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ELIOT SPITZER’S DOWNFALL RAISES A QUESTION: IS THERE A FAIL-SAFE WAY TO PAY FOR NAUGHTY THINGS?
Here is a little privacy advice from a somewhat unlikely source: Forbes magazine. What is the most effective way to cover your spending tracks? For relatively small transactions, clearly cash is the natural and good way to accomplish this. As transaction size gets into the thousands of dollars it is time to start scoping out alternatives. Outside of cash, Forbes seems to think that pre-paid "stored value" cards and digital currencies such as e-Bullion or BullionVault.com are the best bets.
New York's governor was felled not by "Kristen" -- but by Osama bin Laden. Since 9-11 stronger anti-money laundering rules and new technology have made it tougher to hide dirty transactions of all sorts. As a result, the feds are just as likely to nab a high-profile john as they are a terrorist or drug dealer. "It's very difficult to avoid creating a paper trail," says Gregory Baldwin, a lawyer specializing in money laundering issues in Miami. "If you try too hard, you can trip a wire." In other words, it is easier to cheat on a spouse than to cheat the system. Here are five ways spenders try to cover their tracks.
1.) Wires/Transfers. If accusations in court filings and the rumors are true, Spitzer's mistake was to wire funds to QAT, a front company used by the Emperors Club V.I.P. There was a time when money wiring (via, say, Western Union) was a good way to move dirty money undetected. But now such transfers, especially to suspicious entities, raise red flags. Both banks and money services are required to record wire transfers of $3,000 or more and take note of who received the money. That is what helped nail Matthew Thompkins, a New Yorker who was sentenced last year to 23 years for operating a national underage prostitution ring. He moved a total of $850,000, in increments of less than $3,000 at a time, via U.S. Postal Service money orders and Western Union transfers. Financial institutions are required to keep an especially careful eye on so-called politically exposed persons, usually meaning foreign government officials. But many banks have decided to expand the definition to include U.S. politicians.
2.) Credit cards. You would think felons would know better, yet that is partly how the feds collected evidence against Dennis Paris. Convicted of running a Hartford, Connecticut sex-trafficking ring that used underage girls (including a 14-year-old), Paris has been fined $1.5 million and is facing life in prison. Court documents make these claims: Pretending to operate an escort service and using front companies with innocuous names, Paris walked around town with a mobile credit-card processor. His clients paid for prostitutes with Visa, MasterCard and Discover cards. Sex chits were processed by First Data Corp.
Discover Financial Services says it got wise to Paris -- it will not say how -- and shut down his account within three months. Visa, MasterCard and First Data decline to comment. Neither First Data nor the card companies have been accused of wrongdoing.
The use of credit cards to pay for unsavory goods or services (especially, pornography) happens more than credit card companies admit. But these companies do have software designed to spot suspicious transactions, which must be reported to the feds. The industry shares a database to help identify illegal behavior, not only to help the government stop criminals but also to mitigate fraud losses, which run into billions. "Think algorithms and models and different software and Web crawlers," says Christine Elliott, an American Express spokesperson. Despite the safeguards, however, Amex cards were used to purchase sex from the Emperors Club, according to the criminal complaint, apparently without triggering the criminal investigation.
3.) Prepaid cards. "Spitzer should have used a stored-value card and put money on that," says Gregory Calpakis, executive director of the Association of Certified Anti-Money Laundering Specialists in Miami. "It is almost an untraceable instrument." Prepaid cards have become a big money laundering concern for the feds. American Express sells gift cards with denominations as high as $500 that can be purchased at retailers anonymously (that is, with cash) and without limit. The company points out that customers cannot bank with the card or use it outside the U.S. But other stored-value cards, often branded by Visa or MasterCard, can be accessed for cash via ATMs worldwide and reloaded with cash online or at checkout counters without a bank account or face-to-face identity verification. Law enforcers have seen drug dealers use these cards, and they fear that terrorists rely on them, too.
Sallie Wamsley-Saxon pleaded guilty in February to running a prostitution service in Charlotte, North Carolina, using prepaid cards from Green Dot Corp. to move cash, say court filings. Over a two-year period she took in fees from prostitutes (sometimes via her PayPal account) and transferred $120,501 to her Green Dot cards, each with a $2,500 maximum. She used the funds partly to pay for the hookers' hotel rooms, according to court filings. "What we do is a reasonable measure to know the identity of each customer," says John Ricci, general counsel for Green Dot, which apparently did not get wise to Wamsley-Saxon (someone tipped off the cops) but cooperated with the investigation.
4.) Digital currency. According to the Justice Department, between 1999 and 2005 child pornographers, hackers and identity thieves made use of e-gold, an online payment system in the Caribbean. Users provide an e-mail address to e-gold, then go to a currency exchange (like Cambist.net) to swap greenbacks, euros, yen and so forth for digital currency backed by gold. From there the customer is free to conduct anonymous transactions anywhere in the world. The feds indicted e-gold last year for money laundering and illegal money transmitting because it operated without an appropriate license. The company pleaded not guilty, and its lawyer, Andrew Ittleman, says e-gold fully complied with anti-money-laundering laws and did not need a license to operate.
5.) Cash. Unless you are unlucky enough to get marked bills, cash is still very hard to trace, says Fred L. Abrams, a New York City asset-recovery lawyer. Client #9 (Kristen's benefactor) eventually arrived at that insight, paying $4,300 in bills in his final dealings with the Emperors Club, says the complaint.
Deposits or withdrawals that total more than $10,000 within the same day automatically prompt a currency transaction report to the federal government. Smaller amounts will also be picked up by software monitors if they fit a suspicious pattern. Slicing up transactions to avoid detection -- a.k.a. structuring -- is illegal. Structuring and money laundering account for half the 600,000 suspicious activity reports banks now file with the feds annually, compared with 162,720 SARs at the start of the decade. (In a bizarre case, Riggs Bank, the Wall Street Journal reported, filed SARs on former U.S. Senator Bob Dole, after regular withdrawals of up to $8,000 in 2004; no wrongdoing was ever alleged.)
So what is the safe way to get a wad of cash out of the bank? Take it in small and regular doses. Withdrawing $1,200 every week for a high earner is probably not going to trigger an alarm, says Clemente Vazquez-Bello, a lawyer in Miami who advises banks on anti-money-laundering regulations. And if it does, have a good explanation ready. You are within your rights to be a big spender at restaurants and flea markets where credit cards are not accepted.
NEW TAX HITS BRITAIN’S ATTRACTION AS CENTER OF GLOBAL FINANCE
The proposal from the U.K. government to cut back, even if apparently only slightly, on the tax breaks enjoyed by "non-domiciled" foreign residents of the U.K. continues to reverberate.
Indian and other foreign-origin high net worth individuals [in London] are being courted by tax havens to move there after Britain imposed a £30,000 tax on people claiming non-domicile status.
Chancellor Alistair Darling's announcement during the budget speech prompted a flurry of activity with tax consultants and representatives of tax havens such as Monaco, Lichtenstein and Geneva advising clients on the next move.
The tax of £30,000 is unlikely to make a difference to the super-rich such as steel baron Lakshmi Mittal, but many among the 23,000 individuals who claim non-domicile tax status are considering moving out of Britain.
Critics of the tax on non-domicile people better known as 'non-doms' include top figures of British trade and industry, and the Trade minister Lord Digby Jones. They believe the tax threatens London and Britain's attractiveness as a global financial hub.
Describing the tax as 'laughable', Liberal Democrat leader Nick Clegg said: "Their new poll tax which the Conservatives not surprisingly support, will be wildly punitive for ordinary foreign workers but will be no more than a 'flea bite' for foreign billionaires who have come to regard the UK as nothing more than a tax haven."
The non-domicile rule is a tax loophole that made Britain a tax haven and a favorite destination for the world's super-rich, industrialists and businessmen. It was framed during the days of the British Empire. It allows some residents of the UK to cite another country as their real domicile and then, unlike all other residents, to pay UK tax on their earnings in the rest of the world only if they remit the money to the UK. If they do not remit it to the UK, no tax is levied.
ITALY AND FRANCE LAUNCH PROBES INTO OFFSHORE ACCOUNTS
Further fallout from Liechtenstein client data leak.
The authorities in Italy and France are reportedly set to launch major investigations into whether some of their citizens may have evaded tax in their home states by moving money to accounts in Liechtenstein.
According to the UK's Financial Times, Italian investigators have a list of 390 Liechtenstein bank accounts, which they suspect have been used for the purposes of tax evasion, after receiving information from the tax authorities in the United Kingdom. It is believed that the sums of money held in these accounts range from €200,000 up to €400,000.
The information provided by the UK dated back to 2002, and currently it is unclear whether the account holders may have already declared, and lawfully repatriated, their offshore assets in one of the numerous tax amnesties instigated by former Prime Minister Silvio Berlusconi. Italy has since imposed a major crackdown on tax evasion under Prime Minister Romano Prodi's center-left government.
The Italian media began reporting last week that several high profile celebrities, business people and politicians, including one Senator, were on the list. However, the authorities may have to race against time to conclude their investigations with the statute of limitations -- currently set at 7 1/2 years -- which is due to expire soon.
Meanwhile, France's Budget Minister Eric Woerth has informed a French parliamentary committee that the government is preparing to commence "in-depth fiscal investigations" into 20 families and individuals in the coming days. Woerth also revealed that there would be a second wave of investigations targeting 64 groups or individuals featured on a list of around 200 entities which are known by the government to have transferred in the region of €1 billion to Liechtenstein.
This second French investigation will also be based on a tip-off from the UK tax authority, which is understood to have paid £100,000 for a list of Liechtenstein account holders to the same informant -- reportedly an ex-employee of LGT Bank -- who sold information to the German intelligence services, sparking a global tax evasion investigation.
LIECHTENSTEIN’S BANKS POSITIVE ABOUT THE FUTURE
Banks do not fear any long-term consequences of “the German tax affair”.
After all the Sturm und Drang of the illegal leak of confidential client data by a former Liechtenstein bank employee to the German and British intelligence agencies (see entry immediately above), Liechtenstein's banks claim to see a bright future.
The Liechtenstein government has this week described 2007 as a "successful business year" in an official statement. The authorities went on to state that the three largest banks in the Vaduz banking center increased their business activities last year, and revealed that the banks do not fear any long-term problems for the Liechtenstein financial center as a consequence of what they dubbed "the German tax affair".
"We are able to compete with international financial centers in terms of professionalism, tradition, international orientation, and quality of our products and services," Josef Fehr, President of the Liechtenstein Bankers Association from 2006-2008, emphasized at the recent 2008 Bank Day.
The 2007 business year results of the three large banks -- LGT Bank in Liechtenstein, Liechtensteinische Landesbank, and VP Bank -- confirm the assessment that the Liechtenstein financial center has established itself internationally, according to the government. ... In their reports for 2007, all three banks indicated that the strategic reorientation initiated a few years ago has now borne fruit. ...
Michael Lauber, CEO of the Bankers Association, argued at the 2008 Bank Day that: "The Liechtenstein banks have completed a strict training program that will make them fit for the future. This fitness program includes niche innovations and stability, endurance and growth, trust and sustainability."
U.K. TAXMAN PURSUES OFFSHORE BANK ACCOUNT HOLDERS
HM Revenue & Customs has undertaken several sizeable initiatives going after undeclared income from British taxpayers' offshore accounts in the last several years. Now they are turning up the heat further.
HM Revenue & Customs (HMRC) is writing to around 5,000 people whom it believes to be offshore account holders, but have yet to declare any savings and investment income. They will have one last chance to come clean -- or face stringent penalties.
It is one of a string of moves to clamp down on unpaid tax. HMRC is also pursuing those earning income from buy-to-let property investments, both in the UK and overseas. Accountant PKF said the measures turn one of the central tenets of the English legal system on its head -- by presuming that taxpayers are guilty and demanding proof of innocence.
Tax investigations partner John Cassidy said: "Legally, to issue an assessment for unpaid tax, HMRC must have made a 'discovery' or, in other words, have actual knowledge that further tax is due -- not just that it might be due. Yet, the threat is that such assessments will definitely be issued unless informal, voluntary answers are given to the questions raised."
Although taxpayers are under no legal obligation to respond, those who fail to, ultimately face an investigation into their tax affairs and hefty penalties.
Chas Roy-Chowdhury, head of taxation at the Association of Chartered Certified Accountants, said: "They (HMRC) are depending very largely on the willingness of offshore account holders to inform the taxman of their financial details, but if this is not done proactively, the taxman will find other ways and means -- such as targeting banks and finance providers.
"This is an opportunity to put things right with the taxman, but they also warn that if a disclosure is made which shows interest and income has been received, then interest is payable and in some cases the taxman will seek 'penalties'."
HMRC will take co-operation into account when determining any penalties, but has said that these will now be no less than 30% of sums due.
"Tax evaders had their chance to come clean and pay reduced penalties of 10 percent last year," said Gary Ashford, a tax investigations director at accountant and business adviser Grant Thornton. "Now, HMRC is playing hardball and will be taking no prisoners."
COSTA RICA AND U.S. SETTLE GAMING DISPUTE
Costa Rica has allowed the U.S. to buy it off as part of the resolution of a dispute over the legality of U.S. gambling legislation. What Costa Rica obtains apparently includes access to certain U.S. markets that anti-trade legislation had partially closed off. We guess that is better than nothing, which is probably what the U.S. was initially inclined to offer.
Costa Rica has reportedly reached a compensation settlement with the United States in a long-running dispute over legislation which has shut out foreign internet gaming companies from operating in the U.S. market.
According to a recent report by Costa Rican daily the Tico Times, the Central American country has accepted a U.S. offer of greater access to other service markets, including research and development, storage, technical testing and analysis, in compensation for the closure of the U.S. online gaming market to Costa Rican operators.
This agreement is supposedly very similar to the deal that Washington struck with the European Union late in 2007 which, according to the European Commission, provides EU service suppliers with new trade opportunities in the U.S. postal and courier, research and development, storage and warehouse sectors. Canada and Japan have apparently also accepted similar U.S. offers, while the U.S. Trade Representative's office has said that it expected India and Macau to also fall into line. ...
The EU has stressed however, that the compensation package agreed in December is separate from its ongoing investigation over the adoption in the U.S. of the Unlawful Internet Gambling Enforcement Act (UIGEA) in 2006. This law prohibits the use of payment instruments by financial institutions to handle the processing of any form of internet gambling that is illegal under U.S. federal or state law and led to the collapse of many global gaming operations. All EU suppliers of remote gambling services have now withdrawn from the U.S. market further to the adoption of the UIGEA.
Earlier this month, EU Trade Commissioner Peter Mandelson announced that the EC would examine whether U.S. gambling laws are in breach of international trade rules, and discuss the matter with the U.S. "The U.S. has the right to address legitimate public policy concerns relating to internet gambling, but discrimination against EU companies cannot be part of the policy mix," Mandelson commented at the time.
CAYMAN’S ECONOMIC RESILIENCE RECOGNIZED BY MOODY’S
The Cayman Islands were devastated by Hurricane Ivan in 2004, but thanks to the mobilization of backup operational plans then and continued innovation in its financial industry since then they have bounced back from the disaster remarkably. Moody's has maintained the nation's Aa3 government foreign currency bond rating, the highest in the Caribbean.
The Cayman Islands' maintenance of its favorable government foreign currency bond rating demonstrates the jurisdiction's economic resilience in the face of recent natural disasters and uncertainty surrounding the U.S. economy, according to Moody's Investors Service, the international ratings agency.
In a report published earlier this month on the Cayman Islands' macroeconomic performance, Moody's noted the devastation caused by Hurricane Ivan in 2004, and observed that it is this ability to bounce back from disaster that keeps intact the jurisdiction's Aa3 government foreign currency bond rating -- the highest in the Caribbean, and second only to Bermuda. ...
Covering Cayman's 2007 performance, the report stated that economic growth has stabilized to around 4% over the previous two years, after 6.5% growth was posted in 2005 during the hurricane reconstruction period. It added that while there are signs of deceleration in the construction sector, growth drivers -- tourism and financial services -- which comprise around 70% of GDP, performed well.
"Despite the ongoing global financial crisis, the Cayman Islands continues in its role as a leader in the offshore industry, accounting for around 80% of the world's mutual fund registrations. In 2007, new mutual fund and company registrations remained in the double digits, and data for January 2008 shows the same trend continuing," the report stated.
"Tourism consolidated its quick rebound from [the] hurricane in the past two years, particularly for stay-over (as opposed to cruise) arrivals, which returned to pre-hurricane levels in 2007," the ratings agency added. ... [T]he report also warned of challenges to tourism such as a cyclical slowdown expected over the next couple of years, and a recession or slowdown in the economy of the US, Cayman's main tourism market.
It was further noted that compared to arrival numbers before the September 11th terrorist attacks on the U.S., tourism numbers in 2007 reflected a reduction, but there was still good news. "Despite a decline in tourist arrivals, tourism-related inflows are posting robust growth, suggesting that tourists are spending more, even after adjusting for inflation, as the Cayman Islands increasingly attracts high-income visitors," the report concluded.
ISRAEL TO ATTRACT IMMIGRANTS, EXPATS WITH TAX BREAKS
Governments are far more inclined to offer tax breaks to those who have shown they are willing to go elsewhere if such as offer is not extended. Now Israel is offering to exempt from taxes for 10 years all foreign source income to new immigrants, including returnees.
The Israeli government has proposed a generous set of new tax incentives designed to tempt new immigrants, and encourage former Israeli residents to return home, reversing what Finance Minister Ronnie Bar-On calls a "brain drain" on the national economy. ...
Under the proposals, new immigrants, including Israeli returnees, would be exempt from taxes and tax reporting on income earned abroad for a period of 10 years. This exemption would cover all forms of foreign income, such as employment income, capital gains, business income, real estate gains and rents. The qualifying period would be reduced to five years in 2008 and 2009 if that person was a foreign resident on January 1st, 2008.
Under current Israeli tax law, returning residents qualify for 5- or 10-year tax exemptions on dividends, interest, rent, royalties, pensions and capital gains sourced from abroad if they have resided permanently overseas for at least three years, and acquired the assets while living abroad.
Arguing in favor of the new proposals, Bar-On told a press conference that: "The tax reforms for new immigrants and returning citizens will help to reverse the brain drain, will strengthen the Israeli economy and increase growth."
According to Israel's Channel 10, the government is also considering extending the scheme to include other forms of income for wealthy returnees to Israel, particularly if they invest in certain under-privileged communities outside of the major towns and cities.
U.S. STATES LEAD WORLD IN HIGH CORPORATE TAXES
A new study shows that when you add U.S. state corporate tax rates to the U.S. federal tax rate, that for 24 states one obtains corporate tax rates greater than any other country in the world. Even for states with no corporate income tax, the federal rate alone is higher than that of #5-ranked France.
A new study from the Tax Foundation, a nonpartisan tax research group in Washington, shows that most American states tax companies at a higher rate than any other country in the developed world.
"This is startling news for America's businesses and workers," commented Tax Foundation president Scott Hodge, the study's author. "Tax competition for jobs and investment is fierce, and the US continues to fall further and further behind. Our states should be the world's leaders in many things, but high taxation should not be one of them. The high federal corporate tax rate is literally crushing states' competitive abilities. That means fewer jobs for American workers." ...
Counting the federal rate alone, the U.S. has the world's highest corporate tax rate, but including average sub-national rates (federal plus state in the U.S.), Japan, with a combined rate of 39.54%, edges out the U.S. for the highest-tax location.
This new study breaks the tax down state-by-state, adding each state's corporate tax rate to the federal corporate tax rate. The results show that 24 states impose, when combined with the federal rate, a higher business tax rate than in any other nation; 32 states have a combined corporate tax rate higher than 3rd-ranked Germany; 46 states have a combined corporate tax rate higher than 4th-ranked Canada; and all 50 states have a combined corporate tax rate higher than 5th-ranked France.
"If federal lawmakers are serious about making the U.S. corporate tax system more competitive globally, they will have to partner with state officials to lower the nation's overall corporate tax burden," Hodge added. "Likewise, state officials should have a vested interest in cutting the federal corporate tax rate because there is only so much they can do to improve their own competitiveness."
After all, even corporations in the three states that do not impose a major state-level corporate tax -- Nevada, South Dakota, and Wyoming -- still shoulder a higher corporate tax rate than France, and 25 other major countries, because of the 35% federal corporate rate, he observed.
The state of Iowa topped the Tax Foundations's corporate tax table with a combined rate of 41.6%. Pennsylvania (41.5%), Minnesota (41.4%), Massachusetts (41.2%), Alaska (41.1%) and New Jersey (41.1%) all have a combined corporate tax rate of more than 41%. California came in 11th with a combined rate of 40.7%. At the other end of the table, Texas has the lowest combined corporate tax rate at 36% (excluding those states that do not impose their own corporate tax), followed by Alabama (37.8%) and Colorado (38%).
These rates are just plain high, although the rates are applied on the margin. Average rates are lower due to various and sundry deductions, incentives, etc.
HILARY CLINTON CALLS FOR “MORE PATRIOTIC” U.S. TAX CODE
Threatens to eliminate tax deferment of unrepatriated foreign earnings.
Some hints of what a Hilary Clinton tax policy would look like were dropped this week. Details are sketchy, and probably not fully thought through, but apparently she thinks that the "loophole" that allows profits by foreign subsidiaries of U.S. corporations to avoid U.S. taxes until they are repatriated to the U.S. parent should be revoked. Of course, this makes no sense for a long list of reasons -- what an incentive to reincorporate overseas, e.g. -- and it is doubtful it would be passed in the proposed form. But it gives you an idea of how Clinton thinks and -- surprise -- she does not like all this offshore stuff.
Democratic Presidential hopeful Hilary Clinton restated her belief in a newspaper interview on Monday [March 24] that reform of the country's tax and trade policies is needed, so that U.S. companies are discouraged from investing overseas rather than at home.
Following a recent speech in Philadelphia, Clinton told the Pittsburgh Business Times that the U.S. tax code should not reward those companies which set up foreign operations to reduce their U.S. taxes. "I do believe that we have to change the tax code, and quit giving tax incentives to companies that export jobs out of the country," she argued.
She also indicated that a Clinton White House would review trade agreements to "make sure they affect the reality of the global economy we're in. ... So many companies we trade with take advantage of our open markets," she told the paper.
As part of her nine-point tax plan, announced last year, Clinton has pledged to reform U.S.US international corporate taxation by changing parts of the tax code which enable companies to defer paying American taxes for as long as they hold the money abroad, a policy that she contends is encouraging the offshoring of jobs, while placing companies that create jobs in America at a competitive disadvantage.
"Let's once and for all get rid of the incentives for American companies to ship jobs and profits overseas," Clinton declared in a speech at the Manchester School of Technology in New Hampshire last year. "It is one thing for the marketplace to encourage overseas investment. It's another for our own tax code to do so. We actually put companies that want to create jobs here on our shores at a disadvantage to those who ship jobs to tax havens."
MY BIG FAT IRS CASE
You do not have to be dealing drugs, cheating on your taxes or paying prostitutes to run afoul of the structuring law.
If you conduct a currency transaction of $10,000 or more, the financial institution has to file a "currency transaction report". Try to avoid the reporting requirement by breaking the transaction into multiple sub-threshold sized transactions, however, and you have committed the felony of "structuring". Penalities could include the forfeiting of the amount "structured".
What actually constitutes evasive action, you ask? Like so many laws these days, the criteria are not objective. The government would argue that if structuring standards were precisely delineated then immediately everyone would know what to do to avoid being reported. So instead we end up with what we have, where if your transactions get the attention of the IRS they might well grab first and then see if you can convince them of your innocence later. A Forbes article gives muliple instances where exactly this has happened.
Forbes duly notes -- and everyone would do well to note along with them -- that a "suspicious activity report" filed by a bank, which happens when, e.g., the bank suspects structuring activity, will attract more scrutiny than a currency report itself. Also, be aware that banks can be penalized if they fail to report suspicious activity where they "should" have detected it. Thus banks would be biased towards deeming activities "suspicious" when it comes to the reporting end of things.
The young couple hauled in $40,000 in cash at their Greek wedding. They knew if they deposited $10,000 or more at once, the bank would have to file a "currency transaction report" and they would have to wait in line to provide information. So they deposited their loot in smaller lumps. Soon, they were being investigated by IRS criminal agents and paying Chicago attorney Robert E. McKenzie $500-plus an hour to help them avoid seizure of their cash or worse. Carving up deposits to avoid a currency report is "structuring." Structuring is a felony. "It's scary. If you know of the $10,000 requirement and attempt to avoid it, you've committed a crime," says McKenzie, who convinced the IRS to let the newlyweds go.
You do not have to be dealing drugs, cheating on your taxes or paying prostitutes to run afoul of the structuring law. Even if the money is from a legal source and used legally, the government can charge you with a crime and/or demand you forfeit cash. By contrast, with money laundering, the cash has to be related to an underlying crime.
Think no one will notice your $9,000 deposits? Banks send the feds 300,000 "suspicious activity reports" a year flagging potential structuring or money laundering. These attract more scrutiny than the 16 million currency reports filed each year.
The feds seized $400,000 in late 2006 from bank accounts of Jennifer and Jeremy Marshall, the owners of Aquagrill, a SoHo [a New York city neighborhood] seafood restaurant, recently praised in Forbes for its Wellfleet oysters, grilled tuna and lobster salad. The government said the funds traced to deposits of $9,950 or less and began a criminal structuring investigation. The Marshalls' lawyer argues they were not trying to hide money and should not be charged. She adds that an independent expert has confirmed "every penny" was earned legitimately and taxes were properly paid.
In Texas the feds seized $330,000 from the owners of Executive Taxi, Dallas Taxi and Golden Taxi on suspicion of structuring. Allen Mansourian, Barry Sangani and Ahmad Sangani insist that the cash was deposited as it came in from the cab business. In court papers they say they could lose their liability insurance and be forced to shut down if they do not get their money back.
Pravinchandra and Ushaben Patel, who own motels in Hillside and Cicero, Illinois., are making a similar case as they fight to get back $240,000 the government grabbed last August from their Smith Barney accounts. The government says they purposely kept each cash deposit to $8,000 and used multiple bank accounts to avoid currency reports. The Patels say they merely kept a separate deposit account for each motel, where rooms go for $47 and $55 a night. "There is no requirement that persons stockpile funds received on multiple occasions from different payers until the funds exceed $10,000," their lawyer, Barry A. Spevack, argues in a court filing. IRS agents have given no hint they suspect the Patels of anything but structuring, he says.
One outcome of the Eliot Spitzer scandal: It might be harder for people to claim they do not know about the $10,000 filing requirement. His final contribution to investor education, perhaps?
U.S. GOVERNMENT SEEKS TO RESURRECT KPMG TAX SHELTER CASE
U.S. government prosecutors aggressively pursued 13 former partners of KPMG for promoting what turned out to be illegal tax shelters to KPMG clients. Not satisfied with recovered taxes, interest, and penalties, the government sought to make a criminal case against the former partners -- seeking to deter future innovation in the tax shelter business, along with the usual scalp-hunting motivations that drive prosecutors these days.
The feds got too aggressive for one U.S. court system judge when they implied -- how stongly is open to interpretation -- that if KPMG refused to fund their former partners' defense then that might encourage the feds to be a little more lenient in their possible pursuit of KPMG itself. The judge ruled that this deprived the defendants of their constitutional right to counsel. Now, 9 months later, the government is saying this interpretation was incorrect.
On the face of it, the government has some justification. KPMG had no legal obligation to pay for the former partners' defense; it was just "normal practice" to do so, and the company decided not to go the normal practice route in this case. Not honorable behavior, but no contract violation it seems. But to the degree that the threat of government action influenced company actions, it would seem the judge's reasoning can be seconded. Are government prosecutors willing to testify under oath that KPMG's support of its former partners would have no effect on its actions towards KPMG? That might help resolve the issue.
It has emerged that the U.S. government is attempting to revive its case against 13 former partners of accounting firm KPMG, who stand accused of facilitating the use of illegal tax shelters which allegedly cost the Treasury billions in tax revenues.
The case, billed as the largest criminal prosecution in U.S. legal history, was thrown out by U.S. District Judge Lewis Kaplan in July 2007, after he concluded that the government had denied the defendants their constitutional right to counsel by pressuring their former employer to cut off payment of legal fees. But at a hearing in the U.S. Second Circuit Court of Appeals ... the government argued that it had not brought any pressure to bear on KPMG to stop paying the defendants' legal fees, and that any violation of their rights had only been temporary.
While it was normal practice for KPMG to pay the legal costs of former employees accused of wrongdoing, it reversed its policy in this case, fearing that, by being seen to be helping the defendants, it could bring about an indictment on the company itself. According to the so-called "Thompson Memorandum", written in 2003 by then-Deputy U.S. Attorney General Larry Thompson, prosecutors may consider a company's payment of legal fees for "culpable employees and agents" when deciding whether to indict the company.
The defendants, of which there were initially 19, were accused of helping to structure and sell the tax shelters, which were deemed abusive by the IRS. The agency has estimated that the tax shelters helped investors avoid some $2.5 billion in taxes. However, in August 2005, KPMG avoided indictment by agreeing to pay $456 million in penalties to cover former clients who participated in the tax shelters, known as Blips, Flip, Opis and Short Option Strategy. Four of the original 19 defendants are scheduled to go on trial later this year.
COURT: MAN CANNOT BE FORCED TO DIVULGE ENCRYPTION PASSPHRASE
Can someone be compelled to produce a decryption passphrase that would provide access to evidence that could later be used to prosecute him/her? The debate has been going on for some time now, and this article covers a recent court case where the presiding judge ruled that the defendant cannot be forced to divulge his passphrase. The article summarizes the cases for both sides of the debate. The fact that there even is an issue, incidentally, is an implicit endorsement of the power of PGP public/private key encryption. "According to the government, the process to unlock drive Z could take years, based on efforts to unlock similarly encrypted files in another case," wrote the judge in his opinion.
A federal judge in Vermont has ruled that prosecutors cannot force a criminal defendant accused of having illegal images on his hard drive to divulge his PGP (Pretty Good Privacy) passphrase. U.S. Magistrate Judge Jerome Niedermeier ruled that a man charged with transporting child pornography on his laptop across the Canadian border has a Fifth Amendment right not to turn over the passphrase to prosecutors. The Fifth Amendment protects the right to avoid self-incrimination.
Niedermeier tossed out a grand jury's subpoena that directed Sebastien Boucher to provide "any passwords" used with his Alienware laptop. "Compelling Boucher to enter the password forces him to produce evidence that could be used to incriminate him," the judge wrote in an order dated November 29 that went unnoticed until this week. "Producing the password, as if it were a key to a locked container, forces Boucher to produce the contents of his laptop."
Especially if this ruling is appealed, U.S. v. Boucher could become a landmark case. The question of whether a criminal defendant can be legally compelled to cough up his encryption passphrase remains an unsettled one, with law review articles for the last decade arguing the merits of either approach. ...
This debate has been one of analogy and metaphor. Prosecutors tend to view PGP passphrases as akin to someone possessing a key to a safe filled with incriminating documents. That person can, in general, be legally compelled to hand over the key. Other examples include the U.S. Supreme Court saying that defendants can be forced to provide fingerprints, blood samples, or voice recordings.
Orin Kerr, a former Justice Department prosecutor who is now a law professor at George Washington University, shares this view. Kerr acknowledges that it is a tough call, but says, "I tend to think Judge Niedermeier was wrong given the specific facts of this case."
The alternate view elevates individual rights over prosecutorial convenience. It looks to other Supreme Court cases saying Americans cannot be forced to give "compelled testimonial communications" and argues the Fifth Amendment must apply to encryption passphrases as well. Courts already have ruled that that such protection extends to the contents of a defendant's minds, so why should a passphrase not be shielded as well?
In this case, Judge Niedermeier took the second approach. He said that encryption keys can be "testimonial," and even the prosecution's alternative of asking the defendant to type in the passphrase when nobody was looking would be insufficient.
To us, a key difference is that safes can be forced open and DNA samples taken, in principle, without the individual's cooperation. All that is legally required is a warrant of some sort (which are not too hard to get these days). The PGP decryption requires the individual's cooperation. A warrant alone is insufficient.
A second reason this case is unusual is that Boucher was initially arrested when customs agents stopped him and searched his laptop when he and his father crossed the border from Canada on December 17, 2006. An officer opened the laptop, accessed the files without a password or passphrase, and allegedly discovered "thousands of images of adult pornography and animation depicting adult and child pornography."
Boucher was read his Miranda rights, waived them, and allegedly told the customs agents that he may have downloaded child pornography. But then -- and this is key -- the laptop was shut down after Boucher was arrested. It was not until December 26 that a Vermont Department of Corrections officer tried to access the laptop -- prosecutors obtained a subpoena on December 19 -- and found that the Z: drive was encrypted with PGP, or Pretty Good Privacy. (PGP sells software, including whole disk encryption and drive-specific encryption. It is a little unclear what exactly happened, but one likely scenario is that Boucher configured PGP to forget his passphrase, effectively re-encrypting the Z: drive, after a few hours or days had elapsed.)
On the face of it, Mr. Boucher was (a) lucky the evidence was not collected before the mysterious reencryption of the drive, (b) smart for having configured PGP to make that happen, (c) stupid for not having encrypted everything before he went through customs, and (d) doubly stupid for carrying evidence of a clear crime -- assuming a crime was committed -- across an international border, encrypted or not.
Some of the odd particulars in the case might serve as a reason/excuse to overturn the ruling. That in turn -- given the way courts these days -- could provide fodder for rulings that say a defendant must provide a password. It is at least good to see a court ruling that correctly addresses the essentials of the issue at hand, independent of the tangential particulars.
CALIFORNIA STANDS UP (A LITTLE) TO FEDS ON REAL ID
A state is considered to be "complying" with the Real ID act if it merely promises that it will implement the standards somewhere down the line. Some states that fail to throw even this sop to the feds still get granted compliance exemptions anyway, indicating that this kind of passive resistance might be the best hope to thwarting the effective implementation of the despicable piece of legislation.
California and a few other states have been offered extensions by the federal Department of Homeland Security on their compliance to national standards so as to let Californians with state IDs access to airports and federal buildings at which they might have been barred pending compliance. Apparently, the DHS originally demanded a promise that California would comply within the next couple years. California has not backed down, and DHS seems poised to give an exemption anyway. It has also recently given Montana a waiver that was not sought, indicating perhaps that only outwardly recalcitrant states will be punished.
The Real ID sailed through Congress three years ago without much debate at all, and has largely been defended on two grounds: As an anti-terror measure and as an anti-illegal alien measure. It is difficult to see, however, how state DMVs, if their licensing is so incompetent, will be made more precise and exacting once the DHS adds another layer of bureaucracy to the process. And while some politicians have discussed a national ID card as something the aliens would be forced to carry, this is absurd on its face. What kind of ID is only compelled upon the outsiders? Would NOT having an ID then be proof of being legal??
And as for terrorism, we might wonder about the national government focusing so much on airline security in the first place. As I wrote in August, 2006, market solutions can secure airlines, which itself has become a strange obsession, given all the other possible ways terrorists can attack. See also William Watkins on the civil liberties threats presented by Real ID. And here is Pierre Lemieux, who writes that "in the history of organized political power, interior passports have been the norm, especially for little people" and so Real ID only has come after decades of "our traditions [being] under continuous attack."
In the short-term, the recent compromises coming from DHS are somewhat reassuring, especially for those of us who are planning to fly in May, since, without compromise, it looked possible that those of us in non-complying states would not be allowed to use our standard state IDs to get on a plane. The issuance of exemptions also raises an interesting question: If Real ID is so urgent, so crucial, why is it okay for states not to comply? Why is the federal government treating the process with such ad hoc informality?
For the long run, it is to be hoped that more states stand up to this, continuing to expose the national government's weakness and contradictions. Perhaps rebelling state governments are our most realistic hope of avoiding America's final descent toward a future of being just one more police state where "Papers, Please," is as common a phrase as "Hello."
EDITORIAL: NEW HAMPSHIRE RIGHT TO REFUSE TO ADOPT REAL ID LICENSES
This editorial lays out the case against the Real ID act in a simple and straightforward manner. The reasons given by the Department of Homeland Security and other federal mouthpieces fail the basic commonsense test.
New Hampshire was the first state to reject federal Real ID driver's license rules that will create a high-tech version of a national identification card. To emphasize our opposition, Gov. John Lynch signed a law prohibiting New Hampshire from participating in the system.
Now the state, led on this issue by Lynch and U.S. Sen. John Sununu, should stand fast against federal authorities, who say that starting in May residents of New Hampshire and three other states will be turned away from airports and federal buildings or subjected to enhanced security measures unless the state adopts the new driver's licenses.
Airport security checks, even post-9-11, generally involve minimal delays. That will change on the day the new law goes into effect. Travelers who show up without a Real ID or a passport will be funneled to secondary screeners and clog the system. Some of the people forced to travel with a passport will no doubt lose them, thus decreasing rather than increasing national security.
The entire Real ID program should be put on hold until Congress has the opportunity to fully debate the law, its costs and its implications for national security and citizen privacy. No, "show us your papers" law that fundamentally changes America's way of life and freedom to travel should have been passed without debate as an addendum to a spending bill. But that is what Republicans did in 2005 with the Real ID Act. The law tramples on the rights of states and inflicts an exorbitant and unnecessary burden on them.
The new regulations require states to issue driver's licenses with magnetic strips that contain a wealth of personal information about drivers and links to copies of birth certificates and other documents used to prove identity. Homeland Security Secretary Michael Chertoff claims the system is both necessary to fight the war on terrorism and secure. It is neither.
The new ID cards may be almost impossible to counterfeit, but that is not true of the documents used to establish an identity and get a Real ID. Birth certificates can be faked, as can passports and other documents. Harried clerks who issue and renew driver's licenses may not catch the forgeries.
Corrupt officials could be bribed to accept bogus documents, and greedy people with access to the information would be tempted to sell it. Inevitably, some of the private information would be posted on the internet by mistake or contained in a laptop that is lost or stolen.
Chertoff claims that the wealth of personal information on the new IDs will be safe from hackers, identity thieves, political enemies and curious or malicious employees. Tell that to the three presidential candidates whose passport files were illegally accessed by supposedly curious federal workers.
Tell that to the millions of people who shopped at T J Maxx, Marshalls and Hannaford whose credit card information may have been hijacked. Some have been the victim of identity theft, and all must routinely monitor their accounts for signs of illegal activity to protect themselves.
Sununu has joined a handful of other senators to ask Chertoff to exempt all 50 states from the May deadline. Chertoff should do so. That would give Congress time to reform the bill in a way that makes licenses more secure without compromising the privacy of citizens in the name of fear.
BOOK REVIEW: WHO SPEAKS FOR ISLAM? WHAT A BILLION MUSLIMS REALLY THINK
Ever since 9-11, the American people have been fed a steady dose of the "they hate us for our freedoms" spiel. This is very convenient for those whose shining vision is one of perpetual war against the powers of evil -- as deemed by them -- and are willing to use any means to line the public up behind it. If Americans are hated for their values and lifestyles then, it follows, all manner of endless and preemptive wars against those who hate them are justified. From the perspective of that worldview, the choice is characterized as strike first or sit back and wait to be struck.
But is the they-hate-us-for-our-freedoms line true? Osama bin Laden claimed that his and his followers' objections are to American foreign policy as implemented in their neck of the woods, as opposed to Paris Hilton, MTV, and the Bill of Rights. Anyone who engages in a modicum of introspection would probably conclude that you are likely to object to someone trashing your neighborhood far more stongly than to some profligate libertines living on the other side of the world, however degenerate or even blasphemous they are in your opinion.
Ah, we are told, but the Muslims are fanatics -- all of them -- and normal rules of human psychology and conduct do not apply to them. Oh? Someone had the bright idea of doing a comprehensive survey of the Muslims themselves, using Gallup polling procedures. The results of a 6-year inquiry are now available in a new book, Who Speaks for Islam? What a Billion Muslims Really Think, by John L. Esposito and Dalia Mogahed. Among their principal findings: A nearly complete absence among Muslims of a desire to destroy America's equality of opportunity, liberties, or democracy. In fact, these are the aspects of U.S. society that Muslims most admire. (Wouldst that their perceptions were accurate.)
The survey did find that Muslims do have a different value system -- hardly surprising or indicative of an inability of East and West to get along. For instance, they consider the cultural status of women in the West to be degraded. So this lack of consuming hatred is good news, right? Not to those whose plans for us feature war, war and more war. We can expect them to keep on spouting the Big Lie. That is what you expect from fanatics, after all.
A new book by John L. Esposito and Dalia Mogahed ought to have a profound and transforming influence on Americans' view of their government's confrontation with Islam. The book, Who Speaks for Islam? What a Billion Muslims Really Think, presents the results of six years of Gallup polling in the Muslim world between 2001 and 2007. "With the random sampling method that Gallup used," the authors explain, "results are statistically valid with a plus or minus 3-point margin of error. In totality, we surveyed a sample representing more than 90% of the world's 1.3 billion Muslims, making this the largest, most comprehensive study of contemporary Muslims ever done" (xi). Based on this data, Esposito and Mogahed have determined that Washington's conflict with Islam is "more about policy than principle" (xi). The pivotal findings of this massive study for U.S. national security pertain to the motivation of the Muslims who oppose the United States and the authors' claim that "[o]ne of the most important insights provided by Gallup's data is that the issues that drive radicals are also issues for moderates" (93).
Over and over again, Esposito and Mogahed show the nearly complete absence among Muslims of a desire to destroy America's equality of opportunity, liberties, or democracy. Indeed, the Gallup data show that these are the aspects of U.S. society that Muslims most admire. "[T]he sentiments of vast majorities of those [Muslims] surveyed," the authors write, "[show] they admire the West's political freedoms and they value and desire greater self-determination" (31). But, of equal importance, Muslims do not believe that greater democracy and self-determination in the Muslim world require a Western-like separation of church and state. "Poll data show," Esposito and Mogahed explain, "that large majorities of respondents in the countries surveyed cite the equal importance of Islam and democracy as essential to the quality of their lives and the future progress of the Muslim world" (35). And, again, these findings are common to those the authors refer to as moderates and radicals, as well as to male and female respondents (48).
- "As we have seen in the [Gallup] data, resentment against the West comes from what Muslims perceive as the West's hatred and denigration of Islam; the Western belief that Arabs and Muslim are inferior; and their [Muslims'] fear of Western intervention, domination, or occupation" (141).
- "As our [Gallup's] data has demonstrated, the primary cause of broad-based anger and anti-Americanism is not a clash of civilizations but the perceived effect of U.S. foreign policy in the Muslim world" (156).
- "[The Gallup data shows that] contrary to what the 'They Hate Our Freedom' thesis might predict, Muslims do not recommend or insist upon changes to Western culture or social norms as the path to better [Western-Muslim] relations. ... Rather they call on the West to show greater respect for Islam, and they emphasize policy-related issues [U.S. interventionism; unqualified support for Israel; and protection for authoritarian Arab regimes]" (159).
The Gallup data also show that Muslims make a keen distinction between modernity and Westernization. The surveys found that Muslims have a profound respect and admiration for the West's technology and for its work ethic; both are regarded as tools of modernity and avenues of social and economic progress for Muslims (p. 97). Having presented this finding, however, the authors warn it must not be taken as eagerness for Westernization. "[W]hile acknowledging and admiring many aspects of Western democracy," the authors write," those [Muslims] surveyed do not favor wholesale adoption of Western models of democracy ... few respondents associate 'adopting Western values' with Muslim political and economic progress." Perhaps the most counterintuitive result of the Gallup data for Western readers will be findings that the ostensibly degraded cultural status of women in the West is one of the things most despised by Muslims of both genders (110) ; that "the data simply do not support the persistent popular perception in the West that Muslim women can't wait to be liberated from their culture and adopt the ways of the West" (110); and that there are no "systemic differences in many [Muslim] countries between males and females in their support for Sharia as the only source of legislation" (48).
The work of Esposito and Mogahed establishes a solid empirical base for refuting the contentions of U.S. political leaders in both parties that "Muslims hate us for who we are not for what we do." But will it do the trick? Previously, Robert Pape's empirical study Dying to Win: The Logic of Suicide Terrorism demonstrated that U.S. intervention in the Muslim world is a key generator of suicide attacks on U.S. interests, and Marc Sageman's quantitative study Understanding Terror Networks politely shredded our leaders' claims that poverty, illiteracy, and unemployment cause terrorism -- but the they-hate-our-freedoms chorus still chants on. Indeed, after these books were written, Norman Podhoretz and George Weigel published neoconservative tomes that not only ignored the work of Pape and Sageman, but also scourged their countrymen for being too stupid to see that all U.S. interventions abroad are saintly and only medieval Islamofascists could oppose them. On no other foreign policy issue since the Cold War's end has the truth been so easy to establish on the basis of hard facts but so hard for Americans to see -- primarily because their leaders eagerly distort or ignore the truth.
The reality accurately presented by Esposito, Mogahed, Pape, and Sageman -- as well as by Dr. Ron Paul -- has never eluded Osama bin Laden, however. Five years before Gallup even started collecting its data, bin Laden knew that U.S. foreign policy effectively united the Muslim world's moderates and radicals in anti-U.S. hatred, and that when he defied Washington and attacked U.S. interests because of those policies he both drew and grew support for his jihad against America. The conclusions of my own books about bin Laden's thinking, words, and actions -- which are largely corroborated by the findings of Who Speaks for Islam? -- make it clear beyond a doubt that al-Qaeda's chief knows precisely what will sell wildly in the Muslim world and unite his brethren, as well as what will be rejected outright by U.S. leaders, with disastrous consequences for Americans.
Unfortunately, then, it seems unlikely that the fine book Who Speaks for Islam? will attract the attention, let alone change the mind, of any senior U.S. political leader. Under either party, Washington will maintain its now 40-year-old foreign policy status quo. It will keep intervening in the Muslim world; and it will continue telling Americans they are hated for who they are, not for what their government does. Ultimately, our bipartisan political elite will turn the United States into one enormous Israel, lethally deaf to the realities of our struggle with Islamists, arrogantly confidant of its pure intent and sure knowledge of God's will, and utterly dependent on inadequate military and intelligence options to fight a rising tide of hatred among 1.3 billion Muslims.
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