Wealth International, Limited (trustprofessionals.com) : Where There’s W.I.L., There’s A Way

June 2008 Selected Offshore News Clips

(Especially noteworthy articles’ headings highlighted in gold.)

June 7, 2008

Privacy expert and Sovereign Society columnist Mark Nestmann fills us in on the details of Congress's plan to impose an exit tax. As Nestmann writes, Congress has effectively sent the message to anyone with more than a modest amount of wealth that "You are slaves on our plantation. And if you want to exercise your right to leave, you will pay dearly for the privilege."

Nestmann predicted in February 2007 that Congress would pass such a law eventually. It is obvious that most politicians think of us a sharecroppers on their plantation, so no one should be surprised when they encode such thinking into law.

The United States is the only major country on the planet that taxes citizens on their worldwide income, no matter where those citizens happen to live. ... If you were born in England, Ireland, Japan, or almost any other country, all you need to do to avoid the obligation to pay tax on your worldwide income is leave. ... But not the USA. To permanently disconnect from U.S. tax obligations, a U.S. citizen must not only leave the United States, but also take the radical step of giving up U.S. citizenship. ...

The income tax savings from expatriation can be huge. But for truly wealthy U.S. citizens, the biggest savings from expatriation come after they die. ... An entrepreneur with a $20 million estate could save over $8 million in estate and gift taxes by giving up U.S. citizenship.

However, the image of wealthy former U.S. citizens living tax-free in tropical paradises is an irresistible populist target. The result has been a series of increasingly stringent laws that penalize U.S. citizens who give up their U.S. citizenship with "tax avoidance" as a principal purpose.

Congress has now once again amended these "anti-expatriation" provisions in a new bill. Both houses approved the bill unanimously, and sent it to President Bush for his signature. ... [The law] imposes the first-ever "exit tax" on even moderately wealthy expatriates. ... Once President Bush signs this bill, the law will require future expatriates to pay a tax on all unrealized gains of their worldwide estate, including most offshore trusts. And the tax applies not only to former U.S. citizens, but also to long-term green card holders who have resided in the United States for at least eight of the 15 years before they expatriate. ...

It would be one thing if the exit tax only affected billionaires. But, with only a few exceptions for dual nationals and others with strong ties to another country, the law applies to any expatriate that:
  1. Has an average annual net income tax liability that exceeds $139,000, adjusted annually for inflation for the five preceding years ending before the date you lose your U.S. citizenship or terminate your residency
  2. Has a net worth of $2 million or more on such date
  3. Fails to certify under penalty of perjury that he or she has complied with all U.S. federal tax obligations for the preceding five years or fails to submit any proof of compliance the IRS demands
If you qualify under any of these criteria, you may be subject to the exit tax. ... [T]he first $600,000 of gains is excluded. This exclusion doubles to $1.2 million for a married couple filing jointly, when both expatriate. This exclusion will increase by a cost of living adjustment factor after 2008.

Gains will be calculated "mark-to-market," or the difference between the market value on the expatriation date and the market value at acquisition. ... This phantom gain will presumably be taxed as ordinary income (at rates as high as 35%) or capital gains (at either a 15%, 25%, or 28% rate), as provided under current law. When you actually sell the assets, you will not have to pay any additional taxes. However, your adopted country might tax the gain a second time, leading to double taxation on the same income.

And now for the really bad news: Once you expatriate, you will pay up to a 51% tax on distributions from retirement plans. The same goes for most other forms of deferred payments. If there is a silver lining, it is that the tax is not due until you actually receive payments from the plan. ...

Your individual retirement account [IRA] is NOT eligible for this treatment. If you are a "covered expatriate," you must pay income tax on the entire value of the plan, as if you received it in a lump sum. ...

[I]f you are a covered expatriate, and you make a gift or bequest to a U.S. person 10, 15, or even 50 years after your expatriation, the recipient must withhold tax at the highest marginal gift or estate tax rate that applies. Exactly how much tax you pay depends on the amount of gift or estate tax paid to a foreign country with respect to that gift or bequest. ...

If your net worth is only a little over $2 million ($4 million for a married couple expatriating at the same time), the most obvious way to avoid the exit tax is to spend enough money to get your net worth under these thresholds. Take a trip around the world. Blow some money in Las Vegas. Throw a really big party.

You can also contribute your excess funds to a qualified charity, or give away up to $1 million over your lifetime to anyone else without triggering a gift tax liability. If you have paid more than an average of $139,000 annually for the previous five years, however, this strategy will not work. And if you do not have sufficient cash to pay the exit tax, your best option may be to elect to defer payment. You will pay interest for the period tax is deferred, and you may be required to post a bond with the Treasury Department.

Fortunately, you can make this election (which is irrevocable) on a property-by-property basis. For instance, it appears as if you could pay the exit tax on all assets outside your IRA, and defer it for the assets in the IRA. ...

The bottom line: with the exit tax, Congress has made the most significant change to the anti-expatriation rules since their inception in 1966. In doing so, the IRS has sent wealthy U.S. citizens and long-term residents a clear message: You are slaves on our plantation. And if you want to exercise your right to leave, you will pay dearly for the privilege.

Is expatriation for you? The decision to give up U.S. citizenship is a serious one. It requires that you obtain a passport from another country, leave the United States permanently, and set up residence in a suitable jurisdiction.

It is a step you should take only after consulting with your family and professional advisors. But it is the only way that U.S. citizens and long-term residents can eliminate U.S. tax liability on their non-U.S. income, wherever they live. And it is a tax avoidance option that Congress has now made much more difficult.

In Nestmann's February 2007 piece cited earlier he wondered whether the U.S. courts might declare an exit tax unconstitutional, on the basis that: "... the right to expatriate is fundamental in American law. Indeed, the Declaration of Independence cited it as a 'law of nature.' The U.S. Constitution guarantees the right to end U.S. citizenship, to live and travel abroad freely, and to acquire citizenship from other nations. All of these rights have been affirmed by the U.S. Supreme Court." He held out "a glimmer" of hope that the courts might do this. Sounds about right.

Also, we can readily imagine the thresholds being lowered so that anyone who expatriates with any net worth gets hit. After all, it is such a privilege to live in the land of the free that anyone who decides to leave deserves whatever punishment the government chooses to mete out.

June 2, 2008

Coverage continues from last week on the lastest U.S. and E.U. efforts to undercut Switzerland's long tradition of financial privacy.

A Wall of Silence

Switzerland's wall of silence has been in place for more than 70 years. In the Third Reich, both the Nazis and the persecuted Jews valued the small country's discreet services. After the war, Colombian drug dealers, African dictators and tax evaders from around the world pumped their ill-gotten billions into Swiss vaults. Former Philippine dictator Ferdinand Marcos, for example, had more than $600 million (€387 million) stashed away in Swiss bank accounts.

Money-laundering was not made a criminal offense in Switzerland until 1990. Before that, Swiss banking secrecy laws were even impregnable to foreign authorities pursuing members of the mafia. In the meantime, however, it has become easier to crack the country's once hermetically sealed vaults.

A treaty with the European Union "to combat fraud" is expected to come into effect by the end of the year. When that happens, Switzerland will "also provide administrative and legal assistance in cases of tax evasion in the area of value-added tax," says Robert Waldburger, a professor of tax law and former deputy director of the Swiss Tax Administration. German tax investigators will then be able to contact their Swiss counterparts directly and discuss the necessary account information.

The new rules will be especially detrimental to small and mid-sized companies. Their private illicit earnings are often derived from undeclared company sales, for which they also failed to pay value-added tax.

Is Swiss banking secrecy headed for the history books? And are Steinbruck and other finance ministers fighting a paper tiger? Almost, but not entirely. According to Waldburger, "the automatic exchange of information," in other words, the disclosure of account details, "would spell the real demise of Swiss banking secrecy." But the treaty on the taxation of interest between Switzerland and the EU still prevents this from happening.

After years of negotiations, the EU member states agreed that the Swiss could levy a source tax, a sort of withholding tax, which would increase over time, on the interest earnings of foreign customers, and turn over this source tax to the EU states without including customer data. However, the tax is easily circumvented with special financial products and letterbox companies, because it does not apply to legal [i.e., it does not apply to trusts, companies, etc.] persons.

But this is precisely what EU member states Austria, Luxembourg and Belgium are also doing. For this reason, a uniform EU directive to strengthen the interest taxation directive is not in sight. When finance ministers met in Brussels last Wednesday, Steinbruck encountered strong resistance to his demands. Austrian Finance Minister Wilhelm Molterer has said that banking secrecy is "not up for discussion."

In the United States, on the other hand, the Swiss banking industry could run into difficulties sooner. For years, the U.S. Senate has been conducting its own detailed inquiries into the issue of tax evasion. Senators have summoned key representatives of the industry, including tax advisors, accountants, lawyers and bankers, to the Capitol in Washington for lengthy hearings.

We would wager that these representatives were operating inside the U.S. for the most part, and thus had little choice but to heed the Senators' call.

These hearings have produced reports, some of them hundreds of pages long, on the "tax shelter industry" and "its tools, methods of obfuscation and those pulling the strings." UBS was mentioned early in the Senate documents as an offender. With relish, the senators cited a letter written by an insider to UBS management. According to the letter, the bank offers "U.S. taxpayers illegal tax evasion models," part of a system that costs American tax authorities "several hundred million dollars a year."

Of course, others -- the auditors at KPMG -- invented the system on which this is based. After admitting to charges of criminal tax fraud conspiracy, they only managed to avoid further criminal prosecution in the U.S. in 2005 by paying $456 million (€294 million) in fines and penalties.

By this point, the UBS executives should have known that they were likely to face significant problems in the United States. Many of the "tax optimizers" advised by KPMG had maintained accounts with the Swiss bank. The trail had been set. All the American officials had to do was to follow it.

Three U.S. authorities are now conducting investigations against the Swiss portfolio managers: tax investigators from the U.S. Justice Department, the Securities and Exchange Commission (SEC), headed by Christopher Cox, and New York Attorney General Michael Garcia. All are now hunting down the Swiss.

Political conflict is also on the horizon. An aggressive bill to combat tax evasion, the "Stop Tax Haven Abuse Act," was introduced in the U.S. Congress last year. The legislation provides for tough measures against 34 tax havens, including Liechtenstein, Luxembourg and Switzerland. The bill has stood little chance of becoming law until now. But that could quickly change after the presidential election in November. Once of the bill's three sponsors is Senator Barack Obama, who is currently favored to win the White House.

The devil will be in the "tough measure" details, if this bill comes to pass. It is one thing to bully a small, island tax haven into doing the U.S.'s bidding. It is another to take on the richest countries in Europe, however small they may be.

June 7, 2008

When you get rid of an old PC, whether via sale, donation, or even disposal, you should wipe the hard disk drive clean so that whatever information you want to keep confidential stays confidential. As this article explains, this is no easy matter. "Deleting" a file really just deletes the pointer to the file. The data is not effectively removed until every bit of the space it was occupying on the drive has been overwritten. And the more times it is overwritten, the less likely a determined electronic forensicist can recover it. Motivations along that line drove Richard Nixon secretary Rose Mary Woods to alleged erase part of the famous Watergate tape -- it of the 18 1/2 minute gap -- five to nine separate times.

The program suggested for thoroughly wiping one's hard drive is a Unix/Linux utility called wipe. Even if you are a Windows user, you can boot from a Linux live CD and follow the instructions from the article.

An alternative program which works to the same end is called Boot and Nuke. During the setup you create a bootable floppy disk, CD or USB device containing a minimal Linux distribution. The drive wiping routine is automatically invoked after boot-up. Wiping a 40GB hard drive using eight erasure passes took over 24 hours when we tried it. Effective security requires some patience.

Everybody who owns a computer will someday need to dispose of a disk drive. Before you do, it is a good idea to cleanse the drive, so no one can read your sensitive information. Deleting files and reformatting is not sufficient. Determined effort can still reveal data from a drive even after it appears to be gone. To do a more thorough job, I suggest using wipe.

You need to take special pains because files that are "deleted" are not really gone. Most operating systems, including Linux and its ext2 filesystem, just delete the pointer to a deleted file; the data still exists on the drive. It is not effectively removed until every bit of the space it was occupying on the drive has been overwritten. Even then there are ways, albeit difficult, to analyze the drive and extract data. The only way, short of melting the drive, to ensure the data is gone for good is to overwrite the drive several times with random data.

Several Linux utilities can cleanse files and drives, and all do the same thing. Wipe has more options than some of the other tools, including the ability to erase a block of data on a partition.

If the target drive is installed in a working system, the easiest way to clean it is to run wipe off of a Linux live CD. Knoppix, the granddaddy of Linux live distributions, comes with a ready-to-use version of wipe. To get started, download and burn the latest version of Knoppix, then put the CD in the CD drive of the target machine and boot. If all goes well, Knoppix should boot and present the KDE interface.

wipe is not the only utility for cleansing files and disk drives. shred is another, it can do anything that wipe can do. Another tool is the secure-delete suite, which comes with four separate programs: srm, smem, sfill, and sswap. ... All of these tools essentially do the same thing, and they all do it well.

Launch Konsole, KDE's terminal emulator, using the icon in the bottom toolbar. Find the partition names of the target hard drive by listing all of the disk devices in the /dev directory. For IDE drives, run ls /dev/hd*. For SCSI drives, use ls /dev/sd*. The command should list several items. The primary drive is typically /dev/hda or /dev/sda. There will be an item in the output for every partition on the device.

It should go without saying that running wipe will nuke everything on the target file system. Everything beyond this point is destructive, so make sure anything important is backed up.

Wipe's developers suggest only wiping one partition at a time, so for every partition, including the swap partition, run the command sudo wipe /dev/partition. Use the sudo command so that there are no permission errors. The wipe process will take several hours to complete for a moderate-sized hard drive. If you want it to go faster you can tell it how many passes you want it to make by using the -Q option with a number less than the default of 4. However, the more passes wipe makes, the better the protection, at least in theory.

If the target drive is not in a working machine, you can place it in a USB enclosure and attach that to a Linux machine. Note that most window managers will automatically mount external USB storage devices when they are attached; unmount the drive before running wipe. If wipe is not already installed on the machine, install it using your distribution's package manager. Next, launch a terminal session, find the device, and run wipe on each partition, using the command above.

Using wipe does not absolutely guarantee that data on the drive cannot be recovered, but it goes a long way in making it difficult.

June 9, 2008

By forming multinational investigative teams, the IRS and other tax collectors are cracking down on evaders and giving new meaning to globalization.

Spiegel has followed up its article on the battle against Swiss secrecy, "Europe, US Battle Swiss Bank Secrecy" -- covered in Offshore News Digest here and here -- with an article covering the increasingly effective multinational initiatives by tax agencies to uncover evasion. The agencies are collaborating with each other, and are successfully pressuring tax havens to cough up information on clients.

We at W.I.L. have always advised against relying on secrecy for any part of your asset protection strategy. Now it is getting to the point where secrecy is meandering towards endangered species status.

Government authorities from Australia to the U.S. are hunting big game together. Their prey? Wealthy tax evaders -- as well as the asset managers, banks, and accountants who help prosperous people conceal cash in offshore bank accounts. For decades, globalization has afforded an edge to tax cheats. Now it is working for the tax cops, too.

Buoyed by new multinational investigative teams, agreements with banks to open once-secret records, tougher penalties for cheats and third parties, and a thirst for billions of dollars in recoverable revenue, the new globe-spanning tax man has got the world's mega-rich worried they could run afoul of the mounting crackdown.

With so much money at stake, it is no wonder the U.S. Internal Revenue Service, Germany's Bundesministerium der Finanzen, Britain's Her Majesty's Revenue & Customs, and other international colleagues are eager to nab wealthy tax evaders. Almost $6 trillion is estimated to be hidden from tax authorities across the globe -- Germany's central bank suggests $775 billion in German assets alone have been secreted out of the country. In the U.S., the IRS reckons $295 billion of potential tax revenue goes uncollected -- much of it because of underreported income. With governmental budgets strained everywhere, leaders are eager to mop up those missing payments.

A Collaborative Effort

To close this "tax gap," U.S. investigators and their comrades overseas are cooperating as never before. Since the September 11 terrorist attacks, tracking money movements has become a priority. In response, law enforcement and banks have started to share more information about possible tax evaders. Governments also realize they have a lot to gain from stiffer penalties that return more money to underfilled coffers. ...

Cross-border collaboration has become a buzzword in global law enforcement circles. Under an OECD-negotiated treaty, 19 countries, including states as diverse as the U.S., Italy, and Azerbaijan now can prosecute tax evaders within their jurisdictions on behalf of other signatory countries. The European Union passed a similar law in 2000, while Brazil, India, and South Africa began cooperating with each other to identify suspect transactions in 2006. Their targets typically conceal assets in the roughly 40 nations generally seen as tax havens, which are analyzed routinely by international organizations such as the OECD and the International Monetary Fund.

These days, an investigator following a lead need not even cross a border for help from his international colleagues: He or she merely has to walk down the hallway. Since 2004 tax shelter sleuths from five countries -- the U.S., Britain, Australia, Japan, and Canada -- have shared work space, tactics, and information in a joint office at IRS headquarters in Washington. The success of the operation led to its expansion last year, including the opening of a London-based outpost at HMRC.

The physical setup of this so-called Joint International Tax Shelter Information Center reflects the sensitivity of the work. Each member of the unit -- which is physically separated from the rest of the IRS -- has a separate, closed office, allowing for confidential communication with counterparts back home, as well as discreet one-on-one conversations with local colleagues and the IRS. "The office space is configured in a manner that reflects the critical need to protect the privacy of taxpayer information," according to an IRS spokesman.

The IRS argues that such cooperation is essential in a world of globalized money flows. "Cross-border migration of capital and people has made this a more integrated world, and the IRS is working closely with other national tax administrators to ensure that we have a global view of our work," says the top tax official in the U.S., IRS Commissioner Douglas Shulman. This close work with other tax authorities, he adds, has allowed the IRS and its equivalents in other nations to achieve "a new level of cooperation in identifying, developing, and sharing leads on abusive tax transactions and schemes."

Such cooperation will only increase as governments clamp down on tax evasion, says Daniel Feingold, senior partner at Britain-based global tax consultancy Strategic Tax Planning. "There's a definite push for this sort of thing," he says.

Squeezing Tax Havens

All of this has put the squeeze on tax havens such as Liechtenstein and Andorra that have long-held traditions and laws supporting no-questions-asked banking for wealthy clients. "The number of countries safe for this activity is dwindling," says Beverly Hills-based tax lawyer Edward Robbins Jr., a former assistant U.S. attorney who oversaw tax prosecutions in California. "There aren't that many left, frankly."

For decades, banks in places such as Switzerland have flourished by offering seemingly ideal havens from the tax man. Switzerland's code of silence, for instance, goes back at least 200 years. And during World War II, Nazis and Jews alike made use of Swiss bankers' discretion. Since then so have corporations and non-governmental organizations -- as well as drug traffickers and corrupt dictators.

Yet even this Alpine paradise has conceded to mounting international pressure. Most major Swiss banks have signed up with the U.S. to be "qualified intermediaries." The system gives the IRS access to any account containing U.S. securities and requires the filing of tax and other forms with the U.S. that identify clients and balances -- not exactly the image of tight-lipped discretion portrayed in movies such as The Spanish Prisoner and The Bourne Identity. Even the Swiss government admits to a disconnect between tradition and current reality. "Swiss banking secrecy is in no way absolute," cautions the Swiss embassy's Web site.

We suspect that the Swiss banks becoming qualified intermediaries are those with a physical and/or legal presence in the U.S. For many reasons besides privacy, it makes sense to avoid such financial institutions. They can far more easily be pressured into releasing information and assets, or compromising their stated principles, than those with no presence in the client's home country.

Often under pressure, other tax havens have followed suit. Agreements with traditional ports-of-call for evaders like Malta and Bermuda have aided the IRS and its international counterparts. Now tax collectors do not even have to pick their way through complicated avoidance schemes: They can make a case against alleged tax cheats simply by catching missing or falsified paperwork.

Elaborate Web

Here is how it works. For years, a bank client with any kind of interest in an overseas account valued at more than $10,000 has had to file a special form with the IRS disclosing that fact. But to avoid taxation, he might not file the form, or might underreport the value of the account on his tax return. More deviously, he might conceal transactions in an elaborate web of trusts and holding companies. Now, thanks to more international sharing of data, the IRS may find out about the account anyway -- from the bank itself.

Failing to report an overseas financial account under your control when its value (ever) exceeds $10,000 has always been unwise, in our opinion.

The recent high-profile indictment of former UBS banker Brad Birkenfeld shows just how tough the authorities are getting. Birkenfeld's wealthy client, Igor Olenicoff, has pleaded guilty to filing false tax returns and agreed to pay $52 million in back taxes. Both Olenicoff and Birkenfeld, who was born in Boston and lives in Switzerland, are believed to be cooperating in a continuing investigation that began with the discovery of $200 million allegedly concealed in European tax havens on behalf of Olenicoff, a Russian émigré-turned-California real estate developer.

As a result of that probe, the extended arm of U.S. law may reach not just other clients of Birkenfeld (and those of an alleged collaborator in Liechtenstein named Mario Staggl, who specializes in the intricacies of tax havens and trusts) but also other employees of UBS. "This is not an isolated incident," says David Schwedel, a Florida entrepreneur who is now an investment partner of Birkenfeld's. "He won't be the last banker called in for questioning. There will be a lot of bankers called into this. They're going after others at UBS and any US individuals involved with the bank."

Alerted About the Risks

Kevin Packman, a Miami lawyer who represents taxpayers running afoul of the IRS, says he is amazed that even sophisticated CPAs with major corporate and individual clients seem unaware of the international push against money held offshore. Tax lawyers around the world tell of clients -- often expatriates -- who are becoming increasingly worried about being ensnared in the tightening net, thanks to publicity surrounding tax avoidance test cases in Europe and the U.S.

One lawyer tells of trying to alert a client in Argentina about the risks of failing to disclose information to authorities in the client's home country. Even so, the client persisted in wanting to keep income under wraps. But tax lawyers and wealth managers from Basel to Boston say the risks of doing so are rising. "It's obvious that there's a growing intolerance of tax avoidance in the Western world," says Ted Wilson, a senior consultant at Scorpio Partnership, a London-based strategic consultancy to those who advise wealthy clients.

Of course, when the cat is in Zurich or Malta, the mice will find other havens. Asset managers, tax lawyers, and investigators tell BusinessWeek that wealthy evaders are taking a closer look at new frontiers for concealment. One such nation is the Republic of Vanuatu, a tiny, tax-free South Pacific archipelago 1,000 miles from Australia. Local officials even promote their tax haven status to potential clients. "Attractions for the foreign investor" include "extensive secrecy protections," according to a Vanuatu business and taxation guide.

Vanuatu is a haven that has yet to prove itself in our eyes. More interesting will be how rising Asian economies and offshore financial centers such as Singapore and Hong Kong deal with a rising level of interested customers. They have not shown any great welcome mat to proceeds from money laundering, but turning over tax evaders to their home countries is another matter.

Wealthy individuals looking to evade taxes likely will always find ways to circumvent the law. Yet as enforcement finds new ways to share information, the number of prosecutions is expected to rise. That has put pressure on well-known tax havens, such as Liechtenstein, either to shape up or face the full brunt of global tax authorities. In fact, there are signs things are already changing. Says Strategic Tax Planning's Feingold: These days, "among experienced practitioners, no one would ever use Liechtenstein."

June 9, 2008

The evidence about the increased number of American's applying to become dual citizens is largely anecdotal so far, but is also convincing. This article focuses on people applying for citizenship in EU countries. Motivations reported vary: economic opportunity, a kinder and gentler lifestyle, flexibility, and as a backstop in case things deteriorate further in the U.S. The idea that greater economic opportunities may lie outside the U.S. is fairly new, and will probably be with us for a while -- perhaps generations.

While the thresholds for citizenship are lenient in some cases, many people will not qualify. In that case, the remaining option is to acquire economic citizenship.

For millions of Europeans who braved the Atlantic Ocean for a glimpse of the Statue of Liberty and dreams of a lavish life, there was little thought of ever emigrating back. Yet for a new generation of Americans of European descent, the Old Country is becoming a new country full of promise and opportunity.

The creation of the European Union and its thriving economy is very appealing for Americans in a global economy. "With an EU passport, I can live and work in 27 countries," said Suzanne Mulvehill of Lake Worth, Florida. "With a U.S. passport, I can live and work in one."

Americans can claim citizenship in any of the 27 European countries that are in the EU based on the nationality of their parents, or in some cases, grandparents and great-grandparents. Citizenship in one of those countries allows you to live and work in any EU nation.

Since the United States does not keep statistics on dual citizens, it is impossible to know exactly how many people have applied for citizenship in Europe. But it is estimated that more than 40 million Americans are eligible for dual citizenship, and a growing number of Americans want to try their luck elsewhere.

"I have to say that over the past few years, calls I never would have received before have been made to the office," said Sam Levine, an immigration attorney in Palm Beach Gardens. "It's not like a tidal wave, but it's certainly more substantial, and it's remarkable."

He is receiving calls from people like Mulvehill, executive director of the Emotional Institute, a Lake Worth-based company that trains entrepreneurs. Mulvehill's mother was born in Romania, which became a member of the European Union last year. She is obtaining Romanian citizenship, which she estimates will have taken about three years, a ton of paperwork, $750 in fees and a trip to the Romanian consulate in Washington. But once she receives the passport, probably early next year, she'll be able settle anywhere in the EU.

"I recognized for the first time in my life that being American had limits," Mulvehill said, "and that if I really wanted to become what I call a global citizen, then I needed to tap into all my resources to expand my ability to serve entrepreneurs not just in Lake Worth, which is one town, and not just in Florida or in America or North America, but on the globe."

Globalization is a word on the mind of Lauren Berg, a recent college graduate from Michigan who is obtaining Greek citizenship based on her grandfather. She plans to move to Paris, brush up on her French and engross herself in the European business world.

"It's definitely a really good thing to have on your résumé with business going so global," Berg said. "I probably never would have done it if it wasn't for the EU, but at the same time I've always been extremely proud of my Greek heritage."

But not everyone is so excited about this increasing trend. "I understand the impulse: You can get a better deal over there," said Stanley Renshon, a professor at the City University of New York and former president of the International Society of Political Psychology. "Whether it's good for the American national community is quite a different question."

Renshon belongs to a faction of immigration experts that believes dual citizenship diminishes the American identity. "The devaluation of American citizenship for the sake of comparative advantage strikes me as fairly self-centered," Renshon said.

Self-centered people. The horror! The horror!

Dual citizenship became a major issue during the War of 1812, when the British military tried recruiting, and in some cases forcing, British-born American citizens to fight on Britain's side.

For years, being a dual citizen was seen as unpatriotic, and until 1967 it was possible for the United States to revoke American citizenship for people who voted in foreign elections. But in the 1967 Afroyim vs. Rusk decision, Supreme Court justices ruled 5-4 that it was unconstitutional to bar dual citizenship.

"It was the high point of the 1960s and individual rights," said Noah Pickus, the associate director of the Kenan Institute for Ethics at Duke University. "So the notion that you could take a citizenship away from somebody would seem to violate the basic notion of individual choice."

Today, immigrants who become American citizens have to swear that they renounce their previous citizenship, but it is more of a symbolic gesture, and Renshon said it is actually difficult to renounce a citizenship.

One of the biggest advocates of dual citizenship is Temple University professor and author Peter Spiro, who believes that defining one's identity by his citizenship is a thing of the past. "There are really no harms caused by individuals having additional citizenship these days," Spiro said. "It's the wave of the future, because more and more people are going to have it. It's going to multiply on an exponential basis going forward."

And as the value of the euro -- the currency shared by 15 EU countries -- rises and America's economy slumps, it is an attractive alternative for Amber Alfano, a recent University of Florida graduate who is becoming an Italian citizen like her father.

"I'm doing it as an exit strategy of sorts," Alfano said. "I like knowing that I have another place to go if things get even worse here, or if I just get tired of running on the American mouse wheel. "My dad was actually the one who put a bug in my ear about the whole citizenship thing. He said that Europeans are more interested in the quality of life than the quantity, and that it was a good place to have and raise children because of the way their social systems work. I don't care much about the child-rearing part, but I would gladly trade in some of my material possessions for a little flat, a scooter and more vacation."

Levine, the Palm Beach Gardens immigration attorney, was born in Canada and has received calls from people also interested in obtaining Canadian citizenship. He also understands the European appeal. He said he is proud to be an American and proud of what the U.S. has accomplished on a global scale in the last century but that there are some advantages to living elsewhere. "You have to look at things like how hard people work here and how little vacation time people get here," Levine said. "A lot of people who live in Europe might not make same amount of money as Americans, but in some senses it's a kinder, more gentle lifestyle."

When Alfano went to fill out her paperwork at the Italian consulate in Coral Gables, she said "the waiting room was full of second- and third-generation Americans (of Italian descent) picking up passports."

Pickus said he has heard stories of parents getting their children European citizenship as an 18th birthday present -- "We didn't get you a car, but we got you an Italian citizenship."

Some, like seasonal Vero Beach resident Tony Monaco, who has been trying to get Italian citizenship based on his grandfather, bought property in Italy and learned that taxes would be much lower if he was a citizen.

For those who are moving for the EU economic boom, Hudson Institute senior fellow John Fonte -- one of the nation's leading immigration experts and critics of dual citizenship -- warns that it might not last. "I think it's a short-term phenomenon," Fonte said. "I don't think the European economy in the long run will do that well because it's a heavy socialist welfare state in most of the countries."

Mulvehill, the Lake Worth entrepreneur trainer, taught a course at Lynn University and encouraged her students to obtain dual citizenship if they were eligible. "Expand your possibilities. If you can get citizenship, why not?" she said. "The world is a bigger place than America. Look at what technology has done, creating a global economy. That, in my opinion, is what has created this phenomenon."

Every country has its own process for obtaining citizenship. Ireland, Italy and Greece are among the most lenient in terms of letting an individual claim citizenship not just from a parent but from a grandparent or possibly a great-grandparent.

Even in countries that allow an individual only to claim descent based on a parent, in many cases the new citizen can pass the citizenship on to his child. Eric Hammerle, a Vero Beach resident whose father was born in Germany, said it was easy for him and his 16-year-old son Nick to become German citizens.

They acquired the necessary documents -- birth, marriage and death certificates -- and took them to the German consulate in Miami. "The whole process took about 20 minutes," Hammerle said. "They read over the documents, came back and said, 'Congratulations, Germany has two new citizens.' It was a fee of $85."

June 16, 2008

“I do not see any basis for economic analysis that would not throw up really alarming signals.”

Lord William Rees-Mogg wonders whether a repeat of the 1930s is in the offing.

Economic theory tries to deal with a limited number of factors and the mechanisms by which they interact. The main factors are population, food, energy, property, and manufactures, all of which are physical realities capable of being counted. They are the beans that bean counters count with. There are four mechanisms of exchange: money, barter, markets, and allocation. These are the mechanisms by which the beans are exchanged.

Different economists have put emphasis on different factors. David Ricardo, the classical economist of the 19th century, was a banker who gave special attention to money. Thomas Malthus, another founder of 19th-century theoretical economics, paid particular attention to population. Indeed, he is the founder of population studies.

Karl Marx, the founder of socialist theory, paid attention to manufactures, and to population, seen particularly as labor. The leading 20th-century economists, such as Maynard Keynes, Irving Fisher and Milton Friedman, have been derivatives of the Ricardian or monetarist school, though Keynes was a rebel against classical Ricardian orthodoxy.

Unfortunately, it is impossible to think of all these factors simultaneously. Perhaps there will be a time in the future when some supercomputer will be able to calculate the interreaction of the global economy holistically. We are still far away from that day.

At present, the limitation of the human intelligence means that we can concentrate effectively on only one of these factors at a time. The selection of any one of these factors or interreactions for study draws attention away from other, equally important factors. One can be both a Ricardian or a Malthusian, but one cannot concentrate on both aspects of economic analysis simultaneously without a loss of focus.

However, one can simplify economics by using the different physical factors as a checklist to detect signs of difficulty. That does make economics the gloomy science. At present, the world is suffering from a crisis of overpopulation, with the human population stretching the food supply beyond its limits. Population is continuing to grow, although there is already an inadequate food supply for 6 billion people and famine is growing in Africa. It is possible that the 21st century will replace the 19th as the century of famine.

Food is very closely linked to energy. Food production is dependent on the oil industry, in cultivation, in transport, and in protection against pests. The food price has followed the oil price, to the point at which millions of people cannot afford a minimum food supply. That is already a catastrophe, and the trends are unfavorable. There is also a significant shortage of water.

Markets have flagged food and energy as danger areas for the world economy, by raising their prices. Property and manufactures are secondary to food and energy, in that their prices can change without immediately affecting the price of food and energy. In fact, there has been a worldwide fall in housing prices, particularly notable in Britain and the United States, at a time of steep increases in food and oil prices. The price of manufactures has been held down by the growth of low-cost Asian manufactures.

There is much discussion of the scale of the global economic crisis. Some people expect it to cause a crisis comparable to the Great Depression, a wiping out of capital values, a liquidation of global debt. We cannot yet be sure, but we can see that the main factors of global economic development are all in difficulty. On the one hand, there is oil at $130 per barrel -- on the other, there are banks writing off billions of dollars of assets.

I do not see any basis for economic analysis that would not throw up really alarming signals. These adjustments of the fundamental factors in any analysis put huge pressures on every government. In the 1930s, most governments were destroyed by the slump. In Britain, Labor lost office in 1931. In Germany, Hitler came to power in 1933, as did Franklin Roosevelt in the U.S. I fear that process will be repeated, even if only by democratic defeats. The storm of the world is still rising.

June 16, 2008

Lots of reactions to the Irish voters' rejection of the proposed EU Lisbon treaty, which allegedly left Europe "reeling". We do not pretend to know the treaty's details sufficiently well to have an intelligent comment on the matter right now, but all the wailing and gnashing of teeth from the politicians instinctively tells us that the Irish smelled a rat and voted accordingly.

Europe was left reeling ... by Irish voters' rejection of an EU reform treaty, even as French and German leaders argued it could be kept alive if other members pushed on with ratification.

The result of the Irish referendum was a major blow, with Czech President Vaclav Klaus insisting that the Lisbon Treaty was now "finished" and Luxembourg Prime Minister Jean-Claude Juncker conceding it would at least miss its January 1 target for coming into effect.

Austria said the Irish "no" vote was an unmitigated "failure" for Europe. "You cannot dress it up any other way," said Austrian Foreign Minister Ursula Plassnik, while her Spanish counterpart Miguel Angel Moratinos acknowledged it was "not good news."

Other leaders and senior EU officials refused to sound the death-knell for the treaty, which aimed to create a full-time EU president and foreign policy chief and streamline the workings of the 27-member bloc.

Sounds like a major effort to create the "United States of Europe". Perhaps the Irish voters got a case of "been there, done that," if only vicariously.

"We take note of the democratic decision of the Irish citizens with all due respect, even though we regret it," French President Nicolas Sarkozy and German Chancellor Angela Merkel said in a joint statement. Noting that the Lisbon Treaty has already been ratified by 18 EU countries, they said they hoped other member states would "continue the process" -- a call echoed by European Commission chief Jose Manuel Barroso. ...

Britain was among those who quickly pledged to move ahead and adopt the treaty. "It's right that we continue with our own process," said Foreign Secretary David Miliband, shortly after Irish Prime Minister Brian Cowen said there was no "quick fix" following his country's "no" vote.

Gordon Brown's government had come under strong pressure to offer British voters a referendum on the treaty, but the Lisbon Treaty will proceed towards its third reading in its parliament's upper House of Lords [this week]. ...

The Netherlands, whose voters helped plunge the bloc into one of its worst crises three years ago by rejecting the treaty's predecessor, the draft constitution, also vowed that it would ratify the text. But Czech President Klaus argued that it was "no longer possible" to carry on as before. The Czech Republic, which will take over the presidency of the EU in January, is among those that has yet to ratify the treaty.

The current holder of the EU presidency, Slovenia, said the treaty remained a key building block in efforts to make Europe "more efficient, more democratic and transparent."

While most countries said they accepted Ireland's verdict, their disappointment at the result was palpable. "By voting no, the Irish people have put the brakes on the development of the EU. The Irish "no" will affect us all. The EU's competitiveness is going to suffer," said Estonian President Toomas Hendrik Ilves. "The "no' to the Lisbon Treaty in Ireland, one of the EU member states that has most enjoyed the benefits of the EU, is very regrettable."

Portugal, whose capital gave its name to the treaty, was optimistic that the way ahead would become clearer after a crisis summit in Brussels yesterday and that Europe still had the desire to overcome this major hurdle. ...

Poland's Prime Minister Donald Tusk said it was important to avoid a "two-speed" European structure, adding that Europe must find "solutions which take into account the fears of the Irish, without throwing into question the treaty's reforms. ... The European Union has overcome difficult moments and each time it has come out of the crisis stronger, ready for new endeavours and challenges. I am sure that this time things will be the same."

Poland's eurosceptic President Lech Kaczynski has so far failed to sign the treaty which was approved by his country's parliament in April. Tusk said Kaczynski could sign the treaty shortly.

June 17, 2008

A new breed of online services is putting the law within the reach of everybody.

Technology is starting to work its way into that vast, amorphous blob that is the set of all court rulings out there. It turns out that that blob has some crucial similarities to the World Wide Web itself, so tools created by the likes of Google will apply usefully to the challenge of cataloging and cross-linking legal cases. The wheels are in motion to ultimately either put a lot of law researchers out of business, or at least reduce their hourly rates for tasks that can be largely accomplished via computer searches.

Philip Rosenthal and Edward Walters were young lawyers at Covington & Burling, a prestigious Washington firm, when they got an unusual request from a large corporate client to start looking up legal case histories on the Internet. The client was fed up with paying the firm's stiff bills for legal research.

At first they were shocked. Rosenthal and Walters were used to racking up hours on the online research services lawyers snidely call Wexis, after Westlaw, a unit of Canada's Thomson Reuters, and LexisNexis, owned by Anglo-Dutch publishing conglomerate Reed Elsevier. Big law firms pay as much as $4 million a year for access to Westlaw and Lexis.

This was in 1999. When the two lawyers started trolling for cases on the Web, they noticed courts around the country were beginning to post filings online. Why pay Westlaw and LexisNexis so much for documents that were already in the public domain?

“The courts produce this stuff at taxpayer expense, it gets shipped to these foreign companies for free and then they charge us to read it,” says Rosenthal, a Caltech-educated physicist who graduated from Harvard Law School.

“I thought, 'This is completely stupid. I have got half a mind to start the alternative to Lexis/Westlaw,'” adds Walters, who attended law school at the University of Chicago and was once a speechwriter for George H.W. Bush.

Eight years and $7 million later Rosenthal and Walters have their alternative, an online legal-research service called Fastcase. It uses computer algorithms to perform all the case indexing now done by the thousands of human editors at Westlaw and Lexis. Operating out of a slightly seedy Washington office building, Fastcase brings in less than $10 million a year in revenue, hardly a threat to the Wexis duopoly, which last year roughly split a combined $1.6 billion in pretax profit on sales of $6.5 billion.

Disruption is in the air, however. Fastcase sells bulk memberships to state bar associations for as little as $2 per member per year, a compelling reason for law firms to at least try it out. Just as cheap personal computers undermined the mainframe business in the 1980s and open-source programs like Linux and MySQL are challenging Microsoft and Oracle today, outfits like Fastcase are attacking Wexis' stranglehold on legal research from the bottom up.

A mix of for-profit and not-for-profit firms have missions similar to Fastcase's, including PreCydent, Public.Resource.org and Collexis Holdings' Casemaker division. They are assembling a digital version of the collections that fill miles of shelves at law libraries across the country.

What people will do with it is anybody's guess. Public.Resource.Org is the brainchild of Carl Malamud, a data-access advocate who in the mid-1990s started putting filings from the Securities & Exchange Commission online for free. The SEC later took up his idea and created the Edgar online service for accessing filings. Malamud prodded the U.S. Patent & Trademark Office to do the same with patents in 1998.

With the help of influential backers like eBay founder Pierre Omidyar's foundation, Malamud's Public.Resource.Org is filling up a 24-terabyte Sun Microsystems server with case law going back to 1754. (That is a lot of bytes, enough to type out 12 million novels.) Malamud bought some data from Fastcase while building his service, which is available for free on the Web. "If we do it and do it right, there are 100 other people who will copy our data and use it in interesting ways," Malamud says.

Bigger law firms will continue to use Westlaw and Lexis for a long time. The established vendors have the most current and comprehensive databases, and, says Thomas Fleming, lawyers know them best. Fleming oversees the research department at 150-attorney Jeffer Mangels Butler & Marmaro in Los Angeles. His firm uses Fastcase for quick searches and to cross-check citations, but he says it has a "phenomenal niche" serving smaller firms that cannot afford Wexis.

Those who would unseat Wexis have the arduous task ahead of digitizing all of the court records still in books. Optical scanning systems have a 98% accuracy rate, which means an unacceptable 40 errors per page. So Fastcase and others are paying Indian data-entry firms 40 to 60 cents per 1,000 characters to "triple-key" the books into digital form, with three typists entering the text and a computer picking the version at least two agree upon. Malamud estimates it will cost $6 million to digitize all 10,000 books covering the entire history of district, appellate, Supreme Court and bankruptcy law. The Indian typists have to leave out the editors' notes in the Westlaw or risk copyright infringement.

Another tricky task will be training computers to determine whether a holding in a case has been overruled or altered by a subsequent decision. The army of lawyers and editors at Westlaw and Lexis do this now, coding cases with helpful symbols like red flags to warn lawyers that a particular section of a case is no longer valid. "In the free-case world, it is all probably there, but is there a way to relate one case to another?" asks Richard King, chief operating officer of Thomson Reuters's West division

Working in the open-sourcers' favor is the fact that what lawyers do for a living is quite similar to what Google's software algorithms do with Web sites. Lawyers prepare cases by looking through old court decisions to find arguments that will help their cause. Then they rank those cases according to a well-established hierarchy. Decisions that have been cited frequently by other judges are considered more reliable than ones that nobody cites. Appeals courts rank higher than trial courts. Recent decisions trump old, stale ones. Google's servers use similar logic, ranking Web sites according to how many other sites link to them and how lofty the referring sites are in the ranking.

The similarity struck Thomas Smith, a professor at the University of San Diego School of Law, a few years ago. Thomas got LexisNexis to share data on millions of court citations, and with the help of mathematician Antonio Tomarchio, he showed that citations display a highly skewed distribution, similar to that of links among Web sites or the likelihood that top movie stars will appear in a film together. Out of 4 million cases he studied, 400,000 were not cited at all, and 773,000 were cited only once. Only 0.3% had been cited more than 500 times.

Smith and Tomarchio used this knowledge to develop a free search engine called PreCydent. In recent tests Smith and others have shown that PreCydent turns up those cases legal experts consider the most authoritative more reliably than any of the existing legal-research services.

"These little guys [Fastcase and PreCydent] are throwing a lot of Internet technology at the problem, and they may be getting close to replicating human analysis," says David Curle, an analyst at Outsell, a market research firm that tracks the legal information business.

Fastcase, with seven full-time programmers, is working on new ways to display data, including a four-dimensional chart that sorts cases by relevance and time (see chart). Type in "abortion" and "privacy," for example, and Fastcase displays a field of circles, with the largest at 1973: Roe v. Wade, the U.S. Supreme Court decision that legalized abortion. Click on the circle and the case is displayed, with hypertext links to other cases cited within it.

This is a fundamental break from the way legal research has been performed since the mid-1700s, when Sir William Blackstone revolutionized the practice of law by putting English common-law cases into categories. A century later Westlaw founder John West began collecting U.S. court decisions as they were issued and compiling them in volumes he called "reporters," so lawyers could keep track of the law as it evolved. Many courts still require lawyers to use the West volume and page numbers in their citations.

The Ohio Bar Association built the first large-scale computer legal research system in the late 1960s, using technology developed for the U.S. Air Force. That system later became LexisNexis. Both Westlaw and LexisNexis still index cases according to preset legal topics, lumping them into categories in much the same way as Blackstone did. "I think of it as pre-computer technology," says Fastcase's Walters. "Pull a book off the shelf and see how your point of law fits into their outline."

Tradition may be an obstacle now, but never underestimate what smart programmers and a lot of cheap processing power can do.

June 27, 2008

Former UBS private banker Bradley Birkenfeld has followed through with his previous agreement to plead guilty to a variety of charges in connection with a U.S. tax evasion investigation. More background on the case may be found here.

Of interest in this round of coverage are the details of how he "helped" the bank's U.S. clients evade reporting requirements and taxes. It is a pretty good case study in what not to do. Also interesting are some tidbits on the business pressures on Swiss banks that might lead their employees to act as they did, and why you do not want to do business with banks like UBS if you value your privacy.

Banker Bradley Birkenfeld has pleaded guilty to conspiring with an American billionaire real estate developer, Swiss bankers and his co-defendant, Mario Staggl, to help the developer evade paying $7.2 million in taxes by assisting in concealing $200 million of assets in Switzerland and Liechtenstein, the U.S. Justice Department announced on Thursday [June 19].

Birkenfeld, an American citizen employed by a Swiss bank [UBS; we are not sure why the article assiduously omits the Swiss bank's name], pleaded guilty before U.S. District Court Judge William J. Zloch in Fort Lauderdale, Florida, on 19th June. During the plea, Birkenfeld admitted that between 2001 and 2006, while he was employed as a director in the private banking division of a large Swiss banking firm, he routinely traveled to and had contacts within the United States to help wealthy Americans conceal their ownership in assets held offshore and evade the payment of taxes on the income generated from those assets.

According to statements and documents filed with the court, Birkenfeld's services to American clients violated a 2001 agreement that the Swiss bank entered into with the U.S. Under the terms of the agreement, the bank would identify and document any customers who received reportable U.S. source income or would withhold and anonymously pay a 28% withholding tax. This agreement was a major departure from historical Swiss bank secrecy laws under which Swiss banks concealed bank information for U.S. clients from the IRS.

It approximates the agreement that the Swiss government painstakingly negotiated with the EU, which for EU clients of Swiss banks has the same report or withhold option. We see in this blog post from Sovereign Society's Bob Bauman what he thinks about UBS as it pertains to this matter:

Long time members of the Sovereign Society know that we never have recommended UBS as a Swiss bank for offshore accounts -- and that was not only because of its monster size and impersonal service. What concerns us is the UBS anti-privacy policy.

The merger of Swiss Bank Corp and Union Bank of Switzerland creating UBS AG was approved by the U.S. Federal Reserve Board in 1999 -- but only after UBS supinely agreed to provide the U.S. government with all information "necessary to determine and enforce compliance with ... [U.S.] federal laws." This surrender went far beyond the financial information required to be exchanged under the existing U.S.-Swiss Tax Treaty and it also nullified Swiss bank secrecy laws that usually require a court order to release private banking information.

UBS caved in after the U.S. government threatened to shut down the bank's extensive American financial operations. The UBS sell out was bad news for financial privacy seekers -- and it blew a large hole in the much vaunted concept of Swiss "bank secrecy."

Then and now we advise U.S. and other potential depositors to avoid UBS AG and any Swiss bank that has active U.S. financial operations and offices beyond a mere "representative office." A similar privacy killing deal was made between the Fed and Credit Suisse when that leading Swiss bank merged with First Boston.

So the current case represents the fruition of the UBS/Fed agreement. Note the statement that Swiss banks are usually responsive to court orders. But that would require that the U.S. government spend extra time and have some sort of real evidence before they could obtain the required information. Due process is not convenient, but it is not supposed to be.

It is believed by the U.S. authorities that, when the bank notified its U.S. clients of the requirements of this agreement, many of the bank's wealthy U.S. clients refused to be identified, to have taxes withheld from the income earned on their offshore assets, or to sell their U.S. investments. These accounts were known at the Swiss bank as the "United States undeclared business."

According to evidence provided by Birkenfeld to the court, managers and bankers at the firm, including Birkenfeld, assisted the U.S. clients in concealing their ownership of the assets held offshore by helping these wealthy customers create nominee and sham entities. It is thought that this was done to prevent the risk of losing the approximately $20 billion of assets under management in the United States undeclared business, which earned the bank approximately $200 million per year in revenues. To this end, Birkenfeld, managers and bankers at the Swiss bank, and U.S. clients are accused of preparing false and misleading IRS forms that claimed that the owners of the accounts were sham offshore entities and failed to prepare and file IRS forms that should have identified the true U.S. owner of the accounts.

The $20 billion estimate comes from U.S. federal investigators. With $1.9 trillion under management, a $20 billion loss in assets seems pretty insignificant to UBS. The market value of client assets probably fluctuates that much each day. No doubt the $200 million in revenue (whoever came up with the $20 billion number must have assumed a 1% of assets management fee) was far more significant to the specific bank employees involved than to the bank as a whole, so the incentive was to do whatever it took to keep the clients from walking.

To further assist U.S. clients of the bank in concealing their offshore accounts, Birkenfeld admitted that he, Mario Staggl, additional private bankers and managers at the Swiss bank, and others advised U.S. clients to place cash and valuables in Swiss safety deposit boxes, and purchase jewels, artwork and luxury items using the funds in their Swiss bank account while overseas.

It is unclear how exactly these later actions are actually illegal. Tangible property held offshore does not need to be reported. Given the other actions which clearly were illegal, the issue is somewhat moot. The actions make for good press in any case.

Additionally, they advised the clients to misrepresent the receipt of funds from the Swiss bank account in the U.S. as loans from the bank, destroy all offshore banking records existing in the U.S., utilize Swiss bank credit cards that they claimed could not be discovered by U.S. authorities, and filed false U.S. individual income tax returns that omitted income earned by the clients, and fraudulently misrepresented that the clients did not have an interest in and signature authority over accounts held offshore.

Birkenfeld admitted that from at least 2001 through the date of the indictment, he conspired with Staggl, the American real estate developer, additional private bankers and managers employed by the Swiss bank, and others to defraud the U.S. of approximately $7.2 million in tax revenue by assisting the real estate developer in evading income tax on the income earned on $200 million of assets hidden offshore in Switzerland and Liechtenstein.

To circumvent the requirements of the agreement between the bank and the IRS, Birkenfeld and others conspired to conceal the American real estate developer's ownership and control of the $200 million of assets hidden offshore by creating and utilizing nominee and sham entities, including Bahamian corporations, Liechtenstein trusts and Danish corporations.

Now comes the sanctimonious pronouncements from the lower-level functionaries of the true criminal party here:

"I want to thank the attorneys and agents of the Southern District of Florida, the Department of Justice's Tax Division and the Internal Revenue Service, who have worked diligently on this matter," commented R. Alexander Acosta, U.S. Attorney for the Southern District of Florida. "It is sad that individuals with wealth and access to offshore accounts would abuse their advantages and use schemes to evade tax obligations. We must fully investigate and prosecute these offshore schemes."

"U.S. taxpayers who honestly report their income and pay their taxes can rest assured that those who do not, those who secrete and conceal their assets offshore to avoid paying their fair share, will be investigated and prosecuted by the IRS and Department of Justice," added John A. Marrella, Deputy Assistant Attorney General of the Tax Division.

"I believe this case will send a strong signal to anyone hiding money in offshore bank accounts to avoid paying the taxes they should. The IRS will pursue people using offshore accounts in this manner as well as financial advisers and others who orchestrate these tax fraud schemes," stated IRS Commissioner Douglas Shulman.

Besides the IRS agents involved in this case, the prosecution is being handled by senior trial attorney Kevin M. Downing and trial attorney Michael P. Ben'Ary of the Justice Department's Tax Division, as well as Assistant U.S. Attorneys Jeffrey A. Neiman and Jeffrey Kay of the US Attorneys Office for the Southern District of Florida.

Yes, turn over our cut or we will break your legs. Having said that, it is not very smart to put yourself at risk like the U.S. clients of the Swiss bank have when you already have more money than you can spend in a lifetime. Besides the reliance on a secrecy that wasn't, we just do not understand why they went the route of utilizing sham and nominee entities when they had plenty of money to do it the right way.

June 26, 2008

The recent death of comedian George Carlin at the comparatively young age of 71 must be regretted by anyone who is tired by the all the untruths that dominate modern day consensus reality, political and cultural. For he untiringly spit in the eyes of the originators of those untruths, and got a good laugh while doing it.

The death of comedian George Carlin came as a shock. Not because I knew him personally, but as a visceral reaction to the end of an era, the era of my childhood. I am a baby boomer, born in the ‘50s and coming of age in the ‘60s and ‘70s. Sex, Drugs, Rock and Roll: that great cultural leap off of the cliff like a horde of burnt out lemmings. This was the age in which dogma was criticized and overthrown: mass protest brought the Vietnam War to an end, women's liberation, and civil rights stepped to the forefront of public consciousness. A vigilant media, tired of the lies of Richard Nixon, effectively brought his Presidency to an end. The state was staggered with body blows and sent reeling against the ropes.

George Carlin owed his livelihood to his unique ability in skewering the dogma of conventional wisdom on prime time in front of millions. We all knew what he was against, and as such he was one of us, a David throwing rocks at Goliath. ... Carlin was able for more than 40 years to identify the big lie and how it masquerades behind the mask of scientistic and legalistic facade. Dogma to Carlin was a dragon to be slain whenever and wherever it reared its noxious head.

The first step to solution of a problem is identification, and George Carlin was a master at identifying many of them. Carlin used humor as his primary tool in ironic perception, and with that lever he pried open many a mask over the facade of conventional wisdom. His cultural role was not to solve problems, but to identify them. No matter how bad things were he could always bring a smile and a laugh as one of the benighted speaking his mind regardless. He kicked political correctness right in the teeth while Bill Maher was still wearing diapers.

My favorite Carlin quote came from a monologue I watched in the ‘70s one night at a friend's house after a multi-hour skull cracking study session in Angell Hall.
"I love people, I hate groups.
 People are smart, groups are stupid." ~~ George Carlin
These simple words embodied Carlin's philosophy of opposition to the status quo, the conventional wisdom. He rarely articulated who the enemy was, since his audiences knew it a priori. For baby boomers it was clear who it was -- the man, the establishment. His philosophy embodied all that economic freedom and individual liberty enshrine. For Carlin individuals were sacrosanct and groups to be despised.

Individuals provide mankind faith, science, culture, music and philosophy. Groups take it away with lies, deception, theft and murder. While an avowed atheist, he was, paradoxically, a man of deep faith. Faith in the ability of the individual to create meaning in life, despite one's brief duration of life, despite the opposition of the privileged and the powerful. He stood on their stage and spat right in their eye.

Carlin knew that groups exist to imprison the individual, to place them in castes, to assign them limited possibilities, to dull their senses into acceptance of the inevitable, to use rape as the powerful desire. He recognized that in groups we find the bestiality of primitive man ascendant to run roughshod over the benighted masses. The cowardly hide behind groups as protection against being held accountable for their deviant behavior. During his professional career he saw Richard Nixon pervert the mantle of the leader of free world for cynical personal ends. In the last decade of his career he saw the draft dodging duo of Bush II and Evil Dick Cheney reincarnated as Nixon gone wild with an unlimited budget ($4 trillion in fresh debt for the unborn) and a facade of legitimacy to maim, crush or kill anyone desired.

Carlin railed against war, poverty, racism, sexism, how the privileged dupe the commoner in order to fleece them. He had no answers for these problems only a firm conviction that group dynamics keep these perversions alive across the generations. The answer lies, where it has always lain, in the politics of Eighteenth Century Jeffersonian Democracy, that is to say, in the individual.

The world is a grayer place without George Carlin in it. Still I take comfort in the image of George Carlin standing with St. Peter in front of the pearly gates keeping the assholes out.

June 30, 2008

How will the incoming (an assumption, to be sure) U.S. administration deal with the incontrovertibly dire federal government deficit? If it is Obama, a good bet is that an early target will be the "low-hanging fruit" of wealthy tax evaders who are accused of using offshore havens, and corporations that use a variety of offshore entity-juggling strategies to reduce their tax bills. After all, Obama co-sponsored the "Tax Haven Abuse Act" introduced last year.

When John McCain or Barack Obama enter the White House next January, either one will face a crucial problem: How to raise revenues or cut spending to shrink the massive federal budget deficit.

Tax economist Martin Sullivan suspects Obama will go for the "low-hanging fruit" first -- that is, chasing down wealthy tax evaders, individual and corporate. Obama signed on to the Tax Haven Abuse Act, a bill introduced in 2007 by Sens. Carl Levin, D-Michigan, and Norm Coleman, R-Minnesota.

Levin figures secretive offshore tax havens cost the federal government $100 billion in lost tax revenues each year. That is part of the total "tax gap" -- the amount of unpaid taxes owed by individuals, corporations, and other organizations -- estimated by the IRS to be $345 billion. As Levin sees it, these tax evaders are "willing to rob Uncle Sam and offload their tax burden onto the backs of honest taxpayers." His bill will be reintroduced next year. ...

Ah the blinding power of an ideology. It flat does not seem to occur to Levin and his ilk that an alternative interpretation of things is that it is Uncle Sam who "offloads" the burden of his beneficiaries onto the backs of everyone it can shake down. Even forgoing a fundamental reorientation of beliefs such as that, what about the huge amount of waste in the federal budget, starting with the multi-trillion dollar boondoggle in Iraq? Is it unreasonable to ask that they mount some rhetorical offensive against all those who feed at the federal trough at the expense of everyone else?

Tax havens have existed for many decades. That is because some commercial banks have effectively blocked legislation to curtail their activities, explains Lucy Comisar, co-chair of the U.S. wing of the Tax Justice Network, a London-based group. Banks, she charges, make a "lot of money" from placing private financial accounts in such places as the Cayman Islands, Bermuda, the Isle of Man, etc. The business has been growing for years.

The Tax Justice Network is a reliable voice in favor of increasing taxes and getting rid of "loopholes." For more commentary on TJN, see this posting. And you have to love Ms. Comisar's name. Very fitting.

But the tolerance toward tax havens on both sides of the Atlantic appears to be weakening. In Europe, tax havens were brought into the public eye this year by a juicy scandal involving secret bank accounts in Liechtenstein. A multimillion dollar sum was paid to an informer who provided hundreds of names behind tax-dodging accounts held by German business tycoons, about 100 American taxpayers, and tax cheats from other nations.

In Washington, the IRS stated in February that it is "initiating enforcement action" against the 100. It said "combating offshore tax avoidance and evasion are high priorities." But so far, no further word on the action has emerged.

The Bush administration, in Comisar's view, has been inadequate in tackling tax-haven losses. While McCain has not talked about tax havens on the campaign trail, Obama has frequently referred to Ugland House in Grand Cayman, a building that houses thousands of tax haven corporations, as "the biggest tax scam on record."

Comisar is hopeful Obama will push for the Levin bill, if elected. Maybe closing or limiting tax havens is "an idea whose time has come," she says.

Sullivan sees greater efforts to close tax havens as a "twofer." It would raise substantial revenues. It also would trim the growing income gap in the United States between the wealthy and the middle and lower classes, since the wealthy are more likely to use tax havens than those with less income.

Probably true. But does anyone believe that those who control the political process are going to allow themselves to be caught in a net of their own making?

An IRS report obtained by the Wall Street Journal in March indicated the nation's top 400 income-tax payers (with at least $100.3 million in adjusted gross income) controlled 1.15% of the nation's total income in 2005 -- twice the share they controlled in 1995. Over that same period, the average effective income tax rate paid by this same group fell from 30% to 18%. The Bush tax cuts aided this shift. Also, there is a suspicion the use of tax havens has increased. Money transfers can be done electronically and easily with the help of a bank. It is no longer necessary to cart bushels of money in a briefcase to some remote island.

Joel Slemrod, a tax economist at the University of Michigan Business School in Ann Arbor, sees tax havens as "clearly a bad thing." They enable many small island nations to "commercialize" their sovereignty at the expense of mostly industrial nations, he says. Tax havens have given tiny nations a lucrative job-creating business. The Cayman Islands, for instance, has 5,400 financial-services employees.

Another in a distiguished line of academic economists who end up serving as scribes and apoligists for the state. But the subject of academics is another story.

June 30, 2008

Too much time has passed since the U.S. annexed a major portion of Mexico for this to qualify as irony, but students of history will surely experience some amusement -- what goes ‘round, comes ‘round indeed. The Mexican peso and economy have outperformed their U.S. couterparts sufficiently that some Mexicans are buying U.S. property on the cheap.

When Texas successfully seceded from Mexico in 1836, its population largely consisted of recent European immigrants who came in via the U.S. So the idea of "Mexicans" taking back what was forcibly taken from their ancestors does not really fly. But that corrupt, socialist Mexico is outperforming the great imperialist to the north is surely another sign of the decline and fall.

More than a century and a half after Mexico lost Texas to the U.S., Virgilio Garza wants a piece of it back. A "Texas for Sale" sign and cowgirls in boots and white hats greeted Garza at the Convex center in Monterrey, Mexico, earlier this month. A Monterrey developer and investor, Garza was in search of foreclosed U.S. property to buy.

"Texas is like our home," said Garza, 45, who joined hundreds of Mexicans poring over lists of Texas properties at the 4-day event. Garza, who owns manufacturing sites and other land in Mexico, said he and five partners may invest as much as $8 million in Texas. "We believe there can be some opportunities."

A rising peso and an economy growing faster than the U.S. have given some Mexicans the buying power to take advantage of the housing slump in Texas, which the U.S. annexed in 1845 after Texans gained independence from Mexico nine years earlier. A 3-year war followed and ended with Mexico ceding about half its territory, including Arizona, Nevada and California, to the U.S. under an 1848 treaty.

The peso has gained 5.9% against the dollar since the beginning of the year. ... The economy, which rose 2.6% in the first quarter from a year ago, is expected to grow 2.6% this year ...

Marco Ramirez of McAllen, Texas, is among those trying to sell foreclosed Texas homes to Mexicans. Ramirez's company, called Now! Co., has bought 32 Texas properties and has options on 88 more. His best prospects are Mexican buyers, especially in Monterrey, 150 miles from the Texas border, he said. "Many of these people have children who are studying in the U.S.," Ramirez said. "They've been renting or leasing and now it's a great time to buy."

Mexico is better known for providing the U.S. with cheap labor than investment. The U.S. is home to an estimated 12 million Mexican-born residents, about half of them living there illegally, according to the Pew Hispanic Center in Washington.

Sales of existing U.S. homes in April fell 18% to an annual pace of 4.89 million from 5.93 million a year ago as banks shied away from making new loans, according to the National Association of Realtors in Washington. The slump in demand pulled down the median price of an existing U.S. home in April to $202,300 from $219,900 a year ago, according to the association.

While Texas has not been hit as hard as California and Florida, where the housing boom drove up prices the most, existing home sales in Texas fell 12% from a year ago in the first quarter. Foreclosures in Texas rose 29% in the first quarter from a year earlier, with one of every 274 households in the foreclosure process, according to RealtyTrac Inc. ...

Garza and other Mexicans with money to invest believe the time is right to buy, Ramirez said. "These are very sophisticated businessmen," he said. "They realize what's going on in our country. Everybody needs cash right now and Monterrey has lots and lots of cash."

Victor Gonzalez, 48, who owns a Monterrey print shop that employs 40 people, wants to use his savings to buy a $250,000 house in a gated community in the South Texas community of Mission. "This is exactly what we've been looking for," said Gonzalez, who was wearing a black Harley-Davidson T-shirt. "We're ready to go." He said the price is $50,000 less than he expected he would have to pay. Gonzalez said he plans to turn over the shop to his children in five years and retire to Mission, where the traffic is lighter and the crime rate lower.

The only requirement for foreigners purchasing residential and commercial property in the U.S. is a valid visa to enter the country, said Jose Cuellar, a realtor with Houston-based Cornerstone Mortgage Co. who caters to Mexican clients.

Raul Fabela, owner of McAllen, Texas-based Construction, Ltd., came to Monterrey looking to sell 42 rental properties of four apartments each, double his normal inventory of available properties. U.S. buyers have dried up, he said. ... He said 26 people filled out credit applications in Monterrey. "It turned out a lot better than we thought."

For Garza, the U.S. real estate slump has opened the door to diversifying his holdings. Garza's company, Grupo Vigia, owns five industrial parks and 600 hectares (1,483 acres) of land earmarked for housing development near Monterrey. "We think there's opportunity to buy right now at reasonable prices," Garza said. "We want to keep the properties two or three years until the market turns around and then begin to develop them."

June 30, 2008

Butler Shaffer's articles are reliably stimulating. For instance, see this one on "Obedience as a Radical Act," which we have previously commented on here. Another one is posted immediately below. In Calculated Chaos: Institutional Threats to Peace and Human Survival -- first published in 1985, revised in 2004 -- Shaffer argues that that bane of life called government is a manifestation of a consensus belief system that such an authoritarian institution is necessary for life to work. But that pervasive belief creates lots institutions of an authoritarian nature besides governments. And once such institutions are created, they effectively take on lives of their own with interests and purposes independent of its members.

Now we are at the point where these institutions threaten the survival of the human species. But undermining them is not accomplished by actively working directly towards that end. What you resist will persist if the mind-set behind the creation remains in place. John Lennon summarized the way out pithily: "You tell me it's the institution, well, you know. You better free you mind instead."

My shift from minarchism to anarchism was not completely, over even substantially, motivated by a distaste for government (I already had that). Rather, anarchism is a way of looking at the human condition that does not presuppose the power relationships we take for granted. I grew to view state politics as but one manifestation of these underlying relationships.

If the way in which we organize and think about ourselves precipitates certain outcomes, perhaps we can effect different, more desirable outcomes by choosing different organizing ethics. Such an examination leads one in an extremely open-ended -- yet liberating -- direction, where these ethics and their premises are finally considered on their own merits. To quote Einstein, "The significant problems we have cannot be solved at the same level of thinking with which we created them." So how do we start to talk about that next level of thinking?

The existence of this uncharted territory, outside the pragmatic confines of our regimented, conservative society, is not directly explored in Butler Shaffer's Calculated Chaos: Institutional Threats to Peace and Human Survival. Admirably, Shaffer wastes no time arguing for his -- or any -- particular solutions to mankind's many crises and problems. Instead, he takes the revolutionary step of removing the veil of indifference and deference to the primary units through which we realize our agendas: institutions. The book is a cataloging of the myths we tell ourselves and each other to keep things comfortable and stable at the expense of our freedom.

Written almost a quarter century ago but still penetratingly relevant, Calculated Chaos tries to strip down our modern managerial society into its basic organizing ethics. Shaffer's thesis may seem awkward at first, but through careful examination of society the weight of this argument is established throughout the book
Briefly stated, the basic theme of this book is that institutions are the principal means by which conflict is produced and managed in society. Peace is incompatible with institutional activity. Stated another way, the success of institutions depends upon the creation of those conditions in which personal and social conflict will flourish. We experience so much conflict in our lives because we have permitted ourselves to be organized into self-perpetuating, self-justifying organizations with which we have identified our personalities and to whom we look for direction. We have allowed our lives to be taken over and monopolized by a variety of political, religious, educational, economic, and social agencies over which we have little, if any, influence. These entities have helped us construct the barriers that not only restrain us, but keep us separated from one another and serve as the boundary lines for the intergroup struggles of which we are part. Through these groupings, we have helped to institutionalize conflict, to make it a seemingly permanent and necessary feature of human society. Such conflict has not resulted from mere accident of inadvertence, nor has it been the product of vicious or depraved minds. Rather, for reasons to be developed herein, conflict is a condition upon which the health and well-being of institutions is absolutely dependent.
It is crucial for anarchists and libertarians to note that he is not confining this argument to the state, though he devotes a whole chapter to "the people pushers" of politics. In order to appreciate the weight of this book, you must understand that his argument applies just as much to the Catholic or Baptist churches, to the activist groups of the left and right, to the corporations, to the Kiwanis and Rotaries, and so on.

Not all groups are institutional, Shaffer argues. By institutions, he means:
"any permanent social organization with purposes of its own, having formalized and structured machinery for pursuing those purposes, and making and enforcing rules of conduct in order to control those within it."
A key distinction for Shaffer between institutional and noninstitutional forms of organization lies in part in the formality of such groups. People coming together for a common purpose of their own is not institutional, because the group is merely a convenience for each individual pursuing their interests. The problem arises when the group becomes something more than that: an entity in its own right, with interests and purposes independent of its members'. Surprisingly (for a LewRockwell.com columnist) he even challenges some Austrian sacred cows:
What begins as a simple division of labor, a system of specialization designed to allow the work of the group to get done more efficiently, becomes a division of purpose, with group members segregated into a chain of command. When this takes place, the organization is no longer a tool serving its members: the members have become conscripts in service to the organization.
It should be clear by now that Shaffer plays no favorites in his critique of institutional society -- everything is game for the thinking individual. Yet individualism is not Shaffer's bag, either. To him, that philosophy is just as reactionary as the collectivism of many institutions:
The search for human liberty is not one in which every individual is arrayed against the presumed collective of all others, or of one group struggling against another group, but is a pursuit that should serve to unite us on the basis of our common desire for the autonomy we require if we are to experience self-fulfilling transcendence of our continuing evolution.
If there is an individualistic theme to Shaffer's argument, it is only because of his insistence on the personal part each of us play in the conflicts that make institutional society function. In contradistinction to the group identities of institutions, Shaffer discusses the spontaneity and intimacy of community, and the need to know and be yourself within it.

Self-analysis and self reflection end up being the lynchpins of this book. Much of our dilemma stems from personal values and assumptions we have accepted of our own free will without careful thinking -- sometimes because of indoctrination, often out of laziness or a lack of self-esteem. Calculated Chaos is in many ways not a call for society to change, but for the reader to rediscover himself.

I must admit my surprise at how metaphysical Shaffer's book becomes as it delves deeper and deeper into the personal nature of the organizational ethics and principles underlying our society. For instance, Shaffer proposes that institutions serve as surrogate identities that allow us to expand what he calls our "ego boundaries". This imperative to seek outside ourselves for purpose and meaning arises, he posits, from failing to train our attention on the present moment and allowing narratives of reality to arise that are incomplete and simplistic. Institutions encapsulate a convenient myth that divorces us from the responsibility to know ourselves fully, providing contrived identities to which we can cling. These identities and allegiances drive the interpersonal and intergroup strife that establishes institutional primacy because we are acting out of a lack of understanding of ourselves.

Shaffer provides very few answers in his exploration of the conflicts we have established within and without ourselves, preferring to ask questions that challenge the hidden premises of our institutionalized society. This is uncomfortably deliberate. One of Shaffer's theses is that institutions thrive in regimented, predictable environments where events conform to articulable principles and systems. To transcend the conflicts created by our institutional manners of thought, we must appreciate that our need for the certainty is largely artificial and unessential, serving the purposes of institutional perpetuation and organization more than our own. A dogmatic, rule-oriented approach to reality will always be necessarily limited, because it is built on assumptions of stability and order based on past experience instead of present experience. By participating in these rigid, static systems of thought, we lose our awareness for the present, which is dynamic, mysterious, and able to be apprehended without inhibition or formula.

It is in this speculative, inquisitive, inward-directed manner that Shaffer explores "our well-organized conflicts". Anarchists would find the idea that institutions create the conditions of strife and discord that give them their social functions quite unremarkable. But Shaffer goes deeper, locating the origin of institutions in our own minds and hearts. It is through sublimating our own selves to institutional identities, adopting the views that reinforce their purposes and interests, complying with and depending upon their expectations, direction, and mobilization, that we realize a world so chaotic and conflicted.

Calculated Chaos advances the unthinkable political concept that you and I are responsible for the institutional dysfunction of society. This seems hard to accept because radical politics is built on identifying enemies in things outside ourselves that compel and control us. Shaffer's book is a new take on the philosophy of liberation: We have made the agendas of institutions our own agendas, but we can choose otherwise. To all left libertarians, anarchists, and advocates of a voluntary society, I give this book the very highest recommendation possible.

NOTE: Google Books has the full text.