Offshore News Digest for Week of July 25, 2005

GLOBAL BUSINESS

CHINA TARGETS $4 TRILLION GDP BY 2020, SAYS PRESIDENT

Chinese President Hu Jintao said that Asia’s fastst growing country is planning to quadruple its GDP to $4 trillion by 2020, with the per capita GDP reaching $3,000. Hu promised to continue pursuing the scientific approach in achieving economic and social progress of China, and always “put the people first” while striking economic attainments. The Chinese president made the remark on Monday in an address delivered to more than 500 CEOs and officials at the opening ceremony of the 2005 Fortune Global Forum at the Great Hall of the People in Beijing. The number of the poor has dwindled from some 250 million in 1978 to 26 million nowadays, which Hu said is a marked contribution to the world’s progress.

China will keep opening up its market, find new ways of using foreign capital, improve on legislations and regulations for encouraging and protecting foreign investors, revamp foreign economic management, step up protection of intellectual property rights, and work still harder to help foreign investors and create an even better environment for trade and cooperation between China and the world, he addressed. The full text of Hu Jintao’s speech follows.

China GDP grows at 9.5% rate for first half of 2005.

In what state media called “stable and rapid growth” for the first half of the year, China reported a GDP increase of 9.5% year on year to 6,742.2 billion yuan ($812.3 billion). The average GDP growth rate in the past 27 years is about 9.4%, according to Zheng Jingping, spokesman of the National Bureau of Statistics. According to NBS figures, the overheated fixed asset investment has cooled down due to strict control policies by the government. In the first six months of this year, fixed assets investment achieved a year-on-year increase of 25.4%, 3.2 percentage points lower than the same period of last year, said Mr. Zheng. Mr. Zheng said the government would continue to exercise central control to further cool housing prices.

Disposable income per capita of China’s urban residents reached 5,374 yuan in the first half of this year, a year-on-year increase of 9.5%. In the first half of the year, China’s foreign trade volume reached $645 billion, up 23.2%, with a surplus of $39.6 billion, due largely to the fact that trade is long on export. Of all the export processing businesses, foreign-invested companies account for as much as 50% to 57%, Mr. Zheng said.

On China at least, Nixon was right.

“China will never make it economically.” That is what I was told four decades ago, during my days as a graduate fellow at UC Berkeley’s Center for Chinese Studies. That widely shared pessimistic view was based on the notion that the Chinese economy, plagued by scarce resources and massive overpopulation, would never take off, no matter what ideology dominated. Everyone knows those experts were wrong. China, despite having almost a billion more mouths to feed now and being far more dependent on foreign resources, is frightening not because of the prospect of its economic failure, but because of its success. You could smell panic over China’s offer to buy Unocal.

Sadly, the prospect of hundreds of millions of people being lifted from abject poverty seems to alarm even leading Democrats in Congress, who claim to be driven by a standard of social justice. And many Republicans, who tend to trumpet the virtues of free trade when it involves the domination of world markets by U.S. businesses, are also raising the protectionist flag against the prospect of Chinese ownership of a single mid-size American-based oil company.

The signals we send to China have always been bizarrely mixed: Play in the capitalist ballpark but not so well that you become one of the big stars. It is a message that, as with the Japan-bashing of the 1980s, is at best paranoid and at worst racist. We in the West can be trusted with enormous economic power, but not the children of a lesser god. The fear-mongering must be confusing to Asians, who have been hectored by the West for two centuries about the ineffable beauty of free trade. Americans, for instance, do not think that Asians should feel in the least bit threatened because of Unocal’s ownership of natural gas fields on their continent. That is just the market in action.

And consider the hypocrisy: The Senate that authorized the “preemptive” conquering of the nation with the 2nd-largest oil reserves on the planet is now challenging China’s right to use dollars it earned exporting legal products to buy a U.S.-based multinational company. The protectionists must be defeated and U.S. policy should stay rooted in the wisdom of Richard M. Nixon – a prosperous China is good for us all.

China-mart takes over.

My poor beloved country, trapped in a Middle Eastern quagmire and tricked by Osama bin Laden into subsidizing to the tune of $300 billion (spent or appropriated) a training ground for Muslim terrorists and insurgents while our once fabulous economy disintegrates. If the U.S. were still rich and just wanted to throw several hundred billion dollars at bin Laden as a goodwill gesture, that would be one thing. But we are borrowing the money that we are using to train Muslim terrorists to kill and maim our troops in Iraq and Londoners in England. The money is being lent to us mainly by Asians, especially the Chinese. China has so many dollars to lend to us because we send so many dollars to China to pay for the goods and services that patriotic American corporations have decided to supply to us from China instead of from America.

U.S. corporations decided that the way to get rich was to destroy their American consumer base by closing their American factories, throwing their U.S. employees out of work and hiring Chinese instead. The Chinese work for less, you see, and free trade economists say lowering costs makes us better off. What U.S. corporations and the free trade economists overlook is that giving Americans’ jobs to foreigners raises foreign incomes and lowers American incomes. When credit cards and home equity lines are maxed out, there will be nothing to support the U.S. consumer market. The American corporations who moved their capital and technology to China will have to find new customers.

Maybe the Chinese government will let the relocated US firms sell to Chinese customers, or maybe the Chinese government will let the U.S. firms go bankrupt. The latter favors China’s strategic interest. Chinese businessmen will purchase the bankrupt firms, and Chinese businesses will sell to Chinese customers. Americans are pouring so much money into China that China can finance our wars while it buys up our companies. Everyone was shocked that a Chinese company could outbid Chevron for Unocal. China has already purchased IBM’s personal computer business. The outsourcing mania has hit the Pentagon, and China will soon be supplying the ships for the US Navy. The Pentagon, seeking lowest cost, is pushing defense contractors to outsource offshore for more materials, components and systems.

China is now the third largest shipbuilder after South Korea and Japan. In 5 years China’s submarine fleet will be twice the size of America’s. In 10 years China’s navy will be larger than the American fleet. This is amazing performance for a country that as recently as 1989 had essentially no shipbuilding industry. This year the U.S. is producing 6 ships, one-tenth of South Korea’s output. In 2006 the U.S. is scheduled to produce only 4 ships, because China has outbid us for the steel. The U.S. “superpower” can no longer afford to compete against China for essential materials.

DUBAI’S FUTURE PROMISES EXCESS, SIN

As your jet starts its descent, you are glued to your window. The scene below is astonishing: a 24-square-mile archipelago of coral-colored islands in the shape of an almost finished puzzle of the world. In the shallow green waters between continents, the sunken shapes of the Pyramids of Giza and the Roman Colosseum are clearly visible. In the distance are three other large island groups configured as palms within crescents and planted with high-rise resorts, amusement parks, and a thousand mansions built on stilts over the water. The palms are connected by causeways to a Miami-like beachfront chockablock with full of mega-hotels, apartment high-rises and yacht marinas. As the plane slowly banks toward the desert mainland, you gasp at the even more improbable vision ahead. Out of a chrome forest of skyscrapers (nearly a dozen taller than 1,000 feet) soars a new Tower of Babel. It is an impossible one-half mile high, the equivalent of the Empire State Building stacked on top of itself.

Welcome to paradise – the Persian Gulf city-state of Dubai in 2010. After Shanghai (population: 15 million), Dubai (population: 1.5 million) is the world’s biggest building site, an emerging dreamworld of conspicuous consumption and what locals dub “supreme lifestyles”. Dozens of outlandish mega-projects are actually under construction or will soon leave the drawing boards. Under the enlightened despotism of its crown prince and chief executive officer, 56-year-old Sheikh Mohammed bin Rashid al-Maktoum, the Rhode Island-size Emirate of Dubai has become the new global icon of imagineered urbanism. The coastal desert has become a huge circuit board into which the elite of transnational engineering firms and retail developers are invited to plug in high-tech clusters, entertainment zones, artificial islands, “cities within cities” – whatever is the latest fad in urban capitalism.

Sheikh Mo’s architectural megalomania, although reminiscent of Albert Speer and his patron, is not irrational. Having “learned from Las Vegas”, he understands that if Dubai wants to become the luxury-consumer paradise of the Middle East and South Asia (its officially defined home market of 1.6 billion), it must ceaselessly strive for excess. From this standpoint, the city’s monstrous caricature of futurism is simply shrewd marketing. Moreover, Dubai can count on the peak-oil epoch to cover the costs of these hyperboles. Al Qaeda and the war on terrorism deserve some of the credit for this boom. Since the Sept. 11 attacks, many Middle Eastern investors, fearing possible lawsuits or sanctions, have pulled up stakes in the West. According to Salman bin Dasmal of Dubai Holdings, the Saudis alone have repatriated 1/3 of their $1 trillion overseas portfolio. The sheikhs are bringing it back home, and last year, the Saudis were believed to have plowed at least $7 billion into Dubai’s sand castles.

Paradise, however, has its dark corners. Dubai, any of the hipper guidebooks will advise, is the Bangkok of the Middle East, populated with thousands of Russian, Armenian, Indian and Iranian prostitutes controlled by various transnational gangs and mafias. (The city, conveniently, is also a world center for money laundering, with an estimated 10% of real estate changing hands in cash-only transactions.) The sheikh himself has been personally linked to Dubai’s most scandalous vice, child slavery. Sheikh Mo, who fancies himself a prophet of modernization, likes to impress visitors with clever proverbs and heavy aphorisms. A favorite is “Anyone who does not attempt to change the future will stay a captive of the past.” Yet the future that he is building in Dubai – to the applause of billionaires and transnational corporations everywhere – looks like nothing so much as a nightmare of the past: Walt Disney meets Albert Speer on the shores of Araby.

Now, expats in Dubai can get UAE passport.

Expatriates living in Dubai for 20 years or more will now be eligible for a UAE passport, the government of the Emirate has said. After a thorough review of their application by a special committee, expatriates, who are granted the passport, will be issued a document, which will entitle them to be treated as UAE nationals, a local daily quoted a senior official as saying. The Dubai Naturalisation and Residency Department will receive applications from anyone living there for at least 20 years and the committee will review them and interview each applicant separately.

UAE, Saudi investors launch $8 billion realty project.

UAE and Saudi investors launched an ambitious 30-billion-dirham ($8.2 billion) real estate project that will be “carried out in three stages over 15 years.” The president of the UAE firm Tameer Holding, Omar Ayesh, told reporters that foreign nationals would be able to buy homes in the residential and commercial project on a 99-year lease basis. “This project will offer a quiet environment, high construction quality and lower prices than comparable projects elsewhere,” Ayesh said of Al Salam City, which will also include parks, sport and entertainment facilities and hotels.

Sharjah-based Tameer Holding and the Al Rajhi Group of Saudi Arabia each own 38.5% of the first phase of the project, in the northern emirate of Umm al-Quwain. The government of Umm al-Quwain, one of 7 emirates that constitute the Gulf state of the UAE, holds the remaining 23%. Dubai-based property developer Emaar said it would also build a $3.3 billion mixed-use project in Umm al-Quwain. “Umm al-Quwain, one the smallest of the emirates, is teaming up with investors to take part in the property boom that the UAE has been witnessing,” said Ahmed Gad, analyst at investment bank EFG Hermes. “I think most customers for housing units might be UAE nationals in search of a second home or expatriates who cannot afford the prices in Dubai,” Gad told Reuters.

Real estate experts said land prices in the remote, less developed emirate of Umm al-Quwain were about one-fifth of those in Dubai, the trading and tourism hub of the UAE. Dubai has been the center of a real estate boom in the past few years after it allowed foreigners to buy property. “Some home buyers might also be attracted to Umm al-Quwain because of a more liberal attitude there to alcohol sales, whereby anyone can buy, while in Dubai you need to be a non-Muslim to buy at shops,” said a real estate salesman who asked not to be named.

ANALYSIS REVEALS HONG KONG’S CONTINUED GROWTH AS INVESTMENT CENTER

International offshore law firm, Walkers announced that a new analysis of the Hong Kong marketplace has found a 165% increase in investment companies based there – with the overwhelming majority of them originating in the Cayman Islands – over the last 3 years. According to the law firm’s survey, in 2004, there were 28 investment companies, 21 of them originating in the Caymans, compared to 17 investment companies, 11 of which were from the Caymans, in 2001. The Walkers analysis also revealed a 470%, or $217 billion, increase in private equity funds raised in Hong Kong over the last three years, growing from $58.6 billion raised in 2001 to more than $276 billion in 2004.

“Given a surging local stock market and the growing global pool of money available for hedge fund and private equity investment, Hong Kong offers global offshore investors a jurisdiction that is savvy, sophisticated, and stable,” Vicki Hazelden, managing partner at Walkers’ Hong Kong office observed, “precisely the characteristics that every investor craves. With more than $60 billion invested in hedge funds across Asia today, the growth curve is clearly poised to accelerate throughout the rest of 2005 and into the future.” It is expected that hedge fund flows into Asia will grow even stronger in the wake of China’s recent revaluation of the yuan. The upward tick in private equity deals is also expected to get a boost from the currency change.

BAHAMIAN AUTHORITIES UNDER PRESSURE TO SOLVE AUSTRIAN TOURIST MURDERS

Mounting pressure to establish leads and nab suspects has Bahamian authorities concerned about the possible fallout for tourism following the discovery over the weekend of the bodies of two Austrian visitors in Room Six at the Anchorage Hotel in Alice Town, Bimini. A hotel employee discovered the bodies of Bolza Berhard, 34, and Refreiin Perfall, 32, at 12.30 p.m. last Saturday. According to police reports, Mr. Berhard’s body was on the floor between two beds with his hands tied behind his back and a single gunshot wound to his upper back. Ms. Perfall was found on one of the beds with severe wounds about her head and face.

The killings have upset the bucolic little settlement made famous by Ernest Hemmingway and long considered the sport fishing capital of the western hemisphere and long a quick getaway for boaters who make the short 50 mile journey for a weekend of fishing and relaxation. Unlike the visitors, Biminites will be living with these killings in their midst for sometime to come. And in time it will join the long storied history of the Islands in the Stream.

WASHINGTON RECASTS TERROR “WAR” AS “STRUGGLE”

The Bush administration is retooling its slogan for the fight against Al Qaeda and other terrorist groups, pushing the idea that the long-term struggle is as much an ideological battle as a military mission, according to senior administration and military officials. In recent speeches and news conferences, Defense Secretary Donald Rumsfeld and the country’s top military officer have spoken of “a global struggle against violent extremism” rather than “the global war on terror,” which had been the catchphrase of choice. Administration officials say the earlier phrase may have outlived its usefulness, because it focused attention solely, and incorrectly, on the military campaign.

General Richard Myers, chairman of the Joint Chiefs of Staff, told the National Press Club on Monday that he had “objected to the use of the term ‘war on terrorism’ before, because if you call it a war, then you think of people in uniform as being the solution.” He said the threat instead should be defined as violent extremism, with the recognition that “terror is the method they use.” Although the military is heavily engaged in the mission now, he said, future efforts require “all instruments of our national power, all instruments of the international communities’ national power.” The solution is “more diplomatic, more economic, more political than it is military,” he concluded.

The shifting language is one of the most public changes in the administration’s strategy to battle Al Qaeda and its affiliates, and it tracks closely with Bush’s recent speeches emphasizing freedom, democracy and the worldwide clash of ideas. “It is more than just a military war on terror,” Steven Hadley, the national security adviser, said in a telephone interview. “It’s broader than that. It’s a global struggle against extremism. We need to dispute both the gloomy vision and offer a positive alternative.” The language shift also comes at a time when Bush, with a new appointment for one of his most trusted aides, Karen Hughes, is trying to bolster the State Department’s efforts at public diplomacy.

TAXES

EUROPEAN RULING ENDS GIBRALTAR’S EXEMPTION FROM EU DIRECTIVE

The European Court of Justice ruled Gibraltar must comply with the EU’s rules on tax information. It comes after Spain complained Gibraltar was not complying with EU rules on fiscal transparency. Europe’s highest court called on Gibraltar’s financial authorities to provide information about private investments there when requested to do so by other EU states. The ruling effectively ends the British colony’s status as a tax haven.

It is the end of a long battle between the Spanish government, backed by the EU, and the British authorities in Gibraltar. Spain has claimed VAT should be applied in the British colony at the same rate as elsewhere in the EU. Madrid also claims tax information should be exchanged under the terms of the EU’s “mutual assistance” arguments. The court ruled, “The UK has failed to uphold its obligations under EU rules.”

Crown dependencies up in arms over Gibraltar exemption.

A tax loophole which has given Gibraltar an apparent advantage over the Isle of Man and the Channel Islands is likely to dominate a meeting of the Crown dependencies in Douglas today. Although other topics will be discussed, the row over the EU savings directive is set to be one of the leading agenda items as senior politicians gather at the Villa Marina. The UK has been given until this coming Monday to say how it will close the loophole or face action by the Crown dependencies.

On July 1 the contentious EU savings directive came into effect. It is intended to discourage tax evasion across EU and neighboring territories by calling for either automatic exchange of information or a withholding tax to be introduced. The aim was to ensure a country was either able to monitor citizens with business affairs outside their home nation or get back some of the tax lost by that citizen keeping their savings in another nation. The Isle of Man plumped for a withholding tax, which means details of foreign investors do not have to be revealed to other countries, but money lost through unpaid taxes in those nations is handed over – although customers are allowed to choose for their details to be handed back to their home country instead of paying the withholding tax.

However, because the EU views Gibraltar as part of the UK, it has not been made to sign up to the directive in its own right, meaning it is not required to have either an automatic information exchange or withholding tax in relation to investors based in the UK. That means someone living in England could try to avoid UK tax by putting their savings in Gibraltar and not being subjected to either measure outlined in the savings directive. The Crown dependencies have called on the UK Government to explain how it will solve the problem by the end of the month and, while there appears to be a commitment from the UK to do that, there is a question over how long it will take. Although the Crown dependencies have issued differing responses to the situation so far, they are broadly of one mind that action is needed immediately.

Gibraltar responds to criticism over EU Savings Tax Directive.

Gibraltar is already within the ambit of, and is fully compliant with, the terms of the EU Savings Tax Directive, the Gibraltar government argued this week in response to criticism from the UK’s offshore dependencies that it has managed to wriggle out of its responsibilities under the directive. “The Government of Gibraltar notes statements in the Channel Islands which refer to a ‘last minute problem’ and ‘an initial difference of views between the UK and Gibraltar’ in the implementation of the Taxation of Savings Directives between the UK and Gibraltar and demanding a ‘quick resolution to the problem’. There have even been calls for UK to ‘force’ Gibraltar to comply with the Directive,” the Gibraltar government noted in a statement.

The statement continued, “These remarks are based on lack of familiarity with the facts. Gibraltar already is within the ambit of and complies with the Savings Directive. There has been no ‘last minute problem’, nor any difference of views. Nor, as has been said has ‘Gibraltar signed up to the Directive’. The Directive applies, and has always applied to Gibraltar as of right and obligation because Gibraltar is an integral part of the EU. However, as was stated jointly by the Gibraltar Government and the UK Government in a joint press statement issued by them on 1st July 2005, the Directive does not apply as between the UK and Gibraltar because we are not separate member states in relation to each other.

“Nevertheless, as announced jointly on 1 July 2005 the two governments are in discussion to agree appropriate arrangements for exchange of information between them outside of the legal framework of the Directive, which does not apply between them. The two Governments have jointly announced that they are working together with a view to agreeing such arrangements during the next few months. Expectations by ill informed third parties that this should happen by the end of this month are as inappropriate as they are unrealistic.” A spokesman for the Gibraltar government noted that the Crown Dependencies “appear to be getting over-excited about this issue.”

Crown Dependencies decide not to suspend their bilateral agreements with the UK.

At a meeting in the Isle of Man yesterday, the Crown Dependencies decided not to suspend their bilateral agreements with the UK. “It was agreed to accept the UK Paymaster General’s commitment to conclude arrangements with Gibraltar so as to ensure a level playing field during the period of the UK’s presidency of the EU,” said a joint statement from the islands’ political leaders after discussions. “We will be keeping in direct contact with the UK and will be monitoring progress closely. In view of the very firm promises we have obtained from the UK Paymaster General, we are assured that the gap with Gibraltar will be closed. However, we have already made it clear to her that it is a point of principle for us that the UK must deliver on its commitment.”

AUSTALIAN TAX SCAM PROBE WIDENS TO 500

Australia’s biggest tax evasion investigation was now probing more than 500 people, dramatically widening its focus from the 12 wealthy individuals initially targeted, Tax Commissioner Michael Carmody said. The investigation, which was originally tracking tax evasion cases suspected of totalling A$300 million, gathered pace after more than 60 people came forward to pass on leads to the Australian Crime Commission and the Australian Taxation Office, Mr. Carmody said. The ATO has hinted that high-profile identities in the entertainment and sporting fields are caught up in the investigation, which focuses on illegal offshore tax schemes. A lawyer for boxer Kostya Tszyu confirmed this month the former world champion was named on a search warrant and entertainment promoter Glenn Wheatley has said he was raided by ATO agents.

ACCENTURE LOSES BID TO PROTECT OFFSHORE TAX BREAKS

U.S. lawmakers rejected a lobbying effort by Accenture Ltd., the world’s 2nd-largest consulting firm, to ensure that it obtained an exemption from tax penalties on companies that incorporate in havens such as Bermuda. A legislative package of so-called technical tax corrections introduced by the leaders of the House Ways and Means and Senate Finance committees and endorsed by the Treasury Department omits the exemption Bermuda-based Accenture had sought. House Democrats had objected to the change to benefit Accenture.

A provision in last year’s $145 billion corporate tax bill designated companies that move to Bermuda and other tax havens as U.S.-based for tax purposes, denying them tax breaks. The law exempts companies that completed a move prior to March 4, 2003. The omission of the change Accenture sought may be a setback for the company, which said in public filings it is concerned the IRS may not recognize its overseas incorporation in the same way the tax agency does for Tyco International and Ingersoll-Rand, which also are based in Bermuda. In regulatory filings, Accenture said it did not believe it was subject to the provision maintaining U.S. corporate taxes on companies that move to tax havens.

IRS “STUDYING” BUSINESSES ON TAX EVASION

The IRS said it plans to audit 5,000 businesses to measure tax evasion and refine the agency’s estimate of annual unpaid taxes. The examinations follow similar research among individuals completed this year, which led the tax collectors to estimate that taxpayers owed $312 billion to $353 billion in unpaid taxes in 2001. The research will target randomly selected S-corporations, enterprises that do not pay corporate income tax but instead pass income and taxes through the business to individual shareholders. The audits will include those shareholders. S-corporations have become the most common type of business, accounting for nearly 60% of all corporate tax returns in 2002, the most recent statistic available. It could be two to three years before the IRS completes the study.

NEW RULES WOULD LIMIT TAX WORK BY AUDITORS

Accounting industry regulators are set to impose strict new limits on the kind of tax work that auditors can perform for their clients in a long-awaited vote today. Under the plan, auditors would be banned from selling abusive tax shelters and preparing tax returns for top executives at companies whose accounting practices they review. The move is designed to ensure that auditors’ judgments about accounting are not compromised by lucrative tax fees. The Public Company Accounting Oversight Board first proposed the limits in December, after Ernst & Young LLP, KPMG LLP and PricewaterhouseCoopers LLP came under fire for marketing tax-avoidance deals to clients.

The Justice Department is considering whether to bring criminal charges against KPMG in connection with its sale of tax shelters as well as possible obstruction-of-justice charges, according to news reports. The firm issued a statement last month saying it is cooperating with investigators and is taking “full responsibility for the unlawful conduct by former KPMG partners.” Separately, Ernst drew criticism in 2003 for advising two Sprint Corp. executives how to avoid paying steep personal income taxes at the same time Ernst did audit work for the company. The Sprint executives later resigned. Under current practices, corporate board members must give prior approval for any tax work that auditors perform, but beyond that there are no limits.

Since the passage of corporate accountability reforms in 2002, investor advocates have called on the board to prohibit auditors from providing any tax services to clients, but the new rules do not go that far. Even so, the accounting board plan has drawn 800 mostly supportive public comments.

PEPSI LATEST FIRM TO REPATRIATE FUNDS TO THE U.S. UNDER AJCA

Pepsico said that it plans to repatriate up to $7.5 billion of undistributed international earnings, which under the American Jobs Creation Act will incur an estimated $475 million tax expense. Under the AJCA, firms with substantial profits earned abroad are encouraged to repatriate the income at a temporary rate of tax of 5.25% instead of the usual 35%, a move which lawmakers hope will spur domestic investment. The repatriation provision requires that funds be invested in qualified investments in the U.S., including compensation and benefits for employees, hiring and training, capital and infrastructure investments, research and development, and advertising and marketing expenditures.

Pepsico said the tax expense will be booked in its current third quarter. Other major corporates to make repatriations under the AJCA include drugs manufacturer Eli Lilly ($8 billion), and Johnson & Johnson ($11 billion). According to some estimates U.S. companies could return around $320 billion in overseas earnings to the U.S. during the year-long tax break.

ASSET PROTECTION

NEW DIRECTIVES A THREAT TO TAX HAVEN STATUS OF MONACO, ANDORRA?

Media reporting of a new E.U. savings tax directive has left many people wondering whether European tax havens could soon become obsolete. The July directive requires banks throughout Europe, including low and no tax areas such as Gibraltar, Monaco, Malta and Andorra, to disclose bank account owner information to their home country’s tax authority. But Roger Munns, Managing Director of tax haven property specialists Tribune Properties, says that some of the reporting has been less than accurate. “The purpose behind this directive is primarily aimed at those who hold illicit funds, such as drug dealers, who will need to look outside of the European banking system to place large cash deposits,” he said. “The main attraction of Monaco and Andorra is the zero per cent income and inheritance taxes, and these remains intact and there are no plans whatsoever to change this.”

Monaco and Andorra have long been favored destinations for the well-to-do, but with new technology allowing businessmen and women to run their offices from anywhere in the world, operating from low tax bases has seen added interest for Europe’s primary tax havens, doubling property prices in the last ten years. Both Monaco and Andorra are outside the EU, and their signing of the directive voluntarily is often overlooked in the media’s analysis of any effects on the two small countries long term popularity.

Liechtenstein and the EU Savings Tax Directive.

Liechtenstein has come to an agreement with the EU on the EU Savings Tax and will therefore retain the same withholding tax as Switzerland. As everybody expected, Liechtenstein developed within the frame according to what Switzerland has already worked out. Therefore a short look to what has happened in Switzerland is important to understand the treaty and the differences to Switzerland.

SWISS HIDE THEIR WEALTH UNDER A BUSHEL

There are no fewer than 185,000 dollar millionaires living in Switzerland today, according to consultants Capgemini and investment bank Merrill Lynch. In percentage terms, the number translates into well over 2% of the population with personal assets (excluding primary residential property) worth at least SFr1.2 million. However, the study also highlights an interesting social paradox. If the mainstream media are a good guide to what people really think, then “excessive” management salaries are one of the country’s hottest social issues. But there is an apparent dearth of public interest in the huge number of Swiss who are just “plain rich”.

So, where is all the money? A first-time visitor to Switzerland would certainly register many of the obvious signs of an affluent nation, but there is little of the so-called vulgar pomp that in many countries signals the presence of extreme wealth. The privacy principle seems to extend well beyond banking, for instance to the world of property – Lake Zurich’s Gold Coast is dotted with beautiful and extravagant villas, but it is a labor of Hercules to find out who they actually belong to.

The Swiss attitude to wealth is well illustrated by an anecdote from legendary Swiss banker Hans Bär, co-founder of the country’s largest private bank, Julius Bär. In his recent autobiography, Bär tells the story of how his family deliberately bought two identical limousines, in order to give the neighbours the impression that they only had one. A hangover from Switzerland’s Calvinist past? Either way, it’s hardly a story you’d expect to hear about any of the Beverley Hills “elite”. While many Swiss may still prefer to hide their wealth under a bushel, they are less hesitant when it comes to making sure they hang on to it. Basel University economics professor Silvio Borner says the level of accumulated wealth in Switzerland, particularly among the elderly, is one reason why the country finds it so hard to push through economic reforms.

CITIZENS BANK OF PENNSYLVANIA BEGINS CREATING AN OFFSHORE PRESENCE

The bank is creating a presence in the Cayman Islands so that it can offer its commercial clients offshore banking capabilities, tapping into a controversial line of business some banks have sought to avoid. Citizens applied earlier this month to the Pennsylvania Department of Banking to create a Cayman branch, although Citizens CEO Steven Steinour noted in an interview last week that “it’s not a bricks and mortar thing.” Steinour said the Cayman presence will give Citizens’ corporate clients, especially those with a multi-national presence, the ability to deposit foreign currencies, such as euros, offshore overnight and keep it in the same time zone. Steinour said Citizens Bank of Massachusetts, a sister bank owned by parent Royal Bank of Scotland, has offered deposits in the Cayman Islands for years.

Despite the potential for abuse, Citizens and other banks are providing customers with services that are perfectly legal. They can even help ease international trade in a global environment in which borders are becoming less of an obstruction to business. Steinour said Citizens’ commercial clients are increasingly involved in international business and require international banking capabilities. Other local banks also offer offshore capabilities to its clients.

BANKRUPTCY FILINGS RISE AS INDIVIDUALS MOVE BEFORE NEW LAW TAKES EFFECT

When it comes to personal bankruptcy, many financially strapped people are deciding there is no better time than the present. Sweeping changes to bankruptcy laws take effect in October and will make the process more onerous for consumers. That is prompting many debtors to hurry up and put their financial house in order. The number of bankruptcy filings surged 12% in April, May and June from the same period last year, according to exclusive numbers from research firm LexisNexis. That is quite a rise, considering filings were down 2.6% during the first three months of the year, LexisNexis says.

Consumers teetering on the edge are taking the bankruptcy plunge now because the new law attempts to curb the use of Chapter 7 bankruptcies and steer people into Chapter 13 proceedings. There is a big difference: Chapter 7 forgives most debts, while Chapter 13 only extends the amount of time to pay. Many expect the number of Chapter 7 bankruptcies to increase even more as the Oct. 17 cutoff nears. Timothy McFarlin, a lawyer in Irvine, California, says there would be even more cases if more consumers realized they still had time. Also, rather than filing for bankruptcy, many consumers are tapping the equity in their homes, says Raymond Seo, a bankruptcy attorney in Long Beach.

EXPATRIATION TO SAVE TAXES (GIVING UP YOUR CITIZENSHIP)

The U.S. is virtually the only major country in the world that imposes income taxes and estate taxes on it citizens or long term residents (U.S. “persons”) no matter where they live, where their assets are located or where their income is realized. A U.S. person could spend thirty years in a foreign country and still be subject to the U.S. tax laws. By contrast, most other countries impose taxes on the income of their residents. Some countries (like Canada) impose tax on the worldwide income of their residents but if a Canadian citizen moves to a low tax country (a tax haven), they have no legal duty to pay taxes to Canada after moving. Similar rules apply in most European countries. Thus, tax havens are valid and legal for nearly everyone in the world except U.S. persons. The only way a U.S. person can escape from the yoke of U.S. taxes is to give up his or her citizenship or residency.

In spite of the high taxes imposed by the U.S., the tax rates in many foreign countries are even higher. The primary advantages of expatriation are for the U.S. citizen (or permanent resident) who has substantial investment assets that can be moved to a low tax country, like a tax haven. By changing citizenship to a foreign country, the U.S. person will be subject to local taxes on any salaries or business profits in that country, but can avoid U.S. taxes on that income. In addition, the expatriate can avoid taxes entirely on the income derived from any assets kept in a tax haven. In addition, expatriation can be an effective way to avoid huge estate taxes on large estates.

For many years, the U.S. has imposed income taxes on unrealized gains derived by U.S. citizens or long term residents for up to ten year after they give up their citizenship. In addition, U.S. estate taxes would be imposed on any U.S. based assets for up to ten years after expatriation. However, any future earned income and any investment income realized from new savings outside the U.S. could be arranged to be free of U.S. taxes. And, any “tax paid” assets that could be moved outside the U.S. could be free of U.S. estate taxes. “Tax paid” assets are those assets with no deferred income or unrealized gains. The current expatriation tax scheme basically seeks to collect the income taxes on all untaxed income or gains at the time of expatriation. However, that is an extremely simplified explanation of some very elaborate and complicated tax rules.

PRIVACY

GIVE UP PRIVACY TO SKIP AIRPORT SECURITY LINES?

Attention frequent fliers. Your dream of bypassing long security lines may soon be a reality at airports across the country. But you will have to let the feds scan not only your background, but your iris too. And you will have to give up prints of your index fingers. Several airports around the country, from San Francisco International to Port Columbus International, hope to expand the federal Registered Traveler program already in operation. The newly formed Registered Traveler Interoperability Consortium wants to create a nationally recognized program that would allow frequent fliers, such as business travelers, to experience a more efficient trip, no matter where it originates.

“STEP UP SURVEILLANCE,” U.S.A.

Pressure is building for greater use of video cameras to keep watch over the nation’s cities – particularly in transportation systems and other spots vulnerable to terrorism – after the bombings in London. The calls have come over the last few weeks as British investigators released surveillance footage of the bombers in the deadly July 7 attacks and then put out frames of suspects in last week’s failed attacks. “I do not think that cameras are the big mortal threat to civil liberties that people are painting them to be,” Washington, D.C., Mayor Anthony A. Williams said.

He is not alone. While privacy advocates question their effectiveness, Sen. Hillary Clinton called for New York City subway officials to install more cameras, even though officials said some 5,000 cameras are already in use across all modes of city travel. In Stamford, Connecticut, Mayor Dan Malloy said it is time to revisit a 1999 ordinance that limited cameras to watching traffic. In many other spots around the country, cameras already are in place. “In general, I think we’re getting used to cameras,” said Roy Bordes, who runs an Orlando, Florida, security design consultant firm. “Hey, that’s just the way the world is.”

In most cases prior to the last few years, street crime – not terrorism – was the driving factor behind the cameras. There has also been a boom in traffic-monitoring cameras, and huge reliance on surveillance cameras in private business, especially in retail establishments like convenience and department stores. Security experts say that technology has not yet caught up with hopes for the equipment, however. They point out that despite London’s huge network of cameras, the bombings were not prevented. In those two cases, the cameras have only helped in the investigations. One significant weakness is that the images caught by camera cannot automatically link to a list of known terrorist suspects – not that that would have helped in London, as men identified as bombers were not on any watch lists.

TSA BROKE PRIVACY LAWS

The Transportation Security Administration violated privacy protections by secretly collecting personal information on at least 250,000 people, congressional investigators said last week. The Government Accountability Office sent a letter to Congress saying the collection violated the Privacy Act, which prohibits the government from compiling information on people without their knowledge. The information was collected as the agency tested a program, now called Secure Flight, to conduct computerized checks of airline passengers against terrorist watch lists. TSA had promised it would only use the limited information about passengers that it had obtained from airlines. Instead, the agency and its contractors compiled files on people using data from commercial brokers and then compared those files with the lists. The GAO reported that about 100 million records were collected.

The 1974 Privacy Act requires the government to notify the public when it collects information about people. It must say who it is gathering information about, what kinds of information, why it is being collected and how the information is stored. And to protect people from having misinformation about them in their files, the government must also disclose how they can access and correct the data it has collected. Before it began testing Secure Flight, the TSA published notices in September and November saying that it would collect from airlines information about people who flew commercially in June 2004. Instead, the agency actually took 43,000 names of passengers and used about 200,000 variations of those names – who turned out to be real people who may not have flown that month, the GAO said. A TSA contractor collected 100 million records on those names.

The GAO letter said that the TSA also said originally that it would not use and store commercial data about airline passengers. It not only did that, it collected and stored information about the people with similar names. “As a result, an unknown number of individuals whose personal information was collected were not notified as to how they might access or amend their personal data,” the letter said. It was only after meeting with the GAO, which is overseeing the program, that the TSA published a second notice indicating that it would do the things it had earlier said it would not do.

CAMERAS IN BRITAIN RECORD THE CRIMINAL AND THE BANAL

The cameras of the London Underground never sleep. Yesterday, the London police released images of four men they were “urgently” seeking in connection with the attacks last Thursday. The images showed four men in subway stations and on a bus shortly before detonators on four bombs went off, though the bombs themselves failed to explode. How did the images appear so quickly? “It’s very easy,” said a spokesman for the London transportation system, who spoke on the condition of anonymity under British civil service rules. “We have 6,000 cameras across the network,” with 9,000 planned by 2010. About 1,800 are installed in London’s train stations, and some on its buses as well. They constitute a small portion of the estimated 4.2 million closed-circuit television cameras, or CCTV, across the country. It is commonly estimated that the average Briton crosses the line of sight of a security camera 300 times each day.

The result is that when the attacks occurred, cameras were recording. The network is moving toward all-digital recording, said the spokesman, with some of the images stored on hard drives, some burned onto DVD’s and some on videotape. All of the images from the day of the attacks in their various formats were gathered and given to the police. A spokeswoman for the London police, who also asked that her name not be used under the same civil service rules, said no high-tech wizardry, like facial recognition software, was used to examine the video record for images of suspicious-looking young men with backpacks. “We certainly had lots of CCTV to look at,” she said, but “we had lots of officers” to look at the video. “People are drafted in,” she added, though she declined to say how many.

The video sentinels were originally proposed to prevent crime according to the theory of the panopticon of Jeremy Bentham, the 18th-century philosopher. The panopticon was a prison designed to keep the inmates under constant scrutiny, which would theoretically reduce bad behavior because of the likelihood of getting caught. In modern Britain, the cameras have proved more useful as a tool for investigating crimes, because no one can keep up with the millions of hours of video recorded daily, said Jeffrey Rosen, a law professor at George Washington University who specializes in privacy and has studied the British surveillance system.

“The fact that the bombers struck in the most heavily surveilled city in the world, the city with more CCTV cameras than any other, reminds us of the chilling but obvious truth: suicide attacks, are by their nature, very difficult to prevent,” he said. “Nevertheless, the London bombings suggest that cameras may be one of many useful tools in investigating attacks after the fact.” The National Association for the Care and Resettlement of Offenders, a crime prevention charity in Britain, published a study in 2002 that said the growing network of cameras was not as effective in reducing crime as its proponents had claimed.

LAW

TOP TEN REASONS EVERYONE SHOULD FEAR THE TRANSIT SEARCHES IN NEW YORK CITY

1.) I is starting small. 2.) It began this way at the airports. 3.) According to the courts, you consent to being searched by flying – and now riding. (I kid you not.) 4.) The searches purport to be random, but cops are picking on “suspicious” folks. 5.) It is spreading like wildfire. 6.) NYC officials have been scheming about this for 3-1/2 years, but they were waiting for the right moment to spring it on us. (Yo, guys, those plans for the camps: have you ordered the razor-wire yet?) 7.) It has nothing to do with security. 8.) Your fellow citizens think it is dandy. 9.) Contraband will get you arrested. 10.) Larry D. Hiibel, Petitioner v. Sixth Judicial District Court of Nevada, Humboldt County, et al. This case, decided last summer by the Supreme Court, held that citizens must identify themselves to cops. Refusal can result in arrest.

At some point, Our Rulers will revoke the “freedom” to leave the transit system rather than be searched. And searching will spread to streetcorners. If one consents to being frisked by riding in planes and busses, one consents as well by stepping onto a sidewalk. Those who do not cooperate, who complain or hesitate or perhaps do not raise their hands overhead as quickly as ordered, will immediately rouse suspicion. Names will be demanded and compared against lists of “protestors”. It will not be difficult to join those lists. Writing letters critical of Our Rulers to one’s congressman or a newspaper editor will be enough. Having written one probably will be too – computers have long memories. And we all know the patience police states extend to dissidents. Are you scared yet?

U.S. HOUSE VOTES FOR A PERMANENT PATRIOT ACT

The House voted last week to extend permanently virtually all the major antiterrorism provisions of the USA Patriot Act after beating back efforts by Democrats and some Republicans to impose new restrictions on the government’s power to eavesdrop, conduct secret searches and demand library records. The legislation, approved 257 to 171, would make permanent 14 of the 16 provisions in the law that were set to expire at the end of this year. The remaining two provisions – giving the government the power to demand business and library records and to conduct roving wiretaps – would have to be reconsidered by Congress in 10 years. The House version of the legislation essentially leaves intact many of the central powers of the antiterrorism act that critics had sought to scale back, setting the stage for what could be difficult negotiations with the Senate, which is considering several very different bills to extend the government’s counterterrorism powers under the act.

In the House, a daylong debate about the Patriot Act turned into a referendum on the Bush administration’s antiterrorism policies, as lawmakers sought to calibrate the proper balance between protecting national security and ensuring civil liberties. The vote was the first time either chamber of Congress gave an up-or-down vote to the act as a whole since it was passed by overwhelming margins in the weeks after the Sept. 11 attacks. The law has become a lightning rod for critics who say it invites abuses and Big Brother-like tactics by the government.

With the reauthorization of the law a top priority for the Bush administration, Republicans offered a spirited defense of it during the debate. They said that the government’s expanded surveillance and law enforcement powers had given it the tools it needed to track terrorists and that it had broken down the bureaucratic walls that bottled up investigations before the Sept. 11 attacks. Critics of the law charged that Republican leaders on the House Rules Committee had stifled debate by refusing to allow the full House to consider amendments that would have prevented the government from demanding library and bookstore records and would have forced a reconsideration of some surveillance provisions in 4 years instead of 10.

Don’t expand the police state, says Ron Paul.

Simply sunsetting troublesome provisions does not settle the debates around the PATRIOT Act. If the PATRIOT Act is constitutional and needed, as its proponents swear, why include sunset provisions at all? If it is unconstitutional and pernicious, why not abolish it immediately?, asks Rep. Paul.

THE POLICE STATE ACT: A REPORT

Congress passed legislation last week that reauthorizes the Patriot Act for another 10 years, although the bill faced far more opposition than the original Act four years ago. I am heartened that more members of Congress are listening to their constituents, who remain deeply skeptical about the Patriot Act and expansions of federal police power in general. They rightfully wonder why Congress is so focused on American citizens, while bin Laden and other terrorist leaders still have not been captured. The tired arguments we are hearing today are that same ones we heard in 2001 when the Patriot Act was passed in the emotional aftermath of the September 11th terrorist attacks. If the Patriot Act is constitutional and badly needed, as its proponents swear, why were sunset provisions included at all? If it is unconstitutional and pernicious, why not abolish it immediately? All of this nonsense about sunsets and reauthorizations merely distracts us from the real issue, which is personal liberty. America was not founded on a promise of security, it was founded on a promise of personal liberty to pursue happiness.

Unfortunately, some of my congressional colleagues referenced the recent London bombings during the debate, insinuating that opponents of the Patriot Act somehow would be responsible for a similar act here at home. I will not even dignify that slur with the response it deserves. Let us remember that London is the most heavily monitored city in the world, with surveillance cameras recording virtually all public activity in the city center. British police officials are not hampered by our 4th amendment nor our numerous due process requirements. In other words, they can act without any constitutional restrictions, just as supporters of the Patriot Act want our own police to act. Despite this they were not able to prevent the bombings, proving that even a wholesale surveillance society cannot be made completely safe against determined terrorists. Congress misses the irony entirely. The London bombings do not prove the need for the Patriot Act, they prove the folly of it.

The Patriot Act, like every political issue, boils down to a simple choice: Should we expand government power, or reduce it? This is the fundamental political question of our day, but it is quickly forgotten by politicians who once promised to stand for smaller government. Most governments, including our own, tend to do what they can get away with rather than what the law allows them to do. All governments seek to increase their power over the people they govern, whether we want to recognize it or not. The Patriot Act is a vivid example of this. Constitutions and laws do not keep government power in check. Only a vigilant populace can do that.

U.K. BANK WATCHDOG FACES TOUGH HUNT FOR TERROR CASH

Financial firms appear to be cooperating fully in investigations into the London bomb attacks but the hunt for terror cash is proving difficult, the UK’s financial watchdog said. Philip Robinson, crime sector leader at the UK’s Financial Services Authority, said the FSA was forging closer ties with law enforcement officials to ensure financial firms cooperate in probing money laundering and terror finance. The probes that have followed the July 7 attacks on London’s transport network which killed 52 people have shown the UK financial industry, one of the world's largest, is able to respond quickly to urgent queries, he said.

Robinson declined to comment on any aspects of the London bombing probes, but said that those who committed the crimes were almost bound to have left some evidence within the system. But bankers, police and financial watchdogs have expressed continual frustration with the hunt for terror cash ever since the issue leapt to the top of the international agenda following the September 11 attacks on U.S. targets in 2001. Most investigations have shown that many attacks have been funded with small amounts of money, with some requiring no outside funding at all. Even if criminals leave a paper trail, it does not mean that attacks can be prevented or that anything suspicious will be flagged. Investigators usually look for foreign wire transfers or large transactions. Even more difficult to trace are cash transactions. So-called cash couriers are increasingly the focus of anti-money laundering investigations. Often, criminal transactions lead across borders, leaving investigators to a dead-end when more information is required.

DEATH VIA COPYRIGHT

Rudi Cilibrasi says he traveled from the U.S. to Europe to spend $25,000 on drugs allowed on the Old Continent but unapproved on the new. Yet Customs Officials blocked a shipment of the drugs. Apparently, he says “there was a patent or IP law problem restricting the European branch of the pharmaceutical industry from selling these drugs to Americans, even if I bought them in Europe with my own money for personal use.” Several years later, his parents having now died from Hepatitis C. Cilibrasi says it should be a basic human right to have his illness treated in the most effective way possible but this did not prove possible “because of a mere Intellectual Property dispute.”

THE FEDS KILL MINIATURE GOLF

In New Jersey not long ago, I went to play miniature golf with my fiancée. I will call the place “Golfville”. After we had paid, we discovered that the course consisted of nothing but flat, straight, unchallenging par-2 holes. I immediately complained to the management, and the response was that a NJ law requires any new miniature golf course to be wheelchair accessible! In other words, I mused, only crappy miniature golf courses can now be built – which means no one who is not handicapped will want to play, effectively killing the pastime – just so a handful of theoretical miniature golf “diehards on wheelchairs” can play. Sounded pretty stupid. (BTW, we did not even bother playing, and they would not give me a refund.)

An online search of NJ statutes turned up nothing about miniature golf courses, so I assumed the proprietor of “Golfville” was simply a big prevaricator. Not so, as it happens, for the actual perpetrator of such idiocy is – you guessed it - the federal government. Specifically, the Architectural and Transportation Barriers Compliance Board (an Orwellian moniker if ever there was one) issued a “final rule” in 2002 that “amends” ADAAG (Americans with Disabilities Act Accessibility Guidelines) by adding a new “special application section for amusement rides, boating facilities, fishing piers and platforms, golf courses, miniature golf, sports facilities, and swimming pools and spas.” Just what the nation needed. I invite readers to peruse this overstuffed 90-page document. It is hard to believe how much time and money was obviously spent on micro-managing every aspect of recreation which might be applicable to the disabled.

An email to the aforementioned Compliance Board indicated that it is likely for this process to take a couple of years to be completed. So the time to get your mini-golf ya-yas out is now.

NEW EU PROPOSAL INVOLVES EXTENSIVE DISCLOSURE REQUIREMENTS ON WIRE TRANSFERS

The EU unveiled new proposals aimed at cutting off funding for terrorist networks. Under the plans banks will be required to register the name, address and account number of everyone making money transfers in the EU’s member states. That information would not normally be disclosed, but would be made available to police seeking to prevent money laundering, or to investigate or prosecute those behind terrorist funding. The new requirement would apply to even the smallest amounts of money, and would include all transfers made from abroad into the EU and from the EU to accounts outside Europe. A simpler version of the regime will apply to money transfers within the EU, so as not to endanger the Union’s efforts to build a single market for payments.

If those sending money – individuals or institutions – refuse to provide the required data, banks and other money remitters will ultimately be obliged to reject such transfers, or end links with these customers. Banks will be obliged to retain transfer data for at least five years. The European Commission, the EU executive, says the new measures will assist the appropriate law enforcement authorities in detecting, investigating and prosecuting terrorists and other criminals and tracing their assets.

Internal market commissioner Charlie McCreevy said the new measures aim to increase the traceability of money flows by increasing the obligation for banks to alert law enforcement agencies of irregular payments that may then lead to prosecution of money laundering or terrorist financing. McCreevy said he hoped the measure will quickly be endorsed by the European Parliament so it can become law across the EU in 2007.

The proposed new regulation is part of the EU’s “plan of action to combat terrorism”, and comes shortly after the London attacks in which suicide bombers killed 56 people and injured some 700. The attacks sparked renewed criticism of the EU’s record in fighting terrorism, as well as fresh pledges to step up joint work on terrorism and to meet missed commitments made after last year’s Madrid bombings.

Banks back rules to thwart terror.

European banks have given full support to a EC proposal involving strict new disclosure requirements on banks and other financial institutions. Under the rules, which still require approval of EU member states and the European parliament, banks would have to transmit the name, address and account number along with every money transfer they make. Receiving banks do not now get so much information. The rules would apply to all wire transfers into and out of the EU, and to all sums. Money transfers within the EU would be subject to lighter disclosure requirements. Records of every transfer would have to be kept for five years and must be made available to law enforcement authorities for the purpose of “detecting, investigating and prosecuting terrorists and other criminals and tracing their assets.”

Robert Priester, head of the European Banking Federation’s legal department, said the industry welcomed the proposals. “It brings about further duties and obligations, but the banking sector has given this proposal its full support.” Darren Fox, financial services partner at UK law firm Simmons & Simmons, said the latest move was an improvement on the current regime. “The existing regime only checks ID when accounts are set up and, as such, lacks bite,” he said. Neither the Commission nor the banking industry were able to give an estimate of the additional costs. The new regime would follow a recommendation made by the FATF, an inter-governmental body set up in 1989 to combat money laundering and terrorist financing. However, the draft regulation is more restrictive than the FATF recommendation, which would allow member countries to exclude payments of up to $1,000 (€770, £590) from the disclosure requirements.

“KNOW YOUR CUSTOMER” RULES IMPACT IS LIMITED

There remains increasing pressure on Offshore Financial Centers (OFCs) like the Cayman islands to adopt higher Know Your Customer (KYC) standards. But it is questionable whether following stringent KYC procedures and carefully filtering new account applications actually makes as much difference in the fight against money laundering and the financing of terrorist activities as some think it does. A report from the Scarman Center for studying criminology at the University of Leicester found that KYC had fairly limited impact on reducing money laundering. According to the banks and other financial institutions surveyed as part of the report, KYC procedures may make it more difficult for someone to just walk in off the street and start laundering money, but serious criminals can easily overcome the KYC checks.

The survey also found general skepticism among financial professionals and banks about the effectiveness of suspicious transaction reports (STRs) – the other mainstay of efforts to counter money laundering. Traditionally, banks and other institutions must file an STR for any transaction that shows any signs of being suspect. But they get little, if any, feedback from the authorities because the regulators are overwhelmed by the number of reports being filed. The U.S. Financial Crimes Enforcement Network (FinCEN), which oversees anti-money-laundering efforts, is notorious in U.S. banking circles for having a huge backlog of STRs.

In addition, a report issued by the UN in September 2002 found that the drive to close down the sources of terrorist finance had slowed sharply after the initial flurry of activity. Indeed, the UN’s report could hardly have been less encouraging. For the UN found that the fight against terror financing was failing, and al-Qaeda had as much money as it is needed and could move it wherever it wanted.

Most of the money used to finance terrorism does not flow through the global financial structure but via an alternative banking system. This system, known in India as hawala, and in Pakistan, Afghanistan and the Middle East as hundi, is hundreds of years old. For example, if someone working in the U.S. wants to send money back to a village in Pakistan, a bank transfer – which would have to take place at the official exchange rate – would be of little use since the village in Pakistan is unlikely to have a bank. It is more likely that the Pakistani would approach a hundi broker, often a local small businessman, and give him the money. After a short time his contacts back home will deliver the money – at the (more favorable) black market rate, in local currency and minus a handling fee – to his relatives.

Hundreds of thousands of Americans from overseas use systems such as these to remit money to relatives who live anywhere from the Middle East to the Pacific. There is no paper trail, no fuss and no money ever crosses a border. Discrepancies in the two-way flow are settled up at the end of the month, or perhaps every half-year. Consequently the system is ideally suited to drug traffickers – Afghan drug smugglers have used Pakistani hundi brokers for years – other criminals and, of course, terrorists.

MOVIE ILLUMINATES TIMELESS TRUTHS ABOUT HUMAN NATURE, NATURAL LAW VS. STATE’S LAW

The movie, Devil’s Doorway, a fine Hollywood western released in 1950 by Metro-Goldwyn-Mayer, dramatically illustrates timeless truths about human nature, natural (higher and unchanging) law, and the State’s (man-made and evanescent) law. Lance Poole (Broken Lance), convincingly portrayed by Robert Taylor, is a Shoshone Indian returning to Wyoming and his tribal and family lands known as Sweet Meadow, a fertile valley. He is a decorated (Congressional Medal of Honor) veteran of the War of Secession. In the 5 years after his father’s death, he greatly builds up his cattle ranching business, using Sweet Meadow to graze and water his large herd. Entrance to the valley is through a pass known as Devil’s Doorway.

Louis Calhern plays a lawyer named Verne Coolan, Poole’s antagonist. However, the unstoppable forces that set the tragedy in motion and keep it going are the white man’s land hunger and its official emblem, the Homestead law, which touches nearly everyone in the movie. Coolan makes no secret of his hatred for the Indian, but his motivations go deeper than antipathy and prejudice. Twice he speaks in glowing terms of Sweet Meadow as a home to go to, a place for one’s final rest. He jealously covets the place that Sweet Meadow is, not to farm or graze or use its land, not for money or gain, but as the Heaven that this Satan can never enter. For Coolan is the Devil of the story’s title and his behavior throughout is exactly that of a devil.

In the course of the story, Coolan pretends to be an angel to gain power, via offering to sign a petition in Poole’s favor, and by using the law against Poole. Through lies and promises, he recruits sheep farmers to travel to Wyoming to enter Sweet Valley. But without access to Sweet Meadow’s water, he knows that their sheep will soon die. He lies to instigate an incident that places Poole in a bad light. He becomes temporary Marshall and recruits the sheep farmers to violence. He uses deceit and provokes Poole. Coolan mobilizes force, lying, fraud, snares and machinations, all classic workings of the Devil. His goal is an invasion of Sweet Meadow, and he succeeds.

Although Poole endures several encounters, including intrusions by the sheep farmers, he behaves maturely and with restraint to defend his land, using the least possible force, warning intruders, and not rising to anger. He continually stops short of senseless violence and gives the other side a chance to withdraw. He is basically not a man who likes violence, and he regrets having to use it. The War saw to that. However, in the last reel, when he one-sidedly kills Coolan with his bare hands, after Coolan has entered Sweet Meadow with a large band of men, he loses any pretense of restraint. In effect the Devil has won. Poole almost becomes corrupted. Although he fights for his land with good reason, he almost uses his power as patriarch to bring death upon all the remaining members of his tribe still with him. In the end, he relents.

He and his tribe are surrounded by an overwhelming force of soldiers. Their Lieutenant acts with admirable sense, forbearance, and conscience, clearly not wanting to slaughter innocent women and children. Poole then reciprocates, man to man, soldier to soldier, warrior to warrior. The brotherhood of soldiers that he felt during the late War returns. Mortally wounded, he goes to meet the soldiers, after donning his uniform and medal. He returns the Lieutenant’s salute after the man sees his medal. Poole is defeated. He wears the trappings of those who defeated him, their symbols of distinction, valor and heroism. But he stands proud. He goes out of this life as one proud soldier to another proud soldier, in honor. But not without a complete understanding of the irony of his final seconds on earth.

Would that our present day overstuffed military, the brutal DEA, the monstrous CIA, the Gestapo FBI, and our political officials, our cruel Albrights, our dictatorial Renos, our conniving Clintons, hypocritical Bushes and appalling Rumsfelds who give the orders, our cowardly legislatures that buy the bullets with our money, our shallow fellow voters who cheer them on, and our scheming and power-hungry Kristols would display the least little bit of conscience depicted here as a value. Instead their lips cheer on massacres and tortures that add to a century long list. The horror! The shame!

Lance Poole, his father, and other Shoshones have lived in Sweet Meadow for a long, long time. Poole uses the land intensively for raising cattle. Several times in the movie, he makes it very clear that Sweet Meadow is his land, his property. In several instances, he defends it against intrusion. The story thus leaves no doubt that the Shoshones own this land by virtue of a natural right of true homesteading, meaning that they have been the first to mix their labor with the land, and that they did no one any harm in doing so. They have justly become the original appropriators of the land. The movie unambiguously depicts this working of natural law.

This rosy picture is disturbed by the man-made or statutory law, the Homestead law. A series of homestead laws dispersed Federal lands in 160-acre parcels under certain conditions, one of which was being a U.S. citizen. Since Poole is not a U.S. citizen, he cannot homestead his own land, which, by the way, is far more than 160 acres. The man-made law is on Coolan’s side. We have also a contrast between a higher law to which man can turn versus worship of a graven image, law, the State’s handiwork. Kafka saw this law as a heartless bureaucratic machine that swallowed up and ruled even its operators, turning on them to engrave their hides with the law. Can man worship any handiwork of man without soon turning against those who do not share that worship? Although good people of goodwill abound in the story and have workable solutions, the law keeps raising its ugly head and preventing cooperation and reconciliation. It fosters and facilitates the conflict in the presence of a few evil people like Coolan.

JUDGE GETS IN SWIPE AT BUSH ADMINISTRATION AS HE SENTENCES TERRORIST

The sentence itself was fairly straightforward. An Algerian man received 22 years for plotting to bomb the Los Angeles airport on the eve of the millennium. It was what the judge said in imposing the term that raised eyebrows. U.S. District Judge John C. Coughenour said the successful prosecution of Ahmed Ressam should serve not only as a warning to terrorists, but as a statement to the Bush administration about its terrorism-fighting tactics. “We did not need to use a secret military tribunal, detain the defendant indefinitely as an enemy combatant or deny the defendant the right to counsel,” he said. “The message to the world from today’s sentencing is that our courts have not abandoned our commitment to the ideals that set our nation apart.” He added that the Sept. 11, 2001, attacks have made Americans realize they are vulnerable to terrorism and that some believe “this threat renders our Constitution obsolete … If that view is allowed to prevail, the terrorists will have won.”

Critics of the Bush administration have long accused the U.S. government of unjustly detaining terror suspects at the Guantanamo Bay prison in Cuba, as well as a small number of American citizens who have been designated enemy combatants. U.S. Attorney John McKay said he agreed with the judge’s comments that U.S. courts are equipped to handle terrorism cases. He would not comment on the judge’s criticism of military tribunals and the handling of enemy combatants.

The comments were only the latest surprise in a terrorism case that began on the eve of the millennium when Ressam was arrested as he drove off a ferry from British Columbia with 124 pounds of bomb-making materials. Prosecutors said he had attended terrorist training camps in Afghanistan and was intent on bombing Los Angeles International Airport. Facing up to 130 years in prison after being convicted of terrorist conspiracy and explosives charges in 2001, Ressam began cooperating with authorities in hopes of winning a reduced sentence. He told investigators from several countries about the operation of terrorist camps and disclosed the identities of potential terrorists, the use of safe houses and other details. Ressam’s information was given to anti-terrorism field agents around the world – in one case, helping to prevent the mishandling and potential detonation of the shoe bomb that Richard Reid attempted to blow up aboard an American Airlines flight in 2001. Coughenour has called the information Ressam provided “startlingly helpful”.

OPINION & ANALYSIS

THIS IS AMERICA?

I have long had an uneasy relationship with airport security. Before September 11, I resisted the demand that I produce a government-issued ID, believing that it smacked too much of the “Papers, please” of the former Soviet Union that Hollywood movies used to mock and we free Americans used to laugh at. I also used to withhold permission to search my bags. On one occasion before September 11, in the Birmingham, Alabama, airport, the security guard was nonplussed when I answered no to her perfunctory request for permission to search my briefcase. I told her, and then her supervisor, and eventually a man who identified himself as the head of security at the airport, that I am protected by the Constitution from unreasonable searches and seizures. I showed him the Fourth Amendment in the copy of the Constitution I always take with me when I travel. It meant, I said, that unless they had either a warrant or probable cause to suspect me of some crime, they had no right to demand to search my bag. They admitted that they had neither, but, in what was then a shocking revelation and now seems only to have been ahead of its time, the chief of security said, “Well, you have your law; I have mine.”

That was before September 11. Since then, all sanity – not to mention quaint notions like individual liberty, rights, and privacy – is fast going the way of the Edsel. Several weeks ago in the airport in Traverse City, Michigan, my wife, my children of 8, 5, and 3, and I were all “randomly” selected for a complete search of all our belongings. I have never been subject to more humiliating treatment in my life. We all—including my three-year-old son—had to take off our shoes, and hand them over for “inspection”. I had to take off my sport coat and belt as well; and I had to hand over my wallet for it to be – well, who knows?

I made my usual protest about protections from unreasonable searches and seizures, but they fell on deaf ears. “We’re just following orders,” I was told. That was the defense Nazi war criminals used, I said. Following orders does not relieve you of responsibility for your own actions. “Are you calling me a Nazi?” one demanded. “You call me a Nazi again and you’re never getting on that plane!” Whose orders are you following? “The FAA’s.” The FAA has instructed you to detain and search innocent American citizens and their families? “Where have you been lately, buddy? Haven’t you heard of what happened in New York?” But wasn’t that tragedy, like most terrorist activities against America, perpetrated by people who were not native-born American citizens, and who were not traveling with their wives and small children?

By this point I was surrounded by approximately half a dozen security guards and several armed National Guardsmen. I was informed that if I did not “shut up,” I would be made to “go Greyhound the rest of [my] life.” I asked whether I was suspected of a crime. I was informed that asking so many questions “about the Constitution and all” was making me suspicious. “This is America now, buddy. You better shut up and get used to it!”

LEFT VS. RIGHT FUTILITY

During the Abbeville Institute’s week-long summer school a few weeks ago a student asked the Institute’s founder and director, Professor Don Livingston of Emory University, a question about the composition of “The Left” and “The Right” in American politics today. He wanted Professor Livingston’s opinion of the prospects for the success of “The Right” to get the country to move in a more conservative direction. Professor Livingston correctly pointed out that the premise of the question was all wrong. The premise, of course, was that America’s highly centralized, monopolistic, imperialistic, federal government – the Lincolnite state – is desirable if not inevitable. Consequently, the route to greater freedom and prosperity is for “The Right” to control the federal Leviathan and use the levers of federal power to achieve its political ends.

It is true that, since the death of genuine federalism – sometimes called “states’ rights” – in 1865, this has indeed been the political game. But it is not inevitable. An alternative way of thinking of how to achieve a freer and more prosperous society is through the devolution of political power, as Professor Livingston responded. Therein lies the only hope of citizens ever being able to control their own government and becoming sovereign over it once again. Forget about the fantasy of controlling the federal government. It has accumulated so much power and created so many vested interests in that power, that any genuine conservatives or libertarians who become a part of it are immediately targeted, sabotaged, worn down, smeared, and marginalized so that they have no influence whatsoever. The entire apparatus of the centralized state will always view this as its number one priority.

A relevant publication is a book that Professor Clyde Wilson regards as the best book ever written on the subject of the “Civil War” and Reconstruction. It is North Against South: The American Iliad, 1848–1877, by Ludwell H. Johnson, professor emeritus of history at William and Mary College. Professor Johnson argues that “The Confederate Constitution throws considerable light on the reasons for secession”. Like the U.S. Constitution, it outlawed the African slave trade but declared slavery to be legal. (But unlike the U.S. Constitution, it permitted individual states to abolish slavery. At the exact same time this stipulation was being added to the Confederate Constitution, Abraham Lincoln and the Republican Party were supporting a constitutional amendment that would have prohibited the federal government from ever ending slavery).

In addition, the Confederate Constitution restricted the powers of the central government much more than the U.S. Constitution did by abolishing the “General Welfare” Clause, explicitly declaring that the states were sovereign, “delegating” and not “granting” any powers to the central government, allowing constitutional amendments to only be initiated by the states, outlawing protectionist tariffs altogether, making all federal expenditures more difficult by requiring a two-thirds vote of Congress and giving the president a line-item veto, and more. “These innovations,” writes Professor Johnson, “can be summarized as an attempt to protect the rights of the states, to limit the power of the central governme…” Southern secession can only be understood, says Professor Johnson, by realizing that “Underlying the Southern movement for independence was an abiding passion to be free from outside control and interference. This is a phenomenon with deep roots in Anglo-American history.”

A conservative or libertarian takeover of the federal Leviathan state is the silliest of pipe dreams. The only hope for restoring a free society is the devolution of power and a complete overthrow of the Lincolnite ideology of government, with all its garish monuments to itself, its “civic religion” of centralized governmental power in pursuit of world domination, its brainwashing of the public through nationalized education, its army of myth-making court historians (a.k.a., “Lincoln scholars”), and its monstrous appetite for tax revenues, which now account for almost half of all national income – especially if one counts the implicit “tax” of the costs of government regulation. The devolution of power, combined with the destruction of all the Lincolnite superstitions, is the most hopeful means of emancipating America’s tax slaves.

HAS THE U.S. GONE CRAZY?

Here, in the home of the free, the land of the brave, and suchlike prattle, I encounter this: “An 11-year-old girl who threw a stone at a group of boys pelting her with water balloons is being prosecuted on serious assault charges in California. Maribel Cuevas was arrested in April in a police operation which involved three police cars and a helicopter.” It seems that the rock gashed the little monster’s forehead and, according to the BBC, he needed “hospital treatment”. (I suspect this means that he needed treatment that any general practitioner could have given him in his office, but ambulances do not take people to general practitioners.) Now, if I had a son who was ganging up with other boys to torment a girl who did not speak English, or did (apparently Maribel barely did), I would slap him across the room so hard that he would think he was an astronomer. Actions have consequences. There are things kids need to know that you do not do, especially boys, who are pack animals.

But what leaves me gasping in wonderment is the police. First, why the police at all? Schools and parents cannot manage children who have not even reached adolescence? When I was a kid in high school in rural Virginia, the principal did not need cops to control a school full of rowdy country boys. These were kids who could hurt you. My girlfriend Gloria, pretty as a flower, could pull a crab boat onto a mud flat by herself, and did. We all had guns. No serious discipline problems. Ever. Anywhere. The concept was like presidential grammar … unheard of. Anyone who bucked the principal would have been expelled in three seconds, and would have known better than to go home, ever. His father would be waiting.

How is it that the police department needs three squad cars, an ambulance, and a freaking helicopter to subdue an annoyed girl of 11? In my many years of riding with the police, I knew them to be men, gutsy, hard-core, willing to go to bad places full of bad people. You might like them or you might not, and you might have reason either way. But they were not pansies. Real cops would be stone embarrassed to arrest little girls on assault charges. Not these cops, though. Yet the use of police when frightened mushroomy little purported teachers get upset is becoming the custom in American schools.

Cockamamie stories are legion. I have followed any number of them. A little boy swats a little girl on the backside on the playground, and he is arrested by cops, charged with sexual harassment, and put into compulsory psychiatric counseling. Another kid draws a picture of a soldier with his rifle, and gets suspended. On and on. What twisted circus of social decay is going on here? Have these people’s minds, if any, been taken over by extragalactic flatworms? That is my guess. We are seeing the first step toward cocooning us. They plan to feed us to their starving wiggly populations on some croaking planet knee-deep in bloodsucking phyla unknown to science. Gurgle gurgle glop. I’m serious.

Now, I may not know what is really going on, but I sure as hell know what is really not going on. None of this is about security. At least, it is not about security in any sane way, having some minor 3-generations-back relation to reality. We are a nation frightened of our daughters of eleven? Are girl kids that dangerous? Does any other country, anywhere, fear its daughters? Give me a break. It is truly weird. America, the most aggressive nation on the planet, the grr, bowwow, woof superpower, is also the most timid. Anyway, I guess the Chinese will be merciful. Maybe they will put us in special homes, with soft walls.

ACADIA: PEACEFUL, PROSPEROUS, STATELESS … CLEANSED

This year marks the 250th anniversary of the Acadian deportation, a cruel episode that left the year 1755 stamped on the collective memory of Acadians throughout the world. By today’s standards, most agree that the deportation, at the onset of the French and Indian War, was nothing less than an attempt at ethnic cleansing (the first by Americans against a north American people). At the time, however, the officials who planned the atrocities believed that ridding Acadia of its inhabitants, in order to settle their lands with good English subjects, was “noble”. In the Pennsylvania Gazette of September 4, 1755, we find, “We are now upon a great and noble Scheme of sending the neutral French out of this Province, who have always been secret Enemies, and have encouraged our Savages to cut our throats.”

The deportation had several goals. One was the confiscation of what were considered the best cultivable lands in North America, while another was the dispersal of the inhabitants in English colonies in order to assimilate them into the Anglo-Saxon culture. A third, I would argue, was to destroy what was becoming a thriving libertarian community. In fact, the Acadians appear to have been the ones with a great and noble scheme, that of establishing a stateless, free society. But throughout history, few things seem to have upset rulers more than the unwillingness of a people to submit. Some things just never change.

IT IS STILL MARTIAL LAW EVEN IF NO ONE HAS DECLARED IT YET

Picture this: you and your family are vacationing in the Big Apple. You are riding one of those double-decker busses and enjoying the circus that is Broadway. Suddenly, in a scene borrowed from a banana republic, troops waving rifles ambush the vehicle. “Hands up!” they shout while your family shrieks, your heart thuds, and the other passengers begin screaming. “Get your hands up! Nobody move!” 60 terrorized tourists lived this nightmare near Times Square last Sunday when cops in riot gear invaded their bus. As one of them told the New York Post, “I thought we were going to die.”

It seems that when these folks had embarked on their tour a few hours earlier, five of them aroused suspicion among the bus company’s employees. One wary worker was the driver, 43-year-old Mohammed Stout of the Bronx. You would think a man living in the urban jungle would not scare easily, but Mohammed insisted to the Daily News, “I was definitely frightened from the beginning. That’s human nature.” And what was it about these five men that petrified a Stout denizen of the Bronx? Were they sporting bandoliers, carrying machetes, and shouting, “Death to capitalist pigs”? No. They were “South Asian”, which, we will assume, is PC-speak for “indeterminate variety of Moslem”, they had British accents, they were carrying backpacks, and their pockets were “stuffed”. Again, you might think employees of a tour-bus company would be accustomed to backpacks and bulging pockets among their customers, but no one at Gray Line seems to have the sense God gave an amoeba. Reports differ as to whether Mohammed or another employee called in the alarm. In any event, the SWAT team attacked the bus.

Seems a poor way to thank patrons, by snitching on them to the drama queens at the NYPD. Let us hope Gray Line fires these dimwits before they abuse more customers, but given the fortress mentality that pervades New York City, they are likely to promote them instead. Reprehensible as the employees’ behavior was, it pales beside that of the cops. Without even the pretense of a warrant, the NYPD’s warriors forced not only the five “suspects” but the other 55 passengers as well to reach for the sky and vacate the bus. “People were really scared,” said Jill Sully, who is visiting from Canada. “There were sharpshooters with guns pointed toward our bus.” That is the land of the free for you, Jill.

Amazingly, the sheeple are not cheering the NYPD this time, nor do they seem convinced its histrionics once again saved them from annihilation. “You want to talk about real terror?” said passenger Robert Arrigo of White Plains, NY. “There were two little girls with their parents who were just terrified. They were crying uncontrollably.” The stormtroopers had not finished their rampage. They swarmed into a McDonald’s and forced patrons there to evacuate, too. Deliciously, the NYPD and Mayor Michael Bloomberg are now scrambling to convince us they are actually sane adults instead of irresponsible fascists playing war. To prove their maturity, they are blaming others, specifically the bus company, for their lunacy.

“OK,” you are saying, “New York’s nuts, and the whole country knows it. So what?”

The essentials of this incident were repeated a few days later, this time in the air and far from New York City. Once again, nervous Nellies alarmed by perfectly normal behavior ratted out their fellow serfs, as the police state so frequently urges us to do. Once again, that state joyously jumped to respond. It seems that passengers on United Airlines Flight 934 from Los Angeles to London were scared when three Pakistani men kept pacing the aisle. Says a lot about Americans’ faith in Leviathan’s ludicrous airport screening, does it not? The crew diverted the flight to Boston, where it landed in the middle of the night. The plane was searched (which means screeners had a second shot at molesting everyone aboard, a fitting punishment for snitches), the “suspects” arrested and interrogated. Turns out they were pacing because one of them had been sitting in coach while the other two were in first class, and that made talking difficult. Martial law thwarts yet another terrorist scheme in the home of the brave.