Offshore News Digest for Week of January 27, 2003

EU “TAX SAVINGS DIRECTIVE” FALLOUT

Now that the brokered deal is done, let the spinning begin. Pundits predict that the deal will lead to a trickle of capital out of Europe, rather than a flood. Another notes that even the watered-down compromise depends on cooperation from non-EU countries such as Switzerland and the U.S. Free market oriented organizations denounce the pact, even as they admit it could have been a lot worse.

Initial responses from some of the more obedient jurisdictions indicated happiness with the deal, but reflection will surely bring a more critical response, even if it is not expressed publicly. What happens next, for the offshore jurisdictions, is hard to divine - pretend agreement, leaving it to banks and their clients to find ways around the rules, or brazen it out at least until 2010, when the remaining three EU countries are due to fall into line on the presumption that Switzerland and the US will have joined the EU’s suicide pact? Withholding tax, or information exchange?

LONDON: Chancellor Gordon Brown proclaims “victory” for the information exchange advocates over the withholding tax forces.

U.S. AND SWISS SIGN NEW “MUTUAL AGREEMENT”

WASHINGTON: The pact, an addition to a 1996 tax treaty, calls on each country to “support the tax administration and enforcement efforts of each Contracting State to the greatest extent possible.” [Foreign tax evasion is not a crime in Switzerland, but “tax fraud” is. Presumably the US will try to favorably define “tax fraud” in order to crack Swiss secrecy.]

SWISS PRIVATE INSURERS FORECAST MORE DARK TIMES AHEAD

In its annual review, the Swiss Insurance Association, the industry’s umbrella organisation, revealed that the previous 12 months had been worse than expected. Many insurers were forced to mass-sell equity holdings at any price, which in turn drove down companies’ equity capital as this fed further share price declines.

“RIGHT WING” SWISS POLITICAL PARTY BACKING AT ALL TIME HIGH

A survey on voting intentions at October’s parliamentary elections showed the People’s Party share of the vote rising to 26%. Gains by the Right and Left are being made at the expense of the Radicals and the Christian Democrats – the two parties closest to the political Center.

CAYMAN LAWYERS CALL FOR ATTOURNEY GENERAL’S OUSTER

GEORGE TOWN, C.I. The Cayman Islands Law Society and the Caymanian Bar Association have issued a joint statement saying that “it is in the interest of the Cayman Islands” that the Attorney General, Mr. David Ballantyne, “should retire”. They said Mr. Ballantyne had lost the confidence of the legal profession following the collapse of the Euro Bank money laundering trial on January 14. Mr. Ballantyne has so far refused to step down and last week received the full support of the UK government.

The Director of the Cayman Islands Financial Reporting Unit (CAYFIN) Mr. Brian Gibbs told lies and deliberately failed to disclose and knowingly destroyed evidence which he was aware was highly relevant to the Euro Bank trial. A special report on the collapse of the money laundering trial is given here.

A top civil servant from the UK Foreign Office has flown to the Cayman Islands, apparently to discuss whether British intelligence agencies interfered in a money laundering investigation in the Caribbean territory.

MORE CARIBBEAN NEWS

UK related island nations set up own Privy Court to replace London; UK sends official to Cayman Islands after bank spy revelations.

BELGIAN FINANCE MINISTER CALLS FOR A EUROPE-WIDE TAX AMNESTY

Mr. Didier Reynders called for the amnesty in order to allow EU citizens to wipe the slate clean prior to the implementation of the EU agreement on non-resident savings interest taxation, citing the success of similar revenue-boosting initiatives in Italy and Portugal: “We should give taxpayers the opportunity to fix their mistakes from the past during a certain period of time - probably six months but no longer than one year.”

PHILIPPINES: RUSH TO PLEASE FATF

The Philippines House of Representatives is pushing ahead with belated measures against money laundering in the hope of avoiding imminent financial sanctions. The measures bring the threshold for reporting suspicious transactions to 500,000 pesos (less than $10,000). If sanctions are imposed, the FATF’s members - which include the US, Japan and the whole of Western Europe - could limit transactions with the Philippines.

THE NEW GLOBAL JOB SHIFT

The next round of globalization is sending upscale jobs offshore. They include basic research, chip design, engineering - even financial analysis. Can America lose these jobs and still prosper? Who wins? Who loses?

Work that costs $100 an hour in the U.S. costs $20 in India. Even Wall Street jobs paying $80,000 and up are getting easier to transfer. A Forrester Research analyst predicts that at least 3.3 million white-collar jobs and $136 billion in wages will shift from the U.S. to low-cost countries by 2015.

THAT ELUSIVE ECONOMIC RECOVERY

Who would have thought it? Three years ago, the global economic boom looked unstoppable. Today, a return to sustainable, buoyant growth looks more elusive than it did only a year ago. The American economy is, at best, going through what Alan Greenspan has called a “soft patch”. Europe’s problems are being likened to those in Japan. Latin America is watching yet another regional economy - Venezuela, this time - implode. And emerging-market economies in the rest of the world can only hope that the pace of global growth quickens soon.

OFFSHORE BANK ACCOUNTS FOR BRITS

Three times more people in the UK consider an offshore bank account as more of a status symbol than owning a Lamborghini, according to research carried out by Abbey National Offshore. A lack of understanding deters most people from opening an offshore account. Yet offshore banking is something everyone could benefit from at some point in their lives, if working or buying a property overseas, or retiring to a sunnier climate, are in the offing.

BRITISH CRACK DOWN ON DIRTY CASH

Customs and Excise has seized more than £4m since new laws were passed three months ago, vs. £14m for the whole of 2002. The new powers give customs officers the right to hold onto suspicious cash funds for 48 hours while they probe its origins, and the authority to seize cash inland, not just at borders. They can also target currency, cheques, bankers drafts and postal orders suspected of being linked to any crime - in the past they were limited to suspected drug money. Leading the way in catching the cash crooks are sniffer dogs, specially trained to pick up the scent of the ink used in banknotes.

INTERNATIONAL BANKS STRUGGLE WITH USA PATRIOT ACT

Florida’s international bankers are scrambling to decipher the anti-money laundering rules approved after the September 11 attacks. The far-reaching regulations, some of which have yet to be finalized, are being gradually phased in, but their implementation has raised many questions as banks try and adapt to a new environment that seems to place a far greater burden on them to investigate suspicious activity. Meanwhile, the changes have jammed up compliance operations at some Miami-area institutions, whose reach extends throughout the Caribbean and Latin America.

While no financial institutions have been penalized under the USA Patriot Act, recent fines and penalties for Bank Secrecy Act violations indicate a significantly higher level of vigilance from law enforcement, according to bankers, lawyers and government officials.

U.S. SENATE CURBS FUNDS FOR PENTAGON SPY PLAN

WASHINGTON: The Senate voted to bar deployment of a Pentagon project to search for terrorists by scanning information in Internet mail and in the commercial databases of health, financial and travel companies here and abroad. The curbs on the Total Information Awareness Program were adopted without debate and by unanimous consent as part of a package of amendments to an omnibus spending bill.

Senator Ron Wyden (D-Oregon), who proposed the amendment, said after the vote that it passed so easily because dismayed Republican senators had told him that “this is about the most far-reaching government surveillance proposal we have ever heard about.”

US HEALTH DATA MONITORED FOR BIOTERROR WARNING

The Centers for Disease Control and Prevention is to lead a multimillion-dollar surveillance effort, which officials expect to become the cornerstone of a national network to spot disease outbreaks by tracking data like doctor reports, emergency room visits and sales of flu medicine.

“We’re not Big Brother,” said one of the laboratory heads involved in the project. “Our objective is to support public health. The information we receive has been sanitized by the provider to ensure that it is impossible to identify individuals.”

The US health secretary, Tommy Thompson, warned that a bioterrorist attack that could kill thousands was inevitable and urged industrial and developing nations to spend tens of billions of dollars more to gear up medical systems to cope with the threat. “There is going to be an attack. Whether it is in western Europe, the US, Africa, Asia or wherever, you have got to anticipate that there is going to be a bioterrorism attack and the only way to defend yourself is by getting prepared,” he said.

U.S. WARNS AMERICANS ABROAD

The State Department sent a cable to embassies around the world on Friday telling Americans abroad to be ready to leave their resident country quickly in an emergency, its first such blanket warning. A senior State Department official made no comment when asked if the cable was related to a possible military campaign against Iraq. The message advice is to have a supply of prescription medicines on hand, keep passports up to date and maintain adequate stocks of food in the event of political unrest, natural disasters or “terrorist” attacks.

CYBERCRIME SOARING

Long a painful side effect of the innovations of Internet technology, Cybercrime is reaching new dimensions, security experts say. Spurred by a tightening economy, the increasing riches flowing through cyberspace and the relative ease of such crimes, technically skilled thieves and rank-and-file employees are stealing millions if not billions of dollars a year from businesses in the United States and abroad. Thieves are not just diverting cash from company bank accounts - they are pilfering valuable information like business development strategies, new product specifications or contract bidding plans and selling the data to competitors.

“Criminal activity on the Internet is growing — not steadily, but exponentially, both in frequency and complexity,” said Larry Ponemon, chairman of the Ponemon Institute, an information management group and consultancy. “Criminals are getting smarter and figuring out ways to beat the system.”

Part of the problem is that cybercrime is much harder to detect than crime in the actual world. “The vast, vast majority of virtual crimes right now never get caught or prosecuted, where you have some chance in the real world,” said Dan Farmer, chief technology officer of Elemental Security, a computer security firm in Silicon Valley. “It is extraordinarily hard to prove anything using digital evidence.”

STILL MORE ABOUT THE IRS OFFSHORE CREDIT CARD “AMNESTY”

Coming forward could have its own risks. A San Antonio civil and criminal tax-law attorney says taxpayers need to be very careful in how they proceed.

CHANCE OF IRS AUDIT IS LOW

But for those who use offshore credit cards, tax shelters or trusts to hide income, or for wealthy taxpayers who understate income, the odds may be considerably greater.

DOES THE U.S. UNDERSTAND THE EUROPEAN UNION?

Donald Rumsfeld recently expressed opinion that France and Germany are part of “old Europe” and “a problem” in their opposition to military action in Iraq contributed to the growing polarization between the old and new worlds, and disclosed the lack of depth of America’s global hegemony. Why do Canadians and Americans adopt their myopic view?

Notwithstanding sputtering economies, the reality is that the economic and monetary union is well underway in the European Union. Never before has Europe been united through peaceful means. The result will be a new nation stretching from the Atlantic across Eurasia to the Bering Sea. A union without question more formidable than the United States. What will this mean for the world and the U.S. dollar? The writer is optimistic about the Union’s prospects.

IN SOME COUNTRIES DANGEROUS LEGAL PITFALLS AWAIT THE UNWARY VISITOR

While the vast majority of business conducted by Americans abroad is relatively problem-free, security specialists, lawyers and diplomats all recommend taking great care in countries where navigating an array of obscure and often byzantine laws can be perilous. The State Department estimates that about 3,000 Americans are arrested in foreign countries every year, and most experts say the true figure is probably higher. In many cases, guilt or innocence is irrelevant. The State Department recommends that travelers check its Web site for specific warnings and advisories.

While most business travelers are smart enough not to bring illegal drugs or firearms into foreign countries, they can be caught unaware by some local regulations. Many countries prohibit taking photos of government buildings and airports. A woman was detained in Zimbabwe for photographing a government mansion last year. And Japan bans such commonplace over-the-counter medications as Tylenol Cold Medicine and Nyquil.

US CITIZENS WARNED TO LEAVE ZIMBABWE

This week the US State Department issued a warning to citizens visiting Zimbabwe that the country was “in crises” and could be unsafe.

GOLD IN THE NEWS

Gold reached its highest level in more six years, $372.55 an ounce, on Monday as war jitters, a fragile dollar and falling stock markets stoked interest in the safe-haven metal. [Note: These are classic ex post explanations of price movements]

The gold rush has started, but will it last? With equities in turmoil, investors are retreating to an old-fashioned store of wealth. Its price may go up ... but then again, it may go down.

KOREA: Hoarding raises gold price there. Investors with idle money are increasingly choosing gold rather than housing, a trend that has raised the price of the valuable metal and encouraged smuggling.

IN E-GOLD WE TRUST?

For online consumers, especially those making international purchases, e-gold offers an ease of use and a degree of anonymity that credit cards cannot match. And for some merchants, of course, the only selling point e-gold needs is that there are people who want to spend it. A transaction fee of 1%, capped at 50¢ per spend, comes in well under the 2-5% fees charged by credit card companies. And as for that bane of online businesses, the credit card chargeback: Unlike almost any other form of online payment, e-gold clears instantly and finally, with no chance for the spender to cancel after the fact.

A large percentage of e-gold’s early adopters come from the ranks of the laissez-faire radicals for whom gold has long been an icon of economic freedom from government. Others are goldbug investors, desperately bullish on the metal despite years of declining prices. Still others come to e-gold via e-dinar, looking to honor Islamic financial commandments and subvert the Western economic system.

A long and interesting introduction to and perspective on the evolving transaction mechanism.

IRS / CONGRESS TAKE A HARD LOOK AT OFFSHORE HEDGE FUNDS

Hedge fund managers have made billions from deferring taxes on offshore fees and billions more from leaving pre-tax income to compound over years. The IRS was fairly liberal in allowing managers to defer offshore tax, one tax lawyer said, but may now have realised the sums involved. The practice would be banned if Congress passed the National Employee Savings and Trust Equity Guarantee Act, which aims to prevent offshore tax scams, but would also cover hedge fund managers’ tax deferrals.

Is a nearly $1 billion hedge fund on Park Avenue in financial hot water? That is the worry confronting investors in the Lancer Offshore Fund as the news spread last week that the fund is undergoing a severe, and intensifying, liquidity squeeze. One immediate concern is how far the ripples will spread.

The fund was basically a penny-stock house of cards. Supported by bull market greed that inevitably morphed into bear market fear, the fund has been attempting since summer to hold that fear at bay by means of a strange accounting theory - and that effort, too, now seems to have failed.

ONLINE OFFSHORE GAMBLING GROWTH

Online gambling looks set to be one of the huge growth areas of the next two years. A research company estimates that online betting and gaming revenues will reach $10 billion by 2002. The interactive betting services are looking to attract a new audience - the kind of people who don’t frequent betting shops but are nevertheless keen to have a flutter online. The two biggest potential growth markets are the middle classes and women.

NEW WRINKLE ON NIGERIAN SCAM

A new version of the infamous “Nigerian scam” surfaced when a man was conned into trying to cash a counterfeit check for $53,000 at a bank. “This was an excellent counterfeit of a Bank of America cashier’s check,” said Vancouver, Washington police Detective Troy Price. The casher’s cut was to be $3,000. The man was not charged because he had no idea the transaction was not on the up and up.

WHO ARE THE RICH IN AMERICA?

Rich and poor alike view themselves as simply “middle-class”. Few Americans think of themselves as wealthy. In a Gallup Poll a few years ago, the typical respondent believed 21% of Americans were rich, but less than a 0.5% saw themselves as rich.

The secret of human aspiration is that people are rarely happy with what they have, no matter how adequate or munificent their station. By much of the world’s standards, even minimum-wage U.S. workers are wealthy beyond hope, yet they do not feel rich. Numerous sociologists have shown that happiness in most countries often is tied to relative, not absolute, material success.

REP. RON PAUL: GOVERNMENT CANNOT CREATE WEALTH, BUT IT CAN DESTROY IT

While tax cuts are always good for the economy, it is dangerous to promote the idea that government can create value in the financial markets. The collapse of stock prices in the last two years provides stark evidence that the Federal Reserve’s monetary policies of the 1990s did not create lasting prosperity, and we should understand that tax policy is no different. Centralized planning via tax policy is every bit as harmful as centralized planning in monetary policy.

Even in hindsight, many do not seem to understand the true nature of the 1990s Fed-created financial bubble. The prosperity enjoyed by so many companies and individuals was artificial, caused by Fed policies that vastly inflated the money supply and made the cost of borrowing money artificially low. Much of the “money” made in the market, and most of the astonishing paper increases in market capitalization, were illusory. The economic problems created by this artificial bubble are real, and we cannot hope to insulate ourselves from the ongoing correction merely by tinkering with the tax code.

CANADA’S BIGGEST IDENTITY THEFT?

IBM has lost a hard drive containing the records of 180,000 clients of an insurance company. Details include “names, addresses, beneficiaries, social insurance numbers, pension values, pre-authorized checking information and mothers’ maiden names”, according to wire reports, and, oh yes, their bank account details.

But is it carelessness, or is it theft? The hard-drive was stored in a supposedly secure facility in Regina, Saskatchewan, at an IBM subsidiary.

DOT.COM FALLOUT: AOL TIME WARNER LOSES $99 BILLION

Half of the loss came from a $45.5 billion charge in Q4 to write down the value of AOL.

ANTIGUA TELLS OECD: “ALL BETS ARE OFF”

Antigua and Barbuda’s Chief Negotiator on international financial services, Sir Ronald Sanders, wrote this week to the Secretary General of the OECD informing him that his country wants a meeting of the OECD Global Tax Forum so that “all jurisdictions could collectively decide whether there is any basis for further commitment to the OECD’s initiative to eliminate tax competition”. Sir Ronald’s letter follows the decision six days ago by the EU whereby twelve out of fifteen member states will adopt information sharing, but the remaining three, Austria, Belgium and Luxembourg will not be required to exchange information on tax matters even though this is central to the OECD’s “Harmful Tax Competition Initiative”.

The OECD had threatened over 40 jurisdictions with sanctions unless they made a commitment to exchange information with OECD countries on tax matters. Consequently, these jurisdictions committed in February 2002 to work with the OECD in its Global Tax Forum to implement new standards including automatic exchange of information.

LIECHTENSTEIN DOES NOT LIKE E.U. TAX DEAL

“EU demands more than we are willing to give,” said head of government, Otmar Hasler. Announcing that he anticipated an increase in pressure on the Principality as a result of the EU agreement, Mr Hasler nevertheless welcomed the fact that low tax jurisdictions are being given the choice between information exchange and imposing a withholding tax at source.

Guernsey ponders its fate under EU deal. The general consensus in Guernsey’s finance center appears to be that the imposition of a withholding tax is the better option.

CAYMANS-U.K. SCANDAL FALLOUT CONTINUES

The Cayman Islands Law Society and the Caymanian Bar Association have called for the jurisdiction’s Financial Reporting Unit (FRU) to be restructured following the collapse of the Euro Bank money laundering trial earlier this month. The legal bodies have also called for the resignation of Attorney General, David Ballantyne. The trial collapsed when it emerged that the Director of the FRU had destroyed crucial evidence following a tip-off from an unidentified UK government agency that his home was about to be raided.

UPDATE ON NEW BERMUDA IBC LAWS

John Collis, head of the Corporate Department at Bermuda law firm Conyers Dill & Pearman, explains the impact of the Bermuda Companies Amendment Act 2002, which comes into force on 14th February, 2003.

IS OFFSHORE INVESTING FOR YOU?

Historically the term “offshore” has gotten a bad wrap from the media, which paints a picture of investors stashing their money with some illegal company located on an obscure Caribbean island where the tax rate is next to nothing. Yes, it’s true that there will always be the instances of shady offshore deals, but a vast majority of offshore investing is perfectly legal. In fact, depending on your situation, offshore investing may offer you many advantages.

EASTERN EUROPE STOCK MARKETS BOOMING

The world’s major stock markets may have had a horrid 2002, but there have been some bright spots in more obscure corners of the globe. One of the most sparkling last year was eastern Europe, where both Russia’s RTS Index and Prague’s PX 50 produced returns of 38% in dollar-adjusted terms. Fund managers specialising in the region are confident that the fundamentals remain strong, despite sluggish global economic growth and the growing threat of war.

THE DEBATE OVER RUSSIA CAPITAL FLIGHT

MOSCOW: Is capital flight a problem for Russia? Most people would say “yes” and would regard the recent reversal of capital flight as a positive sign for the Russian economy. But there is another school of thought that believes capital movements should be a matter of complete indifference and certainly not the object of government concern.

SOUTH AFRICAN PROPERTY WILL NO LONGER BE AN EASY WAY TO CLEAN MONEY

JOHANNESBURG: Criminals may try to launder the proceeds of illegal activities by paying cash for properties which, when sold at a later date, generate “clean” funds. Starting next month though, such buyers will no longer be able to hide behind an agent’s legal obligation to keep a client’s affairs confidential. Agents will in fact be obliged to report to the national Financial Intelligence Centre (FIC) any transaction known or suspected to involve money laundering or tax evasion.

CANADIANS REGULATORS TRY TO CROSS BORDERS

OTTAWA: Market Regulation Services (RS), the group that monitors trading activity on Canadian stock exchanges, is looking to extend its reach outside the country. RS is in discussions with the country’s various securities commissions for a recognition order that would allow it to pursue Canadian dealers who conduct improper trades on foreign exchanges. The move is one of three regulatory initiatives RS is pursuing.

GOLD SMUGGLING POWERS HAWALA SYSTEM

DOHA, Qatar: The Middle East acts as a source of smuggled gold into South Asia and as a return conduit for money flowing back from heroin sales in Europe, a document released at a symposium on anti-money laundering said yesterday. Proceeds from narcotics sales in Europe may arrive in the Middle East as cash, be wired through normal banking channels, be sent via a variety of forms of gold, or it can be transferred by the informal banking system — hundi or hawala.

Gold is also used in South Asia and the Far East as an alternative remittance or underground banking system. The global spread of ethnic groups from South Asia has provided a worldwide network of underground systems known frequently as “hawala”. The system provides a method by which funds can be transferred from individual to individual or country to country without paperwork and sometimes without using the traditional banking infrastructure. The system operates on trust and the anonymity of its customers is assured.

LIFE INSURANCE: THE ULTIMATE PUT OPTION

There are some straightforward formulas for calculating the minimum levels of life insurance a person should have in place, and some additional considerations on term length. Lastly, there are both Internet and real-world places to go for the cheapest policies. Proceeds of a life insurance policy are delivered free of federal and state income taxes to the beneficiaries, but the value of the proceeds is added to the value of your estate.

ASHCROFT UNETHICAL?

It is not uncommon for lawyers to communicate to the press in high-profile cases. In several highly publicized terrorism cases (Zacarias Moussaoui, John Walker Lindh, etc.), however, Attorney General John Ashcroft has made an unusually large number of public statements. Indeed, in each case, he has held at least two press conferences. Moreover, Mr. Ashcroft’s statements have often included bold criticisms of the defendants and highly charged language. Going so far in criticizing the accused may violate government ethics rules which require that prosecutors refrain from making public statements that might unfairly harm defendants.

While prosecutors have a duty to try to win cases on behalf of the government, their role is not simply that of a zealous advocate for law enforcement. Rather, prosecutors have an additional, superseding duty: to ensure that justice prevails in each case. A Department of Justice motto makes clear that “The government wins when justice is done” - not when it procures a conviction.

Perhaps most flagrantly, Ashcroft repeatedly stated that John Walker Lindh had voluntarily confessed to all of the acts as charged. Courts have specifically noted that discipline is appropriate for a prosecutor who refers either to an alleged confession, or to evidence that may be held inadmissible at trial. Ashcroft did both: It was clear from the start that Lindh’s lawyers, like any competent defense attorneys, would likely challenge the admissibility of Lindh’s lawyerless alleged confession.

DUTCH PASSPORTS TO HAVE BIOMETRIC CHIP

Starting autumn, 2004, Dutch passports are to be equipped with an electronic chip containing the passport holders’ biometric details.

VISA DELAYS COST U.S. BUSINESSES MILLIONS

Six months pass before a foreign buyer can get in.