Offshore News Digest for Week of November 29, 2004

GLOBAL BUSINESS

ECONOMIC FREEDOM MUST LEAD THE WAY IN HONG KONG

In his address to the Legislative Council in March, Financial Secretary Henry Tang said there should be no tax increases so that Hong Kong’s recovery could gain ground. More important, he emphasized that the underlying principle guiding future development should be that the “market leads and government facilitates.” Now that the recovery is well underway, the secretary’s attention has turned to closing the fiscal deficit by introducing new taxes and holding government spending to no more than 20% of GDP. And he still wants the market to lead the way. But will it?

If a new goods and services tax is enacted, along with proposed taxes on capital gains and on income earned by Hong Kong residents overseas, the budget gap may be closed, but Hong Kong would no longer be the most free-market economy in the world. The secretary’s goal of limiting spending to no more than one-fifth of GDP may sound good to someone looking at European welfare states, but it certainly is not what Sir John Cowperthwaite (financial secretary from 1961-71) and the founders of Hong Kong’s laissez-faire system had in mind. Total government spending for 2004-05 is expected to be HK$258.7 billion, about 20% of GDP, with 26.4% of the budget going for social welfare and health.

Social welfare spending has risen by 236% over the past decade. If that growth is not stemmed, Hong Kong will lose its comparative institutional advantage. Instead of creating wealth, Hong Kong will increasingly redistribute and lose wealth. Mr. Tang told the Legco in March that he hoped the budget could be in balance by 2008-09, and that he would strive to cut the size of government to 16.9% of GDP. However, if his tax proposals were to be enacted, the government’s tax base would widen. There is no doubt that tax rates would rise as the government sought to maximize its revenue, just as happened in the United States after the Reagan tax reforms of the 1980s.

Whether Hong Kong continues to thrive will depend largely on how well it safeguards its legacy of laissez-faire. Instituting new taxes to stabilize government revenues and close the deficit should be secondary to limiting the size and scope of government and preserving economic freedom.

BERMUDA CAUGHT IN THE CROSSFIRE

Bermuda has traditionally enjoyed the spotlight as a dominant insurance marketplace. But the island hardly relished its role as political football in the US presidential election when Senator John Kerry made it, and the “Bermuda Loophole”, central to his election platform. While war in Iraq dominated the campaign’s latter stages, Kerry consistently decried “corporate Benedict Arnolds” -- U.S. corporations that move to Bermuda, or elsewhere, to reduce their U.S. corporate tax burden.

Details aside, Senator Kerry’s campaign protestations were founded on the erroneous premise that offshore companies are no more than nameplates and empty offices. It is on this point that the senator’s political diatribe falls into a mire of factual inaccuracy -- and where Bermuda’s greatest strength lies. Anywhere in the middle of the City of Hamilton, reinsurance companies, brokers, managers, lawyers and accountants are no more than a stone’s throw away. Without a doubt, the Bermuda insurance marketplace is very real and has developed into a truly functioning and competitive arena for a range of insurance, reinsurance, legal, tax, accounting and brokerage services.

The proof is in the pudding. Statistics released in May 2004 show a marketplace that continues to develop as one of the world’s most important providers of insurance and reinsurance capacity and expertise. Bermuda’s successful marketplace did not merely materialize. The simple (and undeniably unexciting) explanation is that it was launched from solid regulatory foundations. These include sound insurance regulation, regulatory flexibility, an outstanding reputation, a recognized legal system and market acceptability.

When the political dust has settled and hyperbole has given way to fact, Bermuda will be seen clearly again for what it is: an active, thriving insurance and reinsurance marketplace. Given the island’s focus on quality, and the depth and scope of its insurance regulations, it is ironic that Senator Kerry chose Bermuda for his political football. Traditionally, these factors have provided an effective barrier to politicking. It is reasonable to assume they will continue to do so into the future.

SWITZERLAND TRAPPED IN ECONOMIC “SLOW LANE” BY ITS SYSTEM, SAYS ECONOMIST

Professor Silvio Borner, head of Basel University’s department of applied economics, says there is a “Swiss illusion” that acquired wealth is a sufficient cushion against economic stagnation. He also thinks Switzerland’s direct democratic system has a tendency to block introduction of badly needed reforms. Borner sees only two ways out -- internal reform or reform from the outside, i.e., through EU membership.

Borner hit the headlines earlier this year when he calculated that the Swiss spend as much annually on subsidizing three cows as they do on primary schooling for one child. But he says high agricultural subsidies are only one symptom of more far-reaching economic and political problems.

“Economically, it is easier for countries to catch up than to stay ahead. But that doesn’t mean you should be overtaken. In Switzerland’s case, several nations have now overtaken us in terms of GDP per capita, the most spectacular case being formerly very poor Ireland,” he said.

Swiss business leaders call for sweeping tax reforms.

The Swiss business federation, economiesuisse, says cross-border “tax competition” is evolving so rapidly that Switzerland risks being “left behind” internationally. A new report compares the Swiss system in international terms and proposes major reforms. However, it says changes should be introduced gradually, and does not evaluate implementation costs.

The study says government spending has increased more rapidly than in any other OECD country, and no effort must be spared to reduce this as a percentage of GDP. The federal taxation system -- unique with the exception of the U.S. -- promotes inter-regional “tax competition”, but needs to be made more efficient (for instance, by avoiding “redundancy” at the cantonal level).

In international terms, Switzerland’s personal income tax regime is “no more than average”, and varies considerably from canton to canton. Reforms are proposed in the areas of family taxation, shareholder taxation and tax rates. The report concludes that Switzerland’s “lead” in the area of company taxes has shrunk in recent years. Tax rates send a “clear signal” to investors, so Switzerland should act to cut these taxes further.

Europe debate hits Swiss parliament.

The Swiss parliament is set to approve a second series of bilateral treaties with the European Union -- despite opposition from the Right. The People’s Party is using the parliamentary debate to launch its campaign for a nationwide vote on the treaties next year. Discussions during the winter session of parliament are focusing on a new set of bilateral accords, including closer cooperation on security and asylum, and the taxation of EU residents’ savings income in Swiss banks.

Both houses of parliament are also due to examine a government proposal aimed at gradually opening up the Swiss labor market to the ten new EU member states. Three of the four main political parties -- backed by the business community -- have come out in favor of the accords, although the center-left has expressed reservations. Only the People’s Party is expected to mount a strong attack against the treaties, also known as Bilaterals II. Heated debates are expected over a plan to ease access to the Swiss labor market for citizens of the ten new EU member states.

Swiss senators say “yes” to Bilaterals II.

The Swiss Senate has approved by a clear majority a second series of bilateral treaties with the EU. Security fears over the controversial Schengen/Dublin accord on cross-border security and asylum fell on deaf ears. The treaties will now be debated in the House of Representatives. The Senate considered it unnecessary to hold an obligatory nationwide vote on the Schengen/Dublin accord.

The Swiss People’s Party, which is strongly opposed to Schengen/Dublin, has repeatedly threatened to challenge the accord by forcing a nationwide ballot. Sceptics from the ranks of the People’s Party questioned whether the country’s security would be strengthened under Schengen/Dublin. They also complained that too many questions had been left unanswered.

Before approving the most contested of the accords, the Senate took the precaution of making a number of conditions. It accepted two amendments: the first would ensure that the cantons can have their say on implementing Schengen/Dublin; the second would allow them to maintain border guards once the accords are in force.

PANAMANIAN ECONOMY PRAISED IN IMF REVIEW

Specifically, the IMF praised the newly-elected government of Martin Torrijos for the emphasis placed on strengthening public finances and improving fiscal transparency through the containment of the fiscal deficit, proposals to restrain expenditure in the 2005 budget, and planned tax reform. “The mission observed that the government’s commitment to prudent fiscal policies is part of a broader strategy for promoting sustained economic growth, including policies for good governance, further integration in the regional and global economy, and improving the international competitiveness of Panama, particularly in the export-oriented service sectors,” the multilateral body’s statement said.

GIBRALTAR MUST NOT FALL INTO HONG KONG TRAP

As constitutional talks begin in London, Gibraltar must not fall into the Hong Kong trap: of not advancing in constitutional terms and regretting it later. While the situations of Gibraltar and Hong Kong are different in that the lease over most of Hong Kong was expiring, and British sovereignty over Gibraltar is held in perpetuity, it cannot be forgotten that the Labor government as recently as 2002 had wanted to agree the joint sovereignty of Gibraltar with Spain.

What happened in Hong Kong when the crunch came was that they realized that, while the place was an economic paradise, their constitutional advancement left much to be desired. Thus, in the negotiations with the Chinese, the point was made by China why should they give the people of Hong Kong greater powers than the British had been prepared to give them. It follows that what Gibraltar must achieve, and leave no stone unturned to achieve it, is the greatest possible devolution of power, so that the people of Gibraltar are masters in their own homeland.

ISLE OF MAN WARNED THAT IT WILL HAVE ITS HANDS FULL RESPONDING TO FORTHCOMING EU MEASURES

The Isle of Man will have to “duck and dive to survive” in response to new measures likely to come out of the EU over the next few years, according to Ian Kelly, the outgoing Assessor of Income Tax. Addressing a Manx Business Connection breakfast, Mr. Kelly said the Island had to recognize its role and fight very hard to retain it. He said further proposals would be coming out of the EU -- partly to do with tax but also about regulation, an amalgamation which had been gathering pace for some time. The EC had put out a recent paper dealing with the necessity of co-ordinating activities to fight international crime and terrorism. This had referred to four different levels of defence including regulation and tax.

Said Mr. Kelly, “I think you will see that coming together and it is going to be a bit of a challenge for us. As always with the European Union we find ourselves having to meet their standards and yet we can’t compete on that level playing field because we are denied access to those markets.”

“THE CHINA PRICE”: THE THREE SCARIEST WORDS IN U.S. INDUSTRY

In general, it means 30% to 50% less than what you can possibly make something for in the U.S. In the worst cases, it means below your cost of materials. Makers of apparel, footware, electric appliances, and plastics products, which have been shutting U.S. factories for decades, know well the futility of trying to match the China price. It has been a big factor in the loss of 2.7 million manufacturing jobs since 2000. Meanwhile, America’s deficit with China keeps soaring to new records. It is likely to pass $150 billion this year.

Now, manufacturers and workers who never thought they had to worry about the China price are confronting the new math of the mainland. These companies had once held their own against imports mostly because their businesses required advanced skills, heavy investment, and proximity to customers. Many of these companies are in the small-to-midsize sector, which makes up 37% of U.S. manufacturing. The China price is even being felt in high tech. Chinese exports of advanced networking gear, still at a low level, are already affecting prices. And there is talk by some that China could eventually become a major car exporter.

Multinationals have accelerated the mainland’s industrialization by shifting production there, and midsize companies that can are following suit. The alternative is to stay at home and fight -- and probably lose. Ohio State University business professor Oded Shenkar, author of the new book The Chinese Century, hears many war stories from local companies. He gives it to them straight: “If you still make anything labor intensive, get out now rather than bleed to death. Shaving 5% here and there won’t work.” Chinese producers can make the same adjustments. “You need an entirely new business model to compete.”

America has survived import waves before, from Japan, South Korea, and Mexico. And it has lived with China for two decades. But something very different is happening. The assumption has long been that the U.S. and other industrialized nations will keep leading in knowledge-intensive industries while developing nations focus on lower-skill sectors. That is now open to debate. “What is stunning about China is that for the first time we have a huge, poor country that can compete both with very low wages and in high tech,” says Harvard University economist Richard B. Freeman. “Combine the two, and America has a problem.” How much of a problem? That is in fierce dispute.

Just how cheap is Chinese labor?

This past summer, the Bureau of Labor Statistics hired a Beijing-based American consultant, Judith Banister, to dig through China’s mountain of incomplete and sometimes unreliable statistics. The goal: to calculate average manufacturing compensation in China in 2002 -- the last year for which data was available. BusinessWeek was given a preview of her findings, which she will present to the BLS later this month.

Her estimate? The cost of Chinese factory labor is a paltry 64 cents an hour. Although that figure is rough, since it is pieced together from sketchy statistics, it is still the most thorough estimate ever compiled. It includes both wages and employer contributions for benefits and social insurance. And it covers not just city factory workers, who get the most attention, but the more numerous rural and suburban factory workers as well. For comparison, hourly factory compensation in the U.S. in 2002 was $21.11, and an average of $14.22 in the 30 foreign countries covered by the existing BLS report.

Beware: China at U.S. border.

President Bush, in Chile last weekend for an economic summit of Pacific Rim nations, can talk up trade all he wants, but it is China that is doing the wheeling and dealing in Latin America at the U.S.’s peril. Chinese Premier Hu Jintao spent 12 days in the region pledging billions of dollars to close deals in Argentina, Brazil and, yes, Chile. Everything from investing in gas pipelines in Brazil and copper mining in Chile to oil exploration in Argentina. Oh, yeah, throw in Chinese tourists, too.

Meanwhile, Bush’s Americas free-trade agreement goes nowhere as members of Congress, including Republicans, try to set up protectionist roadblocks for their farming interests. China has been worming its way into Latin America, as more countries turn to socialist leaders for salvation and the Bush administration gets consumed on the terrorism front. Just last week Defense Secretary Donald Rumsfeld, meeting in Ecuador with his 33 Latin American counterparts, was calling for some kind of coordination between Latin countries’ military and police forces to secure the region from drug gangs and potential terrorists.

No doubt Latin Americans need better security -- kidnappings and murders are way up, and there are reports that suspected Arab terrorists are using Latin America to raise money and to slip through the borders into the United States. And, yes, you need a secure environment for trade and investment. Having the military assume police duties is not the solution, though. There should be a very clear separation between the two. Certainly citizens of countries like Chile, Argentina and Brazil, which lived through military dictatorships, understand the distinctions.

Let us be clear. China is a U.S. trade partner, but it is not a warm-and-fuzzy friend. It is a communist regime that, despite its pseudo free-market philosophy, has not budged on human rights for its people and continues to reward party officials and their families with economic plums. Those who run enterprises and rake in the big bucks in China are not Horatio Alger types -- they are the sons and daughters of Mao Tse-tung types. They are the political elite running sweatshops for international conglomerates. American businesses that trade with China are more than willing to look the other way -- they get cheap labor, no real environmental regulation, easy bucks. But as China continues to hold more U.S. investments and help sustain America's rising federal debt by buying up U.S. dollars, we must wonder: How sovereign is America? And how will China’s growing influence in Latin America affect our hemisphere?

HONG KONG LUXURY GOODS SALES CONTINUE TO BOOM

Not by mer chance are the Asia-Pacific headquarters of LVMH, Prada, and Dolce and Gabbana based in Hong Kong. In addition to the city’s proximity to China’s enormous emerging market, Hong Kongers show no sign of cutting back on their luxury goods spending. From designer-clad women checking what is new in French couturier stores to men eagerly snapping up tailor made suits from a U.S. outfitter and trendy youngsters overflowing out of European sports gear shops, locals of all ages seek out the world’s most prestigious and expensive labels.

What distinguishes buyers in Hong Kong from other luxury goods consumers around the world, however, is that they are substantially members of the middle class rather than the super rich, and having big-name labels close at hand is another reason for rising luxury goods sales. In a city packed with high-end shopping malls, shoppers do not even need to step out into the rain or heat and humidity since many major buildings contain malls linked by overhead walkways. Living in such a business-minded, materialistic city also helps boost sales, with high-profile brand names such, as Christian Dior, Chanel, Louis Vuitton and Hermes, Rolls Royce and Jaguar, on every corner.

Asia accounts for 40% of world luxury brand sales and outside of Japan, Hong Kong residents buy more luxury items than any other Asians. Sales have received a further boost by a rise in the number of Chinese tourists from the mainland visiting Hong Kong following the relaxation of the mainland’s travel policy. In addition, high taxes on luxury goods in mainland China make the cheaper prices in Hong Kong a big attraction for Chinese visitors.

DOZENS ARRESTED AS AUTHORITIES BREAK UP OFFSHORE SPORTS BETTING RING

Forty-three people were charged and guns, cocaine and $1 million in cash seized as authorities moved to break up a sports betting ring allegedly operated by members of three organized crime families in northern New Jersey. A joint investigation by the Bergen County Prosecutor’s Office and state police began in January following a tip that a gambling ring, which used a so-called wire room in Costa Rica to process bets placed by phone and computer, was being run out of the Caffe Roma in East Rutherford, Prosecutor John Molinelli said.

“It’s the direction illegal gambling is taking,” Molinelli said of the offshore connection. “You get an access code, you get an 800 number letting you call the wire room and place a bet.” Molinelli said investigators learned that the cafe was also used as a base of operations for a faction of the Genovese crime family that engaged in a variety of illegal activities, including extortion, loan sharking, fencing stolen property and drug dealing.

The operation took in some $300,000 per week from bettors who paid a $25 weekly fee in exchange for numbers and access codes allowing them to place bets to the Costa Rican wire room, Molinelli said. “Runners” would collect the weekly fees, and “agents” would make payments to winners or collect from losers. In one case, on Oct. 8, a losing bettor’s car was set on fire to intimidate him into making an overdue payment, Molinelli said.

BEFORE YOU FLEE TO CANADA, CAN WE TALK?

I moved to Canada after the 2000 election. Although I did it mainly for career reasons -- I got a job whose description read as though it had been written precisely for my rather quirky background and interests -- at the time I found it gratifying to joke that I was leaving the U.S. because of George W. Bush. It felt fine to think of myself as someone who was actually going to make good on the standard election-year threat to leave the country. Also, I had spent years of my life feeling like I was not a typical American and wishing I could be Canadian. I wanted to live in a country that was not a superpower, a country I believe to have made the right choices about fairness, human rights and the social compact.

So I could certainly identify with the disappointed John Kerry supporters who started fantasizing about moving to Canada after Nov. 2. But after nearly four years as an American in the Great White North, I have learned it is not all beer and doughnuts. If you are thinking about coming to Canada, let me give you some advice: Don’t.

Although I enjoy my work and have made good friends here, I have found life as an American expatriate in Canada difficult, frustrating and even painful in ways that have surprised me. As attractive as living here may be in theory, the reality is something else. For me, it has been one of almost daily confrontation with a powerful anti-Americanism that pervades many aspects of life. When I have mentioned this phenomenon to Canadian friends, they have furrowed their brows sympathetically and said, “Yes, Canadian anti-Americanism can be very subtle.” My response is, there is nothing subtle about it. The anti-Americanism I experience generally takes this form: Canadians bring up “the States” or “Americans” to make comparisons or evaluations that mix a kind of smug contempt with a wariness that alternates between the paranoid and the absurd.

Part of what is irksome about Canadian anti-Americanism and the obsession with the U.S. is that it seems so corrosive to Canada. Any country that defines itself through a negative (“Canada: We’re not the United States”) is doomed to an endless and repetitive cycle of hand-wringing and angst. The rush to make comparisons sometimes prevents meaningful examination of the very real problems that Canada faces. Ultimately, Canadian anti-Americanism says more about Canada than it does about the U.S.

I do not intend to apply for Canadian citizenship, because experiencing the anti-Americanism I have described has been instructive. Living here and coping with it has forced me to confront my own feelings about America. And it has helped me discover what I do value about it: its contradictions, its eccentricities, its expansive spirit, all the intensity and opportunity of a deeply flawed, widely inconsistent, but always interesting country. Perhaps I am a typical American, after all.

TAXES

MONACO IN THE SITES OF HIGH-TAX FELLOW EUROPEANS

That Monaco is crowded with celebrities is no piece of news. Since 1869, when the personal income tax policy became favorable, Monaco attracted very many individuals with high net income, such as movie stars and sporting stars, who became residents of the Principality in order to benefit from personal income tax exemption. But the number of celebrities is far outnumbered by the number of business people who enjoy the country’s tax facilities. Being a resident of Monaco implies proving you have a place to live and are rich enough to afford a very high standard way of life. And I mean really rich, as a place to live in the apartment blocks jammed into two square kilometers, either rented or bought, is extremely high.

Having attracted so many rich people resulted in a conflict of interests: many countries disapprove of this taxation policy, looking at it as an evasion from taxes in their national area. In fact, Monaco has been attracting capital from the high tax countries. Looking at the issue from the perspective of the Principality, it seems only right to try and succeed to evolve with the few means and resources a state so small has. Monaco developed from one of the poorest countries in the world (in the 1860s) into a state with one of the worl’s highest per capita income (around €22,000). And it was possible due to a strategic leadership of a resourceless country. It is after the territory was drastically reduced that this personal income tax policy came into being. Attracting foreign capital become one of the main targets for development.

So, from the point of view of big economic powers, Monaco should be punished, and so deserves any country daring to offer a better taxation alternative, putting at a disadvantage their high-tax based economy. The OECD has a project on “harmful tax practices” stipulating a set of punitive measures for the non-cooperating jurisdictions. Invoking money laundering and international terrorism tracking, many OECD governments promote a policy of free information exchange that has as main purpose limiting the tax competition, beyond the intention to limit tax evasion and to combat serious crime.

Mohamed Al-Fayed hightails it out of the U.K. for Monaco.

Like old King Farouk, Egyptian tycoon Mohamed Al-Fayed has finally decided to set up residence in Monaco -- joining the likes of Formula One racing driver David Coulthard and actor Roger Moore in the Riviera tax haven. After 35 years in the UK, the owner of Harrods and the Ritz Hotel in Paris left Britain 18 months ago for the shores of Lake Geneva, angry over the “grossly unfair treatment” dealt to him by the British establishment and tax authorities. But Switzerland has not proved so benign, and a recent change in the local law excluding foreigners from a loophole to avoid inheritance taxes has prompted his move to Monaco.

Apart from American and French residents who have to pay their countries’ income taxes, the tiny principality’s other foreign residents still enjoy no income or inheritance taxes. The problem is Monaco is now keen to spruce up its old Somerset Maugham image as a “sunny place for shady people”. French residents will also soon have to pay France’s controversial special levy on large fortunes, as well as their normal income taxes. Worse, Monaco, along with Lichtenstein and Andorra, is considering signing up to the OECD’s transparency and exchange of information standards already adopted by 33 other offshore tax havens. This would then leave only two offshore centers on the OECD’s “black list”: Liberia and the Marshall Islands. Not the sort of places, one suspects, Mr. Al-Fayed would choose to take up residence.

MOVIE STAR CONSIDERED, THEN REJECTED, SERVICES OF JEROME SCHNEIDER

When confessed tax fraud promoter Jerome Schneider handed the IRS a list of his clients, there was one well-known name on the roster: Sandra Bullock. The vivacious star of Miss Congeniality and other films, paid Schneider for advice on how to buy an offshore bank, said her attorney, E. Howell Crosby. But, he said, she never cheated on her taxes by moving money overseas.

“We knew this guy was the Music Man from Day One,” Crosby said, referring to the charming swindler in a Broadway musical. “She lost some money taking a look at it, but she never put money offshore.” The IRS, which has strict confidentiality rules, declined to comment. Crosby said other lawyers representing Bullock explained her limited involvement with Schneider to the IRS and have not had further discussions with the agency.

NEW LAW ATTACKS TAX ADVISORS, SAYS VERNON JACOBS

I just spent two days at a tax conference where a lot of the presentations were about the American Jobs Creation Act of 2004. One of the many helpful things that I learned was that a lot of tax professionals are likely to find some other way to make a living as soon as they discover what this new law has done to them. Among other things, it imposes severe penalties on tax advisors who help taxpayers to engage in what the IRS regards as abusive tax avoidance transactions or tax shelters.

I have just completed a draft of an eight page summary of the impact of the new tax law on the relationship between tax advisors or preparers and taxpayers. Before I make it available on my web site, I will ask a number of other tax professionals to critique it for me just in case I got a little carried away with the moment. But for now, it is my opinion that most tax professionals who take the time to study these new rules will quickly decide that they should either find some other line of work or they will need to have a very clear understanding with their clients that any transactions that might be considered to be any kind of “abusive” transaction or a tax shelter transaction by the IRS will require disclosure on the tax return of the taxpayer who is participating in the transaction.

U.K. CHANCELLOR TO CRACK DOWN ON CORPORATE TAX AVOIDANCE

Gordon Brown is to intensify his crackdown on corporate tax avoidance with punitive action aimed at deterring advisers from flouting disclosure requirements. The chancellor will use this week’s pre-Budget report to close a loophole that has been exploited by firms marketing avoidance schemes that the Treasury says are abusive. Mr. Brown is understood to be annoyed and frustrated by efforts of some tax advisers to circumvent a system introduced only six months ago that requires them to tell the Inland Revenue about avoidance schemes. At stake are hundreds of millions of pounds in tax revenue that the Treasury is determined to collect. The chancellor, who has little room for manoeuvre on expenditure and borrowing before a general election expected next year, is determined to be relentless in improving the tax take.

The pre-Budget report is expected to reveal that 450 schemes have been disclosed to the Revenue, covering PAYE, National Insurance, capital gains tax, controlled foreign companies and accounting standards. More than 80% of those identified have fallen foul of the new rules and been shut down. Treasury officials believe the system is working well but have uncovered two areas of concern.

They have found evidence of tax advisers lining up dozens of customers to take advantage of schemes during a 5-day period between their launch and when they are required to disclose details to the Revenue. In addition, officials believe the industry has been marketing more aggressively and more widely schemes set up before the new rules were introduced.

EASTERN EUROPE GIVES TASTE OF FLAT-TAX PARADISE

Flat taxes are back on the world’s economic agenda. In the U.S., newly re-elected President George W. Bush has talked of simplifying the tax code, words taken by some as meaning a flat tax. And in countries such as the U.K. and Germany, there have been calls for flat taxes. Economists can debate the theory endlessly. Everyone has neat curves showing government revenue rising as taxes fall, and vice versa. Yet this debate does not have to be conducted in charts, or tested only in lecture halls. Flat taxes have been introduced in several former communist countries in the past few years. So far, the evidence shows they are working. If that success is sustained, it will give a powerful boost to the proponents of flat taxes. After all, even in tax policy, good ideas are eventually copied.

Let’s take a tour of flat-tax-land. Start in tiny Estonia, which has a flat rate of tax of 26% for individuals. And how have government tax receipts been holding up? According to the Bank of Estonia, government revenue for 2003 was 48 billion kroons ($4.06 billion). That compares with 42 billion kroons in 2002, and 36 billion kroons in 2001. In other words, revenue has risen steadily.

Next, head south to Slovakia. At the end of last year, the country introduced a flat tax of 19% for individuals and companies. The system came into effect at the start of this year. This month the government of Slovakia said tax revenue will probably exceed its forecasts for the year by 700 million koruna ($23.6 million). As a result of that, it said the budget deficit would be smaller than originally forecast.

Now, head east to Russia. In 2001, ussian President Vladimir Putin introduced a flat tax of 13%. After adjusting for inflation, personal income tax revenue increased 25.2% in 2001, 24.6% in 2002, 15.2% in 2003, and is predicted to total more than 16% in 2004, according to a recent study on flat taxes from the London-based Adam Smith Institute.

Now in Russia surging oil prices play a big part in the healthy budget surplus and the booming economy. And in small, less-developed economies where the system of tax collection may be weak, low and simple taxes that people actually pay work better than high and complex taxes that they do not. In more-developed economies, with tougher tax collectors, that may not be true. In different countries, flat taxes would produce varied outcomes. Still, there is no escaping the evidence. Where they have been introduced, flat taxes are yielding impressive results. Quite rightly, people are paying attention.

Bulgaria’s corporate tax rate will be reduced from 19.5% to 15%.

Parliament has been in full gear in the past few weeks in passing numerous changes to tax legislation in line with the forthcoming approval of Budget 2005. Since Bulgaria has already been defined as one of the tax havens of Central and Eastern Europe, MPs are eager to prove that this is a worthy definition. In 2005, the corporate tax rate in Bulgaria will be reduced from 19.5% to 15%.

Dividend payments and liquidating distributions to shareholders allocated by a local corporate entity in Bulgaria to a foreign entity in an EU member state will be exempt from tax at source. This provision applies only to foreign entities which, for tax purposes, are recognized as local entities in an EU member state according to that state’s tax legislation, and which are not recognized as local entities in a non-EU state pursuant to a double taxation avoidance agreement. The foreign entity must be liable for profit tax under the national legislation of the respective country, without having right of choice or exemption from that tax.

End the U.S. corporate income tax.

On Nov. 18, in a speech given at the Finance Ministry in Vienna, Austria, the very highly regarded European economist and first woman president of the Mont Pelerin Society, Professor Victoria Curzon Price, called for eliminating the corporate income tax. There, in the center of socialist Europe, was not only the call to get rid of this destructive tax, but almost everyone in an audience of economists, various government finance officials and public policy experts appeared to agree with her.

The idea and practice of the corporate income tax has been dying slowly for the last two decades. The corporate income tax is a highly destructive tax that greatly distorts proper economic decision-making, taxes the same income more than once, is endlessly complex, and provides a declining share of tax revenue in most countries. For instance, in the U.S., corporate income tax revenues fell from 4.2% of GDP in 1967 to only 1.2% of GDP in 2003, though there was minimal change in the tax rate.

Good economists have long known the corporate income tax causes more problems than it solves. Many countries, seeking higher economic growth and employment, have sharply cut their tax rates. Ireland cut its corporate tax rate from 43% to only 12.5%, attracting investment from around the world and, in turn, becoming not only one of the fastest-growing but one of the wealthiest economies in Europe. The new market economies of Eastern Europe seeking high growth and rapid job creation have also been cutting their corporate tax rates. As a result of this competition, even France (34%) and Germany (38%) have been forced into modest corporate tax reductions, giving them lower rates than corporations face in the U.S. American companies now have an average 40% rate (including state corporate taxes), and only very poorly performing Japan with its 42% rate is higher.

Looking at these numbers, it is easy to understand why corporations doing business around the world elect not to have the U.S. as their legal home, because it makes them noncompetitive. When running for president, Sen. John Kerry proposed punishing companies for leaving the U.S. The correct solution is for the U.S. to abolish the corporate income tax, thereby making it the most desired location on the planet for many companies to incorporate.

Does “corporate responsibility” mean paying more taxes than required by law?

In the U.S., avoiding taxes has been dubbed unpatriotic. In the U.K., the Inland Revenue has compared it with drinking and driving. Tax avoidance is firmly on the agenda of the “corporate social responsibility” movement, says the OECD. Reluctant taxpayers have long faced moral pressure. But the effort to defeat tax avoidance by appealing to the conscience of taxpayers has stepped up a gear as tax authorities around the world try to stop the erosion of the corporate tax base. Should companies take notice? Does aggressive tax planning put a company’s reputation as a good corporate citizen at risk? Or is it simply minimizing costs a duty to shareholders?

The reason these questions are being asked with increased urgency is that companies have become increasingly adept at reducing their tax bills. When Robert McIntyre, director of Citizens for Tax Justice, a campaign group, analysed the federal tax payments of 275 Fortune 500 companies in 2002 and 2003, he found the average rate was less than half the statutory 35%, and 82 paid nothing. In part, these low tax rates reflect government-inspired corporate tax breaks. They also reflect ways of reducing tax bills that are of questionable legality.

The effort expended on reducing tax bills is partly due to the growing emphasis on shareholder value. Moreover, globalization has created new opportunities for tax avoidance. But the tax-planning industry defends its methods vigorously and cites globalization in its defence. Many in the tax-planning business believe tax should be a matter of law, not morals. “Taxation is no more than legalized confiscation of someone else’s money,” argues Stephen Edge of law firm Slaughter & May. He thinks companies if not individuals are justified in seeking to minimize their bills. Scepticism about tax morality has a long tradition. “Taxes are enforced exactions, not voluntary contributions,” said a U.S. judge in 1947, “To demand more in the name of morals is mere cant.”

The OECD’s Jeffrey Owens thinks that the emergence of nongovernmental organisations intent on exposing largescale tax avoiders could eventually achieve a change in attitude comparable to that achieved on environmental and social issues. “Tax is where the environment was 10 years ago.” If tax authorities succeed in changing companies’ behavior, it will be by increasing the risks and costs of tax avoidance. But at a time when companies are nervous about reputation, a potential public row over abusive tax policies can only heighten the risks.

HURRICANE IVAN’S AFTEREFFECTS MEAN TAX-FREE EARNINGS FOR MOBILE CANADIANS

An ill wind that devastated a tropical tax haven last September has created employment opportunities for mobile Canadians. People like Pam Larson, Freya Palesch and John Bird are fleeing Vancouver’s soggy winter to earn tax-free dollars in the Cayman Islands, which sit in the sunshine several hundred kilometers due south of Florida. For Larson and Palesh it will be a return to waitressing work they lost last September when Hurricane Ivan damaged 95% of the buildings on Grand Cayman and killed two residents. All three were recruited by Paul Storey, former manager of a Vancouver pub, whose new posting as manager of three restaurants on Grand Cayman’s famous Seven Mile Beach was dramatically put on hold as he waited at Toronto’s Pearson Airport last September for a connecting flight that never came.

Ivan was one of the most powerful hurricanes in the Caribbean in the last 100 years and left devastation on an unprecedented scale. Thousands lost their homes and many of their possessions while almost every building on the main island suffered water damage from a 5-meter storm surge driven by 300 km/h winds. While Storey was hiring servers and bartenders, he is now also looking for carpenters and drywallers and other trades desperately needed for reconstruction. Would-be islanders can learn more at Storey’s website.

Earnings are received tax-free because there is no income tax on the three Cayman Islands, which the U.S. CIA discreetly describes as “a thriving offshore financial center”. Because of the crisis, authorities in the British Overseas Territory are fast-tracking work permits and have relaxed requirements to little more than a police check. Temporary workers should realize that taxes not demanded in the Caymans will be required back in Canada unless they sever all connections with the home country and stay away for at least two years. One upside of Hurricane Ivan is that Seven Mile Beach got piles of new white sand. Larson, 22, and Palesch, 30, say they cannot wait to get back.

ISLE OF MAN TREASURY MINISTER SIGNS ON THE EU (TAX) LINE

EU residents with investments in the Isle of Man, starting this coming July, will have the option of paying a withholding tax rather than agreeing on the free exchange of their tax information with their home country’s tax authorities. The bilateral agreements will be signed by all 25 EU member states and is part of the EU Savings Directive. The majority of the countries involved will sign to make exchange of information compulsory. However, the Isle of Man, along with Austria, Belgium, and Luxembourg has decided to adopt a withholding tax. The initial tax will be set at 15% and rise to 20% after three years; after a further three years it will rise to 35%. The tax will be levied by the country where the money is held and 75% of that sum will be sent to the taxation authorities of the country in which the individual is a permanent resident. In the case of information exchange, tax details will be sent to the same place.

Although the bilateral agreements only effect EU residents, a crucial part of the process is that non-EU jurisdications such as Switzerland, the Channel Islands and other British Crown dependencies, sign up to impose similar restrictions on individuals from participating countries with funds located in that country.

Isle of Man’s chief minister quits, after being arrested.

The political leader of the Isle of Man has resigned after being arrested by police probing his financial dealings. Richard Corkill quit as Chief Minister after police questioned him and his wife Julie about grants paid to them by the island’s department of tourism for a holiday home they run. The Isle of Man, a British Crown dependency although not part of the United Kingdom, is governed by a council of ministers with the chief minister nominated by the island’s parliament the Tynwald -- the oldest parliament in the world in continuous existence.

“I am stepping down to safeguard the integrity of the office of Chief Minister," Corkill said in a statement. This has become necessary because of the fact that my wife and I were arrested yesterday in connection with allegations concerning our family business.” Corkill said he and his wife had been released without charge and were confident of being cleared of any wrongdoing.

UK CHANCELLOR CLAMPS DOWN ON TAX DODGES

A number of measures aimed at tackling tax fraud and avoidance have been unveiled by Chancellor Gordon Brown in his pre-Budget report (PDF file). They include legislation to shut down avoidance schemes that involve companies paying workers with shares. “Artificial” diversion of profits from the UK and schemes exploiting double taxation relief will also be stopped. The measures are designed to boost state coffers without imposing tax rises in the run-up to an election. The government will also block offshore VAT tax avoidance schemes involving settling UK insurance claims and will clamp down on attempts to avoid capital gains tax.

Gordon Brown recently introduced a new tax regime under which businesses were forced to disclose their tax planning ideas to the Revenue earlier than before. The idea was to nip in the bud any potential tax avoidance strategies. But accountants say companies will continue to avoid taxes as part of their tax planning. And because companies are already acting within the law in their tax planning, the Chancellor may not be able to raise as much money as he had hoped. The pre-Budget report did not indicate how the disclosure strategy was going.

U.K. tax avoidance disclosures begin to bite.

Gordon Brown struck a blow against tax avoidance in the pre-Budget report, with the first major deployment of intelligence forced out of accountants by new disclosure rules. Experts concluded that the Revenue’s Avoidance Intelligence Unit, created in this year’s Budget, had started to show its teeth. The chancellor sank them into a number of financial avoidance schemes that came to light as a result of the new disclosure rules.

A GUIDE TO BUSH’S FIRST TAX HIKE

The Bush administration seems to have two basic fiscal principles: Do not raise taxes and do lots of favors for big corporations. It is about to violate both of them. Washington Republicans usually insist that the expiration of a temporary tax cut is the same as a tax increase. By that standard, corporate America will be whacked with a huge tax hike on January 1, 2005, when the complicated but lucrative bonus depreciation rules enacted in 2002 and 2003 are set to expire. The temporary measures allowed companies to instantly write off bigger chunks of capital investments through 2004, thus lowering taxable profits. For companies that loaded up on corporate jets, computers, or capital equipment, the accelerated write-offs were accounting maneuvers, but the tax savings were real.

In 2005, however, companies unable to write off such large portions of those investments will thus have to report (and pay taxes on) higher profits. The Office of Management and Budget wrote that “after 2004, corporate taxable profits will increase because the provision expires, and because less capital will remain on the books to depreciate.” Indeed, the administration is counting on the higher corporate tax revenues as part of its pledge to halve the deficit by 2009. I am betting that the expected corporate receipts will fail to materialize.

ASSET PROTECTION

BAHAMAS RAPS “LIP-SERVICE” APPROACH TO FIGHT AGAINST GLOBAL TERRORISM

During a second reading of a Bill to affirm The Bahamas’ stand in the global fight against terrorism, Attorney General and Minister of Education Alfred Sears, said the country would be merely paying lip-service to international conventions if they were signed but not complied with. Following the 9-11 attacks, the U.N. Security Council adopted Resolution 1373, a wide-ranging measure that called for suppressing terrorist financing and improving international cooperation. Mr. Sears said The Bahamas had already adopted 40 recommendations of the Financial Action Task Force (FATF) relating to the financing of terrorism.

He said that in 2001, The Bahamas enacted the International Economic Obligation and Ancillary Measures Act. “As result, we were able to authorize financial institutions to freeze the accounts of persons identified on the United Nation’s list,” Mr Sears said. He further noted that the Acts should not be seen as legislation that would compromise sovereignty or chill trade unionism. He then outlined 12 major multilateral conventions and protocols related to states’ responsibilities for combating terrorism.

GUERNSEY AND JERSEY LINK UP ONLINE TO REINFORCE THEIR REPUTATION AS OFFSHORE CENTERS

The site www.offshoresearch.com has the backing of Guernsey Finance. It aims to lead investors and intermediaries to the wealth of financial services available in the Channel Islands. It is believed to be the first major marketing initiative in which the two centres are presented as partners. Plans to extend it to the Isle of Man were scotched after industry figures confirmed that the two islands were considered an entity within finance and the Isle of Man would only muddy the marketing position.

The site, a joint development project of Guernsey’s The Partnership and web designers Byte Art, is presented as an online directory and web resource, structured by jurisdiction and sector, covering accounting, legal, banking, insurance, investment and trust. It also contains a news section.

The site should go live next year and is already close to selling out at £2,500 a page, discounted if more than one listing is taken. Restricting the number of companies listed is expected to encourage them to keep a stricter control and update their pages more regularly.

PRIVACY

WEB WON’T LET GOVERNMENT HIDE

Given the government keeps tabs on the world using armies of agents, algorithms and wiretaps, how can a citizen compete? Try a browser. Governments at every level these days are providing less information about their inner workings, sometimes using fear of terrorism as an excuse. But it is precisely times like these that mandate citizens’ rights to check the efficiency of their government and hold those who fail accountable, open government advocates say. The government itself will not make it easy, so an increasing number of websites and data crunchers are stepping in to provide information about the inner workings of government.

For starters, there is Google’s little-known government specific search engine. Those proficient with crafting search terms can find Attorney General John Ashcroft’s office number, gee-whiz nanotechnology movies and NASA’s Microgravity Man comic strip. One can even find homeland security alerts about truck bombs (PDF) and the intelligence needs of the FBI. Another trove of information is George Washington University’s National Security Archive, which contains thousands of documents acquired through patient Freedom of Information Act requests. And there is CoolGov, a blog devoted to ferreting out quirky tidbits such as videos of airline crashes.

Those interested in the nitty-gritty of how and why the government hides information can subscribe to Stephen Aftergood’s Secrecy News listserv, which is part of his work as the director of Federation of American Scientists’ Project on Government Secrecy. Aftergood, who publishes a couple times a week, has built up an archive of previously unpublished reports created for Congress and information about the CIA’s ongoing opposition to the publication of its budget.

NEW HIGH-TECH PASSPORTS RAISE SNOOPING CONCERNS

The State Department will soon begin issuing passports that carry information about the traveler in a computer chip embedded in the cardboard cover as well as on its printed pages. Privacy advocates say the new format will be vulnerable to electronic snooping by anyone within several feet, a practice called skimming. Internal State Department documents, obtained by the American Civil Liberties Union under the Freedom of Information Act, show that Canada, Germany and Britain have raised the same concern. “This is like putting an invisible bull’s-eye on Americans that can be seen only by the terrorists,” said Barry Steinhardt, the director of the A.C.L.U. Technology and Liberty Program. “If there’s any nation in the world at the moment that could do without such a device, it is the United States.”

The organization wants the State Department to take security precautions like encrypting the data, so that even if it is downloaded by unauthorized people, it cannot be understood. In a telephone interview, Frank E. Moss, deputy assistant secretary of state for passport services, said the skimming problem “can be dealt with.” [Ed: How reassuring.]

The technology is familiar to the public in applications like highway toll-collection systems and “smart cards” for entering buildings or subway turnstiles. In passports, the technology would be more sophisticated, with a computer having the ability to query the chip selectively for particular information. The chip, expected to cost about $8, would hold 64 kilobytes of data, the same as early personal computers.

ACLU issues warning on RFID passports.

The ACLU claims the U.S. government is rushing the rollout of insecure, RFID-enabled passports in hopes of creating a de facto global identification standard. The organization said that government documents it obtained under the Freedom of Information Act show that the U.S. ignored experts’ advisories on security and encryption of data to be stored on RFID chips in passports. “We’ve seen what amounts to -- whether intentional or not -- a coherent effort to bypass a national identification card and go straight to an international identification card through this process of coming up with what they call a globally interoperable machine readable passport,” said Jay Stanley, an ACLU technology expert.

“This issue is bigger than just passports,” the ACLU stated in a warning last week. “It is about the construction of a global identity card that will likely influence the creation of national identity documents and threaten to facilitate tracking and loss of privacy around the globe.” International privacy organizations say they were shut out of the ICAO standards process, and that the United States blocked efforts to encrypt and secure passport data in its desire to impose a standard that could be adopted by the poorest countries.

The ACLU warned that these RFID-enabled passports will let third parties skim the information. A store could gather the names and addresses of shoppers, while terrorists could single out the Americans in a group of tourists. “We can see these passports becoming a necessity if they become regarded as the gold standard for identity and adopted by more and more private parties,” said the ACLU’s Stanley. “Citizens will get asked for them at every turn,” just as Social Security numbers and drivers licenses in the U.S. are now used as identifiers by most public and commercial entities.

AIRLINES COUGH UP PASSENGER DATA

U.S. airlines turned over a month’s worth of passenger data to Homeland Security officials, who want to test a massive, centralized passenger-screening system. The TSA ordered America’s 72 airlines to turn over their June 2004 domestic passenger flight records by Tuesday afternoon. The airlines had initially questioned the order because of privacy concerns, but they all complied.

The agency wants the records -- which can include credit card numbers, phone numbers and health information -- to test a system called Secure Flight. Currently, passengers are screened by the airlines, which check itineraries against a set of watch lists provided by the government. The TSA hopes to reduce the number of people flagged incorrectly by performing the checks itself using an expanded, centralized terrorist watch list. Privacy advocates contend that the list-based system is ineffective and that passengers with names similar to suspected terrorists would still be snagged under the new system.

The TSA plans to evaluate the system over the next 90 days in hopes of rolling out the system in the spring. Congress, however, has barred the system from airports until the Government Accountability Office certifies that the system is effective and not overly invasive. This is not the first time airlines have turned over passenger data to help test an antiterrorism screening system, but it is the first time that the transfers were not secret.

FEDERAL PLAN TO KEEP DATA ON STUDENTS WORRIES SOME

A proposal by the federal government to create a vast new database of enrollment records on all college and university students is raising concerns that the move will erode the privacy rights of students. Until now, universities have provided individual student information to the federal government only in connection with federally financed student aid. Otherwise, colleges and universities submit information about overall enrollment, graduation, prices and financial aid without identifying particular students. For the first time, however, colleges and universities would have to give the government data on all students individually, whether or not they received financial assistance, with their Social Security numbers.

The bid arises from efforts in Congress and elsewhere to extend the growing emphasis on school accountability in elementary and high schools to postsecondary education. Supporters say that government oversight of individual student data will make it easier for taxpayers and policy makers to judge the quality of colleges and universities through more reliable statistics on graduation, transfers and retention.

The change would also allow federal officials to track individual students as they journey through the higher education system. In recent years, increasing numbers of students have been attending more than one university, dropping out or taking longer than the traditional four years to graduate. Current reporting practices cannot capture such trends; a mobile student is recorded as a new student at each institution. The proposal is supported by the American Council on Education, the American Association of State Colleges and Universities, and the State Higher Education Executive Officers Association, but opposed by other education organizations, like the National Association of Independent Colleges and Universities.

Jasmine L. Harris, legislative director at the U.S. Student Association, an advocacy group for students, said that since the Sept. 11 attacks, the balance between privacy and the public interest had been shifting. “We’re in a different time now, a very different climate,” Ms. Harris said. “There’s the huge possibility that the database could be misused, and there are no protections for student privacy.” She pointed to the National Directory of New Hires, a register of people who re-enter the workforce, which began as an effort to track job trends. Since its creation, however, the database has also been used to track parents who fail to pay child support or who owe the federal government non-tax debt, she said. “The door is wide open,” Ms. Harris said.

NO ONE WANTS TO SEE YOUR ID CARD IN FRANCE ... BUT IT SURE WAS HARD TO GET ONE

I have never regretted moving to France, four years ago. We came here because we fell in love with the Languedoc. Our move coincided with massive interest among Brits wanting a better life, so I continued working as a journalist, writing articles and a book about the expat experience that was published last week. But one of the downsides (and one of the things that inspired me to write the book) is French bureaucracy. I sometimes wonder that the whole place does not sink under the weight of useless bits of paper.

Getting a carte de séjour -- the official French identity card for foreigners, literally a “card of staying” -- was more painful than giving birth. And took much longer. The rather grandly embossed and laminated plastic card carries your name, address, date of birth and photograph, and to extract one from the French state is a rite of passage -- a course in French bureaucratic lunacy. I made more than a dozen trips to the local mayor’s office with various forms and bits of paper, always hopeful, always to be sent away for further documentation. It was not enough, for example, to have my birth certificate. They needed my birth certificate with both my parents’ names on it. I was asked for a livret de famille (yet another document compulsory in France). Obviously, I have none. “So how do I get one?” I asked. “Marry a Frenchman,” was the response.

In the end, I could have saved myself the trouble of applying for a carte de séjour, not only because I was never asked for it, but because the key to identity in France is not an ID card but an EDF (Electricité de France) bill. Within a few months of finally securing our precious cartes de séjour, they were declared unnecessary under EU law, at least for nationals of EU member countries. So -- a complete waste of time. In France, you are obliged to carry identification with you at all times; you can be hauled off to the police station if you do not have your papers.

I have read that the plan to introduce identity cards in Britain is intended to promote the fight against crime, terrorism, identity theft and welfare fraud, as well as to raise revenue (French identity cards have been free since 1998). But one would have to look very hard in France for evidence that the legal requirement for identity papers has resulted in any less crime, terrorism, or anything else. Women hate them because they carry a home address. That means that if your purse is stolen with your wallet and keys, the robber is going to go straight to your house.

LAW

CANADA’S ANTI-MONEY-LAUNDERING AGENCY FOUND LACKING

A federal government agency set up to crack down on money laundering and terrorist financing is of little use to law enforcement agencies and does not fully meet international standards, Auditor-General Sheila Fraser has concluded. In a damning indictment of Canada’s efforts to combat illicit money flows, Ms. Fraser says the country’s privacy laws restrict the amount of information the agency can share with law enforcement authorities. Her audit report, tabled in Parliament yesterday, also highlights a lack of co-ordination with customs officers, who seized more than $46-million in the fiscal year ended March 31, and criticizes Ottawa for excluding lawyers from the requirement to report suspicious transactions.

Canada is a haven for money launderers and there are more active terrorist groups operating in the country than anywhere else in the world, a securities industry conference was told this year. The federal government estimates CN$17 billion worth of criminal proceeds are laundered through Canada every year.

In her report, Ms. Fraser says the information Fintrac passes on to law enforcement agencies is too limited to warrant action. The main problem is a lack of context, including what led the agency in the first place to suspect money laundering or terrorist financing. As a result, police forces are reluctant to devote scarce resources to an investigation that could lead to a “dead end” the report says. Reports received directly from the banks often contain more useful information than that disclosed by the agency, it adds.

IDENTITY FRAUD IN U.K. TO CARRY 10 YEAR PRISON SENTENCE

Anyone found guilty of tampering with the database for the Government’s new identity cards scheme will face up to ten years in jail, it was announced today. Tony Blair announced the tough penalties at his monthly Downing Street press conference, hours before the Home Secretary published the ID Cards Bill in the House of Commons. It emerged that civil servants who improperly disclose information could be jailed for up to two years.

Mr Blair explained the harsh punishments, saying that the Government took people’s privacy and freedom very seriously. He sought to reassure those who fear that carrying the cards will infringe their civil liberties, saying that the ID card register would only hold basic information already held by different public bodies. Mr. Blair said ID cards were not a “silver bullet” to defeat terrorism, but were an important weapon in the fight against terrorism and organized crime. They would also be a vital tool to stop people fraudulently claiming services and benefits they were not entitled to, and they would help against illegal immigration and working, Mr. Blair said. He insisted they would protect, not erode civil liberties.

WORSE THAN ASHCROFT: GONZALES HELPED WRITE THE PATRIOT ACT AND SUPPORTED TORTURE

I do not approve of filibustering presidential nominees, no matter who is president, because the Constitution, along with the Federalist Papers, makes clear that the whole Senate is to give advice and consent to these presidential nominees. But if I were a senator, I would be sorely tempted to filibuster Alberto Gonzales. The Democrats, still shell-shocked by their second loss to Bush, and by the size of the Hispanic vote for the president, are not likely to filibuster Gonzales. But since Gonzales will be more dangerous to our liberties than Ashcroft, I will begin here to show how low the standards have become for the chief law enforcement officer of the nation. Maybe at least the American Bar Association and the Association of the Bar of the City of New York will stand up against Gonzales.

I must credit National Public Radio’s Nina Totenberg, an experienced analyst of constitutional law and a reporter who never stops digging to get to the core of Gonzales’s ominous record as White House counsel. On November 11, she pointed out, “Gonzales was responsible for developing the administration’s policies on the treatment of prisoners; for developing a new definition of torture to allow more aggressive questioning of prisoners. He developed the policy that allowed the indefinite detention of American citizens deemed to be enemy combatants without [being charged] or [having] access to counsel. ... The Supreme Court, though, rejected that [Gonzales] theory ... Top legal brass in the army, air force, and navy say that Gonzales deliberately left them out of developing policy on the treatment of prisoners because he knew they would oppose.”

There is a lot more about Alberto Gonzales that will prepare you for what to expect for the next four years from the Justice Department. In a January 2002 memorandum to George W. Bush, he emphasized that this new war on terror “renders obsolete Geneva’s strict limitations on questioning of enemy prisoners and renders quaint some of its provisions.” Gonzales also told George W. Bush that in denying these “detainees” -- many of them now held at Guantánamo for nearly three years without charges -- prisoner of war status under the Geneva Conventions, the president did not have to worry about being held accountable by the courts. As commander in chief, his actions were unreviewable.

Alberto Gonzales, moreover, will not in the least disturb John Aschroft’s beloved USA Patriot Act, because Gonzales helped write it, and he wholly agrees with his patron, the president, that nothing in it should be changed despite the act’s “sunset clause” that allows Congress to review sections of the act by December 2005. Those who know Gonzales, however, keep saying he is a nice guy.

THE DRUG WAR TOLL MOUNTS

In Washington, D.C., a 27-year old quadriplegic is sentenced to 10 days in jail for marijuana possession, where he dies under suspicious circumstances. In Florida, a wheelchair-bound multiple sclerosis patient now serves a 25-year prison sentence for using an out-of-state doctor to obtain pain medication. And in Palestine, Texas, prosecutors arrest 72 people -- all of them black -- and charge them with distributing crack cocaine. The scene bears a remarkable resemblance to a similar mass, mostly-black drug bust in nearby Tulia five years ago. These examples are not exceptional. They are typical. America’s drug war marches on, impervious to efficacy, justice, or absurdity. Drug prohibition was nowhere to be found in Election 2004. There was no mention of it in the debates, the conventions, or the endless cable news campaign coverage.

In some ways, that was a blessing. Campaign discussion of drug prohibition has too often focused on which candidate took what drugs when, and who was more sorry for having done so. While it is refreshing that we have moved beyond apologies, it is also true that under the laws many of today’s politicians support, a kid who experiments with illicit drugs the same way many of them once did may not get the chance to finish school or go to college, much less run for political office. The number of policymakers who have dared to question any aspect of the drug war could comfortably fit on the back of a pocket-sized edition of the Bill of Rights. This needs to change. America should reexamine its drug policy.

Today, federal and state governments spend between $40 and $60 billion per year to fight the war on drugs, about ten times the amount spent in 1980 -- and billions more to keep drug felons in jail. The U.S. now has more than 318,000 people behind bars for drug-related offenses, more than the total prison populations of the U.K., France, Germany, Italy, and Spain combined. Our prison population has increased by 400% since 1980, while the general population has increased just 20%. America also now has the highest incarceration rate in the world -- 732 of every 100,000 citizens are behind bars.

The drug war has wrought the zero tolerance mindset, asset forfeiture laws, mandatory minimum sentences, and countless exceptions to criminal defense and civil liberties protections. Some sociologists blame it for much of the plight of America’s inner cities. Others point out that it has corrupted law enforcement, just as alcohol prohibition did in the 1920s. On peripheral issues like medicinal marijuana and prescription painkillers, the drug war has treated chronically and terminally ill patients as junkies, and the doctors who treat them as common pushers. Drug war accoutrements, such as “no-knock” raids and searches, border patrols, black market turf wars and crossfire, and international interdiction efforts, have claimed untold numbers of innocent lives.

For all that sacrifice, are we at least winning? Even by the government’s own standards for success, the answer is unquestionably “no”. The drug trade is not just thriving, it is growing. Illicit drugs are cheaper, more abundant, and of purer concentration than ever before. Like alcohol prohibition before it, drug prohibition has failed, by every conceivable measure.

OPINION & ANALYSIS

THAT PRE-9/11 MINDSET: MEET THE NEW NORMAL, SAME AS THE OLD NORMAL

Critics of the current régime’s so-called “War on Terror” are often accused of having a “September 10th” or “pre-9/11” mindset. The suggestion is that everyone’s worldview should have been radically transformed by the events of September 11th, while anyone whose worldview was not so altered -- anyone who continues to favour diplomacy over a resort to military force -- must simply be blind to reality. But there is a problem with this argument: it assumes that everyone’s worldview needed changing. After all, any worldview that was radically altered by the September 11th attacks must have been radically mistaken to begin with. But anyone whose understanding of the world was substantially correct would not have had his or her overall view of things shaken by those events.

Why did more of us (“us” being those of the anti-war/anti-state persuasion, whether “left” or “right”) not abandon our way of thinking in response to 9/11? Because 9/11 did not teach us anything we did not already know. We have been saying for decades that the U.S. government’s arrogant interventions around the world have only been increasing the risk of blowback, and that the State, in the event of such blowback, would be as ineffective at protecting the civilian population as it is at everything else. The 9/11 attacks did not shake our view of the world but rather were the most eloquent confirmation of that view. Those whose worldview was shaken by the 9/11 attacks must have had their heads in the sand. It may sound rude to say “we told you so”, but given that our opponents’ decision to ignore our warnings has led to thousands of deaths, perhaps a bit of rudeness is in order. We told them so.

Of course, if truth be told, the 9/11 attacks did not have much of an effect on our opponents’ worldview either. The neoconservative D.C. establishment favors the same policies of imperial aggrandizement now that they favored before 9/11 .The attacks merely made it easier for them to get away with what they had been hankering after all along. We know from Richard Clarke and other White House insiders that plans for the invasions of Afghanistan and Iraq had already been drafted, and were simply awaiting a pretext. Not only freedom’s friends, but freedom’s foes too, are continuing in their pre-9/11 mindset.

FAILURE AFTER FALLUJA?

The U.S. military “victory” in Falluja is unlikely to change the dismal course of the guerilla war in Iraq. Military history has repeatedly shown why the cliché “winning the battle and losing the war” has crept into popular culture. Moreover, winning back Falluja the way the U.S. did is likely to be a sure prescription for military defeat in the wider Iraq war. To be fair, blunders by the Bush administration politicos have put the U.S. armed forces in an untenable position. Especially after the aborted U.S. offensive on Falluja in April, continuing to allow the Iraqi insurgents a safe haven to attack the U.S. military and Iraqi security services would make U.S. forces seem weak. Alternatively, taking the town block-by-block with more lightly armed U.S. forces -- sans the heavy firepower of artillery, armored vehicles, flying gunships, and jet aircraft -- would have eliminated the Falluja safe haven without destroying the town, but with much heavier U.S. casualties.

The Bush administration allowed the U.S. military to retake Falluja in its preferred way -- with the gloves off using massive amounts of offensive firepower. Tactically, the use of such firepower is very effective in winning toe-to-toe battles against both conventional armies and guerrillas. Yet even in more conventional wars, winners of battles do not always win the war. George Washington lost most of the battles of the American Revolution but over time eventually wore down the British public’s tolerance for war in the faraway colonies. Robert E. Lee -- revered in the American South to this day for his genius in winning battles using swashbuckling offensive tactics -- was a strategic incompetent who lost the war for the Confederacy. Although Lee was triumphant in many tactical engagements, the enormous Confederate casualties caused by his offensive tactics wore down the smaller gray armies faster than their larger blue Union counterparts. Instead, Lee should have used a “defense in depth” strategy that withdrew the gray forces into the vast southern lands and avoided a battle of attrition that he could only lose.

Destroying Falluja with heavy firepower was a military victory but likely will be a political disaster. Although effective U.S. deception about the direction of the attack on Falluja probably surprised, trapped and killed a significant number of guerrillas, many got away. In this war, the insurgents have shown themselves capable of learning, and they will probably be less prone in the future to slug it out with a more powerful enemy. Most guerrilla movements have to learn this the hard way -- for example, the communists had to do so in Vietnam.

The guerillas realize something that the Bush administration cannot seem to grasp: The real battle for “hearts and minds” is being fought not only in Falluja, Mosul, Samarra, and Baghdad, but in Fargo, Mobile, Seattle, and Baltimore. And public opinion polls show that the administration seems to be losing the political battle in both Iraq and at home. If the guerillas are not decisively defeated, they will win by waiting until the U.S. public is tired of the pointless carnage and demands that U.S. forces withdraw from the Iraqi war zone. Unfortunately, Iraq is then likely to descend into chaos and civil war. So despite Bush administration boasting of killing 1,200 guerrillas in Falluja, the future of Iraq looks grim indeed.

ALEXANDER THE NEOCON

There are two things a moviegoer should know about Oliver Stone’s Alexander. First, it is blinding awful -- literally. Ten minutes into it one of my contact lenses fell out, right as a one-eyed Val Kilmer came charging into a snake-handling Angelina Jolie’s boudoir. The less said the better. If you are thinking of seeing it, don’t. Go see Seed of Chucky instead. Jennifer Tilly vs. killer dolls will not be any campier than Alexander and Jolie’s take on the conqueror’s mother as Cruella DeVille.

The second thing worth knowing is that Alexander is mildly interesting as a document of left-wing Bushism. War, slaughter, and all that goes with world conquest are all right, as long as they secure such goods as improved literacy and the mixing of different races and cultures. This is a perfectly natural companion, by the way, to libertarian Bushism, or liberventionism, which says that a bit of bloodshed is perfectly fine as long as it secures open markets and the free flow of people and goods. There is a line about that in the movie too.

For all that Stone has done to discredit the conspiracy theory -- which is saying something -- Alexander gets the history right ... mostly. Where Stone has embellished the story he is guilty not so much of distortion as bad taste. What a shame, because the left-neocon Stone does have at least a rudimentary grasp on Alexander’s politics, if not his character. The “civilizing” mission of the conqueror was something Alexander’s propagandists played up at the time and perpetuated long after his death. It is part of his enduring appeal to megalomaniacs of all stripes. By force of arms he changed the political culture, and indeed the culture generally, of the known world, East and West. He did what liberventionists and multicultural imperialists alike long to do. Alexander is any would-be world-shaper’s role model. If the whole thing sounds familiar, well, it goes to show that Karl Marx was not always wrong. History has no laws, but the human race as a whole never learns much from its mistakes, so history does repeat itself, the first time as tragedy, the second and farce. And it keeps getting more farcical every time.

THE CONSEQUENCES OF SURRENDERING LIBERTY TO GOVERNMENT SECURITY

Recently it was reported that Senator Ted Kennedy was prevented from flying on commercial airlines because his name appeared on the federal government’s no-fly list. Now comes a report that another well-known American, commentator Cal Thomas, has also appeared on the no-fly list and consequently is harassed every time he attempts to board planes. For Thomas, that is about a three-times-a-week occurrence.

Senator Kennedy had direct access to the private telephone number of Homeland Security Director, Tom Ridge, so that he could demand that his name be removed. Yet, even knowing the head man took the powerful Senator three weeks to get off the list. Cal Thomas does not have such access, so like the rest of us, he suffers while trying to get uncaring, mindless, faceless federal bureaucrats to act and remove his name.

His story is a warning for what the rest of us face if Congress enacts National ID card legislation that is now on a fast track to passing as the result of massive pressure to fully implement the recommendations of the 9/11 Commission. Listen carefully, America. This is your future. [Ed: Think the all-time classic dark comedy Brazil.] In his column detailing his experience being targeted for constant baggage inspections and body searches, Thomas tells of the horrors of dealing with a government behemoth like the Transportation Security Administration.

Take a look around you, America. Our nation is becoming less efficient, less productive, less secure and less educated than any time in our history. What is the common denominator in this equation? Government has gotten involved in more and more of our everyday routines.

SOVIET CANADA: TROTSKY’S TRIUMPH

Back in November of 1975, a lawyer in Newfoundland told me of his recent trip to the USSR. One of his observations startled me: “The Soviet Union,” he said, “is becoming more like us in the West, and we are becoming more like them. In a few decades, we’ll have become Marxist and they’ll have gone capitalist.” Naturally, I humoured him. I avoided making sudden moves. You never know what can set one of those wacko lawyers off. Today, 28 years later, history has proven him right. Canada and the United States are thoroughly Sovietized, and Russia and the former Soviet Republics have become showcases of “wild west” entrepreneurial capitalism, complete with organized crime gangs. The symptoms of sovietization are manifesting themselves in all aspects of Canadian society.

As in the USA, for example, government agents swarm in Canadian airports, where they harass and intimidate travellers in the name of “safety” and “anti-terrorism”. Everywhere, one is constantly being asked to produce identification, and for no better reason than to verify that, “Your papers seem to be in order...” In an increasing number of businesses, employees are required to wear special identification cards on belt-like ribbons round their necks. It reminds one of nothing so much as the ear tags which replaced the branding of cattle.

There surely has never been a more brainless, incompetent bureaucracy than the Canadian federal government in history. The vast hallways of all levels of government are lined with offices which are empty except for 9:30 to 11:45 in the morning and 1:30 to 3:15 in the afternoon, except on Fridays, when it is impossible to find any of the taxpayer financed memo writers after 1:00 p.m. In Canada, the people sheepishly accept all this crap, and we never even had a Stalin to terrorize us into submission. But then you do not have to train sheep to be sheep. People here like the “nanny state”, as it saves them from having to think for themselves. I no longer believe that a significant number of Canadians are at all interested in living in ... Peace and Liberty.

AN INCREASINGLY DECENTRALIZED WORLD PROVOKES CRISIS OF STATE AUTHORITY

More than three years after 9-11, I visited the Wall Street area of New York City to discover police officers with machine-guns patrolling the streets in front of the stock exchange. Other than their menacing presence, everything else seemed peaceful. Why this show of force in that area when other parts of Manhattan -- much less the streets of Los Angeles with which I am more familiar -- were devoid of such well-armed agents? Standing just a few blocks from the World Trade Center site, they looked more like props one would find at a historic recreation such as Gettysburg or Valley Forge, or the spear-bearing sopranos in Wagner’s Die Walküre, rather than integral parts of the functioning economic system in which they were located. What possible purpose is served by this .50 caliber charade? The explanation, I believe, lies in a crisis of authority being experienced by political systems in an increasingly decentralized world.

To remain viable, every system must enjoy the sanction of its members. Such approval ultimately depends upon the effectiveness of the system; upon its capacity to produce intended, beneficial results. In a market economy (i.e., one free from government restraints or manipulation) a business enterprise must continue to satisfy the preferences of customers in order to remain in business. Even political systems must appear to be effective agencies of social order if they are to enjoy the continued sanction of their subjects. To this end, states condition people in the belief that, through the exercise of coercive power, they can protect the lives and property of their citizens, and generate social and economic regularities in what, it is alleged, would otherwise be a disordered and destructive society.

In order to carry out this ordering function, the state must convince its subjects that it has the capacity to marshal and analyze information that is unavailable to others, in order to create programs, policies, and practices that can produce predictable and desired ends. Modern political systems are grounded in the belief that legislation has magical powers to transform humanity; to mandate “good” and to enjoin “evil”. It is presumed that a combination of wise leaders and expert advisors will employ political power to achieve wondrous social ends. Such illusions have become increasingly difficult to maintain, even for college-educated folk.

I have written before about the importance of the study of chaos -- or complexity -- to an understanding of why vertically-structured political systems are not only incapable of generating social order, but invariably produce disorder. In a complex world, only unstructured, spontaneous practices are capable of generating social order, a truth that can be glimpsed by comparing marketplace economic behavior with systems of state planning. In an age of sophisticated technology, political thinking remains an anachronism, bogged down in medieval social assumptions that continue to find expression in such bromides as “the more complex society becomes, the greater the need for government.” To speak of “unintended consequences” is but to acknowledge the dynamics of complexity, whose interconnected networks render our social world quite unpredictable.

While state authorities are no more capable of predicting outcomes from the interplay of complex relationships than are you or I, they are quite adept at reacting to such events. Political systems must have been the model for the adage about locking the barn door after the horse has escaped. In reacting to the unpredictable -- particularly when done with dramatic self-righteousness -- the state endeavors to reinforce the impression that it is controlling that which determines events.

The devastation of 9/11 was implicit in years of American foreign policies and military actions, but it was not predictable. Neither are any future terrorist actions -- including the forms they might take -- predictable. Still, the illusion of being able to control the future must be maintained if the state is to retain credibility with the public. For this reason, political agencies establish systems and practices directed against behavior that has already occurred! behavior on the part of government functionaries -- like the presence of machine-gun-armed police officers in the Wall Street area – serves no pragmatic purpose. Theirs is a purely symbolic role, a reaction to 9-11. Like the attacks on Afghanistan and Iraq, these reactions are designed to leave gullible minds with the assurance that the state is controlling events so as to prevent such further atrocities.

When a crisis of authority confronts the state, it reacts irrationally and destructively in order to sustain its privileged position. I liken the modern American state to a chicken that has just been beheaded. In a final burst of energy, it flaps around wildly and noisily in a futile resistance to its terminal state. It makes a bloody mess of anything with which it comes into contact. But its fate has already been determined.

WHO IS A FASCIST?

It seems to me that “fascist” is bandied about on the right in the same careless way as one finds on the left. Note that the anti–New Deal American Right in the thirties fell over themselves denouncing FDR and his minions as American Mussolinians. The Old Right associated the fascists with a corporatist economy, welfare programs, and military rearmament, all of which they despised. Did Mussolini not teach his nation to do everything for the state and nothing against it? How is this different from Bill Kristol’s view that to be an American patriot one must love the American state?

It may be possible to point out certain palpable differences between the two forms of state worship. Neoconservatives and fascists do not share the same historical context. Nor are they reacting against the same enemies. Fascism was an interwar phenomenon and one bound up with a reaction against the revolutionary Left in Italy, Spain, Austria, and other European countries. It was also profoundly reactionary, in the sense that it valued certain classical conservative principles, like hierarchy, patriarchy and the restoration of antiquity, but believed it was only possible to bring about what it wanted through a constructivist project. Therefore Mussolini and his counterparts created a neoclassical version of a pre-bourgeois society, which was cobbled together with Roman republican and Spartan models. Although not all fascists were racialists (the German case was the lunatic exception), most of them were avowed anti-internationalists and would not have approved of anything as destabilizing as immigration expansion.

The neoconservatives are not only not connected in any way to European counterrevolutionary traditions but are clearly on the side of what Michael Ledeen calls the “creative destruction” of the social and cultural traditions of other peoples. Without judging the merits of this, it seems that those who pursue it are not definable as fascists. They may in fact be far more destructive but are not a subgenus of interwar fascists who have landed up in our society. Depicting them as such depends on an underdetermined definition that serves strictly polemical ends. Just because all modern Western industrial states have large administrations that socialize the family and feature public education does not make them “fascist”. Fascists took advantage of a political paradigm they shared with non-fascist modern governments, in order to achieve in some cases counterrevolutionary ends. But they did not initiate the welfare state, which flourished without the fascists, on the Euro-American left. Nor were the fascists unique in having military dictators and wars of expansion.

MUSLIMS DO NOT HATE AMERICA’S FREEDOMS, BUT ITS POLICIES

A taskforce of military, diplomatic, academic and business experts, assigned to develop strategy for communications in the “global war on terrorism”, had unfettered access, denied to journalists, to the inner workings of the national security apparatus. There was no intent to contribute to public debate, much less political controversy. The report was for internal consumption only.

As it journeyed into the recesses of the Bush foreign policy, the taskforce documented the failure of fundamental premises. “America’s negative image in world opinion and diminished ability to persuade are consequences of factors other than the failure to implement communications strategies,” the report declares. What emerges is an indictment of an expanding and unmitigated disaster based on stubborn ignorance of the world and failed concepts that bear little relation to empirical reality, except insofar as they confirm and incite gathering hatred among Muslims.

The Bush administration, according to the defence science board, has misconceived a war on terrorism in the image of the cold war. However, the struggle is not the west versus Islam; while we blindly call this a “war on terrorism”, Muslims “in contrast see a history-shaking movement of Islamic restoration” against “apostate” Arab regimes allied with the U.S. and “western modernity -- an agenda hidden within the official rubric of a ‘war on terrorism’”.

The report has been ignored by those to whom its recommendations are directed. For the Bush administration, expert analysis is extraneous, as it is making clear to national security professionals in its partisan scapegoating of the CIA. Experts can only be expert in telling the White House what it wants to hear. But no one can claim the catastrophe has not been foretold by the best and most objective minds commissioned by the Pentagon -- perhaps for the last time.