Wealth International, Limited

Offshore News Digest for Week of September 17, 2007

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


I would like to highlight the sectors, businesses and companies that are worth considering here from a local investor’s perspective in Hong Kong. These notes are by no means investment recommendations. Rather, my tour notes are in the style of Jim Rodgers’s book Investment Biker. I want to give you an idea of what investment themes to look out for, some background information on each, and explain why everybody is so excited about these particular opportunities in this part of the world.

If you join us on the tour, you will land in Chek Lap Kok airport. It is one of Asia’s most modern and busiest airports, which serves over 80 international airlines and provides more than 5,000 flights per week to more than 150 destinations. In addition to being a regional transport hub for Asia (similar to L.A.’s international or New York’s Kennedy), Chek Lap Kok is one of the largest international air cargo handlers in the world. The airport is cited to go for a listing on the local stock exchange in 2008 as the government is looking to partially privatize it. The local airline, Cathay Pacific, is Asia’s second most profitable carrier after Singapore Airlines. Cathay is the dominant international carrier flying into 104 international routes and 30 routes in China thanks to its recent acquisition of Hong Kong’s other airline, Dragon Air.

You may take the high-speed train from the airport. This train will whiz you directly into the heart of Hong Kong’s Central business district. The railway is operated by the MTR Corporation Limited, which also operates Hong Kong’s subway system. MTR (“Mass Transit Railway”) has recently merged with the government-owned railway company: Kowloon-Canton Railway Corporation. With this merger, MTR now fully operates all of Hong Kong’s domestic subway and rail networks. But the real value of the merger lies in property concessions. MTR is now able to develop the stations and surrounding government land for retail malls and private housing developments. The MTR makes 65% of its revenues from property sales and rental.

The airport train will speed you across the world’s largest suspension bridge – the Ching Ma suspension bridge. As you cross it, you will see Hong Kong’s container terminals located on the coast of Kwai Chung. Hong Kong is a major logistics hub for several reasons. First, Hong Kong is the gateway to the Pearl River Delta – China’s highly industrialized area and production plant to the world. Hong Kong is also a free port, where there is no tax for imports or exports. And finally, Hong Kong is one of the most modern and efficient deep port facilities in the world. Port Operators such as HIT – owned by Hutchinson Whampoa and Wharf Holdings – unload ships from large carriers such as COSCO Pacific and China Merchants.

As you arrive in Central, you will see one of the world’s most magnificent city skylines with gleaming skyscrapers dotting the landscape. The tallest building is the International Finance Centre (IFC), where rentals reach and surpass Manhattan’s madness in price. Nearly all of the 4.7 million square feet is fully leased out. The surrounding shopping mall and 5-star Four Seasons Hotel are both a joy to walk through. You will see rich bankers come down from their office towers to the mall to mingle with richer Tai-Tais – rich wives of wealthy businessmen, who do not have to work, so they enjoy most of their day spending money on the house and themselves.

The developers of IFC are Sun Hung Kai Properties and Henderson Land – probably two of Hong Kong’s best and biggest property developers. They also own a lot of residential property projects throughout Hong Kong where there is a shortage of housing and a growing population. The Hong Kong property sector is a no-brainer investment for locals. There is an extremely tight supply of land because the government only releases a few plots of land per year for sale, and the population is growing. However, constant speculation by locals has caused property prices to spiral up and down – good news for property developers, bad news for home buyers.

Our tour will be staying in Mandarin Oriental), one the most luxurious hotel chains in Asia. The Mandarin Oriental is partly listed and partly owned by the Jardines’ group. The Jardines’ group also happens to be Central’s largest landlord through its other listed subsidiary Hong Kong Land. Jardines’ roots date back to opium trading in the colonial days, which means they are still not favorites of the Chinese government. It is one of many foreign-owned conglomerates known as “Hongs”, in Chinese. Today the Jardines Group is listed in Singapore and offers an interesting play into Hong Kong as they often trade at a discount to other local property counters. Plus, this company remains the dominant landlord in the business district.

The other local “Hong” with an illustrious colonial past is Hong Kong and Shanghai Banking Corporation or HSBC. Starting as the merchant bank for trade ships moving along the East-West routes, HSBC today is a powerhouse of international banking. This global super bank handles global retail, corporate and investment banking clients from around the world. Even though HSBC now rivals huge conglomerates like Citigroup and UBS, HSBC’s roots still remain in Hong Kong with its headquarters based in Central.

Other China super banks are emerging throughout Hong Kong. Industrial Commercial Bank of China (ICBC) is one of the four state banks that were listed in Hong Kong in 2005. Due to its sheer size and soaring stock price, ICBC at one time had a market capitalization of $254 billion. That means their market capitalization exceeded th capitalization of Citigroup. In addition, the other banks that make up the “Big 4” as they are known are China Construction Bank (CCB), China Agricultural Bank (plans to list in 2008) and Bank of China.

The financial floodgates are finally open.

There is profit windfall heading straight for Hong Kong. A recent landmark ruling from the mainland Chinese government will soon allow Chinese retail investors to finally take advantage of Hong Kong markets. China officials were worried about the mainland stock bubble and buildup of excess liquidity (hot money) chasing the runaway stock markets in Shanghai and Shenzhen. So they ruled investors could finally send funds overseas and straight into the coffers of Hong Kong stock market.

In a pilot scheme announced on August 20th, China local retail investors will very soon be allowed to invest directly in Hong Kong stocks, bypassing the over-hyped mainland exchanges. This program is initially limited to one city within China, but if successful, the scheme will spread to other cities like Shanghai and across the nation. China always deregulates slowly on a city by city basis to ensure an orderly flow of funds and not a flood of money if they were to open the floodgates suddenly.

As the sole beneficiary of this vast money flow, the impact on the Hong Kong stock market should be tremendous. China investors will start to invest their funds into familiar H shares – state owned companies that are listed in Hong Kong, as well as Red Chips (Hong Kong companies that derive all their income from China businesses). You might have heard of the Red Chip bubble in 1997, when China mania caught on to China related shares. This time is different as the fundamentals are there to support the valuations. Yes, real businesses with real earnings are flourishing in China. As turnover soars, beneficiaries would be listed stockbrokers like Quamnet and Sun Hung Kai Financial. Also, you may want to consider the Bank of China (Hong Kong). The Bank of China is the main bank handling all the settlement and trading for the Chinese red tide.

Catering to shopoholics.

As you travel through Central Hong Kong, you will notice the abundance of designer shops and retail outlets. These stores target and cater to the ultra-chic around the Mandarin Oriental Hotel. Most of these shops are located within the Landmark and the IFC shopping malls. Shopping is a local pastime of Tai Tais and visitors alike. Shoppers love to visit Hong Kong malls because big-ticket items are much cheaper with no sales tax. Plus, they use the Hong Kong dollar, which is fixed to the depreciating USD.

Every year, 25 million foreign visitors come to Hong Kong, eager to splash their cash on Western label goods (imported with no taxes). To these visitors and locals alike, Hong Kong is indeed a shopping Nirvana. If you visit one of the big malls, you will begin to understand this shopaholic tendency. Pacific Place is a beautiful mall located in the urbanized area Admiralty – in the eastern side of Central Hong Kong. Pacific Palace is owned by Swire Pacific. Wharf Holdings owns 2 big malls – Times Square and Ocean Terminals – where the big cruise liners disembark.

One of the hottest big-ticket items for visitors to Hong Kong is jewelry, and more specifically watches. If you visit the local chain Chow Tai Fook (owned by local conglomerate New World Developments), you will see the demand coming from China tourists. Rich Chinese love western designer labels. For electronic gadgets, there is an electrical goods chain called Gome, with 587 stores throughout China. For the ladies, you must visit a SaSa store – a Hong Kong-based chain which stocks every major brand of cosmetics and perfume you can imagine. SaSa operates on high profit margins as it imports brand cosmetics from other developing countries and sells them tax-free. SaSa has around 95 retail stores and counters in Asia where women will spend half their incomes on themselves. Local food outlet Café De Coral serves Asian fast-food, Chinese style. With over 330 outlets in Asia and over 200 outlets in North America, this local eatery is fast becoming the McDonalds of the East.

Gracing the magnificent harbor-front in Hong Kong is the Hong Kong Convention and Exhibition Centre, where large international expos and conventions are held year-round. Hong Kong is the regional center for the international convention business. Global Sources home in Hong Kong and organizes many B2B sourcing fairs. In addition to running major trade shows, Global Sources publishes trade directories listing over 1.8 million products and more than 150,000 suppliers.

Also involved in the sourcing from China is the Li and Fung Group, which is one of the world’s largest export and sourcing firms. In addition to managing the supply chains for many of the U.S.’s top merchandise outlets, Li and Fung privately owns Toys ‘R’ Us. This company also owns Convenience Retail Asia, which has 950 7-11 type convenience stores throughout Asia.

Macau – Las Vegas of the East

You can easily reach Macau by taking the one hour ferry ride from Hong Kong to the former Portuguese enclave. Since the deregulation of gaming in 2004, the big players of American gambling like Sands and Wynn Resorts have moved in to setup spectacular hotels and casinos. Last month, Las Vegas Sands (LVS) Chairman and CEO Sheldon Adelson opened the groupwts Venetian Macao. It is a giant casino, hotel and convention complex that cost US$2.4 billion. Sands Group expects to spend as much as US$12 billion on 14 more hotels with casinos offering a total of 20,000 rooms by the end of 2009.

Local players like the established Lisboa, owned by Shun Tak Holdings, and the newer Melco are building their own mega-hotel casinos to attract the gamblers to Macau as well provide family style resort vacations. In the 3 years of deregulation, Macau’s tax revenues on gaming have already surpassed that of Las Vegas in the first half 2007. And try the Portuguese wine and Macanese food – a fusion of East and West which even Hong Kong cannot beat.

Shenzhen – Enter the Dragon

From Hong Kong, you can take a day trip into Shenzhen. The border train runs from Kowloon 60 miles north into Lo Wu station, which is the border crossing and gates to the Middle Kingdom – the literal meaning of “China”. Shenzhen has grown quickly from a sleepy border town in the marshes to a major city servicing cross-border trade. Property prices have doubled (yes up 100%) in 2006 alone and major developers like Shum Yip Investments have done very well.

An opportunity to visit Shenzhen Overseas Chinese Town (owned by OCT listed in Shenzhen) is interesting and you can see the (“Disney style”) Chinese theme parks and leisure facilities. The leisure industry in China is one of the fast growing sectors as richer consumers take more holidays to enjoy their wealth. China Travel is the dominant travel agent in China.

A visit to the Peak of Hong Kong is a great way to conclude your investor’s sightseeing trip. As you reach the tram station office in Garden road you will be greeted by a wax-work of Mr. Li Ka Shing, Asia’s richest man. Mr. Li is the local Tai-Pan (“Tai-Pan in Chinese means the big boss of a major conglomerate or Hong”) of companies Hutchinson Whampoa, Cheung Kong Holdings, Hong Kong Electric, and more. With a net-worth of US$19.9 billion, the self-made Mr. Li is revered by the Chinese like Mr. Gates and Mr. Buffet is by the U.S.

Moving up the steep incline of the peak tram, you will gaze into the windows of expensive apartments where yuppies relax from a hard day at work. As the city prospers, so have property prices. Local property developers like Chinese Estates and Hysan made their fortunes building homes for the burgeoning middle class of Hong Kong. The Peak shopping center and Tower was developed by Hang Lung Properties and is one of Hong Kong’s major tourist attractions. At the top of the Peak is where the Mr. Li and the other Tai-Pans live with their Tai-Tais and Princelings (the privileged rich kids of Tai-Pans and Tai-Tais).

Far beyond the mountains of Kowloon, you may just see the lights of Shenzhen that rises like a Phoenix from the marshes. To the South, the magnificent Ching Ma bridge connects Hong Kong to the mainland. To the East, the big container ships move “made in china” cargo out through the world’s shipping lanes. To the North, you can almost imagine invisible Big Red Gates that leads into China – a consumer market of 1.3 billion people - the biggest untapped market in the world. As these metaphorical gates open, a red tide of capital sweeps into Hong Kong, turning everything it touches into gold. And as you reflect on all the opportunities of your Hong Kong visit, the ideas you have digested will become as clear as the fresh mountain air you breathe. You will understand why Hong Kong is known as the Gates to the Middle Kingdom.

Part I, Part II.
Hong Kong must fully tap potential of CEPA, Says Tsang – link.


Everyone is aware that Chinese products have had quality problems, but you would think its blue-chip stocks, bearing the New York Stock Exchange’s seal of approval, would be safe Wrong. It turns out that the NYSE’s usual corporate governance requirements do not apply to foreign firms or those with 50% or more control in the clutches of a single entity. That exemption applies to all 10 Chinese firms with NYSE-listed ADRs – all are ultimately controlled by the Communist government.

RateFinancials, a New York research outfit, dug into its financials in a report about to be released and found worrying signs, such as poor quality of earnings, lack of transparency and conflicts of interest. This has not stopped its stocks from flying high in recent months. Says RateFinancials’ president, “Ultimately, investors are trusting the Chinese government to do what is best for them, even if it’s not synonymous with its own interests.” Good luck. Here are RateFinancials’ findings.

Link here.


Obelisk International, which advises investors on opportunities in real estate markets worldwide, says that the current weakness of the dollar creates good buying opportunities for holders of the euro and the British pound in areas whose currencies are linked to the greenback. “Over the last three years the dollar has seen a major downward turn against some of the world’s major currency markets, but this has also had a positive effect on pegged currency countries that have seen renewed tourism and bullish property investment” says Tim vanDijk Project Manager for Obelisk. “... the situation creates a window of opportunity for many Arab states including Dubai, Caribbean Islands and various Latin American countries, to capitalize on the European tourist and property investment market.”

Large parts of the world used to peg their currencies to the dollar, although some countries have broken the link, including Russia, China and Kuwait. But many South-East Asian and Middle-Eastern countries still peg to the dollar, as do some Central American and Caribbean states, including Panama, the Bahamas, Bermuda, Belize, the Cayman Islands, and the British Virgin Islands.

Mr. vanDijk concludes “Highlighting the weakened dollar presents an advantage in the market, and the strong exchange rates generate the opportunity to secure property at very attractive prices. Looking for areas that have strong tourism and rental markets provides further value for money. However, the dollar will not remain weak forever and as such astute property investors making an early entry to these markets will be rewarded with a very viable and tangible asset to an overseas property portfolio.”

Link here.
Green air taxes may hurt overseas property prices – link.


Barbados has one of the highest per capita incomes in the region, ranks high on social, political, and competitiveness indicators, and enjoys an investment grade rating. Services, particularly tourism and increasingly financial services, account for 75% of GDP, and an even higher share of exports.

The economy has been growing at a solid pace, and the outlook for this year is generally favorable. Robust output growth of about 4% is expected to continue this year, supported by tourism and construction. Inflation, which was pushed up in 2006 by higher energy prices and a temporary import surcharge, is set to decelerate to 5.5% in 2007. However, the current account deficit, despite having narrowed in 2006, is still high and projected to remain unchanged at about 8.5% percent of GDP.

The IMF concluded by announcing that, “Directors ... noted that capital account liberalization will expose the financial sector to greater volatility and risk taking, and thus will require stronger prudential regulation and supervision. Directors welcomed the progress being made on containing financial risks in the banking sector and encouraged the authorities to proceed with the speedy passage and implementation of pending financial sector legislation, and improved prudential oversight of non-bank financial institutions, and encouraged the development of a regional framework for financial regulation and supervision.”

Link here.


An audience of 30,000 assembled in Panama earlier this month to witness the historic first step towards the expansion of the Panama Canal – the first major improvement to the canal’s capacity since its completion almost a century ago. The expansion program will add a new lane of traffic along the Panama Canal through the construction of a new set of locks, which will double capacity and allow more traffic and longer, wider ships.

The first construction project, a dry excavation project on Paraiso Hill that begins the construction of the new Pacific Locks access channel, got underway on September 3. The new Pacific Locks access channel will ultimately connect the Gaillard Cut to the new Pacific Locks.

Link here.


The world’s smallest independent state, the Principality of Sealand, has received a multi-million dollar investment opportunity to fund the launch of a communications satellite. The principality has been approached by a Russian investment group attracted by Sealand’s independent status and its potential for developing media download services, operating under its own jurisdiction. The potential satellite system would enable content to be broadcasted internationally, directly from the former military fortress. The proposed plan, from a Moscow-based venture group, involves optimising high-capacity servers on the micro-nation and launching a satellite to enable content to be delivered online.

Sealand recently launched the world’s first national online casino, Sealand Casino, offering all players tax-free winnings. The micro-nation celebrated its 40th year anniversary on September 2, commemorating the day that Prince Roy of Sealand exerted state authority on the island. The Principality of Sealand is located six miles off the Eastern shores of Great Britain. The latest Principality of Sealand developments can be found at its official digital newspaper, Sealand News.

Link here.


The IRS may be losing hundreds of millions of dollars because it will not spend the time and money to match millions of income statements with incorrect or missing identification numbers to existing tax accounts, an IRS watchdog said. The Treasury Inspector General for Tax Administration said that in 2004 the IRS received about 3.8 million miscellaneous income statements reporting some $150 billion in earnings that could not be computer-matched to a filed tax return because of missing or erroneous ID numbers.

The IG’s office, which does oversight of the tax agency, looked at a sampling of these mismatched IDs and calculated that some 6,000 of these individuals had not filed 2004 tax returns despite having income statements indicating they earned more than $100,000. That translates into some $630 million in income, it said. Much of the income involved compensation for nonemployees such as independent contractors reported on unusable miscellaneous income statements.

The office said that it looked at 620 income and wage statements with mismatched names and ID numbers reporting more than $60,000 in earnings. Using IRS automated data systems, it was able to manually match half of those to taxpayer accounts in IRS records. It urged that Congress pass legislation, backed by the administration, that would require employers to verify the accuracy of ID numbers for the employees they hire. The office also recommended that the IRS do more to investigate high-dollar miscellaneous income and wage statements with mismatched names and IDs.

The IRS, in response, said it supported the legislation but concluded that the cost of manually tracking down mismatched names and IDs might exceed that of the benefits. “The IRS’s opposition to this recommendation is confounding,” said Inspector General J. Russell George, adding that their audit showed that increased examination of statements would more than pay for itself in increased revenue.

Link here.


Members of the U.S. Senate Finance Committee are urging the IRS to take action to ensure that working families who lose their homes to foreclosure face more reasonable, accurate tax bills for their home loan debt forgiveness. “Working families who lose their homes are getting hit with huge tax bills,” explained Chuck Grassley, ranking member of the Committee. “Some of those bills are unfairly high and even inaccurate. The IRS needs to take steps to ensure the accuracy of the bill in the first place. Then the IRS should offer the taxpayer every opportunity to negotiate the size of the bill and a fair payment plan. The agency has plenty of authority to treat taxpayers reasonably in these situations. It needs to use that authority to serve taxpayers.”

Grassley and fellow Finance Committee members Sens. Gordon Smith of Oregon and Pat Roberts of Kansas wrote to the Treasury secretary to urge these changes. The letter directs the Treasury Department to take immediate steps to encourage working families that face mortgage repayment difficulties to submit (and have the IRS accept) offers in compromise that will either eliminate or reduce the taxes that they owe due to cancelled mortgage debt on a primary residence.

The Senators’ concerns over the issue have been heightened by a recent article in the New York Times which described the case of a Pennsylvania man who could not keep up payments on his $106,000 mortgage. When his bank foreclosed and wiped his debt slate clean, he was hit with a $34,603 back tax bill because the IRS considered the canceled debt to be income and therefore taxable. He was also assessed for penalties and late fees. President Bush has proposed that canceled mortgage debt on a primary residence should not be treated as income, noting in a recent speech that, “When your home is losing value and your family is under financial stress, the last thing you need to do is to be hit with higher taxes.”

Link here.
IRS offers advice to struggling homeowners – link.


The White House has insisted that President George Bush’s chief economic advisor, Edward Lazear, will not profit from a corporate tax minimization scheme patent application upon which his name appears. White House spokesman Tony Fratto explained that Lazear, chairman of Bush’s Council of Economic Advisers, “stands in no way to benefit from the patent,” and he brushed aside concerns that a pending patent application for the scheme – which would help companies to reduce their corporate tax liability – represents a conflict of interest.

Fratto said that Lazear’s name is mentioned in the application because the algorithm used in the scheme was invented by Lazear for an earlier project, and that Lazear had severed his ties with the company that owns the patent. The revelation is something of an embarrassment for the administration, which is spearheading a strong crackdown on the use of dubious tax shelters by corporations and wealthy individuals, and is likely to provoke strong criticism from those concerned with narrowing the “tax gap” between legally owed and collected taxes.

Link here.


Gibraltar’s chief minister, Peter Caruana, predicted that tax havens will cease to exist within 10 years because of what he calls “international scrutiny and pressures.” Of course, the Rock is both a semi-independent British overseas territory and a certified tax haven. The busybody, left-leaning OECD once listed Gibraltar as a harmful tax haven. But since then, Gibraltar has reformed its laws to become more “transparent” – a favorite word the anti-tax haven crowd uses to refer to tax information exchange about individuals among governments. Or in other words, “transparency” means the end of financial privacy.

Of course, Mr. Caruana sang praise for his own jurisdiction. But he might just as well have praised almost the entire offshore financial community, including all tax havens. In the last decade, almost every offshore jurisdiction has adopted stringent new anti-money laundering and “know your customer” laws. These offshore regions have also imposed obligations to report suspicious financial activity. These laws are aimed specifically at drug and terrorism money. In fact, most of them are far tougher and are better enforced than those in the major centers of dirty money – including the U.S. and the U.K.

The real source behind all the pressure and manufactured media hullabaloo against tax havens has been the tax collectors of major welfare state nations. These collectors are a miserly group that is convinced everyone and anyone who does business offshore is automatically a tax evader. The IRS and British HMRC hate the fact that tax havens offer tax-free profits and statutory guarantees of bank and financial secrecy. They refuse to accept the fact that tax competition among nations helps the world economy because it keeps taxes lower, increases profits and creates jobs.

Proof that tax havens have improved comes from none other than the notorious OECD group, the Financial Action Task Force (FATF). The OECD sidekicks in the FATF are the self-appointed blacklisters of all tax havens, from Switzerland to the Cayman Islands. Earlier this month, the FATF announced that the Marshall Islands has been removed from the OECD’s list of so-called “harmful tax havens”. The announcement came after this tiny Pacific island jurisdiction committed to improving transparency and establishing exchange of tax information. The only “uncooperative” tax havens remaining on the FATF hit list are Andorra, Liechtenstein and Monaco – all nations with strict financial secrecy laws that they refuse to waive in the face of FATF bullying. And God bless them!

What must be understood is that the decade old anti-tax haven campaign is really all about tax collectors using phony reasons (anti-drug, anti-money laundering, anti-terrorism) as public relations covers for curbing the right of individuals to bank, invest and do business anywhere in the world they wish. These phony attacks run counter to all modern economic trends of globalization, expanded world trade, international investment and free exchange of funds among nations. For some of the major protagonists, such as the U.S. and the U.K., it is sheer hypocrisy, because these two haven bashers are also major tax havens for foreigners who invest there.

But bashing tax havens has become an international sport among leftist politicians who have always preached “soak the rich” themes in trying to appeal to the poor, hard working masses. It is called demagoguery. Not to be outdone, the Democrats who now control the U.S. Congress are already passing new restrictions and levying new taxes on offshore financial activity. (President Bush, get out your courage and your veto pen!)

It is reported that Pope Benedict XVI is working on an encyclical that strongly condemns wealthy individuals from using tax havens and offshore bank accounts. The Times of London reports that the Pope will argue that tax avoidance and evasion is morally unjust because it supposedly prevents governments from collecting revenues to help society’s least fortunate people.

This is one Catholic who wishes the Pope had better economic advisors so that he might understand the beneficial role tax havens play in the world economy. (According to the Council of Vienne [1311], a person who charged interest on a loan was to be punished as a heretic committing a mortal sin). Notwithstanding the continuing leftist onslaught against tax havens, I predict they will survive and prosper, just as they have been doing since this battle began 10 years or more ago.

Link here.
Can offshore banking be considered a mortal sin? – link.


Swiss finance industry aspires to be in global top 3 by 2015.

An umbrella group representing the Swiss investment and banking industry has published a document dubbed “Vision 2015”, which outlines a joint strategy to put Switzerland among the top three centers of international finance. The growth targeted by the document would create between 40,000 and 80,000 new jobs, and generate CHF11-17 billion in additional new tax revenues, depending on economic trends and how successfully the strategy is put into practice.

Specific measures with regard to taxation, regulation and institutions have been drawn up for individual industries, and will be put forward for debate in the political arena. The groups noted that the finance industry is the most important sector of the Swiss economy, accounting for almost 15% of GDP and 16% of total tax revenues. It provides some 200,000 skilled jobs, which represents 5% of the whole Swiss workforce.

However, the group went on to warn that there is no guarantee that this success will be sustained in the future, as international competition among financial centers continues to grow at a rapid pace. According to the group, while Switzerland is still viewed as a major financial center, it has lost ground to its competitors, and has slipped from 2nd place internationally in the 1980s to 6th place today. To restore its place among the top three centers, the group stated that the Swiss financial sector’s contribution to GDP has to grow by a nominal 7-9% a year in terms of value, which would be in line with the current growth rates of London and New York.

To achieve this, the group said that the government need to ensure that the Swiss tax system is internationally competitive, particularly in the area of alternative investments. One example would be the gradual abolition of stamp duty. Efficient, market-oriented regulation and supervision is also needed, according to the strategy document. This means more self-regulation and principles-based regulation, and the development of risk-based monitoring.

Link here.

British venture capital group warns of offshore defections if taxes on private equity partnerships are raised.

The British Venture Capital Association has warned that treating the carried interest earned by private equity partnerships as income rather than as capital would damage the UK’s reputation as a place to do business, and could lead certain sections of the industry to move offshore.

In a briefing paper on the taxation of carried interest in the private equity industry, the BVCA concluded that the return generated by carried interest is an investment profit and should be taxed as such. The paper argued that carried interest should not be treated as ordinary income at higher rates of tax than at present, because it reflected the substantial amounts of investment made by private equity partnerships, and is an “appropriate return for the significant risk run by the executives.”

UK Chancellor of the Exchequer, Alistair Darling is under pressure to change the capital gains tax rules to stop private equity firms benefiting from taper relief on carried interest. Business assets taper relief was introduced in 1998 as part of the reforms to the CGT system. In its original form, it reduced the CGT payable on business assets that were held for at least 10 years from 40% to 10%. In 2000, the period after which the maximum taper relief applied was reduced to five years, and it was reduced again in 2002 to two years. The original intention was to reward long-term investment, with a view to promoting enterprise, but critics of the system contend that it gives private equity funds and their partners an unfair tax advantage.

Link here.

UK offshore tax-dodger ordered to pay back £16.25 million.

A London court issued one of the largest ever confiscation rulings in relation to a tax fraud case, when it ordered former chartered accountant Ian Leaf to pay £16.25 million ($32.6 million). HM Revenue and Customs announced that the confiscation hearing concluded an eight year investigation by HMRC which resulted in a 10 year jail sentence for Leaf.

Leaf, who moved from the UK to Switzerland in 1987, is accused of buying up 13 UK subsidiary companies and using an array of complex financial arrangements to evade £54 million in taxes. Leaf was found guilty of 13 counts of fraudulent trading, one count for each of the 13 companies acquired using this particular scheme. The offence of fraudulent trading requires the prosecution to prove that the defendant was knowingly carrying on a business for fraudulent purposes.

According to HMRC, when purchased by Leaf, the companies had outstanding tax liabilities from past profits and enough cash to pay the tax owed. Rather than paying off the tax, Leaf created fictitious documents from a bank registered in the Pacific island of Nauru which was controlled by him, and appeared to show that the companies had borrowed huge sums of money. The resulting fabricated interest payments were offset against tax. It was also falsely claimed that these loans were used to undertake massively profitable foreign exchange deals which were not subject to UK tax, out of which were paid dividends. Leaf then falsely used these to reclaim corporation tax rightly paid by the companies before he purchased them.

The order handed down by the court is not yet formal, and will not be made so until receivers get to grips with a complex network of family trusts, in which Leaf says most of the remaining proceeds from the fraud are concealed. Nonetheless, Leaf faces an additional 10 years behind bars if he fails to comply with the Judge’s order.

Link here.

Cayman government proposes “radical” company law overhaul.

The government of the Cayman Islands is proposing radical changes to the jurisdiction’s companies law, aimed at simplifying the legislation and making the provisions more suitable to the needs of the Cayman Islands financial services industry. A bill to repeal and replace part five of the Companies Law in order to reform the legislation relating to the winding up of companies, due to be debated on 17 September in the Legislative Assembly, reflects the Law Reform Commission’s 2005 recommendations, following a 4-year private sector review of Cayman’s corporate insolvency law.

Link here.

Jamaica looks to join Caribbean offshore club.

Jamaica’s newly sworn-in Prime Minister, Bruce Golding, has ambitious plans for turning around years of economic stagnation and under-investment, with proposals to develop an offshore financial center, and new tax and regulatory policies to attract the “right kind” of foreign investment. Golding was sworn in as the country’s new leader last week after bringing the Labour Party back to power in an election on September 3, ending 18 years in opposition for the party.

His priorities are reversing the “erratic financial mismanagement” by previous administrations which has led to a devaluation in the Jamaican dollar to 69 per U.S. dollar from 5.50, high levels of government borrowing which have forced up interest rates and stifled investment, and crippling inflation that once topped 100%. He intends to do this by repeating the recipe put in place in other Caribbean jurisdictions with much success.

“There are other islands in the Caribbean that have done very well in their offshore activities,” Golding told the UK’s Financial Times in an interview. “We believe that it is an area that Jamaica can secure benefits from.”

While admitting to the paper that the creation of an offshore financial centre was something that he would not have considered 15 years ago, he now believes that the offshore world has moved on considerably in the last two decades, and that regulatory mechanisms “are sufficiently well developed to give us the kind of protection that we want in order to ensure that we are not taken advantage of.” ... “Importantly, it would be a critical engine to drive the redevelopment of the city of Kingston,” he added, in reference to the city’s high rates of crime.

Golding also wants the government to embark on “a comprehensive reform program designed to simplify the tax system,” to make it more equitable, remove disincentives for investment and job creation, and ensure greater compliance. Proposals include the elimination of double taxation on dividends for non-listed companies to encourage reinvestment for expansion. The tax-free threshold will also be increased substantially to provide relief to thousands of wage earners.

Links here and here.

Mexico enacts tax reform package.

Mexico’s long awaited tax reform bill – which proposes a minimum tax on business and aims to boost tax revenues for the government – has finally passed Congress, but President Felipe Calderon had to give away some concessions in order to ensure that the key reform was enacted. The minimum corporate tax will start at a rate of 16.5% in 2008, rise to 17% in 2009 and 17.5% in 2010. This is lower than the 19% tax rate initially proposed by Calderon.

The tax package also includes a 2% monthly tax on bank accounts containing more than 25,000 pesos ($2,250), refundable when account holders pay their federal income taxes, and removes tax exemptions on stock sales that involve a change of control of a company, or the sale of more than 10% of a company’s stock in a 12-month period.

Calderon’s original tax proposal aimed to raise tax collection by 3% of GDP, to about 14%, by the end of his term in 2012, but now the measures have been watered down somewhat, analysts expect tax revenues to increase by about 2.5% of GDP. At 10% of GDP, tax revenues in Mexico are among the lowest in the region.

Link here.

Dutch government to cut SME corporate tax in 2008.

The Dutch government’s Tax Plan for 2008 will cut corporate tax for small- and medium-sized business, but will increase taxes on environmentally harmful products and activities, Finance Minister Jan Kees de Jager has announced. As of January 1, 2008, under his proposals, the 20% lowest rate of corporate tax will apply to the first €40,000 of income, up from €25,000, and the second bracket will be extended from €60,000 to €200,000, with the tax rate lowered by 0.5% to 23%.

De Jager said that it will also become easier to start a new business out of an existing business without tax consequences. Currently this is only possible if the business closure was prompted by government intervention. But under the new plan, this will also apply if entrepreneurs start a new business of their own accord.

Link here.

South Africa tax proposal effecting transfer of IP offshore causes controversy.

South Africa’s new Revenue Laws Amendment Bill, released for comment earlier this month, is causing controversy over provisions designed to increase the difficulty of transferring intellectual property offshore. The Treasury’s chief tax policy official, Keith Engel explained that under the proposed legislation, payments made for the use of intellectual property will not be tax deductible if the property was previously owned or developed in South Africa.

Under current rules, a South African entity can develop a product or process and transfer the intellectual property to an offshore patent holder, which then charges the local firm for use of the IP in question, a charge which is tax deductible. The royalty payments are then usually transferred back to the South African taxpayer by the offshore entity in a format attracting lower taxes, for example as dividends.

Link here.

Russian tax amnesty yields $130 million.

A worthwhile 3.22 billion rubles ($130 million) in previously undeclared income has been reported in the first six months of the Russian tax amnesty, reports in the national media have revealed. Under the amnesty, those who declare monies to the authorities will avoid prosecution in return for paying income tax at a rate of 13% on previously hidden assets.

Tax experts have warned the government that the scheme may do very little to yield additional revenue, due to uncertainty over the legal standing of those considering declaring unpaid taxes – especially in the case of those already guilty of financial crimes such as money laundering and currency and customs violations. However, it seems the government has managed to overcome this flaw by barring those convicted of tax evasion and other fiscal crimes from using the service. They have also tempted many tax payers into making declarations by promising that interaction with tax officials will be minimal during the process, as payments are made directly into a special Federal Tax Service bank account.

As yet, however, it remains to be seen how the amnesty has affected the trend towards capital flight.

Link here.

Malaysia to enhance Labuan’s tax environment.

Malaysian Prime Minister, Datuk Seri Abdullah Ahmad Badawi has announced that the tax regime for companies in the Labuan International Offshore Financial Center will be made more flexible, to boost the jurisdiction’s international competitiveness. In future, companies registering in the Labuan offshore sector will have the option of having their offshore business income taxed under the Income Tax Act 1967, in addition to under the Labuan Offshore Business Activity Tax Act 1990.

“In the light of greater global competition, we need to ensure that Labuan remains competitive as an international offshore financial center. Given that investors in Labuan undertake a wide range of financial services, a flexible tax regime is necessary,” the Prime Minister explained.

The Labuan Offshore Business Activity Tax Act 1990 (as amended 2004) provides for the reduction or complete exemption of income tax in respect of certain business activities carried on by offshore companies in Labuan. Chargeable profits derived by an offshore company from an offshore trading activity are subject to tax at a rate of 3%. An offshore company which carries on an offshore non-trading activity is exempt from income tax altogether. The Income Tax Act 1967 applies to any activity other than offshore business activity carried on by an offshore company, meaning that they pay normal taxes.

The Labuan IOFC, which celebrated its 10th anniversary in 2006, is home to over 300 financial institutions providing a comprehensive range of financial services, both conventional and Islamic.

Abdullah also announced in his budget speech earlier this month a number of measures aimed at boosting the competitiveness of Malaysia as a business and investment location. These included an additional 1% cut in corporate tax to 25% effective 2009, and deregulation of the Islamic finance industry in line with the government’s stated objective of creating one of the world’s leading centers for Islamic finance.

Links here and here.


California bank served as conduit for Mexico drug profits.

A currency exchange house known as Ribadeo Casa de Cambio was shut down by Mexican regulators after its president was found shot to death in the back of a car. Between 2002 and 2006, say documents from the U.S. Drug Enforcement Administration and the Justice Department, drug traffickers used Ribadeo to launder $300 million through U.S. banks.

Ribadeo proved so useful to the cocaine trade, in part, because it had an account at the Union Bank of California, the nation’s 27th-largest bank (assets: $53 billion) and the main unit of the Japanese-controlled holding company Unionbancal. Details of Union Bank’s connection with Ribadeo comes to light via the criminal prosecution of Ricardo Mauricio and Juan Manuel Bernal of Colombia, who pleaded guilty in late August to laundering drug money. Following a Justice Department investigation, Union Bank of California is trying to resolve the feds’ concerns about its relationship with Ribadeo.

Since September 11 the feds have introduced new laws and tightened up old regulations to shift some of the onus for catching bad guys onto banks. There are tougher benchmarks for recordkeeping and more detailed reporting, along with requirements to check customers against the Treasury Department’s so-called specially designated persons list. Complying with U.S. anti-money-laundering rules costs financial institutions maybe $3 billion a year, says the Peterson Institute for International Economics. Even then it is possible for well-intentioned banks to miss a suspicious wire-transfer request or dirty money commingled with legitimate funds. In the last 16 months the feds have gone after three U.S. financial institutions for complicity – unwitting or otherwise – in drug-money laundering.

Drug traffickers move as much as $25 billion a year, says the Justice Department – a good chunk of that through networks like the Bernal-Ribadeo-Union Bank connection. The problem has become so vexing that the U.S. Treasury Department issued a rare advisory last year that warned American banks about “a dramatic increase in the smuggling of bulk cash proceeds from the sale of narcotics” and the “potential misuse of relationships with U.S. financial institutions by certain Mexican financial institutions, including Mexican casas de cambio,” or currency exchange houses.

What did Union Bank do wrong? It was a cog in the machinery of a three-country contrivance for cleansing illicit profits. Here is how it worked – at least, how Ricardo Mauricio explained it to an informant of the DEA. Ricardo claimed he controlled Ribadeo and asked the informant if he could accept funds in Miami wired from Ribadeo’s account at Union Bank, then find a way to transfer the money to Colombia in pesos. According to the court affidavit, the Bernals wired $2.5 million to the informant through Ribadeo’s Union Bank account. The informant then delivered checks and cash to the representative of a Colombian dollar-peso broker in Miami. That broker used the dollars to settle unspecified debts that Colombian importers had incurred in the U.S. (often, in such cases, they are for appliances like refrigerators and microwaves). The importers paid the broker in pesos. The broker, through the informant, delivered the pesos to an agent of the Bernals, often on street corners in Bogotá.

Union Bank closed Ribadeo’s account by 2006, but the Bernals continued to launder money through other undisclosed U.S. banks, says an affidavit. The brothers were arrested in Colombia and extradited to Miami this year – part of a global sting that reached as far as Spain, where police seized $20 million and two tons of cocaine with a wholesale value of $80 million.

That is a tiny sliver of what gets through, of course. The government last year managed to seize only $80 million at the border, the first link in the new money laundering chain. Sometimes agents are lucky enough to catch couriers. Aided by money-sniffing dogs, agents have found $100 bills stashed everywhere, from car tires to people who have swallowed money placed in latex gloves and condoms. But significant nabs are rare because U.S. officers do not keep track of southbound traffic at the border. They inspect outbound vehicles only “on an intermittent basis,” says Roger Maier, a spokesman for U.S. Customs & Border Protection in El Paso, Texas. “Our focus is what is coming into the country.”

Figuring out what goes on farther south at exchange houses like Ribadeo is even dicier. These casas de cambio and centros cambiaros serve as a legitimate parallel banking system in Mexico. Operating out of storefronts or temporary locations like trailers, they provide currency exchange and money transmissions, and act as brokers for financial transactions. Casas often have correspondent relationships with U.S. banks and are widely used by Mexicans working in the U.S. to remit funds to families back home. But casas also play a major role in money laundering operations. Sometimes they do so by intermingling legitimate funds with drug money.

Union Bank, which declines to comment on its link with Ribadeo, is bracing for another whack for other activities. In July it announced it was reserving $10 million to deal with threatened civil penalties for violating anti-money-laundering regulations. The bank reportedly cut off relations with hundreds of Russian banks in 2004 and sold most of its international operations in 2005 in connection with money laundering issues raised by the Federal Reserve Bank of New York but has remained on the hook for any residual problems.

In August American Express agreed to pay $65 million to deal with Justice Department claims that its international private banking group was used to launder $55 million of Colombian drug proceeds. Like the Bernals, the goodfellas turned dollars in America to pesos in Colombia by hooking up with importers of goods. The same federal investigation that netted Amex also nailed BankAtlantic Bancorp of Fort Lauderdale, Florida, which last year paid $10 million to settle money laundering claims. Amex’s fine was the largest ever paid out by a U.S. financial institution. Do not be surprised if that record gets broken soon.

Link here.
California bank fined $31 million for skimping on anti-money laundering campaign – link.


If someone wants to monitor your conversations through the telephone, they do not necessarily need to tap your phone. A number of ingenious alternatives are available.

One ingenious monitoring method is an ordinary extension telephone. An eavesdropper impersonates you and asks the telephone company to install an extension phone to an existing line. When you pick up the phone, the surveillance tape begins rolling. Executives who install private lines that bypass a central PBX are particularly susceptible to this attack.

Cell phones are also vulnerable to this attack. It is now routine for police to get a court order to obtain the same cell phone number as a suspected criminal. A person dialing your cell number will have his number displayed not only on your phone, but on an identical one carried by an investigator. Text messages may be monitored this way, too.

Another common surveillance device is a modified telephone that functions as a combined wiretap and room bug. It operates normally but conducts room audio over spare wires in the telephone cable. Many telephones are working as room bugs without any modifications. They may be remotely activated by telephone to transmit all room audio.

Cell phones may also be converted into room bugs. Many cellular telephones have an auto answer feature and allow you to turn off the ringer. Just leave your auto-answer cell phone in a room, with the ringer turned “off”. Then dial your cell phone and listen to a conversation in the room. It is also possible to turn a cell phone into a room bug by installing the appropriate software in it. This can be done remotely, without your knowledge, by your cellular service provider or others with the requisite knowledge. This is possible even if the phone is switched off. This attack is increasingly common in corporate espionage situations and was approved for use in criminal investigations. The only way this form of surveillance can be defeated is by removing the battery from your cell phone.

There is no single strategy to follow to defeat these attacks. One strategy is to pay very careful attention to billing statements from your telephone company to make certain you are not paying for an extra extension or extra handset you never ordered. Another is to hire a counter-surveillance professional to examine your telephone system and meeting rooms to insure they have not been compromised.

To avoid wiretaps, do not discuss anything confidential on a phone listed in your name. Instead, purchase prepaid private cellular service. The per-minute cost is significantly higher than if you have a service contract, but you can obtain your cell phone and purchase prepaid calling cards for it without a credit check and without showing proof of identify.

Link here (scroll down).


Talk about a scary phenomenon! Through a virus or worm, a criminal takes over your PC, which behaves normally until it receives instructions over the Internet to mass-mail spam, take down a company’s network as part of a Distributed Denial of Service (DDoS) attack, or log your keystrokes to gain access to your bank account. When it is done, your system reverts to acting like a normal PC.

You cannot easily tell if your PC has been zombified. The usual malware warning signs – computer slowdowns, odd behavior – apply to zombies, though they could easily be signs of lesser problems. Watch your firewall software for strange outgoing traffic. Run multiple online virus scanners (check How Can I Tell If My PC Has Caught a Virus? for details). Also check out the 15-day free trial of Symantec’s $30 Norton AntiBot utility, which specifically looks for bot infections. Still, do not consider yourself safe in the event that AntiBot does not turn anything up.

Some zombie or bot software can hide itself from virus and malware scanners by installing a rootkit. Free rootkit-revealing software such as Sophos Anti-Rootkit and Sysinternals’ RootkitRevealer can help cleanse those infections. Although your ISP can identify zombies among its clientele, that does not necessarily mean you can contact the company’s support staff and reach someone who knows what you are talking about. And, according to Trend Micro network architect Paul Ferguson, it is not in ISPs’ economic interest to be especially diligent or helpful about this.

If e-mail bounces back to you with a message that you have been blocked, your address may be on a spam blacklist – most likely as a result of being zombified. More than 100 such blacklists exist, and many ISPs use one or more of them to block the IP addresses of known spammers. If you are on one or two such lists, most of your mail will get through, but some will not.

Even if your e-mail is not bouncing, it is a good idea to find out whether you have been blacklisted. Go here to view the IP address you send out to the world – probably your router’s. Copy the displayed address.

There are several blacklist reporting sites. My favorite is Robtex’s. Paste your IP address into the only field on the page, and click Go. Robtex will list a great many blacklist sites. If any of them are red, you have got a problem. Use the list’s contact information to find out why you are on that list and how to get off of it.

Prevention is the best medicine. Keep Windows and your antivirus, firewall, and other security software up-to-date. Those precautions will reduce the chances of infection from almost certain to reasonably unlikely.

Link here.
Storm worm gains strength, creating the most robust botnet yet – link.


But your browsing speed will take a hit.

AT&T has announced plans to snoop on Internet traffic to discourage people from sharing pirated music and movies. The company has not provided details – like whether it intends to spy only on its own ISP customers, or on all traffic in its massive Internet backbone network.

Piracy is illegal, but using indiscriminate spying to catch pirates goes too far. Add to this the many Web sites and services that save records of what you searched for, posted, or looked at, and it may seem as though browsing online is about as private as standing on the corner with a bullhorn, shouting out your plans.

I spent some time with JanusVM, a program that attempts to counteract this epidemic of indiscriminate snooping by disguising the source of all of your Internet traffic – not just your surfing. The software’s creators request a donation, but they allow you to use the app for free. It will definitely cost you some speed online. But if you want to stay unknown as you perform sensitive tasks, JanusVM may be worth the price in slower performance.

JanusVM is a collection of free, open-source privacy tools, such as Tor, which links you with other Tor users to mask your virtual location. These tools are packaged in a virtual appliance that makes setup and configuration a breeze. To use it, you will need the also-free VMWare Player (a chunky 145MB download), which lets you run virtual PCs within Windows distinct from the operating system.

Regrettably, whereas my laptop’s Wi-Fi connection ran at 1.5 mbps without the software, according to a test I ran at DSLreports.com, it dragged along at 350 kbps with it [Ed: about the speed of a dial-up connection]. Though browsing was noticeably slower, it was still functional.

Link here.


Microsoft’s latest spasm of software will drive a lot of users to Apple, perhaps even enough to shift the whole PC software market past the tipping point, leaving Microsoft on the wrong side of the landslide.

It seems that the people at Microsoft have lost faith in the personal computer. Maybe they are right – maybe the PC as some of us once knew and loved it really is history. If it is, the future belongs to Google. If, on the other hand, the PC does have life left in it, Microsoft’s latest spasm of software could leave Microsoft on the wrong side of the landslide.

The technology columnist writing in the last issue offered a revisionist view of Vista, that it was surprisingly good at managing entertainment media. Here I will tell you how Vista and the new Office are surprisingly bad at other kinds of data.

Blunder 2007 is not at all comfortable with big files. Any attempt to open a large data file in the first release of Outlook 2007 paralyzed even the fastest desktop machine. After a tedious search I found the patch that fixed the problem – which Microsoft apparently released some time after declaring that no fix was needed, because the new Outlook just was not intended for big files. If you are serious about backing up lots of data, do not touch Microsoft’s OneCare – it quickly chokes any hard drive you use for backup, and it takes some real techie skill to clean up the mess.

Nor is Blunder 2007 friendly to people who like to customize their software. You can turn off parts of Microsoft’s kiddie search engine and install a real one, but this requires some deep fiddling. If you have spent years tweaking Word to your liking and memorizing keyboard commands, skip Word 2007. The new Word makes some attempt to accommodate the old guard, but it is infuriatingly kludgy. Why Microsoft decided not to include a “Word Classic” option in its new release is utterly mystifying. This is the sort of mistake huge companies make when they get complacent, as General Motors or Sears did in the 1970s. Evidently Microsoft now aspires to settle in as the Sears of operating systems and the Buick of the office desktop.

The company can not seriously hope to hold on to low-end users – they are all headed for Google. There, advertisers foot the bill for the free e-mail, word processor and spreadsheet, with other applications to come. So skip Microsoft completely – and most of Dell and the rest of the PC, too – if you are content with basic functionality, do not work with huge files and trust Google with your data. Google can buy processors, disk drives, backup power and software much cheaper than you can. If you do want the power on your desk to deal with large graphic, audio and visual files, or just want a stylish box and neat interface, you will probably stay with Apple.

Twice before in this industry’s short history companies have paid a terrible price when they made one pivotal mistake. Microsoft itself was created by Blunder 1981 – IBM’s decision to license the operating system for its first PC from Bill Gates. Gates cooperated with IBM long enough to secure his company’s dominance of PC operating systems, then casually tossed Big Blue overboard. Apple’s Blunder 1985 did just the opposite. The company spurned Microsoft’s proposal to license Apple’s operating system with its neat graphical interface and adapt it to run on other computers. This forced Microsoft to develop what later became Windows.

Microsoft grew and prospered on the simple, dogged conviction that the future belonged to the desktop, with open competition in the hardware beneath, open competition in the software above and a relatively thin, highly flexible and hugely lucrative layer of Microsoft monopoly in the middle. I cannot discern how all the components of Blunder 2007 fit into that old strategy, or into any promising strategy at all. I bought all the pieces of Blunder 2007 earlier this year and gave them my very best shot. I am now going through the horrendous process of dumping them piece by piece. At least one of us – Microsoft or me – is getting old.

Link here.
Apple lost its opportunity to defenestrate Windows – link.
20 Vista downloads to tweak and improve your system – link.
ECJ backs European Commission ruling that Microsoft had abused its dominant market position – link.


The Bush administration plans to exercise their “state secrets” privilege. They plan to again use this dubious legal tool to try to stop a lawsuit against Belgian banking cooperative, the Society for Worldwide Interbank Financial Telecommunication (SWIFT).

According to court documents, SWIFT secretly supplied millions of private financial records to the United States government. The suit alleges that SWIFT, in secret cooperation with the U.S. government, violated the privacy of an untold number of persons by allowing the U.S. access to SWIFT cash transfer records.

Swift is a privately run cooperative founded in 1973 and headquartered in Brussels, that electronically transmits trillions of cash transfers every day to more than 200 countries. The network handles some nine million transfer instructions and confirmations a day with a value of about $6 trillion. SWIFT is considered the nerve center of the global banking industry. Its secret partnership with Washington gave the C.I.A. and the U.S. Treasury Department access to millions of records on international banking transactions.

This massive access was part of an effort to trace money that government police claimed might be linked to financing terrorism. The Justice Department claims that the suit against the Swift consortium threatens to disrupt the operations of a vital national security program and to disclose “highly classified information” if it continues. No doubt the Bush officials do not want the world to know just how great a violation of the privacy of millions of people may have been.

In my opinion, you better believe that the U.S. money snoops who say they are looking for terrorist cash are also looking for tax evasion, money laundering of all kinds and any other indictable offenses – all in violation of the Fourth Amendment, which guarantees against illegal searches without a warrant The question now is whether the U.S. government money police will be allowed to hide behind the “state secrets” doctrine and conceal just how far they have gone in violating everyone’s privacy.

Link here (scroll down).


Former Comverse Technology CEO Jacob “Kobi” Alexander, a fugitive from criminal charges, lost a bid to stop U.S. prosecutors from seizing about $50 million in two of his bank accounts. The government claims a portion of the money constituted profits from an illegal options-backdating scheme at New-York-based Comverse, the world’s biggest maker of voicemail software.

U.S. District Court Judge Nicholas Garaufis rejected Alexander’s argument that the government should not be allowed to attach the two accounts because that would violate his constitutional rights. The judge said there was nothing preventing Alexander from returning to the U.S. from his new home in Namibia to fight the criminal charges. “The seriousness of the allegations against Kobi coupled with his continuing efforts to keep himself and his assets outside the jurisdiction of the United States courts leads this court to conclude that it should” bar him from pursuing his claim to the assets, the judge said in a ruling in Brooklyn.

U.S. prosecutors last year announced charges against Alexander, former Comverse general counsel William Sorin and ex-CFO David Kreinberg. The government accused them of participating in a stock-option backdating scheme at Comverse. At the time charges were announced, then Deputy Attorney General Paul McNulty said the Justice Department had asked to freeze the accounts for possible forfeiture actions because they were used to launder proceeds of the scheme. The government later began forfeiture proceedings, targeting what they said were profits earned through the options backdating practice.

After Alexander was charged, he was arrested in Namibia last September, where he bought a home. He is free on bail there while the U.S. seeks his extradition to face 35 criminal counts related to stock-option backdating, conspiracy, securities fraud and money laundering. Alexander flew to Israel from the U.S. on June 21, 2006, while federal prosecutors were investigating him and conducting an options backdating probe of Comverse. While Alexander’s lawyers promised he would return to the U.S. by June 28, 2006, he wired $57 million from one account to his accounts in Israel, the judge said. Alexander did not return to the U.S., and a warrant for his arrest was issued on July 28, 2006.

“There is absolutely no basis for concluding that Kobi is not free to return to the United States to face criminal charges against him,” Garaufis wrote in his ruling. “Kobi has clearly declined to re-enter the United States.” That satisfies the requirements to declare Alexander is not entitled to the funds because he is a fugitive under federal statutes, the judge said.

Garaufis said Alexander’s wife, Hana, had to “provide the court with sufficient information” about her standing and rights to the money. He said the papers she has submitted are “vague” and “intentionally designed to obfuscate the nature of Hana’s connection” to these bank accounts. The judge said prosecutors may question her under oath and may file amended court papers related to her.

Link here.


Originally promoted as a tool to fight organized crime, powers instead are used against small marijuana growers.

The Ministry of the Attorney General of Ontario has increased its use of sweeping provincial civil forfeiture powers in the past year to seize assets, including people’s homes, even if criminal proceedings have been stayed or withdrawn because of Charter violations. The increase in applications under the Civil Remedies Act has led to suggestions that the ministry is effectively condoning police misconduct and unfairly using its powers as a “cash grab” in a manner that is not proportional to the alleged offences.

The civil forfeiture powers were enacted by the former provincial Conservative government in December 2001 and originally called the Remedies for Organized Crime and Other Unlawful Activities Act. The act permits the province to seize assets if it can show on the balance of probabilities the assets were acquired directly or indirectly “in whole or in part” as a result of any illegal activity. Renamed the Civil Remedies Act by the Liberal government, the legislation withstood a challenge this spring in the Ontario Court of Appeal, which found it did not encroach on the federal government’s criminal-law power.

Attorney General Michael Bryant spoke out against the legislation in 2001 when he was an opposition MPP. He suggested it could be unconstitutional and would not be effective in seizing the assets of actual organized crime groups. (Bryant voted in favor of the bill when it was passed in the legislature three months after the 9-11 terrorist attacks.)

As attorney general, however, Bryant has been an enthusiastic supporter of the legislation and told The Toronto Star last month that the Court of Appeal decision provided an opportunity for an “exponential growth,” in the use of the seizure powers. In response to a recent critical editorial in The Globe and Mail, the attorney general dismissed suggestions that the law was a “blow” to civil liberties, and said there were no violations of rights because only property was being seized.

A report issued recently by the attorney general’s office stated that $3.6 million in property has been seized in the past four years in 170 proceedings. Nearly $1 million has been distributed to crime victims and more than $900,000 transferred to municipal police forces. In negotiations with someone facing a forfeiture hearing, the civil branch of the ministry will normally offer respondents 5% of assets to avoid a costly court hearing.

When the provincial Conserv-atives introduced the legislation in 2001, they stressed that the bill was to be used to fight organized crime. But Toronto defence lawyer Darren Sederoff says the forfeiture hearings are almost exclusively related to marijuana grow-op investigations, and are targeting low-level people involved in the operation. “They are going after the gardeners,” says Sederoff. “This is a cash grab to fill the government’s bank accounts and to put out press releases.”

“The province has become a bottom feeder,” suggests Paul Burstein, who acted for the Criminal Lawyers’ Association as an intervener in the Chatterjee case this year that upheld the Civil Remedies Act. Robin Chatterjee is seeking leave to appeal to the Supreme Court of Canada. The civil hearings are a “dilution of the burden of proof,” says Burstein, noting there are already powers in the Criminal Code to seize “real proceeds of crime,” if there is a criminal conviction.

While the Charter does not protect property rights, Burstein disagrees with the attorney general’s contention that there is no infringement of civil liberties when the state seizes someone’s home. “There is no proportionality analysis,” in applying these powers, says Burstein. A ruling last month by Superior Court Justice Rose Boyko upheld the seizure of a $265,000 home in Markham from a 60-year-old man accused of running a small grow-op in his residence. The province netted $5,000 after it sold the home and repaid the mortgage holder.

The man was represented by Sederoff, who explains that the federal Crown agreed to diversion because of numerous potential Charter breaches by police. “They are effectively ungoverned,” says Sederoff. “Police know this, especially drug officers. From their perspective, they will either get the house, or the conviction, or both.” A spokesman for the Ministry of the Attorney General says there is no policy to try to seize property in every grow-op proceeding.

Link here.


The Swiss government has welcomed a new Stolen Assets Recovery Initiative launched by the U.N. Office on Drugs and Crime (UNODC) and the World Bank. The Swiss Federal Department of Foreign Affairs stated that the new initiative corresponds with Switzerland’s view that progress in the freezing, restitution and use of stolen or embezzled assets demands joint action at the international level.

“Switzerland has every interest in preventing the abuse of its financial center as a result of the presence of assets of criminal origin,” the FDFA stated. “It has taken effective measures to prevent, uncover, freeze and return such assets. It takes the view that assets of criminal origin, especially those of politically exposed persons, should be restored to their country of origin whenever possible.”

The Swiss government believes that it has taken a leading position on restitution in comparison with other financial centers, having returned a total of $1.6 billion in the context of the Marcos, Montesinos, Abacha, Kazakhstan and other cases.

The World Bank/UNODC initiative aims to assist developing countries in recovering assets stolen by corrupt leaders, help invest them in effective development programs, and combat safe havens for such funds internationally. “This Initiative will foster much needed cooperation between developed and developing countries and between the public and private sectors to ensure that looted assets are returned to their rightful owners,” announced the Secretary General of the U.N., Ban Ki-moon, during the official launch of the Stolen Asset Recovery (StAR) Initiative.

Link here.


Not good for landscaping, construction, and other small businesses.

Robert and Judith Ahlers, both 66, have built Rhino Masonry into a profitable Mesa, Arizona commercial contractor with 70 employees, including one of their four children and a grandson-in-law. But they are honest enough to tell you that very likely some of those workers – they do not know which ones – are illegal immigrants. That places them squarely in the middle of a new beefed-up crackdown on illegal immigration by the federal government and many states. The new rules and laws generally aim to force employers to either purge illegal immigrants from their payrolls or face severe sanctions.

The Ahlers, like other employers, say they will be starving for workers if they have to jettison their suspect employees. “Every contractor in our state knows that the construction industry has been built on the backs of Mexican workers, legal and illegal. We need the Mexican labor force to keep our businesses going. It is the same for many other industries – agriculture, hospitality and landscaping, to name a few,” the Ahlers declared in a recent letter they sent to elected officials and the local newspaper. Judith says she felt she had to speak out because other employers, fearful of making themselves targets of U.S. Immigration & Customs Enforcement or talk radio, will not.

With immigration bills comatose in Congress, the feds began their crackdown in August with an attempt to narrow a loophole in the law that makes it easy for employers to hire illegals. Companies have to ask employees for documentation asserting their legality but are not required to verify it.

Now the Social Security Administration is preparing to send letters to 140,000 employers telling them billions of dollars in tax deposits they made on behalf of 8 million workers could not be matched with valid Social Security numbers. In years past many employers ignored similar “no-match” letters. But in August the Department of Homeland Security issued rules providing that the letters will count as evidence an employer knew a worker was illegal if he does not either resolve the discrepancy – perhaps a worker got married and changed her name – or fire the worker within 93 days. That is all the more threatening since Homeland Security began last year slapping more employers with criminal charges of knowingly hiring or harboring illegal aliens in what it considers egregious cases. (Previously worker enforcement was mostly civil.)

A San Francisco federal judge has temporarily blocked the rules while the court considers legal challenges brought by unions, civil rights and employer groups. But Baker & McKenzie partner Carl Hampe, who as a congressional staffer helped draft the 1986 immigration law, expects the rules to eventually take effect. If they do, some businesses fear a labor crisis, says Laura Reiff, cochair of the Essential Worker Immigration Coalition, whose members depend on low-skilled labor. “One of our employers got 25,000 no-match letters last year. You can’t lose 25,000 workers and continue to run your show.”

Another lobbyist reports some small employers are already speculating about evasive actions. The letters are being sent only to businesses with 10 or more workers. “A guy calls me up and says, ‘I have 18 illegals. Can I get around this by forming a separate company for each 9 of them?’”

The immigration reform bill that died in Congress would have allowed guest workers and a process to legalize some current workers. It comes after an era of lax enforcement. DHS estimates that from January 2000 to January 2006 the illegal population rose 37% to 11.6 million. Jobs were the magnet.

Last year Colorado adopted a particularly tough regime, including a requirement that all government contractors run new hires through E-Verify – an otherwise voluntary federal online service that checks if the Social Security or immigration id numbers that new hires provide are legit.

Employers have reacted in varying ways. Dylan Norton, owner of Durango Doughworks, a Colorado breakfast-and-lunch shop, says he would not be able to fill his four $12-an-hour kitchen jobs if workers had to clear E-Verify. So he has dropped his business with the city government. Road contractor Mark Gould raised his wage from $14 an hour to $16 after half his new hires for unskilled jobs failed the E-Verify check. He got 90% of the workers he needed and passed the higher cost on to local governments. But with a state unemployment rate of just 3.8%, other businesses that cannot pay so much are coming up even shorter. Farmers, in particular, are hurting, with stepped-up border enforcement as well as Colorado’s laws scaring off migrants. Five farms are using state prisoners to pick their crops.

For all the angst the rules are causing employers, they will not stop determined immigrants from working. An employee fingered by a no-match letter can go to another company and use the same bogus number and documents for a year or so, until another letter arrives. Even E-Verify is not designed to flag an illegal using a stolen identity.

What really rankles employers is that neither program gets at an illegal who works completely off the tax books. And neither affects an illegal’s ability to get a tax identification number from the IRS and hire himself out as a nonemployee “independent contractor”, with no income, Social Security or Medicare taxes withheld – and often none paid. By contrast, the government gets to keep the Social Security taxes paid for bogus numbers, without providing the illegal workers who used them any retirement benefits.

Larry J. Rohlfes, a staffer at the California Landscape Contractors Association, says one of his members sadly understands what will happen after employees are fired for the no-match letter. “They are going to get a truck and start their own landscape business,” the contractor told him. “They’ll be poaching his clients and they are likely to become part of the underground economy.”

Link here.


A U.S. district judge has struck down a part of the Patriot Act that requires telephone and internet service providers to turn over records to the government without telling customers. Judge Victor Marrero, of the U.S. District Court for the Southern District of New York, ruled the Act provision that allows the FBI to obtain ISP and telecom subscribers’ billing, calling and Web surfing records without court approval violates the U.S. Constitution.

Marrero ordered the FBI and the U.S. Department of Justice to stop issuing so-called national security letters, or NSLs, requiring ISPs to turn over subscriber records. The NSL program prohibited ISPs from telling customers that they were being investigated. Marrero delayed the order pending a DoJ appeal of his decision.

The NSL program violates the First Amendment to the U.S. Constitution as a restraint on free speech, the judge said in his 107-page order. The program also bypasses judicial oversight of the requests, Marrero said. The NSL program could allow the FBI to unmask the identity of Internet users posting anonymous comments, obtain all of the e-mail messages of an Internet user, and even find out all the Web sites a user has visited, Marrero said.

“In light of the seriousness of the potential intrusion into the individual’s personal affairs and the significant possibility of a chilling effect on speech and association – particularly of expression that is critical of the government or its policies – a compelling need exists to ensure that the use of NSLs is subject to the safeguards of public accountability,” the judge wrote. The DOJ is reviewing the decision and considering its options, a spokesman said.

The American Civil Liberties Union, which brought the lawsuit against the DOJ and FBI, praised Marrero’s decision. “Courts have a constitutionally mandated role to play when national security policies infringe on First Amendment rights,” Jameel Jaffer, director of the ACLU’s National Security Project, said in a statement. “A statute that allows the FBI to silence people without meaningful judicial oversight is unconstitutional.”

Many civil liberties groups have criticized the law for being overly broad and targeting innocent U.S. residents. Marrero in 2004 ruled that the NSL provisions of the Patriot Act violated the Constitution because they amounted to unreasonable search and seizure. After the 2006 revisions to the Patriot Act, the U.S. Court of Appeals for the Second Circuit sent the case back to Marrero for a ruling on whether the NSL provisions were still unconstitutional.

The FBI’s use of the NSL program, which existed before the Patriot Act, has ballooned since the law was passed, Marrero noted. In 2000, the FBI issued about 8,500 NSL requests, and the number of requests rose to 56,000 in 2004, he wrote. The NSL program’s “most troubling” aspect, Marrero wrote, is that it attempts to bypass judicial review of law enforcement requests. The program “reflects an attempt by Congress and the executive to infringe upon the judiciary’s designated role under the Constitution,” he wrote.

Link here.


It is now becoming clear that whether or not Vladimir Putin relinquishes the presidency nominally, he will remain in effective control of Russia for many years after 2008. In that event, his “spook” economic and political priorities, honed during his decades with the KGB, will doubtless rule Russian policy. Since Putin appears most comfortable in a cold war world, that is what we are likely to return to. It is not an attractive prospect.

In order to have a cold war, you need adversaries of approximately comparable strength. The West cannot have a cold war with al Qaeda, which has neither the military nor economic strength to challenge it by conventional means. At the opposite extreme, the Soviet bloc was a worthy Cold War opponent, not so much because of its always fairly feeble economy, but because of its dedication to military might, which allowed it to punch far above its demographic or economic weight in world councils.

Putin is now trying to recreate the Soviet position. He has one major disadvantage – a population of only 141 million, which is tending to decline. He has on the other hand an enormous advantage over the Soviet Union. That is intelligent exploitation of Russia’s immense energy resources in a period of high oil prices, not so much to confront the West directly, but to attract allies into a bloc that will be large enough and powerful enough to do so. A second minor advantage is that he is not ideologically compelled to defend an indefensible economic and political system. Allies who stand alongside Putin are not forced to adopt Communism, but can retain whatever bizarre political, economic and religious beliefs they already have, uniting only in hatred of the common adversary.

Had the West in general and the U.S. in particular not made several serious mistakes since 2000, Putin would not be in a position even to dream of realizing his disreputable ambitions. The 9-11 attacks differed only modestly in scale and not at all in kind from myriad previous terrorist attacks that had afflicted the Western world over the previous 30 years, while by chance largely sparing the U.S.

Terrorism is an unfortunate and ineradicable danger of modern life. It is becoming clear that nothing in the 9-11 attacks justified selecting one particular group of terrorists and reorienting U.S. foreign policy around it. The U.S. tied its military forces down in Iraq and Afghanistan, allowed the various Islamic terrorist groups to consolidate and alienated potentially neutral countries such as Iran and leftist political groups throughout the West. By focusing foreign policy so completely on “Islamofascist” terrorism, other challenges, notably those presented by Putin’s Russia and Hugo Chavez’s resource-controlling Venezuela, were neglected.

In 2001 a Russian challenge to the U.S. would have been met by a united West and laughed off the international stage. Had President George W. Bush pursued the “modest” foreign policy on which he was elected in 2000 that would very likely still be the case. Instead, there is today a disgruntled element in the EU and elsewhere that regards Putin as less of a menace than Bush, while anti-U.S. feeling in the UN and the EU has prevented effective blocking action in the ex-Soviet “near abroad” of Georgia, Ukraine and Kazakhstan. Beyond those countries, Putin has quite rich and potentially powerful allies in Iran and Venezuela. China is at best neutral and even in Japan opposition groups have taken to denouncing U.S. policy. Even Putin’s nuclear buildup, renunciation of arms control, detonation of record-sized bombs and recreation of a Russian air force that may well be better in quality than the USAF have been met with little response.

Higher defense spending is a priority for the U.S. and still more for the EU, which has allowed its defenses to fall to pathetically low levels. Both the U.S. and the EU have permitted defense procurement to become an incredible sinkhole of corruption and inefficiency, while Russia has spent resources in what is for governments an efficient manner. During the pacific 1990s, the Russian defense equipment sector fell far behind those of the West, but there is no question that under Putin it has been catching up fast.

To take one example, the F-22 Raptor fighter aircraft was originally put out to tender in 1986, but the first aircraft was not delivered until 2003. The current estimate of its production cost is $361 million per aircraft. The Eurofighter Typhoon, a similar aircraft, costs $440 million per aircraft. The Russian PAK-FA appears to be at least comparable or better in capability, is expected to come into service in 2010 and to cost $30 million per aircraft. The U.S. and the EU may have larger economies than Russia, but at anything like that cost differential, their economic advantage is negated.

One source of Russian efficiency has been competition. Putin’s people understand far better than the old Soviet bureaucracy how incentives and competition can be used to spur innovation. While defense production has remained in the state sector, competition between different agencies has deliberately been fostered, with substantial bonus payments to the management and staff of agencies that prove successful in an endeavor. This produced a system considerably more efficient than the U.S. defense procurement system, where the companies are largely private sector but competition between them is determined by who hires the best-connected lobbyists.

Outside the defense sector, a new cold war will bring challenges in energy. With Venezuela and Iran as allies, Russia will control a high proportion of the world’s oil supplies. Whereas today the Arab Middle East controls the majority of the world’s oil output, Venezuela’s Orinoco tar sands make it a much more important oil source over a 10-year time frame and Iran too will benefit from Russian technology and oil industry know-how. The old Soviet Union brought very little to its clients in terms of technological capability in fields outside defense. Russia used the period of openness to Western influences well, modernizing its oil sector and bringing its technology up to cutting-edge levels. It is now unlikely that Russia will fall back since competitive forces have been maintained. Russia will use the energy supplies to which it has preferential access to influence policy in such oil-thirsty countries as China, and to browbeat customers in strategically important but politically feeble places such as the EU.

Globalization will go partly into reverse. High tech investment will be diverted to a large extent towards devising defense mechanisms against possible cyber-attacks. Barriers will be erected against takeovers by Russian state controlled behemoths. Indeed, such barriers could reasonably be erected against all takeovers by state-controlled companies. Trade will become somewhat less free, although the protectionist impulses thrown up by Cold War suspicion may be somewhat balanced by a geo-strategic need to play nice with Third World countries wishing to export to the U.S. and Western Europe. Gross World Product growth will be lower than it might otherwise be, and more of it will be concentrated in unproductive defense and security sectors.

The one positive effect of a new Cold War might be in weeding out public sector waste in the U.S. and Western Europe. Russian public spending is only 21% of GDP, below the U.S. level and far below levels in the EU. The country runs a large budget surplus and its finances are further buttressed by soaring receipts from the 13% “flat tax” that Putin introduced when he came to office in 2001. While Russia has huge corruption and an overstuffed military, it wastes much less than the West in unproductive social spending, wasteful subsidies to agriculture and politically-directed “pork-barrel” projects. To accommodate higher defense spending without plunging its economies into recession, it is likely that the West will have to adopt a Russian – and in this respect, more capitalist – approach to its taxation system and public spending priorities.

Is there any way to prevent the escalation of this debilitating competition? Well yes, there is. The whole point of being capitalist is that one has good access to capital and uses it wisely. Russia, when given access to capital, tends to waste it, stashing it away in Swiss bank accounts and spending it on soccer clubs and call girls. However since 1995 Western central banks have used their almost unlimited ability to create money to make capital extremely cheap, in fact almost worthless as demonstrated by the huge number of insane dot-coms, vulgar oversized housing developments and megalomaniac empire-building takeover artists it has funded.

In recent years, this has also allowed the world economy to grow at a higher rate than is sustainable, raising the prices of energy, commodities and shipping ad infinitum. In other words, we have negated our advantage in capital availability and artificially enhanced Russia’s advantage in energy and natural resources.

The solution is thus quite simple – a prolonged period of much higher real interest rates, which will raise the value of capital. That will enhance our relative economic advantage and depress the price of oil and other commodities, thus forcing Russia and its satraps Venezuela and Iran into bankruptcy. A similar period of tight money and low commodity prices was instrumental in defeating the Soviet Union in the late 1980s. There is indeed a good case to be made that Paul Volcker did more to win the Cold War than Ronald Reagan! The process can be repeated now. There are other ways of winning wars beyond mere armaments.

Link here.
Previous News Digest Home Next
Back to top