Offshore News Digest for Week of January 17, 2005

GLOBAL BUSINESS

FREE TRADE OFFERS BETTER HOPE FOR AFRICAN NATIONS THAN MORE AID

Does foreign aid work as a tool to raise economic growth, and eliminate poverty, in Africa and the rest of the developing world? The Chancellor of the Exchequer thinks so. Gordon Brown, currently on a highly-publicized visit to Africa, has almost single-handedly put the issue on the political agenda. As well as championing the reduction of debt and of interest payments by African countries, he has launched the idea of a Marshall Plan for the sub-Saharan nations, to double western aid from $50 billion to $100 billion a year. Even without the scourge of war and dictatorship, western aid -- it is argued -- would still be needed to boost investment and create a virtuous cycle of self-sustaining growth.

However, there is a solid body of evidence that queries the proposition that increasing western aid is the route to helping Africa. A recent study by the Swedish economist, Fredrik Erixon, found that in only one country out of 138 was there a positive relationship between economic growth and aid. “It is a striking fact,” says Erixon, “that it is only in the last 15 years, when global foreign aid has actually fallen, that the number of poor people in the world has actually started to decrease.”

There are deep structural reasons why aid is a bad tool for economic development. At the recipient’s end, foreign aid tends to increase the power of corrupt officials. Hiding the stolen money then corrupts the local banking system, turning it into a criminal conspiracy rather than a tool for entrepreneurship. Even when the corrupting effects of aid are minimized, it is patronizing and robs the recipient nation of independence. As if all this were not enough, western aid has never been completely altruistic. Often it comes with conditions to buy western equipment or arms. Above all, western aid has become a good way of salving the conscience of western intellectuals.

Nature of risk changing for investors in Africa.

Risk to investors in Africa may be declining as democracy spreads across the continent, but analysts say conflict, corruption and poor productivity continue to deter flows of foreign money into the world’s poorest region. The nature of the risk is changing, some analysts say, with military coups and power struggles between the strong men of the past now making way for wider ethnic conflicts that could even threaten Nigeria, seen as one of the rising economic powerhouses.

A move towards multiparty democracy in many countries, the end of some of the longest-running civil wars, such as in Angola and Mozambique, and growth in anti-corruption bodies and increasing judicial independence were all good signs. But investors remain cautious about a continent rich in natural resources and potential but seen by many as a bad business address, and where analysts say some anti-poverty measures such as debt write-offs could hurt investment. Analysts say investors who see debt being written off worry they too might be unable to get their money back in the future.

Poorer countries attract record investment flows.

Record investment flows to developing countries sparked a recovery in global foreign direct investment (FDI), the United Nations reported. After three years of decline, world FDI rose 6% to $612 billion last year as increased flows to developing countries and to central and eastern Europe offset a slump in developed countries. The UN Conference on Trade and Development predicted that a continuing improvement in economic activity, equity market valuations and mergers and acquisitions would fuel expansion of FDI over the medium term. FDI in developing countries rose 48% to 255 billion from 2003. Developing countries’ share of global foreign direct investment rose to 42%, from 27% in 2001-03.

A strong rebound in commodity prices helped inflows to Africa increase for the second year in a row, to $20 billion. The UN predicted that a further increase was possible if high commodity prices prompted multinational companies to undertake new exploration projects in Africa. The U.S. was the world’s largest recipient of FDI, with inflows of $121 billion, pushing China into second place with half as much. Foreign direct investment flows to Latin America and the Caribbean rose for the first time in five years, up 37% to $69 billion.

IN SOUTH AFRICA, THE GOOD LIFE FOR A FEW

They are the black princes and princesses of the new South Africa. They wear Armani to the office, drive late-model Mercedes or BMW sedans and buy vacation villas in Tuscany. The children of Johannesburg’s new business elite attend once-segregated private schools in neighborhoods that look like Beverly Hills. Ten years after the system of legal racism known as apartheid fell, jewelry shops now market diamonds to this new carriage trade. And the natio’qs world-famous country clubs, where whites once learned enough Zulu to tell a caddy, “Move your shadow,” still thrive. The new black elite loves golf.

Is there something wrong with this picture of prosperity? Rolling back the legacy of apartheid -- essentially an affirmative-action program for the white minority -- was the African National Congress’s top priority when it took power in 1994. But now the ANC’s own affirmative-action campaign is under siege. So-called Black Economic Empowerment (BEE) laws steer government business to firms that include at least 15% black ownership. Yet statistics show that the gap between rich and poor has widened. Between 1995 and 2000, for example, average black household income shrank by 19%, while that of whites -- and of the new black middle class -- rose by 15%. The country’s Gini coefficient -- a measure of inequality -- also worsened.

Respected figures within the former liberation movement, including Moeletsi Mbeki, brother of president Thabo Mbeki, have denounced the program. They argue that its emphasis on creating black corporate owners has forged a selfish new class of well-connected opportunists but done little to help the masses. Setting off a bitter public debate last fall, former Anglican archbishop Desmond Tutu demanded, “What is black empowerment when it seems to benefit not the vast majority but an elite that tends to be recycled?”

IRELAND WEALTHIER THAN THE U.S., RANKING 4TH IN THE GLOBAL “RICHEST” LEAGUE

Ireland is now wealthier than the U.S. and is on course to become the world’s third richest economy, according to a leading economist. Economic wealth per head of population surpassed that of the U.S. for the first time late last year. “We are richer than both Boston and Berlin,” said Bank of Ireland chief’s economist, Dan McLaughlin. “We surpassed Berlin in the millennium year and, now in early 2005, we are richer than Boston.”

The analysis is based on an increase in Irish economic wealth to €36,100 per head of population ($41,500), at an exchange rate of $1.15, which has surpassed the U.S. figure of $40,100. The current exchange rate for the euro is $1.31. Mr. McLaughlin added, “For most of Ireland’s modern history, Irish people went to the richer country in America and sent back remittances to poor relations back home. Now, we have U.S. companies in Ireland sending remittances in profit cheques back home.”

However, Fine Gael’s Finance spokesman Richard Bruton sounded a note of caution, while agreeing the economy has been growing at a “phenomenal pace”. He warned that the traditional manufacturing section was in “sharp decline”. “We are pricing ourselves out of the market by becoming, what is colloquially described as a rip-off country,” he said.

JULIUS BAER FAMILY PLANS TO GIVE UP CONTROL OF BANK

Julius Baer Holding AG, Switzerland’s biggest publicly traded private bank, said the founding family will give up control of the company and Michael Baer will leave because of “differing views” on strategy. The Baer family will lower its voting rights to match its 18% stake-holding under a plan to be presented at the annual general meeting on April 12. At present, family members hold 52% of voting rights. Michael Baer, who had headed private banking, will leave the company in mid-year. The new share structure may make it easier for Baer, which competes with larger banks such as UBS AG and Credit Suisse Group for wealthy clients, to combine with another private bank. The shares last week gained 11% on speculation the bank may seek a buyer for all or parts of the company. UBS in December agreed to buy Baer’s North American wealth management business.

Swiss private banks, which manage about a third of the world’s private wealth deposited in foreign accounts, have been combining amid rising costs and competition. Lombard Odier & Cie. and Darier Hentsch & Cie., two of Geneva’s oldest banks, merged in 2002. Union Bancaire Privee and Discount Bank & Trust Co., also based in Geneva, also combined in 2002.

CAYMAN ISLANDS LEADER SUES NEWSPAPER FOR LIBEL

The Cayman Islands government leader has sued a newspaper, alleging libel following the publication of an anonymous letter insinuating the government had awarded him a lucrative contract. The charges stem from a letter to the editor published November 17 by Cayman Net News in which the author insinuated government leader McKeeva Bush was behind MC Restoration, a locally registered company that had been awarded a $10.7 million debris-removal contract following Hurricane Ivan.

In September, Hurricane Ivan tore through the main island of the British Caribbean territory of 43,000 residents, destroyed 70% of buildings and damaged many hotels, causing more than $3 billion in damages. The dollar amount of damage in the islands was higher than in other Caribbean countries that suffered similar hurricane destruction. In the letter, the anonymous author stated, “Something is starting to stink here. The contractors in Cayman have a right to demand explanations.” As a result, the lawsuit said, Bush’s “personal and professional reputation has been severely damaged, and he has suffered great hurt and embarrassment.”

POLITICAL DIVISIONS PERSIST IN AMERICA

President Bush will begin his second term in office without a clear mandate to lead the nation, with strong disapproval of his policies in Iraq and with the public both hopeful and dubious about his leadership on the issues that will dominate his agenda, according to a Washington Post-ABC News poll. On the eve of presidential inaugural ceremonies, the survey found few signs that the country has begun to come together since Bush defeated Sen. John F. Kerry two months ago. The president has claimed a mandate from the election, but the poll found as much division today as four years ago over the question of whether Bush or Democrats in Congress should set the direction for the country.

Only 45% polled said they preferred that the country go in the direction that Bush wanted to lead it, whereas 39% said Democrats should lead the way. During the first months of his presidency, after the bitterly disputed 2000 election, Americans said they preferred Bush to take the lead by 46% to 36%. But the public also wants cooperation from the Democrats. At a time when Democratic leaders are preparing to challenge many of Bush’s major initiatives, nearly seven in 10 Americans agree that Bush’s victory means that congressional Democrats should compromise with him -- even if it means compromising on their party’s principles. Only one in four said Democrats must not compromise on things they find objectionable, even if it means less gets accomplished.

On Social Security, the poll offered mixed findings that underscore the enormous challenge facing Bush at the start of what both parties see as the most significant legislative battle of the second term. Those surveyed gave Bush negative marks -- 38% approval vs. 55% disapproval -- for his handling of the Social Security issue, and three in five said the system will not have enough money to pay benefits by the time they retire. But Iraq and terrorism, more than Social Security, are the issues the public wants Bush to concentrate on in his second term. Bush said in an interview last week with The Washington Post that the 2004 election was a moment of accountability for the decisions he has made in Iraq, but the poll found that 58% disapprove of his handling of the situation to 40% who approve, and 44% said the war was worth fighting.

FAITH IN PUBLIC FREEDOMS GROWING IN HONG KONG, SAYS POLL

Continuing protests and negative news coverage may reflect Hong Kongers’ dissatisfaction with the government and powerful interest groups, but at least the public have greater faith in freedom of speech and assembly, a university poll shows. “Almost all subjective freedom indicators have gone up over the past three months -- many near record highs since the handover,” Hong Kong University’s public opinion programme director Robert Chung said. The programme earlier this month asked more than 1,000 people to rate their satisfaction with 10 “freedom indicators”. Chung said recent marches and demonstrations had boosted the public’s confidence in freedom of expression and their right to demonstrate. Among the 10 indicators, “freedom of speech”, “freedom of the press” and “freedom of publication” rose the most in the past three months.

Hong Kong’s leader apologizes for his governance, but promises to remain in office.

“We have our inadequacies and we have to summarize our experience and learn our lesson,” said Tung Chee-hwa, the chief executive of Hong Kong, an autonomous Chinese territory, echoing criticisms of him last month by President Hu Jintao of China. Mr. Tung warned twice in a news conference, without specifics, that public unhappiness here should not reach the point that Beijing becomes concerned about maintaining social order. “If the society is stuck in instability, it will fill the central government with worries,” he said.

In his annual policy address and in the subsequent news conference, Mr. Tung was also fairly noncommittal about a plan for an empty 100-acre peninsula in the middle of the harbor, a plan criticized as a subsidy to the city’s wealthiest developer, Li Ka-shing. Mr. Tung’s top aides have called for handing over the entire government-owned peninsula to one large developer, most likely Mr. Li, for the construction of an immense complex of museums, concert halls, apartment buildings and hotels. When asked Wed whether he still supported choosing one developer, Mr. Tung replied that while he hoped a cultural district would emerge, “We will carefully listen to the views of the public.”

Democracy proponents and advocates for the poor have long criticized Mr. Tung, most notably in a march by 500,000 people on July 1, 2003, that forced him to withdraw a proposal for stringent internal security laws. What has changed in the last month is that many of Mr. Tung’s longtime allies among business leaders have turned on him, and not just over plans for the so-called West Kowloon Cultural District. They have used public pressure and the courts to block two potentially profitable projects in the past two months. One involved bulldozing seven new but never occupied public housing towers to make way for luxury apartments. The other called for selling $2.73 billion worth of shops and parking spaces at public housing projects to investors at a discount. The government’s setbacks prompted thousands of stockbrokers and disappointed investors to protest on Jan. 1, to criticize populists and to demand that Mr. Tung do a better job of pushing through his proposals.

A CARIBBEAN PERSPECTIVE ON RELATIONS WITH THE U.S.

Condoleeza Rice and Robert Zoellick have been appointed as Secretary of State and Deputy respectively, and their confirmation hearings by the U.S. Senate should be a fairly easy run. The Caribbean will have to treat with them over the next four years, but getting their attention and holding it will not be easy. Two difficulties arise. First, the Caribbean is not high on their lists, although both Cuba and Haiti will undoubtedly find a place on them, and second their positions on international issues will not jive easily with Caribbean perspectives.

Under Colin Powell, the State Department was often a dissenting voice within the Bush administration on Iraq and other key foreign policy issues. Mr. Powell’s views and those of his Deputy Richard Armitage on the importance of multilateral diplomacy and cooperation with the UN chimed with Caribbean positions. Ms. Rice and Mr. Zoellick are likely to bring the State Department more in line with the unilateralist thinking of the Bush inner circle, and this will pose a challenge for the Caribbean in strengthening relations with the U.S. Both of them are extremely talented and capable people with personal ambitions and special interests. They want to be involved with the big international issues. Ms. Rice in politics and security, and Mr. Zoellick in trade and economics.

Apart from Cuba and Haiti, the Caribbean has not featured highly on the U.S. international agenda over the last four years, and Mr Bush’s “third border initiative”, which should have seen emphasis being placed on Latin America and the Caribbean, never took off. Therefore, Ms. Rice, preoccupied with Afghanistan, Iraq and the Middle East, would have had little time to look at the rest of the Caribbean. In any event, throughout her tenure as National Security Adviser, U.S. policy on the Caribbean, except for Cuba and Haiti, has been dominated by anti-terrorism activities including countering terrorism financing, curbing drug trafficking, contributing to fighting HIV/AIDS, and stopping illegal immigration. U.S. focus on these points in relation to the Caribbean is unlikely to change over the next four years unless the region is able to persuade the U.S. to take account of other considerations.

As U.S. Trade Representative for the last four years, Mr. Zoellick has come to know the region and its issues, as indeed the region has come to know him. Without question, Mr. Zoellick knows how the Caribbean feels about the necessity and importance of “special and differential treatment” in trade and economic arrangements for our very small economies. He well knows that we want more time for our economies to adjust to lower tariffs on imports and more time for our local businessmen to prepare themselves to cope with competition both in an FTAA and in any new trade rules to be agreed at the WTO.

He has led the charge by the U.S. for trade liberalization and globalization. In leading that charge, he has had to build coalitions with other countries, and he has had to be mindful of the problems caused for developing countries by U.S. protectionist policies especially in agriculture. In any event, Robert Zoellick does have wide personal experience with developing countries, and he has been exposed to the peculiar problems of the Caribbean. He may not be sympathetic to all of them, but at least he knows them and understands some of them. Because we will be competing with every other region in the world, it will be as hard to get Mr. Zoellick’s attention as Ms. Rice’s. But, at least we will not be starting from scratch.

TAXES

CANADIAN SNOWBIRDS FLOCK TO FLORIDA TAX SHELTERS

As many as one million Canadians now use Florida as a tax shelter, according to a financial services company opening a branch office in Boca Raton this coming summer. The founder of Keats, Connelly and Associates, Inc. said he was opening the new office because Boca had become a focal point for the millions of Canadians seeking tax havens on the Gulf and Atlantic coasts. “Between two and three million Canadians visit Florida during the snowbird season,” Robert Keats said. “Many buy winter homes. On the Atlantic coast, Boca Raton is right in the middle of that activity.”

Canadian citizens pay higher taxes than U.S. citizens, but are permitted under the North American Free Trade Agreement (NAFTA) to move their primary residences and businesses or investments to the U.S. -- at a substantial savings. Keats said Canadians at or above a 48% tax bracket, which is about $80,000 in U.S. dollars, can cut their taxes in half in Florida. Business taxes, he said, can be reduced by about one third.

Keats and Associates, the largest American company specializing in U.S.-Canadian cross border tax issues, finds most of its clients in Florida and Arizona -- and some in California. David W. Reed, a retired Chevron employee and dual U.S.-Canadian citizen, said he had saved more than $20,000 for every $100,000 of taxes a year since he became a California resident in 1987. “Canada’s taxes are different. The U.S. has so many deductions that Canada doesn’t have and you’re better off as a U.S. taxpayer at any time.”

FOREIGN-PROFIT TAX BREAK IS OUTLINED

The Bush administration outlined rules for a huge one-time tax break for companies that reinvest their overseas profits back into the U.S. The tax break, which was part of last year’s corporate tax bill, would allow companies to pay a fraction of the normal tax rate on hundreds of billions of dollars in foreign profits if they pledge to invest the funds in activities that may create jobs at home. In a setback for many of the biggest potential beneficiaries, the Treasury Department said companies could not use their windfalls for repurchases of stock or increases in shareholder dividends. Stocks of companies that pushed hard for the tax break declined slightly after the rules were announced.

The rules would help companies finance some activities that do little to directly increase employment, and a few -- like corporate acquisitions -- that might lead to job cuts. The tax break could also be used to finance advertising and marketing. The administration said companies could also use their foreign profits to redeem old debt and spend on the general purpose of “financial stabilization”. The law would give companies a one-time opportunity this year to bring a total of as much as $500 billion in foreign profits into the U.S. and pay a tax rate of 5.25%, instead of the standard corporate tax rate of 35%.

Globe-spanning companies have for years deferred their U.S. taxes on foreign earnings. Under traditional tax law, the companies would be required to pay the full tax rate as soon as they brought the money back into the country. The one-time tax break would let companies take advantage of the lower rate if they put forward a plan to reinvest their profits in ways that enhance employment in the U.S.

EU TAX ROW SET TO GROW OVER AUSTRIA INVESTOR DATA

The differences in the EU over harmonizing company taxes looked set to grow after Austria published figures showing a sharp increase in the number of foreign investors last year. The rise has been widely attributed to the country’s landmark tax reform, slashing company taxation from 34% to 25% -- one of the lowest rates in the EU -- from the beginning of the year. The cuts were accompanied by a variety of measures to reduce the burden on big groups using Austria as a base for regional headquarters by greatly raising the number of tax breaks for subsidiaries. The number of foreign companies investing in Austria jumped by 30% compared with the previous year, with investors from high-tax Germany and Italy leading the way. Officials also noted a rise of about one-third in the number of serious inquiries about investment.

Austria’s tax cuts have strained relations with Germany -- traditionally the biggest inward investor -- and especially Bavaria, its neighboring region. The Bavarian government last year complained that Austria was trying to lure Bavarian jobs across the shared border. Austrian ministers say they have little choice but to reduce corporate taxation to remain competitive with their low-tax neighbors, full EU members since last May. Corporate taxation in Slovakia is 19%, while the rate in the Czech Republic is 24%. Hungary levies a rate of just 16%, but also taxes company dividends, leading to a higher combined rate if profits are paid out. Last year’s success was marred only by the lack of spectacularly big individual investment projects. Overall investment accordingly fell to €283 million ($370 million).

IMF, OTHERS PRESCRIBE VAT FOR THE BAHAMAS

As The Bahamas deliberates whether or not a change in the current tax structure is needed to match growing government expenditure to revenues, several international organizations have urged against relying so heavily on import duties. Speaking at the annual Bahamas Business Outlook, State Finance Minister James Smith revealed that after a comprehensive study, the IMF recommended The Bahamas reform major components of the local tax system. Based on the findings of the study, performed in 2002, the IMF suggested strengthening revenue administration over the short term, while making long term plans to shift the tax system from being import based to domestic based. The ideal tax system suggested for The Bahamas was a Value Added Tax.

A similar change was also suggested by the UK-based Crown Agents employed by the government in 2004 to perform a more in depth study of the tax regime following the recommendations of the IMF. Among the conclusions reached by the Crown Agents, on the current method of revenue generation for The Bahamas were a lack of buoyancy as a result of the numerous exemptions and the pervasive culture of evasion.

International ratings agency, Standard and Poor’s also saw an urgent need for strengthening government revenue through an alternative tax regime. Mr. Smith noted that in an assessment of the Bahamian economy performed at the request of the government to support the 2003 foreign bond issue, Standard and Poor’s outlined constraints on government revenue, which it blamed on an inefficient tax structure. The agency gave the country a conditional A- rating dependent on tax reform.

Mr. Smith concluded, “a comprehensive review and subsequent reform of our tax system is regarded by many reputable international agencies as an indispensable element in the equation to transform the Bahamian economy and provide the base for sustainable economic development.” The Bahamas’ current reliance on import duties was also predicted to face significant challenges in a world trending towards trade liberalization by Barbadian tax expert, Ben Arrindell. He summed up the conclusions of the international studies performed on The Bahamas’ tax system, as outlined by the State Finance Minister, as evidence that the current tax system is “ineffective” and riddled with compliance issues.

ANOTHER INCOME TAX DENIER WILL HAVE HIS DAY IN COURT

Al Thompson gathered two dozen employees of his California manufacturing company, Cencal Aviation Products, four years ago and announced that he had stopped withholding taxes from their paychecks. Mr. Thompson went on to tell his workers that he believed that Americans were tricked into paying taxes and then introduced his new accountant, Joseph R. Banister, a former I.R.S. criminal investigator who travels the country advising business owners that the tax laws are a fraud. Mr. Thompson is to go on trial Wednesday in Sacramento for willful failure to file tax returns and failure to turn over more than $500,000 that should have been withheld. The trial is expected to last three weeks, and a major piece of evidence will be a videotape of the gathering, which showed Mr. Thompson and Mr. Banister being questioned about court rulings that have rejected similar antitax arguments.

His case illustrates some of the reasons that tax evasion is growing, despite repeated statements by the I.R.S. that it is cracking down on those who deny the legitimacy of the tax laws. The Internet, antigovernment news organizations and dwindling law enforcement resources are all factors in the spread of the tax denial movement. The case also highlights a change in tactics by the Justice Department tax division. Criminal cases often take years to develop, allowing tax frauds to continue. For decades, I.R.S. policy was that once a case was treated as criminal, all civil actions ceased. But in 2001, the Justice Department decided to use civil injunctions in tandem with criminal investigations.

Now, within weeks of learning about various tax frauds, Justice Department lawyers ask federal judges to issue orders to shut down Web sites and require promoters to turn over lists of customers and other actions. The lawyers have been successful in their cases each of the 121 times they have asked judges to take action. In Sacramento, Judge Frank C. Damrell Jr. of U.S. District Court ordered Mr. Thompson in 2003 to turn over more than $500,000 that should have been withheld as taxes and to file tax returns. Mr. Thompson refused to obey, saying the judge had no authority. Last March, Judge Damrell had him arrested.

At his trial Mr. Thompson, who is representing himself, is expected to argue that he sincerely believes Congress repealed the tax laws in 1939 and never properly enacted new laws. In a 1991 tax protester case, the Supreme Court ruled that John Cheek, a pilot, could not be convicted of willful failure to file tax returns because he “sincerely believed” he was not required to do so. Mr. Cheek still owed the taxes, however. Mr. Thompson’s defense will be complicated because of Judge Damrell’s orders. Prosecutors are sure to argue that the civil order, as well as a separate state court proceeding, and the fact that Mr. Thompson was jailed three times for civil contempt, gave him ample reason to question whether his belief was mistaken. Prosecutors are expected to argue that he is willfully blind to the law.

In the 92 years since the modern income tax began, people who deny the legitimacy of the tax laws have yet to win a case. But their ranks are growing. Their claims are spread by Internet news organizations, which laud them as heroes fighting what they call a conspiracy by the government and mainstream news organizations to trick Americans into paying taxes they do not owe. Tax deniers say the fact that they never win shows that the government is a criminal organization that illegally extracts taxes and unjustly imprisons those who challenge it. Kevin Brown, the I.R.S. commissioner for small business, says that technology has helped spread tax fraud. “What was peddled in Holiday Inn conference rooms on a Saturday” to small groups, he said, “is now a 24/7 business on the Internet, which makes it easier to spot, but also makes it easier to disseminate.”

The I.R.S. has an efficient system to identify tax cheating by wage earners, whose salary, bank interest, dividends and mortgage interest are all independently reported to the government. As a result, most tax evasion schemes these days focus on investors and business owners. The agency has acknowledged that its antiquated computer software cannot catch many types of cheating by investment partnerships, business owners and landlords. Often, tax cheating can be seen by human eyes reading forms filed with the I.R.S., but with a third fewer audits than it had 15 years ago and far more returns to examine, the I.R.S. relies mostly on computers, which are often blind to frauds operating in plain sight.

DEADLINE ON GIBRALTAR TAX BREAK RULING

The government will be given four weeks to accept the end of a tax break for thousands of international companies registered in Gibraltar after the EC found the scheme violated state-aid rules. The tax break, known as the exempt company scheme, will have to be phased out by 2010, and London will have to curb the use of the scheme in the years leading up to that date. Officials and diplomats in Brussels said the UK stood ready to accept the Commission’s order, in an attempt to bring to a close a dispute that had been raging for more than five years. Such a deal would make it hard for newcomers to win favorable tax treatment in Gibraltar, since the number of beneficiaries would be capped at the 2003 level, said people familiar with the Commission decision.

Businesses registered there are likely to retain their special status until the end of the decade, and they will not be forced to reimburse past savings. Under the scheme, companies can be exempted from corporate taxation in return for a payment of £225-£300. It was first identified as a potentially harmful and distorting measure by a group of EU tax experts in 1999. Since then, the Commission and the British government have debated how to phase out the scheme, but a UK offer to replace the regime with a less advantageous system was rebuffed. Brussels argued that Gibraltar should not be allowed to offer companies a tax regime that is even marginally more favorable than the UK system, and that any deviation would, therefore, constitute state aid.

Senior lawyers in Gibraltar acknowledge the importance that has been played by the special status in building up the UK colony’s economy as an offshore financial services center. “Without some period of grace, scrapping all tax exempt companies would have a disastrous impact on the local economy,” said one lawyer. Gibraltarian officials separately suspect the Spanish government may try to portray what has been agreed in Brussels as a victory for Madrid’s long-running allegation that the UK colony’s privileged tax status is a haven for tax evasion and money laundering.

VERNON JACOBS DISCUSSES PROSPECTS FOR TAX REFORM IN THE U.S.

The U.S. income tax has been like a pendulum responding to changes in the political environment. As tax rates go down, so do the deductions and loopholes. We are presently at the lowest level of marginal tax rates since before World War II. But as the top tax rates have been reduced, a great many tax loopholes, tax sheltered investments and tax deductions have either been eliminated or greatly reduced. The 16th Amendment gave the Congress the power to assess taxes selectively, without making the tax uniform among the states. Historians and students of that amendment argue endlessly about whether it was really ratified as required and whether the courts have interpreted it correctly. To my way of thinking, the tax law is no more and no less than whatever the judges say it is today. If they construe the 16th Amendment as giving the Congress a blank check on the income and assets of every citizen -- or of even a single citizen -- then that is the law for today.

No matter how we change the tax system, some segments of the public get a windfall and some other segments of the public get the proverbial shaft. If you tax income, you get less income. The higher the rate of tax, the more incentive there is for taxpayers to reduce their income in accordance with whatever exceptions the law allows -- such as tax exempt interest or accumulations of life insurance or unrealized gains on various kinds of assets. If we start to tax goods and services, it is arguable that we will get less consumption. One of the arguments in favor of a sales tax is that we need to eliminate the tax on savings and capital formation in order to have more savings. But we can also expect that as the level of tax on consumer goods increases, there will be much more incentive for tax evasion. Unless the tax rate is so low that the effort is not worth the savings, there will be tax evasion.

It is my humble opinion that the real issue should be about government spending rather than about how we collect the taxes to pay for that spending. Despite the rhetoric of the politicians, higher taxes result in more spending. Less taxes may result in less spending, but only if there is some mechanism to prevent the politicians from finding new ways to get more money. All of the arguments about alternative tax systems are having the effect (whether intended or not) of diverting discussion from the proper role of the federal government in our lives.

I hve been watching the changes in the tax laws for nearly 30 years and have observed numerous periods of intense discussion about fundamental reform of the income tax. However, the politicians benefit greatly from the status quo and they cannot be expected to eagerly relinquish control of the “golden goose” that lays the golden eggs that provide the politicians with nearly unlimited funds to reward their friends and to punish their enemies. I fear that we will have to experience a destruction as severe as that of the former Russian Empire or the old Roman Empire before a majority of the voters will be willing to seriously press for the elimination of the income tax. Until then, the politicians will tinker with the law endlessly.

ASSET PROTECTION

IDENTITY THEFT MASTERMIND GETS 14 YEARS

Philip Cummings, 35, used his job as a computer helpdesk employee to steal personal information from more than 30,000 unwitting customers. He passed credit card and other stolen details on to other criminals. The fraud is believed to have taken place from early 2000 to October 2002. He pleaded guilty in September 2004. Judge George B Daniels said the case “emphasised how easy it is to wreak havoc on people’s financial and personal lives”, and added that consequences for individual victims were “almost unimaginable”.

Cummings, who worked for Teledata Communications -- a New York-based software company which helps lenders access major credit databases -- had access to clients’ codes and passwords. He would steal people’s credit reports and pass them on to an accomplice, who would sell them on and share the profits with Cummings. The stolen identities, bought by intermediaries for about $60 per name, were then used to access the victim’q bank accounts and use their credit cards. The criminals would buy expensive goods, including computers and electronic equipment, and resell them to other members of the network. By changing a customer’s personal details, the thieves could have new credit and ATM cards mailed directly to them.

MONTANA’S SWISS-STYLE BANKING LAW UNDER FIRE

The Legislature is looking to repeal Montana’s controversial 1997 law to allow Swiss-style banks that promised millions of dollars in returns, but which has nothing to show for it but some bad publicity. The law allowed foreign capital depositories to set up in Montana to set up offshore bank accounts used by people seeking to protect their wealth from tax collectors and government regulators in their homelands. The international offshore market had been estimated at $27 trillion. Backers said the state could reap $10 million a year for the state treasury from several billions of dollars in deposits that never materialized. Montana was to have made money through a 0.75% tax on every transaction made at a foreign capital depository in the state.

“Unfortunately, the best-laid plans sometimes go awry,” said Rep. Larry Jent, D-Bozeman. “We had a couple of applicants, both of which were convicted of financial shenanigans.” The world has changed dramatically since this bill was enacted, Jent said, referring to the 9/11 terrorist attacks. These Swiss-style banking accounts can be used by “sinister organizations” to shelter their assets, he said.

Kill that Swiss-banking law, newspaper editorializes.

When the Montana Legislature convened in the year 1997, it met in a different world. Sept. 11 was just another date. The stock market’s bubble would never burst. But even in 1997, skeptics ridiculed a law to allow Swiss-style banking in Montana so foreign zillionaires could protect their money from taxation or other threats in their homelands. Montana, by imposing a 0.75% tax on all that loot, would make a killing. Most folks were not so hot in the prescience department back in 1997, but those who were skeptical about secret Swiss-type bank accounts in Montana were right on. The idea turned out to be a silly flop, and it is time to put the law out of its misery.

In truth, the dream of establishing a foreign capital depository was worse than a failure. Cynics who worried that such a scheme would attract a bad element turned out to be correct, as well. The Swiss-banking law has been on the books for eight years now, and it has yet to earn Montana a dime. Given the Patriot Act and other laws regarding secret stashes of money, it is doubtful such a bank could even get off the ground. Meanwhile, according to state banking regulators, the law already has cost the state about $300,000. Rep. Larry Jent has a bill to kill the law. Let the execution proceed.

IRS CLAIMS DEFECTIVE OFFSHORE TRUST SETUP INCREASES TAX LIABILITY OF FLORIDA MAN’S ESTATE

The estate of orthodontist L. Thomas LaSalle of Boynton Beach, Florida filed a petition asking U.S. Tax Court to overturn the IRS’s demand for the additional estate taxes. LaSalle died in July 2000. The petition claimed the IRS erred when it ruled that LaSalle, who had orthodontic offices in Delray Beach, Boca Raton, and Coral Springs retained control and the income from a trust he established in Bermuda that included 73,182 shares of SouthTrust stock. “He never owned the stock,” William Jay Palmer, a Miami tax attorney for the estate, said. “It was owned by his trust. They are trying to include the trust in the estate (value), and we’re saying it’s not includable.”

According to the petition, LaSalle, a Miami native and former Air Force captain, established the LaSalle Indenture of Settlement trust in Bermuda in 1970, five years before he and his wife married. The petition argued that neither LaSalle nor his wife served as a trustee of the trust and that they did not receive income from it. The IRS notice of deficiency ruled that LaSalle had transferred assets into the trust. The notice also said he had retained the right to the income from the assets in the trust and power to revoke the trust. The notice increased the taxable value of the estate by $2.2 million, which the IRS estimated was the value of the estate when LaSalle died. Besides $1.26 million in additional taxes, the IRS ordered the estate to pay $949,074 in civil tax fraud penalties.

LAWYERS WEEKLY USA OFFERS REVIEW OF LARGEST CIVIL JURY AWARDS IN 2004

$1.6 billion, $776 million and $366 million -- these represent only a sampling of 2004’s most notable jury verdicts. Lawyers Weekly USA, the authoritative voice for lawyers throughout the country, released their annual list of Top Ten jury awards for 2004. The Top Ten jury verdicts to individual plaintiffs increased across the board in 2004, with the average award four times larger than in 2003. Topping the list at #1 is a $1.6 billion award to a woman who paid $3,000 for a nonexistent life insurance policy. The abrupt decline in damages that occurred in 2003 reversed itself this year. Each of the Top Ten verdicts in 2004 was larger than the verdict in the corresponding position in 2003 -- and all ten were for more than $100 million.

“The difference can be attributed primarily to punitive damages,” said Susan Bocamazo, Editor of Lawyers Weekly USA. “Last year only two of the Top Ten verdicts included punitives, compared to six of the top verdicts this year. In other words, punitives from 2003 accounted for just 22% of the total money awarded in the Top Ten verdicts, but in 2004, punitives accounted for 70% of the total, and the average punitive award was 13 times larger than the previous year.”

In addition to large awards, this past year’s list was also important in various other ways. In the #7 verdict, for example, lawyers for the family of a boy killed by Islamic terrorists established a new cause of action that will make it possible to go after domestic funding sources for international terrorists. The #2 verdict is the largest award by a factor of 10 against the manufacturers of the diet drug fen-phen, while the #5 verdict was Ford’s first defeat involving Explorer rollover accidents after building an impressive record of 13 consecutive defense verdicts.

PRIVACY

FBI KEEPING RECORDS ON PRE-9/11 TRAVELERS

If you are among the millions of Americans who took airline flights in the months before the Sept. 11, 2001, terrorist attacks, the FBI probably knows about it -- and possibly where you stayed, whom you traveled with, what credit card you used and even whether you ordered a kosher meal. The bureau is keeping 257.5 million records on people who flew on commercial airlines from June through September 2001 in its permanent investigative database, according to information obtained by a privacy group. Privacy advocates say they are troubled by the possibility that the FBI could be analyzing personal information about people without their knowledge or permission. The data are called passenger name records, or PNR, and can include a variety of information such as credit card numbers, travel itineraries, addresses, telephone numbers and meal requests.

IRIS SCAN TEST ON TAP FOR JFK AIRPORT PASSENGERS

International travelers will soon be able to zip through JFK Airport with the blink of an eye. The airport will be home to a new pilot program that uses high-tech eye scans to speed pre-registered passengers through security and customs checkpoints. Travelers who voluntarily enroll in the eye-scan program must undergo an extensive background check, including criminal history reviews, fingerprinting and a face-to-face interview with a homeland security official. Once approved, they will receive a special “smart card” that holds their passport and iris details. When they arrive at JFK, the pre-approved passengers can skip the long lines at customs and head straight to special kiosks, plug in their smart card and have their eyes scanned. Provided their eyes match the records held in the smart card, the travelers can grab their bags and enter the country “without routine Customs and Border Protection”.

GPS PROLIFERATES AS COSTS FALL; PRIVACY STRAINED

John Phillips works for Satellite Security Systems, or S3 -- one of a growing number of private companies providing satellite tracking services to anyone willing to pay. Once a fabulously expensive tool for the military, the technology is becoming part of everyday life, spawning dozens of new uses. S3’s clients include school districts, state and federal government agencies, police departments and companies. But there are plenty of individual customers, too -- people interested in keeping tabs on new teenage drivers, Alzheimer’s patients, or philandering spouses.

The position of vehicles or people is determined by gear they carry that includes Global Positioning System, or GPS, technology, which uses a network of satellites orbiting the Earth to pinpoint the location of things on the ground. The information is then beamed to S3’s computers. On a recent weekday, the screens were flashing through maps almost too quickly for the human eye to process. A computer technician was making his way along Sully Avenue in Centreville. Milk delivery trucks were swarming all over Houston, making their morning drop-offs. Tank cars of oil were traversing the Midwest.

Phillips said the tracking systems have helped increase security as well as efficiency for those who use them. “We look for anything out of the normal and can get a sense of the big picture of how things are moving around in a particular area in a way that couldn’t be done before,” said Phillips, who is now chief executive of S3.

FBI RETIRES CARNIVORE, DECIDES COMMERCIAL PROVIDERS WILL BE SUFFICIENT

FBI surveillance experts have put their once-controversial Carnivore Internet surveillance tool out to pasture, preferring instead to use commercial products to eavesdrop on network traffic. Two reports to Congress obtained by the Electronic Privacy Information Center under the Freedom of Information Act reveal that the FBI did not use Carnivore, or its rebranded version “DCS-1000”, at all during the 2002 and 2003 fiscal years. Instead, the bureau turned to unnamed commercially-available products to conduct Internet surveillance 13 times in criminal investigations in that period.

Carnivore became a hot topic among civil liberations, some network operators and many lawmakers in 2000, when an ISP’s legal challenge brought the surveillance too’qs existence to light. One controversy revolved around the FBI’s legally-murky use of the device to obtain e-mail headers and other information without a wiretap warrant -- an issue Congress resolved by explicitly legalizing the practice in the 2001 USA PATRIOT Act. The new documents only enumerate criminal investigations in which the FBI deployed a government-owned surveillance tool, not those in which an ISP used its own equipment to facilitate the spying. Cases involving foreign espionage or international terrorism are also omitted.

RECENT DEVELOPMENTS SHOW BIOMETRICS STILL HAS MUCH TO PROVE

Biometrics is widely touted as the Holy Grail of security. But like the legendary cup, it promises much while remaining impossible to attain. The idea of security based on the person is a popular, and its value cannot be discounted. However, its reliability, costs and usefulness to the private sector are a lot more questionable. The idea of using aspects of someone’s physiological make-up, from fingerprints to DNA, to assure identity is not new. In fact, it is so old that it can be traced back thousands of years to the time when the Egyptians built the pyramids.

From the early days of ink fingerprinting to today’s high-tech iris scanners and DNA-based solutions, biometrics has always had a role to play in identifying the so-called “bad guys”. Watch any number of modern-day thrillers or sci-fi movies and it will not be long before fingers and eyes are being chopped and popped for someone to bypass a biometric security system. Historically, biometrics in the form of fingerprinting has been used by police forces to catalogue and identify criminals, while maintaining DNA databases have been the preserve of the medical and research communities. More recently though, biometrics has been touted as the latest weapon in the “War Against Terror”. The public sector has gone potty over new biometrics initiatives to protect the nation’s borders -- not just from terrorists, but also unwanted asylum seekers. From passports to ID cards, biometrics solutions are being scrutinised and tested across many government departments.

No matter how excited the public sector gets though, what is the current state of biometrics in the private sector? And, more importantly, is there anything in this for the channel? Biometrics vendors have a way to go to convince everyone that their technology is up to the job of identifying an entire nation on a regular basis. The public sector might be leading the way, but the private sector has yet to be convinced by the hype.

U.S. BIOMETRIC PASSPORTS FAIL EARLY PRIVACY TESTS

U.S. federal officials, eager to step up controls on people entering the country, are preparing to issue passports with embedded personal and face-recognition data. A good plan to increase security it may be, but poorly executed it will put individuals’ privacy at risk. The U.S. Department of Homeland Security has spent the past six months testing biometric passport prototypes and wants to roll out the new technology as soon as possible. The passport’s chip will store more than just the holder’s name. It will store biometric facial recognition scan data to help a computer recognize the holder by, for instance, the distance between their eyes. It will also contain a passport photo in digital form, as well as personal data including name, birth date and birthplace, gender and passport number.

Other countries, as well, are adopting passports with electronic data, under a specification developed by the International Civil Aviation Organisation (ICAO). The organization has created the specifications for most of the world’s passports for more than 50 years. U.S. Homeland Security officials say that the new passports go a long way toward preventing people from using another person’s passport. The passports also permit touchless data transfer, meaning that a passport agent can collect the data without connecting the passport’s chip physically to a computer. Unfortunately, the personal information is stored in unencrypted form. Worse, touchless technology might let someone with the right equipment read the personal information at a distance.

Officials are developing workarounds to prevent so-called skimming, but until they do, the contactless technology poses a threat. Instead, officials should use smart cards that must be physically connected before they will divulge their data. Issuers should also encrypt the data included on a passport.

LAW

MONEY-LAUDERING LAWS ENFORCEMENT WAVE HITS MIAMI-DADE BANKS

Bank regulators have ordered Eagle National Bank of Miami to improve compliance with the Bank Secrecy Act as part of stepped-up efforts to enforce anti-money laundering laws. The enforcement action against Eagle is the third regulators have publicly issued against Miami-Dade banks since October. A Miami accountant said he knew of five more that are pending regarding the secrecy act. In a consent order dated Dec. 20, the U.S. Office of the Comptroller of the Currency (OCC) also ordered Doral-based Eagle to stop lending to businesses affiliated with Jaime Gilinski, the Colombian-born chairman of its parent, Eagle National Holding Co. The consent order, one of regulators’ strongest enforcement actions, did not cite any violations of the secrecy act. The law requires banks to have systems to detect suspicious deposits and other transactions.

Miami Beach-based Beach Bank and Coral Gables-based The International Bank of Miami also agreed to improve their compliance with the secrecy act. Industry officials expect the OCC, which regulates national banks, and other regulators will soon release several other orders against South Florida banks. Regulators are targeting banks they feel have been lax in adding staff and computer systems to comply with the secrecy act and the 2001 USA Patriot Act, whose requirements include expanded background checks on new customers.

At least five South Florida banks have recently agreed to enforcement orders on secrecy act issues that regulators have not yet released on their Web sites, said Frank Gonzalez, a partner in Miami-based accounting firm Morrison, Brown, Argiz & Farra. The banks are negotiating terms of improvements they will have to make, said Gonzalez, whose firm does audits, tax work and other services for about 30 South Florida banks. Five banks that have not been clients of his firm have contacted Gonzalez, asking for assistance in complying with pending enforcement orders.

CONGRESS SHOULD RESTRAIN THE PRESIDENT

Something surprising was said during the debate on the intelligence reform bill. Rep. Carolyn Maloney (D-N.Y.) declared, “We will see today or this week who is running the country, powerful [congressional committee] chairmen or the president of the United States.” It is surprising that a Democratic member of Congress would want to grant such power to a Republican president. Unfortunately, the only thing surprising about it is that it came from a Democrat. It is usually members of the president’s own party who declare that Congress’s role is to do what the president asks. For instance, when President Bush proposed a sequel to the PATRIOT Act, a Capitol Hill Republican told the New York Times, “We have to be as supportive as we can of the president.”

Neither Maloney nor the anonymous Republican displayed the attitude James Madison expected members of Congress to have toward the president. The president is not a dictator. He does not “run the country”. Indeed, his job under the Constitution is to “take care that the laws be faithfully executed”. But “all legislative powers herein granted” are granted to Congress. It is Congress’s responsibility to make the laws, not to delegate its lawmaking power to the president. Advocates of an imperial presidency ask who comprehends the general will of the American people. Their answer: the one official elected by all the people -- the president. Unlike Congress, they believe, he represents the national interest, not just the parochial interests of states and vested interests. The voters have chosen the president, and Congress should carry out his Sun God-like “mandate”. If Congress refuses to execute the general will, then presidents increasingly claim the power to rule by decree, through executive orders.

Such an idea is poisonous. It would replace the constitutional safeguards against majoritarianism with a president virtually unconstrained in his ability to do good, as he sees it, for the people. Congress has an important constitutional role. Too often we assume that only the Supreme Court has the duty to uphold the Constitution. In fact, every person elected or appointed to office takes an oath to “support and defend the Constitution of the United States”. The first duty of every official is to act within the authority of the Constitution and to ensure that other officials do so as well.

Recent presidents have blithely exceeded the powers granted to them under the Constitution. They should be held accountable for those abuses of power -- by Congress. Thanks to its negligence, Congress bears a significant part of the blame for presidential excesses. If they would like to curb executive excesses, members of Congress may want to turn their attention to four tasks: limit the President’s war powers, stop the abuse of executive orders, stop delegating lawmaking authority to the federal bureaucracy, and consider the Constitution when passing laws.

HOMELAND INTELLIGENCE CHIEF HUGHES WARNED CIVIL RIGHTS WOULD HAVE TO BE “ABRIDGED”

Eight months before the White House appointed him the Homeland Security Department’s top intelligence official, retired U.S. Army Gen. Patrick M. Hughes told a public forum at Harvard last year that the government would have to “abridge individual rights” and take domestic security measures “not in accordance with our values and traditions” to prevent terrorist attacks in the U.S.

“What I’m about to say is very arrogant -- arrogant to a fault,” said Hughes, a former chief of the Defense Intelligence Agency (DIA), in previously unreported remarks at a March 2003 Harvard University forum on “Future Conditions: The Character and Conduct of War, 2010 and 2020. “Set aside what the mass of people think. Some things are so bad for them that you cannot allow them to have them. One of them is war in the context of terrorism in the United States,” Hughes said, according to a transcript obtained by CQ Homeland Security.

“Therefore, we have to abridge individual rights, change the societal conditions, and act in ways that heretofore were not in accordance with our values and traditions, like giving a police officer or security official the right to search you without a judicial finding of probable cause,” said Hughes. Neither the department nor Hughes would comment for the record on whether Hughes stood by his comments in the year he has held the senior DHS intelligence post.

“Roger Cressey, who ran the Transnational Threats unit of the National Security Council in the Clinton administration, took issue with Hughes’s remarks. “It’s a little surreal. I don’t agree with that,” Cressey said. They “fuel the conspiracy theorists and those on the extreme left and right who believe the government is only out for one thing: to screw with the American people. I don’t think it’s a helpful way of advancing the discourse.”

An official with the 9/11 Public Discourse Project -- the lobbying effort created by the former members of the 9/11 commission -- drew a stark contrast between Hughes’s reflections and the 9/11 commission’s position. “The choice between security and liberty is a false one,” said the official, who agreed to talk only on condition of anonymity to protect the project’s efforts from charges of partisanship. “Our history has shown us that insecurity threatens liberty. Yet if our liberties are curtailed, we lose the values that we are struggling to defend,” the official said.

TO WHOM DOES THE BILL OF RIGHTS APPLY?

My article on Torture has also prompted some dissent -- mostly contesting my statement that the Bill of Rights applies equally to American citizens and non-citizens. I made the mistake in my article of focusing on the fact that the only references to “citizens” in the Constitution have nothing to do with the rights of the people. That is true but it is a roundabout way of making the case. The important point is that the Constitution does not apply to Americans, it does not apply to citizens, it does not even apply to “people”. It applies to the federal government. The body of the Constitution tells the federal government what it is allowed to do, and in some places it explains how to do it (election procedures and such).

The Bill of Rights tells the federal government what it is not allowed to do -- do not infringe on the right to keep and bear arms, do not conduct unreasonable searches and seizures, do not deny an accused a speedy trial, do not deny an accused a trial by jury, do not exercise any power not authorized in this Constitution, etc. Where exceptions were meant to apply, they are specifically stated. And there are no exceptions stated for any type of guns, for any type of speech, for any specific crimes, or for crimes where non-citizens are involved.

My overriding point in the article was that, until a suspected “terrorist”" gets a fair and impartial trial, you do not know whether he is a terrorist. So even if you think non-citizen terrorists have no rights, how do you even know for sure that they are terrorists -- or that they are non-citizens -- until every facet of due process has been applied. The Bush administration is trying to establish procedures whereby it can lock up a suspect for life without giving him access to an attorney, without any judicial process, without even letting him tell his family where he is.

In the U.S., human rights groups complain that the government is imprisoning and torturing American citizens in violation of the Bill of Rights. But the President tells the press and public not to worry -- that only non-Americans are being imprisoned and only terrorists with vital information are being tortured. What if you cannot prove that you are neither a foreigner nor a terrorist, because there has been no impartial judicial hearing in which you have the benefit of an attorney, the right to confront your accusers and cross-examine them, and the judgment of a jury of your peers? But don’t worry; this is not really happening. All those people confined in Guantanamo, in Iraq, in Afghanistan, and in other countries to which the U.S. government has transferred people? They are certainly guilty and they are certainly foreign -- or our government would never have put them in prisons. So go back to sleep. Your government will protect you.

EVERYONE IS A CRIMINAL

I am a criminal. Yes, that is right. I, R. Lee Wrights, being of sound mind and aging body, do solemnly acclaim and justly affirm that I am a criminal. And, if I do my job correctly, by the time you finish reading this you will realize that you are a criminal also, and that something needs to be done about it. My premise is simply that government, not only at the federal level but in particular at the state and local level, has grown so gorged and bloated that it has become virtually impossible for any of us to remain “law-abiding citizens”. In order to be law-abiding, one must first know and understand the law. Now I ask you, in today’s society how many people really know, let alone understand, “the law”? Moreover, how many policemen really know or, more importantly, understand the law? Do the lawyers and judges, who are charged with the protection of America’s most sacred document, even understand the law? Judging from the number of appealed judgments these days, it would appear that even these “protectors of justice” are unable to effectively untangle the thicket of jurisprudence created by the endless loads of fertilizer produced by the various legislatures.

Government has simply made it too easy to break the law for us not to be criminals. I mean, you are required to have a license or permit to do practically everything. That means that you must go to a bureaucrat somewhere and ask their permission before you proceed or you become a criminal. If you want to drive to work, you must first have a paper from the State that says you are allowed to operate a vehicle. If you want to get a job to support your family, you cannot do so without a number supplied by the benevolent nannies that soil the seats of CONgress. How long does this list have to be before you realize that if you have to ask permission to do everything, not only will you eventually slip up and become a criminal, but you have also ceased to be free? With every new law enacted another little piece of liberty dies.

SECRETS OF WHO PAYS WHAT TO THE SICILIAN MAFIA REVEALED

An accounts book has fallen into the hands of the Sicilian police that reveals for the first time the rules and regulations which dictate who must pay pizzo -- protection money -- to the Mafia, how much they must pay, and who is exempt. The ledger, which details illegal protection payments for the Vucciria area of Palermo, provides the most detailed picture yet of how the Mafia continues to control commercial activity in the Sicilian capital, more than 10 years after it gave up the gun. Line-by-line, street-by-street evidence of Mafia extortion is contained in the accounts book confiscated from a small-time mobster arrested recently in Palermo.

Leaked to La Repubblica newspaper, the book reveals that the Mafia operates a graded tariff, with small shops paying €500 to €1000 per quarter, upmarket shops such as jewelers paying €2,500 to €3,000 and big shops paying €5,000. Shopkeepers with family members in prison are exempt, as are those with relatives in the police force and those who suffer a bereavement, who are let off a single quarterly payment. New shops setting up in the area are obliged to make a hefty downpayment. Mafiosi coming into the area from outside have to pay 3% of their take to the local bosses.

The quarterly payment is collected by young mobsters with nice manners who usually have no criminal record. Most shopkeepers, claims La Repubblica, are happy to pay up. The fact that the jewelers of Palermo’s Via Giovanni Meli do not need to lock their doors is thanks to the pizzo. “In Giovanni Meli it is forbidden to rob, forbidden to harass. The 30-odd jewellers along the street all have their doors open.”

OPINION & ANALYSIS

CERTAIN ASSUMPTIONS ABOUT THE NATURE OF THE WORLD ARE SUSPECT

Post-World War II U.S. foreign policy, including that of the Bush administration, has been based on certain assumptions about the nature of the world. Unfortunately, most of those assumptions are suspect. The most notable assumption is that if the U.S. government (USG) does not dominate the globe militarily and ensure security through wanton armed interventions, the world will fall apart. Yet the USG did not even exist for the vast majority of recorded history and the world got along just fine using what scholars call a “balance of power” among great powers. In fact, often times the USG has invaded other countries and removed their governments for no good reason -- for example, the U.S. invasion of Panama in 1989 and the recent invasion of Iraq. Other times, the USG has used the CIA to remove a foreign country’s more democratic government and replace it with a less democratic one that was friendlier to U.S. interests -- for example, in Iran in 1953, Guatemala in 1954 and Chile in 1973.

Such examples of recent aggressive U.S. behavior should cast doubt on a couple of other assumptions held by the U.S. policy elite and general public. The first is that democracies are more peaceful than more authoritarian governments. Scholars have shown that no empirical support exists for this proposition. In fact, newly minted democracies go to war at greater frequency than more autocratic states. The second is that democracies do not go to war with each other -- the democratic peace theory. The validity of this theory is also disputed among scholars.

Even if these two dubious propositions were true, the costs of all of the wars needed to convert autocratic countries to democracies would be too high. In addition to expending much blood and treasure, all U.S. wars have eroded civil liberties at home. The last assumption -- given to us by the president but eagerly embraced by the interventionist foreign policy elite -- is that al Qaeda is attacking the U.S. because of its freedoms. The Defense Science Board, made up of high-powered consultants to the Department of Defense, recently issued a report debunking this notion and accurately noting that al Qaeda attacks the U.S. because it hates U.S. interventionism in the Islamic world. However, the U.S. National Intelligence Council -- a consensus of the U.S. intelligence agencies -- apparently still does not get it. Bin Laden’s heinous deliberate attacks on civilians should not be condoned, but he does have a motive beyond merely getting a thrill out of killing.

The USG’s propaganda machine excessively demonizes the motives of anyone or any country that takes actions the U.S. does not like and asserts that U.S. motives are only idealistic and pristine. No one in the Islamic world -- or in the entire world, for that matter -- believes the latter. The USG’s propagandistic “hoo-ha” is really meant for the American public, the only party that has been bamboozled into believing it.

CHOSEN NATION?

During the 2000 presidential election campaign, George W. Bush famously said that the United States needed a “more humble foreign policy”. During the 2004 presidential election campaign Bush’s opponent, John Kerry, argued -- in essence -- that America needed to become a more humble empire. Bush (our “make the world safe for democracy” president and recent convert to nation building) disagreed with his rival, of course, at every turn. What a difference four years can make -- and, in this instance, definitely not for the better. In order to more fully understand America’s movement toward and open admittance of its renewed nationalism, militarism and imperialism, it is important to look for “first causes”. In his 2004 book, Myths America Lives By, Richard T. Hughes does some work in this regard on our behalf.

Hughes, a Distinguished Professor of Religion at Pepperdine University, argues persuasively that America’s recent foreign policy misadventures did not begin or end with the mendacious activities of the neoconservative cabal surrounding the Bush administration. These calamitous policies have far too much support among the American people in general for us to so easily and totally blame them on such a sorry lot of pseudo-intellectuals as the neoconservatives. Hughes -- like Walt Kelly’s cartoon character, Pogo -- has seen the real enemy and “it is us”.

Hughes instructs us that the English word myth is derived from the Greek word mythos, which literally means “story”. Our national myths become, then, the stories that we Americans tell ourselves about the history, meaning, purpose and destiny of our country. Although almost all of these stories are accepted with blind faith (and, largely, in an unconscious manner), some are much more grounded in reality, history and truth than others. Perhaps the best example of what Hughes writes about is his description of the myth of “America as the Chosen Nation”. Hughes describes wonderfully how the myth of America as the Chosen Nation became central to the story Americans tell themselves about their country’s founding, meaning and purpose. To a point Hughes has no problem with the story of America as a seemingly Chosen Nation. It is when versions of this myth become absolutized that the author begins to point to the dangers of taking the story too literally.

The 2004 presidential election demonstrated once and for all that these myths still have religious power in America. Patriotism is love of one’s country. Nationalism is a corruption of this natural affection and replaces it with the worship of the nation-state as a civil religion. As such, nationalism is a false faith that represents the chasing after idols. But as the Chinese say, “A journey of a thousand miles begins with one step.” Let our initial steps be to understand the “first causes” of our civil religion and -- should we choose to worship at its altar in any way -- to engage in its practices in the most humble manner possible.

How Americans were seduced by war.

Americans have been betrayed. Sooner or later Americans will realize that they have been led to defeat in a pointless war by political leaders who they inattentively trusted. They have been misinformed by a sycophantic corporate media too mindful of advertising revenues to risk reporting truths branded unpatriotic by the propagandistic slogan, “you are with us or against us”. What happens when Americans wake up to their betrayal? It is too late to be rescued from catastrophe in Iraq, but perhaps if Americans can understand how such a grand mistake was made they can avoid repeating it. In a forthcoming book from Oxford University Press, The New American Militarism, Andrew J. Bacevich writes that we can avoid future disasters by understanding how our doctrines went wrong and by returning to the precepts laid down by our Founding Fathers, men of infinitely more wisdom than those currently holding reins of power.

Bacevich, West Point graduate, Vietnam veteran, and soldier for 23 years, is a true conservative. He is an expert on U.S. military strategy and a professor at Boston University. He describes how civilian strategists -- especially Albert Wohlstetter and Andrew Marshall -- not military leaders, transformed a strategy of deterrence that regarded war as a last resort into a strategy of naked aggression. The resulting “marriage of a militaristic cast of mind with utopian ends” has “committed the United States to waging an open-ended war on a global scale.”

The greatest threat to the U.S. is not terrorists but the neoconservative belief, to which President Bush is firmly committed, that American security and well-being depend on U.S. global hegemony and impressing U.S. values on the rest of the world. This belief resonates with a patriotic public. Bacevich writes, “in the aftermath of a century filled to overflowing with evidence pointing to the limited utility of armed force and the dangers inherent in relying excessively on military power, the American people have persuaded themselves that their best prospect for safety and salvation lies with the sword.” If Americans persist in these misconceptions, America will “share the fate of all those who in ages past have looked to war and military power to fulfill their destiny. We will rob future generations of their rightful inheritance. We will wreak havoc abroad. We will endanger our security at home. We will risk the forfeiture of all that we prize.”

Bacevich understands that the problem is not how to deal with terrorism but how to deal with the hubris, laden with catastrophe, that America is God’s instrument for bringing history to its predetermined destination. Being assigned such an exalted role creates the delusion that America’s virtue is unquestionable and its use of preemptive coercion is infallible. The new American militarism has abandoned the Founding Fathers, deserted the Constitution, and unrestrained the executive. War is a first resort. Militarism is inconsistent with globalism and with American ideals. It will end in abject failure. The U.S. has demonstrated that it cannot impose its will on a tiny part known as Iraq. American realism may yet reassert itself, dispel the fog of delusion, cleanse the body politic of the Jacobin spirit and lead the world by good example. But this happy outcome will require regime change in the U.S..

ABOLISH THE IMF

When the Argentine economy collapsed in December 2001, predictions of financial Armageddon abounded. Unless it adopted orthodox economic policies and quickly cut a deal with its foreign creditors, as it had done repeatedly (and to little avail) in the past, hyperinflation would surely follow, the peso would become worthless, investment and foreign reserves would vanish and any prospect of growth would be strangled. More importantly, the country would become an investment pariah, starved of any needed foreign capital to finance future growth.

How different things appear today. Just three and a half years after Argentina declared a record debt default of more than $100 billion, the largest in history, the anticipated disaster has not played out. Instead, the economy has grown by 8% for two consecutive years, exports have soared, and the currency has even begun outperforming the dollar on the foreign exchange markets. Contrary to expectations, investors are gradually returning (the stock market has more than quadrupled from its August 2001 lows) and unemployment has eased from record highs -- all without a debt settlement or the requisite good housekeeping seal of approval from the IMF.

Much ink has been spilled over the past few years suggesting the obsolescence of the U.N. or the World Bank, but somehow the IMF has escaped comparable scrutiny. Other than a few staunch golfing purists, most of us believe in the concept of taking a mulligan. And if the Argentina episode was an anomalous misstep in an otherwise stellar history, we would not be so hard on the IMF. But the singular lack of success of the Fund, especially over a series of emerging markets’ crises in the 1990s does call into question the organization’s long term viability as a positive reforming force in global finance. If anything, its record over the past decade has been one of expanding moral hazard and exacerbating underlying global financial fragility.

The IMF is so imbued with the ideology that fully deregulated and liberalized markets are the optimal way to organize economies, developed or developing, that it is inconceivable that they would advocate the sort of policy mix that served Chili so well. Which does lead one to question what the IMF’s true role is today? The prevailing neo-liberal development paradigm -- enshrined as the Washington Consensus of the WTO, the World Bank, and the IMF and echoed in the counsels of the Federal Reserve and U.S. Treasury -- is for the most part useless in dealing with the types of crises that afflicted Argentina and other emerging market economies over the past 20 years. The IMF, however, does enable these same failed development strategies to be perpetuated under the guise of a “neutral multilateral” institution. Because it continues to do Uncle Sam’s dirty work for it, it will likely be allowed to continue in its present form, inflicting more misery on the developing world unless more nations begin to have the courage to follow Argentina’s precedent.

REAL OR ABSTRACT: THE APPLICABILITY OF THE LAWS OF ECONOMICS

Economic principles are crucial not only to arguments for economic freedom, but also for personal and political liberty and for peaceful coexistence. Yet many people are ignorant of economics, or have heard some misleading or incorrect information. Still more people do not see how economic principles can be applied to everyday life, liberty, and the pursuit of happiness. The trouble that many people seem to have applying economics, or accepting the libertarian view that economics is much more widely applicable than traditionally believed, is that they view economics as an abstraction, a set of patterns or guidelines, or some philosophy or social science that attempts to model reality. Since economics is viewed only as a model, when economics and reality do not coincide it is simply assumed that the model is flawed, and thus economics is seen as just one way of looking at things, that is sometimes useful and often inaccurate.

Some economics is abstraction. The supply and demand curves, for example, are abstract, not real. There are no actual curves, physically manifest in the real world, that are supply and demand curves. They are a mathematical model, and as such, they are useful only in helping us to visualize the data they represent -- not to predict outcomes with great accuracy. On the other hand, the core principles of Austrian economics are real, universally applicable laws. In the real world, physically, things are produced and consumed, they are supplied and demanded. The laws governing these actions are just as real as the laws of the physical world.

Every action one takes involving any resource that is scarce, anything that can be spent, is an economic action. Whether you are spending money or material goods, or time, attention, or effort, or whether you are spending any social capital, good will, influence, or credibility – any time you shrink your pool of anything that is available to you, for any reason, you are engaging in an economic action. Taking these actions while ignoring the rules governing them is just as potentially hazardous as driving a car without knowing how to steer, or walking around on top of a steep mountain while ignoring the laws of gravity.

Whenever an individual acts to meet his or her desires, he or she is subject to the rules of physical reality -- of cause and effect, of scarcity, and of gravity and other physical laws. He or she is also subject to the rules of economics. Free trade allows the most efficient specialization, which means the greatest productivity. Disasters are bad. People trade things they have for things they want more. Scarcer goods are more expensive. These and other laws are immutable and both empirically and aprioristically proven.

Abstraction is a tool some economists overuse, but this should not be construed to deny the validity of economic laws. The free market is not an abstraction but an actual state of affairs, one that is to be striven for. The scope of economics is wide, and the rules thereof apply to things you might not expect them to -- they apply to any action taken to meet a desire. The denial of economic reality can be as disastrous as the denial of physical reality. The belief that you can defy economics is similar to the belief that you can fly by sprinkling fairy dust on yourself and thinking happy thoughts -- it is a fantasy that could prove harmful or fatal if taken too far.