Offshore News Digest for Week of February 24, 2003

SELLING HOMELAND SECURITY - HOW IT WORKS

What did you make up in the war on terror, daddy? The Register’s recent discovery of the “approved news” panel on the front page of the US Customs site is already paying dividends. We have an item headed “On the front lines of Homeland Security” from NPR. Within this piece, you’ll note news of “perhaps the biggest arrest in the ongoing war on terrorism”, that of Ahmed Ressam in Port Angeles, Washington.

Ressam was arrested on December 18, 1999. December 18th 1999? Ongoing war against terrorism? Ah yes...

EBAY WILL FAX YOUR DATA TO ANY OLD COP WHO ASKS

A report on Israeli newspaper Ha’Aretz said that law enforcers need only to call Ebay and they will be sent every detail of visitors to its auctioneering web site, immediately. Ebay users agree that the firm can submit all personal data to any law enforcement officer who asks as part of the terms and conditions for using the site.

Ebay will fax back full names, email addresses, home address, phone number, and the history of items and all other data that it stores. It has stored every bit of data since it started in 1995. Ebay says it routinely receives something like 200 such requests a month from law enforcement officials.

AOL SECURITY BREACH EXPOSES 35 MILLION CUSTOMERS

Hackers have gained access to “Merlin” - AOL’s customer database application - despite the fact that the system requires a user ID, two passwords, and a specialized ID code to gain access. If AOL cannot patch the holes and verify the data of its users, the company could find itself in real trouble. A database of 35 million credit cards is a gold mine too good to pass up, but those same customers will vanish if they feel AOL cannot protect their data.

FORTRESS AMERICA

Until recently, the United States and countries like Israel occupied opposite ends of the security spectrum: one a confident and carefree superpower, seemingly untouchable, the other a tiny garrison state, surrounded by fortifications and barbed wire, fighting for its survival. But the security gap between the U.S. and places like Israel is narrowing. Subways, sewers, shopping centers, food processing and water systems are all now seen as easy prey for terrorists.

As a possible war with Iraq - where, for the first time in history, it seems plausible that an enemy might mount a sustained attack on the United States, using weapons of terrorism - approaches, there is no clear consensus yet on how to go about protecting ourselves. A well written and comprehensive summary of existing and possible anti-terrorism avenues being pursued.

Bankers and brokers required to spy on customers. What does your bank know about you and when did it know it? More and sooner than you think. In the late 1990s, the Federal Deposit Insurance Corporation proposed regulations that would have required banks to tell the Feds about any “unusual” financial activity in the accounts of individual customers. These so-called “Know Your Customer” regulations were chiefly aimed at helping the Feds prosecute the Drug War. Civil libertarians of all stripes denounced the regulations and they were shelved.

That was then, this is now. What the Drug Warriors could not enact was hastily revived as a “tool” to fight the War on Terrorism. “Perhaps surprisingly, given that the press reports have focused upon the electronic surveillance, ‘sneak and peak’ warrants and other anti-privacy provisions of the Patriot Act, in fact, the money laundering provisions of [the Patriot Act] comprise its bulk,” writes David Russell, who practices international law at Bose McKinney and Evans in Indianapolis. “The breadth and depth of the provisions is staggering.”

War on terrorism squeezes businesses. Florida tour operators complain that they are losing business to Canada and South America because it is taking Mexican travelers up to four months to get visas to visit the United States; newly painted Boeing jumbo jets sit for days on a tarmac in Seattle because their foreign buyers are unable to obtain visas for pilots to come to the United States for training to fly the aircraft home; and a $5 million metal-cutting machine has been stranded at a Cincinnati factory for four months because its Chinese purchaser cannot get its engineers into the United States for a final inspection.

U.S. companies, heretofore reluctant of appearing to be unpatriotic profiteers, are becoming increasingly unhappy - and vocal - about the campaign to secure America’s borders. Anecdotal evidence suggests that the homeland security effort is adding a huge amount of expense and uncertainty to a struggling U.S. economy.

MIAMI: Professor’s terrorism case will test new powers of Patriot Act. Tampa university professor Sami al-Arian and seven others are charged with conspiracy to commit murder via suicide attacks in Israel and the Palestinian areas, racketeering and money laundering - charges they strongly deny. Al-Arian says he was indicted because of his pro-Palestinian views.

Legal experts say the case will be watched closely because the indictment is a direct result of the new federal powers created by the USA Patriot Act. What makes the al-Arian prosecution a test case is the collaboration between federal agents gathering foreign intelligence and prosecutors bringing domestic criminal charges. Before the passage of the Patriot Act, that was not permitted under Justice Department guidelines.

PORTLAND, OREGON: Portland case will be key test of government’s domestic spy powers. Federal agents nabbed Patrice Lumumba Ford and four other suspects, mostly black American converts to Islam, last October, in what Attorney General John Ashcroft called a “defining day” in the fight against terrorism. U.S. District Judge Ancer Haggerty is expected to hear arguments Tuesday and Wednesday asking the government to reveal its justification for 36 secret warrants the FBI used to watch and listen to the suspects, who have all lived in the Portland area.

Defense attorneys plan to challenge evidence collected under the warrants issued by the ultra-secret Foreign Intelligence Surveillance court, or “spy court”, said defense attorney Whitney Boise. “Civil liberties for the defendants, and all citizens, certainly are at stake here,” said Boise, attorney for defendant Ford.

CONCORD, N.H.: A Canadian telemarketing scheme that defrauded elderly victims across the United States of more than $5 million was broken up Tuesday, federal agents said. The scam, which began in early 2000, involved callers telling elderly victims that they had just won a large cash prize in a Canadian lottery, police allege. The victims were told that to collect their winnings they had to prepay the taxes on the winnings.

Of the money, $4.5-million was seized from Israeli and Jordanian banks under the U.S. Patriot Act.

U.S. TREASURY RULES AIM AT OFFSHORE BANKS

A regulation, which was included in the USA Patriot Act and was on a law-enforcement wish list of measures prior to 9/11, will require U.S. banks rigorously to check foreign banks with which they have correspondent relationships and to pay close attention to private U.S. accounts held by foreigners. But analysts and private-sector experts warn that if the new regulation is to be effective U.S. authorities will need to show as much determination in punishing U.S. banks for involvement in money laundering or infractions as it has shown when dealing with overseas and foreign-owned banks.

According to the respected industry newsletter Money Laundering Alert (MLA), the Justice Department has a “blind spot” when it comes to big U.S. financial institutions and laundering. MLA points to the dramatically different treatment in two recent cases - Banco Popular de Puerto Rico and Wall Street’s Lehman Brothers.

TERRORISM CASE RAISES QUESTIONS ON MONEY FLOWS

The federal case against Sami Al-Arian [see link above] offers some telling anecdotes about how the suspended University of South Florida professor and accomplices allegedly directed the flow of funds to aid suicide bombings and other terrorist causes in the Middle East: A $103,000 wire transfer from the United States to the Beirut bank account of the treasurer of a notorious terrorist organization. Thousands of dollars wired from a Bank of America account to a bank in Tel Aviv, then distributed to the spouses of jailed Palestinian terrorists.

Could the financial institutions involved, in the pre-9/11 calm of a decade ago, have done more to spot the red flags? As the publisher of a web site and newsletter on money laundering (moneylaundering.com) said: “[A] drug guy’s money is dirty money going clean, and this is clean money going bad. That’s what makes it more difficult.”

SWISS BANKS LAUNCH U.S. CAMPAIGN

Swiss bankers and regulators are in the United States this week to fly the flag for Switzerland as a financial center. The trip is a prelude to an eight-week festival called “swisspeaks” in New York, which is a unique celebration of everything Swiss. The main financial event takes place on Wednesday in New York and features a panel discussion followed by a dinner attended by this year’s Swiss president, Pascal Couchepin, and former Texas senator, Phil Gramm, who is now vice chairman of UBS Warburg, the investment arm of Switzerland’s biggest bank.

“The basic aim is to inform New York’s financial community about the strengths of the Swiss financial centre,” said James Nason of the Swiss Bankers Association. “It’s also to hammer home the message that Swiss financial privacy certainly does not protect terrorists and criminals, if that was ever a worry, and to tell people that Switzerland is a very well regulated international financial center.”

Swiss “experts” believe the price of gold could rise to even greater heights - despite rising almost 40% over the past two years. The metal, derided in the 1990s as a poor investment [which it was ... then!], is currently worth around $350 an ounce - its highest level since 1997.

The irony of a strong gold price is that some central banks, including the Swiss National Bank, have been selling off much of their reserves of the yellow metal. Since May 2000, the Swiss bank has been selling an average of one ton per day. The Swiss gold sale follows a global trend, whereby central banks are no longer using gold to balance their national currency - a traditional mechanism for ensuring stability.

OECD G-7 MINISTERS MEETING REITERATES FAITH IN THEIR OWN SAGE GOVERNANCE

PARIS: G7 finance ministers and central bank governors said more countries need to take steps to counter terrorist financing. The ministers urged the FATF to foster “effective asset freezing” and more effective oversight of informal financial institutions and charities.

The ministers also urged all OECD countries to implement OECD guidelines on access to bank information and to ensure the effective exchange of information for tax purposes. “A level playing field is crucial to avoid tax evasion shifting from those countries that engage in exchange of information to those that do not,” they said.

They also “remain confident in the underlying strength of our economies and in their capacity to grow more vigorously.” They promise to “continue to cooperate closely. If the economic outlook weakens, we are prepared to respond as appropriate. We will continue to monitor exchange markets closely and cooperate as appropriate.” [Then everything is going to be fine. What a relief.]

They also have nice things to say about the IMF and its sage advice to developing and emerging market countries.

PHILIPPINES GETS US “HELP” TO DEAL WITH FATF

The FATF said that recent anti-money laudering measures failed to address “previously identified deficiencies” in the law. President Arroyo last week called on the US government to urge fellow FATF members to hold off implementing the sanctions which could effect the billions of dollars in annual remittances by overseas Filipino workers.

BELIZE PASSPORT SCANDAL COMES TO LIGHT

“Economic citizenships” continued for sale up to six months after the program was supposedly ended in January 2002. A U.S. Embassy spokesman said that in several cases people had their birth dates and names changed allowing them to bypass U.S. government’s security systems which could create a possible route for terrorists to enter the United States through Belize.

NEW BRITISH PROPERTY SEIZURE LAW

Jane Earl, head of the Assets Recovery Agency - which opens for business today [February 24, 2003] as money laundering rules come into force under the Proceeds of Crime Act - said the agency would start investigating suspect assets in nearly three dozen cases this morning. But she denied the government would use the agency as an easy way of bypassing criminal courts to seize cash from suspects when it had little concrete evidence.

She also admitted that the agency was already gearing up to fight expected legal challenges to moves to freeze and seize assets. “These are groundbreaking legal powers, particularly for the UK. A lot of thought has gone into protecting the human rights of individuals, but that has to be balanced with the rights of the communities that are affected by crime. We are going to be looking for some wins to demonstrate this legislation has teeth. Certainly we want the message to go out to those people who think they are untouchable.”

The Proceeds of Crime Act makes money laundering a criminal offence, punishable by up to 14 years in jail. It opens the way for prosecutions of people who fail to report money laundering if they know it is going on or even if they have reasonable grounds for suspecting it.

But what amounts to suspicion? The act also makes it an offense for a person with reasonable grounds for knowing or suspecting that another is engaged in money laundering to fail to disclose that knowledge or suspicion as soon as is practicable. For those in the regulated sector there is no requirement for actual knowledge or suspicion. Liability arises where a person ought to have had such knowledge or suspicion. In other words, if a hypothetical “reasonable person” would have known or suspected another, the real person will be guilty of the offense of failing to disclose even if he had no such suspicion.

It is a test that should be of intense concern to those who will be affected. Suspicion is a much lower threshold than belief and is a relatively new trigger for criminal liability. There is no authoritative guidance from the Court of Appeal as to what “suspicion” means - yet conviction for suspicion carries a maximum sentence of five years imprisonment. A person too preoccupied to make the relevant checks, or merely indolent, or temperamentally inclined to think the best of others is liable to imprisonment. This is remarkable. These provisions represent a significant extension of criminal liability.

BUBBLES ALWAYS BURST : UK TRUST SCANDAL PROVES THE POINT AGAIN

The most important lesson from the latest investment trust scandal is that we never learn lessons. Every story coming out of the explosion of the greatest stock market bubble confirms that in the 1990s all sane restraints on capitalism fell away. Suspicion of speculators, part of the common sense of the world after the Wall Street Crash of 1929, was replaced by an adoration of the risks they took and the efficiency they promoted in the economy. In the mania inspired by the dream of a new economy the most ruinous risks are run.

One hundred and fifty nine “split-capital investment trusts” were created as the market went from solid growth into a maniacal riot between 1998 and 2000. The banks loaned them billions. Their promoters assured the public that the trusts known as ‘zeroes’ were the safest of bets. They effectively recapitulated the leveraged trust collapses that followed the 1929 crash.

RICH TURN TO ALTERNATE INVESTMENTS

Affluent investors tripled their total exposure to alternative investments, including hedge funds, in 2002, according to a research report, “The Bear Market: The Impact on Affluent Investors and Their Behavior”, published by Spectrem Group. The move into hedge funds and other alternatives is part of an overall shift away from individual stock holdings and into professionally managed accounts, an unsurprising move given the poor performance of the stock market.

Because investors with more than $5 million net worth rely more on financial advisers than stockbrokers, they are more satisfied than those with $1 - $5 million net worth, where the situation is reversed.

WHAT IS SPECIAL ABOUT INVESTING IN EMERGING MARKETS?

A pithy and useful introduction to this sector.

ASIA HAPPY TO FUND US DEFICIT TO STAY COMPETITIVE

Asia, keen for U.S. consumers to buy its goods, finds itself funding the U.S. trade deficit to ensure its own growth - and at the same time putting a floor under the U.S. dollar to preserve the region’s competitiveness. The U.S. export market has become a priority for Asia as the region fights worries of a global slowdown, deflation, and the competitive threat of China.

The U.S. trade deficit for 2002 hit a record $435.2 billion. The trade deficit with China topped $103 billion, and with Japan it was $70 billion. A large trade deficit normally pressures the currency of the debtor nation, while those with surpluses, such as many Asian economies, normally see their currencies tending to rise. One of the factors keeping a lid on Asian currencies has been the rapid growth in Asian central bank foreign reserve holdings. At the end of 2002, Japan, China, Taiwan, Korea and Hong Kong together held $1.15 trillion of foreign currency reserve assets, an increase of over $200 billion dollars in one year. The net position of the European Central Bank and euro zone central banks was about $252 billion at end 2002. Building reserves is not just about keeping currencies from rising. In a region still scarred by the financial crisis of 1997/98, reserves are also seen as one way of heading off another meltdown.

HOW LONG? Analysts said there are some obstacles that could limit Asia’s ability to underwrite the U.S. deficit and cap their currencies, no matter how much they want to.

Mexico draws more foreign investment last year.

BUSH TAX PLAN LETS AN ADDITIONAL 3 MILLION TAXPAYERS OFF THE HOOK

Democrats and liberal groups have unrelentingly characterized the president’s dividend tax cut proposal as a tax give-away to the wealthy, with little benefit to the economy or lower- and middle-income Americans. But according to calculations by the Tax Foundation, not only would Bush’s dividend tax cut spur long-term economic growth, but it would also mean zero federal income tax liability for an additional three million families, primarily due to expansion of the child tax credit from $600 to $1,000 per child.

SMART CARDS IN DEMAND FOR IDENTIFICATION

With security tighter than ever, “smart card” IDs are becoming a first line of defense against terrorists or hackers seeking to penetrate computer networks and office buildings. The cards are hot items with government agencies and corporations - and their popularity is set to expand significantly.

Smart cards contain a computer chip or other device that stores personal information about the cardholder. The technology quickly verifies employees in good standing and grants access to doorways and databases. For added security, the cards can store fingerprints, photos and facial recognition information on a central database.

As the cards swiftly proliferate, privacy advocates worry that security badges may be a first step toward national identity cards that contain masses of personal information. The data-storage capability of the cards continues to grow as the industry expands, and governments and companies have found wide uses for the cards.

FINANCIAL COMPANIES WANT TO TURN REGULATORY BURDEN INTO COMPETITIVE ADVANTAGE

The war on terrorism is hitting financial-service companies hard. For more than a year, the government has pressured banks and other financial institutions to report suspicious activity that might indicate money is being funneled to terrorists or laundered to hide its origins. Every couple of months, the Treasury Department proposes rules that force banks to collect more data, dig deeper into databases, and refine their analyses, increasing the regulatory burden on an industry struggling to comply with existing rules. Last week, Treasury extended anti-money-laundering rules to jewel traders and opened discussions on applying them to auto dealers and travel businesses - all industries that handle large monetary transactions.

The Wachovia Corporation chief compliance officer’s ultimate vision is that the technology will provide returns in other parts of Wachovia’s business, such as customer service. And vendors are picking up on ways to turn the compliance effort into business opportunities. Ten-year-old Searchspace Corp.’s transaction-monitoring system has an application to identify possible money-laundering activity. But other applications address business needs, such as detecting fraud and monitoring sales practices. For example, a brokerage firm could use the system to monitor for internal abuses, such as insider trading, or track brokers’ sales performance. “If you have a solution that can look at every transaction across the organization, can understand the behavior of every customer transaction on every product in real time, then why would you only use that platform for money-laundering detection?” says Searchspace CEO Konrad Feldman.

UK REGULATION OF INVESTIGATORY POWERS ACT PRIVACY INVASION TONED DOWN

The much reviled Regulation of Investigatory Powers Act (RIPa) had been due to be updated to allow all kinds of civil servants access to invade UK citizens privacy almost at whim. Where once even the Food Standards Agency would have had free access to people’s private communications, the Home Office is now saying it is aiming to only allow serious crime-fighting bodies to have full use of RIPa. Other government agencies will have their proposed access to RIPa data seriously curtailed and a criminal offence will be introduced for those who abuse the powers.

THE ADEN SISTERS WEIGH IN ON GOLD, CURRENCIES, STOCKS, ETC.

“Mega change underway”. They believe that the 20-25 year trend where stocks performed well and gold poorly has reversed, and the new trend has much further to run. They do not mince their words: “The S&P has formed a huge top, which is the most massive top ever built in the history of the U.S. stock market. ... [W]e’re in for a long lasting and grueling bear market in stocks. Interestingly, this is exactly the opposite of what gold is showing.”

They believe the dollar’s downward trend is just beginning. These currency charts given you a quick indication as to why. Their favorite currencies are the New Zealand dollar, Swiss franc and euro.

NEW YORK AG INVESTIGATES WHETHER HEDGE FUNDS MANIPULATED SHARE PRICES

The financial sector’s modern “Untouchables” hero, New York attorney-general Eliot Spitzer, is investigating a number of hedge fund operators. Spitzer thinks they may have conspired to manipulate the shares of certain securities, including MBIA, Federal Agricultural Mortgage (Farmer Mac) and Allied Capital.

It is known that the principals of the fund companies attended business school together. Spitzer alleges that they jointly co-invested in short positions in MBIA and Farmer Mac, then used web sites such as The Motley Fool to “talk down” the stocks. The target companies accuse the funds of colluding to drive down their stocks.

CHANNEL ISLANDS DEMAND EU FAIR PLAY

Reports being drawn up by law firms in the Channel Islands on the future of their transparency and tax regimes are likely to spark a political war that will include the EU, the UK Government and other European tax havens. The reports want all European countries to have a level playing field in respect of their duties to disclose outside cash deposits for foreign tax purposes. However, lawyers and the finance community in the Channel Islands are concerned that, while this may be imposed in their jurisdiction, other countries such as Austria, Luxembourg and Belgium, which have so far refused to cooperate in this area of exchange of information, may avoid enforcing the relevant legislation, the EU Savings Tax Directive.

Although many finance professionals in JERSEY and GUERNSEY have expressed a preference for the withholding tax option of the EU Savings Tax Directive, which would allow banking customers to choose for themselves, a senior partner at PwC in the Channel Islands suggested that the industry should consider making a “small sacrifice” in the name of a harmonious relationship with the UK - i.e., accede to exchanging information on depositors with the depositors’ home country governments.

PHILIPPINES HOPES TO SATISFY FATF

MANILA: The Senate leadership expects a final compromise on the passage of an Anti-Money Laundering Act that will satisfy the requirements of the FATF, when senators meet with officials of the international financial body on the content of the impending amendments to the law.

TAX AVOIDANCE VS. TAX EVASION : A VERY BIG DIFFERENCE

But anyone reading some of the more recent pronouncements from the two main UK taxing bodies, the Inland Revenue and Customs & Excise, would be forgiven for thinking there is a political agenda to blur this key ethical and legal distinction.

Any blurring of the line between what is right and wrong is contrary to a well-established principle of the UK tax system - when organising their tax affairs, individuals inevitably have a number of equally valid routes open to them.

INDIA PROPOSES FOREIGN EXCHANGE TAX

India’s prime minister has called for a tax on international currency transactions to protect the world’s developing economies: “I believe this (levy) is a reform whose time has come. It combines in one effective measure an instrument to protect weak economies from the volatility of capital, to enhance investor confidence through stability of capital markets and to generate valuable developmental resources.”

Mr Vajpayee said recent estimated indicate that “even a token tax of a quarter percent could generate annual revenues of the order of $300 billion.” The late James Tobin, a Nobel-prize winning economist, was the first to proposed a tax on currency speculators, which has since been called the Tobin Tax.

U.K. URGES FINANCIAL ADVISERS TO WATCH OUT FOR MONEY LAUNDERING

The Financial Services Authority, the U.K. regulator, urged independent financial advisers to take a broad view when vetting clients to make sure they were not laundering funds: “Our principal finding was that firms focused solely on getting acceptable proof of identity without considering all the information known about the client in the context of detecting suspicious activity,” the FSA said in a release on its Web site.

VEGAS CASINO ACCUSED OF FAILING TO FILE MONEY-LAUNDERING REPORTS

Gambling giant MGM Mirage Inc. could face millions of dollars in fines after its Mirage hotel-casino failed to file required anti-money laundering reports with federal officials. MGM Mirage spokesman Alan Feldman called the company’s failure to file the reports serious, but an administrative error. He said the reports were filed after the problem was discovered in mid-December.

Casinos are required to report individual transactions of $2,500 or more and submit currency reports whenever transactions by any individual total more than $10,000 in 24 hours.

CREDIT SUISSE TO SLASH JOBS AFTER RECORD LOSS

Switzerland’s second biggest bank declared a net loss of SFr3.3 billion ($2.4 billion) for 2002, the worst result in the institution’s 150-year history. Credit Suisse blamed weak financial markets and a series of “exceptional items” - including pre-tax charges of around SFr1 billion for legal settlements in the United States relating to research analyst independence, certain IPO practices, Enron and other related litigation, as well as an after-tax loss of SFr390 million in connection with the sale of the securities clearing unit, Pershing.

UBS AG, which runs the world’s biggest private bank, said that inflows from wealthy clients in the fourth quarter slowed to one-third of the new money gained in the previous three months amid concern about further declines in stock markets.

HIGH YIELD PROMOTOR VILLALOBOS’S INVESTORS LOSING HEART

According to an AM Costa Rica report, a change of attitude appears to be taking place amongst Luis Enrique Villalobos Camacho investors in the jurisdiction, many of whom are losing faith in the fugitive financier. The national news service revealed that the mood amongst investors is becoming increasingly gloomy, and that only a “hardcore handful” now believe that he will return to redistribute the estimated $1 billion held in trust for his investors.

Recent reports have revealed that an increasing number of the estimated 6,400 investors are now beginning to question exactly how Villalobos was able to pay up to 3% returns to his investors each month - a concern shared by the Costa Rican government.

ANTI-TERROR REGULATIONS COULD HIT CAR DEALERS, TRAVEL AGENTS

Because the USA PATRIOT Act was largely negotiated in secret, was presented to House members on the same day they were to approve it, and was sent to the White House without the usual committee report that explains and justifies legislation, some of its lower-profile provisions are only now percolating out to the public. Now car salesmen and travel agents may soon be drafted into the war on terrorism. That would mean new training, new audits and new paperwork; in sum, new costs for what some consider to be questionable benefits. But at least some Californians are wondering why.

MODELING TERRORISM INSURANCE RISKS FOR BUSINESS

Insurance companies have long used sophisticated databases to forecast clients’ exposure to various types of disasters, like earthquakes or floods. In the post-September 11 world, though, companies need to add acts of terror to the list of the possible catastrophes. Last year Aon Re unveiled a suite of terrorism exposure-analysis tools that it makes available to clients - mostly large insurers, but also some big companies and real estate firms. Most clients are shocked when they see the analysis, says Michael Bungert, Aon Re’s CEO. That is because few companies have yet confronted their exposure to terrorism or done much to reduce it.

IRS TO USE PRIVATE DEBT COLLECTORS TO GATHER BACK TAXES

The IRS is planning to use private debt collection firms to pursue some 2.6 million taxpayers, who currently owe around $13 billion in back taxes. The tax agency released a memo to companies interested in participating in the venture earlier this month. However, the proposal cannot officially move forward until Congress passes legislation allowing the IRS to contract some of its tax collection duties out to private firms.

Collection agencies are utilised by other state and federal agencies, and will not be permitted to contact third-parties such as taxpayers’ employers or banks without specific written authorization from the IRS.

US GIVEN DIRECT ACCESS TO DATA ON EU AIRLINES’ COMPUTERS

The recent EU-US deal giving US Customs access to personal data on all European citizens flying to the US is far more drastic than originally seemed to be the case. Rather than “merely” having airlines send the data within 15 minutes of the departure of all flights, the deal means that the US authorities will be accessing it on the airlines’ own databases, held on computers that are within EU jurisdiction.

Notes Statewatch editor Tony Bunyan: “Anyone who believes that US Customs, which is now part of the Home Security Department, will limit itself solely to downloading information on passengers booked to fly to the USA is very naive... US Customs will have access to passenger details in advance and will be running the names through all the available intelligence databases, so there is every likelihood they will try to stop ‘suspected’ individuals from boarding the plane.”

HAVENS THAT CAVE IN TO UK / EU DEMANDS PAY THE PRICE

According to a new report by independent market analysts, Datamonitor, overall offshore assets held by citizens of major European countries are forecast to drop by 26% by 2013. Offshore investment from major European countries was €1,498 billion in 2001, €747 billion of which was held in offshore territories within the European Union.

Up to a third of the money held by British investors in tax havens dotted around the world - particularly in the Channel Islands and the Caribbean - will be re-directed to onshore accounts in the UK, where they will then be subject to local tax laws. By 2013, the amount of offshore funds and deposits held by UK citizens will decline by 36%, according to the report.

Datamonitor believes that the European Savings and Tax Directive will have a dramatic impact on the offshore market. Many offshore centers will see rapid contraction in their funds and deposit assets, while others will see growth. Oliver Guirdham, financial services analyst at Datamonitor and author of a report into the initiative, said: “UK dependent offshore territories are likely to be among the worst affected by the directive. This will have a dramatic effect on the financial services industries in offshore territories such as the Channel Islands and Caribbean.” The ones that will see growth? Those offshore centers in the Far East that are not party to the EU/OECD tax information exchange.

New EU tax agreement spells end of money shelters. Beginning next year, taxpayers in European countries will find it much harder to hide their savings from tax-collecting authorities by setting up savings accounts in other countries, due to information exchanges, or the alternative 35% tax levied on interest earnings.

SOUTH AFRICA LOOSENS CAPITAL CONTROLS

PRETORIA: The South African government announced a wide-ranging restructuring of its exchange control regime to reflect its greater confidence in the performance of the post-apartheid economy. In the national budget, Trevor Manuel, finance minister, allowed local companies and financial institutions to invest more outside Africa. He also released funds of South Africans who have left the country but could not take their savings with them because of exchange controls.

The collapse of the rand two years ago to record lows gave greater justification for the protection afforded by exchange controls. But the subsequent strengthening of the currency and steady growth levels have boosted confidence to grant greater freedom to capital flows in and out of the country.

A market analust said there was “muted” reaction in the markets to the Budget, adding it was largely in line with expectations, although it was interesting that the rand had not weakened given the easing of exchange controls announced by the minister.

South African anti-money laundering laws will keep “grey money” illegally sent overseas by South Africans in the past two generations from being repatriated, where it could be put to good use. Successful informal economy entrepreneurs now face an additional hurdle if they wish to enter the formal economy. They may have spirited money abroad or used various devices to disguise the source of a substantial cash income.

Is there a way out of the impasse? Maybe. The act may not deter big-league criminals, but those who “only” broke forex rules or tried to hide a cash income might be shocked into penitence. So it may be in South Africa’s interest to delay full implementation of the act or declare an amnesty that opens a window of opportunity for these penitents. They could then bring their money to SA and into the national tax net.

NAURU DISAPPEARS FROM THE WORLD’S SIGHT

The tiny Pacific island - which at 21.2 square kilometers and a population of 12,000 is the world’s smallest independent republic - has spent weeks completely cut off from the outside world after its telecommunications network collapsed. Its isolation is so complete that no one is even sure who the country’s president is any more. Nauru is in a “critical situation”, according to the last message received by the outside world.

The situation is compounded by the fact that when contact was last made, a battle was raging for power between President Dowiyogo and the man he unseated in January, Rene Harris. No one is quite sure who runs the island now. Whoever is in charge is thought to have no budget with which to rule, while the official presidential residence was reported to have burned down last month.

It is a sad demise for an island which not long ago boasted one of the world's highest per capita incomes through lucrative phosphate mining. But with the phosphate reserves nearly gone - and most of the island reduced to a barren moonscape as a result - Nauru has gradually slumped into chaos.

The President of Nauru has told his people that one of the major trusts set up to pay landowners interest on their phosphate royalties has no cash left to pay them.

GERMAN ECONOMY DEAD IN THE WATER

Germany’s economy stopped growing at the end of 2002, after showing only minimal expansion during the rest of the year. The Federal Statistics Office said there was zero growth in the October to December period, and confirmed that for the whole year gross growth in economic output - or GDP - was just 0.2%. This was still better than some analysts had predicted.

THE RIFT BETWEEN “OLD” AND “NEW” EUROPE GOES BEYOND POLITICS

There are real differences between “New” and “Old” Europe. The accession of the new EU members threatens the post-war consensus regarding the social-democratic nature of the European economy. While the French and the Germans agonize about the preservation of their pay-as-you-go public pension systems in the face of growing expenditures and declining ratios between workers and retirees, the Poles and Hungarians have partially privatized their systems. While the governments in “old” Europe prepare for battle with powerful labor unions, the “new” Europeans continue to liberalize their labor markets and attract a growing share of foreign investment. While Brussels seethes over the “social dumping” and “unfair competition” of the new members, the Central and East Europeans see that the only way to escape the communist legacy of poverty is a vibrant free market.

CAYMANS ATTORNEY GENERAL ON THE WAY OUT

GEORGE TOWN: Just when the details of a severance package are being finalised and amidst speculation that he would not return, it is confirmed that the beleaguered Attorney General Mr. David Ballantyne arrived back in the Cayman Islands on Sunday and was continuing with his normal work schedule. Reliable sources have revealed that Mr. Ballantyne has agreed to leave office, but only under certain terms. It would appear as though the only contentious question regarding Mr. Ballantyne’s tenure here is whether the United Kingdom or the Cayman Islands would have to meet the costs of having him prematurely end his contract.

CATO INSTITUTE EXPOSES MISGUIDED NATURE OF IRS REGULATION

As has been pointed out in numerous previous news items on these pages, reporting of foreigners’ interest income earned in the U.S. would hurt the U.S. economy. Not only is it bad policy, it completely disregards existing laws. If the regulation is implemented, few foreigners will invest in the U.S., and those who already have money in the country will shift their investments to other lower tax jurisdictions.

WHO ARE THE WORLD’S BILLIONAIRES FOR 2003?

Forbes magazine’s 17th annual list of the very richest is now in. Bill Gates and Warren Buffet head the list. As a group, this year’s billionaires are worth $1.4 trillion - $141 billion less than last year but still equal to the GDP of the United Kingdom. Four former billionaires were wiped out entirely. Of the 476 who remain, 218 of them saw their fortunes sink. Ten new billionaires hail from the former Soviet Union, thanks to rising oil prices and a 38% spike in the stock market, bringing the total number of Russian billionaires to 17. Three years ago there were none.

The 10 Most Powerful Billionaires? With great wealth comes the power to effect change. But more than money determines how much influence a billionaire wields. In compiling their first power ranking for billionaires, Forbes weighed their political connections, the size and scope of their businesses and investments, their media coverage, their philanthropic pursuits and, of course, their net worth.

Buffet and Gates again head the list. [Tens of millions of “Blue Screens of Death” are daily testament to the far-reaching influence of Bill Gates!]

POUND STERLING “5 TESTS” SET FOR JUNE

LONDON: The UK government is “on track” to complete the assessment of the five tests on euro entry by June, Chancellor Gordon Brown said on Thursday. Mr Brown claimed the five tests would give a “clear and unambiguous” answer on whether it was in the UK’s economic interest to join the euro - and that Tony Blair agreed with him that the tests would be decisive. A “yes” result from the tests would lead to a referendum.

THERE ARE STILL REAL TAX SAVINGS TO BE HAD OFFSHORE FOR UK CITIZENS

The attraction is “gross roll-up”. This means assets can grow without being taxed and could outperform investments at home. Gains or income are liable to tax in Britain only when they are brought back to the UK. For those moving abroad for work or to live permanently, potential tax advantages are greater still.

U.K. CHANCELLOR MIGHT RUN MIGHT RUN CITY OF LONDON AFTER TERROR ATTACK

LONDON: Gordon Brown is seeking sweeping powers to take control of the Stock Exchange and other key financial exchanges, and settlement and payment systems in the event of a terrorist attack. Allowing the chancellor to shut down or take over City institutions such as the Bank of England would be unprecedented, but could avoid economic meltdown in “extreme situations”, a Treasury consultation paper said on Tuesday.

The proposal reflects the government’s belief that there is a high risk of a “dirty” - chemical, biological or even nuclear - terrorist attack on Britain. Ministers fear the economic fallout - and potential damage to London as a financial center - could be worse than the cost of the September 11 attacks on New York.

OVER $60 BILLION HAS FLED ARGENTINA

According to an Argentine Congressional committee preliminary report, over $60 billion fled from Argentina between 1992 and 2001. In spite of current legislation the report indicates that most of the money managed to evade Central Bank and other financial and tax institutions controls, while the banking system was not particularly willing to collaborate with the investigation.

Although during most of the 1990s the free movement of capital was legal in Argentina, the report found out that there was virtually no checking, by financial, taxing institutions or the Central Bank, of the legality or illegality of the money transfers. The “know your client” policy, that has become a world banking standard, apparently only existed in paper given the “efficiency” of the system established by different institutions to oil the way for the fleeing money, much of it apparently tax evasion.

HANDLING U.S. ESTATE-TAX RULES

At first glance, estate-tax rules may seem to apply only to the wealthy. But the rising value of homes, coupled with now generous pension and profit-sharing plans, could bring the average homeowner serious estate-tax consequences.

“It makes sense now for people with large estates to investigate trusts for their children,” said Phil Egger, estate tax attorney. “We often underestimate how quickly assets can appreciate. What you have today is probably going to be worth a lot more tomorrow, yet people often don’t take the time to handle it properly.”

Take the time to check with a tax attorney or an accountant before setting up a trust. Be clear about your goals. Accountants say a transfer to a trust could be treated as a taxable gift, unless the trust is treated as wholly owned by the donor or the donor’s spouse under the grantor trust provisions of the Internal Revenue Code. This provision was included in the new law to preclude individuals from attempting to shift income for income tax purposes to lower income tax bracket individuals, while avoiding gift taxes.

NEUROECONOMICS CORRELATES ECONOMIC BEHAVIOR WITH BRAIN ACITIVITY

A new field, called neuroeconomics, is using the tools of neuroscience to find the underlying biological mechanisms that lead people to act, or not act, according to economic theory. Researchers at Princeton, for instance, have found that receiving low-ball offers stimulates the part of the brain associated with disgust. People whose brains are showing lots of disgust will reject offers.

Traditionally, economists have treated a company as a largely automatic “production function” that turns labor, capital and resources into output. Over the last several decades, however, many economists have turned their attention to understanding companies’ internal workings. “Agency theory” examines how companies can be governed to encourage employees (the “agents”) to pursue the goals of the owners, rather than their personal agendas. This research has not replaced the production-function approach, but it has enriched economists’ understanding of company behavior. Neuroeconomists want to do something similar for how individuals make economic choices.

OUTRAGE OVER PATRIOT ACT II ABOMINATION CONTINUES

“Deliver us from Ashcroft”, says noted civil libertarian Nat Hentoff. Attorney General John Ashcroft, with support from President Bush, has increasingly forgotten that the Constitution is ours - not just his. The Center for Public Integrity has now exposed Ashcroft’s sequel to the Patriot Act for what it is: an assault on the Bill of Rights drafted without consultation with Congress. (You can download the proposed act at www.publicintegrity.org).

One of the most damaging abuses is found in Section 201. According to this section, a federal court decision can be overturned, mandating that the government reveal the identities of those persons it has detained in the investigation of the September 11 terrorist attacks. The new bill states that “the government need not disclose information about individuals detained in investigations of terrorism until ... the initiation of criminal charges,” no matter how long that might take. If passed, this would become the first time in American history that secret arrests would be specifically permitted under the American rule of law.

Moreover, under Section 501, an American citizen who provides “material support” to a group that the United States has designated as a “terrorist organization” can be stripped of his citizenship. Until now, an American could only lose citizenship by declaring a clear intent to abandon his country. Now, the bill says, an “intent to relinquish nationality need not be manifested in words, but can be inferred from conduct.” Who will do the inferring? An employee of Ashcroft? The same Ashcroft who has accused his critics of “(scaring) peace-loving people with phantoms of lost liberty.”

Patriot Act II jeopardizes freedom. Since January 9, the Bush administration has been sitting on draft legislation it intends to shove through Congress when that elected body is in a state of panic - for example, when we are at war with Iraq or suspect a massive terrorist attack is imminent. That is precisely the view taken by House Judiciary Committee Ranking Member John Conyers, D-Mich, in a letter he wrote to the Department of Justice.

The proposed Domestic Security Enhancement Act of 2003 is not merely radical, it grants the U.S. attorney general nearly unchecked powers in a wide arena of law enforcement. DSEA greatly expands the powers the USA Patriot Act granted the Department of Justice and federal law enforcement agencies. Speaker of the House J. Dennis Hastert, R-IL, and Vice President Dick Cheney, as president of the Senate, each received a copy of DSEA on January 10, according to a control sheet issued by the Department of Justice Legislative Affairs Office. No other member of Congress received a copy.

The DSEA is not a working paper. It is a complete proposal for legislation. One cannot escape the ramifications. The thoroughness of DSEA is meant to discourage congressional changes, deletions or amendments. In total, it contains another wish list for federal law enforcement authority, while minimizing any checks on that authority.

Administration Drafts “Patriot Act II” - activists concerned. While Justice Department public affairs director Barbara Comstock said in a recent statement that department staff “have not presented any final proposals to either the attorney general or the White House, and it would be premature to discuss proposals that are still being discussed at staff level,” many opponents of the legislation are not waiting to voice opposition or begin the fight to block its passage.

“Section 215 of the original Patriot Act allows the FBI to order libraries, universities and retail stores to turn over records of citizens and non-citizens. These entities are then prohibited from telling anyone if they’ve been subpoenaed,” said Jayashri Srikantiah, staff attorney with the American Civil Liberties Union of Northern California. “The provision allows the government to monitor anyone without a warrant and to seize property without leaving any proof - something the Constitution mandates. They would have the power to obtain records by violating both First and Fourth Amendment protections.”

The war on civil liberties heats up. While our attention has been on the threats of war in Iraq, North Korea, the Phillipines, and on the internal arguments in the Freedom Movement itself over whether our actions abroad are imperialist or defensive, the regime now resident in the dismal swamp of DC has been busily plotting still more restrictions on our civil liberties at home. All in the name of “homeland security” in the “war on terrorism”, of course.

Good list of links and proposed actions vis a vis the Domestic Security Enhancement Act of 2003 (Patriot II) and Total Information Awareness here.

JUDGE REJECTS CHALLENGE TO FBI SPY POWERS

The FBI does not have to explain why it applied for search warrants to bug homes and tap phones of defendants in a terrorism case, a federal judge ruled Wednesday in an early test of the government’s new and expanded spying powers. The five defendants were charged in October with conspiring to support al-Qaida and the Taliban.

Robert Bloom, a California civil rights attorney, said the decision sanctioned government secrecy. “It would be nice if we lived in a country that abided by its Constitution,” he said.

REPORT SEES FBI FAILING TO APPLY ANTITERROR LAW

The FBI has done a poor job with an antiterrorism law that permits unprecedented levels of domestic surveillance, the Senate Judiciary Committee said in a committee report released yesterday [Feb. 25]. “The lack of professionalism in applying the law has been scandalous,“ said Senator Arlen Specter, Republican of Pennsylvania, who wrote the committee report with Senators Patrick Leahy, Democrat of Vermont, and Charles Grassley, Republican of Iowa. “The real question is if the FBI is capable of carrying out a counterintelligence effort.”

The report contended that the FBI and the Justice Department were guilty of excessive secrecy, inadequate training, weak information analysis, and the stifling of internal dissent in using the Foreign Intelligence Surveillance Act, a key tool in the war on terrorism.