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U.S. AND OTHERS FOLLOW UK, GERMANY INVESTIGATING TAX EVASION IN LIECHTENSTEIN
March 4, 2008
The thief who stole bank records from Liechtenstein bank LGT Group and then sold the list to various interested tax authorities has unleashed a tax revenue windfall for several countries and a publicity windfall for anti-offshore anti-privacy voices all over. This New York Times article brings those who have been heretofore blissfully unaware of the incident up to date.
Following the lead of Germany and Britain, at least eight other countries, including the U.S., said ... that they were investigating whether some of their citizens were using banks in Liechtenstein to evade taxes. The countries involved in the investigations also threw their combined weight behind efforts to change banking secrecy rules in Liechtenstein, a principality nestled between Austria and Switzerland that has a thriving business in managing outsiders' money.
German prosecutors, aided by stolen bank records, began their crackdown nearly two weeks ago, when the police searched the home of a prominent German executive. Since then, 91 of the 150 people being investigated so far have confessed to evading taxes, the prosecutors said, and 72 people have turned themselves in without a visit from the authorities.
Targets in the inquiry have already paid €27.8 million, or $41.5 million, to begin settling their cases, and German prosecutors made clear ... that they expected to collect much more before their investigation is over. ...
The investigation goes back to 2006, when German intelligence services paid nearly €5 million for confidential banking data to an informant, apparently a former employee of the LGT Group, a Liechtenstein bank.
The Germans have so far made a pretty good return, on the order to 5-to-1, on their investment in the stolen data. And the returns continue to roll in. Of course, compared to the billions of dollars/euros lost by the German state banks from speculating in U.S. subprime mortgage-based securities, the $41.5 million is a rounding error. But the amount of money is not the point. Discrediting tax havens or using publicity to pressure them into giving up their evil ways is.
Later, the British authorities paid money to the same person for data on British subjects who had sheltered money in Liechtenstein, and they are investigating about 100 people in Britain, according to an official close to the inquiry who spoke on the condition of anonymity because the case was continuing.
Australia, Canada, France, Italy, the Netherlands, New Zealand and Sweden are also looking into tax evasion by their citizens in Liechtenstein, according to statements from Britain and other countries.
The I.R.S. said ... that it was beginning enforcement action against "more than 100 U.S. taxpayers" on suspicion of evading taxes through investments in Liechtenstein. The I.R.S. was approached last year by an informant with data from the LGT Group, said Barry Shott, deputy commissioner for international affairs in the agency's large and medium-size business division. "We get information from a lot of people in a lot of different ways all the time," said Mr. Shott, who did not identify the informant. "We came into possession of the information and it seemed to be interesting."
He stressed that the U.S. did not pay for the information upfront. But he noted that under federal law, a person who gives the I.R.S. useful information can file a claim to receive a percentage of the money that is collected based on the data.
Audits in the United States have gotten under way, and the I.R.S. is already experiencing "a range of cooperation" with the taxpayers involved, Mr. Shott said. He stressed that the I.R.S. would look favorably on people who report themselves, but that the agency would go to them if necessary. "We know who they are," he said.
Other countries have long sought to pressure Liechtenstein to adopt rules of the O.E.C.D. aimed at curbing tax evasion. The organization, based in Paris, has called Liechtenstein, Monaco and Andorra "uncooperative tax havens."
Dave Hartnett, acting chairman of Revenue and Customs, the British tax agency, said in a statement, "In the light of recent developments involving Liechtenstein bank accounts, there needs to be a significant move toward full implementation of O.E.C.D. standards on transparency and effective exchange of information in tax matters."
Peer Steinbruck, the German finance minister, said last weekend that Germany would also push for change in other countries, including Switzerland, Luxembourg and Austria. Those countries have agreed to limited efforts directed by the European Union to provide account information or tax revenue, and Germany is pressing for further action. Germany plans to raise the issue at a meeting of finance ministers from the 27-nation E.U. next week, and with Prince Albert II of Monaco, who is visiting Berlin this week.
"Liechtenstein is the tip of the iceberg," said Grace Perez-Navarro, deputy director of the Center for Tax Policy and Administration at the O.E.C.D. "They are interested in seeing change in other places, too."
The high tax countries are shocked -- shocked! -- to discover that there is tax evasion going on, and via the use of tax havens no less. The subtext of many of the announcements, that somehow the discovery is some big revelation is, of course, pure bunk.
Fears that Germany and other countries might mount a sustained effort to curb investments in Switzerland have prompted sharp reactions in that country, a well-known destination for money from around the world.
Michel Y. Dérobert, head of the Swiss Private Bankers Association, said that disclosures that Germany's spy agency was involved in obtaining data on its citizens from abroad sat uneasily with his members. "I think this type of episode will discourage German-speaking banks from hiring Germans," Mr. Derobert told the newspaper Le Matin in Switzerland. "That would be logical, although until now we have had good relations with Germany."
The Munich newspaper Suddeutsche Zeitung reported ... that German prosecutors had trained their sights on Vontobel Treuhand, the Liechtenstein subsidiary of the prominent Swiss bank Vontobel. ... LGT, which is owned by the royal family of Liechtenstein, said Sunday that the data obtained by the German authorities covered 1,400 clients, 600 of whom are German citizens. The information is thought to have been taken by a former employee, Heinrich Kieber, who offered it to at least two European countries, Germany and Britain.
As reported in this news item, Liechtenstein citizen Kieber's current whereabouts are unknown.
The data was from LGT Treuhand, a subsidiary of the bank that specializes in setting up foundations, where money can be sheltered and then invested without reporting capital gains to governments outside Liechtenstein. ...
After Germany and Britain obtained their data, authorities began sharing it, according to another official close to the investigation, since a network of tax treaties foresees just such a step. Torsten Albig, a spokesman for the German Finance Ministry, said Monday that Germany would share the information, and the Dutch finance minister, Wouter Bos, said he had already requested it from the Germans. Éric Woerth, the French budget minister, said France was scouring a list of hundreds of names.
Unaddressed in the coverage of the stolen Liechtenstein data incident and its aftermath are the technical details of the stratagems employed by the ratted-out tax evaders. Evidently they were relying on secrecy to make their strategies work. This is never a good idea, in our opinion. As the case at hand clearly reveals, there is no such thing as ironclad secrecy even under the best of intentions. Privacy is definitely desirable, but it is priority for its own sake, rather than a tool to make what is otherwise a dodgy approach work.
Under U.S. tax law, any offshore trust with a U.S. citizen as one of the named parties effectively has no tax or privacy advantages. A foundation with a trust-like arrangement would be treated as an offshore trust tax-wise. A U.S. taxpayor who set up a Liechtenstein foundation and did not report its income or existence would be courting trouble down the line, unless it was set up explicitly to end around those requirements.
TESCO’S £1 BILLION TAX AVOIDING PLAN -- MOVE TO THE CAYMAN ISLANDS
March 5, 2008
U.K. supermarket chain company Tesco has pulled a neat trick whereby it sheltered on the order of £3 billion in capital gains from the sale of its store properties, and thereby saved as much as £1 billion in taxes on the gains.
Tesco has created an elaborate corporate structure involving offshore tax havens which enables it to avoid paying what could be up to £1 billion of tax on profits from the sale of its UK properties. The complex new structures uncovered by a 6-month Guardian investigation include a string of Cayman Island companies, each named after a different color, from aqua to violet.
These are being used by the supermarket giant as it proceeds with its announced program to sell and lease back £6 billion worth of its UK stores. The stores are being sold to external investors providing Tesco with a big one-off gain which, ordinarily, would be liable to tax, while allowing it to remain in the stores and pay rent to the new owners.
This sale-and-leaseback arrangement is not uncommon. The standard line is that the retail company is "getting out of the real estate business" and concentrating on its "core" retailing business.
The first two deals, worth £445 million and £650 million, have already used the companies set up in the Cayman Islands -- where the rate of corporation tax is zero -- allowing Tesco to avoid tax on about £500 million profit.
Large corporations are increasingly developing strategies to cut tax bills and Tesco is not alone in its tax planning. Nearly a third of the UK's 700 largest businesses paid no corporation tax in the year 2005-6. A further third paid less than £10 million each, according to figures from the National Audit Office released last year.
Alistair Darling, the chancellor, recently provoked an outcry from wealthy individuals by launching a crackdown on non-domiciled residents in Britain who pay no tax on earnings outside the country. HM Revenue & Customs said this week it was on the trail of up to 30,000 people owing more than £100 million in back taxes who have hidden their assets in secret accounts in Leichtenstein. But companies such as HSBC have argued against the UK tax system by threatening to move their headquarters overseas where rates are lower.
The Guardian's analysis of Tesco's accounts over the past five years also shows that the company has paid an effective tax rate of just over 20% on the rest of its profits, at a time when the UK corporation tax rate is 30%. Tesco defended its position, saying it had a duty to organize its affairs in a tax-efficient manner. It said profits from its interests are included in full in the company's UK tax returns. It also said it was one of the largest taxpayers in the UK.
The investigation has found:
- New company structures set up by Tesco to own stores that are being sold and leased back mean that 99.9% of the company that owns the stores could end up being held offshore. Tesco would be liable to pay UK tax on only the 0.1% of its profit on the sale of the stores held in the UK. Tesco's first two property deals, worth about £1 billion, have used this structure and will avoid tax on £500 million of profits.
- Although its accounts for the past five years report an average rate of corporation tax of 29%, the actual rate of tax Tesco paid, according to its cash flow statement, is closer to 20%. This is on profits separate from the property deals. UK corporation tax is 30%.
- Tesco has sold its 37 stores in the first two sale and leaseback deals at twice the book value that is included in its accounts, making a profit of about £500 million on the £1 billion of stores sold. If it achieves the same rate of return on all its disposals as expected, its share of profits from property sales would come to about £3 billion. The UK corporation tax due on this would be as high as £1 billion, but the retailer could avoid paying this because of its offshore structure.
- A string of other company structures leading to the Cayman Islands have been set up and more of Tesco's properties have already been transferred to them so that they could be quickly activated for the next tranche of store sales.
One must presume that the "transfers" of the properties to the Caymans structures was all done in strict accordance with UK tax rules after substantial due diligence. There must be some loophole and structuring wiggle-room that enabled Tesco to avoid realizing a gain on the transfers.
Tesco's executive director, corporate and legal affairs, Lucy Neville-Rolfe, defended the offshore structures in a statement. "While every company seeks to operate as tax-efficiently as possible, to do so is our duty to shareholders and customers alike -- Tesco pays a great deal of tax. ... [W]e are in the top 10 taxpayers in the UK." She added that this was "a marked contrast to the significant number of FTSE-100 listed companies that pay little or no corporation tax at all."
The statement added that it was normal for cash tax payments to differ from accounting charges. "These differences, which account for the disparity between the 29% accounting charge and the 20% cash tax payments are mainly down to timing and arise because tax laws and financial accounting standards differ in their recognition criteria."
Quite so. Companies of course like to present an image of maximum profitability to shareholders and minimum profitability to the IRS, HMRC, and company. All perfectly within the rules. To make a big deal about the apparently low tax rate paid on the profits reported to shareholders is gross financial ignorance -- or is banking on the readers' ignorance.
Tesco would not comment on how the ownership of its new partnership companies was structured. "We are not prepared to supply you with commercially confidential documents such as the partnership agreements and other information," Neville-Rolfe said. "Transactions such as these are by their very nature complex as they have to be structured to meet the commercial needs of Tesco, the new partner and the banks providing finance.
"We have an open relationship with Her Majesty's Revenue and Customs and meet with them regularly to discuss our tax affairs, including our property and international transactions. Full details have been provided to HMRC in the normal way."
THE HEGELIANISM OF THE 2008 ELECTION
March 5, 2008
Llewellyn H. Rockwell, Jr., founder and president of the Ludwig von Mises Institute and editor of LewRockwell.com, cuts to the root of the political conflicts of the day. The most fundamental conflict is one of world views. Is the world a basically cooperative place, where if left to themselves people will voluntarily work towards their mutual advantage? Or is it riven by intractable group-based conflicts, where your group -- race, sex, religion, whatever -- will either dominate or be dominated? If the later, then government intervention is needed to effect/avoid the desired/feared outcome.
Marxists promote the conflict view of the world -- originally capital vs. labor, and later in other forms when the original idea was discredited. The Marxian view in turn has roots in the Hegelian view that history drives toward a synthesis of two opposing forces. The philosophies of the two principle political parties in the U.S. are both, when stripped down to their essentials, ones based on a world in conflict. (Thus the article's title.) They both pander to people's fears of what will happen if they are on the wrong side of a conflict resolution.
But relying on the state to resolve conflicts is a fool's game. The evidence alone is overwhelming on this as it is, and the reason why is easy to see. Every act of the state reduces the capacity of people to work out their problems voluntarily, thus exacerbating whatever conflicts exist. "By purporting to be the great social referee, it accumulates more power unto itself and leaves everyone else with less freedom to work out their own problems," Rockwell writes. It is the problem masquerading as the cure.
If the political prediction markets are right, we are going to end up with a presidential contest between two people who agree on the pressing need to expand the entire welfare-warfare state. They can argue about priorities, but they agree on the overall goal. With the campaign lacking serious issues, something tells me that the great American obsession over race is going to play a major role, which is gravely unfortunate since the discussion is unlikely to be enlightening.
Of course it is all politics, that is, equal parts dissembling and illusion, and designed to confer on some groups more power over other groups. But it does raise important questions: What is racism and how can we tell if it exists? I am not talking about someone who dislikes African-Americans or whites or Latinos. We might call that racism on the level of individual ethics, but there are no inevitable and widespread social consequences of a bad attitude. Defining racism, a notion highly charged with political implications, also raises the specter of the Thought Police: Did you or did you not think politically incorrect thoughts?
Let us deepen and broaden the discussion in light of what Ludwig von Mises says about racism in contrast to the liberal view of the social order. In Omnipotent Government, he shows that the modern doctrine of racism originated with the Frenchman Joseph Arthur Comte de Gobineau as a way to justify aristocratic privilege. In the hands of the Nazis, the doctrine was extended to the alleged superiority of Aryans as versus everyone else. They claimed that the races were inherently incompatible, and advocated state policies to bring about their desired outcome.
Mises first regards racism as a particular species of a general social theory that posits the existence of intractable conflicts in society, and that therefore it is impossible for society to work properly absent some fundamental structural change brought about by the state. In the old Marxist variety, this conflict was between capital and labor. That view does not have many adherents anymore since real-world events have disproved the Marxian vision for more than a century. The poor did not get poorer under capitalism. They became richer than ever before in human history.
In a similar way, the racialists must also confront the reality of the market economy. As Mises said, in a market economy, there is no legal discrimination against anyone. Freedom prevails, and "whoever dislikes the Jews may in such a world avoid patronizing Jewish shopkeepers, doctors, and lawyers." The problem is that this does not produce the results racists want. Indeed, the market always tends to bring people together in peace, neither compelling nor forbidding exchanges.
"Many decades of intensive anti-Semitic propaganda did not succeed in preventing German ‘Aryans’ from buying in shops owned by Jews, from consulting Jewish doctors and lawyers, and from reading books by Jewish authors." What the racists wanted required more. "Whoever wanted to get rid of his Jewish competitors could not rely on an alleged hatred of Jews; he was under the necessity of asking for legal discrimination against them."
The end result, then, is a policy of interventionism. This interventionism is required if a racist result is to be brought about, and the allegedly intractable conflict finally resolved. If this logic is carried to its end point, the result is mass suffering and death. The Jews were the problem in Germany, so they had to be eradicated. The Kulaks in Russia similarly had to be destroyed. Same with the anyone with Western or bourgeois attachments in Mao's China or Pol Pot's Cambodia. The Hegelian synthesis in each of these cases is achieved through mass slaughter. The supposedly persistent conflict between groups is washed away in rivers of blood.
Even as Marxists abandoned their old view of capital-labor relations, they promoted the conflict view of society -- one entirely at odds with the old liberal idea -- in other forms. This is because the Marxian view itself has deeper roots in Hegel's view that history must tend toward a synthesis of two opposing forces, culminating in some transforming moment. Socialism is one way to render the Hegelian view in material terms. But there are other ways. So long as you have the perception of a war-to-the-knife conflict, history cries out for a resolution.
Thus does the Marxian view easily mutate to take on a different caste depending on the political moment. The sexist view of the world, for example, holds that men and women have opposing interests, and that a gain by one sex always comes at the expense of the other. A forced rearrangement of social institutions, they believed, was required to fix the problem. ...
The conflict view is a part of the environmentalist agenda too. The notion that humans cannot advance without killing nature is widely held today. ... We see this further today in the area of religion. Some people are dead set on the idea that a free society is incompatible with a multiplicity of religious faiths. This view is particularly popular among Christian fundamentalists, who claim that Islam will never be satisfied until it wipes out Christianity, and that every new mosque is a mortal threat to Christendom. They cannot imagine that people can co-exist in peace, tolerance, and trade, leaving religion to personal conscience.
So too with race. Decades after Gobineau, in the 1930s, it became the intellectual fashion to believe that state eugenics was necessary to cull the population of its inferior elements, so that the superior elements could thrive. ... Why was state planning necessary? Because, it was believed, there was a genetic competition that pitted all racial groups against all, and only one group could win.
Thus did the racialist view sample Marxism, changing the posited conflict from capital and labor to the races. What they failed to understand, or understood but hated, was the capacity for voluntary institutions to harmonize racial interests. The United States showed this to be true. After the ghastly civil war came the blessed abolition of slavery, and then the end of laws requiring racial segregation. We saw how the free market can bring about cooperative trading relationships among all people. (Of course, the laws hindering freedom of association and contract in the name of antiracism retarded social cooperation.)
And the Jim Crow and other forced segregation laws of the post-U.S. War Between the States South locked a system of racial conflict in place.
What freedom has illustrated is that differences among people do not need to lead to intractable conflicts. More and more social cooperation is possible and fruitful, to the extent that people are granted the freedom to associate, trade, make contracts, and work together toward their mutual advantage.
Sadly, however, among many people in this country, there is still the impression that state-mandated institutional change, even revolution, is required to end intractable conflicts. They believe that the very essence of the social structure captures this racial conflict. Some blacks hold this view, some whites hold this view, some Latinos hold this view -- the ideology of racism does not elude any group.
It should be no surprise, then, that Mises's ideas have drawn fire from white racialists who insist that by talking about markets and freedom, we are evading the real issue, which is who will dominate. ... [B]lack activists too speak as if the only issue that really matters is gaining legal preferences for their group. In either case, the agenda is all about who has power over whom, rather than ending the ability of any group to have power over any other group.
The state is not a neutral observer. It will pass environmental legislation. It will regulate relations between races and sexes. It will put down this religion in order to raise that one up. In each case, the intervention only exacerbates conflicts, which in turn creates the impression that there really is an intractable conflict at work. For example, if the state taxes one group to give to another group, it fuels conflict and gives the impression that legislation is the route to liberation.
But who is the real winner in this game? The state and the state alone. By purporting to be the great social referee, it accumulates more power unto itself and leaves everyone else with less freedom to work out their own problems. And here is the real problem with racism or any -ism that fails to understand the capacity of the free society to work out its own problems through exchange and mutual benefit.
Thus can we see that racism is not a unique problem in society but part of a larger misconception about the basis of social cooperation. Of course, it is essential to retain the old liberal view even in the midst of all the coming conflicts, both in rhetoric and in policy. Always and everywhere, the only serious political issue is what the state should and should not do. All the rest distracts.
IS AMERICA THE NEW ROME?
March 12, 2008
The New Rome: The Fall of an Empire and the Fate of America, by Cullen Murphy, reviewed.
The debate about whether America is an empire seems to have been settled. The majority concensus is that it is. Now with its finances and influence in what looks like terminal decline, and its mighty military bogged down in a quagmire involving a relatively small number of "insurgents" in Iraq, the natural question is whether it is destined to go the way all empires have gone. Is it destined to "decline and fall", as Edward Gibbon so famously characterized the Roman Empire's fate. Or will it go the way of the British Empire, a shell of its former self but maintaining a semblance of old appearances?
Writer Cullen Murphy has yet another entry into this prognostication business, and judging by this review sees some interesting, if not wholely convincing, connections between Rome and America. And, of course, the intellectual debate may be interesting and informative. But the more pressing issue is: How does one deal with whatever it is that is happening to America, technically an empire or not? This, in essence, is what W.I.L. is here to help you do.
The American edition of this book, which came out a few months ago, bore the title Are We Rome?. Apparently that was the sort of question for which ancient Romans would have used the word "nonne", expecting the answer "yes"; for the British edition is baldly entitled The New Rome. Sidney and Beatrice Webb did something similar when they dropped the question mark from their Soviet Communism: A New Civilisation? -- but at least they waited a couple of years before they did so.
Cullen Murphy, an author of stylish think-pieces in Atlantic Monthly and Vanity Fair, has become obsessed with the resemblances between the present-day U.S. and ancient Rome. The big similarity, of course, is in geopolitics: at its height, the Roman Empire was a military superpower which dominated much of what is tendentiously called "the known world" (known by whom? -- answer: by people in the Roman Empire).
Rome's imprint on that large part of the world was not just military. The material culture of Roman life -- art and architecture, clothes and food, even including the Romans' disgusting fermented fish sauce -- had an overwhelming allure for almost everyone who became part of the empire, or was in regular contact with it. And for those brought into the empire, Roman law and Roman moral values were powerful influences, often superseding the value-systems they had lived by before. For fish sauce, read McDonald's; for Roman values, liberal democracy (or neo-con dogma, according to taste).
Most of these broad-brush comparisons are obvious and familiar; they are the bread and butter of highbrow op-ed pieces about the "imperial" status of America today. But Cullen Murphy goes further, using his Roman analogy to make points both about the blinkered mentality of the imperial elite, and about the short-sighted way in which it is now undermining the foundations of its own power.
Where the elite is concerned, he has fun comparing the huge traveling circus of officials that accompanies the American President with the similar entourage of a Roman emperor. Both surround a leader so coddled and cocooned that he has little real contact with the outside world. And just as Rome was said to contain the omphalos or navel of the world, so the Washington elite are inclined to suppose that everything revolves around them.
Murphy's most original comparison, however, is between the policies of modern American governments and the fatal errors made by Roman emperors in the Empire's final period. Previously, in the good old days, barbarian tribes that moved into the Empire were accommodated on the basis that they turned themselves into ordinary Roman subjects or citizens. The fatal mistake was to let them settle as blocs, maintaining their separate identities in great chunks of Gaul, Spain or Africa. These were the alien bodies that became the embryos of non-Roman breakaway states.
At first, you might guess that this comparison would be used to warn the U.S. about the dangers of letting southern California become a Spanish-speaking enclave. Cullen Murphy does have some things to say about mass immigration into America, and the Rio Grande border is the main counterpart he offers to the Roman limes or frontier -- a frontier which, he emphasises, was always a porous membrane, not an impenetrable barrier. But instead he turns the comparison in a very different direction.
Fixated on the dangers of privatization, he says that the real equivalents to the Visigoths and Ostrogoths of the late Roman Empire are the giant corporations such as Halliburton, which are taking over key government services. Like the Roman emperors, it seems, the American government now depends on alien armies which it cannot control.
This argument seems more rhetorical than historical. Halliburton is unlikely to sack and pillage Washington, however great the reconstruction contracts that might follow such a development. Nor will it turn Texas into the Kingdom of Halliburtonia. Of course it has aims of its own; but its primary aim is to make money for its directors, shareholders and employees. And most of those are American citizens, who will pay taxes on that money, and remain subject to American laws.
Many of Murphy's arguments work only in a rhetorical way ... If there is an American "empire" today, it is the empire that has been acquired by a particular state -- the United States of America, of which Washington happens to be the capital. But the Roman Empire was not acquired by an Italian state, which happened to have its capital in Rome. This distinction matters in all sorts of obvious ways.
For instance, America is a state with its own constitution. Democratic politics within that state can alter the policies of the state abroad. The kind of empire-beyond-the-borders which American power now enjoys is quite different from the empire-within-the-borders of ancient Rome. Etc, etc.
While the grand thesis of this book fails to convince, however, there are many incidental pleasures to be had along the way. Murphy is a beguiling writer with a good eye for detail, who has read widely among both ancient writers and modern historians of Rome.
We suggest that those who are interested check out the Wikipedia entry under "Decline of the Roman Empire", and also its offshoot entry, "Crisis of the Third Century". In the later entry, the discussion of the breakdown of trade -- in effect, the breakdown of the division of labor -- due to hyperinflation and the inability to hold off external threats is certainly suggestive.
THEY STILL DON’T GET IT
March 14, 2008
Peter Schiff, author of Crash-Proof: How to Profit From the Coming Economic Collapse, has full rights to a round of "I told you so's" at this point. He notes that the apologists for the system and the former bubble still do not get it, which bodes ill for a rational set of policy initiatives issuing forth going forward.
Prior to my last appearance on CNBC in October 2007, I had made more than 50 appearances on the network over the prior two years. In those segments, I repeatedly exposed the superficiality of our prosperity, described the American economy as a "house of cards", pointed out that borrowing and spending were a ticking time bomb rather than a viable plan for long term economic health, and explained how investors could prepare for the tough times ahead. At the time, those forecasts were met with ridicule and led to my being nicknamed "Dr. Doom". Now that these predictions have come to pass, most on CNBC now claim that no one saw it coming!
In my 2006 and 2007 on-air appearances, to a chorus of sneers and laughter, I predicted the bursting of the housing bubble, the collapse of the subprime mortgage market, the credit crisis, tightening lending standards, waves of defaults, bankruptcies and foreclosures, weakness in financials, retailers and homebuilders, stagflation, surging gold, oil and other commodity prices, soaring federal budget deficits and a collapse in the value of the U.S. dollar. You would have thought that some of the reasons I gave for making those predictions would now be given some credence. They have not.
The current line at CNBC is that, prior to the "unexpected" contagion emanating from the subprime mess the U.S. economy was experiencing a "Goldilocks" era of optimal health. They now believe that if the Fed and the Government can divine the right combination of fiscal and monetary policy, Goldilocks will once again be blissfully picking daisies ... or more precisely, buying SUVs. Unfortunately, as I said then, Goldilocks was, and still is, a fairy tale. In fact, the unfolding economic disaster is a direct consequence of the misguided faith placed in that absurdly optimistic parable. And since they were incapable of diagnosing the disease, is it any wonder that their cures are completely ineffective?
This lack of understanding is further confirmed by the skepticism with which the mainstream financial community still regards my diagnosis. For example, in a February 22, 2008 article in TheStreet.com, entitled "Dr. Doom Zeros in on Inflation", Mike Holland, a CNBC regular leveled two common criticisms often used to discredit me. Holland says "investors who listened to Schiff throughout the recent bull market missed out on some attractive returns in the stock market" and "A broken clock is right twice a day. If you say things are going to be bad long enough, eventually you're going to be right."
What attractive returns does Holland think my clients missed out on? Those who followed my advice invested in foreign stocks, bonds and currencies, as well as precious metals, oil and other commodities. Investors who listened to me instead enjoyed much greater returns by participating in the real bull markets. It is amazing how few people have managed to figure this out!
The "stopped clock" analogy is one I have been dealing with for years. Those using it maintain that my early warnings invalidate my forecasts. It is precisely because my warnings were so early that they were so valuable to investors. In addition, such charges assume that the current downturn is unrelated to those warnings and that my critique of the U.S. economy was inaccurate until now. My critics, the real stopped clocks, still do not understand that the phony prosperity they were defending and that I was challenging lies at the root of the current crises. When the bubble was still inflating it is understandable that those trapped inside viewed me as a stopped clock. However, now that it has burst, it is amazing how many still cannot get the soap out of their eyes.
ANTIGUA THREATENS TO ALLOW PIRACY
March 23, 2008
The dispute over online gambling laws between the U.S. and the tiny Caribbean nation of Antigua (background here) is once more in the news. So far the World Trade Organization has sided with Antigua in theory, but in practice -- as one might expect, given the respective sizes of the two countries -- the U.S. has managed to stonewall, bribe its way around, or just plain ignore the rules that have gone against it.
As of the latest WTO ruling, in December, Antigua is allowed to "ignore" U.S. copyrights unless the U.S. backs off on its online gambling prohibition. So far Antigua has blustered but not followed through, understandably.
The government of Antigua is likely to abrogate intellectual property treaties with the U.S. by the end of March and authorize wholesale copying of American movies, music and other "soft targets" if the Bush administration fails to respond to proposals for settling a trade dispute between the two counties, according to the lawyer representing the Caribbean island nation.
The Motion Picture Association of America has been closely following the case with tremendous concern, an org official said, fearing that the copying could be extensively damaging and that -- worse -- a dangerous precedent could be set for other small countries angry at U.S. trade policy. "It is not our preferred option to punish the MPAA or others for the U.S. government's intransigence, but the U.S. has refused to negotiate fairly," said Mark E. Mendel, who represents Antigua.
Goods and materials that would be copied include "virtually everything from pharmaceuticals to music, anything with IP protection that can be duplicated, though we will go for softer targets first," Mendel said.
Antigua has previously suggested it might retaliate as such -- with approval from the World Trade Organization -- but has never stipulated when. So far, the U.S. Trade Representative has dismissed that threat simply as a negotiating ploy. "Antigua would be breaking the law if it did that," said USTR spokesman Sean Spicer. The WTO ruled last year that Antigua was entitled to $21 million in damages because of a dispute with the U.S. over Internet gambling. But Antigua has not received WTO approval to procure its damages via reproducing and selling domestically U.S.-copyrighted goods and materials, Spicer added.
"They continually engage in disinformation," Mendel responded. "The reality is, yes, we have to go before WTO and request their authorization for IP sanctions against the U.S., but we can do that at any time and the WTO will agree. That is 100% guaranteed."
Mendel acknowledged his client would like such entities as the MPAA, the recording industry and Microsoft -- organizations that depend on IP protection -- to pressure the Bush administration into negotiating a "preferred" settlement, which would allow Internet gambling between Antigua and the U.S. But he insisted the threat was neither idle nor empty. "Perhaps the U.S. doesn't think we're serious," Mendel said. "We are."
The case dates back to 2003, when Antigua claimed that the U.S. unlawfully prevented Antigua's online gambling operators from accessing American markets although the U.S. allowed domestic online bets for horse racing. Antigua claimed $3.4 billion in losses and took its grievance to the WTO, which agreed, but awarded only $21 million in damages.
Mendel said his client has been trying ever since to work out an agreement that would allow online gambling between the two countries, but instead the U.S. has responded by "using every possible appeal, counterattack and side attack it could think of. We've been through five separate full-blown WTO proceedings on this and have won every step of the way."
The most recent victory was in December, when the WTO ruled that Antigua could exact damages by ignoring IP agreements with the U.S. should a negotiated settlement fail. Mendel said the U.S. promised then to respond to proposals for settling the dispute. "We have been waiting for three months already and there's been nothing," he said. "If the U.S. doesn't come in with something by the end of March, my suggestion to the Antiguan government will be to forge ahead and impose IP sanctions."
In a letter to the USTR about the potential effects of Antigua's retaliation, sent prior to December's ruling granting $21 million in damages, the MPAA wrote: "The proposed retaliation would be impossible to manage. The real and resulting economic harm would vastly exceed any amount the (WTO) might approve, even the grossly exaggerated amount ($3.4 billion) for which Antigua seeks approval, plus the economic harm would extend to other WTO members.
"MPAA believes it would be very difficult to insulate other WTO members from the effects of Antigua's proposed retaliation," the letter continued. "The unfortunate reality is that the failure to offer or enforce adequate protection of intellectual property rights in Antigua could foster abuses in other countries."
You would think the MPAA might pressure Congress to back off on the online gambling laws in order to avoid jeapardizing their members' IP. But no, rules are for the other guys -- they do not apply to them or their fellow supplicants for protection from Uncle Sam. The WTO was designed to protect various and sundry then-existing interests, so it is amusing to observe a conflict occurring between some of these interests occurs due to the existence of that very organization.
HOW DANGEROUS IS THE INTERNET FOR CHILDREN?
March 21, 2008
Many dubious laws and monitoring initiatives are instigated "for the sake of the children." It has become a cliche, if not a bad joke. So just what are the dangers to children lurking on the internet that would justify widespread monitoring? They mostly reside in the realm of urban legend, it turns out. Like so many risks in life there is a lack of perspective -- witness the hype over the real but negligibly probable prospect of suffering harm due to terrorism, vs. the non-negligible risks incurred when routinely traveling around by automobile.
Both this article, which appeared in the New York Times, and a PBS Frontline documentary -- neither institution of which can be considered a bastion of anti-state thinking -- reached similar conclusions after careful research that the internet's dangers were vastly overstated. And most kids are way too savvy to fall for the come-ons of would-be predators. As with most dangers in life, it seems the best course parents should take is to educate their kids in a matter-of-fact manner and leave it at that. It does appear, however, that "cyber-bullying" is a greater threat than is commonly conceived.
A few years ago, a parenting magazine asked me to write an article about the dangers that children face when they go online. As it turns out, I was the wrong author for the article they had in mind. The editor was deeply disappointed by my initial draft. Its chief message was this: "Sure, there are dangers. But they are hugely overhyped by the media. The tales of pedophiles luring children out of their homes are like plane crashes: They happen extremely rarely, but when they do, they make headlines everywhere. The Internet is just another facet of socialization for the new generation; as always, common sense and a level head are the best safeguards."
My editor, however, was looking for something more sensational. He asked, for example, if I could dig up an opening anecdote about, say, an 8-year-old getting killed by a chat-room stalker. But after days of research -- and yes, I actually looked at the Google results past the first page -- I could not find a single example of a preteen getting abducted and murdered by an Internet predator.
So the editor sent me the contact information for several parents of young children with Internet horror stories, and suggested that I interview them. One woman, for example, told me that she became hysterical when her 8-year-old stumbled onto a pornographic photo. She told me that she literally dove for the computer, crashing over a chair, yanking out the power cord and then rushing her daughter outside. You know what? I think that far more damage was done to that child by her mother's reaction than by the dirty picture.
See, almost the same thing happened at our house. When my son was 7 years old, he was Googling "The Incredibles" on the computer that we keep in the kitchen. At some point, he pulled up a doctored picture of the Incredibles family, showing them naked. "What ... on ... earth?" he said in surprise.
I walked over, saw what was going on, and closed the window. "Yeah, I know," I told him. "Some people like pictures of naked people. The Internet is full of all kinds of things." And life went on. My thinking was this: a 7-year-old is so far from puberty, naked pictures do not yet have any of the baggage that we adults associate with them. Sex has no meaning yet; the concept produces no emotional charge one way or another. Today, not only is my son utterly unscarred by the event, I am quite sure he has no memory of it whatsoever.
Now, I realize that not everybody shares my nonchalance. And again, it is not hard to find scattered anecdotes about terrible things that happen online. But if you live in terror of what the Internet will do to your children, I encourage you to watch this excellent hour-long PBS Frontline documentary. ... It is free, and it is online in its entirety. The show surveys the current kids-online situation—thoroughly, open-mindedly and frankly. Turns out I had it relatively easy writing about the dangers to children under age 12. This documentary focuses on teenagers, 90% of whom are online every single day. They are absolutely immersed in chat, Facebook, MySpace and the rest of the Web. It is part of their ordinary social fabric to an extent that previous generations cannot even imagine.
The show carefully examines each danger of the Net. And as presented by the show, the sexual-predator thing is way, way overblown, just as I had suspected. Several interesting interview transcripts accompany the show online. The one with producer Rachel Dretzin goes like this:
"One of the biggest surprises in making this film was the discovery that the threat of online predators is misunderstood and overblown. The data shows that giving out personal information over the Internet makes absolutely no difference when it comes to a child's vulnerability to predation." (That one blew my mind, because every single Internet-safety Web site and pamphlet hammers repeatedly on this point: never, ever give out your personal information online.)
"Also, the vast majority of kids who do end up having contact with a stranger they meet over the Internet are seeking out that contact," Ms. Dretzin goes on. "Most importantly, all the kids we met, without exception, told us the same thing: They would never dream of meeting someone in person they had met online."
Several teenagers interviewed in the story make it clear that only an idiot would be lured unwittingly into a relationship with an online sicko: "If someone asks me where I live, I'll delete the 'friend'. I mean, why do you want to know where I live at?" says one girl.
Fearmongers often cite the statistic, from a 2005 study by the Crimes Against Children Research Center, that 1 in 7 children have received sexual propositions while online. But David Finkelhor, author of that report, notes that many of these propositions do not come from Internet predators at all. "Considerable numbers of them are undoubtedly coming from other kids, or just people who are acting weird online," he says.
"Most of the sexual solicitations, they're not that big a deal," says another interview subject, Danah Boyd of Harvard's Berkman Center for Internet and Society. "Most of it is the 19-year-old saying to the 17-year old, 'Hey, baby.' Is that really the image that we come to when we think about sexual solicitations? No. We have found kids who engage in risky behavior online. The fact is, they've engaged in a lot more risky behavior offline."
As my own children approach middle school, my own fears align with the documentary's findings in another way: that cyber-bullying is a far more realistic threat. Kids online experiment with different personas, and can be a lot nastier in the anonymous atmosphere of the Internet than they would ever be in person (just like grown-ups). And their mockery can be far more painful when it is public, permanent and written than if they were just muttered in passing in the hallway.
In any case, watch the show. You will learn that some fears are overplayed, others are underplayed, and above all, that the Internet plays a huge part in adolescence now. Pining for simpler times is a waste of time. Like it or not, this particular genie is out of the bottle.
LAZY PRODUCTIVITY: 10 SIMPLE WAYS TO DO ONLY THREE THINGS TODAY
March 19, 2008
This article seems like good advice for those who find that dealing with "urgent" tasks gets in the way of true accomplishment over the longer haul.
I have to admit, I am as lazy as the next guy. I have my moments of productivity, where I am cranking out the tasks and checking things off my to-do list like my life depended on it. But for the most part, I just want to do a few things each day, and then take a nap.
And as it turns out, that is all that is needed. Doing just a few things each day has worked wonders for my productivity -- I do less, but those few things I do have a higher impact. With this method, I have created a couple of successful blogs, and achieved a few other things along the way. Not trying to brag, but only showing that laziness can actually work if you put it to work for you.
How can laziness work? Well, if you only want to do three things, just do three things. But here is the key: make those three things count. Here are my suggestions for making laziness work for you:
- Choose only three things to do today. If you set a limit, you will be forced to choose just the important things. If you do not set a limit, you will try to do everything ... which means you will be busy, but you will be doing a lot of unimportant things as well. Just choose three, but choose carefully.
- Choose for impact, not urgency. There are always things that seem urgent today, and those things tend to push the important stuff back. But here is the thing: the urgent stuff is only urgent in our minds. In a week, they will not matter. But if you choose something that has long-term impact on your work and your life, it will matter in a week. It is those high-impact tasks that really make a difference. If you choose high-impact tasks -- things that will really make a difference over time, that will get you recognition and success and create new opportunities -- you can let the urgent stuff melt away.
- Choose them the night before. Plan your three tasks the night before, so you are prepped for the day when you wake up. Then there is no "urgent" stuff on the list, because you chose them when you were calm. It helps give you a jump-start on your day.
- Start on them immediately. First thing you do when you start working: start on the first of your three important tasks. Do not do little things. Just start.
- Do not check email until the first one is done. There is always the urge to dive into email (or whatever your normal productive distraction is at work), but resist. Let it be your reward for completing the first task on your list. Let your urge to be lazy motivate you to finish that task!
- Choose a fourth, more important task to procrastinate on. Here is where procrastination can really help you. Trick yourself by putting a big task you have been dreading at the top of your list. So you actually have four tasks. You will try to procrastinate on that big task by working on the three tasks below it. In that way, you will still get three very important tasks done while procrastinating on the fourth. How will you get that fourth one done? When something bigger comes along that you dread even more, put that at the top of your list.
- Take breaks in between. When you finish one of your three tasks, give yourself a short break. 10 minutes works well for me, but you may need 15 or 20. That is OK. We are not in a sweatshop here. You are only doing three things today. Take a walk. Get a glass of water. Shoot the breeze with someone. Check whatever you like to check online. Then get back to work on the next task.
- When you are done, celebrate with a nap. After you do your three important tasks, take a nap. You have earned it. You have done three important things today, which is more than most people, to be honest. They might do 7 smaller things, but you have been more productive by doing less.
- Batch process smaller tasks. It is inevitable that you will have smaller things you will need to take care of. Put those off until the afternoon or end of your day, and do them all at once in batches. So do all your phone calls, then all your emails, then all your little paperwork or whatever. Just do not allow these smaller, routine tasks to push back your big ones.
- What if you need to do more? You probably will not actually complete them all anyway. Just choose three and put the rest off until tomorrow. I promise, the world will not end and life will go on. And you will be much less stressed.
ELIOT SPITZER’S DOWNFALL RAISES A QUESTION: IS THERE A FAIL-SAFE WAY TO PAY FOR NAUGHTY THINGS?
March 24, 2008
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.
MY BIG FAT IRS CASE
March 24, 2008
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?
BOOK REVIEW: WHO SPEAKS FOR ISLAM? WHAT A BILLION MUSLIMS REALLY THINK
March 26, 2008
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.
WOMAN JAILED FOR NOT REPAYING EX-HUSBAND FROM IRREVOCABLE TRUST
April 3, 2008
Another case where the effectiveness of a foreign trust in protecting assets is put to the question is in the news. If you are the beneficiary of a trust it is of course absolutely in line for the trustee to arrange that you do indeed benefit from the trust assets by making periodic payouts. In most cases the beneficiary is a reasonable party for the trustee to consult vis-a-vis payout timing and amounts. If the trust is irrevocable and the payouts are completely at the discretion of the trustee, then obviously you want to make sure the trustee is a person of integrity, and also is someone who understands certain subtleties about the beneficiary's needs -- and eccentricities.
In the example at hand, a woman beneficiary of an offshore trust apparently needs a trust payout to avoid going to jail. The trustee says he "does not recognize orders of foreign courts" and is refusing to supply the funds. Case-specific facts aside, this may in theory be exemplary behavior on the part of the trustee, but if you are sitting in jail this victory for the asset-protecting strength of the trust arrangement has its practical limits. The court may not be able to grab the assets that benefit you, but if they grab your body instead then what?
After spending more than two years on the lam, Merry Morris is in the Palm Beach County [Florida] Jail, where she could remain indefinitely unless she pays her ex-husband $1.8 million for violating their postnuptial agreement. In one of the most bizarre and complex divorce cases in recent memory, the 53-year-old former Boca Raton resident is in jail for violating court orders demanding that she pay up.
However, she claims she cannot pay because all of her money is in an irrevocable trust in the Cook Islands. The trustee in the Polynesian island nation adamantly refuses to release the cash, saying he does not recognize orders of foreign courts.
"She is really between a rock and a hard place," her attorney Jeffrey Wasserman said last week. "I've spoken with the trustee, and he is not releasing the money. He is not going to obey court orders from the U.S. and he is not going to take direction from her if it is based on the court order."
The trustee sounds like some borg from Star Trek whose programmers failed to take into account the nonlinear complexities of life: IF "foreign court order" THEN "ignore". They forgot to add: AND NOT("foreign court has kidnapped the beneficiary") to the IF condition.
Attorney Jeff Fisher, who represents Morris's ex-husband and wrote the unorthodox provision that helped put Morris behind bars, said he doubts Morris is helpless. The trustee who has given her money to buy cars, clothes and trips to exotic locales surely would give her the cash she needs to get out of jail, he said.
One might well infer that the funding for some (most?) of these expenditures was supplied in direct response to a request from Ms. Morris. Fine, to a point. But is she now refusing to make a request for the money to save her from jail? Or, is the trustee deciding that any such request is made under duress and should not be honored? Again, this may be by the book in theory. But if a pattern of request followed by consistently acceding to the request has persisted over time, even an impartial observer can be forgiven if they conclude that the beneficiary effectively controls distributions from the trust.
This brings up the so-called "Doctrine of Disbelief", introduced here in a somewhat different context. Is the whole arrangement, viewed in its entirety, credible? If the court decides not, it becomes a standoff between the court and the defendant. If the defendant is incarcerated it is not a battle between equals. Nor, given this, should one expect the court to grant the believability benefit of the doubt to the defendant.
Leland Morris takes no joy in seeing his ex-wife locked up, he said. "He does not need the money. He does not want the money," Fisher said of his client, who moved to Boca Raton from New York after making millions in the real estate industry. "He has consistently made it known that the money she owes can be paid at a substantial discount -- not to him but to his children -- contingent on her getting mental health treatment."
Wasserman agreed that negotiations are under way. But, he said, so far the money Leland Morris is demanding is more than Merry Morris is willing or able to pay. The real problem, Fisher said, is that Merry Morris has repeatedly thumbed her nose at the judicial system, which is why she is spending 120 days in jail -- a week of which was spent in solitary confinement after she was accused of assaulting a guard.
When you start hearing about "willingness to pay" or "thumbing her nose at the judicial system" (never mind assaulting a guard) then the quirks of the case look like they are the effective dominant factors in play. Nevertheless, in principle the battle between the Morrises illustrates the practical limits of the protection an offshore trust can supply.
The convoluted case began before the couple divorced in 2001. Fearing his wife would flee with their son and daughter, Leland Morris asked Fisher to craft a fail-safe for him. In exchange for allowing him to be primary custodian for the children, he agreed to give her a $1.5 million bonus on top of the divorce settlement. But there was a catch: If she contested any part of the postnuptial agreement, she would have to repay the bonus.
Two years later, she accused Leland of violating the agreement and asked that it be modified to accommodate her lifestyle. Circuit Judge Jeffrey Colbath ruled that her complaints constituted a challenge of the agreement. He ordered her to repay the $1.5 million and cover the $300,000 her ex-husband had accumulated in attorney fees. When she refused to pay, Colbath held her in contempt.
With 20-20 hindsight, Mr. Morris should have had the agreement include that the $1.5 million collateral be kept in an easier to grab location, or that the $1.5 million be paid out, e.g., once the younger child reached age 18.
Meanwhile, in an attempt to collect the money, Fisher filed a lawsuit to force her to sell her home to pay part of the money. After the suit was filed, Fisher said she borrowed about $450,000 against the house. Circuit Judge Jonathan Gerber ordered her to return the money. When she did not, he held her in criminal contempt. When she refused to appear in court to explain why she was disobeying his order, he slapped her with two additional criminal contempt charges and issued warrants for her arrest.
Note that extracting the $450k and secreting it away after the judgement is clearly an instance of fraudulent conveyance -- a criminal offense.
She avoided arrest by going underground, refusing to divulge where she was living. Then, in a surprise move in January, she appeared at the county jail, saying she wanted to turn herself in. ... Gerber sentenced her to 120 days in jail for not obeying his order to return the money she borrowed against the house. In April, he is to consider what punishment, if any, she will receive for not appearing in court.
Circuit Judge Amy Smith, who inherited the divorce case from Colbath, is to decide what punishment Morris will receive for not repaying the $1.8 million. Until she pays, it is likely she will remain in jail.
Like other judges who have considered cases involving money squirreled away in offshore accounts, Gerber said he believes Morris can get her hands on the money in the Cook Islands. "You have been living somehow, some way over the last two years in different places around the world, one of them being Barcelona, Spain, and (have been) able to access that money when you have requested it," he said.
Again, the "Doctrine of Disbelief" and the question of just how much actual discretion the trustee exercised is raised. The courts are inclined to the view of "use it or lose it," i.e., if it has not been used in the past then we assume it will not be used in the future, when it comes to that kind of discretion.
Wasserman and Fisher, both seasoned and respected divorce lawyers, said it is one of the strangest cases they have handled. At one point, it was considered by the Florida Supreme Court. While two justices questioned whether the payback provision was even legal, they declined to rule on the case because Merry Morris was a fugitive.
The Morris children, who were the basis for the special clause, are barely an issue in the case any longer. At 18, their son is an adult and cannot be ordered to spend time with his mother. Though the daughter is only 16, she, too, for all practical purposes is beyond the reach of the court, Wasserman said. "This is sad," Wasserman said. "This is really, truly very sad."
Fisher agreed. But, he said, it is of Morris's own making. "Our system, it is dispute resolution. If the loser does not do what the court orders them to do, then the courts' ability to resolve disputes disappears," he said. "It just does."
One would not expect a lawyer -- an officer of the court -- to consider the fact that alternative dispute resolution mechanisms to a government enforced monopoly might be preferable.
RICH MEN BEHAVING BADLY
April 1, 2008
Meet the super-rich, the dysfunctional class threatening American values.
Very short-term focus with no thought for long-term consequences ... sociopathic ignorance of social norms and the effect of one's actions on others ... dependence on handouts from Washington, D.C. Sounds like a description of an enclave in the desperately poor section of some American city, right? It turns out it is not such a bad characterization of Wall Street's super rich overclass as well, as this provocative piece in Slate from business columnist Daniel Gross explains.
For decades, social scientists, policy wonks, and politicians have studied and debated what has come to be known as the "culture of poverty." The consensus: A group of Americans is set apart from the mainstream by geography, class, and income. Its members adhere to norms that do not apply to the rest of society and engage in self-destructive behavior that imposes significant costs on the nation at large. The culture of poverty has made for potent politics (remember Ronald Reagan's fictitious welfare queen?) and spawned best-selling polemics from the right (Charles Murray) to the left (Jonathan Kozol).
We do not hear as much about the culture of poverty these days. Perhaps it is because the market turmoil is making us all feel a little poorer. Or perhaps it is because a highly visible group is now exhibiting all the outward appearances of the underclass: the overclass. Forget welfare queens and the culture of poverty. Think Wall Street kings and the culture of affluence.
Wall Street types do not live in ghettos, barrios, or the hollows of Appalachia, but they do inhabit environments that are sealed off socially from the rest of the world -- the Hamptons on Long Island; Manhattan's Fifth Avenue; Greenwich, Connecticut. Because they rarely interact with people of middle-class means (save the odd doctor, lawyer, or interior designer), they have become woefully out of touch with the solid bourgeois values that made America great.
In the underclass, unmarried, young fathers do not take responsibility for their children. In the overclass, twice-married, middle-aged Wall Street daddies do not own up to the consequences of their insane financial miscues. Wall Street titans are almost incapable of seeing the problem with taking 9-figure payouts in years in which their stocks plummet. "There is just a total disconnect between the compensation and the responsibility for their actions," says William Cohan, a former Lazard banker turned author.
In his book The Age of Abundance, libertarian author Brink Lindsey boils down the difference between the desperately poor and the blissfully rich to an ability to focus on the long term. "Members of the underclass operate within such narrow time horizons and circles of trust that their lives are plagued by chronic chaos and dysfunction," he says. By contrast, elites are well-organized long-term thinkers. Riiiiight. "Modern Wall Street is a system," says Charles Morris -- a former Chase banker and author of The Trillion Dollar Meltdown -- "that rewards crazy risk-taking in the short term without regard for the long-term consequences."
Critics point to a pervasive sense of victimhood in the underclass. But listen to what Bear Stearns CEO Alan Schwartz told the troops after his firm succumbed to wounds that were almost entirely self-inflicted. "We here are a collective victim of violence," he said. Yep, just another case of the Man keeping the Man down.
Conservative critics constantly carp that the culture of poverty has encouraged a sense of dependency on Washington. Of course, in recent months, the bureaucracy -- the Federal Reserve, the Federal Housing Authority, Fannie Mae, and Freddie Mac -- has generally ignored the struggles of poor homeowners. Yet it vaulted into action to save the bankers from their own disastrous bets. When Bear Stearns, the nation's 5th-largest investment bank, approached insolvency, the Feds orchestrated JPMorgan's acquisition of it.
In 1993, the late Sen. Daniel Patrick Moynihan coined the term "defining deviancy down." The prevalence of bad behavior in the underclass, he argued, caused institutions to lower standards and expectations, which effectively socialized the costs of dysfunction. Today, the Federal Reserve is "defining solvency down." In recent weeks, the Fed has responded to Wall Street's crisis by systematically lowering the standards of what it would accept as collateral for loans. (Historically, only government bonds or bonds backed by Fannie Mae and Freddie Mac were good enough.) But as part of the Bear Stearns deal, it agreed to lend $30 billion against assets of dubious provenance. And guess who bears the risk if that $30 billion cannot be paid back? You and me. If write-downs continue, rumor has it, the Fed might start accepting sports memorabilia, Beanie Babies, and Pokemon card collections as collateral.
There are important differences between the underclass and the overclass, notes Susan Mayer, dean of the University of Chicago's Harris School of Public Policy Studies. The overclass is better connected, and it can cause more damage. "Poor inner-city kids selling drugs to suburban kids can harm people," Mayer says. "But financial markets can bring thousands and thousands of people to ruin."
The pernicious culture of affluence merits further study. When self-proclaimed rogue sociologist Sudhir Venkatesh sought to learn about the culture of poverty, he hung out in Chicago's notorious Robert Taylor Homes and befriended drug dealers. The tale is chronicled in his fascinating book Gang Leader for a Day. If he really wants to understand the workings of a dysfunctional class that's threatening American values and taxing national resources, Venkatesh, who teaches at Columbia, should move into a co-op on the Upper East Side and get a job on Morgan Stanley's trading desk. He can call his next book Hedge-Fund Manager for a Day.
Plenty of short-sighted, extravagent behavior can be observed in other socioeconomic classes as well. Buying a house for no money down and expecting to get rich is just a minor league version of taking home a huge paycheck for inferior performance. Taking out a loan collateralized by the inflated nominal value of one's home equity in order to fund the purchase of some neat new gadgets does not exactly demonstrate considered long-term prudence.
We are inclined to look to John Maynard Keynes in seeking to explain all this behavior: "There is no subtler, no surer way to overturn the existing basis of society to than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner, which not one man in a million is able to diagnose." (Most so-called Keynesians these days do not seem to have much of an issue with currency debauchment.)
EXPECTATIONS FOR RON PAUL’S BOOK THE REVOLUTION: A MANIFESTO HAVE BEEN EXCEEDED. BY A MILE
April 4, 2008
With the failure of Ron Paul's presidential candidacy as a candidacy, the question now is whether it was more successful as a mainstream movement -- or at least starting one. And if there now is more mainstream support for the idea and practice of liberty, how to keep up the momentum? According to Thomas Woods, author of 33 Questions About American History You're Not Supposed to Ask and The Politically Incorrect Guide to American History, Ron Paul's new book shows that "anybody who thought Ron Paul's moment was over is sorely mistaken. He is just getting started."
Woods writes that modern-day freedom movement grandfather Murray Rothbard asserted that in order to make progress toward liberty, the state's benign facade has to be ripped away. The people must be made to understand that this institution which they have been taught to worship, to use Ron Paul's own words, instead threatens their liberties, squanders their resources on needless wars, destroys the value of their dollar, and spews forth endless propaganda about how indispensable it is and how lost we would all be without it. This is the book Murray was waiting for, writes Woods.
Whatever your expectations for Ron Paul's book The Revolution: A Manifesto, I can say with confidence that they have been exceeded. By a mile. Ron Paul has produced the kind of book that changes the person who reads it. It is one of the most persuasively argued and beautifully written defenses of the free society I have ever encountered. No president, no presidential candidate, indeed no American politician has ever written anything like this. But that is such faint praise, and such an unjust understatement, that I almost regret uttering it. ...
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