Offshore News Digest for Week of October 18, 2004

GLOBAL BUSINESS

DOMINICA, THE CARIBBEAN’S “NATURE” ISLAND

Half way along the curved necklace of islands comprising the Windward Islands of the Eastern Caribbean basks a mountainous rock of 290 sq miles (750 sq km). Dominica is a land of steep mountains and cliffs plummeting straight into the blue Caribbean sea on the western side and the grey Atlantic on the eastern. Rising at the highest point to Mt. Diablotin at 4,747 feet, this is a country of raw beauty, rugged headlands and moody mountains, their peaks often buried in cloud.

Originally from the UK, but having lived, cruised and built businesses in the Caribbean over the last two decades, my husband and I always hoped to be able to make a home in Dominica when the time was right. The main attractions? Its untamed, unspoiled tropical countryside, the Dominican people’s natural pride and understanding of environmental stewardship and the chance to be a part of that heritage. The reason it took so long? Formerly it has not been easy to make a living in Dominica, but things are changing. Improved infrastructure and communications, a stable government and support from external organizations are contributing to making the country attractive to outside investment.

Roseau is the capital of Dominica. Small, charming, dilapidated, the heart of Roseau beats with a pure Caribbean rhythm. On every street corner is a vendor selling fresh fruit, vegetables or home made snacks. The narrow, hot streets look unbendingly down towards the seafront, and the cruise ship dock which is neighbor to a large marketplace selling local produce and fish in a noisy, colorful, smelly atmosphere. Dominicans are amongst the kindest and friendliest of all the Caribbean peoples. We work in the region with Caribbeans from every nation, and many of them are a joy to know, but most of our long term friendships have been formed with Dominicans. These people have a resourcefulness and a confidence that is quite rare here. Dominicans speak English and a Creole which is a mix of French, Spanish and English. Education is based on the old British system, and is both rigorous and thorough.

Dominica overflows with natural resources. Because of the rainfall the island is verdant throughout, and there is food to be found growing in such abundance that some of it falls and rots. More importantly, Dominica can support itself with food, water and energy, a claim not many small island nations can make.

PANAMA -- ONE YEAR ON

It is estimated that about one-third of Panama’s GDP is derived from canal-related revenues. The country’s shipping registry is the world’s largest (in number of ships). Panama has also continued to improve its democratic credentials. Last month Martín Torrijos was appointed the new President of Panama after May elections which were seen by outside observers as having been free and fair. Voter turnout was about 80% and the elections passed without incident.

There is no denying that Panama faces many challenges, despite good reasons for optimism, and, as a developing country, it must get to grips, for example, with two problems prevalent in Latin America: large bureaucracies and unemployment. There is, however, a middle ground between the Pollyannas and the pessimists and although the pace of Panama’s progress will never please the prejudiced, unchecked optimism is also out of place. It should be recognized that much needs to be done and, at the same time, that much has already been done, especially during the past several years.

Panama has had an offshore industry for several decades and today is Latin America’s largest banking center (in number of banks). The jurisdiction has not escaped scrutiny by the OECD that has established the Global Forum on Taxation in order to achieve fair tax competition world-wide. Panama has agreed with the OECD that, in principle, it will work towards an even-handed international tax system. But Panama has been lumped in with those jurisdictions that are little better than manufactured tax havens with designer tax advantages. By comparison, Panama’s economic development in the field of international services is, as its government puts it, “a consequence of history and not of initiatives to help evade taxes in other parts of the world”. Panama’s government warned that if even-handedness is not applied then the conditions will not exist “in order to develop effective commitments between the OECD and Panama.”

Whether the canal or the gap between the OECD and Panama will be widened remains to be seen, but what is beyond doubt is that the country is widening its international appeal, based on economic and other indicators.

BUILDING A CARIBBEAN EMPIRE WITH OTHER PEOPLE’S MONEY

Jeffrey Prosser, owner and head of Innovative Communication, spent his 48th birthday this September in Washington, D.C. working with $500-an-hour lawyers to stave off a pack of creditors and regulators who are ready to have him tarred and feathered. He would have been happier in the U.S. Virgin Islands. That is the base from which he has built a constellation of telephone, newspaper, banking, cellular phone and cable TV assets with cunning, moxie and other people’s money. Among his adversaries are the former minority shareholders of a firm Prosser merged into Innovative. And the not-for-profit Rural Telecommunications Finance Cooperative of Herndon, Virginia, which accused Innovative of 31 breaches of its lending agreement and filed suit to recover the $550 million it lent Innovative. In August Virgin Islands regulators questioned whether Innovative’s phone company there had made an improper $28.5 million loan to Belize Telecommunications, which an affiliate of Innovative acquired for $105 million in stock in March.

At a sale of physical assets, say, at bankruptcy, its assets would likely go for an estimated $360 million. But as of now Prosser is keeping current on all his loan payments and so may be able to hang on to his steeply leveraged empire. Prosser’s empire includes Virgin Islands telephone business, Vitelco, four Caribbean cable-TV companies, and Virgin Islands Daily News. This past April, the government of Belize gave Innovative permission to buy all the stock Belize Telecommunications Ltd. from Lord Michael Ashcroft and Carlisle Holdings for $105 million. For that deal to go through, Prosser needed cash to pay down Belize Telecommunications’s debts to the Belize government. Prosser’s machinations to effect that drew strong objection from both the rural telecom cooperative and Virgin Islands regulators.

Meantime, competition from wireless and an upstart Virgin Islands broadband service launched in November could erode Vitelco’s customer base and its $53 million a year in revenue. Is Innovative insolvent? “It depends on what your definition of insolvency is,” says Lanny Davis, a lawyer speaking for Prosser. Bill Clinton couldn’t have said it better.

BIG FOUR U.K. ACCOUNTANCY FIRMS ACCUSED OF USING “BLACKMAIL” TO LIMIT PAYING FOR NEGLIGENCE

Britain’s Big Four accountancy firms are being accused of “blackmail” and “propaganda” to cajole the government into limiting their liability for poor quality auditing, a leading academic has claimed. Prem Sikka, professor of accountancy at Essex University, said the firms are scaremongering to ensure they do not pick up the bill for their own mistakes, while leaving out in the cold customers, policyholders, shareholders and staff of firms that go bust despite having “healthy balance-sheets”.

The Big Four -- PriceWaterhouseCoopers, Deloitte, KPMG and Ernst & Young -- have for some months been seeking to persuade the government to impose a “liability cap” that would cut their liability when they lose claims for auditing negligence. They have painted an apocalyptic picture arguing that multinationals would find it increasingly difficult to get a proper audit and that the entire corporate world might collapse were one of the Big Four allowed to follow collapsed global group Arthur Andersen down the tubes.

TINY OVERSEAS TERRITORY TAKES ON BRITAIN IN LEGAL BATTLE

A legal challenge to British jurisdiction over the Pacific island of Pitcairn has far-reaching, albeit highly improbable implications for British territories in the Caribbean. The challenge, which would effectively create a new nation of 47 people, has limited chances of success, an expert said. Pitcairn is a British Overseas Territory, a category covering only around a dozen former colonies, including several in the Caribbean, meaning the charges are officially being brought by the British state. The accused have mounted a challenge to the trial on the basis that London had no authority over Pitcairn, which is populated by the descendants of Fletcher Christian, who led a mutiny in 1789 against Captain William Bligh aboard HMS Bounty. Their submission effectively argues that Pitcairn, all two square miles of it, should be able to govern itself as an independent entity.

In July, Pitcairn’s own Court of Appeal, staffed by New Zealand judges, threw out an earlier challenge, saying the island’s ties to its former colonial master 10,000 miles away were irrefutable. “The proposition is somewhat startling, when it is beyond question that the United Kingdom has, without protest from any quarter until the present challenge was mounted by these applicants on their own behalf, expressly claimed Pitcairn Island as one of its possessions and exercised jurisdiction and governance over it as such since, at the very latest, 1898.” Despite this reverse, the islanders were granted leave to appeal to the Privy Council’s Judicial Committee, a tribunal of senior law lords in London which form the ultimate legal authority for British Overseas Territories.

The islanders looked unlikely to have any more success with the Privy Council than with their own appeal court, said Iain Byrne, an expert on British Commonwealth law with Interrights, a group which advises on human rights in international trials. It was a “very arcane” area of law, he said, but one where the precedent seemed clear.

BOLKESTEIN WARNS EU GROWTH WILL CREATE “CHAOS”

The EU has reached its highest point of integration and the eventual addition of Turkey and other countries as members will create “either chaos or a bureaucratic monstrosity in Brussels,” Frits Bolkestein, the EU’s internal market commissioner, has warned. Mr. Bolkestein, who opposed this month’s Commission decision to recommend EU entry negotiations with Turkey, said it would be impossible to run the EU with 40 member states.

“Whoever lets in Turkey cannot very well refuse Ukraine. The western Balkans are already on track. There’ll be Belarus, then Moldova. At the end of that process, which may take 20 years, only Russia will be excluded,” Mr. Bolkestein said. The commissioner made clear he was not predicting a sudden crisis for the EU, which this year grew to 25 member states after the addition of 10 mainly former communist east European countries. Instead, he said, “The world will end not with a bang but with a whimper.”

EU enlargement -- is Switzerland missing the boat?

Switzerland needs the ten new EU member states far more than they need Switzerland. This was the main message to emerge from this year’s Europa Forum in Lucerne, which brought together political and economic leaders from Switzerland and five of the new member states. The 3-day Europa Forum, one of the major political and economic events on the Swiss domestic scene, was devoted this year to the theme of “EU enlargement and Switzerland”.

Swiss Foreign Minister Micheline Calmy-Rey stressed the positive economic effects for Switzerland of integrating the ten new member states who joined the EU in May. However, she said this would depend on the latest bilateral agreements between Switzerland and the EU not being rejected in nationwide votes expected next year. Jean-Daniel Gerber, Switzerland’s state secretary for the economy, also stressed the importance of the second round of bilateral agreements, saying rejection would be “an absolute catastrophe” that would leave Switzerland “completely isolated in Europe”.

During panel discussions, several representatives of the new member states emphasised the potential economic costs to Switzerland of not “seizing chances” in eastern and central Europe. “Swiss companies tend to prefer trade to direct investment. This is a big mistake,” said István Major, deputy head of Hungary’s state secretariat for integration and external economic relations. “In banking and financial services, where Switzerland really is a major global player, it is totally absent from the Hungarian market, unlike, for instance, France or Germany.”

BARINGS BANK COLLAPSE CULPRIT NICK LEESON EMERGES AS PUBLIC SPEAKER

Nick Leeson -- banned from banking, hardly able to open a checking account and nearly denied a visa to the United States -- has emerged from his infamous role in the crash of Barings Bank to become a public speaker. While still no poster child for risk management and due diligence - or business oversight, Leeson has become a spokesman for the ability to survive, emerging from the stress of prison time, divorce and cancer.

In fact, Leeson is writing a book on stress, after completing a degree in psychology in the decade since his $1.3 billion in trading losses brought down Britain’s oldest merchant bank. He managed to conceal the losses from managers, auditors and regulators until bank officers in London noticed the irregularities. Publicly, Leeson was a star trader known for boosting profits. He was even being recruited by other investment banks. Not even his wife knew it was all a big lie. Leeson bet wrong on the direction of the Japanese stock exchange and took other trading gambles.

At Barings, Leeson said, no one wanted to ask the most basic questions because they were afraid of looking foolish. While derivative trades are complicated, Leeson said, hiding them in Account No. 88888 -- or “Five Eights” -- was elementary. “The things I did at Barings were very simple,” he said. “There were massive levels of negligence and incompetence that should have exposed what I did long before they did.” Leeson said that despite everything that should have been learned in the Barings debacle - especially the need for basic oversight and regulation -- similar problems continue to emerge. “It does remind me that none of the messages from the collapse of Barings have been heeded very well,” he said.

SWITZERLAND REMAINS AMONG LEAST CORRUPT NATIONS

Switzerland is once again in the top ten of the world’s least corrupt nations, according to global watchdog Transparency International. But Philippe Lévy, president of TI’s Swiss branch, said that the country still needed to do more to fight corruption at cantonal and local levels. He also said Switzerland ought to take additional steps to protect whistleblowers.

This year Switzerland has moved up the rankings one place to 7th position, with a slightly higher rating of 9.1 points. Like last year, Finland is the least corrupt country, leading the ranking with 9.7 points. New Zealand and Denmark occupy positions two and three, while Bangladesh and Haiti are at the bottom of the list.

Switzerland to bring insider trading laws in line with Europe.

Under the new rules, set to come into force in July of next year, listed companies will be obliged to report to the Swiss Stock Exchange (SWX) transactions undertaken by a single member of their management team in the company’s shares totalling more than SFr100,000 ($79,000) in any one month. Such reports must be made within two days of the transaction having taken place. This represents a watered down version of the original draft proposals put forward by the SWX Admissions Board. However, representatives of the Swiss banking and business communities had reportedly pushed unsuccessfully for a higher threshold and extended reporting deadline.

DOMINICAN REPUBLIC STRUGGLES THROUGH ECONOMIC ILLS

Leonel Fernández, president of the Dominican Republic, is executing a series of painful economic measures to prevent the ailing Caribbean economy from sinking further. Mr. Fernández took office two months ago after defeating Hipólito Mej´a’s re-election attempt in May. Mr. Mej´a had mismanaged a bail-out of the country’s second-largest bank at a cost of 20% of GDP, causing a collapse of the peso and surging inflation. But it remains unclear whether Mr. Fernández will be able to return the Dominican Republic to the boom years over which he presided during his earlier term as president from 1996-2000.

Last month, legislators approved a rise in sales taxes and a 20% cut in public spending including the elimination of a subsidy on propane gas, beginning in January to cut the budget deficit by 3% of GDP. Consumption of propane gas, used widely among the poor, has grown markedly in recent times as the state’s debt to private electricity suppliers has ballooned and blackouts become more frequent. Implementation of a fiscal adjustment program is a condition for the renewal of a standby agreement with the IMF, and in turn a re-negotiation of outstanding debt with Paris Club creditors.

Since Mr. Fernández took office, the peso has regained some of the 50% of the value it lost during the previous year. Inflation has decelerated and the economy is beginning to grow. Meanwhile, the government is attempting to develop a safety net to avoid what could be a popular backlash from the majority poor in the weeks ahead as a result of the adjustment.

Officially unemployment is running at 16% but the informal economy occupies a larger share of the population. The crisis of the past three years has also prompted a surge in emigrants. In the past 10 months, more than 7,000 Dominicans have been caught attempting to reach Puerto Rico. But some are convinced that the Dominican Republic’s worst crisis in decades is nearing an end, and that Mr. Fernández will deliver the solution. “With no electric light, insecurity and few jobs, we live in a state of collective neurosis,” says Arelis Morán, a community leader in Gualey. “But the population is hopeful that things are going to change for the better.”

Dominicans try to lure Bahamian businesspersons.

Manufacturers of clothing, textiles, furniture, cosmetics, and craft, various Dominican businesses were on hand to woo the scores of Bahamians visiting the island over this past weekend. The trip was also geared toward those interested in importing goods for their businesses from Santo Domingo at a much cheaper rate than in Florida and other U.S. destinations.

MALAYSIA AMONG TOP 15 FOREIGN DIRECT INVESTMENT DESTINATIONS

Malaysia is among six Asian markets that enjoy the strongest investor confidence, the latest Foreign Direct Investment (FDI) Confidence Index, an annual survey of chief executive officers, chief financial officers and other top executives from the world’s largest companies, has revealed. The survey conducted by global management consultant firm A.T. Kearney shows that Malaysia jumped eight places from 23rd position to 15th position.

The other Asian countries that moved up the ranks were Hong Kong from 22nd position in 2003 to 8th position this year, and Singapore from 28th to 18th spot. The robust performances of Malaysia and the other Asian countries were in part driven by North American and European investors seeking to diversify their operations across Asia in anticipating growth opportunities in these markets. It said Hong Kong, Malaysia and New Zealand received higher confidence nods from Asian investors.

According to the survey, China and India rival one another and are aggressively challenging the U.S. as the world’s most favored destinations for FDI. China maintained its position as the number one most attractive FDI destination in the world for the third year in a row, while India rose from sixth to third most likely FDI location globally, behind the U.S.

HONG KONG’S PROPERTY MARKET RECOVERY WILL BE SHORT-LIVED, SAYS ECONOMIST

The recovery in Hong Kong’s long depressed property market will be a short-lived affair and rising prices will be curtailed by long-term pressure on wages and population growth, an economist predicted. “The fundamentals for a strong property market (e.g., strong wage increases or population growth) are not here. If anything, the competitive pressure from Guangdong will continue to exert deflationary pressure on Hong Kong,” argued Morgan Stanley economist, Andy Xie. Xie explained the recent bounce was a combination of a number of factors, including pent up demand following the SARS crisis, historically low interest rates and the conflict in Iraq.

WORDS FLY IN UK TANGLE OVER EU RED TAPE (HUMOR, OF A SORT)

The worlds of business and Westminster collided in a spate of colourful jibes as each side blamed the other for failing to stem red tape from Brussels. MPs on the European select committee were irked by the CBI’s suggestion this summer that politicians were asleep on the job when it came to examining European laws. Digby Jones, director-general of the industry body, was summoned to explain this heresy. Any suggestion the business boss might qualify his comments when faced with a set of clearly offended MPs was rapidly dispelled.

An unrepentant Mr. Jones explained the offending remarks had not been directed at the committee. “I don’t think you are asleep on the job -- I think you are doing it badly [in some cases],” he told them. “There is a distinction between this committee being asleep on the job and doing something we consider poor.” This stung the politicians, who take their committee role very seriously, into reciprocal insults.

CHINA CRACKING DOWN ON MONEY LAUNDERING

A Chinese crackdown on money-laundering has uncovered 330 possible cases involving more than $1 billion (€790 million). The cases, found from January to June, have been handed over to prosecutors, state television reported, citing the government’s foreign exchange regulator. In one case, regulators were alerted by a surge of foreign exchange transactions totaling $17 million through one bank, the report said. It said the money was tracked to a casino boss in the Chinese territory of Macau who collected the money from mainland gamblers. China has been under pressure from other governments to tighten controls on money-laundering and other financial transactions by cross-border criminals such as drug traffickers.

SURVEY FINDS SWISS BANKERS TOP STRESS LEAGUE

Bankers top the salary scales in Switzerland, but their fat pay packets come at a price, according to a survey. One-third of Swiss bank employees say they feel stressed, while one quarter are on tranquilizers or antidepressants. Just 16% say they are satisfied with their jobs. The study, by the University of Lausanne, found that stress levels were much higher in the banking sector than in other industries.

Gianfranco Domenighetti, the visiting professor at Lausanne University who led the study, said that job insecurity was one of the main factors behind the high stress levels in the banking sector. In the survey, 40% of bank employees admitted to being very worried about losing their jobs, compared with 26% in other sectors. Among those bank employees whose company was undergoing downsizing, the figure was 54%. Over the past few years, Switzerland’s banking sector has been going through an upheaval, with poor financial results and job losses.

According to a study by the University of St Gallen cited by Domenighetti, the banking sector is set to lose a third of its employees in the next three years owing to downsizing and outsourcing. Domenighetti said other stress factors included pressure to achieve financial objectives and a tense working atmosphere.

TAXES

TAX REGIME ATTRACTS RECORD NUMBERS OF REGIONAL HQ’S TO HONG KONG

The number of regional headquarters and regional offices in Hong Kong reached all-time highs this year, attracted by, among other factors, the territory’s low and simple tax regime, the government of the Special Administrative Region announced yesterday. According to results of the 2004 Annual Survey of Regional Offices Representing Overseas Companies in Hong Kong, there were 1,098 regional headquarters (RHQs) and 2,511 regional offices (ROs) of companies incorporated outside the territory located in Hong Kong as of 1st June 2004. This compares to 966 RHQs and 2,241 ROs at the same point in 2003, the survey noted.

The United States topped the list of countries/territories with companies that have RHQs in Hong Kong, with a total of 256, followed by Japan with 198 and mainland China with 106 firms. UK firms also have a major presence. All companies that took part in the survey cited Hong Kong’s simple and low taxes, the free flow of information, the absence of exchange controls, the corruption-free government and the city’s status as a free port as the main advantages of locating an HQ in the territory. However, the high cost of renting office and residential real estate was seen as a negative factor in setting up in Hong Kong.

MULTINATIONAL COMPANIES, FOREIGN GAMBLERS GET A TAX BREAK FROM U.S. TAX ACT

How will the bureaucrats at the United States Treasury define the word “reinvestment”? The answer to that question may determine whether the tax bill passed this week will have any chance of living up to the name Congress gave it -- the American Jobs Creation Act -- or whether it will simply provide an enormous tax break for multinational companies.

The bill includes goodies for almost every kind of corporation, and a few breaks for individuals you might not think would warrant special Congressional consideration. But it is reinvestment that has Wall Street salivating. The matter relates to a tax break being given to multinational companies. Under the old tax law, they could escape United States taxes on foreign income until they sent the income home. Now they will be able to pay tax at a rate of just 5.25% on profits brought home by the end of 2005 -- if the money is reinvested in this country. So what is reinvestment? Apparently it includes paying down debt. How about repurchasing stock? The Treasury may go along.

Tax officials in the Bush administration have been quiet on the matter, but Hank Gutman, who runs KPMG’s federal legislative tax group, says companies “can be expected to lobby the Treasury to allow stock repurchases as a permitted use of the funds, and they may succeed.” That would be a strange result. Share repurchases are the opposite of investment. They are partial liquidations that by no stretch of the imagination create jobs.

Link here.

On December 31, 2005, for the first time in more than 84 years, the local manufacturing operations of U.S. manufacturing companies in Puerto Rico will be taxed at a higher rate than those on the U.S. mainland -- link.

CITIZENS FOR TAX JUSTICE’S BLUNDERING CORPORATE TAX REPORT

The nonprofit group Citizens for Tax Justice (CTJ) recently blasted U.S. corporations for increasing their “tax avoidance” behavior during the presidency of George W. Bush. The CTJ report “Corporate Income Taxes in the Bush Years” examines the annual financial reports of a group of large U.S. corporations and purports to show how little these companies paid in taxes from 2001 to 2003. But the report fails to disclose that corporations’ tax return data are not publicly available, a fact that makes CTJ’s analysis imprecise at best. Because of this shortcoming and other errors, CTJ’s conclusion that “loophole seeking-corporations” are not paying their fair share of taxes falls flat.

IS MALTA A “TAX HAVEN”? THE DEBATE CONTINUES

The debate on the international perception of Malta’s financial services has continued on the letter pages of The Guardian. The left-wing Tax Justice Network responds that, “We do not suggest tax haven activity is illegal. What is worrying is that so many countries and professional people around the world seek to divert income from one territory into another to avoid tax payments.

“They undermine the income stream of elected governments which should have received the tax due, and they divert vital revenues from the governments of many of the poorer nations of the world, which do not have the resources to challenge this activity. The result is that tax havens directly contribute to poverty worldwide and to the particular plight of developing nations, many of which are forced to incur massive debt because they are compelled by falling tax yields to borrow on the financial markets to finance revenue and capital expenditure.”

STUPID TAX TRICKS

Sometimes tax avoiders get a little too clever for their own good. A case in point involves an exotic new form of charitable giving now being publicized by Howard Winklevoss of Winklevoss Consultants in Greenwich, Connecticut. Winklevoss just won a nod of approval from the IRS for a system in which a charitable donor gives away money but continues to manage it in a sort of custom endowment account. Wow! A concession to taxpayers from the mighty IRS. But on closer examination this may turn out to be a pyrrhic victory for taxpayers.

What is the point of deferred giving? If you are indeed a great money manager and can turn your $100,000 gift into $200,000 before the money is put to a charitable use, why make the donation now? The better strategy is to buy your Google shares (or whatever) today, in a taxable account, then let them magically double, and give the appreciated securities away to an operating charity like the Salvation Army. That way you get a $200,000 tax deduction rather than one for $100,000. The $100,000 gain goes untaxed if it is long-term.

If, on the other hand, the reason you are intrigued with the Winklevoss tax gimmick is simply that you want to get a deduction right now for money that will be put to charitable use gradually in coming years, consider other options. Below is a survey of the three basic types of deferred-gift accounts. The biggest fans of donor-investment control might be the financial advisers who want to keep managing the money their clients are giving away. Our advice is to think long and hard before setting up one of these accounts.

U.S. VIRGIN ISLANDS JOIN IRS INFORMATION SHARING INITIATIVE

Officials from the IRS and the Virgin Islands Bureau of Internal Revenue (VI BIR) have announced the establishment of a new partnership to work together on common tax enforcement issues. The partnership is part of an effort to enable federal, territorial, state and local tax agencies to join together in ensuring all taxpayers pay the amount of tax that they are legally obligated to pay. Like the other agencies, the VI BIR will be working with the IRS to combat abusive tax avoidance transactions by sharing information and leveraging resources.

The scope of the partnership is broader than previous agreements. Additional aspects include the sharing of resources and coordination on issues involving income tax benefits under the Virgin Islands Economic Development Program (EDP). The Virgin Islands joins 48 states, the District of Columbia and New York City on the list of tax agencies that have signed partnership agreements with the IRS. So far in 2004, the IRS has shared leads on approximately 35,000 taxpayers engaged in abusive tax avoidance with state and city authorities.

EU “TAX TERRORISM”

The Longman Dictionary of Contemporary English defines the word “terrorize” as “to deliberately frighten people by threatening to harm them, especially so they will do what you want.” It is not just political terrorism we are facing today. A French initiative to harmonize direct taxes can be viewed as a clear manifestation of economic terrorism. Recently the French finance minister has “deliberately frightened” EU countries with low taxes by “threatening to harm” them. How? By restricting their use of EU structural funds if they do not raise corporate tax rates.

EU tax laws cannot be changed unless all member states agree. This unanimity requirement has been the only safeguard to slow the movement of tax harmonization. But, as we all know, attempts to abolish the right of veto have been quite active lately and will certainly be put forward again. When? Maybe as soon as it appears that the terrorizing deeds do not bring the waited results. And if the right of veto is abolished, Europe will witness genuine economic terrorism where violence of the strong and the big against the small and the weak is the moving engine.

The situation is disturbing, since everybody knows that terrorism provokes a “lose-lose” situation. It benefits neither the attacking nor the attacked side. The only gain that companies would derive from it is equal rules that are easier to follow. But to raise taxes for the sake of simplicity is far from a brilliant idea. Companies would certainly agree to spend time learning different rules if this enabled them to pay less in taxes. Actually, they are used to doing so and they will continue searching for low-tax places to do business. If they do not find such places in Europe, they will seek for them elsewhere around the globe. Let us have a look at what lies behind the intentions to increase tax rates in the new member states.

The Cradle of the European Tax Rebellion: Estonia

Some big European countries see the low (corporate) tax rates as a threat, not only to investments but the welfare state at large. The French Finance Minister Nicolas Sarkozy, a possible French presidential candidate in 2007, has even gone so far as to bully the new member states, arguing that if they are rich enough to keep taxes low, then they should not seek billions of euros in structural aid funds from the older members. In doing so, he was more or less echoing earlier statements, in May, by the Swedish Prime Minister Göran Persson and German Chancellor Gerhard Schröder who have complained that the rich are not taxed heavily enough in new member states.

Of course these statements have provoked a fierce rebuttal from new members including Poland, Hungary, the Czech Republic, Slovakia and Estonia. In support of this stance, the new European Commission has also refuted the French proposals, saying that it rejected any links between tax rates and structural funds. The new member countries are keen to replicate Ireland’s economic miracle. When Ireland joined Europe in 1973, its per capita income was just 62% of the EU average. By 2002 it was 121%. By slashing taxes and the state’s share of the economy, the Irish were able to exploit their access to the EU market and encourage a massive influx of foreign direct investment. By 1998 American multinationals accounted for 70% of Irish exports. The top corporate tax rate, once over 40%, now stands at 12.5%. The state’s share of GDP, which hit 54% in the 1980s, is now down to 33%. Unemployment is less than 5%.

But besides Ireland, the new member countries have another role model within their own ranks, the successes of which they are eager to emulate: Estonia! Who could have believed some 15 years ago that the most powerful free-market winds would now be blowing from the East instead of the other way around?

BRITAIN’S ERA OF LOW TAXATION ABOUT TO END, SAYS OECD

The OECD, which promotes the interests of the world’s richest 30 countries, said the UK paid the equivalent of 35.3% of its gross domestic product in tax last year. That adds up to roughly £350 billion. The sum is lower than the 44.2% burden on the French taxpayer, and the 36.2% paid by Germans. The amount of tax paid in the UK has been easing since 2000, when it stood at 37.4%, and is currently the same percentage as the UK raised in 1975.

The OECD said the fall in tax over the past few years had been due to “lower personal income tax rates or increased tax credits”. The OECD’s head of tax said, “There will be a pick-up in returns from corporation tax now that the Government is more aggressive over the abuse of tax shelters.” Nevertheless, British taxpayers will be asked for increasingly more money over the next four years. The Treasury says that it will need to raise an extra £33 billion in 2008. That will bring the tax regime in line with the eurozone but will be the highest level of tax raised for 24 years.

IS IRISH CORPORATE TAX RATE UNSUSTAINABLY LOW?

ICTU economic advisor Paul Sweeney told a major conference on taxation in Dublin that the reduction of the rate to 12.5% was a major policy mistake because, “an industrial/development policy which is based on artificial tax subsidies is not sustainable. It has Ireland leading the race to the bottom in Europe -- a race which cannot be won by any state.” The economist said that the “race to the bottom” has intensified with the enlargement of the EU. “We are being pursued by the new members on the tax competition race to the bottom. Estonia actually has a rate of zero for many firms. This will be hard to compete with.”

Sweeney added that the competition to attract investment through low corporation tax would, “invariably lead to a lowering of standards” in other areas. “It could be followed by lower labor regulations and lower health and safety regulations.”

French Finance Minister, M. Sarkozy argued that, “If Ireland was unwilling to fund its public services by levying taxes on profitable companies operating here, then it should not get handouts financed by the taxpayers in the rest of Europe.”

“BENEDICT ARNOLD” CEOS HELP FUND KERRY CAMPAIGN

Although Democratic presidential front-runner John Kerry often rails on the campaign trail against U.S. companies that relocate jobs abroad, seeking lower tax and wage rates, federal records show that the Massachusetts senator is heavily invested in such companies and has recently received substantial support from some of their top executives. Campaign finance reports reviewed by The Hill reveal that employees at 25 companies identified by CNN’s Lou Dobbs as “either sending American jobs overseas, or choosing to employ cheap overseas labor, instead of American workers,” have contributed more than $370,000 to Kerry’s presidential campaign.

On receiving an endorsement from the AFL-CIO last month, Kerry said, “When I am president, and with your help, we’re going to repeal every benefit, every loophole, every reward that entices any Benedict Arnold company or CEO to take the money and the jobs overseas and stick the American people with the bill.”

On Feb. 19, N. Gregory Mankiw, chairman of President Bush’s Council of Economic Advisers, triggered an outcry when he said offshoring service-sector jobs is “the latest manifestation of the gains from trade that economists have talked about … and that’s a good thing.” Under criticism from Kerry and several other Democratic and Republican politicians, Mankiw conceded his remarks were “injudiciously worded”.

Federal Reserve Chairman Alan Greenspan defended Mankiw but said there is “a considerable gulf” in understanding between economists and at-risk employees. “Our economy is best served by full and vigorous engagement in the global economy,” Greenspan said. “The protectionist cures being advanced to address these hardships will make matters worse than better.”

TAX EVASION BY “PIN-STRIPE MAFIA COSTING UK SOCIETY UP TO £85 BILLION A YEAR”

Corporate tax evasion costs UK society up to £85 billion a year, a “crime” perpetuated by a “pin-stripe mafia” of accountants, lawyers and bankers, according to Prem Sikka, the respected professor of accountancy at Essex University. Sikka, speaking on the eve of a lecture entitled “Alternative Economic Strategy” he was due to deliver to the Scottish Trades Union Congress, also attacked the government and the international community for not cracking down on corporate tax evasion. “The truth is that the pin-stripe mafia is picking the pockets of citizens all over the world. It engages in huge transfers of wealth and makes ordinary people pay a higher proportion of their wealth in taxes than big multi-national conglomerates and millionaires. This is the age of reverse socialism, where the poor are supporting the rich,” he said.

Sikka alleged companies are largely avoiding tax by channelling profits into tax havens, where they claim to be resident or have created “shell companies” in places such as Jersey, the Isle of Man, Switzerland and Luxembourg. Many corporations use other other methods, such as inflating manufacturing and import costs, thereby giving the appearance of massively reduced profits.

TECHNICAL SIDE OF EU TAX DIRECTIVE ADDRESSED

Colin Powell, the head of the Jersey Financial Services Commission, has been speaking to the Guernsey International Business Association on how companies should approach the EU savings tax directive. Mr. Powell has drawn up guidance notes on how Guernsey, Jersey and the Isle of Man should interpret it. He has been consulting with industry members in all three islands and redrafting the proposals.

Mr. Powell was the States of Jersey economic advisor from 1969 to 1992 and chief adviser from 1992 until 1998, becoming chairman of the commission in 1999. He also advises the Policy and Resources Committee on international affairs, particularly EU and OECD tax initiatives. It was decided that the three islands would take a common approach to interpreting and operating the directive and Mr. Powell was chosen to draw up guidelines as the most senior and appropriate expert.

ASSET PROTECTION

LUXEMBOURG PRACTITIONERS PRESENT THEIR PERSPECTIVE ON FINANCIAL SERVICES

Banking secrecy, the EU savings tax directive, and the Luxembourg tax regime were among the topics discussed during a seminar. Lawyer Alain Lorang said that trusts had been fully recognized in Luxembourg since the approval of the Hague Convention in July last year. He stressed the strictness of the money-laundering regime, but said that not to declare tax was not a criminal offence, whereas to declare false evidence was regarded as fraud. Stéphane Hanot, co-director of private banking at Banque Populaire Natexis Luxembourg, a French bank, said that from their perspective Luxembourg provided a useful mix of confidential private banking and onshore tax structures.

JERSEY AND GUERNSEY HAVE MORE APPEAL AS OFFSHORE FINANCIAL CENTERS THAN EVER

When Hurricane Ivan devastated the Cayman Islands in early September, law firms and consultants were among the international businesses that chose to relocate staff temporarily to the Channel Islands, among other locations. The two islands are already carving out a promising business in the provision of disaster recovery facilities. Escaping the violent storms that have devastated large areas of the Caribbean over the past three months is only one reason, and a relatively small one, why members of the financial services industry in Jersey and Guernsey are feeling optimistic these days, certainly compared with one or two years ago.

There is a palpable sense that the upheavals caused by a succession of international regulatory and legislative initiatives have largely been dealt with, and reassurance that, for the most part, the islands’ own regulatory bodies, while requiring adherence to rigorous international standards, are not seeking to push ahead of the pack -- an issue that has been a cause for concern in recent times.

CONVICTED MONEY LAUNDERER SPEAKS ABOUT HOW THE BUSINESS HAS CHANGED

Humberto Aguilar, who once used to run his own thriving law firm in southern Florida and who is now a respected part-time lecturer, remembers warehouses in Miami full of the proceeds of drug trafficking. “They were piled high with cash. Everywhere you looked was money,” he recalls. That was in the late 1970s and the 1980s, when Aguilar divided his professional life between representing criminals and laundering some of the contents of these warehouses throughout the offshore world.

For Aguilar, laundering was relatively easy. He knew the corrupt and the corruptible among the banking and legal professions in a raft of offshore states. Upon his request, in return for a cut, these professionals would set up bank accounts to house the dirty money. The cash would then be sent to another offshore state, and then another, before most of it finally returned to the US, clean and untraceable.

Since Aguilar’s days of crime (which ended with a 7 1/2 prison sentence between 1992 and 1999 for drug importation, conspiracy to launder and traveling overseas to perpetuate a felony), the offshore world has undergone a revolution. Offshore regulators have blacklisted badly regulated offshore states. Many tax havens now focus on attracting legitimate business by claiming to offer an uncorrupt financial services system. Nevertheless, Aguilar is convinced that offshore money laundering is still as big a business as it ever was. The difference, he says, is that launderers have to be “more careful and behave differently”. And, he says, they have to be a lot more careful about where they choose to offload their money.

Money laundering sleuths told to look for subtle clues.

A momentary inkling somewhere between speculation and belief is enough to catch a potential money-launderer, according to Detective Constables Barry Moore and Kevin Roper from the Isle of Man’s Financial Crime Unit (FCU). They said the days of people trying to open an account with a suitcase full of cash were long gone and modern-day criminals would have all the identification required. Finance industry employees should therefore be on the lookout for more subtle clues that could identify money-launderers.

“You should check the identity documents and the people who claim to certify them, as we have seen forged bank references. You should also check if the person is really a titled professional and authenticate copied documents. You should submit reports as soon as possible -- we would like to know as soon as you become suspicious, before the transaction has taken place or straight away afterwards.”

They added that if a suspicious transaction report (STR) was warranted, then as much relevant information as possible should be included to make the FCU’s job easier. “We need the disclosure to fully detail the suspects with the names spelt correctly, and details of who introduced the business to you. If the company is limited you should tell us where and also tell us what research you have already done on the suspect company. We are not experts on every type of financial transaction so you should also tell us what should be happening if it is not the normal business process.”

GOVERNMENT SENATOR SAYS JAMAICA SHOULD TARGET OFFSHORE INVESTORS

Government senator Noel Sloley has called on the Patterson administration to set up Jamaica as an offshore financial center and tax haven -- an idea that JLP leadership aspirant Bruce Golding says that he is already studying. Sloley made his suggestion in a Senate speech in which he also urged the government to free the tourism industry from paying taxes, arguing that it would stimulate greater investment and growth in the sector. The offshore financial center and tax haven suggestion comes only a a week after Prime Minister P.J. Patterson’s own proposal for the transformation of Sloley’s home town Montego Bay, on Jamaica’s northwest coast, into an international business center.

“As night follows day, so you are going to have rich people,” Sloley said in his Senate speech. The wealthy want financial centers with low taxation to preserve their wealth. They are going to find these shelters somewhere.” Jamaica, Sloley argued, could be one such location, but noted that the issue was one that required the agreement of both sides of the political divide in order to “find a way to start our people marching to the promised land.”

He, however, did not address the issue of pressure placed on offshore banking jurisdictions -- including several in the Caribbean -- by the OCED to open up their banking secrecy and tax shelter laws so that they are more penetrable by foreign investigators. Sloley also said that if Jamaica were to develop tax shelters and combine it with a lower income tax rate, it could spur the repatriation of some of the billions of dollars held by Jamaicans in the banks of Miami, Cayman and the Bahamas.

PRIVACY

BAHAMAS FIRM SCREENS PERSONAL DATA TO ASSESS RISK

It began as one of the Bush administration’s most ambitious homeland security efforts, a passenger screening program designed to use commercial records, terrorist watch lists and computer software to assess millions of travelers and target those who might pose a threat. The system has cost almost $100 million. But it has not been turned on because it sparked protests from lawmakers and civil liberties advocates, who said it intruded too deeply into the lives of ordinary Americans. The Bush administration put off testing until after the election.

Now the choreographer of that program, a former intelligence official named Ben H. Bell III, is taking his ideas to a private company offshore, where he and his colleagues plan to use some of the same concepts, technology and contractors to assess people for risk, outside the reach of U.S. regulators, according to documents and interviews.

Bell’s new employer, the Bahamas-based Global Information Group Ltd., intends to amass large databases of international records and analyze them in the coming years for corporations, government agencies and other information services. One of the first customers is information giant LexisNexis Group, one of the main contractors on the government system that was known until recently as the second generation of the Computer Assisted Passenger Pre-screening Program, or CAPPS II. The program is now known as Secure Flight. Bell and his business associates said they are trying to fill wide gaps in existing commercial databases that enable criminals and terrorists to roam the globe, sometimes under false identities. Company founder Donald Thibeau, a former LexisNexis executive, said he formed Global Information in the island nation to take advantage of regulations there that he thinks will make it easier to collect data than in the United States, which has a hodgepodge of information and privacy laws that he said would making doing business far more costly.

U.S. TRIES TO CALM FOREIGN VISITORS OVER NEED FOR FINGERPRINTING

American officials began an overseas media campaign aimed at dispelling anxieties about a new security program that requires foreign travelers to be fingerprinted and photographed when they enter the U.S. A full-page newspaper ad taken out in Le Monde in France by the Department of Homeland Security advised travelers that, “The flight to America takes about eight hours. Only a few extra seconds will make your trip safer.” Similar American advertisements are running in major newspapers in England, Germany, Japan, Belgium and Australia at a cost of $1.8 million, officials said.

New U.S. land border procedures set to launch in 2005

New immigration procedures that have snagged scores of undesirables this year at airports and seaports are coming to the nation’s land borders in 2005, after they are tested briefly in Laredo, Texas and two other cities, Department of Homeland Security officials said. But weeks before their implementation along the Mexican and Canadian borders, the rules are being blamed for scaring off foreign visitors along the southern border and discouraging potential tourism and commerce in the interior United States.

Promising minimal delays and intrusion, officials said the procedures will comply with demands for tighter border security after the 2001 terrorist attacks. Mexicans visiting the U.S. interior currently complete the I-94 form by hand. Under the new high-tech system, immigration officials will put the same information into a computer along with fingerprint and photograph images taken from the visitors -- a process said to take only 15 additional seconds. The officials then will check the inkless fingerprints against several databases and make sure the photographs match those on file.

If the visitor qualifies for entry, he or she will be issued a computer-generated I-94 card. Eventually, the cards will be equipped with radio frequency technology that will allow tracking of the card holders as they exit the United States -- another congressional mandate.

VIRGINIA IS FIRST STATE TO CONSIDER PUTTING RFIDS IN DRIVER’S LICENSES

The American Civil Liberties Union urged Virginia not to become the first state in the nation to place radio frequency identification (RFID) chips in its driver’s licenses. Chris Calabrese, Program Counsel of the ACLU’s Technology and Liberty Project, testified before a panel of Virginia legislators that is considering whether to recommend the technology’s adoption.

“Almost everyone carries a driver’s license, and RFID chips allow people to be tracked,” said Kent Willis, Executive Director of the ACLU of Virginia. “This proposal would allow anyone to set up an RFID reader to capture the identities and personal information of every person who comes within range,” added Willis. “FBI agents, for example, could sweep up the identities of everyone at a political meeting, protest march, gun show, or Islamic prayer service.”

Calabrese told the legislators that even aside from privacy issues, adoption of RFID chips would bring a number of unresolved security problems, require construction of a costly infrastructure for reading the chips, and would not likely be effective in improving the security of driver’s licenses.

NEW SCREENING TECHNOLOGY IS NIGH

U.S. government efforts to prevent further terrorist attacks on the nation’s planes and trains are increasingly incorporating smart technologies that can sniff out bomb residue on a passport or see through clothes to detect weapons taped to a would-be terroris’qs stomach. The Transportation Security Administration, which Congress created shortly after the Sept. 11 attacks, has been investing millions to upgrade technology that the nation’s train stations and 429 commercial airports use to detect bombs and weapons.

Currently, the TSA is field-testing a wide range of new gadgets and systems. At five airports, for example, the agency is testing passenger-screening portals that shoot puffs of air at passengers to loosen particles, which the machine then quickly tests for explosive residue. At the back doors of airports, the TSA is testing fingerprint and iris checkers that would keep out unauthorized people. The agency is also prototyping smart identity cards that frequent travelers can use to bypass extra screening at airports and another that they hope to issue to all transportation workers -- from longshoremen to Amtrak linemen -- to keep known terrorists from infiltrating the transportation system.

The TSA is also moving forward on a noninvasive X-ray system, known as a backscatter portal, that can see items hidden on a person’s body, including plastic explosives, nonmetallic handguns and drugs. But a bipartisan group of critics says the agency has simply moved too slowly in shifting technology from test phase to wide deployment.

2-FINGERPRINT BORDER ID SYSTEM CALLED INADEQUATE

Terrorists who alter their fingerprints have about an even chance of slipping past U.S. border watch-list checks because the government is using a 2-fingerprint system instead of one that relies on all 10 prints, a lawmaker said in a letter he made public to Homeland Security Secretary Tom Ridge. Rep. Jim Turner (D-Texas) wrote that a study by researchers at Stanford University concluded the two-finger system “is no more than 53 percent effective in matching fingerprints with poor image quality against the government’s biometric terrorist watch-list.” Turner said the system falls far short of keeping the country secure.

Turner’s Oct. 15 letter comes as government officials supervising the burgeoning border security system, known as US-VISIT, have been touting their use of fingerprints for identifying people crossing the border and checking them against watch lists of suspected terrorists. The US-VISIT program aims to create a “virtual border” using computer networks, databases, fingerprints and other biometric identifiers. The program requires foreign visitors to register their names before traveling to the United States and have their fingerprints checked when they arrive and depart. Officials estimate the system could cost up to $10 billion and take a decade to build.

GOOGLE MIGHT BE A BIG BROTHER

People who use public or workplace computers for e-mail, instant messaging and web searching have a new privacy risk to worry about: Google’s free tool that indexes a PC’s contents for quickly locating data. If the new Google tool is installed on computers at libraries and internet cafes, users could unwittingly allow people who follow them on the PCs, for example, to see sensitive information in e-mails they have exchanged. That could mean revealed passwords, exposed conversations with doctors or viewed web pages detailing online purchases.

Google Desktop Search, publicly released in a beta test phase for computers running the latest Windows operating systems, automatically records e-mail you read through Outlook, Outlook Express or the Internet Explorer browser. It also saves copies of web pages you view through IE and chat conversations using America Online instant-messaging software. And it finds Word, Excel and PowerPoint files stored on the computer.

FDA APPROVAL OF HUMAN MICROCHIP IMPLANT DRAWS FIRE FROM PERSONAL PRIVACY ADVOCATES

A microchip that can be implanted under the skin to give doctors instant access to a patient’s records was approved by the Food and Drug Administration, a step that could revolutionize medical care but is raising alarm among privacy advocates. The tiny electronic capsule, the first such device to receive FDA approval, transmits a unique code to a special scanner that allows doctors to confirm a patient’s identity and obtain detailed medical information from an accompanying database.

Opponents argue the medical benefits are marginal, at best. Patients can already wear bracelets that alert doctors to their identities and special medical needs, and few medical errors are actually caused by patients being misidentified, they said. But the potential for abuse is great, they say.

“Over the long haul, any place where there’s a surveillance camera today, five or 10 years from now will have these ... readers. You’ll walk into a 7- Eleven, and they’ll take your picture and scan your number,” said Richard Smith, an Internet security and privacy consultant in Boston. “If we start carrying these tags, it makes a perfect way, either by private security companies or the government, to keep track of us.” Marc Rotenberg, executive director of the Electronic Privacy Information Center in Washington, D.C., said he was concerned that people might be forced to get the implants.

AMERICAN PASSPORTS TO GET CHIPPED

New U.S. passports will soon be read remotely at borders around the world, thanks to embedded chips that will broadcast on command an individual’s name, address and digital photo to a computerized reader. The State Department hopes the addition of the chips, which employ radio frequency identification, or RFID, technology, will make passports more secure and harder to forge, according to spokeswoman Kelly Shannon.

But civil libertarians and some technologists say the chips are actually a boon to identity thieves, stalkers and commercial data collectors, since anyone with the proper reader can download a person’s biographical information and photo from several feet away.“qEven if they wanted to store this info in a chip, why have a chip that can be read remotely?” asked Barry Steinhardt, who directs the American Civil Liberty Union’s Technology and Liberty program. “Why not require the passport be brought in contact with a reader so that the passport holder would know it had been captured? Americans in the know will be wrapping their passports in aluminum foil.”

Last week, four companies received contracts from the government to deliver prototype chips and readers immediately for evaluation. Diplomats and State Department employees will be issued the new passports as early as January, while other citizens applying for new passports will get the new version starting in the spring. Countries around the world are also in the process of including the tags in their passports, in part due to U.S. government requirements that some nations must add biometric identification in order for their citizens to visit without a visa. Current passports (which are already readable by machines that decipher text on the photo page) will remain valid until they expire, according to a State Department spokeswoman.

Doubts over U.K. passport face scans.

Biometric facial recognition will be brought in as part of an international agreement to target terror and fraud. But trials suggest the technology has a 10% failure rate, the BBC has learned. Some experts say the technology could be unsuitable for the high volume of travellers it will deal with, and may fail to improve airport security. Facial biometric details will be stored on a microchip which will be carried on all new UK passports from October 2005. This will then be compared to a biometric scan taken of travelers’ faces at certain airport check-ins. The problems are apparently due to the technology’s sensitivity to light conditions.

Professor Angela Sasse of University College London -- who has made a study of biometrics, said she was very doubtful whether facial scans were a practical security measure yet. “It will be a huge problem if facial biometrics cannot always correctly identify genuine passport holders,” she told the BBC. But Home Office Minister Fiona Mactaggart said the public should not be concerned. “This technology is not foolproof. No country is looking just to depend on the biometrics technology. They are relying on all the other things that are used.”

LAW

SWISS HIGH COURT APPROVES GIVING ACCOUNT DETAILS TO U.S. IN TERRORISM CASE

The Swiss supreme court approved the handover to the United States of bank documents for the source of a donation to the Islamic Assembly of North America, which is suspected of recruiting terrorists over the Internet and laundering money. The Federal Tribunal’s decision allows Swiss authorities to override banking secrecy and provide documents.

THE EMPIRES STRIKE BACK

There was a school of thought that held that cyberspace was its own sovereign nation. For one thing, “The Net perceives censorship as damage, and routes around it.” What government could control what was said on the Net? The more fuss someone made about a particular site or piece of information, the more likely it was to be mirrored widely. Besides, bands of activist programmers could unite to create circumvention technologies such as anonymizing Web sites, clever software to enable anonymous email and Usenet postings, cleverer software to create hidden, uncontrolled networks. For another thing, international laws are all different. So any time a national government did not like something, all anyone had to do was move the material to a site somewhere else, where it was not illegal or even controversial.

“You have no sovereignty where we gather,” wrote John Perry Barlow grandly in 1996, in protest against the Telecommunications Reform Act and its subsection, the Communications Indecency Act. Censorship and intellectual property laws, he wrote, “will not work in a world that will soon be blanketed in bit-bearing media.” Maybe it is time to change that into, “Governments perceive the Internet as damage, and gang up on it.”

The story behind the week-long seizure of two hard drives, or servers, that hosted some 20 of the anarchist news collective Indymedia’s 50 sites worldwide seems to be a case in point, although to be fair, no one knows yet exactly on which nation’s head the dust will eventually settle. More than 40% of the collective’s sites were hosted at a single location. Arguably, the collective could protect its content better by spreading its content among more servers and having more mirrors. But both data and people must have a physical location somewhere. And as long as governments can find out where that is, they will find ways to act, if they can. And we should have known. You cannot sit around saying confidently, “They can’t get me.” They take it as a challenge.

TREATIES USED TO BYPASS DOMESTIC LAWS AND THREATEN CIVIL LIBERTIES, MEDIA FREEDOM

The growing use of international treaties to bypass the will of national parliaments, by bodies waging the so-called “war on terrorism”, increasingly threatens civil liberties and freedom of the media, warn privacy advocates. When U.S. officials -- reportedly the FBI, though the agency denied it -- last week sought to gain access to computer servers hosting Web sites of Independent Media Centers (or Indymedia), a worldwide, alternative citizen-based news network, it was in response to a request by the Swiss police under the Mutual Legal Assistance Agreement. The treaty establishes procedures for countries to collaborate in investigations regarding international terrorism, kidnapping and money laundering.

Ian Hosein, a visiting fellow at the London School of Economics and a fellow at the organization Privacy International in the U.K., cites the 2001 Council of Europe Cybercrime Treaty as a prime example of “policy laundering”, in which national governments use global treaties to force their parliaments to pass what otherwise might be unpopular measures. All the signatories to the cybercrime treaty -- which include Canada, the U.S. (which has not ratified the agreement) and EU countries -- are obliged to have their legislatures pass lawful access laws that give police increased power to seize records of e-mail messages by people under criminal investigation, as well as force Internet service providers (ISPs) to store transmission data for a period of time.

Canadian officials in the department of Justice in Ottawa have justified passage of the first of two pieces of legislation on lawful access because of this country’s treaty obligations. But Hosein suggests this is a “disingenuous” argument, since “Canada helped write the Council of Europe treaty. This is the most annoying thing about this.”

SOME FINAL THOUGHTS ABOUT MARTHA STEWART

The news coverage has given many people the wrong impression of what happened in the Martha Stewart case. In the first place, no law says that insider trading is a crime. And she was not indicted for insider trading. She was convicted of lying (1) to federal investigators about insider trading and (2) to the shareholders of her own company when she announced that she was innocent of insider trading. She also was convicted of conspiracy to lie about insider trading by making up a lie with her broker, Peter Bacanovic. Thus she was convicted on three counts of lying about something that is not a crime and that she was not charged with doing. If the government cannot charge her with insider trading, what difference does it make whether she lied about insider trading?

Incidentally, if simple lying were a crime, we would all be in prison. Lying under oath is called perjury. Lying to a federal official when not under oath is certainly no worse than a federal official lying to you -- which happens far more often. All Martha Stewart’s alleged offenses were lumped together under the heading of “obstruction of justice”. What justice -- when no crime against anyone was being charged?

BRITISH COLUMBIA TO GUARD CITIZENS’ PRIVACY AGAINST PATRIOT ACT

British Columbia has announced plans to stop any far-reaching effects the U.S. Patriot Act may have on the privacy of people in B.C. The province will introduce rules this fall to forbid Canadian subsidiaries of American companies from handing over private information to American law enforcement agencies. Civil liberty and privacy activists say there is an easier way around the Patriot Act -- stop contracting out government data services to American-owned companies. The province is currently negotiating seven different contracts where private information could be exposed under the act, including financial and medical records.

Patriot Act requires companies to pass on New Zealanders’ info.

Green MP Keith Locke says he will write to the Privacy Commissioner to ask her to investigate the actions of U.S. companies operating in New Zealand that are applying American, rather than New Zealand’s, laws and policies. “The case reported today of Aucklander Mohammad Abbas, whose urgent money transfer to India was delayed for a month by Western Union because his name matched that of a suspect on an American watch list, is another example of George W. Bush’s ‘war on terror’ compromising our interests,” said Mr. Locke, the Green Party’s Foreign Affairs Spokesperson.

“The experience of Mr. Abbas, an innocent man, is a scandal. ‘Mohammad Abbas’ is a common name so such overzealous enforcement of the U.S. watchlist is potentially affecting people in several countries. A similar name is on New Zealand’s list of international terrorist suspects, but if Western Union had any suspicions they should have gone directly to the New Zealand Police, not sent the information to the U.S. ...”

THE TALE OF THE SERVERS “NOBODY” SEIZED

Nobody seized Indymedia’s servers, apparently. On the 7th October hosting company Rackspace “acted in compliance” with a court order and two servers belonging to Indymedia were removed from Rackspace’s premises in London. But the denials of involvement roll in, the latest coming from UK Home Office minister Caroline Flint, who in answer to Parliamentary questions said, “I can confirm that no UK law enforcement agencies were involved in the matter... In the circumstances I do not therefore believe that it is necessary for me to make a statement.”

Which we can perhaps take as meaning that whatever happened was nothing to do with the Home Office, and you lot might as well stop asking us about it. The Home Office’s apparent lack of interest in court orders from non-UK jurisidictions being enforced on UK soil without the involvement of UK law enforcement agencies would however seem a fertile area for further questions.

We have got a U.S. court order served in Texas, we have got a “person appointed by the court”, before whom whatever it is the order requires must be produced, and we have got the seizure of two servers in Heathrow, London. Whatever trail connects the two is littered with denials, so we have to start speculating to consider the options. The one with fewest black helicopters attached is the cockup theory. It also seems perfectly conceivable, even likely, that anything owned by Indymedia and held by Rackspace that was within direct US jurisdiction would have been subject to the order. Black helicopter number two would be to consider the possibility that the Italian authorities knew damn well where the servers really were, but chose to go via the US rather than channel it via the Home Office because they thought they would do better via that route.

Whatever, it should by now surely have come to the attention of the Home Office that it all looks very like somebody else’s laws have been playing all over its jurisdiction without it knowing anything about it. If the Home Office does not know what has been going on, then it should really start finding out, should it not?

U.S. COURT FINDS MASS METAL-DETECTOR SEARCHES OF GEORGIA PROTESTERS UNCONSTITUTIONAL

The ACLU of Georgia applauded a federal appeals court decision to strike down an unconstitutional city policy that forces thousands of protesters coming to demonstrate against a combat training school in November to undergo mass metal detector searches. The court also strongly condemned the city of Columbus for using post-9/11 fears as justification for the searches.

The unanimous ruling by a 3-judge panel of 11th U.S. Circuit Court of Appeals in Atlanta came in response to a lawsuit brought by the ACLU of Georgia on behalf of the School of Americas Watch in November 2002. The lawsuit challenged last-minute plans by law enforcement officials to erect multiple security checkpoints with metal detectors in a public street to search all individuals participating in an annual protest against the school. The ACLU argued that the searches are unconstitutional because they are conducted without probable cause or individualized suspicion.

The ACLU also argued that the measures would cause mass delays and congestion. According to the brief, even if each protester could speed through the security checkpoints in a minute, it would take more than 80 hours for all protesters to make it through the two planned checkpoints.

In its strongly worded opinion, the court wrote, “We cannot simply suspend or restrict civil liberties until the war on terror is over, because the war on terror is unlikely ever to be truly over. September 11, 2001, already a day of immeasurable tragedy, cannot be the day liberty perished in this country.”

OPINION & ANALYSIS

THE EROSION OF PROPERTY RIGHTS

The government should be the protector of property rights, not one of their worst violators. Imagine you have been enjoying your backyard picnic table and chairs for the past 10 years when suddenly, for no apparent reason, you are served notice from a government agency that you will be fined $6,000 a day unless you remove them. Or, imagine you would like to add a stone walkway to your garden. You begin to research the procedure and costs, only to learn that a lengthy application will be required, with multiple hearings before a state commission. You find yourself embroiled in a Kafkaesque legal battle costing tens of thousands of dollars. Finally, after years of struggle the government demands, as a condition for approving your little walkway, that you “donate” a portion of your land to the state.

Do these sound like nightmarish stories out of some totalitarian regime? Shockingly, they are normal, everyday incidents for property owners across the nation. People residing within five miles inland of California’s 1,100 miles of coastline are subject to the California Coastal Commission’s power to approve or deny improvements involving “any solid structure” on their property. This can include adding a room to a home, planting trees, adding a fence or garden walkway and, yes, in one current case, a picnic table and chairs.

The California Coastal Commission and other agencies like it stand the very purpose of government on its head. A legitimate governmental agency would do all that it could to protect the owner in his right to develop his property according to his best judgment. Once we accept the principle that the government can deprive some individuals of their right to property, there is no basis to reject the complete usurpation of private property.

Indeed, all around the country there are escalating attacks on homeowners’ property rights. In Washington, D.C., a landlord cannot sell his own property without permission from his tenant. Near San Francisco certain homes designated as “affordable” can be sold for no more than a government-controlled price. In hundreds of U.S. cities, various laws establishing “historical districts”, “landmarks”, or “improvement zones” straightjacket owners who are consequently unable to remove trees, erect fences, add rooms, or even change rain gutters. Government boards, agencies and commissions with this kind of authority should be opposed not on a case-by-case basis, but on principle. The only proper state policy with respect to private property is: hands off!

DOES “THE AMERICAN DREAM” MEAN A GOOD JOB AND FINANCIAL SECURITY, OR FREEDOM?

A new study suggests this election may be as much about freedom as anything else, with those placing the highest value on it increasingly identifying with the Republican Party. The report is titled, “The American Dream 2004” and was commissioned by the National League of Cities. It is based on an August national public opinion survey. The report’s purpose was to find whether people still believe in the American Dream, whether it is still achievable and what it means.

The good news is 63% of Americans believe they are presently living the American Dream. Moreover, 62% believe it is achievable for most Americans and 65% think their children have a good shot at it. Even among those who those who say they are not living the American Dream, 42% are fairly confident they will achieve it some day.

Of course, the American Dream means different things to different people. For the bulk of people, it means a good job and financial security. But, somewhat surprisingly, living in freedom was the second most important factor. And when people were given a chance to mention the two most important factors to them, living in freedom was the most frequently mentioned thing that defined the American Dream for them.

Among those who cite freedom as an essential element of the American Dream, young people were most likely to list it as No.1. Americans between ages 18 and 29 cited living in freedom as the key element of the American Dream 45% of the time. By contrast, only 24% of those between 50 and 64 put freedom at the top of their list. Whites are more likely to see it as important, blacks and Hispanics less so. Men are more likely than women to cite the importance of freedom, and those with higher incomes and education are likelier to do so than those with less. Politically, 44% of Republicans but only 29% of Democrats say freedom defines the American Dream.

BOMB SHELTER OR TAX SHELTER?

I figure that if I am acting, I might as well have a plan. This concept may not be obvious to others, because often their actions look, to me, more like reactions. I tell my sons that the neighbors sometimes look to me like balls in a pinball machine, being acted upon by forces outside of themselves but making few moves that come from thoughtful deliberation. Perhaps it is perverse, but even if I misstep I would rather it be from my own error than someone else’s impositions on me. Though government’s growth has usurped many decisions from me, there are still a lot of choices left open, even if the environment in which I make them is warped in many places by government action.

I could have sold my home, moved to the country, and built a bomb shelter. So far, I am glad I have not. But that could change. The challenge is to figure out how to rationally plan for the future at a time when lots of absurd things are occurring. The list of absurdities is long, but the poster child is a commercial heard on WBBM radio, the (allegedly) most listened-to AM station in America. In essence, a mortgage company will offer certain qualified persons a home loan, a grant (from a front for home builders) to cover the down payment, and another grant to cover the closing costs. The ad literally says a prospective homeowner can show up with nothing and leave with the keys to their new home. The only qualification implicit in the commercial is that the home buyer be living too close to the edge of their income to be able to save even a few thousand dollars for a down payment. If this is not the proverbial “last marginal buyer”, I do not know who is.

This smells, to me, suspiciously like tech stocks did back in 1999 and early 2000. Most books being published had titles like Dow 36,000. Well, we know how that turned out. You can buy a used copy from $0.37 at Amazon.com.

On the other hand, sometimes absurdities last a really long time. Nixon dissolved the last vestiges of gold’s connection to U.S. legal tender back in 1971, but instead of gold finally winning against fiat currencies, the period 1980 to 2000 saw disinflation. In 2004 dollars, gold’s price peaked in 1980 at about $1,952, so $425/oz gold today is actually down 78% after 24 years. This tells me that no matter how unassailable my logic is, I cannot rely on observations like this to dictate my actions. Smart people who invested in gold during the past quarter century got crushed while balls in the pinball machine who simply followed the herd made a killing in stocks. Ah, but this too is an illusion. The herd was not buying stock in 1982. The herd did not discover stocks until after 1995. Many made quite a bundle in the five years prior to 2000, but a lot of that wealth disappeared in 2000–2002.

Logic tells us that the dollar will be destroyed, that this is an historical inevitability. But like “The Big One” in California, it has not happened yet and waiting for it has been very costly. Real estate seems like a house of cards right now, but it seemed so even before the Fed discovered how to partner with Fannie Mae to allow everyone to use his or her home equity like an ATM and buy a nice shiny Harley Fat Boy. It looked like a top in the housing market years ago yet here we are, still in the ionosphere of mortgage finance availability and low rates. Imagine if houses had to sell for cash in hand. ... That is the limit of how far down real estate could drop if lenders stop lending and borrowers stop wanting to service endless debts.

There are ways to assess the likelihood of change. Though it seems like Voodoo to many, the arcane branch of investing called Technical Analysis can offer tools for forecasting. What does not work, unless one has the patience of a saint and the lifespan of a tortoise, is looking at the fundamentals using logic. Passion rules the tides of these things, and passion does not heed logic, yours or mine. A simple rule of thumb seems to be, if things look extreme, they probably are. But only when extremes seem permanent are they likely nearing a reversal in fortune.

THE MORAL LEVEL OF WAR

In recent weeks, the indirect approach the Marines adopted in April in Fallujah, when they withdrew instead of storming the city, began to pay off. A reduction of American pressure allowed fissures within the Iraqi resistance to appear and grow. Fallujah natives were beginning to turn against outsiders, most of whom represent extreme Islamism, America’s real enemy. Such splits are of the utmost importance in Fourth Generation war, because they operate at war’s most powerful level, the moral level. There is a vast moral difference between us killing fighters for Abu Musab al-Zarqawi in Fallujah and the locals doing so. If American military leaders understood Fourth Generation war, they would slowly, patiently encourage the local Iraqi resistance to go after the outsiders, providing rewards and even assistance, if that was wanted (all done covertly, of course). The first genuine American victory in Iraq would be the day the local resistance asked for our (again, covert) help.

Unfortunately, our leaders do not understand the Fourth Generation, so it appears we are about to throw this opportunity away. We continue to bomb and shell Fallujah, which pushes our enemies toward each other. We seem to be readying an all-out assault on the city, which will have the usual result when Goliath defeats David: a moral defeat for Goliath. Many Iraqis will die, the city will be wrecked (as always, we will promise to rebuild it but not do so), and any losses the insurgents suffer will be made up many times over by a flood of new recruits. Never was it more truly said that, “We have met the enemy, and he is us.”

Our nightly bombing of Fallujah illustrates another important point about 4GW: to call it “terrorism” is a misnomer. In fact, terrorism is merely a technique, and we use it too when we think it will benefit us. In Madam Albright’s boutique war on Serbia, when the bombing campaign against the Serbian Army in Kosovo failed, we resorted to terror bombing of civilian targets in Serbia proper. Now, we are using terror bombing on Fallujah. Of course, we claim we are hitting only Mr. al-Zarqawi’s fighters, but anyone who knows ordinance knows that is a lie. What is sauce for the goose is also sauce for the turkey. Obvious double standards put us on the moral low ground. The rest of the world can see the hypocrisy, even if what passes for America’s “leaders” cannot. As the old saying goes, it is worse than a crime, it is a blunder.

SECESSION, ANYONE?

No topic I write about stirs a more unexpected response than secession -- the right of a state to withdraw from the United States. You might think the issue was settled forever in 1865, when the North crushed the South in the Civil War. But many Americans, North and South, still like the idea, and many others nearly panic at the mere mention of it. A few readers think I am writing with tongue in cheek when I propose secession. Well, though I see the humor of it, I am not exactly joking. I know it is unlikely to happen, for the time being, but the idea has value as a thought-experiment. It can help free our minds of the illusion that the present political status quo was, and is, “inevitable.”

In history, few things are inevitable. Or rather, they become inevitable only after a certain point. At the moment when Soviet tanks rolled into Central Europe in 1945, Soviet rule became inevitable. It had not been inevitable a year earlier. The defeat of secession was by no means inevitable in 1860. The North was deeply divided over whether to accept it, to compromise, or to go to war. Lincoln himself, though he flatly denied the right of secession, was undecided about how to cope with it. His tragic decision to attack South Carolina after it seized Fort Sumter drove the wavering border states, including crucial Virginia, to join the Confederacy.

Lincoln thought secession could be suppressed quickly. He miscalculated terribly. The result of his decision was a long war, spilling an ocean of blood; and although it eventually “saved” the Union, after a fashion, it did so in a way he never intended. He had meant to save the Union “as of old”, as he often put it, with a limited federal government. But the consequences, as in a Shakespearean tragedy, were the opposite of what he had aimed for. The Federal Government became powerful enough to overwhelm the states -- North as well as South, as the North discovered too late. We are what and where we are, not because of inexorable fate, but because of countless decisions, errors, accidents, and contingencies that combined to produce a world nobody had dreamed of. It might have been inconceivably different.