Offshore News Digest for Week of March 21, 2005

GLOBAL BUSINESS

MOVE TO AUTONOMY FOR PAPUA NEW GUINEA’S RESOURCE-RICH BOUGAINVILLE IS ON TRACK

UN-backed plans to intall an autonomous government in Papua New Guinea’s long-troubled island province of Bougainville are on schedule, with the elected administration due to be in place by June 30, a senior PNG minister said. Inter-Government Relations Minister Peter Barter said elections for the provincial government should be held in April and May as the next step in formally ending a 10-year separatist conflict which left up to 15,000 people dead. Bougainville, which is geographically part of the Solomons group and is ethnically distinct from the rest of PNG, descended into rebellion and anarchy in the early 1990s. The rebellion was sparked in large part by anger over the lack of local gains from the formerly Australian-run Panguna gold and copper mine, once was one of PNG’s main export earners.

BERMUDA: SUN MAY FINALLY SET ON THE OLDEST PART OF THE BRITISH EMPIRE

It has been almost exactly 400 years since Admiral Sir George Somers and his crew, shipwrecked en route to Virginia, were fortuitous enough to be washed up on the shores of Bermuda. In the ensuing centuries Britain’s oldest remaining colony, named after the Spanish captain Juan de Bermúdez, who first sighted the uninhabited islands, has developed as a hub of international business and tourism – equally famous for its offshore banking as for its miles of beaches. Part Atlantic and part British outpost, visitors are as likely to be confronted by bright red Victorian post boxes as they are by a policeman wearing the obligatory Bermuda shorts and long white socks.

But change may be on its way. Having long benefited financially from its close links to Britain and its geographic proximity to the U.S., there are some on the island who think Bermuda would be a lot better off by completely cutting its ties to the Crown and standing by itself. This demand for independence is being led by no one less than the island’s leading politician – Premier Alex Scott.

While there has been talk of a free Bermuda since the 1960s, when Britain was granting independence to many of its colonial possessions, Mr. Scott, leader of the Progressive Labour Party (PLP), took the issue to a new level in December when he announced the establishment of an independent commission to investigate the possibility of independence and to report back. The motivation for Mr. Scott’s call for independence appears to be a mix of black nationalism and anti-colonialism, closely linked to the racial divide of the island, which is 60% black. One of the largest hurdles to Mr. Scott’s dream of independence appears to be public opinion. Recent polls suggest more than 60% of people are opposed to independence while estimates as to the number of people who favour such a move range from 20 to 30%.

Bermuda government pledges to take knife to red tape.

Government says it will reduce the red tape for investment funds incorporating on the Island in a bid to “streamline processes and pare down unnecessary bureaucracy”. The move, announced yesterday by Finance Minister Paula Cox, is designed to enhance the efficiency of the incorporation process “without in any way diluting Bermuda’s rigorous vetting and approval standards.” The steps are likely being taken in a bid to attract greater business from the mutual fund and hedge fund sectors - areas where Bermuda has prospered in years past. The changes put Bermuda’s approach in line with rival offshore domiciles.

Government’s announcement comes after Opposition Senator E.T. (Bob) Richards told his Senate colleagues last week that he had grave concerns on the level of regulation being adopted by the Island, saying it was putting Bermuda at a disadvantage against other offshore domiciles. And he named the Cayman Islands as being one jurisdiction that the Island was losing out to on the mutual fund front. A similar charge was laid against the Island on the hedge fund front last year when Joel Press, the New York-based head of the hedge fund practice for Ernst & Young, told an industry audience here that Bermuda was losing out to the Caymans in attracting business from the rapidly growing sector. In specific, Mr. Press said that the process of getting regulatory approval took too long there. It is understood that incorporating a fund in the Cayman Islands or British Virgin Islands can take as little as 24 hours, for those that meet requirements.

MAJOR TOURIST DEVELOPMENT PLANNED FOR GIBRALTAR

According to a headline article published in the Spanish newspaper La Razon under the headline “Gibraltar, from tax haven to real estate business”, the governing authorities in Gibraltar aim to convert the rock into a major tourist destination. The paper claims that British architect Norman Foster has designed a macro marina project with 500 berths for yachts and cruisers of all sizes, hotels, leisure complexes with cinemas, a museum and a shopping center, and 15 buildings including 4 high-rise apartment blocks the largest of which has 26 floors.

If the story is true, there will be much protest in Spain where political and business leaders are fiercely critical of the the fiscal status of Gibraltar where the VAT tax is still not applied. Such are the tax advantages of having a business in Gibraltar that there are more offshore companies registered on the rock than inhabitants. Meanwhile, tourism is a key sector of the Spanish economy, especially in southern Spain, and Gibraltar is located right in the middle of the Costa del Sol, one of Spain’s most popular tourist destinations.

INVESTMENT DIPLOMACY BETWEEN MALTA AND FRANCE

In recent years there has been a shift in the focus of diplomatic work, emphasising increased contacts with the economic and financial sectors – a fact which is clearly underlined by the furthering of Franco-Maltese business exchanges. The principal attraction for French companies to come to Malta is to be found in the comparatively cheaper skilled labor force, the more flexible and less costly social security regulations, a relatively good shipping network and the use of English (increasingly, a pan-European and pan-Mediterranean language). Hence, French pharmaceutical laboratories manufacturing generics, vitamins, and undertaking research, as well as software companies are looking into outsourcing solutions and other openings.

Malta is explaining to French investors that, more than anybody else in Europe, it can help them in doing business, for example, with Libya, through joint ventures with established Maltese companies and the use of the island’s geographical location. Furthermore, while eschewing any wrongfully held impression of it being a tax haven, Malta can nevertheless also legitimately insist on its competitive fiscal regime, notably for ITCs (international trading companies).

FLOW OF ILLEGAL IMMIGRANTS TO U.S. UNABATED

Despite tighter border enforcement and a post-Sept. 11, 2001, economic slump, the number of illegal immigrants in the U.S. has continued to grow steadily, with many moving into states that traditionally have small foreign-born populations, according to a new report. Based on Census Bureau and other government data, the Pew Hispanic Center, a private research group in Washington, estimated the number of undocumented immigrants at 10.3 million as of last March, an increase of 23% from the 8.4 million estimate in 2000. More than 50% of that growth was attributable to Mexican nationals living illegally in the U.S., the report said.

Most of the overall growth has been in states that previously had small foreign-born populations, including Arizona and North Carolina, as well as the Washington metropolitan area. The combined population of illegal immigrants in Maryland, Virginia and the District increased almost 70% from an estimated 300,000 in 2000 to about 500,000 in 2004, said demographer Jeffrey S. Passel of the Pew Hispanic Center. The reason, he said, is simple. “What drives the growth in immigrant populations in general is employment opportunities,” Passel said, especially in fields that do not require formal education. Specifically, Passel cited the booming construction industry in Virginia, Maryland and the District; the service industry in Washington; and poultry processing plants on the Eastern Shore of Maryland.

Pew Hispanic Center Director Roberto Suro said that the number of illegal immigrants continues to grow at the same rate as in the 1990s – approximately 485,000 a year – “despite significant efforts by the government to try to restrain the flow ... at the border.” Of particular note, said Suro and Passel, was the growth of large undocumented populations in states other than those with traditionally large foreign-born populations, such as California, Texas, Florida and New York. Joining those states in 2002 were Arizona, with an estimated 500,000 illegal migrants, and North Carolina, with 300,000. “It’s clear that America’s lost control of its border,” said Steven Camarota, director of the Center for Immigration Studies, which favors tighter immigration controls.

6 million illegals from Mexico live in U.S.

More than 6 million illegal-immigrant Mexicans now live in the U.S., making up more than half of the nation’s nearly 11 million illegal aliens, a new study finds. The report, by the Pew Hispanic Center, found that illegal immigrants have dispersed far more widely than 15 years ago, with nearly 40% now living outside of the six states that traditionally have attracted the most immigrants. Arizona is now 5th on the list, vaulting ahead of Illinois and New Jersey and trailing only California, Texas, Florida and New York. Mr. Passel’s study found that between 80% and 85% of Mexican-born people now in the U.S. came there illegally.

President George W. Bush suffered a symbolic setback in his border policy at home last week when the Senate voted to fully fund the 2,000 new border patrol agents called for in fiscal year 2006 by last year’s intelligence overhaul bill. That bill sought to double the number of border patrol agents by adding 2,000 per year for five years. Mr. Bush signed that bill in December, but in his budget request asked for only 210 new agents – a move criticized by both Democratic and Republican lawmakers and culminating in the unanimous but nonbinding Senate vote last week. Mr. Passel’s study estimates that 485,000 new illegal immigrants arrived every year between 2000 and 2004, an increase of 23%, to 10.3 million in 2004. Given that rate of growth, he calculated there are nearly 11 million now.

Other estimates go as high as 3 million illegal border crossings per year, though many of those are multiple crossings for the same person, and not all of those who cross stay in the country. As for the total illegal population, a recent estimate by Bear Stearns Asset Management put the figure as high as 20 million. Illegal aliens make up 29% of all immigrants, while another 61% are legal permanent residents, 7% are refugees and 3% are there temporarily but legally. The vast majority of illegals are under age 40. Only 1.1 million, or about 10 percent, are 40 or older.

America’s porous borders.

After the Sept. 11 attacks, it was shocking to learn how easily the hijackers entered the United States. What is shocking today is how little progress has been made in securing America’s borders. Terrorists may well be entering the country by crossing from Mexico or Canada. But it is just as likely that they are coming in the way the Sept. 11 hijackers did: at airports, slipping through the Swiss-cheese security system now in place. Until this year, immigration officials routinely handed phony travel documents back to people caught trying to enter illegally, and even now visitors are not always required to show the simplest of evidence that they are truly here on a visit, a return ticket. The government still does not have a workable system for monitoring whether visa holders actually leave when their visas run out.

Only two of the 27 “visa-waiver countries”, whose citizens can enter the U.S. without visas, are expected to meet the October 26 deadline for having new machine-readable passports – which was extended from October 1, 2003. And U.S.-Visit, a much-heralded new system for tracking arrivals and departures, has been rolling out at a glacial pace. One of the most important tasks Michael Chertoff, the new secretary of the Department of Homeland Security, and Congress jointly face is pulling in the welcome mat for would-be terrorists. We now know that Al Qaeda has travel facilitators, who are experts at exploiting the weak points in America’s border security. The U.S. government needs to act quickly and forcefully to make their jobs harder.

LATIN AMERICAN AND CARIBBEAN MIGRANTS SENT HOME $45.8 BILLION IN 2004

Economic migrants from Latin America and the Caribbean sent home $45.8 billion last year, 20% more than in 2003, according to a report to be published this week. Of the total, at least $8 billion (€6 billion) boosts savings or investment, contributing significantly to the region’s long-term economic prospects. So-called remittances have increased spectacularly since the financial crisis of the late 1990s, as a result of heavy emigration mainly to the U.S., Europe and Asia. An estimated 25 million Latin Americans are living and working outside their countries of origin. In addition, reporting techniques by central banks and other agencies have improved, says the report by the Inter-American Development Bank’s multilateral investment fund.

Latin America is the biggest single destination of remittances in a worldwide market estimated to amount to more than $120 billion. Donald Terry, manager of the fund, said that financial institutions, especially micro-finance institutions, were playing an increasingly active role in the market, reducing transaction costs and helping poorer families channel savings towards housing and small businesses. “The process is profoundly entrepreneurial,” says Mr. Terry. “Migrant laborers have become such an integral part of the world’s labour markets. These are transnational families, living and contributing to two countries, two economies, and two cultures at the same time.”

Micro-finance companies have been more active in central America and the Andean countries, partly because regulations there are less rigid than in larger economies such as Brazil. Competition in a market traditionally dominated by money-transfer companies has forced down transaction costs from more than 15% to less than 8%, which benefits migrants and their families. “We are hoping to cut these costs in half again over the next few years,” said Mr. Terry.

FORBES WEALTH RANKINGS TELL DARK STORY BEHIND RUSSIA’S BILLIONAIRES

The annual ranking of the world’s richest people in Forbes magazine is designed to trace the spectacular rise and fall of fortunes. But this year’s list – which shows Russia with an unprecedented 27 billionaires, a number surpassed only by the United States – also traces the path of Russia’s economy since the fall of communism in 1991. The rankings, experts on the Russian economy say, tell the story of a grossly disproportionate distribution of wealth, of the gap between the country’s superrich and ordinary citizens, and, in the case of the jailed oil magnate Mikhail Khodorkovsky, of how much the ability to be wealthy in Russia depends on the benevolence of the Kremlin. “It shows how screwed up things are,” said Marshall Goldman, author of The Piratization of the Russian Economy and associate director of the Davis Center for Russian and Eurasian Studies at Harvard University.

All of Russia’s billionaires, known at home as oligarchs, acquired their capital during the shady privatization era of the mid-1990s, when the post-Soviet government sold state assets worth billions of dollars for tiny fractions of their worth to a handful of well-connected entrepreneurs in insider deals. Now the oligarchs account for nearly one-third of the country’s total personal income, while 1 out of every 5 Russians subsists below the official poverty line of $38 a month. And the chasm between rich and poor continues to grow. The Forbes list “reflects the way the Russian economy was stolen in the 1990s,” said Anatol Lieven, an expert on Russia at the Carnegie Endowment for International Peace.

Most of the oligarchs made their fortunes in controversial deals involving oil, gas or other natural resources, which remain the bedrock of Russia’s economy. As oil prices have soared, so have the fortunes of Russia’s superrich. Unlike the U.S. robber barons of old, Russian oligarchs do not build factories at home, rarely set up charities, and invest mainly in companies based abroad.

NOVA SCOTIA TARGETS RICH IMMIGRANTS

Nova Scotia in Eastern Canada is pioneering a new way to attract skilled immigrants and business immigrants. Under Canadian law, provinces can set their own immigration rules under “provincial nomination programs”. Using this approach, Nova Scotia introduced an immigration program last year for immigrants to stimulate its economy and compensate for a declining birth rate. Under the scheme, immigrants paying C$130,500 are exempt from the federal points system and are granted landed status within a year rather than three years under normal conditions. The immigrant does not receive any of his or her “investment” back.

Immigration lawyers contacted for the article say that the system is faster, simpler and requires a smaller financial commitment than federal programs for business immigrants. The only role the federal government plays in Nova Scotia’s program is checking the health and security risk of potential immigrants. Nova Scotia’s Immigration Minister Rodney McDonald said that last year the province received just 1,500 immigrants, but hopes that this figure will rise to 3,700 per annum by the end of the decade. However, he also admitted that currently 60% of immigrants leave for Toronto, Montreal or Vancouver after arriving in Nova Scotia.

TAXES

PAYING INCOME TAXES VIA PLASTIC BECOMES GROWING TREND

As more Americans file their taxes electronically, they are also more likely to use credit and debit cards to pay the taxes due. Many consumers find that using plastic is convenient and boosts rewards points. The IRS said it received 950,715 credit and debit card payments in 2004, triple the volume of 2002. An additional 834,000 payments last year were automatically transferred from bank accounts, the IRS said [Ed: We assume they mean voluntarily].

“We’re seeing more than 20% growth a year, and we would expect that type of growth to continue for the foreseeable future,” said James Weaver, chairman and CEO of Tier Technologies, which does card processing of IRS payments.

Credit experts are concerned that, for some, the use of credit cards to pay taxes is a sign they are mismanaging money. David Jones, president of the Association of Independent Consumer Credit Counseling Agencies, said people who find they are short of money to cover taxes as the April 15 filing deadline approaches probably have not had enough withheld by their employers or they have not set money aside. Jones sees no problem charging taxes if the consumer can pay the bill in full at the end of the month. “But many can’t, so they’re essentially taking out a loan – at a very high interest rate – and that’s one of the worst things you can do if you’re already in trouble,” Jones said.

COALITION URGES IMMEDIATE WITHDRAWAL OF PROPOSED CLINTON-ERA IRS REGULATION

The Center for Freedom and Prosperity Foundation, joined by more than 40 of the country’s largest and most influential free-market groups, urged Treasury Secretary John Snow to permanently withdraw the proposed IRS regulation (Reg 133254-02) that would force U.S. banks to report deposit interest paid to nonresident aliens. Daniel Mitchell of the Heritage Foundation said, “This regulation should have been withdrawn more than four years ago. In a gross abuse of the rule-making process, the IRS is trying to use a regulation to overturn 84 years of well-established law.” Mitchell also noted that, “The proposed rule would drive capital to London, Zurich, Hong Kong, and other financial centers that would welcome an infusion of job-creating capital.”

The 4-page Coalition letter lists numerous concerns with the proposed regulation;; The IRS is abusing its regulatory authority, the proposed regulation flouts existing law, the rule promotes indiscriminate information sharing which threatens civil liberties and privacy rights, capital and foreign investment will flee the U.S. economy, the regulation will make U.S. banks less competitive, banks will face a heavy paperwork burden, the proposed regulation is bad tax policy, the IRS failed to perform legally required cost/ benefit analysis and the proposed regulation will undermine fiscal competition.

HONG KONG WILL ABOLISH DEATH TAX

One of the most significant measures included in this week’s Hong Kong budget is the proposed abolition of estate duty. “We will introduce the relevant bill into this council for deliberation as soon as possible,” said Financial Secretary Henry Tang Ying-yen. Estate duty is estimated to bring HK$1.5 billion in revenue for 2004-05. The government has been consulting on this step for the past year, and it is expected that legislation will be brought forward within the coming financial year. Responses to the consultation were varied, said Mr. Tang, with some contending that estate duty is a tax on the rich and helps redistribute income between the rich and the poor, but many others advocating abolition given its susceptibility to abuse and inequitable nature; and the need to help Hong Kong develop into the premier asset management centre in the region.

The tax is reasonably easily avoided through the use of trusts and other tax-planning techniques, giving rise to fears in some quarters that abolition would be negative for the professional sector in Hong Kong. But Li Man-fai, president of the Taxation Institute of Hong Kong, said that the trust industry would not be made totally redundant by the move, as estate planning advisory services are still needed. He raised the issue of whether abolition would be retrospective: “As the bill still needs to be passed, whether or not this will be retrospective is bound to lead to some public arguments,” he said. “I would prefer that the date of announcement is the effective date.”

ISLE OF MAN’S ZERO-RATE INCOME TAX ON COURSE TO TAKE EFFECT APRIL 2006

The Isle of Man has been moving towards a zero rate of income tax on companies since October 2000. The 2005 budget, announced on 15 February, confirmed that the island is on course to deliver this by April 2006. The genesis for this strategy was twofold. First, it was generated internally to enable Manx-owned companies to take advantage of the tax neutrality enjoyed by non-Manx-owned companies. Second, it was to satisfy the OECD’s harmful tax competition initiative and the EU’s “Primarolo Report”, both of which criticized the “ringfencing” inherent in a regime that distinguishes between resident and non-resident ownership. It is now apparent, from an international initiative perspective, that a zero rate of tax is not harmful as long as it is applied fairly within an economy and does not discriminate between resident and non-resident participators.

The Isle of Man is fortunate to be able to afford a zero rate. Surprisingly, it collects some 40% of its GDP in tax. This percentage means the Isle of Man is very much within OECD member state norms of tax take. By statute, the Isle of Man has to budget for a revenue surplus each year. The budget surplus for 2004-05 was some £9 million, with £12 million projected for 2005-06. Both Standard & Poor’s and Moody’s rate the Isle of Man’s debt as AAA. The economy is growing at a healthy 6% rate and unemployment is virtually non-existent. The island is able to afford a zero rate because most government revenue is taken from indirect sources, particularly VAT, which accounts for 56% of government finances. Company income tax receipts amount to only 7% of revenue.

GERMANY TO CUT COMPANY TAX TO COMPETE WITH NEW MEMBER STATES

German Chancellor Gerhard Schröder has announced plans to cut the tax rate paid by businesses in Germany in a bid to stem the flow of companies leaving the country and taking advantage of more favorable rates in Eastern Europe. The corporate tax rate in Germany would be cut from 25% to 19%, Mr Schröder told the German parliament last week. A recent report from the Boston Consulting Group showed that many big U.S. firms were considering moving East from Germany to Poland, the Czech Republic or Slovakia, attracted by lower corporate tax rates and lower labor costs. Slovakia, for example, charges a corporate tax rate of 19%. Estonia has a zero percent corporate tax rate for reinvested earnings. An EC spokesperson welcomed the move, saying that the plans, “are going in the direction of creating more growth and jobs in Europe.”

Tax reform alone will not revive flagging German economy.

A little over a decade ago, Americans were being bombarded with books threatening precipitous economic decline if they did not drop their hypercapitalistic ways and adopt the German “stakeholder model”, which allowed labor and capital to work harmoniously for economic growth. Nowadays, anyone coming across such a book could be forgiven for concluding that its authors were daft. German GDP growth has not broken the 2% barrier in four years, and unemployment is at levels not seen since the 1930s. In desperation, Germany seems ready to look to the hypercapitalists for ideas. Gerhard Schröder, the chancellor, has proposed a cut in corporate income tax, to 19% from 25%.

This is not quite as large a concession to big business as it sounds. The proposed change is designed to be revenue-neutral; what it gives in lower marginal rates, it takes back by closing loopholes, particularly the ability of companies to charge losses in previous years against current income. Germany currently has the highest corporate tax rates in Europe, but it also has some of the most generous allowances. Consequently, the corporate levy raises only 2.9% of total tax revenue, compared with as much as 20% in other rich countries (see chart).

But while the proposed tax cut may not do much to bring Germany’s ailing economy back to life, the announcement has nonetheless made economic observers sit up and take notice, for it seems to signal that the German government may be conceding defeat in the battle over “harmful tax competition”. Along with France and Belgium, the Germans have been leading the attacks on the practices of EU members – primarily Ireland – who charge low rates of corporate income tax. For years they have been calling for tax harmonization among members – code for forcing low-tax countries to raise their rates. The OECD, a club for rich countries, has also got involved. In 2000 it published a blacklist of 35 nations it identified as havens for large companies looking to shrug off their rightful tax burden.

Nonetheless, tax competition remains a bigger problem for European countries than for the rest of the OECD. In fact it is Japan and America, not Germany and France, which have the highest corporate taxes. It is probably not a coincidence that both are heavyweights without comparable counterparts in their region. In Europe, on the other hand, efforts to keep taxes high have suffered a number of setbacks. Ireland is not merely recalcitrant, but is setting an example for the new kids on the block. Ireland’s stunning GDP growth – from 70% of the EU per-capita average in 1990 to 136% in 2003 – has made the EU’s new entrants determined to emulate it. In large part, it seems, that means lower tax.

Does this mean that rich countries with fat welfare states are doomed to a “race to the bottom”, slashing spending on social programs in order to keep their tax rates attractive? Probably not. More likely, taxes will simply fall more heavily on labor, which is less mobile than capital. Moreover, while taxes are an important factor in corporate decisions about where to put facilities, they are not the only, or even the biggest, one. Germany’s corporate-tax burden may be twice the rate levied in some Central European countries, but its wage costs are six times as high. And though the recent Hartz reforms have begun to stir Germany’s sclerotic labor market, the country is still widely regarded as a difficult place to do business.

Poland to put in place flat tax system.

The Polish government has announced that it will be following the trend established by Estonia in 1991, and will be putting in place a single 18% rate of corporate tax, income tax, and VAT. Since Estonia launched its flat tax scheme, several other countries, including Latvia, Serbia, Slovakia, Georgia, Russia and Ukraine have followed suit, causing grave concern among the older members of the EU, who have argued that they are effectively subsidising their newer counterparts’ tax breaks. According to Polish Finance Minister, Mirosaw Gronicki, the new system will be put in place by 2008.

RICH MAY BE LURED TO GUERNSEY WITH REDUCED TAXES

Guernsey has businesses and individuals which, because of exceptionally high profits or wealth, can pay income tax far in excess of any possible drain on public services. They could be tempted away by other jurisdictions. The States is considering introducing a system whereby “significant” contributors pay tax at the standard rate to a certain ceiling and then at a reduced rate. States Treasurer Dave Clark said that the move was not unusual, but such openness was. “Every jurisdiction does deals for high earners,” he said. “We don’t, but if we do we think it’s much better to have a transparent approach. We’re not in the business of doing grubby little deals. We’d rather have a reasonable percentage of a great deal than a big percentage of nothing.”

The proposal is part of the consultation document on future taxation strategy. “For those activities where significant extra income can be attracted to the island, with very little or no increase in employment, a reduced rate of income tax above a certain ceiling could be introduced,” said the report, prepared by the States fiscal and economic policy steering group. “Such a system could apply to individuals, finance sector and non-finance industries. ... Such a system would mean that the individual taxpayer would be paying the standard applicable rate of tax on income well in excess of most normal taxpayers, but overall would be liable at rates much lower than in the UK, Continental Europe and the USA.”

Guernsey has to exempt captive insurance from tax, or risk losing the sector to other jurisdictions.

Proposals under Commerce and Employment’s consultation document on the future taxation strategy make it clear that charging them would alienate an industry that employs about 350 people in the island. A separate targeted consultation was carried out last year and the industry view was clear. “If captive insurance companies were made subject to taxation, of say 10%, there would be an immediate decline in the industry in Guernsey,” the consultation document said. “New business would cease and existing business would very soon relocate to other jurisdictions where a zero-tax regime was available.”

GORDON BROWN LEAVES “NON-DOMS” UNSCATHED

“Non-doms” or Non-Domiciled foreign individuals resident in the UK can breathe easily again, as for yet a further year the Chancellor put off any change to the highly favourable tax regime they enjoy. The Treasury said, “The Government is continuing to review the residence and domicile rules as they affect the taxation of individuals and will proceed on the basis of evidence and in keeping with its principles. It would welcome further contributions to the debate, which will then be taken forward by the publication of a consultation paper setting out possible approaches to reform.”

A Treasury paper published in the April 2003 budget revealed that the Inland Revenue has 16,000 individuals on its database who declared a total income of £800 million which stayed out of the Revenue’s clutches by being remitted overseas. However, the accounting profession believes the figure is in reality much higher. Some estimates have put the annual tax loss to the Treasury from the current tax rules at £5 billion, though others have argued the exodus of foreign workers and businesspeople resulting from a change in the rules would deprive the government of double this amount.

The concept of domicile, which is unique to the English-speaking common law jurisdictions, attaches to a person’s original home country, and cannot be changed unless the person moves their whole life, family and base to another country, with the intention of remaining there permanently. Few “visiting” residents will therefore have a UK domicile. Foreign investment income is exempt from tax for such individuals as long as the income is not remitted to the UK. Therefore they can safely make offshore investments knowing that the income will be reinvested without deduction – the ideal way of turning income into capital without taxation.

American citizens, and nationals of the very few other countries that tax world-wide income on the basis of citizenship, will not be able to take advantage of this UK possibility, but for all other nationals, it is available. This rule has led to many foreign celebrities making the UK their home for tax purposes.

U.K. budget closes certain offshore loopholes, Guernsey’s tax experts get to work.

The Budget actually increased the fiscal burden on taxpayers, but still managed to offer some pre-election sweeteners to important voters such as pensioners, families with children and first-time homebuyers. Mr. Brown was able to deliver these gifts by removing some tax breaks for UK businesses, which may damage their international competitiveness slightly. However, all in all, the Budget was very careful and consolidated Labour’s chances of winning a third term.

Importantly for Guernsey, the offshore finance industry might be affected by the closure of certain loopholes which enable UK companies and individuals to avoid tax. This is a technical area which might affect the local economy in the future. However, it is certain that tax experts are intelligent enough to create new opportunities to replace them. This possible loss of business could also be counteracted by the rise in the tax-free threshold governing the monetary value of goods visitors are allowed to take back to the UK. Local retailers might be able to benefit from this.

RUPERT MURDOCK’S $50 MILLION BERMUDAN TAX FINAGLE APPEARS TO LACK SUBSTANCE

Rupert Murdoch has taken the extraordinary step of listing his family’s $8.8 billion News Corp. shareholding on the Bermuda Stock Exchange with the sole motivation of avoiding paying $50 million in stamp duty to the NSW Government. It is all laid out in the prospectus lodged with the Bermuda Stock Exchange on 22 October, 2004. On page 11 one may read the following under the title “Purpose of Listing”: “The listing of Karlholt (formally Cruden, Kayarem and other Murdoch family trusts and structures) may have favourable consequences for the Company’s shareholders under Australian stamp duty legislation. This is because the BSX is a member of the World Federation of Exchanges and transfers of securities that are quoted on a stock exchange that is a member of that Federation are not subject to stamp duty under that legislation. Ordinarily, transfers of shares which are not quoted on a stock exchange attract duty under Australian stamp duty legislation at a rate of 0.6% of the transfer consideration.”

Karlholt owns the Murdoch family’s 29.5% voting stake in News Corp., plus a smalller holding of preferred stock which adds up to almost 13% of the total shares on issue, worth $8.8 billion. The shares have never traded and are unlikely ever to trade, although the prospectus says the float will “also provide access to an efficient facility for executing any future transactions in shares in the Company.” The bizarre nature of the “float” is highlighted on page 12 of the “prospectus” where potential purchasers are told there are only ten shares on issue. Anyone with a spare $880 million can buy a share.

Trading in Karlholt shares on the Bermuda Stock Exchange was quiet again overnight as, er, no shares were traded in a similar trend to the past few months. Could the NSW government argue that they never intended to trade, so the whole listing was a sham transaction? If the (NSW Premier Bob) Carr Government chooses to not go after the Murdoch family, it will be very interesting to see what editorial line The Daily Telegraph takes during the next NSW election. Anyone for a fourth term?

ASSET PROTECTION

CUT ALL TIES TO CANADA IN ORDER TO SAVE TAXES

Unlike the idle rich – hard-working, over-taxed Canadians have few places to hide from the taxman. Tax havens, like sheltering income in the Cayman Islands or Switzerland, are out of reach for ordinary folk, so it is tough to avoid paying income taxes as Canada’s highest paid CEO did for years. Magna International’s founder Frank Stronach – whose paycheck surpassed $50 million a year for the past four years, hitting a record $58.1 million in 2002 – allegedly avoided paying millions in income taxes since 1994. How? By moving his principal residence to Switzerland, a country that has a tax treaty with Canada that provides tax credits to avoid double taxation.

The hard-driving 72-year-old – who started Magna in a small east end Toronto garage in the late 1950s and built it into the world’s largest auto parts maker – has long warned high taxes in Canada are chasing away talented employees and business leaders. No kidding. Tax Freedom Day last year fell on June 28, meaning all the money earned by average families in the first six months of the year goes to pay total taxes, for a tax rate of 48.9%. For corporations, who pay only 25% of Canada’s income tax burden, with 75% paid by individuals, Tax Freedom Day falls in August, when total taxes are added up. Now, here is one way to lessen the blow.

Persons who sever all ties to Canada by giving up a driver’s licence, health cards, a principal residence and who live a majority of the time in another country, can avoid paying taxes in Canada unless the income is earned there, say tax officials. Meanwhile, Canadians have been stashing increasing amounts of money in tax havens, with the amount of Canadian-owned assets held in offshore financial centers in 2003 at C$88 billion. Even Canada’s Prime Minister Paul Martin, whose children now control Canada Steamship Lines, has taken advantage of tax havens, by registering ships offshore to avoid paying Canadian taxes.

At least Canadians have the freedom to flee oppressive taxes.

Canada’s tax system is worse than America’s tax system, but at least Canadians are not treated like serfs. If they take a few simple steps – most importantly that they live outside of Canada – they can enjoy better tax policy in other jurisdictions. Sadly, Americans do not have this liberty because of the imperialistic reach of the U.S. worldwide tax regime.

Tax havens in the Caribbean are becoming stash grounds for Canadian companies.

According to a study by Statistics Canada, between 1990 and 2003, the amount of money Canadian corporations put into tax havens – the most popular of which are Barbados, Ireland, Bermuda, the Cayman Islands and the Bahamas – has soared to $88 billion from $11 billion. The study entitled Tax Havens, An Evolving Taxation Issue has indicated that tax haven countries “accounted for more than one-fifth of all Canadian direct investment abroad in 2003, double the proportion 13 years earlier”. A study last year by researchers at the University of Quebec said Canada’s major banks have used tax havens to avoid paying $10 billion in taxes since 1991. The study found that the banks had a total of 73 subsidiaries in tax haven countries such as Barbados and Cayman Islands.

The Canadian Bankers Association has challenged the report, saying “the underlying premise is entirely unfounded and misleading.” The association added that there is nothing wrong with what the banks are doing.

HELPFUL ADVICE TO U.K. CITIZENS ON HOW TO AVOID ESTATE TAX

One of the few negative drawbacks of the property price boom experienced by most UK homeowners in recent years has been the increased likelihood of your family having to pay inheritance tax on your assets after death. Many people begrudge having to pay inheritance tax because it is essentially seen as a tax on assets that have already being taxed once. But there are ways to reduce your tax liability. Determining how to reduce the amount of inheritance tax against your property and any other assets accumulated throughout life, are best discussed with a professional financial adviser. Remember, what you pay for advice now, could save your family a considerable amount of money in the long run.

Among the options worth considering are trusts. Trusts are a legal way of financially planning an estate. They can be extremely effective, especially when they are established offshore. Trusts allow you to make long term plans for the distribution of your wealth either during or after your lifetime. If you have specific requirements it is also possible to state that your trust is managed exactly the way you want.

NEW U.S. BANKRUPTCY LAW KEEPS SOME ASSET HIDING PLACES

For ordinary Americans, bankruptcy may be a chance to start over, but it generally means starting over from scratch, with little more than a few personal possessions and – if they are lucky, some home equity. But for the“qwell-heeled and well-advised”, as one lawyer called them, bankruptcy can mean millions of dollars stashed, safe from creditors, in one of several different shelters available under current law. And even though the bankruptcy bill passed by the Senate 10 days ago contains provisions designed to restrict these strategies, experts say it appears several of them will remain viable if the bill is signed into law. These experts point to three provisions of current law that give high-rolling bankrupts benefits that do not help the poor and middle class very much.

First, and best known, is the homestead exemption. Although a federal law, bankruptcy defers to the states in many ways, particularly regarding what assets an individual filing for bankruptcy may shield from creditors. Most states allow some protection for a residence, but generally it is fairly limited. However, filers who reside in a handful of states, notably Florida and Texas, can keep multimillion-dollar houses because in those states homesteads are defined by acreage, not value.

Second are “asset protection” trusts. These are legal entities that can be established in five states and a number of foreign countries, to shield from creditors assets of the person who established the trust. Third is a provision of law that bars filers who owe more than about $1.2 million from filing under Chapter 13 of the bankruptcy law, but allows them into Chapter 11, which is meant for businesses. Since Chapter 11 is designed to keep a business going, it allows the debtor to retain income earned after the bankruptcy filing while using only assets the he had at the time of filing to pay past debts.

Continuing to allow U.S.-based asset protection trusts to shield assets from creditors in bankruptcy is “an ugly loophole that protects millionaires,” Sen. Charles E. Schumer (D-N.Y.) said in a floor statement. Its sponsor, Sen. James M. Talent (R-Missouri), said it allows the court to “break open the trust” to get at money and other assets placed there to escape creditors. George Mason University law professor Todd Zywicki said the fact that concern over these trusts has surfaced only recently, though the bill has been under consideration for eight years, suggests the trusts do not pose a crisis. “Judges have tools, such as denying discharge” of debts, for dealing with cases where they think assets are being hidden, he said.

Many states have long permitted individuals to place assets in trust for another person, typically a spouse or child, to shield those assets from that person’s creditors through what has been dubbed a “spendthrift clause”. However, until 1997, states uniformly forbade “self-settled” trusts – those in which the person providing the assets and the beneficiary are the same – from enjoying the same kind of protection from creditors. But that year Delaware and Alaska eased that prohibition, and others have since followed suit. Now, Delaware, Alaska and the others allow individuals to place assets in trust for themselves with extensive creditor protection as long as the trust meets various anti-fraud and procedural requirements.

BVI: GIVE ME YOUR DIRTY, YOUR HONG KONG CASH YEARNING TO BREATH FREE?

China’s Ministry of Commerce has fingered the British Virgin Islands as a major repository of money transferred out of the country illegally by corrupt officials and private companies. The BVI also happens to be the single biggest investor in Hong Kong. Capital flight investigators say a large percentage of the money washing out of the mainland illegally goes to the BVI, Bermuda and the Cayman Islands before returning via Hong Kong. Geng Xiao, a professor at Hong Kong University’s School of Economics and Finance and deputy director of the Institute for China and Global Development, has studied mainland round-tripping, as the technique is called.

He contradicts the World Bank estimates that up to 25% of foreign direct investment (FDI) in the mainland could be round-tripping capital. The figure is too low, he says. “Round-tripping FDI is likely to be in the range of 30% to 50%,” says Xiao. “Hong Kong plays an important role in each of the three stages of [flight] capital’s journey: The original creation of new capital in the PRC, the flight out of the PRC, and the round-tripping FDI back to the PRC.”

Just this week, there was a development that threatens the BVI’s close financial links with Hong Kong – the opening of the Cayman Islands Investment Bureau in the city. The Caymans, which invested HK$53.1 billion in Hong Kong in 2003, aims to “provide a one-stop shop for investors” said InvestHK director-general of investment promotion Mike Rowse. Hong Kong risk investigator Peter Gallo says, “There are many legitimate reasons for the use of offshore companies, but the secrecy that makes them so popular for concealment and money-laundering purposes remains an obstacle to meaningful know-your-customer procedures.”

GERRY SPENCE SAYS AMERICANS BEING LIED TO ABOUT LAWSUIT CRISIS

Americans are being lied to about the civil justice system. That is the message veteran trial attorney Gerry Spence brought to Washington, D.C. this week. Spence, who last year led a successful fight to defeat a medical malpractice cap initiative in his home state of Wyoming, came to the National Press Club in Washington, D.C. as part of an effort to beat back a similar proposal being pushed by President Bush in Congress. The national drive to cap injury awards is being led by the insurance industry, doctors, and the Bush administration. They claim that the country is being overrun by “frivolous” medical malpractice lawsuits that are driving up insurance rates for doctors.

But Senate Majority Leader Bill Frist (R-Tennessee) admits that he lacks the votes to pass legislation through the Senate this year. Spence spent the better part of an hour ripping the insurance industry, the national media, negligent doctors and the Chamber of Commerce. “In my 53 years of practice, I have never seen a frivolous medical malpractice case that has made it to trial,” Spence said. “It costs $250,000 to $300,000 to bring a case to trial,” Spence said. “You just can’t get into the courtroom for less money than that. And that money comes straight out of the lawyer’s pocket.”

“[Y]ou ask me what does the doctor (in an egregious case described) want? He wants immunity from lawsuit. He doesn’t want lower rates. If he wanted lower rates, he would be attacking the insurance industry. He wants immunity from lawsuits and a cap that makes it impossible for children who don’t work, for mothers who don’t work, for retired people who don’t work, for any human being who has no economic loss, to recover for their injuries. And that gives the doctor practical total immunity.”

Spence said the insurance industry and doctors are pushing for caps on non-economic damages. “What are we talking about when we talk about caps on non-economic damages?” Spence asked. “The cap says that you can’t recover anything more than $250,000 for non-economic damages. If you are a mom and staying at home, and somebody runs over you and leaves you crippled in a wheel chair for life, you haven’t lost any economic damages. Because you don’t work. So guess what you get? What do you get? You get nothing.” Spence said that caps are not necessary because “every judge in the country has the power to throw out every lawsuit before it gets to a jury. ... I have never seen a frivolous lawsuit in a malpractice action in 53 years. And there isn’t a single bit of evidence that there is any frivolity going on – it is a lie.”

CALIFORNIA MAN PLEADS GUILTY IN $250 MILLION PONZI SCHEME

Upland resident Larry Toshio Osaki, 56, pleaded guilty to fraud and money laundering after being charged with running a $250 million Ponzi scheme, the U.S. Attorney’s Office for the Central District of California said. Osaki allegedly collected the money from nearly 7,000 investors and caused $150 million in losses. He appeared before District Judge Stephen V. Wilson in Los Angeles. Osaki acknowledged running a fraudulent scheme through a company dubbed Village Capital Trust. The scheme started at his Pasadena company, J.T. Wallenbrock & Associates, and was continued with a second firm based in Edmonton, Canada.

From 1997 until his arrest in October 2003, Osaki allegedly offered investments in accounts receivable financing – which is sometimes called factoring. Employees at Wallenbrock, and later at the Canadian-based Village Capital Trust, told investors their money would be used to buy the accounts receivable of latex glove manufacturing companies based in Asia. The investors also were told the investments would yield returns of 20% every 90 days. Instead, neither Wallenbrock nor Village Capital Trust bought any accounts receivable, and neither operated a factoring business. Instead, Osaki allegedly used investors’ money to improperly pay the salaries for him and his associates and run his own venture capital firm.

In 2002, the SEC filed a civil suit alleging Wallenbrock was part of an illegal securities fraud. The SEC obtained a preliminary injunction that barred Osaki and others from running the companies. Osaki later relocated operations to Canada and Belize – among other places – the attorney’s office said. With the aid of his co-conspirators, Osaki formed a new company offshore, Village Capital Trust, that offered the same bogus accounts receivable investments as Wallenbrock. At sentencing, Osaki faces a statutory maximum sentence of 40 years in federal prison.

PRIVACY

U.K. ID SCHEME WILL BE A COSTLY, DANGEROUS FAILURE, SAYS LSE REPORT

A report published today by the London School of Economics’ Department of Information Systems concludes that the proposals set out in UK Government’s ID Cards Bill are “too complex, technically unsafe, overly prescriptive and lack a foundation of public trust and confidence.” The report accepts that a secure ID system could create “significant, though limited” benefits, that many of the objectives of the scheme could be achieved better by other means, and says the cost is likely to spiral to several times the current headline figure.

The LSE study involved more than 100 academics, and is claimed to be the most comprehensive analysis yet of the scheme. It views the technology being proposed as largely untested and unreliable, and says that despite the intended all-encompassing nature of the scheme, it misses key opportunities to establish a secure, trusted and cost-effective identity system. Identity theft could be better dealt with “by giving individuals greater control over the disclosure of their own personal information”, while terrorism could be more effectively managed “through strengthened border patrols and increased presence at borders, or allocating adequate resources for conventional police intelligence work.”

NEW FEDERAL RULES DICTATE BANK ID THEFT NOTIFICATIONS

The U.S. Federal Reserve Board issued new rules requiring banks and other financial institutions to notify consumers “as soon as possible” when their personal data has been stolen. In an announcement, the Fed and three other government banking agencies unveiled their “guidance” on how banks and thousands of financial institutions regulated by the four agencies must treat personal information theft under federal laws enacted in 2003. The rules come at a time when several companies have acknowledged that consumers’ personal and sensitive information has either been stolen or accessed inappropriately.

A key requirement is that consumers must now be notified when personal information has been stolen or illegally accessed and there is reason to believe it will be misused. In such cases, the institution must conduct a “reasonable investigation” to determine if the security breach was significant enough to require notification of affected consumers. Notice can be delayed, however, if an appropriate law enforcement agency determines that notification will interfere with a criminal investigation. Specific timelines on how quickly such notice should be given have not been established. A financial institution is also expected to notify its primary federal regulator of a security breach involving sensitive customer information, whether or not the institution notifies its customers.

According to the rules, sensitive customer information includes a customer’s name, address, or telephone number, in conjunction with the customer’s Social Security number, driver’s license number, account number, credit card number, or debit card number, or a personal identification number or password that would permit access to the customer’s account. The rules also state that such data breaches would include the release of any combination of sensitive data that would allow someone to log in to or access a customer’s account, such as a username and password or a password and account number.

BIOMETRIC PASSPORTS SET TO TAKE FLIGHT IN U.S.

Biometric passports have made it out of the discussion and testing phase. The State Department’s Office of Passport Policy, Planning, and Advisory Services recently announced that it is ready to begin issuing biometric passports. These passports, which feature an RFID chip, will bring about speedier and more secure entry into and exit from the U.S., the government says. However, critics say the technology behind the passports is flawed and puts your personal privacy at stake. According to the State Department’s proposed implementation rule, the agency plans to issue the first passport carrying an RFID chip by mid-2005. That chip includes all the personal data found on the information page of today’s passports. It also contains a biometric component – a digital facial image. Within a year, all passports issued in the U.S. will feature this technology.

WELL AFTER 9/11, “NO FLY” LISTS A WORK IN PROGRESS

Almost 3-1/2 years after the Sept. 11 terrorist attacks and a year and a half after Congress ordered law-enforcement agencies to consolidate and coordinate its terrorist screening processes, the status of the watch lists remains uncertain and is a cause of frustration for thousands of travelers as well as the nation’s airlines. Every day, thousands of people find themselves unable to do things like print a boarding pass and are pulled aside for extensive screening because their name, or a name that sounds like theirs, is on one of the watch lists. Even well-known lawmakers, like Edward Kennedy of Massachusetts, have found themselves caught in the screening dragnet.

From the TSA’s perspective, the screening is just one of the many new layers of increased security that are designed to thwart terrorist activity. The inconvenience is regrettable, but a price that society has to pay for security. And for national security reasons, the FBI and other government agencies responsible for supplying names to the lists will not divulge the criteria they use. They say that would amount to tipping their hands to the terrorists.

The TSA does acknowledge some problems with the current system. For instance, if your name is the same, or even sounds the same as someone on the list, you will be pulled over for additional screening. So the TSA has set up an ombudsman process for people who feel they are on the list unfairly. (The number to call is 866-289-9673, or the e-mail address is tsa-contactcenter@dhs.gov.) The TSA is also working on a new screening process called “Secure Flight”, which the TSA hopes that eventually it will lessen the confusion between suspected terrorists and those with similar names who are upstanding local citizens.

But civil libertarians and First Amendment activists are more concerned about the long-term ramifications of the current lists and how they are used. On the morning of Sept. 11, 2001, the no-fly list contained 16 names. Now, the combined lists are estimated to have as many as 20,000, although the actual number is classified. But documents make it clear that in the first jittery months after Sept. 11, FBI agents and others responsible for the lists did not have clear criteria to determine who got on and who did not. “The underlying danger is not that Tom Burke can no longer get a boarding pass to get on an airline,” says the First Amendment expert Tom Burke, whose name or namesake appears on the list. “It’s that the Tom Burkes in the world may forever more be associated [with the terrorist watch list].”

LAW

BAHAMAS TIGHTLY CONTROLS ITS OWN CITIZENS’ FOREIGN EXCHANGE TRANSACTIONS

Even with the recent modifications to a series of financial services legislation, laws still exist in The Bahamas making it extremely difficult for Bahamians to open and operate bank accounts overseas. However, Governor of the Central Bank of The Bahamas, Julian Francis recently indicated that a relaxation of the country’s Exchange Control regulations is being considered. Still, it is still not clear which aspects of those regulations would be “relaxed”.

When The Guardian visited the Central Bank last week and asked for monies to be placed on a fictitious U.S. account, an Exchange Control officer said that such transactions needed Central Bank approval. She called her manager who said, “You would have to write to us and give us justification as to why you need a U.S. account and what you will be doing with it. If you are a student, you can have an account in the country where you are studying but if you are coming back here to live, you should not have a foreign account, at least that is what the policy states.”

The manager did not say that the request to wire money to a foreign account would not be approved, but made it clear that the Central Bank would have to thoroughly “review” the request first, a process that could take a week. The procedure sounded so cumbersome, it was enough to deter anyone from performing what is otherwise a simple transaction in the U.S. and Canada. Exchange Controls apply only to resident Bahamians and companies, not to non-residents and offshore entities that are normally used by international businesses.

BANK OUTSOURCES CATCHING MONEY LAUNDERERS TO INDIA

Catching money launderers is an onerous, labor-intensive task. In the U.S., banks and other financial institutions must report illegal cash transfers to authorities, and this task requires them to have automated systems to detect suspicious activity and to have a sizable staff to pursue leads. Even the best money-laundering detection systems produce many false positives, wasting a lot of valuable staff time on wild-goose chases. One major U.S. bank recently decided there was a better way. Rather than grappling with these time-intensive processes in-house, it decided to turn them over to a third party, Kanbay International Inc., which was already handling many of the bank’s other back-office IT functions from a staffing center in India.

Kanbay, an offshore outsourcer specializing in financial services, developed a computer algorithm for identifying money laundering. The algorithm dramatically decreases the number of false leads. Not only does the bank save money on labor costs (salaries in India can be as low as one-quarter of those in the U.S.), but it is also able to reduce the number of hours applied to this activity. As with many financial institutions that have been increasingly outsourcing back-office activities, the bank that used Kanbay to build a better money-launderer trap was willing to speak on the record—but without being identified.

The work that U.S. companies are sending overseas is increasingly high-skilled and highly specialized. Commercial and investment banks, as well as insurance and credit card companies, are fueling a surge in demand for overseas labor, and analysts say they do not expect a slowdown any time soon. Kanbay is based in Rosemont, Illinois, but has 80% of its staff in India. The company said its total revenues jumped 70% between 2003 and 2004, with the growth coming from both new and old clients.

U.K. BRIBERY LOOPHOLES CRITICIZED

The report from the OECD says there are too many organizations in the UK tasked to deal with bribery. None of them, it warns, have sufficient resources to deal with UK companies which bribe foreign officials. While two cases are being investigated and 11 are under review, not a single person or firm has been prosecuted. The report comes a week after the Prime Minister’s Commission for Africa called for a concerted effort from the UK and other rich states to prevent bribery and punish companies which use it.

It was “surprising” that one of the three biggest financial centers in the world, with unusually internationally active companies, had managed to produce no prosecutions, the report said. But the examiners’ main criticism was that there were too many organizations with unclear responsibilities fighting bribery and corruption – and not nearly enough resources or political will.

IN HONG KONG, CHINA PREFERS POWER TO LAW

From purchases of handheld toys to charters of supertankers, contracts in China are frequently written so that disputes must be resolved under Hong Kong law and in Hong Kong courts – even when the parties involved are mainland companies. This reliance by the Chinese on Hong Kong’s robust legal system has given optimists hope that the mainland, where the Communist Party still wields ultimate authority, would inevitably accept the rule of law. They note that the party needs to attract increasing amounts of foreign investment to fuel the economic growth that underwrites its power, but investors want to know that their rights will be reliably protected by laws.

But the optimistic view has been shaken in the past two weeks, in ways that have alarmed Hong Kong lawyers and have underlined how far mainland China is from understanding the necessity of a strong legal system. Beijing authorities have forced the territory's government to do an about-face on a critical constitutional issue by shortening the term of Hong Kong's chief executive to two years from five. The executive is selected by the Electoral Committee, most of whom are strongly loyal to Beijing. This will tie the next leader, and therefore the way the territory functions, much more closely to the mainland.

The question is why Beijing seems to be riding roughshod over Hong Kong, given the negative publicity that will result. Some analysts say that, while China’s leaders are happy to encourage abstruse debates about law, they remain unwilling to discuss a fundamental question: should the government be able to supersede the law when it wishes, or, as in a democracy, should limits be placed on government power? Particularly upsetting to lawyers has been the assertion by the government that the common law system should not apply to the Basic Law, which was drafted by Chinese lawyers 15 years ago.

CREDIT CARD PAYMENTS TO CIGARETTE SITES UP IN SMOKE

Federal efforts to snuff out illegal online cigarette sales got a boost when major credit card companies agreed to refuse payment to Internet tobacco sites, almost all of which are violating one federal law or another. The joint public/private initiative was brokered by the attorney general offices of New York, California and Oregon, and it includes the Bureau of Alcohol, Firearms and Explosives (ATF), as well as American Express, MasterCard, Visa, Discover, Diners Club and PayPal, a division of eBay.

The credit card companies have adopted policies to prohibit the use of credit cards for the illegal sale of cigarettes over the Internet. They have also agreed to investigate and take action with respect to any Internet sellers identified by law enforcement as using their credit cards for illegal online cigarette sales. According to the ATF, virtually all Internet cigarette sales sites are violating the Jenkins Act, a federal law that requires companies that ship cigarettes to out-of-state customers to report the customers to their respective states. States then collect the taxes from the individuals. The ATF said $1 billion in tax revenues have been lost.

ICELAND GRANTING CITIZENSHIP TO BOBBY FISCHER

Iceland’s Parliament voted to grant citizenship to the American chess star Bobby Fischer, laying the groundwork, his supporters said, for his release from the Japanese prison where he has been held since last summer. “We are most happy,” said Einar Einarsson, a spokesman for a committee that has been trying to free Mr. Fischer from Japan, where he is being detained while he fights deportation to the U.S. Mr. Einarsson, who called Mr. Fischer “part of our modern saga and part of our recent history,” said that the 62-year-old chess champion might be released “in only a few days” and that an Icelandic delegation planned to travel to Tokyo to escort him back to Reykjavik.

In Washington, the State Department had no comment, although a spokesman noted that renunciation of American citizenship did not allow citizens to escape prosecution of crimes in the U.S. The vote appears to be a resolution of sorts to the curious legal limbo that Mr. Fischer fell into in 1992 when, the U.S. says, he violated sanctions against Yugoslavia by accepting a $3.3 million fee to play an exhibition match there. After that, the always reclusive, progressively more difficult Mr. Fischer dropped out of sight, living in Budapest – and possibly the Philippines and Switzerland – and emerging now and then on radio stations in Iceland, Hungary and the Philippines to rant in increasingly belligerent terms against the United States and against Jews.

This latest episode began in July 2004, when he tried to board a plane from Japan to Manila and was seized by the Japanese authorities and accused of trying to leave the country on an invalid passport. He has been held in prison since then while the various governments, as well as a staunch group of supporters in the chess world, have tried to find some resolution to what has been a vexing and delicate jurisdictional issue. But while the U.S. – which is also investigating the possibility of charging him with tax evasion – regards Mr. Fischer as a fugitive from justice, in Iceland he is seen as a national hero. It was in Reykjavik in 1972 that he defeated the Russian world champion, Boris Spassky, in an electrifying cold war chess contest that pitted East against West. The Committee to Free Bobby Fischer praised the Icelandic Parliament, saying in statement issued in Tokyo that it had “made history by standing up to the earth’s sole superpower.”

The Fischer King

Why is Bobby Fischer still news? In chess terms he has been defunct since 1972, when he won the world title by beating the Soviet player Boris Spassky in Reykjavik, the Icelandic capital. He could not agree terms for a defence of his crown with FIDE, the world governing body of chess, and was stripped of his title in 1975. In effect, he has not played competitively since the age of 29. He did return to play Spassky again in war-torn Yugoslavia (the source of the sanctions-busting allegations) in 1992, but that was a match played for money by two ageing superstars. The chess was OK, but not sensational. All the pundits agreed that they were past their best.

So why the obsession with this reclusive, dysfunctional, tempestuous 62-year-old American chess genius? Those adjectives, in part, answer the question: in the kingdom of the bland, the mesmerisingly manic man is king. Fischer is larger than life. He meets the world’s idea of what a chess player should be – crazed, obsessed by the game, able to express himself solely through chess combinations. In reality, many players are not like that – they have the souls of accountants. But Fischer walks the walk.

GROUPS FIGHT PATRIOT ACT REAUTHORIZATION

Conservative and liberal groups normally at each other’s throats over the direction of government are finding common cause in wanting to gut major provisions of the government’s premier anti-terrorism law. The American Civil Liberties Union, the American Conservative Union, Americans for Tax Reform and the Free Congress Foundation are among several groups that formed a coalition – Patriots to Restore Checks and Balances – to lobby Congress to repeal three key provisions of the USA Patriot Act. Having people from all sides of the political spectrum working together will keep politicians from calling Patriot Act opponents un-American or willing to help terrorists, which happened during the original debate over the law, the groups said.

The coalition wants Congress to repeal or let expire prosecutors’ Patriot Act ability to easily obtain records in terrorism-related cases from businesses and other entities, including libraries; the provision that allows “sneak and peek” searches conducted without a property owne’qs or resident’s knowledge and with warrants delivered afterward; and what they called an overbroad definition of “terrorists” that could include non-terrorism suspects. The coalition highlighted the provisions in a letter to the president which also said, “We agree that much of the Patriot Act was necessary to provide law enforcement with the resources they need to defeat terrorism.”

Justice Department spokeswoman Tasia Scolinos said the law “contains strong civil liberties safeguards and has a proven track record of being an effective tool in the war on terror. Any suggestion of civil liberties violations is an effort to shift the focus of the discussion away from the facts,” Scolinos said. “There have been no verified civil liberties violations filed against the Patriot Act. Period.” Lawmakers set a 2006 expiration date on many of the wiretapping and surveillance measures, and will begin holding hearings starting in April on whether they should be renewed.

Just because the Patriot Act has not been abused yet does not mean it will not be by government officials in the future, said Grover Norquist, president of Americans for Tax Reform. “Many of us remember what happened with RICO” – the Racketeer Influenced and Corrupt Organizations Act – Norquist said. “It was originally passed and they were going to go after organized crime figures in dark shirts and they ended up using it against pro-life demonstrators years later.”

GERMAN LAW ALLOWS OFFICIALS TO ACCESS BANK DETAILS

A decision by Germany’s highest court allowed tax and welfare offices to peek into citizens’ bank accounts if they suspect fraud or tax evasion. Critics fear a breach of personal rights. The law to “promote tax honesty”, which goes into effect April 1, permits officials in Germany to identify an account holder’s name, date of birth, address and the dates the account was opened and closed. Banks need only share the balance, deposit and withdrawal information when the account is not declared to investigators. The government wants to introduce this legislation because revenues from capital gains tax have fallen in recent years and an amnesty for tax dodgers introduced last year has failed to achieve the desired results.

In its decision, the German Constitutional Court rejected calls by a German bank, an unidentified lawyer, a notary, a recipient of welfare payments and a woman receiving housing subsidies that the law should not take effect as it would breach citizens’ personal rights. The Karlsruhe-based court assured that the law could only be invoked when the authorities suspect that an offense has been committed. It also stressed that citizens must also be informed of data checks after they have been carried out and at the very latest before any legal action is taken.

But, despite the assurances, critics, including politicians, lawmakers, banking groups and data protection officials, fear an Orwellian-style snooping in private lives and say the law has nothing to do with tax honesty. “There is this bogeyman being created in Germany, as if we were a country of tax evaders and that everyone has to protect their accounts,” Green party financial expert Christine Scheel told German public broadcaster RBB in response to concerns about how the law will affect people’s privacy.

OPINION & ANALYSIS

THE IMPACT OF GOVERNMENT SPENDING ON ECONOMIC GROWTH

Policymakers are divided as to whether government expansion helps or hinders economic growth. Advocates of bigger government argue that government programs provide valuable “public goods” such as education and infrastructure. They also claim that increases in government spending can bolster economic growth by putting money into people’s pockets. Proponents of smaller government have the opposite view. They explain that government is too big and that higher spending undermines economic growth by transferring additional resources from the productive sector of the economy to government, which uses them less efficiently. They also warn that an expanding public sector complicates efforts to implement pro-growth policies – such as fundamental tax reform and personal retirement accounts – because critics can use the existence of budget deficits as a reason to oppose policies that would strengthen the economy. Which side is right?

This paper evaluates the impact of government spending on economic performance. It discusses the theoretical arguments, reviews the international evidence, highlights the latest academic research, cites examples of countries that have significantly reduced government spending as a share of national economic output, and analyzes the economic consequences of those reforms. The online supplement to this paper contains a comprehensive list of research and key findings.

This paper concludes that a large and growing government is not conducive to better economic performance. Indeed, reducing the size of government would lead to higher incomes and improve America’s competitiveness. There are also philosophical reasons to support smaller government, but this paper does not address that aspect of the debate. Instead, it reports on – and relies upon – economic theory and empirical research.

THE SPIRIT OF 1994 (RIP)

As the 109th Congress settles into its normal rhythms, Republican leaders face crucial decisions on the policy direction of their party. After 10 years in power, the exact things that Republicans said were wrong with prior Congresses have become worse under their control. The GOP is responsible for record high deficits and their policies have intruded even more into state, local, and private activities. Now many Republicans are saying that even the limited spending restraints in the new Bush budget are dead on arrival.

The reformist spirit of 1994 has been lost on many careerist GOP politicians who have burrowed into the Washington power structure and now resist change. The GOP’s Contract with America promised the “end of government that is too big, too intrusive, and too easy with the public’s money.” But such sentiments sound quaint after the 31% increase in federal spending during the past four years.

Other declarations of the incoming Republicans have been long forgotten. In 1995, Bill Frist of Tennessee went to Senate floor to denounce Bill Clinton’s budget policies, arguing for “adjustment, reform, and downsizing the federal government”. He charged that “without a balanced budget agreement ... there will be profoundly negative consequences.” Today, Majority Leader Frist and his party preside over a deficit that is twice as big as in 1995. The GOP now works directly against many of their original reform goals. The GOP’s sell-out on reform is particularly sad given that the public supported much of the Republican agenda.

HOW THE WAR AGAINST DRUGS IS DESTROYING AMERICA

The self-proclaimed toughest cop in America, Sheriff Joe Arpaio of Maricopa County, Arizona, brandishes a badge and a gun, and drives a custom-painted U.S. Army tank. “We are proud to have the ultimate weapon in the war on drugs in our arsenal,” Arpaio says of the self-propelled “howitzer”, which the sheriff proudly parades before local citizens to “educate our children of the dangers of drug abuse.” (The lesson apparently being, “If you use drugs, we will blow you up.”) The troubling reality that local law enforcement now enjoys access to some of the same military weaponry as do America’s armed forces is just one of the insidious outgrowths of the drug war profiled in Bad Trip: How the War against Drugs Is Destroying America, by World Net Daily senior editor Joel Miller.

Miller writes, “By its intervention in the drug market, the State sets in motion an economic and political domino-collapse that exacerbates crime and corruption, gnaws away at privacy and property rights, endangers people’s well being, jails them, and sometimes takes their lives. In Martin Luther’s parlance, it’s a case of stepping on the dish while fetching the spoon, creating a big problem while trying to solve a small one.”

The “big problem” Miller speaks of includes more than just the growing militarization of law enforcement, as exemplified by General – ahem – Sheriff Arpaio’s private “howie”. It is the exponential growth of government power to seize control over Americans’ liberties, property, and even lives – all in the name of fighting the war on drugs. “Far from a simple attempt to rid the nation of crime and drugs, our policy against narcotics – like any public policy – comes with strings attached,” the author writes. “And increasingly these strings are constricting around the necks of Americans’ lives and liberties.” So what is Miller’s solution to “pull ourselves out of this mess”? Simply put, “As prohibition is the root of all these problems, the fix lies in repeal.”

THE DO-NOTHING CONSPIRACY

If you want an image that captures what American politics will be like over the next few decades, imagine two waves crashing down upon us simultaneously, each magnifying the damage caused by the other. The first wave is the exploding cost of the entitlement programs. The second wave is the ever-increasing polarization of the political class. The polarization will make it impossible to reach an agreement on how to fix the entitlements problem. Meanwhile the vicious choices forced on us by entitlement costs will make the polarization even worse.

The realities of the first wave are pretty well known. According to the Congressional Budget Office, Social Security, Medicare and Medicaid will consume 14% of national output in 2030 and 21% in 2075 – up from about 8% today. Partly as a result, the federal government will have to come up with an extra $50 trillion just to pay for the promises it has made as of today. To cover these costs, federal officials will have several options. If they acted immediately, according to the economists Kent Smetters and Jagadeesh Gokhale, they could increase federal income taxes by 78%, they could double payroll taxes, they could cut Social Security and Medicare in half, or they could do some combination. Tax increases on that scale would decimate the economy. Benefit cuts would cause pain. Doing nothing would lead to enormous deficits, an immobilized government and stratospheric interest rates. It would mean the end of the U.S. as a great economic power.

The realities of the second are also widely recognized. They can be measured by the increase in party-line voting in Congress, the bitter political atmosphere in Washington, the political segmentation of media outlets and the emergence of rigid donor and activist bases in each party that use their power to inflict Stalinist party-line orthodoxy on potentially independent leaders. We are seeing polarization in action in the Social Security debate. We see polarization in action in the looming fight over judges, which is producing talk about nuclear options and threats to shut down the Senate. But as the situation gets worse, the prospects of change get better, because Americans will not slide noiselessly into oblivion. The party alignments have been pretty stable over the past few generations, but there is no reason to think they will be in the future.

PRIVATIZE MARRIAGE

The Terri Schiavo controversy has brought on an avalanche of partisan bickering, federal usurpations, arguments over the sanctity of life and personal choice, questions about the role of the judiciary, and many considerations about the role of politics and future implications set by today’s precedents. One of the most interesting aspects of the case is how liberals have been correctly accusing the right of hypocrisy on issues of federalism, and how conservatives have responded with their own correct accusations of leftist hypocrisy. As in most political scandals, both sides are right about one thing: that the other side is inconsistent. At the forefront of these accusations of hypocrisy we see much finger pointing regarding one recurrent theme in American politics and the so-called “culture war”: the relationship between government and the institution of marriage.

The liberals observe that the right is hypocritical on the “sanctity” and “sovereignty” of marriage. Why isn’t Michael Schiavo given the benefit of the doubt if he is, indeed, the legal husband in a heterosexual, conservative-approved marital arrangement with Terri? The conservatives respond by saying that the left is only appealing to this as a ploy, perhaps to further some other greater anti-family values agenda, and if liberals really cared about marriage they would not try to dilute it by legalizing it for homosexuals.

Of course, the ideal libertarian solution to the gay marriage question is not really on one side or the other, but simply to privatize the entire institution. If people wish to consider themselves married to each other, let them do so, draw up any relevant private contracts to handle the details of the arrangement, and live their own lives in peace. If third parties wish to consider any given pair (or group) of people married, that should be their choice. No one, heterosexual or homosexual, would have any special rights under the law. Hospital visitation rights and other such matters would be handled contractually, and decided by the private individuals and institutions involved – not the state. No one would have to see the government give marriage licenses to some but not others, and no one would have to see the government legitimize any marriage he or she does not personally approve.

It is simple, really, and it is the way marriage was handled, for the most part, throughout the 19th century, when people were married by their own churches and in their own hearts. Marriage is a personal, private, spiritual matter. Government should have absolutely nothing to do with it at all. The marriage controversy, like most battles in the “culture war”, has done nothing to advance righteous values, civility and freedom. It has politicized an issue that should be private, religious and personal. It has distracted many good conservatives and liberals from the explosion of government power, the weakening economy, the degradation of tolerant, moral culture and the trampling of American liberty.

OF GODS AND STATES

Perhaps it is not at all coincidental that at the time the ancient world was being informed of the alleged death of the Greek god Pan – meaning “all” and who gave us the words “panic” and “pandemonium”, that Christianity was taking root and changing the way people thought. After all, this new way of thinking was not given to panic nor was it subject to the primitive delights offered either by the state or the adoration of the state; at least not for the first two and one half centuries after Nero. Rather, Christianity, which Pliny called a “contagious superstition”, fostered those adherents who, in the words Étienne de La Boétie, felt that “…obviously there is no need of fighting to overcome this single tyrant, for he is automatically defeated if the country refuses consent to its own enslavement.”

I am fully aware that most people are not use to thinking of the Roman Empire as a savage or barbaric society. However, one does not have to spend much time studying Roman history to find the absolute barbarism inherent in the nature of the empire or the Roman culture. The fact is that when a people are subjugated to a collective mentality and function as a herd, they are by definition a group of savages and this is irrespective of cultural advancements or material wealth. Thus, Christianity demoted the god Pan to the status of chief among demons; and took the battle over the Roman Emperor’s right to the unnatural, pretentious, and slavish love of being honored as both god and man, to the very halls of power. In return the Roman Empire marshaled it barbaric attitude, armed, and brutally fought to maintain its long-standing supremacy as the sole representative, and the highest expression, of either god or man.

It should have been no contest. Rome logically should have been able to fully and completely suppress the enemy roaming the empire, and certainly would have but for the zeal and tenacious ethic that the Christians brought with them. William Marina in his June 1975 article expresses the successful tactic of the early Christians as being “a superior ethic based upon natural law and a superior voluntary social organization which, in true interstices fashion, simply bypassed the inefficient State. The viability of that institutional structure was a reflection of the legitimacy with which its value system came to be regarded.”

When Constantine sought, in 316 AD, to co-opt Christianity into the power structure of the state, the Roman state had lost the battle but not the war. The only way Constantine could possibly begin to unify the Western empire was by elevating the status of the Christians within the empire. So, Constantine worked to change the face of western history by converting the old Roman Empire to Christianity. This one ruler and his lust for power had made it possible for imperial Rome to survive and rule for another 1000 plus years and in so doing forced Christianity into loosing the war.

Christianity had been seduced by the gentle melody of the syrinx, as the god Pan played his song of unfulfilled and unrequited love. The lure and lust of power, with the trapping of state, had turned the heads of those whose obstinate love for the ethos of natural law had helped bring one of the most brutal empires of the ancient world to it knees. Now the church had taken to itself the role of the preponderate power behind the thrones of all the western nations. The modern Messianic state, supported and bolstered by the legitimacy of the Christian church, had arrived. Unfurled were the ensigns of the savagery which were ultimately to be the continuing legacy of the western “Christian” state: the cross, the instrument of torture and terror; and the sword, the terrible crushing force of state.

The new mantra of the great Messianic state became peace through war. Thus, state sponsored terror spread panic and pandemonium throughout the world until every land was soaked with the blood of the unfaithful. So it continues today, death, destruction, wars and rumors of war and to what avail? If war is the health of the state then it cannot be denied that peace through war is the gospel of the Messianic state. As we approach the day set aside to honor a risen savior, I will leave it to the reader to decide which god is most venerated for having come back from the dead.

“THESE ARE THE TIMES THAT TRY MEN’S SOULS.”

This simple quotation from Thomas Paine’s The Crisis not only describes the beginnings of the American Revolution, but also the life of Paine himself. Throughout most of his life, he was a failure, living off the gratitude and generosity of others, but his writings helped inspire a nation. He communicated the ideas of the Revolution to common farmers as easily as to intellectuals, creating prose that stirred the hearts of the fledgling United States. He had a grand vision for society: he was staunchly anti-slavery, and he was one of the first to advocate a world peace organization and social security for the poor and elderly.

In 1776, he published Common Sense, a strong defense of American Independence from England. He joined the Continental Army and was not a success as a soldier, but he produced The Crisis (1776-83), which helped inspire the Army. This pamphlet was so popular that as a percentage of the population, it was read by more people than today watch the Superbowl. But, instead of continuing to help the Revolutionary cause, he returned to Europe and pursued other ventures, including working on a smokeless candle and an iron bridge. In 1791-92, he wrote The Rights of Man in response to criticism of the French Revolution. This work caused Paine to be labeled an outlaw in England for his anti-monarchist views. He would have been arrested, but he fled for France to join the National Convention.

By 1793, he was imprisoned in France for not endorsing the execution of Louis XVI. During his imprisonment, he wrote and distributed the first part of what was to become his most famous work at the time, the deist-atheist text, The Age of Reason (1794-96). He was freed in 1794 (narrowly escaping execution) thanks to the efforts of James Monroe, then U.S. Minister to France. Paine remained in France until 1802 when he returned to America on an invitation from Thomas Jefferson. Paine discovered that his contributions to the American Revolution had been all but eradicated due to his religious views. Derided by the public and abandoned by his friends, he died on June 8, 1809 at the age of 72 in New York City.