to create an action or an experience. Neither software itself nor the hardware it runs on is the essence of what is wanted. Software, as opposed to its physical manifestation on (say) a hard drive, has no location in space and cannot be seen, touched, heard, or otherwise detected directly. Like the mental image of a flower, software is in essence conceptual, not physical. The ineffable nature of software is tellingly similar to the nature of consciousness or the soul – difficult to describe or define because, once again, both consciousness and the soul are merely specific effects of the software within a living creature such as a human being – or perhaps, at some point, within a machine. Little is yet known about the software involved in creating the soul, and clearly this software, including the software utilized by DNA, is different in many ways from the software running on a modern digital computer.
In real humans, integration between the soul and the body is extremely tight. For one example, “gut feelings” can include important elements of our consciousness. Nerve cells in the gut actually contain most of the serotonin in the body and cells in the gut use serotonin receptors no different from those in the brain. Serotonin is a hugely important neurotransmitter involved in our sense of well-being and in other psychological states, including anger and mood generally. Modeling a virtual personality in ways that miss such contributions from the body outside the brain would create something less human-like than it might be, and perhaps actually inhuman.
Feelings are the guideposts to appropriate behavior in humans and in the animal kingdom generally. Without healthy access to feeling, people can behave in shockingly horrible ways, as history and current events show only too well. How will hyper-intelligent and perhaps conscious machines without human feeling behave? It appears that we will know soon enough, for better or worse.
If the soul is software, then our needs for love and freedom are what programmers would call hard-coded into the system. People can learn to deny their needs for love and for freedom, just as they can learn to deny most other needs (even for something as basic as food – consider the anorexic). But denying needs is not the same as not having them. Our needs for love and freedom are real and unchanging, no matter how strongly we deny them. These needs are fundamental to the human condition.
The connected human duality of love and freedom cannot be denied without consequence, and we see those consequences all around us. The good news is that this truth has not been lost, and cannot be lost, for it is engraved within us. The soul is software. Software is information. The most important information about the human condition is that love and freedom together are the environment every person is born for.Link here.
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