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

W.I.L. Offshore News Digest :: July 2009, Part 1

This Week’s Entries :


Freedom is everywhere for those who dance through life, rather than crawl, walk, or run.

As the U.S. “Independence Day” holiday approaches, it is appropriate to examine the whole concept of independence at a deeper, spiritual, level. Just how independent are you from someone else’s faulty ideas about what causes happiness and fulfillment in life?

Most people have heard, from some source or other, that once basic survival needs are handled that additional consumption is not correlated with happiness. Now even those who “know” this procede to act as if this we not the case, but that does not refute its validity. The rat race goes on, mechanically.

Below Marcel Votlucka suggests that the desire for power is another fundamental and pernicious fact of life and human psychology. And as with wealth, it seems as though how much one has is never enough. Votlucka writes: “Power relies on a negative and rotten psychology to sustain it, one that is hostile to liberty, goes against our better nature, and can snuff out one’s soul.”

As with desire for more material goods, transcending the desire for power requires spiritual growth – a transformation of the self one has come to identify with. Routes to this transformation are offered by Zen and other spiritual systems and practices, and some of the roguish modern derivatives as epitomized by Principia Discordia and Zenarchy, as well as spiritual cousin Anarchic Harmony: The Spirituality of Social Disobedience by William J. Murray.

Bottom line: “Free your mind and your spirit first and the political and cultural reality will follow.” That is true independence.

Money is not the root of all evil, power is – or at least, the desire for power. As an activist, I see that many of the injustices we face can be clearly traced back to that.

A fat cat Wall Street banker can gamble away millions of people’s financial futures, a racist pig can deny you a job, an insane President can murder Iraqi and Afghan children, your community can shun you or make you and your same-sex partner into second-class citizens, your spouse can betray you – all these things and more are examples of how we allow people much power over us in our lives. You might object, “But power can be used for good as well as evil! We just need to correct abuses of power!” Sorry to burst your bubble, but power tends to corrupt us and we cannot hold faith that it can somehow be “reformed.” The problem of power and its solution is a far deeper psychological and spiritual issue at its heart, rather than merely political.

Psychoanalyst Erich Fromm defined power in two ways. The first is “a sadistic striving for domination” to compensate for one’s complete impotence and weaknesses. This means political, economic, and social power wielded by one person or party against others. His second meaning is potency; a person’s ability “to realize his potentialities on the basis of freedom and integrity of his self, where he does not need to dominate and is lacking the lust for power.” When I refer to “power” here I mean more along the lines of Fromm’s first definition – political or social domination, control, force, and the lust for it.

Where does it come from? Fromm and his colleague Alfred Adler agreed that the wish for power is a rational response to one’s insecurities and inferiorities, among other factors. Power ultimately arises from desire – a desire to get what you want and to keep what you have, a desire to stay “on top” in relationships and in life itself, but also a desire to shape the world in a way that pleases and fits your ideals. We see things in terms of power especially when we talk of solving problems and effecting change through politics, elections, mandates, movements and so on. You can dilute power, try to channel it in a positive direction, but history is pregnant with story after story of power corrupting people and movements. We see the same privilege, exploitation, and New World Orders rising from the ashes of the old.

How do we escape this brutal cycle?

I am reminded of a story in the Principia Discordia revolving around a fictional figure named Greyface who preached that we should preserve Serious Order and eradicate spontaneity and even play at any and all costs: “Greyface and his followers took the game of playing at life more seriously than they took life itself and were known even to destroy other living beings whose ways of life differed from their own.” The Discordian “Curse of Greyface” refers to a psychological and spiritual imbalance that results from these beliefs: “This imbalance causes frustration, and frustration causes fear. And fear makes for a bad trip. Man has been on a bad trip for a long time now.”

While we do not function well in total chaos, our lives are punctuated by spontaneity, free will, and free thought. Even the most totalitarian institutions cannot kill them off, so this balance of order and disorder marks even the most rigidly controlled society. But orthodoxy, acts of oppression, other things that kill it off – all are fueled by power-lust so that some can fulfill their desires to stay “on top” in life, or in a political movement. This is all begat by the Curse.

More importantly, the Curse ties into a poisonous social psychology that has seeped into all facets of our society and culture, like acid rainwater leaching into the soil. Question the Established Order and wait how long it takes for someone to call you “crazy” or “naïve” or “unrealistic.” Watch the 10 o’clock news and its endless litany of bloodshed, depravity and woe that can magically be corrected by someone with power. Go to your polling place next election and watch people’s faces as they contemplate voting for the “lesser of two evils” as they approach the booth. Read history books or even the Scriptures and see the horrors and crimes and nastiness that arise out of raw power. We see a psychology of storm clouds and catastrophes, of complacency and passivity, of suspicion and helplessness in the face of the world’s challenges, of Lois Lane awaiting her Superman. We see blind faith and reliance in power and a fragile status quo imposed from above.

But power is at its worst when we take it for granted. After a while, we grow used to the idea that some should wield power over the rest of us, that power itself should even exist. It makes us into monsters if we struggle for it, it makes us into pitiful robotic Greyfaces when we take it too seriously, and history shows that it backfires on us despite our noblest intentions.

The Curse of Greyface, then, is a metaphor for this psychology that we have to reject in order to flee our physical and spiritual shackles. So, how do we save our souls?

“Zen is discipline in enlightenment. Enlightenment means emancipation. And emancipation is no less than freedom. We talk very much these days about all kinds of freedom, political, economic, and otherwise, but these freedoms are not at all real. The real freedom is the outcome of enlightenment. When a man realizes this in whatever situation he may find himself, he is always free in his inner life, for that pursues its own way of action. Zen is the religion of self reliance and self being.”

This passage by Daisetz T. Suzuki in Zen and Japanese Culture evokes the kind of mindset change we could all use. One needs an appropriate mindset to counter power and the Curse of Greyface before hoisting signs and writing propaganda and placing a ballot to deal with the systems fueled by it. I mean fostering a holistic, almost spiritual anarchism and not merely a political and economic one that people might find dull and irrelevant. If we treasure a vision of man without need for rulers or institutions of power, then it follows that the self-empowerment, self-reliance, and self-being Suzuki mentions, are elementary parts of what I would call a “libertarian mindset.”

Suzuki continues, “Zen has no special doctrine or philosophy, no set of concepts or intellectual formulas, except to stress to release one from the bondage of birth and death. It is generally animated with a certain revolutionary spirit, and when things come to a deadlock – as they do when you are overloaded with conventionalism, formalism, and other cognate ‘isms’ – Zen asserts itself and proves to be a destructive force.”

I think this Zen mindset has something to offer those of us who work for progressive, radical change. The simplicity and overall “stripped-down” nature of Zen complements the basic ethos of libertarian ideals: No one has the right to be anyone’s master and no one has the right to be anyone’s slave. Man should neither need nor desire rulers, unaccountable control or raw power. Liberty is his natural state of being. Think of the amount of factionalism among libertarians (and the Left in general), and the endless quarrels over strategy leading to increasingly obtuse theories that never seem to get us anywhere. We hardly know who “we” are anymore. And just who is winning in the end? The more we appreciate that ethos and the less we formalize it, the more willing we will be to listen to each other without confrontation and the more effective we will be.

Zen, and Buddhism in general, emphasizes detachment from earthly desires and concerns and complications that tie down the spirit: the lust for power, the desire to succeed in a meaningless rat race, the need for someone to save us from all our problems, the hope for order and things being in their “proper place” to make us feel better and more secure in ourselves and the world. It emphasizes inner freedom. If we have free will, it means that we reinforce power-psychology with the internalized boss, policeman, and society within each of us. If you want to escape the Curse of Greyface then you cannot fight it on its own terms; instead you have to detach yourself from the desire and need for power and also stop taking it and everything that comes with it so seriously. Not even your own self.

You could be hit by a bus tomorrow despite all the wealth and power and influence you have in the world. How important are any of these things in the end?

You could say that life is a game where you end up being dominated by those with a hold over your life energies. If you take power too seriously and show too much deference to it, you will always be a loser, a pawn, and a sheep in the eyes you allow to be arbitrarily “on top.” If you take the game too seriously, you will lose sight of the values that are really enriching in life. Learn to detach yourself from “the game”; learn to laugh at it! Laugh at power itself! The comedians get it; the fools understand it implicitly. Some of my biggest influences have been people like George Carlin, Margaret Cho and Penn Jillette, and books like the Principia Discordia, all of which challenge and undermine power, institutions and authority figures by laughing at then, making them absurd, lowering their status in our minds.

Of course we laugh with them on the TV or in the theater, but when we take their words seriously and honestly suggest that we could really do without the power-mongers, folks freak out incredulously.

[Discordianism co-founder] Kerry Thornley puts it best in his pamphlet Zenarchy: “The deeper fruits of this union, speaking at least with reference to the Anarchist, are yet to be realized. What Zen has most to offer Anarchism is freedom here and now. No longer need the Anarchist dream of a utopian millennium as he struggles to outwit the State – for he can find freedom in the contest, by simply knowing that freedom is everywhere for those who dance through life, rather than crawl, walk, or run.” Indeed, a sense of spiritual freedom “here and now” is what one should seek before thinking of any active strategy to counter or resist oppression, while pursuing alternatives to the State, Organized Religion, Capitalism, and so on.

Psychological studies have shown that wealth does not make people happy in the long term. So it is with power. Power relies on a negative and rotten psychology to sustain it, one that is hostile to liberty, goes against our better nature, and can snuff out one’s soul. But resisting the Curse of Greyface and prevailing over the temptations of power and the psychology sustaining it, involves a more subtle and introspective strategy than you are likely to find in the literature – self-transformation. It means searching within and freeing ourselves from the desire for power over us and others; it means refusing to see people as tools or “the proletariat” or experimental subjects for policy and a pre-planned revolution, and instead seeing them as equals who have the same dignity and ability to govern their own lives as you. We do not wish to be ruled; we wish to rule nobody. We do not wish to serve; we do not wish for others to serve us.

Is not the desire for power self-defeating for anyone who yearns for a free, fair and prosperous society? Free your mind and your spirit first and the political and cultural reality will follow. Only this can stop Greyface in his tracks.


Loving America has nothing whatsoever to do with loving its governments and their actions.

Looking around on Independence Day this year, Robert Higgs has no problem finding a lot to love about the United States. But none of it has anything to do with any of the levels of government infesting the country. And as for “patriotism”: “The good that this country embraces does need defense, of course, but the protection it most urgently requires is defense against those who falsely purport to be its guardians and saviors.”

Independence Day would seem to be an especially ill-chosen time to denounce what passes for patriotism in the United States. But maybe not, because on this day Americans express their patriotism – in truth, little more than worship of statism and militarism – in extraordinary displays and celebrations, thus presenting more prominent targets to those who have no sympathy for patriotism as it is commonly understood in this country.

I suppose that already some readers are thinking, “Higgs is an America hater. Why doesn’t he do us all a favor and get the hell out of this great country while he still can?” Anyone who is thinking such a thought, however, is utterly mistaken. I do not hate this country, though I do despise the governments – local, state, federal, and hybrid – that now rule it.

Bill Clinton once felt moved to scold the people who took offense at some of the government’s especially monstrous recent crimes by saying, “You can’t love your country and hate your government.” Au contraire, Slick Willy. I am living proof that you can indeed. I do so in every waking minute of every day, and sometimes in my sleep, too. To be perfectly frank, I have trouble in understanding how any decent, halfway honest person who loves America cannot hate its governments, inasmuch as by their laws, their judicial decisions, their regulations, and their daily conduct they prove themselves a standing reproach to every ideal embraced by the men who shed their blood to establish this country’s independence from the British Empire. Do you recall those first patriots’ declared devotion to life, liberty, and the pursuit of happiness? Can anyone today look upon the pack of scoundrels, liars, thieves, and (in all too many cases) murderers who control the governments of this great country and feel anything but the most wrenching revulsion?

“To qualify for my affections, a person, place, or thing almost by definition must exist (or have existed during its time) outside the sphere of government and its manifold evils.”

But if I feel this way about our glorious government leaders, how can I then maintain that I love the country? It is really easy. I simply recognize that everything I love about it – and there is a great deal – stands to its governments more or less in the same relation that matter stands to anti-matter. To qualify for my affections, a person, place, or thing almost by definition must exist (or have existed during its time) outside the sphere of government and its manifold evils.

Thus, I feel no shame about loving many of the physical places of this country, from coast to coast. Who can look out across Puget Sound toward the Olympic Mountains at sunset and not fall in love with the place? Who can resist the tall, slender pines and the sturdy, spreading live oaks, draped with Spanish moss, that adorn my present home in southeast Louisiana? The deserts of the Southwest are often strikingly beautiful, as are, in different ways, the Rocky Mountains, the Cascades, and the rhododendron forests near the Delaware Water Gap. In these places and a thousand others, a man may feel that he is fortunate to call these magnificent exhibits of God’s creation part of his home country.

The America I love embraces not merely places, scenes, and settings, however, but innumerable persons whose accomplishments down through the ages glorify their country and testify to its people’s courage and humanity. If you seek an example of honorable bravery, then consider how William Lloyd Garrison, at great risk to life and limb, persisted in publishing an uncompromising abolitionist newspaper, The Liberator, declaring: “I will not equivocate – I will not excuse – I will not retreat a single inch – AND I WILL BE HEARD.” Or remember Harriet Tubman, for whom her own heroic escape from slavery was not enough, so she returned again and again to the slave region, ultimately helping hundreds of others to gain their freedom via the Underground Railroad. Do you want an Independence Day event to remember? Then forego the vacuous speeches by politicians bloviating about U.S. soldiers’ heroics in wars (most, if not all, of them unnecessary bloodbaths brought about by wicked, ambitious politicians) and recall instead July 4, 1939, when the great Lou Gehrig, though already suffering from the disease that would soon take his life and now bears his name, walked slowly to the microphones in Yankee Stadium and said, “Today I consider myself the luckiest man on the face of the earth.”

When I think of the America I love, I hear the language I love – American English in its countless accents, cadences, and idioms. Not that I claim it is the best language anyone can speak, but it is the one I have heard from birth, studied with care, and enjoyed immensely as I have listened to a great variety of its speakers, from illiterate men I worked with as a youth on the ranch to accomplished poets and scholars I have been fortunate to hear. For six months in the early 1970s, I lived in England. At first, I was amazed at how articulate the English people were: It seemed to me that they commanded their spoken language with a precision that hardly anyone in my native country could match. Yet, after a while, I began to miss American English. The English of England felt increasingly cold and stiff. I found myself longing for the cozy, idiomatic, slang-ridden speech I had absorbed as an American in America. My mother and father were people of little education but a wealth of idioms and folksy turns of phrase. Prizing my education in formal English, I grew up to speak differently, yet, as a young adult, when I would call my parents on the telephone periodically, my wife would remark that after a minute or two on the phone, I began to “talk like a damned Okie.” Fine with me. To this day, I am likely to lapse into this kind of speech when I tell a long-winded personal story.

Yet the language of this country is not always English, and I cherish the other kinds of speech that Americans use, as well. In the little San Joaquin Valley town (Firebaugh, California) near which I grew up from second grade through the twelfth, I would walk along the main street on hot summer days and bask in the smell of stale beer and the sound of música ranchera that spilled out of the open doors of the many Mexican bars that lined the street (air-conditioning was not a part of that time and place). The barbers who cut my hair, like many other people who lived there, spoke a combination of Spanish and English, often mixing the two languages in a single sentence and passing seamlessly back and forth from one language to the other. Theirs was a kind of American language, too, and today when I recall its sounds, I get a warm feeling. Spanish is a beautiful language in its pure form, but for those of us who grew up immersed in Spanglish, it also makes a lovely sound – and a peculiarly American one, to boot. It is something to cherish in a world gone looney with stupid, ignorant ethnic hostilities.

If I am such an obvious America hater, why do I esteem so highly the country’s legends and folkways? You do not expect an al-Qaeda agent to cherish Mark Twain’s story of the celebrated jumping frog of Calaveras County or the legend of Paul Bunyan and the Blue Ox Babe. And what commie would invariably smile at the thought of John Henry, by any standard a remarkable American from birth:
When John Henry was a little bitty baby
Sitting on his daddy’s knee
Well, he picked up a hammer and a little piece of steel
He said, This hammer’s gonna be the death of me
Lawd, Lawdy
This hammer’s gonna be the death of me!

(Commie version:

When John Henry was a little bitty baby
Sitting on his daddy’s knee
He picked up false consciousness and surplus-labor speed
He said, Wage slavery’s gonna be the death of me
Lawd, Lawdy
Wage slavery’s gonna be the death of me!
Ugh! That is so un-American!)
As the old Chevy jingle put it, we Americans love baseball, hot dogs, apple pie, and Chevrolet. Well, for me, three out of four ain’t bad. (Any love I ever had for General Motors went down the drain long ago as its incompetent management and rapacious labor union drove it to ruin – of which there is none more ignominious than the recent government takeover.) At my age, with my decelerated metabolism, I must go very lightly on the hot dogs and apple pie, but life would scarcely be worth living without baseball, the thinking man’s great American sport. As a boy I enjoyed countless hours of playing the game, or just hitting, catching, and throwing the ball when not enough boys were available to play a game, and as an adult I have followed baseball pretty steadily throughout my lifetime. Hardly anything brings me more pleasure than sitting around with my old friend Henry Leng (we go back to 1954 together), recalling the great teams, great players, and great moments – not to mention the veritable mountain ranges of statistics to mull over. This country does not need Bill Clinton, George W. Bush, or Barack Obama. Life would go on just fine without them and their ilk to tell us what to do. But life in this country would be vastly diminished without baseball.

Unlike U.S. imperialism, in which this country’s armed forces set out to intimidate or kill the various allegedly troublesome brown people of the earth, the “imperialism” of baseball shows us what great gains we may realize through peaceful relations with others. America gave baseball to the world, and the world has returned it to us embodied in the great Latin American and Asian players who now elevate the quality of play so gloriously. Aggressive U.S. foreign relations have earned this country the hatred and enmity of the world’s people, whereas the spread of baseball has brought us Vladimir Guerrero and Ichiro Suzuki.

By this time, I hope that the reader understands what I am driving at: loving America has nothing whatsoever to do with loving its governments and their actions. Moreover, everything about this country that truly warrants a free person’s love is antithetical to the operations of its governments. The country worthy of our love most emphatically does not consist of its disgusting politicians or of its hired killers (soldiers) or of its petty tyrants acting as regulators, police, and other wielders of unwarranted – and all too often unchecked – coercive power over their fellows. Above all, the country worthy of our love does not consist of its blessed wars. The most that anyone might truthfully say of any of these wars is that it was a necessary evil. For my part, I will not go even that far. In my view, every one of them was an unnecessary evil, including the American Revolution that some people may happen to recall amid today’s pseudo-patriotic bacchanalia.

The good that this country embraces does need defense, of course, but the protection it most urgently requires is defense against those who falsely purport to be its guardians and saviors.


A tax policy expert has conveniently summarized Obama’s proposed changes to the taxation of U.S. corporations with overseas operations. It amounts to a massive attempt to eliminate many of the tax deferral and avoidance “loopholes” used by companies with offshore subsidiaries. We shall see if it all flies.

If this all goes through the incentive to reincorporate overseas will be substantially increased. We have to believe this will result in a nontrivial increase in such restructurings. Will a shift of high-paying and prestigious jobs out of the U.S. happen as a result?

This is the typical triumph of “fairness” over economic good sense. If implemented we will not get the fairness, but we will get lower growth. This has all been seen before, way too many times. As the quote goes, the one thing we learn from history is that people do not learn from history.

The blogger who originally posted this accurately expressed the nub of the issue: “If there were FEWER burdens on us all, then creating tax loopholes would not be necessary. People and corporations would NOT be going beyond our borders to defer their taxes if their taxes were not so burdensome.”

Faced with growing pressure to close the rapidly increasing budget deficit, President Obama outlined a series of proposed changes to the international tax system. The plan is touted as “leveling the playing field” and filling tax loopholes that allow U.S. corporations operating overseas to avoid U.S. income tax. The following is a discussion of some of the more important aspects of the proposals and the effects of the plan in a policy context.

Author Professor Byrnes writes: The following is a survey of some of the more important aspects of President Obama’s tax proposals, firstly applicable to corporations and secondly to individuals that will impact deferral and international financial centers (tax havens) ... [T]his survey does not address the reduction of U.S. withholding tax pursuant to equity swaps referencing U.S. equities.

(1) Deny immediate deductions on foreign investments when profits are deferred. The proposed change follows Congressman Rangel’s from 2007 (H.R. 3970) to not allow a business to take these deductions until it pays taxes on the offshore profits. Interestingly, President Obama is seeking a major tax incentive carve-out for research and experimentation expenses, allowing these to be immediately expensed. Ironically, this tax incentive will be a boon to the tech and pharmaceutical companies whose use of deferral is a substantial driver for closing down the deferral loopholes.

(2) Revise the check-the-box rules to hamper foreign tax avoidance. President Obama’s proposal would amend the check the box rules so that U.S. companies that establish certain offshore subsidiaries must treat them as corporations rather than as disregarded entities for U.S. tax purposes, effectively eliminating this technique for reducing foreign tax without triggering US taxation.

(3) Further limit the deductibility of interest payments by expatriated parties (earning stripping). The proposal is that debt between related inverted parties may not claim the debt-to-equity safe harbor of 1.5 to 1, and that any interest deduction corresponding to this related party debt be reduced to a maximum 25% of adjusted taxable income, from 50% ...

(4) Limit the shifting of income to a tax haven through the transfer of intangible property. To mitigate future controversy, President Obama proposes that for IRC Sections 482 and 367(d) workforce in place, goodwill and going concern will be included when determining the value of intangible property, and that such value will be determined at the standard of its highest and best use ...

(5) Close loopholes in foreign tax credit (FTC) application. The first loophole occurs when corporations use the FTC to claim FTCs for foreign tax paid on profits that are not subject to U.S. tax ... President Obama’s proposal would not allow this splitting of foreign taxes from foreign income. A second loophole occurs when a U.S. parent controls several foreign subsidiaries and manipulates which of the foreign subsidiaries repatriates dividends based upon which among the subsidiaries has incurred substantial levels of foreign tax. ... President Obama’s proposal requires that the FTC be calculated on a consolidated basis of all the foreign subsidiaries’ income, both high and low taxed ...

(6) Eliminate special tax treatment of U.S. companies with 80% foreign revenue. A U.S. company (80/20 company) with at least 80% of its gross income over a three-year testing period arising from foreign source active trade or business is not required to withhold on dividends and interest paid to foreigners. ... President Obama proposes to eliminate this federal withholding tax exception.

(7) Prevent tax avoidance when repatriating tax-deferred earnings via cross-border reorganizations. ...

(8) Revise Qualified Intermediary (QI) program. The Obama administration proposes [that] ... 1) U.S. financial institutions must withhold 20-30% of all payments of U.S. income to non-QIs with the burden on the underlying income recipient to seek a refund by providing her identity and foreign bona fides; 2) QIs may not have any affiliates that are non-QIs; 3) QIs must file a 1099 form for each U.S. customer, just as U.S. banks must; ...

(9) Bolster IRS’s ability to promote international reporting compliance. President Obama’s plan would include hiring 800 new IRS staff to increase international enforcement and increase the IRS’s enforcement budget by nearly $400 million. The statute of limitations would be increased on international tax enforcement to six years after the taxpayer submits required information. ...

Draft Legislation to Implement Proposed Changes. President Obama was a cosponsor of The Stop Tax Haven Abuse Act (S. 506) (STTHAA) while he was in the Senate. The bill was initially introduced on February 17, 2007. On March 2, 2009 a revised version of the bill was introduced by Senator Carl Levin. This bill is the first piece of the puzzle to implement President Obama’s proposals. ...

While reforming deferral may motivate some nascent companies to form overseas and some existing companies to leave the U.S., low tax rates as an incentive to domicile in a jurisdiction are more important for smaller economies than for the world’s larger economic powers. Tax rates are only one factor informing a company’s decision as to residence. Infrastructure, ready access to markets, political stability, and compliance costs other than taxation are significant factors determining desirability of a particular jurisdiction as a corporate residence. So while taxation is a significant factor affecting corporate residency decisions, it is not the only factor.

Private Banker Moved Funds from Client Accounts Undetected

Case raises questions about how carefully some of its largest institutions monitor their bankers.

A former UBS private banker stands accused of having stolen funds from some client accounts in order to boost the apparent returns earned by other clients. The resulting indictment, once his cover was blown, offers a rare window into the world of private banking. In this instance it clearly featured lax controls and a lot of pressure to perform.

He grew up in elite circles in Buenos Aires, acquiring the polish and privileged connections that paved the way for him to become a star private banker in New York to wealthy clients at UBS and JPMorgan Chase.

But as Hernán E. Arbizu tended the fortunes of his gilded South American clients, he says he also illegally took millions of dollars from them for years while at both banks, without being detected, The New York Times’s Lynnley Browning and Diana B. Henriques write.

What is more, Mr. Arbizu said he regularly dipped into UBS client accounts – and even visited the Swiss giant’s offices in Manhattan to ensure that the illicit transactions went through – for at least a year after he left UBS for a new job at Chase in the fall of 2006.

The fast-lane world of private banking has hit some serious speed bumps in recent months, its affluent clientele hit by Ponzi schemers, failed hedge funds and tax evasion investigations from Washington to Europe.

Several big European banks stumbled into the Madoff swindle, for example. More recently, UBS agreed to a $780 million settlement with the Justice Department to address accusations that it had helped wealthy Americans hide billions of dollars in taxes in secret offshore bank accounts.

The curious case of Mr. Arbizu, whose career exploded when a Chase customer discovered and reported his crime in May 2007, offers a rare window into this well-shielded world, and raises questions about how carefully some of its largest institutions monitor their bankers.

In telephone and e-mail interviews with The Times held in the last eight months, Mr. Arbizu put himself in what he said was the “3% of bankers who at some point get confused because of the pressure. We feel like we can take risks that other people do not even dream to do, and that we can manage that risk – I don’t know why.”

But he also said that UBS“qdid not have proper control over its bankers” and he accused the bank of creating an atmosphere of pressure to keep clients and reel in new ones. A spokesman for UBS declined repeated requests for comment on the case, The Times said.

Mr. Arbizu, an Argentine native, fled the United States for Argentina in May 2008, just before he was to be indicted by federal authorities in New York on federal bank fraud charges. He insisted that he had not personally profited from his actions, but rather had shifted money between accounts to make good on unrealistic investment promises he made to keep important clients. “Of course I made a huge mistake – I feel really bad,” he told The Times.

Yet while his actions pale in comparison with Bernard L. Madoff’s $65 billion Ponzi scheme, Mr. Arbizu’s tale contains the same “rob Peter to pay Paul” logic that apparently guided Mr. Madoff.

Mr. Arbizu, 40, said that in order to maintain an aura of success with major UBS clients, he pretended to remain their personal banker even after he left for Chase. His handpicked successor at UBS, Jose Cecilio Decastro, helped maintain the ruse until he resigned last July and moved to Venezuela.

UBS conducted an internal investigation of Mr. Decastro last year and determined that while he had “done foolish things” by helping Mr. Arbizu, he did not warrant referral for prosecution, The Times said, citing a person briefed on the investigation

In June 2008, weeks after Mr. Arbizu was indicted in New York, the Argentine authorities raided JPMorgan Chas’qs offices in Buenos Aires and confiscated records of 200 wealthy Argentine clients, many of them Mr. Arbizu’s, whose names and assets were then published in a local newspaper.

But Mr. Arbizu, who says he is assisting an Argentine investigation of potential tax evasion and money laundering by Chase customers, was not caught by either bank’s tripwires and controls.

In fact, for more than five years, he was not caught at all.

In early 2003, he moved to Fairfield, Connecticut, to take a job at UBS as a private banker for wealthy clients in Argentina and Chile. He then worked out of the bank’s Park Avenue offices in Manhattan, where he earned $300,000 and bonuses for overseeing 13 accounts worth $200 million.

Mr. Arbizu maintained that he had felt overwhelmed by pressure from UBS early on to keep existing clients and bring in new ones. Just months after he joined the bank, he promised an important client, Alberto Lopez, a wealthy farmer in Argentina, that he would generate a 21% return on one of his accounts. “Of course, this was impossible,” Mr. Arbizu told The Times.

Months later, Mr. Lopez wanted his investment return. Scrambling, Mr. Arbizu secretly dipped into Mr. Lopez’s principal, which he replenished by secretly tapping $2.8 million from another star UBS client, the Acevedo Quevedos family, wealthy and politically prominent in Paraguay.

Mr. Arbizu left UBS for JPMorgan Chase in November 2006 without informing the Quevedo family. The following April, the Quevedo family contacted Mr. Arbizu, saying that its members needed money from their UBS accounts to buy land.

Panicked about covering the shortfall, Mr. Arbizu said he “pretended” he was still the family’s banker at UBS, and secretly raided a JPMorgan Chase account held by Natalio Garber, a prominent media executive in Buenos Aires, for the funds.

He did so, he said, by faxing transfer requests with forged client signatures to UBS’s New York offices, and then visiting the offices to ensure with Mr. Decastro that the transaction had gone through. “Everybody there liked me and trusted me – ‘Oh great, you are visiting us,’” Mr. Arbizu recalled. “I think that my presence there saying that it was O.K. made people not follow the controls.”

Weeks later, Mr. Garber learned of the ruse and called Mr. Arbizu’s boss to complain. JPMorgan Chase fired him and alerted federal prosecutors in Manhattan, paving the way to an indictment that accused Mr. Arbizu of 12 illegal transfers while at UBS and JPMorgan Chase, totaling more than $5.3 million.

Darin Oduyoye, a spokesman for JP Morgan Chase, said that the bank was “waiting for the U.S. government to pursue extradition” of Mr. Arbizu, but declined to comment further, The Times said.

In the interview, Mr. Arbizu told The Times that the 12 transfers, some to client accounts in tax havens like Andorra and the Netherlands Antilles, totaled only $2.8 million. Mr. Arbizu secretly made eight of the transactions from accounts held by his former UBS clients from March 2007 through March 2008, up to 16 months after he had left for JPMorgan Chase.

JPMorgan has not dropped its lawsuit, but it has not made filings that would push its case forward. Last February it quietly closed a case that it had filed against Mr. Arbizu with the Financial Industry Regulatory Authority, the agency that monitors brokers, although a spokesman declined to say whether it had dropped or settled the case.

By contrast, UBS has not sued Mr. Arbizu. But in May 2008, it filed a report with Finra to declare the bank had initiated an internal investigation of Mr. Arbizu a month earlier. The next month, UBS amended the Finra report to include details of $2.8 million in illegal transfers from an unnamed Paraguayan client. But UBS said in the amended report that it had received complaints about those transfers only in May 2008 – one month after it began investigating Mr. Arbizu for illegal money transfers.

UBS quietly settled the Finra action for $1.44 million last December. In mid-June, UBS filed a broker report for Mr. Arbizu’s successor, Mr. Decastro, saying that he had left the firm amid an internal investigation of “violations of firm compliance and client confidentiality rules.”

“I know I am stupid”q Mr. Arbizu told The Times. “I feel that in all these years I had my head divided into two sections, in one small section all this problem and in the rest my ‘normal’ life.”


The IRS and U.S. government continue to press UBS for the names and details of all its U.S. clients. Behind all the often ridiculous rhetoric is the deadly serious battle in which the U.S. is making an all-out effort gut the Swiss financial industry and financial privacy for U.S. citizens. Stay tuned.

The Obama administration escalated its attack on Swiss bank secrecy and tax evaders by insisting UBS AG reveal the identities of 52,000 U.S. account holders.

In papers filed [June 30] in U.S. District Court in Miami, the Justice Department responded to UBS’s opposition to releasing the names. The U.S. is seeking the names as part of a lawsuit against UBS, the largest Swiss bank by assets.

“UBS must disclose the identity of every U.S. taxpayer with an undisclosed UBS account” so they can “get right with their government,” the Justice Department filing said. “The United States has a strong national interest in making sure that all U.S. taxpayers comply with the tax laws.”

They are being completely honest here. However, a more direct translation would be: “The U.S. government has a strong self-interest in making sure that all U.S. taxpayers comply with the government’s tax laws.” In other words, the USG wants to maximize its tax take, and needs to know where to send the men with guns when certain people refuse to cooperate which the U.S. dictates. Clear enough?

The government sued Zurich-based UBS on February 19 a day after the bank avoided federal prosecution for helping wealthy Americans evade taxes. UBS agreed to pay $780 million in penalties, admitted it helped taxpayers hide money in Swiss accounts and gave the IRS more than 250 clients’ names.

In court filings and a diplomatic note, the Swiss government has said the lawsuit would “seriously jeopardize” efforts to revise a 1996 tax treaty.

Under that treaty, Switzerland can turn over account data only on a reasonable suspicion of “tax fraud or the like,” according to a UBS court filing. Unlike the U.S., the Swiss do not view tax evasion as a crime.

Obtaining Information

The treaty does not prevent the U.S. from obtaining the information, the Justice Department filing said.

Swiss law does not shield U.S. taxpayers where “UBS has systematically and deliberately violated the laws of the United States on U.S. soil,” according to the Justice Department filing.

UBS “regularly conducted business in secret” in the U.S. and routinely sent private bankers into the U.S. to solicit business, the Justice Department said. The UBS business “cost the U.S. Treasury hundreds of millions of dollars in unpaid taxes,” according to the filing.

They claim all this like it is a bad thing – which of course it is ... to them. Again, the U.S. government is being honest in their own smarmy way. Soliciting business ... shameful! From what the U.S. seems to be claiming below, due to the fact that UBS was soliciting finance-related business without getting a license from the SEC, the U.S. clients should be made to suffer. Now that is the kind of logic we expect from Big Brother.

UBS issued a statement today standing by its position. “UBS continues vigorously to oppose” turning over the names, said Karina Byrne, a UBS spokeswoman, in a statement. Reports that the company may settle the lawsuit with the U.S. are “speculative,” she said.

Deferred Prosecution

As part of its deferred-prosecution agreement, UBS admitted on February 18 that from 2000 to 2007 its Swiss private bankers helped Americans evade U.S. taxes through sham offshore companies in tax havens including Panama, Hong Kong and the British Virgin Islands. UBS said it created misleading forms saying those companies, not taxpayers, were the beneficial account owners.

UBS also admitted that its private bankers marketed securities and banking services in the U.S., even though it did not have the required license from the Securities and Exchange Commission. Those bankers, UBS admitted, met with clients in the U.S. and communicated with them regularly as they traded securities in their accounts or transferred assets.

The case is U.S. v. UBS AG, 09-cv-20423, U.S. District Court, Southern District of Florida (Miami).


IRS has demanded that investors in offshore hedge-fund and private-equity funds file an FBAR (Report of Foreign and Financial Account) by June 30. (Presumably if the amount invested is less than $10,000 there would be no requirement. Of course most hedge fund or private equity investments are vastly greater than that amount.) Most such investors have been advised that an FBAR was not required; now they are advised otherwise. The IRS claims the requirement has always existed, but the enforcement has been lax.

Without claiming to be an expert in any way, we find the IRS’s interpretation implausible. A hedge or private equity fund investment is illiquid, unlike a financial account which can return your funds on demand. This amounts to extending the scope of a law by bureaucratic fiat.

Effectively this amounts to further harassment of offshore investors of all sorts. Just a friendly reminder that if you go offshore you are being watched.

Stepping up its scrutiny of offshore investing, the IRS demanded that hedge-fund and private-equity investors disclose hundreds of billions of dollars they have invested offshore. This is part of a crack down on questionable use of offshore tax havens, which started with a very public case filed against UBS.

UBS agreed to pay $780 million to settle accusations that it had defrauded the IRS by allowing wealthy Americans to hide billions of dollars using secret offshore bank accounts.

In a conference call on June 12, industry lawyers and accountants were told that investors in offshore hedge-fund and private-equity funds must file an FBAR (Report of Foreign and Financial Account) by June 30. Prior to this time many of these offshore investors were advised by tax attorneys that they did not have to file an FBAR. Some offshore investments are not taxable, but others are.

There was such an uproar about this new ruling that the IRS extended the deadline to September 23 for filers “who recently learned they must file an FBAR,” as long as they have paid their taxes. The IRS insists this requirement to file an FBAR is not new, but it reflects “a much stronger emphasis on international matters. So I would not say we were not enforcing it in the past, but we are now turning to issues that had not been emphasized in the past,” an IRS official told the Journal.

Hedge-fund assets in offshore tax havens such as the Cayman Islands and Bermuda represent more than two-thirds of the roughly $1.3 trillion industry, according to Hedge Fund Research. About $400 to $500 billion belongs to U.S. investors. Tax exempt foundations, endowments and pension funds account for about half of those U.S. investors.

In addition to demanding reports from investors, the Obama administration wants to step up the oversight of hedge funds. The SEC and Congress are proposing that hedge fund managers register with the SEC. The administration also is proposing to end a tax break on compensation for private-equity managers.

In a survey of hedge fund managers done by The Washington Post, the newspaper found that 38% said that “onerous government regulation” was the industry’s biggest threat. They were not as worried about finding new investors. Only 16% indicated that was a big problem. Other problems that received single digit percentages were lack of access to capital and a lack of market transparency.


The Singapore Ministry of Finance is seeking comments on a proposed information exchange law. The law incorporates “internationally agreed” standards for information exchange, as come up with by the OECD and UN. We doubt the offshore financial centers were heavily consulted before these standards were “agreed” upon.

The OECD/UN standard does allow “the requested jurisdiction to reject requests that are frivolous or spurious in nature or ‘fishing expeditions’ by the requesting jurisdiction.” We would guess that once everyone effectively “agrees” to the standard by incorporating it into their laws, this privacy protection standard will be whittled away by hook or by crook. It is SOP.

Singapore’s Ministry of Finance is seeking comments on the draft Income Tax (Amendment) (Exchange of Information) Bill in the period of June 29, 2009, to July 28, 2009.

The Bill proposes amendments to the Income Tax Act, as well as consequential amendments to the Goods and Services Act and Stamp Duties Act, to allow Singapore to enter into Avoidance of Double Taxation Agreements (DTAs) that incorporate the new internationally agreed Standard on the exchange of information (EOI) for tax purposes.

On March 6, 2009, Singapore endorsed the Organization for Economic Cooperation and Development’s 2008 Standard for the effective exchange of information through Avoidance of Double Taxation Agreements.

According to the MoF, the decision was made as the OECD Standard had become an internationally agreed standard following its endorsement by the United Nations Committee of Tax Experts on International Cooperation in Tax Matters in October 2008.

To implement the new internationally agreed standard, Singapore will seek to amend its domestic laws to allow it to extend further cooperation on information exchange through DTAs which incorporate the standard.

The negotiation and conclusion of such DTAs will be based on a mutual balance of benefits.

The legislative provisions under the draft Bill will allow Inland Revenue Authority of Singapore (IRAS) to provide information, including information held by a bank or trust company, in response to bona fide requests made under DTAs which incorporate the standard.

Under such DTAs, IRAS' access to information will not be limited to whether the information request relates to a Singapore tax matter i.e. the domestic interest requirement will be lifted. Such provisions will enhance the level of assistance that Singapore can provide to foreign jurisdictions under DTAs which incorporate the Standard, and vice versa.

The draft Bill also provides for procedures to ensure that only information requests that are clear, specific, relevant, and consistent with the new internationally agreed standard can be acceded to. The standard allows the requested jurisdiction to reject requests that are frivolous or spurious in nature or “fishing expeditions” by the requesting jurisdiction.

The MoF has assured that the proposed amendments are in keeping with Singapore’s status and reputation as a trusted and responsible business and financial hub with substantive economic activities.

Other financial centers such as Hong Kong, Switzerland and Luxembourg have announced similar plans. By implementing the new internationally agreed standard in tandem, international cooperation on the matter can be enhanced while preserving a level playing field amongst financial centres, according to the MoF.

Lastly, the MoF has announced the public can access the consultation documents together with the explanations for the draft Income Tax Bill on the Ministry of Finance’s website as well as the REACH consultation portal.

Respondents may send their comments to the Ministry of Finance directly via the website, email, fax or post, however, all feedback should reach the Ministry by July 28, 2009.


Football is being used as a vehicle for money laundering, according to an agency responsible for tracking the proceeds of crime.

Those intrepid foes of everything that might threaten the established financial order and the elite class it supports, the Financial Action Task Force (FATF), has discovered that British football (soccer) has been used as a vehicle for money laudering and tax evasion. The cases cited sound like part illegal tax evasion and part legitimate tax avoidance – albeit the kind of tax avoidance that tax agencies like to imply is really evasion.

Any business which involves cross-border transactions, and football is one such example, allows opportunities for tax savings which do not exist for purely domestic businesses. That is one reason to structure one’s business that way, although far from the only reason. And that is why so much corporations and wealth people do exactly that. To imply there is something sinister when lawful advantages are utilized is so much cant.

The Financial Action Task Force (FATF) report warns football is at risk from criminals buying clubs, transferring players, and betting on the sport. It also provides a rare insight into tax evasion in British football. The report also raises concerns over human trafficking, corruption, drug trafficking and tax crime in the sport.

The FATF report provides two previously unpublished examples of tax evasion from footballers in the United Kingdom, and suggests that in both cases, the clubs were complicit in the scam.

In one case, according to the report: “A disclosure was made by a player, revealing that his signing-on fee was disguised as part of a fee to a foreign agent.

“He confirmed that the agent then paid him £300,000 abroad and did not previously disclose this to the UK tax authorities.”

The report goes on to suggest: “It is likely that the club concerned was fully aware that the payment to the agent included a signing-on fee for the player and the benefit to the club in such an arrangement is that it avoided social security contributions of £38,000.”

In the second case, a club avoided paying tax through the use of image rights.

The report said: “A player (non-UK national) entered into an image rights agreement with a club. The player had transferred the rights to exploit his image exclusively on a world-wide basis to a company registered in a known tax haven in return for shares of that company.

“Unlike all the other players at the club, he was the only individual not to have either a signing-on fee or a loyalty bonus and appearance fees.

“The club had not exploited the player’s image in any way and after two years had sought professional advice, only to be advised that the image had no commercially exploitable value.

“Nonetheless, the club renegotiated both the playing and image rights contracts after three years, increasing the level of payments in both.

“The club concerned conceded that the image-rights agreement was part of the employment terms and paid over additional duties of £938,688. Additional duties of £404,480 were also to be paid over the future life of the image-rights contract.”

HM Revenue and Customs is understood to have been involved in both cases, but for legal reasons, officials would not comment on either, though the government agency did issue a statement.

“Money laundering is a complex crime and one which HMRC is tackling,” said the HMRC spokeswoman.

“We have a very good track record in the field of law enforcement and we take money laundering and tax evasion extremely seriously, focussing significant resources into tackling them.

“Our investigations can and do result in criminal prosecution sending a clear message to anyone tempted to launder money that they are taking a serious risk.”

The FATF detected more than 20 cases of football-related money laundering from information based on responses to a questionnaire received last october from government and football authorities in 25 countries.

The FATF report provides a series of recommendations for how football can cope with money laundering risks.

One suggestion is that the sport adopts a code of best practices developed by the Football Association, which last year introduced a set of money-laundering guidelines.

It also highlights a risk associated with internet gambling, and suggests that the issue could be investigated in a separate FATF study.


Yekaterinburg may become known not only as the death place of the czars but of the American empire as well.

China and other economic powers who have been financing the U.S. trade/budget deficit – flip sides of the same coin – are saying “enough.” Not only are they rightfully dubious about getting their loans repaid in anything close to full real value, but they realize they are financing their own military encirclement – the U.S. defense budget being by far the largest source of the budget deficit. It is late in the day, but that game is coming to an end.

This is posted after the fact, but when this article was written China, Russia and representatives of other countries in the six-nation Shanghai Cooperation Organization were about to meet in Yekaterinburg, Russia. It meeting was the first formal step by the major U.S. trading partners to replace the dollar as the world’s reserve currency. The U.S. asked to attend the meeting. The request was denied.

Watch what happens there carefully, we are advised. “The gathering is ... the most important meeting of the 21st century so far.”

This week [3rd week of June] marks the end of the dollar’s reign as the world’s reserve currency. It marks the start of a terrible period of economic and political decline in the United States. And it signals the last gasp of the American imperium. That is over. It is not coming back. And what is to come will be very, very painful.

Barack Obama, and the criminal class on Wall Street, aided by a corporate media that continues to peddle fatuous gossip and trash talk as news while we endure the greatest economic crisis in our history, may have fooled us, but the rest of the world knows we are bankrupt. And these nations are damned if they are going to continue to prop up an inflated dollar and sustain the massive federal budget deficits, swollen to over $2 trillion, which fund America’s imperial expansion in Eurasia and our system of casino capitalism. They have us by the throat. They are about to squeeze.

There are meetings being held Monday and Tuesday in Yekaterinburg, Russia, (formerly Sverdlovsk) among Chinese President Hu Jintao, Russian President Dmitry Medvedev and other top officials of the six-nation Shanghai Cooperation Organization. The United States, which asked to attend, was denied admittance. Watch what happens there carefully. The gathering is, in the words of economist Michael Hudson, “the most important meeting of the 21st century so far.”

It is the first formal step by our major trading partners to replace the dollar as the world’s reserve currency. If they succeed, the dollar will dramatically plummet in value, the cost of imports, including oil, will skyrocket, interest rates will climb and jobs will hemorrhage at a rate that will make the last few months look like boom times. State and federal services will be reduced or shut down for lack of funds. The U.S. will begin to resemble the Weimar Republic or Zimbabwe. Obama, endowed by many with the qualities of a savior, will suddenly look pitiful, inept and weak. And the rage that has kindled a handful of shootings and hate crimes in the past few weeks will engulf vast segments of a disenfranchised and bewildered working and middle class. The people of this class will demand vengeance, radical change, order and moral renewal, which an array of proto-fascists, from the Christian right to the goons who disseminate hate talk on Fox News, will assure the country they will impose.

I called Hudson, who has an article ... called “The Yekaterinburg Turning Point: De-Dollarization and the Ending of America’s Financial-Military Hegemony.” “Yekaterinburg,” Hudson writes, “may become known not only as the death place of the czars but of the American empire as well.” His article is worth reading, along with John Lanchester’s disturbing exposé of the world’s banking system, titled “It’s Finished,” which appeared in the May 28 issue of the London Review of Books.

“This means the end of the dollar,” Hudson told me. “It means China, Russia, India, Pakistan, Iran are forming an official financial and military area to get America out of Eurasia. The balance-of-payments deficit is mainly military in nature. Half of America’s discretionary spending is military. The deficit ends up in the hands of foreign banks, central banks. They don’t have any choice but to recycle the money to buy U.S. government debt. The Asian countries have been financing their own military encirclement. They have been forced to accept dollars that have no chance of being repaid. They are paying for America’s military aggression against them. They want to get rid of this.”

China, as Hudson points out, has already struck bilateral trade deals with Brazil and Malaysia to denominate their trade in China’s yuan rather than the dollar, pound or euro. Russia promises to begin trading in the ruble and local currencies. The governor of China’s central bank has openly called for the abandonment of the dollar as reserve currency, suggesting in its place the use of the International Monetary Fund’s Special Drawing Rights. What the new system will be remains unclear, but the flight from the dollar has clearly begun. The goal, in the words of the Russian president, is to build a “multipolar world order” which will break the economic and, by extension, military domination by the United States. China is frantically spending its dollar reserves to buy factories and property around the globe so it can unload its U.S. currency. This is why Aluminum Corp. of China made so many major concessions in the failed attempt to salvage its $19.5 billion alliance with the Rio Tinto mining concern in Australia. It desperately needs to shed its dollars.

“China is trying to get rid of all the dollars they can in a trash-for-resource deal,” Hudson said. “They will give the dollars to countries willing to sell off their resources since America refuses to sell any of its high-tech industries, even Unocal, to the yellow peril. It realizes these dollars are going to be worthless pretty quickly.”

The architects of this new global exchange realize that if they break the dollar they also break America’s military domination. Our military spending cannot be sustained without this cycle of heavy borrowing. The official U.S. defense budget for fiscal year 2008 is $623 billion, before we add on things like nuclear research. The next closest national military budget is China’s, at $65 billion, according to the Central Intelligence Agency.

The most important balance-of-payment deficit for the past 50 years has been Pentagon spending abroad.

There are three categories of the balance-of-payment deficits. America imports more than it exports. This is trade. Wall Street and American corporations buy up foreign companies. This is capital movement. The third and most important balance-of-payment deficit for the past 50 years has been Pentagon spending abroad. It is primarily military spending that has been responsible for the balance-of-payments deficit for the last five decades. ...

To fund our permanent war economy, we have been flooding the world with dollars. The foreign recipients turn the dollars over to their central banks for local currency. The central banks then have a problem. If a central bank does not spend the money in the United States then the exchange rate against the dollar will go up. This will penalize exporters. This has allowed America to print money without restraint to buy imports and foreign companies, fund our military expansion and ensure that foreign nations like China continue to buy our treasury bonds. This cycle appears now to be over. Once the dollar cannot flood central banks and no one buys our treasury bonds, our empire collapses. The profligate spending on the military, some $1 trillion when everything is counted, will be unsustainable.

“We will have to finance our own military spending,” Hudson warned, “and the only way to do this will be to sharply cut back wage rates. The class war is back in business. Wall Street understands that. This is why it had Bush and Obama give it $10 trillion in a huge rip-off so it can have enough money to survive.”

The desperate effort to borrow our way out of financial collapse has promoted a level of state intervention unseen since World War II. It has also led us into uncharted territory.

“We have in effect had to declare war to get us out of the hole created by our economic system,” Lanchester wrote in the London Review of Books. “There is no model or precedent for this, and no way to argue that it’s all right really, because under such-and-such a model of capitalism ... there is no such model. It isn’t supposed to work like this, and there is no road-map for what’s happened.”

The cost of daily living, from buying food to getting medical care, will become difficult for all but a few as the dollar plunges. States and cities will see their pension funds drained and finally shut down. The government will be forced to sell off infrastructure, including roads and transport, to private corporations. We will be increasingly charged by privatized utilities – think Enron – for what was once regulated and subsidized. Commercial and private real estate will be worth less than half its current value. The negative equity that already plagues 25% of American homes will expand to include nearly all property owners. It will be difficult to borrow and impossible to sell real estate unless we accept massive losses. There will be block after block of empty stores and boarded-up houses. Foreclosures will be epidemic. There will be long lines at soup kitchens and many, many homeless. Our corporate-controlled media, already banal and trivial, will work overtime to anesthetize us with useless gossip, spectacles, sex, gratuitous violence, fear and tawdry junk politics. America will be composed of a large dispossessed underclass and a tiny empowered oligarchy that will run a ruthless and brutal system of neo-feudalism from secure compounds. Those who resist will be silenced, many by force. We will pay a terrible price, and we will pay this price soon, for the gross malfeasance of our power elite.

BRIC Nations Getting Bolder

No so fast on world domination.

So what was the substance behind the “much-ballyhooed” meeting among the rising economic powers, led by China? Foreign currency trader Bill Jenkins takes a “serious and sober look at what these countries are about, and why they are doing what they are doing. Assuming that they are even doing anything at all ...”

Jenkins says the four BRIC nations want more power, influence and wealth – in short they want more. They are like everyone else, after all. They want what the U.S. has, and would love to take it out of the U.S.’s hide. And they are legitimately worried about the fate of their dollar-denominated investments. Regarding their plan to “decrease the usability of the U.S. dollar while increasing their own,” he notes that the U.S. “seems fairly determined to bring the first portion to pass by its own volition. The BRICs may not need much help in that arena. But does that automatically guarantee them a seat at the table?”

Jenkins continues: “I am not sure that question has been thought through. Frankly, I believe they just see an opportunity and figure they will jump on it. But only lightly. Because there are repercussions, and some of them are not so favorable.” Analyzing the situation further: “But when all is said and done, this betrays the fragility of each of their economies, and how connected they are to dollar based difficulties. So as they chop away at the tree, they had better be careful lest it fall on them.”

So the changeover in influence and power is coming, but not overnight, one might conclude upon a closer look at the situation.

The BRIC countries (Brazil, Russia, India, China) had a much-ballyhooed meeting to discuss global economics and shake their fists at the U.S. powers that be for crushing their U.S. investments.

We have commented on their plans and purposes on numerous occasions. Now that the meeting has come and gone, let’s take a serious and sober look at what these countries are about, and why they are doing what they are doing. Assuming that they are even doing anything at all ...

First let’s look at the growth of these four dynamic economies. In the GDP growth department, last year India came in at 6.7%, Russia at 8.1%, Brazil at 5.08% and China a staggering 9%. Compare that to the United States’ -6.3%, and you start to get an idea about why they consider themselves superior to America and her economy.

No matter how much you may think those numbers are manipulated, the bottom line is that they are all ahead of the West by light years. They are in regions that were once shackled by the constraints of socialism and outright communism, and are just now breaking free into the light. (Meanwhile the United States is steadily advancing its war on capitalism by increasing debilitating taxation and regulation by the day!)

To put this even more into perspective, the United States has a GDP of about $14 trillion annually. Comparatively, Brazil is at $1.9 trillion, Russia at $2 trillion, India at $1.2 trillion, and China at $4.3 trillion. That means that the combined output of these four nations barely equals 2/3 of the United States.

The GDP per capita, where it is estimated what each person produces each year, also shows some marked disparity.

For the United States, GDP per capita is just under $47,000. Brazil is $8,200, Russia is $14,600, India is $1,000 and China is $3,200. Once again, in terms of output, the United States is far and away the leader, nearly doubling the output of the other four nations combined.

Additionally, the percentage of people in these countries that are below poverty level is shocking. The World Bank estimates that 42% of India’s population is below the poverty level; In China, 10%; Russia, 16%; Brazil, 22%. As that sinks in, also keep in mind that the World Bank defines poverty on an international scale as living on less than $1.08 per day

And not only are these people poor, there is no infrastructure in place to facilitate the increase of wealth among a large portion of their citizens.

Please note, I am not talking about wealth redistribution by government mandate. That will ALWAYS make the poor even poorer. As a matter of fact, it will make the rich poorer, also.

But as a rising tide does lift all boats, severe divergences in wealth from various parts of the population is indicative of markets that are not functioning “normally.” We see this in the United States as well, as government regulation interferes with properly functioning markets and facilitates the destruction of the middle class, leaving only the rich and the poor – not to mention a widening chasm between the two.

How do these relatively “poorer” countries get to call the shots? Why are they influencing policy discussions around the globe? Why do markets tremble when they speak? What is going on here?

You may remember the axiom of Baron Acton, “Power tends to corrupts, and absolute power corrupts absolutely.” Let us be careful here. Absolute power does not corrupt absolutely. God, of course, is exempt, however, in the world of men, it is indeed seemingly axiomatic that the more powerful a man becomes, the greater the temptation to corruption.

No place is this more true than in politics (except maybe religion!). And frankly, it does not matter whence a man hails, what color his skin may be or even what language he speaks, the intoxicating effects of power are universal.

The four BRIC nations have been drinking deeply from this well. They want more power. They want more influence. They want more wealth. In short, they want more. They want what the United States has flaunted. They want the American dream. But they want it wrapped in a turban, served with fine vodka and no more white rice.

They have also learned the meaning of another English proverb: “Strike while the iron is hot.

There is no doubt that that the international media often depicts the United States as an absurd mix between the playground bully and the dunce in the corner. When was the last time you heard an international story praising the U.S. position on anything? From economics to foreign policy, bureaucratic regulation to welfare statism, the United States has become the international piñata.

The fact is, many nations – especially BRIC nations – would like to increase their own amount of “loot” by beating it out of the United States.

The question is, can they do it? Can they decrease the usability of the U.S. dollar while increasing their own. The United States seems fairly determined to bring the first portion to pass by its own volition. The BRICs may not need much help in that arena. But does that automatically guarantee them a seat at the table? Does a U.S. decline mean, ipso facto, that any one, or all four, of these countries gets moved to the head of the class?

I am not sure that question has been thought through. Frankly, I believe they just see an opportunity and figure they will jump on it. But only lightly. Because there are repercussions, and some of them are not so favorable.

As they have sent up a hue and cry for a supranational currency, I have to wonder if they have really learned any lessons at all. Their complaints have centered around a single manipulated currency at whose mercy they find themselves. They seem to intuitively know that a fiat currency system is flawed. It is flawed because men are easily corrupted.

After all, what good is the guilt of corruption, and who would want to bear that burden, unless they could effectively salve their conscience by the increase of wealth? In short, power is rarely of any use to men unless it results in more money. That is what the United States is being accused of (and rightly so). We have taken our position of unquestioned strength and used it to create the illusion of wealth at home, at the expense of our neighbors. And now the neighbors do not like it.

But what is their solution? More of the same. Another fiat currency. Actually, a currency made up of a basket of currencies. This should really strike us as hilariously funny, if it were not so sad. And by sad, I mean stupid.

It is like draining bad oil out of a motor and replacing it with equally bad oil. Or like removing a tire that has a nail in it, only to replace it with one that is dry rotted. Or like trading a job you hate for one that will eventually kill you. Or like ... well, I hope you get the picture. Essentially, the solution they have put forward is no different from the problem they are attempting to repair.

And that is not the only problem.

Here is what I mean. Both India and Russia still receive foreign aid from the United States. They are rather like a rebellious teenager who takes potshots at their parents while holding out their hands for cash and car keys.

Beyond that, consider that the BRIC nations hold over 30% of the U.S. Treasury market. That is a lot of eggs in one basket. So when they start grumbling about policy, they can really strike a fire. On the other hand, upsetting the basket breaks a lot of their own eggs.

The problem is that they must measure their blows carefully. If memory serves correctly, it was China who fired the first shots across the bow of the U.S. economic state. But then, like a playground dog pile, Russia jumped on top as well. Then, lo and behold, the statements are retracted (or at least ameliorated!).

This has gone back and forth, and I imagine it will for some time, since they can ill-afford to knock the United States completely off its horse. To that end, the BRICs have discussed intermarket trading with each other while bypassing the U.S. dollar and talking about a new currency reserve.

Now this is some pretty braggadocio poppycock from upstart powers that “wannabe.” It was just a decade ago that Russia scored big on the international monetary scene by defaulting on a $40 billion dollar debt. (That was back in the day when a billion dollars actually meant something!)

If that were you or I, we would still have that default on our credit report! And no one would let us forget it, no matter how well we had rearranged our household finances.

So then ... have these four countries turned the corner financially? Have any of them got the economic muscle to merge the other three into a formidable monetary force against the United States? Let’s take a look.

Last year during the first leg of the global economic collapse, commodities took a real whack. So did the economies associated with their production and distribution. That means oil – and that means Russia and Brazil.

Even though the Russian stock market climbed more than 6,000% in the previous 10 years, it fell 80% in the eight months of crisis. 80%! While it was the worst of the BRIC alliance, Brazil fared little better. Its equities were down 60%!

And how about the other two BRICs in the wall? Indian stocks were down almost 65%, and Chinese companies ... a whopping 73%!

We also now know that while Russia’s equities were tanking, so was their currency, the ruble. After losing nearly 60% of its value, the bleeding was only stopped when Russian authorities jumped in and sold nearly $200 billion worth of dollars to support their currency in crisis. That was nearly 1/3 of their currency reserves – up in smoke to defend an already overvalued currency.

Now, after all that, they start talking about the concept of buying one another’s bonds, and lessening their investment exposure in the United States.

Now let me ask you a simple question: If you had to buy the bonds of either the United States or Russia, which would make you feel safer? One that defaulted on their debt not so long ago and was just hemorrhaging the value of their currency in the last six months? I am not saying that America is rock solid as an investment, but if you have to pick the lesser of two evils, who you gonna choose?

At this point the U.S. dollar index is hovering around 80 against the weighted basket of currencies by which its value is measured. Last June it was around 72.50 at its lows. That puts it up about 10% on the year.

Conversely, the rupee, real, and ruble, even after some recovery, are still down 35%, 25% and 35% respectively.

Also, consider that from top to bottom of the crisis moves, the ruble was down nearly 60%, the real nearly 70% and the rupee down 30%.

China, of course, has continued to peg its currency, the yuan/renminbi, to the dollar, so such fluctuations, “don’t exist.” Because when a nation, like China, pegs its currency to another nation’s currency, such as the United States, the foreign authorities continually buy and sell their own currency to keep it in a trading range against the other. That way it never suffers from severe fluctuation shock.

But when all is said and done, this betrays the fragility of each of their economies, and how connected they are to dollar based difficulties. So as they chop away at the tree, they had better be careful lest it fall on them.

It is hard to say what the future may bring in terms of changes, but even now, although the BRICs are referred to as an alliance or “federation,” the only two countries that have a trade relation of any substance with one another are Russia and China. India and Brazil see very little trading action with them, and are not even in their top seven in terms of import/export volume.


In the next century the law enforcers are simply going to have to live without wiretaps, concludes William Baldwin. Encrypting communications has gotten too simple and will eventually become the default option for Voice over IP (VoIP) telephone connections. (But why wait until then?)

The century-old arms race between law enforcement and privacy is heating up. Who wins? Who should win?

Your answer to the second question depends on who is trying to keep his communications private. In the 2006 movie Das Leben der Anderen [aka, The Lives of Others], the bad guys are the secret police, snooping on dissidents. In the digital battlegrounds of Tehran and Tiananmen, you root for the privacy seekers.

But what if the subject of the bugging is a gang of terrorists planning to blow up a synagogue? Or a crooked governor selling a Senate seat? Then you realize that a victory for privacy would not be an unmixed blessing.

Like it or not, privacy is going to win this battle. One reason is that mathematics favors the cipher. Add a few arithmetic steps to your encrypting program and you slow down your computer by a few seconds but delay the code crackers by a few thousand years. In a recent column Lee Gomes looks at encryption from the everyday perspective of a Microsoft Office user. For people who take the trouble to use long passwords, security has gotten very, very good. In “Super Secret Encryption” Andy Greenberg explores a breakthrough in coding that, while purely theoretical today, could someday lead to better privacy in a world where most of your personal computation takes place at a far remove from your desktop.

The other factor is the likely drift of the telephone network to the Internet Protocol, the format used by Skype. Voice over IP converts conversations to packets of bits that can be easily encrypted with secret keys invented on the fly. Code your phone calls and all the wiretap warrants in the world will not allow the FBI to listen in.

Chief proponent of encrypting phone calls is Philip Zimmermann, whose Zfone software handles all the details. Mainstream phone companies are for now just sniffing at the idea (unless you consider Latvia a mainstream market). But it is quite possible that, in a world of IP telephony a decade hence, encryption will become the default option.

Zimmermann is a hero to privacy fans for winning a battle with the government in the 1990s over his Pretty Good Privacy encryption program. The feds thought PGP was so powerful that it should be regulated as a munitions export. They eventually backed down. They had to. Encryption these days boils down to some well-known computational tricks. It is one thing to stop a missile launcher at the border, quite another to interdict an equation.

Outlaw encryption? That would be not only impossible but a big mistake. So much business these days hangs on secure transmission – your Amazon order, bank wire transfers, government purchasing. Yes, al Qaeda uses encryption. Bank robbers use getaway cars, but that does not mean we should outlaw the automobile. In the next century the law enforcers are simply going to have to live without wiretaps.


Liechtenstein Parliament Ratifies Tax Information Exchange Agreement with U.S.

This sounds significant, but the provisions say an exchange of information will only be granted upon receipt of a justified request submitted by the U.S. tax authorities, which may be determined by a Liechtenstein court.

Approved unanimously by Liechtenstein’s Parliament, the country’s TIEA with the U.S., signed in December 2008, is due to enter into force on January 1, 2010. ... Under the terms of the agreement, an exchange of information will only be granted upon receipt of a justified request submitted by the U.S. tax authorities, which may be determined by a Liechtenstein court.

Designed to provide swift and efficient international administrative assistance, the amendment to the country’s constitution demonstrates Liechtenstein’s commitment to fully cooperating with information exchange in tax matters.

Delighted with the Parliament’s recent decision, Liechtenstein’s Prime Minister Klaus Tschütscher emphasized that adoption of the tax agreement has shown that Liechtenstein is “able to follow words with deeds.”

“Liechtenstein is proving itself to be a reliable treaty partner, not only vis--vis the United States, but also with a view to the further agreements we want to conclude for the purpose of implementing the OECD standards,” the Prime Minister continued.

With entry into force of the agreement, the QI status of Liechtenstein banks will also be extended by a further six years. It is anticipated that the law will be passed in September.

The Isle of Man Plans to Eliminate Withholding Option on Interest Earned; Reporting to Home Country Will Be Automatic

T he Isle of Man plans to change its tax laws to clampdown further on tax evasion by savers resident in European Union member states. Currently they can either pay a withholding tax on the interest credited to their account or to allow exchange of information on their savings with their home tax authorities. The Manx Treasury plans effectively to withdraw the withholding tax option from July 1, 2011, making exchange of information obligatory.

Allan Bell, the Manx Treasury Minister, ... said: “Our decision today to move to automatic exchange of information under the EU Savings Directive is a sign that we intend to continue to lead the way in international tax co-operation and transparency.”

During the past nine years, the Isle of Man has developed, signed and ratified Tax Information Exchange Agreements (TIEAs) and Double Taxation Agreements (DTAs) and now has 15 of these OECD standard agreements.

It also enforces the European Savings Directive, under which savers resident in EU member states have to pay a withholding tax or opt for exchange of information. Most customers of Manx savings institutions who are EU residents have already opted for exchange of information.

The rate of withholding tax, currently 20%, is higher than the tax currently payable in countries such as Cyprus and is set to rise to 35% on July 1, 2011. This rate is likely to be higher than the tax payable on savings in most EU member states, so most savers will be better off opting for exchange of information.

Singapore Plans to Amend Laws Related to Bank Secrecy

The Singapore government is proposing changes to its tax laws to meet demands from the U.S. and Europe to clamp down on bank secrecy.

“Singapore will seek to amend its domestic laws to allow it to extend further cooperation on information exchange” via double-taxation agreements with other countries, the Finance Ministry said in a statement.

Non-Resident Indians Seek Tax Parity with Foreign Institutional Investors

A group of non-resident Indians led by the Hindujas has asked the government for tax parity with foreign institutional investors on short-term gains in the stock market. In a pre-budget memorandum to Finance Minister Pranab Mukherjee, the IndusInd International Federation (IIF) said such benefits would enable them to make India the hub for their global activities.

Non-resident Indians are required to pay tax at the rate of 10% on their short-term gains on the Indian stock markets, while short-term capital gains earned by Mauritius-based foreign institutional investors are tax exempt. “The treatment of taxation on short-term capital gains needs to be on par for both foreign institutional investors and non-resident Indians,” said the IIF, headed by UK-based Hinduja Group Chairman S P Hinduja. ...

According to the IIF numerous non-resident Indians would like to make India their permanent home after retirement. “The Indian tax authorities should not tax the income derived from interest on their investments in savings and pension plans in foreign institutions and foreign countries,” the IIF said.

Amazon May Lose Californian Affiliates Over Sales Tax

This is a followup to the previous Offshore Digest’s “Amazon Shrugs” post.

While the National Conference of State Legislators struggles to find a workable formula for a uniform national sales tax on internet sales, several individual states are pressing ahead with their own legislation. Last year, Amazon started collecting taxes in New York after the state passed a law requiring the company to do so. Amazon contested the law in court but is faced with lengthy appeal processes and a doubtful final outcome. Heartened by New York’s initial success, other states are following the New York example. Amazon has sent a letter to the Californian State legislature threatening to cease doing business with marketing affiliates based in the state rather than accept the responsibility for collecting and distributing the state sales tax.

Like California, North Carolina, Hawaii and Connecticut, are also considering legislation that would require on-line retailers with “online marketing affiliates” in the State to collect sales tax. Amazon has thousands of such affiliates – vendors who obtain a sales commission from links on their own websites. North Carolina and Hawaii have received similar letters from Amazon. Amazon said efforts to force it to collect taxes based on marketing affiliate relationships were “unconstitutional” and would backfire if Amazon severed links with these advertising associates. It wanted to see a sales tax collection system that was as simple as the current physical presence-based system and evenly applied to all sellers. Seattle-based Amazon collects sales tax on sales in its own state and in North Dakota, Kentucky and Washington where it also has physical operations.

Bet365 Warns There Is No Benefit to Remaining in the UK, Casts Eyes Abroad

Bet365, one of the world’s biggest online bookmakers, has warned there is no benefit to remaining in the UK and that it is losing out to competitors based offshore in lower tax regimes.

With ministers growing increasingly alarmed at the prospect of UK-based bookmakers fleeing these shores, Alan Coates, chief executive of the Stoke-based company which employs 900 people, said it had no current plans to relocate its sports betting business.

But he said it was “very aware” what it would take to move abroad. It already has its gaming business based in Gibraltar. “Being based in the UK, from a tax perspective, is very expensive,” said Mr. Coates, pointing to the burden of having to pay gross profits tax of 15%, the racing levy, non-recoverable valued added tax and corporation tax.

Asked whether there were benefits to being in the UK, Mr. Coates said: “There is not a great advantage, no. There are highly skilled workforces all over the world. But we are a Stoke firm and that is important to us.”

William Hill last week upped the ante with the government when Ralph Topping, its chief executive, told the Financial Times that it did not have “the luxury of being parochial about our future.”