Offshore News Digest for Week of April 18, 2005

GLOBAL BUSINESS

WORLD BANK AND IMF “UNDEMOCRATIC”

Finance ministers from developing countries have renewed their calls for a greater say at the World Bank and International Monetary Fund (IMF). Their comments came on the eve of the World Bank and IMF’s 2005 spring meetings in Washington. With finance officials from around the world in attendance, those from the G24 group of developing nations said there remained a “democratic deficit”. Repeating the complaint they made when they last met last year, the G24 finance ministers said “the role of small and low-income countries in the decision-making process [of the World Bank and the IMF] is extremely limited.” The G24 also called for the U.S. to take action to reduce America’s giant trade deficit, saying the current high level increased the risk of excessive movements in global currencies. In addition, it renewed its call for more work to be done to increase debt relief.

SWISS BANKS NO LONGER HAVE IT ALL LOCKED UP

The names may differ, but the style remains the same. Marble halls, lifts that transport clients without pressing any buttons, anterooms and taciturn flunkies serving refreshments: Welcome to the world of Swiss private banking. It is a model that has worked for decades, centuries even, as foreign potentates, politicians and the plain rich have sought a haven for their wealth. But recently, behind the immaculate facades, signs have emerged that confidence may be slipping. Data are hard to find in an industry noted for discretion. But what evidence there is suggests that Switzerland, once a byword for private banking, is no longer casting its special spell.

The oldest and most traditional banks, such as Pictet and Lombard Odier Darier Hentsch in Geneva, still bear the names of their founding families. Tightly run by partners bearing unlimited liability, they are under no obligation to publish figures. Others, such as Zurich’s Julius Baer and Vontobel, or Basel-based Sarasin, must be more forthcoming. Though still dominated by founding families, their decisions to issue shares have required more transparency. Deposits at Sarasin rose just SF416 million last year, a mere 1.3% of the SF30 billion under management. At Julius Baer, a relative upstart tracing its roots back only to 1890, clients actually withdrew SF800 million, on balance. Nearby Vontobel attracted a net 200 million francs. “It is difficult to generate new money in Switzerland,” said Herbert Scheidt, Vontobel’s chief executive. Even UBS and Credit Suisse Group, the giants of Swiss banking, are struggling at home.

The reasons the flood of foreign money has turned into a trickle lie in tougher controls at the banks and changed attitudes among customers. New laws on money laundering have eliminated Switzerland’s former attractions as a destination for illicit, or just undeclared, money. Declining personal tax rates in Europe have also reduced the fiscal incentives for stashing money in Swiss accounts. Italy, Belgium, France and Germany have even introduced amnesties to entice wealthy citizens to repatriate funds. Holding money in Switzerland will become even less appealing after a savings tax on some assets takes effect in July. Clients, meanwhile, have developed different priorities from the days when asset preservation sufficed. Portfolio performance has gained importance, as has cost consciousness. And not every private bank has delivered. But the new circumstances do not mean private banking is unattractive or unprofitable, just that the rules have changed.

LATEST LETTER FROM PANAMA IS OUT

The Economic Commission for Latin America and the Caribbean predicts that the region’s per capita GDP will repeat last year’s result and grow by 4% in 2005. ECLAC reports that the region’s economy grew by 5.5 per cent in 2004, a figure which has surprised everyone and is the region’s best result since 1980. The current regional recovery has been largely due to GDP growth accompanied by a surplus in the balance of payments current account; at the same time there has been a rise in output, despite large capital outflows (almost $20 billion net). In 2004, regional inflation stood at 7.3% with combined exports of over $460 billion and imports of almost $399 billion. There seems to be less dependency on international capital markets and sovereign risk premiums have been lowered. The level of external debt last year fell from 42.8% of GDP in 2003 to 37.2%. The demand, particularly in Latin America, for labor has seen a marked increase in job creation and not since 1997 has growth exceeded 3% in all six of Latin America’s biggest economies.

It was all quite different just two years ago when Brazil was expected to follow in the financially faltering foot steps of Argentina. And Argentina has, of course, produced its own surprises since then with economic growth of 8.2% last year. It is a country of contradictions. In 1913 its income per capita was on a par with both France and Germany and it was considered a developed country. It soon lost its status after that and many reasons have been given for the decline, but two stand out: a failure to both industrialize and diversify in the early 1900s and – the perennial thorn – politics. Today’s president, Néstor Kirchner, is seen by many as being the very essence of a Peronist, and they hope, therefore, that he can bring more disciplined governance to their big yet sparsely-populated (38 million) country which, in area, is the world’s 8th-largest. He is authoritarian and it is said that he inspects the government’s accounting books every day. Perhaps by paying close attention to the books he can do what many of his predecessors since the 1930s have failed to do, forget past glories and strive towards regaining the status of a developed country.

Another unpredictable country, Venezuela, continues to upset the president of one of its large oil customers, the U.S.A. On a visit to Beijing last December, Hugo Chávez signed an accord with China to sell 120,000 barrels of fuel oil a month and to also allow Chinese companies to help pump oil from 15 Venezuelan oil fields. It is reckoned that at the moment there is one car for every 70 Chinese vs. one car for every two Americans. If car ownership eventually rises to American levels it would equate to 650 million cars, a figure that exceeds the number of cars in the world today. Venezuela and Panama have discussed using an existing Panamanian pipeline in conjunction with Panama’s canal to enable oil to be shipped faster and more economically to Asia.

If widening the canal is on the cards, narrowing the country’s budget deficit is taking precedence. The new fiscal reform package, promised by president Martín Torrijos, has been presented. Torrijos has said that the reforms are central to his economic plans and he acknowledges that they represent “drastic austerity measures”. The expectation is to cut the government’s budget deficit (about $700 million) almost in half by 2006 through tax increases and spending cuts. The government wants to cut its payroll by 30% in 2005 alone. The international market has welcomed the initiative. The new tax regulations have yet to be published, but those with offshore Panamanian companies should not be concerned. Even although the annual company franchise tax is set to increase from $250 to $300 next year, it still makes Panamanian company costs competitive. Offshore financial services are not a target and alarmism is unwarranted.

GLOBAL ECONOMY IS LEADING TO BUSINESS TRAVEL TO MORE DANGEROUS PLACES

Jeffrey J. Ake wrote a 1993 article for Inc. Magazine that extolled the growth opportunities for small businesses in exports. New markets were opening in the farthest-flung corners of the world, and he urged small-business owners to broaden their horizons and go for them. “Nothing can take the place of the old-fashioned sales trip,” he wrote. “You make sales trips to Des Moines, Sacramento and Pittsburgh, right? Get yourself to Bangkok, Taipei and Santiago.” After 15 years of international business travel, Mr. Ake, 47, was kidnapped last week in Iraq.

He owns a small Rolling Prairie, Indiana, company, Equipment Express, that makes machines for bottling drinking water and other liquids. In 1996, when he self-published a book, Aggressive Exporting: How to Make Your Small Company Into an International Tiger, he was already roaming the world. He was aware of the risks. He just depended on good advance planning and good luck to avoid serious trouble. His luck ran out on April 11, when he was kidnapped by gunmen at a water-treatment plant near Baghdad, American officials said. Two days later, he was shown pleading for his life in a videotape broadcast on the Al Jazeera network. As of the evening of April 18, no new information had been released on his fate.

Economic globalization is adding a whole new element of peril for a growing number of business travelers who, like Mr. Ake, are making their way to stretches of the globe that were once well off the beaten path. “Business travel is perhaps the most dangerous form of travel,” said Robert Young Pelton, a world traveler and the author of The World’s Most Dangerous Places, a 1,074-page book crammed with common-sense advice – often in the form of trenchant wisecracks. Tourists, Mr. Pelton writes, “wouldn’t consider flying into a Colombian war zone for a week, yet folks from oil, computer, pharmaceutical, agricultural and telecom companies do it regularly,” while also making themselves prime targets by frequenting good hotels and restaurants with other well-heeled foreigners.

Mr. Pelton, who writes a monthly column called “Pelton’s World” for National Geographic Adventure magazine, says kidnapping has become a growth industry in Iraq and elsewhere mostly because insurgents and common criminals know many business travelers have kidnap insurance. The “Dangerous Places” books are written with assistance from a worldwide network of collaborators and sources, some of them clandestine. Of course, a guide book is only one tool for those venturing into places where trouble lurks. In recent years, security companies have proliferated offering real-time personalized travel alerts, as well as bodyguard, emergency evacuation and on-scene medical services.

Risk is a component of life, and, as Mr. Pelton points out, people in general encounter fewer dangerous mishaps on the road than at home. And some of the most intense, exhilarating travel experiences occur in “places where people warn you not to go,” he said. Nevertheless, never forget the squad room motto: Be careful out there.

FOR BUSINESS TRAVELERS, FEES AND TAXES EVERYWHERE

The $39 parking charge at San Francisco’s expensive Westin St. Francis hotel did not faze Veronica St. Claire, a business traveler who is instinctively wary of extra fees wherever she goes. But when the hotel added a $5.46-a-night bed tax to the parking charge on a recent visit, she felt ambushed. Unusual or exorbitant add-ons to bills have always been a way of life for frequent travelers. But the fees normally ebb and flow, tempered by economic cycles and consumer sentiment. After the terrorist attacks, for example, many egregious surcharges vanished. Now that they are making a strong comeback, business travelers are feeling more put-upon than they have in years. And they are noticing a new intransigence when they try to have unusual charges waived.

While the industry’s creative billing is aimed at anyone who hits the road, business travelers – and their employers – are disproportionate victims, in large part because they account for a disproportionately large part of travel spending. While they make up only 18% of all domestic travel, they account for 31% of overall travel spending, according to the National Business Travel Association, a trade group that represents corporate travel managers. Moreover, many of the fees are for services that would not be used by leisure travelers, and are charged mainly by business class hotels, where vacationers normally do not stay.

No single organization tracks all the surcharges, probably because the task would be far too complex and time-consuming. But during the last year, the tax-and-fee burden on corporate travelers has increased “significantly”, pushing corporate travel and entertainment expenses higher, according to the Caleb Tiller, a spokesman for the organization. “We only know that it is growing, and that companies are aware of it, and they aren’t happy about it,” Mr. Tiller said.

It seems that fees are multiplying everywhere. Texas legislators have been considering a measure to raise hotel taxes in Dallas to 18%, from 15%, to pay for more police. The city’s occupancy taxes would surpass Houston’s 17% levy to become the highest in the nation. Meantime, Anchorage, Alaska, increased its bed tax this month to 12%, from 8%, to finance a new convention center. And in February, Las Vegas approved a 2% tax on car rentals, joining a long list of other cities and counties that tax drivers. (A Travelocity survey found that car rental customers at airports pay an average 25.8% of the base price in taxes and surcharges.) Even the federal government views travelers as a reliable revenue source. President Bush’s proposed 2006 budget would increase security fees to a maximum of $8 a ticket, from a current $5 limit, a move that business travel advocates are opposing. In early March, the State Department added a $12 “security surcharge” to passports. “Business travelers are a fee-slapped bunch,” said Donald Groff, who publishes the consumer travel Web site dgroff.com.

INTERNATIONAL CELL PHONES: THE GOOD, THE BAD AND THE CHEAP

If you, like many, find freedom from phones to be one of the great rewards of traveling, you can stop reading right here. But whether it is a sick relative, a nervous client or simply to check in with mom and dad, sometimes being out of touch is simply not an option. International cellular phones can free you from the inconvenience of being chained to a hotel or pay phone while providing reliable and yes, even an economical way of calling back home while overseas. But be prepared to either purchase or rent a second phone because standard domestic models do not work overseas and here is why: Some countries drive on the other side of the road. Some countries use different TV systems (remember this when buying videos and DVDs internationally). And, unfortunately, most countries use a different type of cell phone service, too.

Europe and much of the world adopted a common cell phone standard called Global Service for Mobile (GSM). Equally important, Europe, Africa and Asia not only had the foresight to adopt the same cell phone standard, but they also decided that their cell phone networks would operate on the same frequencies (the 900mhz, initially and later the 1800mhz band). This explains why the same cell phone that works in London will work equally well in Johannesburg, Beijing and Sydney. Thus most countries around the globe – more than 205 at last count – have adopted the GSM wireless technology and if you want to go travel and want the convenience of carrying a cellular phone, then you’re going to need a GSM cell phone service. The U.S. and much of the Americas did not standardize and consequently competing wireless standards emerged from the various wireless carriers. There are some American GSM cellular providers however they typically operate on a different (1900mhz) frequency then is used in Europe Asia and Africa consequently you will need this frequency on your phone if you plan on traveling to North and much of South America.

A GSM tri-band cell phone can be rented for typically $29-$59/week with per minute charges ranging from $1.50-$5/minute, for your incoming and outgoing calls. If you travel infrequently (less then once/ year) and your stay is less then a week then this may be the best option even with the outrageous per minute costs. If you already have local GSM service then you can probably use the international roaming feature of your domestic provider but that can get expensive fast. Typical roaming rates, depending on your ultimate destination can cost between $1-$7/minute. To really take advantage of a cell phone overseas and not need a second mortgage on your house, you will want to purchase your own GSM cell phone and a local prepaid SIM card for your next international destination. With a prepaid cell phone you have a cost effective way of staying in touch with no bills, no roaming charges and no hassles.

MORE ABOUT LIVING IN COSTA RICA

It was not too long ago that, for me, life was a hum drum “status quo” existence which was far underperforming my own personal expectations of what I had envisioned for myself in my youth. How many of us feel “trapped”, or at best “limited” by life and how we have positioned ourselves in it? Of course as much as we try to look elsewhere for causes, we only have ourselves to blame. That was the war cry for me. “I” was the only one who had the power to change it and I did. The life of international travel had always appealed to me. Exploring other lands, people, cultures, cuisine and philosophies was always intriguing and seemed exotic for this country boy from Minnesota.

My studies (well into my adulthood) took me to writers like W.G. Hill (Perpetual Traveler), Adrian Day, Ayn Rand, Marshall Langer (The Passport Report), Peter Trevellian (The Invisible Investor) and many others who knew too well the dangers of being ‘stuck in the mud’ with nothing but your native domicile. History is all too blunt to show us the suffering that has been imposed on “homebodies” who never had the foresight or vision to ‘diversify’ their interests and assets for their own well being. Now you might be asking yourself, “what assets?” Believe me, you have plenty to protect above and beyond any cash, businesses or holdings of tangible value. You have assets such as your “domicile” legal status, business base, citizenship, banking & finance center, and more.

The objective for me had been set: I was determined to achieve the “PT” lifestyle. For those familiar with W.G. Hill and Harry Schultz, you would relate to “PT” as being something along the lines of a, “Perpetual Traveler”, a “Previous Taxpayer”, a “Permanent Tourist”. I will not recap his wonderful book here, but the idea is simple. As a “PT” you always appear to be from somewhere else!

Have you ever noticed that “tourists” are always handled with extra special TLC from the host government? It’s true. They want the tourism profits, the good image and they want you to come back again with your friends next time. Often, they will overlook slight indiscretions in favor of this mantra and you go on your merry way. Further, if you understand commercial law and how your local State Department of Motor Vehicles ties you into their corporate body politic to extract revenue, subservience and ultimate control over your person and your property, you would understand that the regulatory code they use for this tyranny is applied by the jurisdictional clauses in the statutes which are applied against: “residents” and “persons engaged in business(commerce)” in their jurisdiction.

I left my old country of domicile (It felt like a prison escape!) seeking business and ways to support myself along the way as I was not wealthy nor even close to retirement and had no certain income. I knew a business structure was important and so was properly structuring the banking. Now was my chance to implement the “5 flag philosophy” I learned from W.G. Hill.

MORE ON RETIRING TO PARADISE

After spending 7 days on Margarita Island, Venezuela, I can say, this is where I will semi-retire, sooner rather than later. I enjoyed virtually everything about this delightful island some call the Pearl of the Caribbean. It is famous for oysters, seafood, and fresh fish, etc. Venezuela has allowed this island to be 100% duty free. On a fixed income(social security for example) anyone can afford to live here. And when I say live, I mean live and enjoy life and not just squeak by as many of us will have to do once we retire. You only need to have an income of $1200 to actually be considered for residency.

La Isla, what the locals call Margarita, is truly what I am looking for and I know many others are as well. Once other Americans discover this little Paradise they will fall in love as I did. The island has warm, kind, friendly handsome people(and from a male point of view, the women are stunningly beautiful). The weather is great and predicable, between 78-85° and a nice breeze at all times. The pace is slow (so get out of the rat race). There is only one large town over 100,000 population (Porlamar). There are numerous small towns(of 2-10,000 people), very little crime, inexpensive medical care and the cost of living is easily under $1,000 per month including rent. You are never more than 10 minutes from a beach or 20 minutes from the largest city of Porlamar where the nightlife goes til 2 or 3 a.m. or until whenever. I say, sometimes, you just gotta go for it. You only go around once in life, so go for the gusto NOW!

DOMINICA – THE NATURE ISLAND OF THE CARIBBEAN

The Commonwealth of Dominica is an independent English speaking island state situated between the French islands of Martinique and Guadeloupe. It is a former British colony and a member of the Commonwealth of Nations (British Commonwealth) as well as the United Nations, Caricom, and other international organisations. It should not be confused with the Spanish-speaking Dominican Republic to which it has no ties.

Dominica has a pleasant climate, particularly during the cool months from December to March. It is certainly one of the most beautiful countries of the Caribbean. Covering an area of almost 800 square kilometres, it supports a population of more than 65,000, including about 3,000 of the last surviving indigenous Carib people. Dominica offers good opportunities for investors and manufacturers. The workforce is well-educated, English speaking and friendly. Other advantages include tax breaks of up to 15 years, repatriation of profits, economical supply of electricity, and the possibility of tax-free entry of produced goods into the U.S. market. Substantial European import benefits also apply.

Dominica is an island state located in the Eastern Caribbean. It is part of the Lesser Antilles and is easily reached by air. There are good flight connections from Europe and North America. There are state-of-the-art telecommunications, reliable electricity supplies and clean piped water coming directly from natural springs in the mountains. The Dominicans are regarded by many travelers as the friendliest people in the Caribbean.

The economy is largely based on agricultural exports including bananas, citrus, coffee, cocoa, coconut products and oil, tropical fruits, fruit juices and copra. Other exports are fish and various manufactured products including rum, soap, and timber. Agriculture remains the most important sector of the economy both in terms of employment and contribution to the gross national product. Due to a scarcity of white sandy beaches, Dominica never underwent the typical Caribbean conversion to a holiday island, therefore missed the huge influx of capital associated with this. However, tourism is an increasingly important sector of the economy, and luxury and eco-tourism are being encouraged.

The Dominican Government is adopting a structured approach to economic development through a number of interesting programmes, among them the promotion of Dominica as a new and attractive offshore banking and company formation centre, and of course an attractive Economic Citizenship Programme.

Election countdown begins in Dominica.

Dominicans will go to the polls to vote for the 2005 General Elections on May 5. That date was announced by Prime Minister, Roosevelt Skerrit, during a Labour Party meeting in Grandbay on Tuesday evening. The announcement has put to rest much anticipation and assumptions about the election date.

INVESTING IN BULGARIA

Located in the Balkan Mountains in South Eastern Europe, one of Europe’s poorest countries is now in a period of transition with major investment helping its economic growth with predicted membership to the EU on course for 2007. The Republic of Bulgaria covers an area of 110,910 square miles with a population of over 7 million. It boasts 354 kilometers of dramatic coastline along the non-tidal Black Sea. Its tourist industry is flourishing as people flock to the clear waters of the Black Sea and temperatures that beat the Mediterranean in the summer months.

Interest in Bulgaria has been growing rapidly as investors look for the next “big thing”. The country is on course to enter the EU in 2007 and as a result money to develop its banks, telecommunications and transport is being splashed around. New Embassies, offices, conference centres, hotels and motorways are being built and international firms are moving to the capital Sofia. In short Bulgaria offers an almost unrivalled quality of life and investment opportunity.

BULGARIA AND ROMANIA CLEARED FOR ACCESSION TO EU

The European Parliament voted by a large margin to approve the EU accession of Bulgaria and Romania. Both countries expect to join in 2007. But they could face a year’s delay if important reforms become bogged down in the course of the remaining 20 months. After a last-minute tussle with the EU member states, who normally have the final say on enlargement issues, the parliament also won the right to have its voice heard up until the countries’ actual accession.

Romania hits back at French “lecturing”.

Romania’s president has warned France to stop lecturing his country over its close links with London and Washington as he prepares to sign the treaty to join the EU. Traian Basescu says he wants to form a “special relationship” with the U.S. and Britain to improve security in the Black Sea region, and he also aligns himself with London’s liberal economic policies. Mr. Basescu’s stance has infuriated France, Romania’s biggest supporter in the EU, and could exacerbate fears in France that it is losing its grip on an expanding EU. Next week Romania and Bulgaria will sign the accession treaty paving the way for them to join the EU on January 1 2007, bringing the union’s membership to 27.

Members of Romania’s center-right government, in a series of interviews with Brussels-based journalists, made it clear they saw themselves in the Atlanticist, free-trade bloc which Donald Rumsfeld, U.S. defense secretary, called “New Europe”. Mr. Basescu said Jacques Chirac, French president, caused offence in 2003 when he told EU candidate countries to “shut up” over Iraq, and that Michel Barnier, French foreign minister, recently compounded the insult when he said Mr. Basescu did not have “a European reflex”.

Romania to relaunch its currency.

Starting July 1, a cup of coffee currently costing about 50,000 Romanian lei will be priced at just 5 lei instead. The leu’s redenomination follows a similar move by Turkey, which chopped six zeros off the Turkish lira at the beginning of the year. Romania is liberalizing its economy, as part of the former communist state’s EU membership campaign. The National Bank of Romania’s decision could prove popular with travellers to the country and Romanians themselves, making the calculation of simple transactions a less complicated task. Currently, one dollar is worth about 28,000 lei.

PANAMA REAL ESTATE AND PRICES

Was I in Miami or Central America? Weaving through the streets of picturesque Bella Vista in downtown Panama City, Elias Mizrachi of Procasa Realty was chatting me up about ocean views and tax benefits… I was staring out the window in the back of his BMW sedan at a city that seemed to have grown up since I was last there. What a fantastic time to buy in Panama City. Two weeks before I had been bit by the bug again … so I booked my flight, contacted some developers, and headed down for a long weekend. I kept quiet this time; I hate getting the obvious question – “Why are you going there?” I made a tentative itinerary to meet with two developers of new condo projects and another developer who specializes in the renovation of colonial quarter residences … fairly ambitious for a short trip, but worth the rush.

Real estate is booming in Panama. Rich Latin Americans as well as baby boomers from the States are buying up condos in Panama City. Like all cities, Panama is running out of land to develop within the city limits. Moreover, the Panamanian government passed a favorable tax law that exempts owners from paying property taxes for 20-years if they purchase a development constructed in 2005. Consequently, every major developer in the city is trying to squeeze a condo project anywhere they can find space.

Panama City is a growing town. The new casino business is booming, the banking sector is as strong as ever, the Canal is – as ever – a tremendous revenue source, tourism is on the way up, and foreign capital is flowing into the country. I saw far more Americans on this trip than the last. Panama is entering the mainstream. As baby boomers retire and seek to extend the purchasing power of their dollar, Panama will inevitably be high on the list. There is no currency fluctuation (Panama is on the dollar), the weather is as warm as the people, you can fly anywhere in the world (direct flights to several cities in the U.S., Latin America, and Europe), the shopping is as extensive as most major western cities, and the cost of living is very low. I determined that, with an income of $2000 monthly, one could live exceptionally well in this beautiful, modern city (the average Panamanian makes significantly less than $10,000 annually).

RICE BACKS “EUROPEAN PROJECT” (SAYS IT WILL BRING PEACE IN OUR TIME)

U.S. Secretary of State Condoleezza Rice expressed support for the completion of the “European project”, but sidestepped a question about the EU’s controversial new constitution. Rice said the EU has been an important force in reuniting the European continent after the fall of the Iron Curtain by drawing ex-communist countries in central and eastern Europe, eight of which joined the EU last year. Asked about the EU constitution – which is facing a crunch referendum in France next month when voters there could effectively kill it off – she said the U.S. is “not part of the EU and we’re not a part of this debate.” A long series of opinion polls over the last few weeks have indicated that the French “no” campaign against the EU constitution is set to win a referendum on May 29. A rejection in France France would plunge the EU into one of the most serious crises in its half-century history.

Greek parliament backs EU constitution.

The Greek parliament overwhelmingly voted in favor of the EU’s constitution, making Greece the fifth EU member to approve the 25-nation bloc’s landmark document. The constitution was approved by 268 deputies who voted in favor and 17 against in the 300-member unicameral parliament. Lawmakers from both the governing conservative party and the opposition socialists voted in favor. Another 15 deputies were absent. The constitution aims to simplify EU procedures and decision-making after the bloc’s expansion last year to include 10 new members.

The parliamentary vote came just over a month before France holds a May 29 referendum on the new EU blueprint. Polls in France indicate voters there could reject the constitution. With approval by all 25 EU members necessary for the document to come into effect, such a result would stop the constitution in its tracks. Germany’s parliament is to vote on the constitution on May 12, while British Prime Minister Tony Blair hinted that his country would not hold a referendum on the issue if the French reject the constitution in their referendum.

BRITISH WOMEN ARE POWERING AHEAD IN THE RACE FOR RICHES

Female millionaires will outnumber their male counterparts across all age groups within 20 years, says just published research. It describes women as the “financial powerhouses” of Britain. The study predicts that women will own 60% of the nation’s personal wealth by 2025, with many using their professional and personal skills to extraordinary financial effect. At present, women millionaires between the ages of 18-44, and over the age of 65, outnumber male millionaires, the report says. They own 48% of the nation’s personal wealth. But significant change will occur as a result of the rise in “financially sophisticated younger women”, who will swell the numbers of those who inherit their wealth.

Many more women will own property – property ownership has helped to catapult women in business – and girls are performing better than boys at school, obtaining traditionally male, high-powered jobs. Women are also living longer and are more likely to inherit. Then there are those who marry – and divorce – “well”. Women are increasingly using their business wiles to gain financial rewards from their private lives. In America they are classified as “Boomers” (those who have inherited their husband’s wealth) and “Sarahs” (Single And Rich And Happy) who have made their cash through clever wrangling in the divorce courts.

TAXES

FLAT-OUT CASE

If anything is likely to boost support for the flat tax, it is the annual nightmare of tax season. Imagine junking all the paperwork the current system requires and replacing it with two simple postcard- sized forms that tax income only once and at one low rate. Imagine a simple and fair tax system that required all Americans to play by the same rules, regardless of how many lawyers and accountants they had on the payroll. And imagine politicians having no ability to put loopholes in the tax code in exchange for campaign cash. These are all strong arguments for the flat tax. But there is an even bigger reason to support it: It would be good for the economy.

Other countries certainly seem to realize the importance of tax competition. Eight nations in Eastern Europe have adopted flat taxes, for instance, including a 13% flat tax in Russia. Tax competition has forced other European nations to cut their corporate tax rates. Indeed, there has been so much progress that every nation in Europe now has a lower corporate tax rate than the U.S. – even socialist countries such as France and Sweden. The U.S. needs to regain its status as a major contender in the tax-competition battle. Moreover, China and India are shifting toward free-market policies and are attracting jobs and investment. It is even rumored that China may adopt a flat tax. If that happens, the U.S. will face even more vigorous competition. Hong Kong has enjoyed incredible prosperity with a flat tax, so just imagine if the rest of China gets the same simple, pro-growth tax system.

President Bush has appointed a tax-Reform advisory panel, which has been holding hearings and learning how the tax system undermines U.S. competitiveness. Members are expected to issue a report on July 31 and almost certainly will recommend that the U.S. move in the direction of a flat tax. Hopefully, they will be bold and suggest that the entire tax code be junked.

THE INJUSTICE OF “TAX JUSTICE”

What does the phrase “tax justice” mean? A definition is important because some groups claim to favor “tax justice” but really want to increase taxes on productive people and transfer resources to the state. Webster’s, in part, defines justice as “the assignment of merited rewards or punishments”. There is an organization called the “Tax Justice Network”. Many of its leaders are, or have been, associated with the Fabian socialists in Britain and other socialist groups around the world. Yet, this group just held a “briefing” for members of the U.S. Congress and their staffs. The organization strongly opposes tax competition between governments and has a “manifesto for tax justice”, with the underlying goal of increasing global tax revenue.

Virtually every serious study of global taxation has concluded tax rates in almost all countries are above the welfare and revenue-maximizing rates, and that the size of government in most countries is well above the growth-maximizing level. Thus, how can increasing government tax revenue be “just” if it is likely to do more harm than good in most places? The authors of the “tax justice manifesto” aim “to eliminate cross-border tax evasion and limit the scope for tax avoidance, so that large corporations and wealthy individuals pay tax in line with their ability to do so.” (Shades of “From each according to his ability, to each according to his need.”) They also want to increase corporate tax rates worldwide and taxes on the “wealthy” as part of their antitax competition and tax harmonization proposals.

Reading through their program, one becomes curious about how little they seem to know of real world economics and how little regard they have for individual liberty. Among other proposals, the authors of the manifesto want to “prevent the further privatization and degradation of public services.” Somehow, these self-proclaimed “tax justice” advocates miss the undeniable fact socialism has failed almost everywhere tried. Despite the high-sounding rhetoric, the Tax Justice Network is only a collection of socialist-no-nothings – or worse – whose policies, if enacted, would destroy economic growth, financial privacy, civil society and individual liberty.

TOP KOREAN OFFICIAL DEFENDS TAX PROBE INTO CAYMAN HEDGE FUND

Finance and Economy Minister Han Duck-Soo defended a tax audit of foreign funds as part of a drive to enhance transparency in South Korea. Yonhap news agency said the tax authorities have already found some alleged irregularities by US-based investment fund, Carlyle Group, which held a stake of some 36% in KorAm Bank and sold the lender to Citigroup for $2.6 billion in 2004. It also did not pay taxes by registering its affiliate in the Cayman Islands. His comment followed reports that auditors from the National Tax Service (NTS) probing suspicions of tex evasion raided the offices of several foreign funds. The tax probe comes amid growing complaints from foreign investors that South Korea is increasingly hostile towards them and offshore entities who use tax havens and tax treaties to avoid taxation.

Hostility is growing in Korea towards foreign funds which have made huge amounts of money by acquiring real estate and other prime assets in the aftermath of the 1997-98 Asian fincancial crisis. Defenders say the funds took on high-risk investments at a time when South Korean investors were unwilling to do so and saved or created thousands of jobs and boosted the country’s economy.

EU SAVINGS TAX DIRECTIVE STILL ON COURSE FOR JULY 1

The Ecofin Council – the group of EU finance ministers who have the final word on when the directive comes in – met on Tuesday and announced that they were “convinced” that the directive would come in on July 1, which is already six months later than they first hoped for. But the decision was still not finalized at the meeting in Luxembourg, and the implementation date will be confirmed on June 7. The last remaining sticking-point is a technical issue over whether the interest earned in a fund that invests in another fund (a “fund of fund”) should be included in the directive. Member states had agreed previously that if a mutual fund generated less than 15% of its income from interest then it would be excluded from the tax directive. Ecofin has now concluded that it will cover both direct and indirect investment and has now asked member states to guarantee that they will honor this.

An EU tax directive loophole for Britons with hidden overseas accounts.

A savings directive, due to be implemented in July, aims to clamp down on tax evasion. But bank customers with offshore accounts who agree to pay a withholding tax will have their identities shielded from their home tax authorities. Mike Warburton at Grant Thornton, an accountant, said, “Anyone who is deliberately evading taxes will shift their money elsewhere – … there is always somewhere you can move your money to avoid tax and these people will do just that.” Under the terms of the directive, EU states will have to hand over tax information about the income they are paying to foreign customers. Banks in other member states will have to inform the Inland Revenue about accounts held by Britons.

But Belgium, Luxembourg and Austria objected because they felt it infringed people’s privacy. As a result, they will offer customers a choice: they can either disclose their savings on their tax return or their foreign bank will levy a withholding tax that will be deducted from the interest paid. The rate will initially be 15%, rising to 20% in 2007 and 35% thereafter. Each year, 75% of the tax collected will be paid to the relevant tax authorities as an anonymous lump sum and the collecting state will retain 25%. This is said to be a temporary measure and these states are due to comply with the full directive in five years.

Switzerland and the Channel Islands, which are not members of the EU, have agreed to similar provisions. They will apply a retention tax, basically another name for the withholding tax. Simon Hull at Alliance & Leicester International said, “The Isle of Man, Jersey, Guernsey and Switzerland will apply a retention tax, and will not identify individuals. Customers will have the choice of disclosure or paying the retention tax.”

TAX OUTLOOK BLEAK FOR FUTURE RETIREES

If you want to replace your purchasing power in retirement, you will have to pay more taxes to Uncle Sam today. You will have to pay still more tomorrow. This will happen because Uncle Sam has had the power to tax Social Security benefits since 1983. Few noticed back then because so few were taxed. One-half of your Social Security benefits plus all your other income had to exceed $32,000 for couples, $25,000 for singles. Very few retirees exceeded the threshold because $32,000 went nearly twice as far in 1983 as it does today.

And that is the problem.

Every year retirement benefits rise, but the $32,000 and $25,000 thresholds remain. According to a 2004 Georgia State University/Aon study, a newly retired two-earner, middle-income couple today needs about 75% of their combined pre-retirement income in retirement. The 75% figure reflects adjustments made for employment taxes, lower income taxes, savings and work-related expenses. How much more in taxes will today’s 30- and 40-year-olds pay if they try to do the same thing – replace 75% of their earning power at retirement? The short answer: a lot more. Here is what I learned comparing the prospects of three couples trying to achieve the same goals at different times.

THE CURSE OF THE WITHHOLDING TAX (THANK YOU, MILTON FRIEDMAN)

But regardless of the amount of federal income tax that one ultimately pays, the fact that the U.S. government seizes the wealth of its citizens slowly over the course of the year via the withholding tax means that the typical taxpayer is comfortable because he does not actually have to write out a check to the government on April 15 of each year. The withholding tax makes it possible for the government to silently steal the wealth from its citizens with little or no outrage about the loss. And even in the case where the citizen receives a refund of all the taxes he has paid in, the withholding tax still serves two evil purposes. First, getting a refund of all the taxes one pays in amounts to an interest-free loan to the government. The government gets money to continue its spending orgy, and the citizen loses the ability to receive a return on money that could be invested. And second, getting a tax refund fosters the notion that the government is benevolent. Never mind that the money is yours. If the government sends you a check in the mail then the government cannot be all that bad.

So where did the withholding tax come from? It was not part of the original income tax that resulted from the 16th amendment in 1913. Very few people paid any taxes back then anyway. The income tax did not directly affect the average American until World War II. On the eve of the war, few Americans paid income taxes. Those that owed taxes paid them in one lump sum on March 15 (later changed to April 15). To pay for the war, the Revenue Act of 1942 lowered exemptions and raised income tax rates. But it also did something even more insidious – it instituted a 5% “Victory Tax” on all wages above an exemption of $624. The tax was to be collected by the employer and deducted from the employee’s paycheck – just like the Social Security tax that began in 1935.

The Current Tax Payment Act of 1943 then revolutionized the income tax by making withholding taxes universal. The withholding tax was part of the new tax plan offered by Beardsley Ruml (1894–1960), the chairman of the New York Federal Reserve Bank and treasurer of R.H. Macy and Co. By 1945, about three-fourths of Americans were paying federal income taxes. And although the withholding tax was sold as a wartime emergency, like most expansions of government instituted during wartime, it has been a way of life for most Americans ever since.

The income tax allows the government to confiscate the wealth of its citizens. The curse of the withholding tax is that it allows the government to commit this crime systematically, effortlessly, painlessly, and benevolently. Surprisingly, it was a free market economist who helped the federal government implement the withholding tax in the first place, as was pointed out by the Austrian economist, Murray Rothbard, in his 1971 article “Milton Friedman unraveled”(PDF file).

ASSET PROTECTION

OHIO MAN ADMITS TO $8 MILLION OFFSHORE INVESTMENT FRAUD

A Cincinnati man pleaded guilty to defrauding investors of more than $8 million that he spent on 18 vehicles, a Hawaiian cruise for 17 relatives and friends and gambling. John Patrick Kisor confessed to wire fraud, securities fraud and money laundering. According to the IRS’s Criminal Investigation section, Kisor, 42, scammed about 30 Cincinnati-area investors through his investment company, PDK International, from 1999 to 2002. He also defrauded more than 100 investors from Ohio, Michigan and elsewhere through an enterprise called Agave Limited. Most of the funds were invested though offshore bank accounts in the Cook Islands and elsewhere and wire transferred to brokerage and bank accounts controlled by Kisor in the U.S. PDK investors put up about $4 million and lost at least $2.7 million, said the IRS. The Agave group lost $5 million to $17 million.

FEE PROPOSED FOR INTERNATIONAL MONEY TRANSFERS

A Texas Senate committee heard pros and cons of a plan to impose a fee on international money transfers as a way of funding health care for the indigent. The bill would impose a 50-cent fee for every $100 wired, up to a maximum of $5. Supporters, including Harris County Commissioner Sylvia Garcia, who proposed the fee, told the Senate Finance Committee that the fee would help the Harris County Hospital District fund the tens of millions it spends each year to provide health care for legal and illegal immigrants. Some immigrant advocates, however, view the fee as an unfair tax that would fall hardest on poor people already paying fees to wire-transfer companies.

Based on conservative projections, individuals wire $3.48 billion annually internationally from Texas, according to Garcia. That would bring in $17.5 million in wire fees at the 0.5% rate. The state would return all fees to the counties where they were paid, and the money would be earmarked for providing health care for the indigent. Harris County would receive about $3 million in 2006 from such fees, Garcia said.

The Mexican American Legal Defense and Educational Fund opposed the bill, saying it is not a user fee but a tax, with the built-in assumption that individuals sending money abroad are the same ones relying on indigent health care. Banking industry representatives testified against the bill, saying the pot of money proponents are counting on is illusory. If the bill passes, banks would simply start doing business differently, they said, funneling wire transfers through other states.

TELECOM TYCOON USED INTERNATIONAL FINANCIAL LABYRINTH TO TRY AND OBSCURE HIS DEALINGS

After building a long-distance phone business in the early days of Washington’s telecom frenzy, Walter C. Anderson did something unusual: He all but gave the company away. On the verge of a deal that would pay Mid Atlantic Telecom Inc. shareholders about $6.7 million, Anderson transferred his controlling interest to a company called Gold & Appel Transfer SA, based in a Caribbean tax haven. When Mid Atlantic was sold, it was Gold & Appel that reaped the gain.

Prosecutors now allege that the 1992 transfer was one of the first steps in a long-running scheme to cloud ownership of Anderson’s assets and escape taxes. All told, the government alleges, Anderson hid more than $450 million in offshore companies such as Gold & Appel. From 1995 through 1999, prosecutors allege, he dodged more than $200 million in personal income taxes in what they describe as the largest individual tax evasion case in U.S. history. Anderson has pleaded not guilty and said in an interview shortly after his arrest that the assets he controlled in offshore holding companies were to benefit a Panamanian foundation he created to advance human rights, arms control, family planning and the development of space.

In ordering Anderson, 51, held without bail last month, a federal judge cited his “considerable experience in conducting business abroad and moving money and assets across borders without detection.” In fact, Anderson left an extensive paper trail. Whether he was bidding on art at Christie’s, investing in telecom companies during the market bubble, attempting to privatize the Mir space station or paying a former girlfriend $2 million for the rights to water on a farm her family owned in Brazil, Anderson had millions of dollars at his disposal. However, it was often unclear where ultimate ownership or control of the assets rested. A tax-exempt private foundation he created and presided over in the United States became entwined in his business affairs in a variety of ways, using (and ultimately losing) some of its assets as collateral for an Anderson loan, funding research that could support Anderson’s profit-making designs on Mir, and lending money to Gold & Appel, which Anderson controlled.

Transactions at the heart of the prosecutors’ case appeared in the public record and attracted suspicion in the business arena long ago, evidence of how hard it can be for the government to determine whether sophisticated and successful people are paying their share of taxes. “The story underneath it that is so shocking is how long it has taken IRS to get its act together and make the case,” said Washington lawyer Jack A. Blum, an expert on international taxation and money laundering who believes that many Americans use foreign havens to evade taxes. “If anybody looked at the paper trail and put the pieces together, used some common sense, he would have been up on the front burner a long time ago. Why it took so long and why the system can’t produce a result in a reasonable amount of time is utterly beyond me,” Blum said. “What in the hell are they going to do about all the other guys who are doing this who haven’t been quite as flamboyant?”

The IRS’s chief of criminal investigation, Nancy J. Jardini, said such criticism is unfair considering, in Anderson’s case, the sophistication brought to bear in trying to obscure the ownership of funds. The IRS is keeping up with tax evaders and has over the past couple of years “really started to extend our enforcement operations to be much, much more international,” Jardini said. The agency now conducts undercover operations in foreign countries, “something that we did not do previously,” she said. But generally speaking, she said, “in those cases where we have to start from ground zero and attempt to construct a financial history of these individuals and trace these funds and trace the nominee names and trace the layered transactions, that is a very tedious time-intensive effort and it can take years.”

TIMELY ADVICE FOR BRITISH EXPATRIATES

If you are working abroad for several years, do not forget the finances. You have a golden opportunity to do some serious saving. The longer you stay in this situation, the more opportunities there are for maximizing your wealth. Enhanced earnings. An employer may pay an overseas allowance, bonus, utility bills, school fees, travel allowances, etc, and it is all for a good reason. They believe in their “return on investment” in you. You deserve the perks, so let us see how you can make these work harder for you.

Very simply put, moving overseas and becoming “non-resident” can reduce or negate income tax. Staying overseas and becoming “not ordinarily resident” can mitigate capital gains tax, and changing your “country of domicile” can negate inheritance tax on your estate. What is “offshore”? One common myth is that “offshore” is “based in ‘questionable’ tax havens”. The offshore companies that are members of the AILO (Association on International Life Offices) operate from some of the world’s most highly regulated jurisdictions. The Republic of Ireland and Luxembourg, like the UK, are full EU member states, and the Isle of Man and Channel Islands are UK dependent territories. These jurisdictions have been thoroughly scrutinized by global monitoring bodies and have received recognition for their strong regulatory controls and investor protection measures.

What is available? Offshore bank accounts, for a start. These are not an exclusive club for the rich. They are legal and above board, and quite often the subsidiary of a high street bank in the UK. You can keep the account even if you do move back to the UK or another country. Setting up the account is a formality even if you do not have an existing UK bank account.

Regular savings offshore: This is what makes you rich. If you do not have enough emergency cash in the bank, then please, raid the lump sum first. You can take advantage of your residence status to regularly invest in funds that are not available from the UK. Regular savings reduces risks and smooths out the peaks and troughs of volatile markets by “unit cost averaging”. The whole policy is totally tax free while you are overseas and you can enjoy such tax benefits as “gross roll-up”, “time apportionment”, and “top slicing” even if you are repatriated.

PRIVACY

CHOICEPOINT WINS PRIVACY MENACE AWARD

A data broker that sold personal information to identity thieves, an elementary school that tried to track students with radio-frequency ID tags and a consulting firm that helped orchestrate an invasive traveler-monitoring system all received honors this week from privacy rights advocates. The honorees were named as winners of this year’s U.S. Big Brother Awards, a dubious prize intended to shame government agencies and companies that have done the most to invade personal privacy. Award recipients received a statue of a golden boot stomping on a human head.

“There were so many eligible choices,” said Ed Mierzwinski, consumer program director of U.S. PIRG and a member of the panel of privacy experts who served as judges. “We should have done it like American Idol and had regionals and semis.” Faced with pressure to select finalists from an unusually large pool of nominees, Mierzwinski said, judges homed in on one of the obvious picks: data broker ChoicePoint. ChoicePoint received Big Brother’s Greatest Corporate Invader award in 2001. This year, after the company generated headlines for selling personal information about 145,000 people to criminals, judges decided to grant it a Lifetime Menace award.

STOP THE REAL ID ACT! (CONVENIENT ACTION FORM PROVIDED)

Earlier this year, the U.S. House of Representatives passed the REAL ID Act, bringing us a giant step closer to a “national ID”. The REAL ID Act would establish a vast national database of ID holders, where even a small percentage of errors would cause major social disruption. The ID would essentially be an internal passport that would be shown before accessing planes, trains, national parks, and court houses – an irresistible target for forgers and identity thieves. It would also divert resources from security measures that could actually work. And in calling for the use of “common machine-readable technology”, the REAL ID Act paves the way for the federal government to force every state to put radio-frequency identification (RFID) chips into their ID cards.

The Senate needs to be reminded that such proposals have always been rejected for good reason: our privacy and civil liberties are at the core of what it means to be an American citizen, and they should not be traded for what amounts to security theater. Tell your senators to reject the REAL ID Act, by completing the form on the left, personalizing it, if you wish, and sending it to your senators.

LAW

FALL IN CASES OF SUSPECTED MONEY LAUNDERING IN SWITZERLAND

The Money Laundering Reporting Office (MROS) has announced a drop in the number of suspicious transactions for the first time in its 7-year history. Officials said that the total number of cases reported fell by 5% last year, adding that this was proof that tougher regulations were working. Officials noted that the bulk of convictions since the introduction of stricter reporting obligations related to minor drug trafficking, while cases involving organized crime were rare. Although the total number of reports of alleged money laundering were down – most significantly regarding international payments – those involving banks increased yet again. The Money Laundering Act, which came into force in 1998, places the emphasis on self-regulation and requires all financial institutions – and not just banks – to report suspicious transactions.

Swiss charge Abacha’s son after extradition

A Swiss judge charged Abba Abacha, son of the late Nigerian dictator Sani Abacha, with money laundering in connection with billions of dollars in embezzled Nigerian state funds. Abacha, arrested in Germany in December, was extradited to Geneva on Thursday of last week and indicted on Friday with money laundering, fraud, forgery and participation in a criminal organization. Nigerian authorities have accused the inner circle of Sani Abacha, a military strongman who died in 1998 after 5 years in power, of plundering up to $3 billion to stash away in offshore accounts. Swiss justice officials, who requested Abba Abacha’s extradition from Germany, have said that his arrest was in connection with his father’s activities. Switzerland agreed in February to return to Nigeria some $458 million siphoned into Swiss bank accounts by Sani Abacha, quashing an appeal by his family to halt the transfer. Nigeria is ranked as the third most corrupt country in the world by sleaze watchdog Transparency International.

BUSH SEEKING MORE FLEXIBLE PASSPORTS RULE

Plans requiring passports from people entering the U.S. do not pass muster with President Bush, who has ordered a review of this border security effort amid fears it would impede legal travel from Canada, Mexico and other U.S. neighbors. The president said he was surprised by the proposed rules announced last week by the State and Homeland Security departments. “I thought there was a better way to expedite the legal flow of traffic and people,” he said.

Bush, a former Texas governor, said he has ordered a review of the rules. “If people have to have a passport, it’s going to disrupt the honest flow of traffic. I think there’s some flexibility in the law, and that’s what we’re checking out right now,” the president said. In December, Bush signed into law an intelligence overhaul that requires tighter border security against terrorists and was the basis for the passport proposal. The White House did not say why the president was unaware of the plans, which his administration announced a week ago.

Texans cheer Bush intervention.

South Texas officials and business leaders are cheering President George W. Bush for calling for a review of a federal proposal that would require U.S. citizens to have a passport to re-enter the U.S. after visiting Mexico. The departments of Homeland Security and State announced April 5 they planned to impose the new border-crossing rule by January 2008, but last week Bush, a former Texas governor familiar with border issues, intervened in the process.

More than 12 million people live along both sides of the U.S.-Mexico border and thousands cross it legally each day to work, shop and carry out business and trade. The proposed rule would have a similar impact along the northern border with Canada. The rules were authorized under the Intelligence Reform and Terrorism Act signed last December by Bush, but he said that he believes it offers more flexibility in implementation. Bush also acknowledged that he was unaware of the proposed rules until he read about them in the newspaper.

In most cases U.S. citizens can freely cross the Mexican border and return with a driver’s license or other form of government-issued photo identification. Border residents in Texas fear long lines and more congestion on international bridges over the Rio Grande if passports are required. South Texas officials and business leaders were elated to hear that Bush intervened because they said the rule would have an adverse impact on commerce and everyday life. Laredo, with nearly 177,000 residents, is one of the busiest ports of entry along the Mexican border. In 2000 about 40% of the overland trade with Mexico crossed the four international bridges spanning the Rio Grande. “This would significantly impact the economic well-being of the border in general,” said Larry Dovalina, the city manager at Laredo.

Requiring passports to visit U.S. would be major impediment to ties says Quebec premier.

Requiring passports of Canadians who routinely visit the U.S. for work or recreation would be a “major impediment” to cross-border relations, Quebec Premier Jean Charest said. And after meeting Homeland Security Secretary Michael Chertoff, Charest said officials may well settle on another form of identification – like an upgraded driver’s licence. “He was reassuring in the sense that we would work together on this,” said the premier. “This would not be implemented in a unilateral fashion. It’s the beginning of a process. It would not discriminate against Canadians. It would be applicable to Americans.”

Earlier, after a speech to an American think-tank that emphasized the paramount importance of security and pushed for expanded North American trade ties, Charest told the story of his 82-year-old father who lives along the border in Coaticook, Quebec. His father, who takes his girlfriend of 30 years to a New Hampshire restaurant every Saturday, was worried about a U.S. proposal this month to require a passport from all Canadians crossing the border. “It’s a very simple story of life,” said Charest. “Repeat this story I don’t know how many million times.”

The anti-terrorism proposal was widely criticized by those who feared it would disrupt the tourist trade and cost businesses big money. Within three years, it would have ended the ability of Canadians to simply produce a driver’s licence or birth certificate at border crossings, requiring a passport “or other accepted secure document” from air and boat travelers as well.

A solution in search of a problem.

What is the rationale for a program to require U.S. citizens and residents who visit Mexico and Canada, beginning in 2008, to acquire U.S. passports and show them to border guards when they return? Frankly, we do not think there is one. It resembles all too many of the vaunted airport “security” measures, designed to be a visible sign that the authorities are doing something, however ineffective it might be, to fight terrorism. But it will impose noticeable inconvenience and expense on the 16.8 million U.S. tourists who make short trips to Mexico and the 16.2 million who make trips to Canada each year. The cost of a passport – $97, $82 for people under 16 – is not overwhelming, but it is not insignificant either. For a large family – the Homeland Security proposal will require children to have passports, too – it could be quite expensive.

For as long as anyone can remember, the United States, Mexico and Canada have had a common-sense border policy: U.S. citizens have not been required to get visas or show passports to enter Mexico or Canada, and upon returning they have simply been asked to show a driver’s license. This system has contributed to friendly relations among the three countries, made visiting Mexico or Canada relatively hassle-free for Americans and facilitated tourism and commerce across the borders. Is changing that system and burdening American travelers with new costs and delays really worth it?

You might make the case if there were good evidence that numbers of terrorists have been regularly passing through normal border-crossing checkpoints or that it would be difficult for a determined terrorist to acquire a forged passport. But neither of those claims is demonstrated or even claimed by supporters of the passport requirement, which thus seems like a costly “solution” in search of a problem. The House Homeland Security Committee would do well to tell Homeland Security bureaucrats that the passport requirement looks more like a classic case of using a generalized threat to impose more government mandates, costs and inconvenience on innocent citizens.

U.S. passport requirements will affect Caribbean tourism.

For years U.S. citizens have travelled into and out of the Caribbean with no more identification documents than a driver’s license. This will change between now and January 1st 2008, and will have an adverse impact on the regional tourism industry. It is the U.S. government that is making the change, requiring all U.S. citizens to have valid passports to enter the U.S. Consequently, they must have passports to travel out of the U.S.

In the past, Caribbean nationals have been irritated by the U.S. requirement that they must have passports and visas to enter the U.S., while U.S. nationals enter Caribbean countries on driver’s licenses. After 9/11, Caribbean and other non-U.S. travelers became even more irritated with travel into the U.S. when the U.S. Department of Homeland Security required visitors to be fingerprinted and photographs taken of their eyeballs at U.S. ports of entry. Many people saw this both as an intrusion on their privacy and as a humiliation. This feeling was exacerbated by the fact that U.S. citizens were whisked though immigration lines while visitors endured lengthy periods waiting in line to be interviewed by immigration officers. Caribbean nationals have regarded the different treatment accorded to them and to US nationals as a double standard. They have recognized the right of the U.S. and any other country to apply its own immigration procedures, but they have argued that these procedures should be reciprocal.

But economic necessity won the day over the personal affront felt by Caribbean nationals. Caribbean tourism relies a great deal on U.S. tourists, and since the vast majority of Americans do not have a passport and can not be bothered to get one, Caribbean governments were content to allow them to enter their countries on driver’s licenses. Now, all of this has begun to change. Anyone traveling into the U.S. recently would have noticed that U.S. citizens are no longer being whisked through immigration control at U.S. ports of entry. Now, U.S. citizens and residents are being questioned as closely as foreigners although their finger prints are not yet being taken nor are their eyeballs being photographed. The lines for U.S. citizens and residents at U.S. immigration control are now as long as those for foreigners.

U.S. citizens and residents traveling on documents such as drivers’ licenses is now fast becoming a thing of the past, and Caribbean tourism industry will be affected by it. In part, this is because the vast majority of Americans do not have passports, and they have not needed one to travel to the Caribbean. They have simply hopped on planes knowing that their drivers’ licence or social security cards are enough. There should not be an assumption that U.S. Citizens will now automatically apply for passports. The reality is that only a comparative small number of US citizens have passports, and these are business people or those with higher incomes who travel on vacation to Europe, Asia or countries outside of the Western Hemisphere.

Under the new rules, a Caribbean vacation can not be spontaneous. It will entail Americans being in possession of passports or similar documents. This is a reality that the tourism industry in the Caribbean has to take account of now. The industry should not expect the U.S. public to know about the requirement that they have passports by January 1st, 2008. It is surprising how little public attention has been given to this development by mainstream media in the U.S.

ARAB BANK COMPELLED TO SUSPEND MOST U.S.-BASED OPERATIONS WHILE UNDER INVESTIGATION

An investigation by U.S. banking regulators and Israeli military interests into Arab Bank PLC has traced large sums of money moving through the bank’s New York branch. Over $20 million has moved through the branch to or from a few dozen terrorist or terrorist group suspects. The U.S. banking regulator, the Office of the Comptroller of the Currency, compelled Arab Bank to suspend most of its US-based operations. Though many suspected terrorist names have turned up in the investigation, the Arab Bank claims it has not done business with anyone designated by the U.S. Government as a terrorist. The investigation has been referred to as an “open-enforcement case” and no other public comment has been made on the matter.

MORE BANK DATA MAY NOT AID FIGHT AGAINST TERRORISM

A plan to force banks into disclosing hundreds of millions of wire transfers to help fight terrorist financing would overwhelm bankers and regulators and add questionable value to the war on terrorism, experts and officials say. The proposal is being studied by the U.S. Treasury and would grant the government unprecedented access to banking records. Banks wire more than $6 trillion across the globe each day, the bulk of it in and out of the U.S. While counterterrorism officials are eager to tap into this mother lode of financial information, some officials, bankers and experts question whether authorities can actually glean pertinent information from the flood of data, while protecting the privacy of banking clients.

“The big provisos are whether that data can be obtained in a cost-effective way that doesn’t overburden the private sector, doesn’t choke the government, and in a way that it can be ... used without running roughshod over privacy and civil liberties concerns,” said Joseph Myers, a former National Security Council official under President Bush. One current counterterrorism official said, “With a billion additional reported transactions a day, yo’qre just increasing the amount of hay in the haystack. You’re not getting any closer to finding the needle.” Many officials and experts, including Myers, say wire transfers might contain useful information to track down terrorists and believe the idea of reporting some of those flows merits study, as long as the challenges are clear.

A sweeping intelligence bill passed by the U.S. Congress in December to overhaul the U.S. spy community called on the Treasury to study whether the proposal was useful and feasible. A Treasury spokeswoman said, “Information collected from certain cross-border wire transfers could be incredibly valuable to our efforts to starve terrorists of funding.” Douglas Greenburg, who co-authored the Sept. 11 Commission’s landmark report on terrorism financing, pointed to Abdul Aziz Ali, a facilitator of the Sept. 11 plot who wired an estimated $120,000 from Dubai to the hijackers in the U.S. “If the government had a database they could search through by name to find what wire transfers he’s made, where and to whom, that could be extraordinarily useful,” Greenburg said.

OPINION & ANALYSIS

REFORMING THE HOMELAND SECURITY DEPARTMENT IS UNLIKELY

The Department of Homeland Security has too few incentives to protect Americans from terrorism. Testifying recently before Congress, Michael Chertoff, the Bush administration’s new Secretary of Homeland Security, admitted that his department often fails to adequately collect, piece together, and share intelligence information. (This same problem has afflicted the entire U.S. government in its failure to detect terrorist attacks as far back as September 11, 2001 and has not been corrected.) The situation is unlikely to improve because the massive Homeland Security bureaucracy has a poor incentive structure.

Some in Congress are frustrated that the department spends too much time, effort, and money developing responses to possible terrorist attacks and not enough on preventing them in the first place. The department, however, is merely reacting to incentives the Congress has provided. Local hospitals, paramedics, and police and fire departments are slated to provide the first response to any terrorist attack. These “first responders” form powerful lobbies that insist on receiving their cut of the homeland security funding pie. Under the guise of fighting terrorism, they often try to garner more federal funds to improve general local services. Most of their representatives in Congress are only too happy to oblige, doling out pork to local interest groups right and left. The result has been a Homeland Security budget that distributes spending around the country rather than concentrates it in the few large American cities that might actually be the targets of terrorism.

In contrast to terror response, terror prevention – that is, the intelligence functions of the Homeland Security Department – has few powerful grassroots constituencies providing support. Thus, despite rhetoric to the contrary, the department’s imbalance between response and prevention will probably continue. Another roadblock to better intelligence is the sheer size of the Homeland Security bureaucracy. The department is just too large and has too many parts to share and integrate intelligence information adequately. Yet unfortunately, Chertoff seems about to mimic those that have gone before him in trying to solve the problem dramatically highlighted on 9/11 – poor intelligence sharing among government bureaucracies. Chertoff is thinking about adding bureaucracy instead of streamlining it, which will exacerbate problems with intelligence sharing and coordination, not lessen them. The government’s failure to consolidate and streamline its intelligence function could result in another ugly 9/11-like surprise. The enemy is no longer an equally ponderous foreign government, but small, agile terrorist cells that can run circles around large security agencies.

THE HOAX OF DEMOCRACY IN IRAQ

Iraq’s January 30th election was a glorious day, and a great success, say federal officials and the mainstream press. A step toward promoting democracy in the Middle East, it was, but is that a good thing? For Westernized Muslims – those who want their highest law to be democratic – perhaps so. For the rest who want their highest law to be Islamic, it is a catastrophe, and further incentive for them to become guerrillas, or give aid and comfort to the guerrillas.

This Western love of democracy is nothing short of ridiculous. Read the literature of the American Revolution. Try to find just one mention of the Minutemen or Sons of Liberty fighting for democracy. They were fighting for liberty, which is something much different than majority rule. In the Federalist Papers, Madison, Hamilton and Jay made it very clear they had no love of democracy. In Federalist Number 10, Madison warned that democracies “have ever been spectacles of turbulence and contention; have ever been found incompatible with personal security or the rights of property; and have in general been as short in their lives as they have been violent in their deaths.” India got rid of the British in 1947, and went democratic. Then Indians spent 44 years voting for socialism, meaning voting to stay locked in poverty and strife. They did not start getting rational, and more prosperous, until their free-market reforms began in 1991.

What really happened in Iraq’s January 30th election? Like scores of other countries, the Iraqis joined the Americans-for-a-day club. Previous members of this club have included the Afghans. They voted, and now almost the entire place is run by warlords, drug lords and various other types you would not want to meet in a dark alley. Russians got democracy, and what did they vote for? Fascism. President Putin is well on his way to being another Mussolini. Liberty is a complex system, even most Americans no longer understand it – certainly no one in the federal government does – and we would be foolish to assume Iraqis will be any more enlightened about it than, for instance, the Russians.

The two fundamental laws taught by all religions are what make civilization possible. This first law is do all you have agreed to do. The second is, do not encroach on other persons or their property. Each religion expresses these laws in different ways, but all teach them. Widespread obedience to these laws is liberty. The type of government a country has is not very important. What counts is the extent to which the government obeys the two laws. A dictatorship that adheres closely to the laws is far preferable to a democracy that roundly ignores them. My guess is that like Russia, Iraq will begin moving in the direction of fascism, and all their problems will be blamed on America.

ON THE PERILS OF A GERMAN POPE

The elevation of Joseph Cardinal Ratzinger to the papacy testifies to the value of the College of Cardinals as an electoral instrument, particularly in comparison to the periodic circuses by which the “democracies” now choose their titular heads. Next to this dignified, multilingual, and immensely learned German churchman, who will be henceforth known as Benedict XVI, our current “democratic” leaders, exemplified by the tongue-tied W and his English lap dog Tony Blair, look almost infantile. One needs the pen of an H.L. Mencken to depict this staggering contrast, which seems particularly striking at a time when we are launching wars to make the rest of the world resemble the “democratic” West. Perhaps Joseph de Maistre was close to the mark when he recommended a papal directorship of European countries, to insure peace. At the very least the College of Cardinals may be able to impose controls on our capricious court system and rampaging bureaucracy. Such a body might give us judges like Ratzinger instead of Baader-Ginsburg.

On a related note, I am struck by the grotesque charge that the new pope was a Nazi, despite the fact that a noted liberal maven, Abe Foxman, is sure (New York Post, April 20) that Ratzinger has “spent his life atoning for his limited Nazi link.” Except for a forced membership in the Hitlerjugend and a minor role protecting German cities against the Allied bombing of German civilians, Ratzinger had no links to the Third Reich. Before the War’s end, he surrendered to American forces, which allowed him to return to a Catholic seminary. He and his brother Georg, who also became a priest, came from a staunchly anti-Nazi Bavarian family, which made only the smallest necessary compromises to survive in a regime they plainly disliked. By what right should anyone accuse the new pope of having a Nazi past or expect him to atone for one?

The answer is simple. We now live in a PC society, in which no white Christian male can ever be entirely free of the suspicion of harboring “fascist” thoughts or impulses. The only way someone who falls into this category can escape the effect of his original sin is by providing constant evidence of atonement for one’s inherited history, particularly as a German or Southerner, and by actively supporting multicultural initiatives. It is in the second area that Benedict XVI has been found deficient. As a Christian traditionalist, he is not about to support gay and feminist agendas. He also advised the late pope to withhold communion from politicians, like John Kerry, who endorse, as my academic colleagues would say, a “woman’s right to choose”, including a late-term abortion. Not surprisingly, Benedict XVI has already been subject to windy invectives from Catholic liberals and from all of the other usual suspects for his residual Nazi proclivities, which are supposedly apparent from his not signing on to gay unions and the feminization of the clergy.

THE HEART OF A FIGHTER

Like most others, I found myself very gratified by the attention given to Pope John II after his death, and not just because he wrote a very good encyclical on economics that warmly embraces free markets. Karol Wojtyla began adulthood as a simple priest who only sought to minister to others but history called him to a different role. A picture in recent weeks stands out in my mind. It showed the current U.S. president and three previous presidents kneeling at the rail in front of the Pope’s coffin. Even in his death, he brought power to its knees. It is especially gratifying to think that in the attention given to John Paul II, some historical wrongs are being undone.

After all, the 20th century was a time when the world sung the praises of despots and despotism. The more wars government leaders fought, the more they centralized their control, the more they hobbled the economy, the more liberty they stole, the more they cut off trade and exchange with other nations, the more their gain was our liberty lost, the more these very government leaders have been celebrated by historians and pundits of all stripes.

To continue the righting of great wrongs, I would like to tell you about another man who had started out with what seemed to be a simple vocation but eventually came to play a major role in the history of ideas in the world. His life would be dominated by terrible tragedy and yet come to represent a grand vision of the social and political future. His name was Ludwig von Mises, born in 1881 as a Jew in the outer reaches of the Austro-Hungarian empire and died in New York City in 1973. In his life, he wrote 25 books and taught students of all ages. His theme cut against the grain of the 20th century. Instead of socialism, fascism, and war, he advanced a case for freedom and peace. His treatises such as Human Action, Liberalism, and Theory and History revolutionize economic science and political philosophy. Not only that, he single-handedly saved Austria from communism and rampant inflation. And in the course of a lifetime, he personally stood up to despots of every stripe, and inspired several generations of intellectuals on two continents.

GLOBALIZATION AND ITS DISCONTENTS

It is widely believed that the Chinese are eating our lunch. Their factories hum and belch smoke, while ours go silent and send up weeds in the parking lot. This phenomenon is commonly called “globalization”. But it is also commonly misunderstood. In the reverie of modern Americans, globalization means the rest of the world sends you things you do not have to pay for.

The world has been globalized for a long time. An Englishman in 1910 could sit in his parlor off St. James Park and drink tea that came all the way from Ceylon in cups that came all the way from China. Then, putting down his drink, he could pick up a Cuban cigar, put it to his lips … and perhaps sprinkle a few ashes on the carpet that he had bought in Egypt … or the leather boots he had ordered from a shop down the street that sold Italian goods. Globalization is nothing more than the extension of the division of labor across international boundaries.

There are really only two ways to get what you want in life. You can do so honestly, or dishonestly. You can get it by working for it, or by stealing it. You can get rich by “economic means” or by “political means”, as the great German sociologist, Franz Oppenheimer put it. Globalization is merely an elaboration of the economic means of getting things. It requires civilized relationships to make it work. People have to get along with each other in order to trade. They must rely on others – even other people in strange, faraway places – for their daily bread. They must also be able to count on the medium of exchange that they trade goods and services in. If they cannot trust the money, they are not likely to want to do business.

In 1914 a European war disturbed nearly 100 years of peace and progress. People thought the war could not happen. And if it did happen, they said, it would be short and sweet. They were wrong on both points. Globalization had entered a shrinking phase. Then, on April 2, 1917, Woodrow Wilson stood before Congress and announced that the world’s biggest economy was about to shift to “political means” to get what it wanted. Instead of merely doing business with the Entente powers, America, too, was going to get involved in killing people. This day marked not only another big setback for globalization … it also establishes a frontier for where one empire ended and another began. Britain ceased being the world’s hegemonic imperial power. Henceforth, the United States was the cock of the walk.

There are times when civilization goes forward. And there are times when it goes in the other direction. Woodrow Wilson slammed the United States into reverse in 1917. It has been backing up ever since, in the sense that Americans rely more on force and fraud to get what they want. Gun-toting soldiers now defend America’s many supposed interests all over the world – even in places where America seems to have no interests. The U.S. government takes far more of its citizens’ money than it did in 1917 … and provides detailed instructions to Americans on such a wide variety of matters that one can scarcely toss a chicken out the window or blow up an outhouse without asking permission of the authorities.

But while the U.S. Empire was growing, so was world trade. In the free world until 1989, and now almost everywhere, a “pax dollarum” greatly aided the cause of globalization throughout the second half of the 20th century. But this new globalized commerce has a fraudulent side to it. The hegemonic power is using political means, even while it shops. During the last big boost in the division of labor, in the 19th century up until 1914, the money in which transactions were calibrated was backed by gold. No country – not even an imperial one – could cheat. The dollar, on the other hand, is merely a piece of paper, backed by nothing more than the full faith and credit of the U.S. treasury. How good a promise is that? No one knows for sure.

The odd thing about the spurt of globalization in the last five years is that it is so lopsided. The U.S. takes – but does not give, borrows – but does not pay back, buys – but does not sell, imports – but does not export. The only reason foreigners put up with those shenanigans is because they receive paper currency in payment. They assume their dollars will be as valuable in the future as they are now. They assume that someone, somewhere, has the situation under control. And yet, “If the private market – which knows that with high probability the dollar is going down someday – decides that that someday has come and that the dollar is going down now,” writes Brad DeLong, “then all the Asian central banks in the world cannot stop it.” What will happen when the world figures out that the U.S. is pulling a fast one? We don’t know. But like the period following the sinking of the Lusitania, we are sure it will make the history books.

THE STATE EXPANDS, AND WEAKENS

Permit me to draw your attention to what strikes me as the most profound political paradox of our times. The U.S. government is larger, more consolidated, more powerful, and more intrusive than it has ever been in its history – indeed our sweet land of liberty is now host to the most powerful leviathan state that has ever existed. Never before has a government in human history owned more weapons of mass destruction, looted as much wealth from a country, and assumed unto itself so much power to regulate the minutiae of daily life. By comparison to the behemoth in Washington, with its printing press to crank out money for the world and its annual $2.2 trillion in largess to toss at adoring crowds, even communist states were powerless paupers.

At the same time – and here is the paradox – the United States is overall the wealthiest society in the history of the world. The World Bank lists Luxembourg, Switzerland, and Norway as competitive in this regard, but the statistics do not take into account the challenges to mass wealth that exist in the US relative to small, homogenous states such as its closest competitors. In the United States, more people from more classes and geographic regions have access to more goods and services at prices they can afford, and possess the disposable income and access to credit to put them to use, than at any other time in history. Truly we live in the age of abundance.

In the face of incredibly bad government policies, enterprise killers in every way why, then, does enterprise continue to thrive? The answer is complex. In many ways we continue to live off the capital of previous generations. Some economic sectors benefit greatly from an artificial injection of created credit, making prosperity seem more real than it is in sectors such as housing and perhaps stocks. There is a bitter irony at work here too in that the larger the economy, the more there is to tax, and so government grows as an after-effect of economic growth.

But here I would like to concentrate on what I think is an explanation that is too often overlooked. It requires that we understand something about the extraordinary capacity of the human mind to overcome obstacles put in its path. In all the history of states, in all the history of reflection on social organization and economics, this component is the most underestimated because it is the least predictable and the most difficult to comprehend. Human beings are creative and determined, and, if they have a love of liberty, and cooperate through exchange, they can overcome seemingly impassable obstacles.

It is because of this power of human ingenuity and determination to improve the world around us, despite the bureaucrats, that a vast gulf has come to separate the accumulated power of the nation state from its effective power in the management and guidance of society and the world economy. There is a sense in which the state is nowhere as effective as it claims. Economic law limits what the state can do. It can control surprisingly few forces that work in the world. It is my view that the gulf between accumulated power and effective power is going to grow ever wider in the coming years, to the point where the nation state itself will grow effectively weaker, more anachronistic, and finally irrelevant to the course of social development.