Offshore News Digest for Week of August 8, 2005

GLOBAL BUSINESS

THE EXPANDING OFFSHORE UNIVERSE AND COLLIDING MORAL GALAXIES

The offshore wealth management and legal services industries are always in some stage of transition, sometimes in synch and sometimes not. I am not sure whether the developments I am going to comment on fall into the category of harmonious parallel advancement or, perhaps more likely, the uneven stop-start or incremental process which has long characterized Anglo-American legal culture. What I am sure of is that some historic frontiers are being breached and redefined. To illustrate this I will take as my theme three matters. Two are obviously related but I will have to make good the case for connecting them to the third.

The past few years have seen a marked expansion in the presence of a number of leading offshore law firms outside their “home” jurisdiction or indeed geographical region. A new frontier – or at least where one can have a shrewd idea that one is emerging – is that part of the Persian Gulf area which comprises six Gulf Co-operation Council (“GCC”) Arab Islamic law states, Bahrain, the U.A.E., Kuwait, Saudi Arabia, Qatar and Oman. At least one of these states (Bahrain) is currently in the process of preparing legislation to provide for what practitioners from common law jurisdictions would recognise as a form of trust of the offshore variety. This development is still at an early stage and what is being mooted strikes me as a curious fusion of Islamic law or Shari’a concepts with American trust drafting. In other GCC states (in particular Saudi Arabia and the U.A.E.) there has been a substantial growth in interest in sophisticated but Shari’a–compliant investment vehicles alongside more conventional financial arrangements.

The important point is that the post-September 11th repatriation of Arab capital from the U.S., coupled with economic growth within the region, has created a vast reservoir of funds seeking new channels of investment and wealth management, and regional interest in offshore vehicles has never been higher than at present. My firm belief, based on dealings with Middle Eastern clients over a number of years, is that to service the new regional demand for legal and wealth management expertise two things are essential: one is a sustained presence in the region itself and the other is knowledge of and respect for the religious heritage which forms such a large part of the basis of Gulf political and legal institutions.

Anyone who has tried to frame a Shari’a-compliant trust or will, where there are beneficiaries subject to U.S. or UK capital taxation, will know what complications there are in trying to reconcile legal concepts and language that arise out of very different traditions. That brings me to my third and final point. I fear that the language barrier between lawyers from the English, American and Islamic legal backgrounds is one of the most difficult aspects of this particular expansion of the offshore horizon. I am not confident that English and American trust lawyers speak the same language anymore, at least when it comes to tax issues, or that we will make ourselves clear when it comes to dealing with Shari’a law issues. It certainly will take practice. In any case, I am sure that all our skills at translation are about to be severely tested.

LEGAL INDUSTRY SEES MORE WORK SENT OFFSHORE

Lawyers and legal assistants across the world are doing routine legal work that once was taken care of in the U.S. “There are no more boundaries,” said John Tredennick, chief executive and founder of Denver-based CaseShare Systems. “That doesn’t mean walking into the courtroom, but beyond that there isn’t anything that can’t be done with the Internet.” Among other things, Tredennick’s company manages electronic documents for the legal industry and partners with others to outsource work formerly done in America by paralegals and junior attorneys.

Legal firms sending their work to India, New Zealand, Australia, South Korea and other countries are motivated by the same drive for lower costs that has sent manufacturing and customer service jobs out of the country. Foreign workers can perform the tasks for up to 80% less than their American counterparts, Tredennick said. The trend is relatively new and may have limited impact on American jobs. U.S. regulations bar lawyers who are not licensed in this country from giving legal advice on American law. But its impact on the legal industry is growing. So far this year, 20,000 legal jobs have been shipped overseas, and market research firm Forrester Research predicts that number will grow to 79,988 by 2015. About 1 million trained attorneys are now registered in the U.S., according to the American Bar Association. The association does not track paralegal and support-staff positions.

SPAIN PROPOSES GIBRALTAR A “SPIRIT OF OPENNESS”

No relationship with Gibraltar will ever be possible if the Gibraltarians do not want us, is the frank admission made by Spain’s Director General for Europe Jose Pons, and contained in an article published last week in the Rock’s Chronicle. In his article Mr. Pons points out that Gibraltar and Spain are at an important historical crossroads and have a unique opportunity to build up a different future that is “mutually beneficial” and can unfold “in a spirit of openness.” However Mr. Pons acknowledges the pitfalls along the way and that there will be resistance to change, “attacks and even sabotage” from those on both sides who would wish to cling on to the prejudices of the past, and use history as “an instrument of separation” so as not to move forward.

He then reflects on the improved climate of cross border relations since the Tripartite Forum was set up six months ago, and contrasts it to the situation exactly a year ago today when “there were drums of confrontation in the air”, as Gibraltar prepared to celebrate the Tercentenary of “the British occupation” of the Rock. Mr. Pons says that none of the sides have made any concessions in the forum, but all believe it is possible to work in a productive manner to come to mutually beneficial agreements. He further describes it as a process of dialogue in which “Gibraltarians can take part in a climate of confidence” that allows for rapprochement to take place.

On the very complex airport issue Mr. Pons argues that many of Gibraltar’s economic development projects have little future without an airport deal, and that this will require concessions from all sides. “This is how we work in the European Union nowadays” he declared. Mr. Pons says that Spain cannot be expected to assist in Gibraltar’s economic development through an airport agreement, but at the same time accept that Spaniards are denied entry or presence in the airport’s daily management systems. “The airport is built on disputed territory [the isthmus] and it will have no future without a full agreement with Spain” he declared.

HUSBANDS FOR SALE IN CUBA

A wedding is a big occasion in any society, but in Cuba it can also be big business. Many Cuban women see a foreign husband as a ticket out of the country - a passport, possibly, to new prosperity. The other day I bumped into a Cuban friend of mine in a shoe shop in Havana. She was buying a pair of white slippers. It turned out my friend was taking part in what is a small, but booming market in Cuba – the purchase of foreign husbands. Usually arranged through intermediaries, many Cuban women consider it by far the best way to leave this country. But it is not cheap. My friend paid $5,000 for her Mexican groom. That, I am told, is also the going rate for American, Canadian, and European husbands. A Costa Rican man can apparently be persuaded to tie the knot for around $2,000. Peruvian men, for some reason, are currently particularly good value. Just $800 will secure one.

A few days after meeting my friend, I went to her wedding. Often the line between what is real and what is not is somewhat blurred in Cuba, but this really was an extreme example. The bride’s family had showed up in force. And none seemed happier than her mother, decked out in an extravagant 1960s flowery outfit. Some children, from a previous marriage, were also there, along with aunts and uncles from all over Havana. All seemed delighted with their new purchase. Pepe, the husband, whom they had only met a few hours before, was a jolly, retired engineer in his late 50s, who seemed quite prepared to go along with this theatre as far, and probably beyond, as was required.

Many Cubans do not have to go to these lengths, or expense, in order to leave this island on the arm of a lonely foreigner. Cuba, after all, was once likened by Graham Greene to a factory producing human beauty. Outside the grand neoclassical villas which house many of the embassies here, you will see queues of young, often beautiful, Cuban women, waiting to convince embassy staff that their acquaintances with tourists they recently met look set to be long term. The queue beside the Italian Embassy is usually the longest. Plenty of these relationships do continue happily outside Cuba. But plenty do not.

WASHINGTON ANTI-TERROR GHOST ARRIVES IN PANAMA

With few details and under a mantle of almost absolute silence in local media, the U.S. is preparing to lead joint military maneuvers against a hypothetical attack on the Panama Canal. Panamax 2005, labeled part of Washington´s anti-terrorist crusade, will take place between August 9 and 16 around the Canal that U.S. troops returned to Panamanian hands in 1999 after 85 years of control. Supplementing the meager fare in local press, sources wishing to remain anonymous told Prensa Latina the maneuvers are considered another step by the Bush administration to establish dominion over strategic areas of the American continent.

The land and sea exercises in and around the Pentagon´s former regional military keystone are part of Plan Colombia and the expansion of U.S. military interference in Latin America, the sources declared. Some 3,500 naval crewmen from the U.S., Argentina, Canada, Chile, Colombia, Ecuador, Honduras, Mexico, Peru and the Dominican Republic, directed by U.S. Southern Command Chief Vinson Smith, will form an Atlantic and Pacific ring around “the nerve center” of world trade as part of the drill. Costa Rica, El Salvador, France, Uruguay and Panama, the host country which does not have an army, will attend as observers of the exercises, which will also include anti-mining operations on the coasts and amphibious exercises at Lake Gatún, which supplies water to the Canal.

WAR PLANS DRAFTED TO COUNTER TERROR ATTACKS IN U.S.

The U.S. military has devised its first-ever war plans for guarding against and responding to terrorist attacks in the United States, envisioning 15 potential crisis scenarios and anticipating several simultaneous strikes around the country, according to officers who drafted the plans. The classified plans, developed at Northern Command headquarters in Colorado Springs, outline a variety of possible roles for quick-reaction forces estimated at as many as 3,000 ground troops per attack, a number that could easily grow depending on the extent of the damage and the abilities of civilian response teams.

The possible scenarios range from “low end”, relatively modest crowd-control missions to “high-end”, full-scale disaster management after catastrophic attacks such as the release of a deadly biological agent or the explosion of a radiological device, several officers said. The war plans represent a historic shift for the Pentagon, which has been reluctant to become involved in domestic operations and is legally constrained from engaging in law enforcement. Indeed, defense officials continue to stress that they intend for the troops to play largely a supporting role in homeland emergencies, bolstering police, firefighters and other civilian response groups. But the new plans provide for what several senior officers acknowledged is the likelihood that the military will have to take charge in some situations, especially when dealing with mass-casualty attacks that could quickly overwhelm civilian resources.

Several people on the staff at Northern Command headquarters and at the Pentagon said in interviews that the debate and analysis within the U.S. government regarding the extent of the homeland threat and the resources necessary to guard against it remain far from resolved.

THE ROUGHER SIDE OF BOCAS REAL ESTATE

First-time visitors to Panama often find themselves in one of the mid-priced restaurants along Via Argentina in the Cangrejo district of Panama City. Before their meal arrives they often get a cartooned placemat map of the country. Over Panama City there is usually something to do with the old fort at Panama Vieja. Over the Darien there is usually a reference to the indigenous population. And over the Bocas del Toro region there are banana trees, which is appropriate on several levels – the real estate market there has gone completely bananas. Marred with scandal after scandal after scandal, Bocas del Toro province is slowly making its way down the list of retirement destinations in Panama. The truly beautiful archipelago has been through more than its fair share of title problems and fraud cases, and now it has taken a turn for the worse.

There are two sides clashing in Bocas these days: farmers who were given land by former dictator Omar Torrijos or had occupied land up to several decades before, and the holders of titles that often date back to when Panama was part of Colombia. Bocas del Toro was the location of a huge banana boom throughout the early 20th century, but in 1914 a plague began to strike the crops, and by the mid 1930s there wasn’t much left, including inhabitants. In the middle of the 20th century settlers began to come in from other regions to farm the still rich soil, and then in the 1970s Torrijos began granting small to medium plots of the presumed abandoned land to underprivileged individuals who could farm it.

Fast forward to the late 90s. Foreign investors “discover” the beauty, tranquillity, and, most of all, financial opportunity of the region. Land values shoot up much faster than restaurants or hotels. Old titles no longer represent just jungle and spent farmland. They are potential resorts, hotels, or, more than anything, retirement or vacation homes for wealthy investors “looking for the next Costa Rica,” as the often repeated saying goes.

VENEZUELA: RISING WATERS

There is an increasing awareness in Latin America of a clash between liberal democracy and populism and there is no greater proponent of the latter than Hugo Chávez. His closest ally is Fidel Castro and he has proudly declared himself a Fidelista, a follower of Fidel Castro. The U.S. is alarmed by such developments after having spent decades trying to ensure that South America would not have another Cuba. Bolstered by his success in a recall referendum in 2004 and high oil prices, Hugo Chávez has attempted to spread his “Bolivarian Revolution”, named after the president’s hero, Simón Bolívar, throughout the region. General Bolivar defeated the Spanish army in a protracted war between 1810 and 1821 and became known as El Libertador. The General’s military skills were far greater than his political abilities, however, and although he dominated Venezuelan affairs until 1820, he was replaced by an illiterate but cunning rebel general, José Antonio Paez. Hugo Chávez has appealed to the masses with his economic vision. However, he has not concentrated on the slow but steady strengthening of institutions that creates the conditions that lead to permanent growth in investment.

Chávez exercises personal control over Venezuela’s main institutions, including the armed forces, state radio and television, as well as the state oil monopoly. His own political party, The Fifth Republic Movement, plays a secondary role and the backbone of his support comes from the armed forces; a high number of serving and retired officers hold key positions in his administration. Venezuela is concentrating on trade and investment deals with several countries including Iran, Russia and China while relations with Washington are becoming more distant. The U.S. receives approximately 60% of Venezuela’s crude oil exports at present but Venezuela now has an accord with China. The accord allows China to purchase 120,000 barrels of fuel oil per month and permits Chinese companies to help pump oil out of 15 Venezuelan oil fields. Once the Chinese have the refineries capable of processing Venezuela’s heavy crude oil, how much of the supply currently sent north will be diverted to China? This backdrop has made Washington look askance at all the other left-wing governments in Latin America, namely, Argentina, Brazil, Chile and Uruguay. They, too, in varying degrees, have embraced business with China, a country which has encroached on Washington’s historical sphere of influence.

It would be a mistake, however, to look at South America’s other left-wing governments and see the face of Hugo Chavez because there is a distinction to be made. The government, headed by Chávez, has more of the characteristics of the military regimes that leftist governments south of Caracas vigorously opposed in their fight for democracy. Their source of inspiration is more likely to have been Adam Smith’s doctrine of free enterprise rather than the revolutionary convictions of Che Guevara. Not unlike Chávez, Guevara dreamt of social revolution and proceeded to launch one in Bolivia, only to be injured in a gun battle and afterwards executed by Bolivian troops backed by America’s CIA. There is some concern that the Venezuelan president is also encouraging Bolivians to take a revolutionary path as rumours circulate that he is financing left-wing opposition in that country.

Oil has buoyed the Venezuelan president’s belligerence towards Washington. Crude oil has produced crude politics but things change and the present Venezuelan situation should not be allowed to affect the long-term strategy for future regional relationships. The Chinese take the long view and their president’s November 2002 trip to Latin America was part of that philosophy. No wonder Zhou Enlai, China’s prime minister from 1949 to 1976, when asked about the effect of the French Revolution on world history is reported to have answered, “It’s too early to tell.” That is certainly the case with the Bolivarian Revolution.

Venezuela suspends anti-drug cooperation.

Venezuelan President Hugo Chavez dismissed cooperation with the U.S. Drug Enforcement Administration as unnecessary in a new blow to his country’s fraying ties with the U.S. The Venezuelan leader, an ally of Cuba and harsh critic of U.S. foreign policy, said he had suspended cooperation with the DEA and accused the agency of spying against his government.

HOW LONG CAN PANAMA HOLD OUT FOR A FREE TRADE AGREEMENT THAT REFLECTS ITS OWN NATIONAL INTERESTS?

In the wake of the U.S. Congress’s recent approval of the Dominican Republic-Central American Free Trade Agreement (DR-CAFTA), another U.S. free trade agreement with Panama, an oft-overlooked trade partner, simmers on the back burner. Panama, conspicuously absent from the DR-CAFTA negotiations, has been involved in a separate set of free trade discussions with the U.S. since April 2003. The U.S.-Panama Free Trade Agreement (FTA) has undergone eight rounds of negotiations thus far without showing any potential for compromise in the near future. The backlash from U.S. special interest groups angered by the passage of DR-CAFTA is likely to stiffen U.S. obstinacy when it comes to protecting its agricultural subsidies, thwarting hopes that a U.S.-Panama FTA might set a precedent for a fairer template for free trade in the Americas.

While it may seem that Panama would not have much bargaining leverage with an economic giant like the United States, the isthmian country is not a novice to free trade negotiations. Within a short time span, Panama has opened up the second largest duty-free zone in the world, the Colón Free Zone (CFZ), formed free trade alliances with two Asian powerhouses, Singapore and Taiwan, and accepted an offer to become an associate member of MERCOSUR, South America’s regional trading partnership. Panama’s CFZ, the largest duty-free trade area in the Americas and the second largest in the world, after Hong Kong, has drawn the interest of many international market players to Panama as a potentially explosive trading partner. More than 2,000 companies and 25 banks operate within Panama’s trade zone. Its market is larger than the country’s entire internal market, with transactions totaling $12.2 billion in 2003. The majority of the trade flowing through the CFZ is between Asia and Latin America, suggesting yet another reason why the U.S. may be interested in an FTA with Panama – to regain the markets it has slowly ceded to its most vigorous economic competitors. The U.S. currently accounts for about 4.3% of exports transactions and 9.3% of imports to the CFZ. The CFZ has proved extremely lucrative for Panama, generating $22 million a year in direct revenue for the Panamanian government. In addition, the zone employs 19,000 workers in a country with a perpetually high unemployment rate.

Panama may hold increasing value for the United States as a link to MERCOSUR, South America’s premier regional free trade bloc. Those serving as Panama’s trade representatives see an FTA as a potentially “tremendous opportunity” for their underdeveloped country, which already uses the U.S. dollar as its currency but struggles with high poverty and unemployment rates. In addition, appearing to take concerted action to stimulate the Panamanian economy could win public favor for an administration already deeply mired in corruption allegations and a scandal over no-show diplomas at the University of Panama. As U.S.-Panama FTA talks wear on, Panamanian taxpayers are becoming increasingly alarmed over the daily cost of the negotiations. The question remains whether the U.S. will use its colossal economic clout to allow Panama to fully benefit from the virtues of reciprocal free trade that is not only free, but fair.

The Darien scheme: a promising, yet flawed, idea that bankrupted Scotland.

The idea for the Darien adventure was the brainchild of William Paterson, the Scottish founder of the Bank of England. Paterson had heard sailors’ tales of the Darien peninsula in what is now Panama, a fertile land of friendly natives accessible through a sheltered bay. He recognized the economic benefits of establishing a colony controlling trade between the Pacific and Atlantic, then hampered by the long and arduous journey around the tip of South America. Paterson’s dream of making Scotland independently wealthy proved popular. In 1695 the Scottish Parliament established the Company of Scotland Trading to Africa and the Indies. Initially, the venture was also funded by English and Dutch money, but the English Parliament forced the backers to withdraw. Undaunted, the Scots eventually raised about £400,000 from a national scheme, equal to half the country’s GNP. Five vessels with 1,200 people aboard set sail from Leith on 12 July 1698, reaching Darien on 3 November.

Instead of finding fertile land the area was full of malaria-infested swamps. The Scots bravely tried to build a settlement, New Edinburgh, subsisting on just a pound of infested flour a week. By March hundreds had died. The natives were also unlike the sailors’ descriptions of vain savages and did not want the hundreds of combs and mirrors the Scots foolishly brought to trade, but did give the dying Scots fruit and fish. Although the English had colonies nearby, a royal proclamation barred all trade with Darien. The foolhardy Scots also overlooked the Spanish, who were not pleased to find new neighbors in the middle of their own American empire. The Scots built a fort around New Edinburgh, but abandoned the colony when pressed by the Spanish. Only one ship returned with less than 300 survivors. Another ship of 1,302 colonists had already set sail from Edinburgh but they were driven out by a Spanish blockade. The Darien farce all but bankrupted Scotland and contributed to forcing the country into union with England.

CORRUPTION AT THE HEART OF THE UNITED NATIONS

For over a year, investigators have pored over questions of mismanagement and corruption at the UN. On Monday August 8th, they produced their firmest – and most painful – conclusions to date. An independent commission has found that Benon Sevan, the former head of the UN’s oil-for-food programme in Iraq, “corruptly benefited” from kickbacks while he was in charge. Another UN official, from the procurement office, is accused of soliciting bribes. The UN’s biggest-ever humanitarian undertaking seems to have become its biggest-ever scandal. The report makes only passing references to UN Secretary-General Kofi Annan, but he is personally connected to another affair still under investigation – into whether Mr. Annan’s son Kojo, who worked for a Swiss inspection-services firm called Cotecna, used his UN connections to help Cotecna win a bid. But even if Mr. Annan is cleared of wrongdoing, the Volcker team has already highlighted extensive management failures that let so many things go wrong with oil-for-food on his watch. And all of this comes at a crucial time for the UN, as it begins to consider how to reform itself.

America has just sent John Bolton, a fiery critic of the UN in the past, to be its ambassador there. Those Americans backing the hard-charging Mr Bolton say that he is the ideal man right now, as the UN needs a good shake-up. Only someone not afraid to slaughter sacred cows, they say, can get the job done. But the UN, rightly, turns some of the criticism over oil-for-food back to America (and its ally, Britain). First, while quite a bit of money went missing in the kickbacks and bribes detailed in the reports, much more misdirected cash went elsewhere. Saddam supported himself by selling oil illegally to neighbors including Jordan and Turkey. UN defenders say America turned a blind eye to this, since these two countries were its allies. And UN backers remind America that the UN Security Council, through its sanctions committee, approved every contract awarded under oil-for-food. That means that America and Britain could have vetoed any of the dodgy deals involving Mr Sevan and the others accused. But they appear to have been more concerned with potentially weapons-related “dual use” Iraqi imports than they were about corruption.

RUSSIAN GOVERNMENT APPROVES LONG-AWAITED CAPITAL AMNESTY

On August 11 the Russian government approved a long-awaited capital amnesty in hopes that it will help bring back some of the billions of dollars that have been stashed away abroad in the 1990s. Alexei Kudrin who heads the ministry said that beginning on January 1, 2006, Russian citizens will be able to transfer earlier-concealed incomes to Russian bank accounts using a simplified scheme. Then they will have to pay a 13% income tax and be free from any punitive sanctions from the tax authorities. The proposed amnesty would run from January 1 to July 1 of next year. Though the cabinet backed the idea in principle, ministers questioned whether the terms the Finance Ministry had drawn up would entice much money back. Deputy Prime Minister Alexander Zhukov called for the amnesty rate to be 7%. Other ministers suggested the amnesty should run for more than six months and should include property as well as money.

Russia, with gold and foreign exchange reserves of nearly $150 billion and a budget surplus that would be the envy of many countries in Europe, is not in desperate need of tax receipts. According to some estimates Russians have more than $250 billion stashed abroad in bank accounts and assets. Tax cuts during Putin’s first term in office were a major incentive for people to declare their income but many Russians, rich and poor, still operate in the shadow economy. The persecution of the Yukos oil major and its founder Mikhail Khodorkovsky rekindled capital flight that had showed signs of slowing. Net private capital outflow topped $9 billion last year and officials have said it could be equally high this year.

TAXES

IRISH BUSINESSMEN USE INVESTMENT IN A LUXURY YACHT TO CUT THEIR TAX BILLS

Ireland is awash with new money and much of it is being spent acquiring and financing some of the old-moneyed world’s celebrated meeting points and trophy assets. A less well-known group of Irish investors has played a pivotal role in the restoration of the luxurious Christina O, the 325 foot motor yacht once owned by Aristotle Onassis, where the young John F Kennedy was introduced to Winston Churchill. Temporary home for Thabo Mbeki, the South African prime minister, during last year’s Athens Olympics, the Christina O is also a favourite relaxation spot for Ireland’s growing ranks of millionaires.

Based in the Mediterranean and registered in Panama, the Christina O was refurbished through a partnership registered on a south Pacific island and is majority-owned by a Greek shipping magnate. But as it cruises around the Med in the summer or through the Caribbean in the winter, the Christina O – on hire for between $1 million (€800,000) and $1.5 million a fortnight – has been sucking cash out of the Irish exchequer. Documents show that earlier this year, following a High Court case, the Revenue Commissioners were forced to hand Robert “Pino” Harris, a truck dealer and property investor, a cheque for €9.1 million after attempts to disallow tax breaks on his investment in the luxury yacht were knocked back on appeal.

The precise details of ownership of the Christina O remain a mystery, but it is known that a number of individuals, including Harris, were instrumental in restoring the vessel to its former glory, at a cost of €50 million. This investment was used to drastically cut their tax bills through an innovative use of the tax code.

ITALIAN TAX INSPECTORS GO UNDERCOVER (SO TO SPEAK)

Sexy female tax inspectors are stripping off to expose tax frauds at beachside bars in Italy. Tax authorities have admitted that they have sent the undercover female tax agents posing as bikini-clad holidaymakers to the tourist region of Liguria to see if bars and restaurants were issuing customers proper receipts. News website Tgcom.it reported that the trial project has been such a success, it will now be expanded to the rest of the country. It is estimated the state loses millions of pounds a year in tax frauds by companies which do not give out proper receipts to customers.

EU TAX MEASURE DRIVES 18 FUNDS FROM BERMUDA

Eighteen funds have left Bermuda due to negative impacts tied to the EU’s Directive on the taxation of savings income which came into force on July 1. According to the Bermuda Monetary Authority, the 18 discontinued funds had a total net asset value of $4.47 billion. At the end of the first quarter 2005, the total net asset value of funds in Bermuda was $166.50 billion. The EU directive provides a mechanism for EU countries, as well as third-party countries aligned with the directive, to share information on the savings income of EU citizens not resident in the country where the account is held with their home governments. In some cases, a system of tax retention through a withholding tax is also being implemented.

Bermuda and other financial services centers such as Singapore and Hong Kong are not directly affected by the directive. However the manner in which some countries, particularly Switzerland, have applied “their home rules” has had unanticipated outcomes on funds and collective investment schemes which are domiciled in Bermuda but have paying agents located in a country subject to the Directive. A Bermuda domiciled fund could be caught within the scope of the directive if for example, its paying agent was located in Switzerland. The Swiss home rules is perceived to be detrimental to funds because they would be subject to withholding tax. “It was really a question of the goalposts moving against us in a way the industry never ever foresaw and therefore it did not prepare,” Bermuda Monetary chairman Cheryl-Ann Lister said. She adds however that many of the funds that that have departed are only moving domicile. They are not moving the administration off the Island.

Bermuda Finance Minister takes tax concerns to Switzerland.

Finance Minister Paula Cox took concerns about the impact of a EU tax directive on investment funds located in Bermuda directly to tax officials in Berne, Switzerland last week. Finance officials said the tax directive, which came into effect on July 1, has negatively affected some funds domiciled in Bermuda even though the Island and other financial services domiciles, including Singapore and Hong Kong, are not directly affected by the new ruling. The directive provides a mechanism for EU countries, as well as third-party countries aligned with the directive, to share information on the savings income of EU citizens with their home governments.

In some limited cases, a system of tax retention through a withholding tax has been instituted. Finance officials said a Bermuda domiciled fund could be adversely affected if, for example, its paying agent was located in Switzerland, which means it would be caught within the scope of the directive. Ms. Cox addressed these points with senior officials at the Swiss Federal Tax Administration in Berne, Switzerland.

CANADA HIRES AUDITORS, EXPANDS OFFICES TO CUT TAX EVASION

Canada will spend C$30 million ($25 million) to build 11 “Centres of Expertise” and is hiring more auditors in a bid to crack down on tax evasion from offshore accounts, the government said today. The government is trying to crack down on individuals or companies that shift money abroad to avoid paying taxes, said Colette Gentes-Hawn, a spokeswoman for the Canada Revenue Agency. Last year, the agency reassessed about C$1.1 billion in taxes due on international transactions, she said. Better auditing could boost government revenue and add to the C$2 billion budget surplus Finance Minister Ralph Goodale has said he expects for the fiscal year ending in March 2006. 36 employees will work in the new centers, Gentes-Hawn said in a phone interview. The agency will also add 100 auditors to the 270 it employs to review international transactions.

In one practice uncovered last year, taxpayers trying to avoid capital-gains levies from the sale of private corporations diverted the proceeds to spousal trusts in Barbados, she said. As a result of its audit, the government reassessed 72 people for C$254 million. It later reassessed C$177 million for similar plans. The Centres of Expertise represent a new way of doing business for the CRA. By bringing together audit professionals from the areas of international tax, special audits and tax avoidance to create teams of experts, the CRA is ensuring a more coordinated approach in addressing aggressive international tax planning and the abusive use of tax havens.

U.K. TREASURY REJECTS CALLS FOR FLAT TAX

A flat tax regime that dictates the same rate of tax on all income is misleading and unsubstantiated according to Treasury documents released under the Freedom of Information Act. Interest in one single rate of income tax, currently in place in Hong Kong, Russia and eastern Europe, has blossomed in recent months with high-profile calls of support from the Conservative Party and the Adam Smith Institute, the free market think-tank. Both claim the introduction of one unified tax on all incomes would be a simpler, more transparent solution, serving to boost revenues for the Government, more than the current regime with its array of tax charges. George Osborne, the shadow chancellor, has recently renewed the call for flat taxes by praising their adoption in several eastern European countries; Lithuania, Latvia & Estonia to name just a few. Adding weight to the Tory appeal, Lord Pattern told his peers in June that flat taxes would represent a departure from “our ludicrously complex and costly taxation system.”

Furthermore, flat tax advocates claim revenues for the Government would increase, as compliance costs and the need for avoidance decline under a system defined by less economic distortion. Yet the Treasury is unconvinced. It says that evidence for a low rate of tax as a means to create more compliance and economic activity “is at best mixed.” Moreover, advocates of flat tax structures were so fierce about making their case for the UK, “because so little hard evidence exists to support the pro-flat tax claims.” Arguing about a reduced compliance as a result of flat taxes was dubbed “misleading”, with the Treasury citing the UK as higher in the economic maturity stakes than Baltic countries that had ushered in a flat tax regime alongside other reforms. The Treasury also had difficulty accepting claims that flat taxes were progressive. “Flat tax [advocates] have to face up to the reality that such a system is tough on the low paid unless you spend a lot of money on generous personal allowances or a very low rate of tax – or both.”

Nick Herbert however, of the think-tank Reform, believes that introducing a flat tax system has “immense” gains including the abolition of separate taxes and “complicating reliefs”. “Tax evasion is reduced as activity is shifted from the black to the legitimate economy,” argues Herbert, as just one in a long line of advantages of single rate income tax. “President Putin introduced a 13 per cent flat personal tax rate in Russia. Tax revenues doubled,” Herbert says. “The revolution soon spread to Serbia, the Ukraine, Slovakia, Georgia and Romania.”

ASSET PROTECTION

U.K. RENEWING CRACKDOWN ON OFFSHORE ACCOUNTS

Individuals with offshore bank accounts are being targeted by the HM Revenue Customs as part of a renewed campaign against tax evaders. In the latest attempt to uncover money that has not been disclosed to tax authorities, the Revenue has sent out 500 letters to people with funds in offshore tax havens. The letters ask investors to justify why they think no tax liability arises from their offshore accounts, reminding them that interest income on offshore accounts needs to be declared in the UK. The Revenue’s Offshore Fraud Projects Team, which sent the letters, has given recipients just 30 days to respond. Tax experts view the letters as the first sign that the Revenue is starting to take a tougher stance on individuals suspected of using offshore accounts to avoid tax.

CYBER CRIMINALS SPECIALIZING IN IDENTITY THEFTS ARE GETTING MORE SOPHISTICATED

The Swiss watchdog for cyber fraud has warned that perpetrators of online financial scams are using more and more refined methods to target internet users. Fraudsters have attempted to persuade unsuspecting online customers of financial institutions in particular to divulge their user names and passwords, leaving their accounts open to interference. “Phishing” involves counterfeit websites and brand hijacking, which bypasses the banks and targets customers directly, taking advantage of their good faith and cooperation. Incidents of phishing are monitored by the Swiss Coordination Unit for Cybercrime Control (Cyco) in collaboration with the Reporting and Analysis Center for Information Assurance at the Federal Police Office. Cyco handles around 500 complaints a month, mainly concerned with spam mail.

Stephan Glaus of the analysis center says the scam begins with bogus emails sent to a very wide audience. Usually the fraudsters do not know which bank a person is using but if they cast the web wide enough they will find potential targets. “When you get an email that urgently requests some action on your part and asks for your username, password or credit-card details, you must treat it sceptically and not react. A reputable online company would never ask for information in this way,” he explains. Robert Shaw, an internet-strategy expert at the Geneva-based International Telecommunications Union (ITU), warns that the perpetrators of these attacks are highly organized. “These aren’t casual individuals anymore. Criminal gangs are involved and they are the quickest adapters to new technology.” Shaw said that the issue has become very serious. “Consumer confidence in the internet has been declining rapidly over the past 12 months because people are becoming more and more aware that it’s a bit of a Wild West out there.”

Two recent cases of phishing attacks have taken place in Switzerland involving PostFinance and eBay. In both cases messages were received from faked sender addresses. Customers were asked to click on a link to confirm their login data. The links in question were convincing counterfeit copies of the real internet sites, which were in fact controlled by the fraudsters. The language used in the phony PostFinance emails was English. But despite the unusual nature of the email, 12 PostFinance customers were taken in by the scam and their accounts were robbed. The company offered to cover the amount of their customers’ losses. Glaus says that the criminals involved are always improving their methods and that future attacks are likely to happen in Switzerland using German or French, two of the country’s official languages.

Identification theft ring infiltrates 50 banks with spyware.

A spyware ring has infiltrated the IT systems of as many as 50 international banks and logged social security numbers, credit card and bank account numbers, passwords, eBay, and PayPal account information and chat transcripts, according to the security firm Sunbelt Software. The anti-spyware manufacturer’s president wrote in the company blog that it discovered the identity theft operation while doing research on a CoolWebSearch exploit. The spyware downloads with CoolWebSearch, but is a separate program. The FBI is investigating the breach, which Sunbelt President Alex Eckelberry wrote used a keystroke logger to capture information from thousands of machines. In this instance, Sunbelt said that Windows XP users who have not installed Service Pack 2 are most vulnerable and anti-malware programs will not catch this Trojan horse. Both Sunbelt and Hunt recommend a firewall that detects outbound information.

OFFSHORE INVESTMENTS 2005 COMPANY FORMATION SURVEY IS OUT

Offshore Investments’ thirteen annual “unique and comprehensive” survey is out, updated to incorporate the latest developments in each jurisdiction.

BUSH CHENEY REGIME COMPELS U.S. EXPATRIATION

U.S. citizens are expatriating in record numbers, writes political-economic analyst Al Martin in his column “The Bush Cheney Regime’s Asset Confiscation Policy: A Review” (www.almartinraw.com). People are moving to Eastern European countries like Czechoslovakia, Bulgaria, and Estonia for asset protection, writes Martin because “despite the 40% decline in the U.S. dollar under the scourge of Bushonomics that has occurred under the regime, these are countries where the U.S. dollar still has buying power.

“Many people, particularly middle-class retirees, constitute the second largest group of expatriates from the United States. The top 10% of the nation, the Smart Republican Money Crowd, has consistently been the number-one expatriate group. But now we are seeing a record number of middle class citizens expatriating. This is particularly true among retirees and small business people.

“People who are frequent travelers abroad understand the situation. The economies of the Czech Republic, Bulgaria and Estonia are booming.”

PRINCE ALBERT APPARENTLY WANTS TO RID MONACO OF ITS REPUTATION AS A TAX HAVEN

Monaco’s Prince Albert, Princess Caroline and Princess Stephanie hosted the annual Red Cross Ball in Monte Carlo. The ball was usually hosted by the late Prince Rainier, but Albert has taken over his father’s duties since ascending to the throne last month. The prince has promised to rule with a less formal hand than his father did during his 56-year reign, and he started by demanding the resignation of all palace councillors. He hoped to be less authoritarian than his father, who styled himself “le patron” (the boss) of the principality’s 32,000 residents. The prince also said he wanted to rid Monaco of its reputation as a tax haven. He said recently, “This will remain a virtual obsession for me. I want to place morality, honesty and ethics at the center of my Government’s concerns.”

HALF OF “FOREIGN” INVESTMENT IN CHINA ACTUALLY LOCAL

It is reported that a remarkable amount of the capital coming into China, the leading country to attract foreign investment, from outside was actually local. It is noted in the report prepared by China Central Bank that almost half of the flow of capital to China from oversea finance centers is actually local capital, which was masked by bringing it out of the country in several ways. According to the report some owners of capital who want to take advantage of tax exceptions and some bureaucrats, who invested by bribing and with other irregularities, sent their money to finance centers like the Virgin Islands, Cayman Islands and Samoa, which are known for being “tax havens”. After that, they bring the money back into the country as if it were a foreign investment.

DUE DILIGENCE RESOURCES FOR OFFSHORE INVESTORS

Over the years, I have noticed that a great many individual investors have a pre-occupation with wanting “hot tips” from newsletter writers and seminar speakers. At investment seminars where I have been invited as a speaker (usually about taxes), I see the attendees eagerly writing down the ticker symbols of companies mentioned by the other speakers. Hopefully, these investors do not rush to call their brokers based purely on such hot tips, but I suspect that many do.

Con artists are rarely able to cheat someone is free of greed or fear. Greed is the emotion that leads us to want something for nothing or to seek high returns on investments with claims of little risk. Greed gives us the motive to be willing to take advantage of another person. Someone once said that “You can’t con an honest man.” The word “honest” could be substituted for “someone who is not greedy”. Your single best defense against any potential scam or scheme is to be willing to walk away from the perceived “opportunity”. When you know that professional investment managers rarely make more than the returns achieved by the various market averages, you should be instantly suspicious of any offer that alleges to give you the opportunity to get results far greater than those obtained by professional investors. When the rate of return for a home mortgage is at 7% per year, it does not make sense that you can make 10% a month on any kind of investment.

The second emotion that causes many people to lose money is fear. Nearly every con game or scam tries to encourage a sense of urgency or you lose the opportunity. You have to move fast, to be decisive, say the hustlers and promoters. The fear of losing an opportunity to get something for nothing causes people to invest without investigating first. Greed causes investors to buy at the top of a rising market and fear causes them to sell at the bottom. Greed causes otherwise sane people to give their life savings to a total stranger who is offering the allure of a “special opportunity” to get high returns without risk or effort. Fear often prevents them from even seeking help to recover their money. Greed causes people to buy trust packages that allege they can magically move money between a number of trusts (like the carnival shell game) and end up not owing taxes on their income.

Due diligence is the process of investigating a potential investment. Failing to undertake basic “due diligence” (or vetting, as they call it outside the U.S.) can be financial folly in the offshore investment game, where financial information about companies (or the people behind them) is much harder to secure and far more costly when it is available.

PRIVACY

I HAVE SEEN BIG BROTHER – AND HE IS US

Having been recently appointed Anti-Money Laundering Officer at my investment firm, I now have the official, government-sanctioned power to scrutinize our clients’ account activity and report almost anything I deem “suspicious activity” to the federal government. Be worried, friends – be very worried – since every bank, every brokerage house, every financial institution in the U.S. is required by the Patriot Act to appoint an AML Officer, enact procedures to combat money-laundering, and file Suspicious Activity Reports on U.S. citizens. (You can view the 4-page SAR-SF form here.)

The Act’s definition of a financial institution is disturbingly broad. It includes dealers in precious metals, stones, or jewels, pawnbrokers, loan or finance companies, insurance companies, travel agencies, telegraph companies, sellers of vehicles, including automobiles, airplanes, and boats. Essentially, it means your financial transactions are subject to investigation if you purchase an engagement ring, insure your home, take a vacation or buy a car. According to the statute, if I simply should have become aware of suspicious activity and fail to report it, I may have broken the law. So, if I have a head cold one day and miss a $5,000 wire transfer on a client’s brokerage statement – which is clearly suspicious activity since this client is a 90-year-old widow living on fixed-income investments, who has never made a wire transfer in ten years – I could be in trouble. This applies not just to the AML Officer, but to every employee in a financial organization in a position to view client transactions. So, if you make an unusually large deposit at the bank one day, your teller must report this potential “suspicious activity” to higher ups or face possible sanctions.

As AML Officer, I am required to report a client’s activity as suspicious if it merely fails to make business sense or appears to be without economic purpose. By the way, as AML Officer I am safe-harbored against violations of privacy laws I may be forced to commit while adhering to the regulations of the Patriot Act. I find this situation repulsive in the extreme. It is 1984, slightly delayed. It will result in a paranoia explosion reminiscent of Nazi-era Germany. I am already an unpaid tax collector for the federal government, since I prepare my firm’s payroll, and now, without my consent, I am also its unpaid law enforcement agent and informant. I can only wonder, fearfully, what comes next.

AMERICANS REJECT EXTREME ANTI-PRIVACY SECURITY MEASURES

Americans appear to be on a heightened state of alert about terrorism as a result of the recent London suicide bombings, but they are not so fearful that they are willing to surrender their personal privacy, or to suspend the right to a fair trial of terrorist suspects who are U.S. citizens. In the name of domestic security, most Americans are willing to endure metal detectors and security checks at buildings, and are in favor of a national ID card. They also think it is OK for the police to profile Arab Americans at airports. But most reject allowing the police to search people and homes at random or without a warrant, or expanding government surveillance of e-mail and telephone calls.

BRITISH LICENSE PLATES GET CHIPPED

The British government is preparing to test new high-tech license plates containing microchips capable of transmitting unique vehicle identification numbers and other data to readers more than 300 feet away. Officials in the U.S. say they will be closely watching the British trial as they contemplate initiating their own tests of the plates, which incorporate radio frequency identification, or RFID, tags to make vehicles electronically trackable. So-called “active” RFID tags, like the one in the e-Plate made by the U.K. firm Hills Numberplates, have built-in batteries, allowing them to broadcast data much farther than the small passive tags used to track inventory at retail stores. Active RFID is already enjoying limited use on U.S. roadways. Under a new program, the U.S. Department of Homeland Security is issuing RFID tags to foreign freight and passenger vehicles as they enter the country.

The technology is also used in electronic toll-collection systems in the United States to automatically charge participating drivers as they breeze past unstaffed toll booths. In the San Francisco Bay Area, FasTrak toll transponders are also polled at readers away from the toll booths, to determine how quickly traffic is moving through particular areas. Proponents argue that making such RFID tags mandatory and ubiquitous is a logical move to counter the threat of terrorists using the roadways, and that it will scoop up insurance and registration scofflaws in the process.

Privacy advocates are less enthusiastic about the technology. “It’s too easy for (RFID license plates) to become a back-door surveillance tool,” said Jim Harper, director of information studies at libertarian think tank the Cato Institute and a member of the U.S. Department of Homeland Security’s Data Privacy and Integrity Advisory Committee. Civil libertarians do not object to an RFID automatic toll-collection system that “anonymizes” vehicles in databases once a transaction is completed. But they doubt the government – given its thirst for intelligence – will use such privacy-protection measures. From a law-enforcement perspective, “there is no reason to have privacy for anything,” said Lee Tien, senior staff attorney at the Electronic Frontier Foundation. Active RFID is a huge improvement over cameras that use optical character recognition to read license plates and are accurate only 75 to 90% of the time, said Michael Wolf, president of the EVI Management Group.

RADIO ID TAGS BEING TESTED AT BORDERS

Foreign travelers will notice few changes getting into and out of the U.S. as border officials test new radio identification tags for the next year at five crossings into Canada and Mexico, a homeland security official said. The radio tags will be part of the standard registration process for entering the U.S. The wireless technology is nearly identical to that already being used to speed up passage at toll booths on many of the nation’s highways, said the operations director for the U.S. Department of Homeland Security’s US-VISIT Program.

Testing of the radio frequency identification tags is also being done at the Peace Arch and Pacific Highway crossings in Blaine, Washington, and two crossings in Nogales, Arizona. The testing will run through next summer. If successful, the technology could help relieve congestion for travelers at border crossings and also help authorities weed out potential terrorists, drug dealers and other criminals.

This is the second phase of US-VISIT, the federal government’s screening system launched in 2004 at 115 airports, 15 seaports and 50 of the nation’s busiest land crossings into Canada and Mexico. The system requires scanning fingerprints and photographs of the visitor’s face into a computer. The radio tags are the next step in the process. All foreign travelers using visas will obtain their radio tag from U.S. Customs officials when they first register to enter the U.S. The tag is embedded into a document, which the traveler carries and presents each time he or she enters or leaves the U.S.

The crossing points are equipped with special antennas that read the tags for a secured and coded serial number linked to a database containing the biometric and biographic information provided by the travelers. Before travelers even pull up to a checkpoint booth, the guard will know their identity. The antennas can read the tags up to 30 feet away and recognize as many as 55 different tags simultaneously.

RFID: to tag or not to tag.

Retailers love them, privacy advocates eye them with suspicion and some Christians think they are the “mark of the beast”. For such tiny devices, RFIDs are stirring up huge controversies. But even as the tags infiltrate a range of things from clothing and pets to passports and license plates, confusion abounds over how the devices work, and what problems and advantages they bring. Here are answers to some of the most common questions about this increasingly ubiquitous technology.

CRITICS SLAM NET WIRETAPPING RULE

An FCC ruling that internet telephony services must provide the same built-in wiretapping capabilities as conventional phone companies has civil libertarians feeling burned. “I think a legal challenge is highly likely at this point,” said John Morris, an attorney with the Center for Democracy and Technology. The FCC announced last week that some voice over internet protocol, or VOIP, companies are substantial replacements for old-fashioned telephone service, and must equip their systems to respond to federal wiretap orders. The services will have 18 months to comply with the order, which also applies to cable-modem companies and other broadband providers. While the full text of the ruling has yet to be released, critics say the announcement marks a significant expansion of the Communications Assistance for Law Enforcement Act, or CALEA, which drew a line between “information services” and phone networks.

“The essential compromise of CALEA was hands off the internet, and that promise has been broken,” said Electronic Frontier Foundation attorney Kurt Opsahl. The FBI already has the necessary capabilities to conduct surveillance of internet activities, and the FCC’s order runs contrary to Congress’s intent when it passed the law, said Opsahl. Enacted in 1994, CALEA required land line and cellular providers to build their networks to accommodate a variety of wiretaps, and established exacting technical standards regarding what information about a phone call or voice message had to be provided to law enforcement when subpoenaed.

After a protracted campaign by online civil liberties groups, Congress exempted “information services” – like electronic publishing and online messaging – from the rules, partly for fear the regulations could stifle innovation. The Justice Department’s request last year to expand CALEA to some internet services stirred vigorous opposition from online civil liberties groups, VOIP providers and technology companies like Sun Microsystems. “Even if you make (the) argument that underlying broadband service is a non-information service, no one would dispute that VOIP or e-mail or IM are applications, and they are excluded from CALEA,” said Morris. The ruling only covers VOIP services like Vonage that let customers dial from their computers to the traditional phone network.

LAW

BUSH ADMINISTRATION SEEKS SETTLEMENT IN KPMG CASE

The Bush administration has instructed federal prosecutors to seek a settlement with KPMG LLP over its sale of tax shelters to avoid criminal charges that could drive the accounting firm out of business, people familiar with the case said. The Justice Department in Washington directed David Kelley, the U.S. attorney for the Southern District of New York, to negotiate a deal, said the people, who requested anonymity. One issue is the size of the fine the Big Four firm must pay, with prosecutors demanding as much as $500 million, the people said.

A settlement that avoids criminal charges would ease concerns in the Justice Department and among securities regulators that KPMG’s collapse would eliminate thousands of jobs and reduce the number of major accounting firms to three. Hundreds of large companies would be left, at least temporarily, without an auditor if KPMG disappears. If the talks between Kelley and KPMG break down, the firm could still be indicted, the people familiar with the discussions said. KPMG may face charges it obstructed justice, sold abusive tax shelters to rich clients and misled investigators from the IRS. KPMG has been negotiating with officials in Washington to help resolve the case, which is being handled out of Kelley’s office in Manhattan. The firm acknowledged the threat of an indictment in June and apologized for what it said was unlawful conduct by former partners.

The 2002 federal indictment of Arthur Andersen LLP led to the destruction of the accounting firm that once employed 85,000 people worldwide. The Supreme Court on May 31 overturned Andersen’s conviction for obstructing a government investigation into Enron, ruling the jury based its verdict on faulty instructions. The Andersen prosecution reduced the number of major U.S. accounting firms from five to four. The remaining firms – PricewaterhouseCoopers LLP, Ernst & Young LLP, Deloitte & Touche LLP and KPMG – audit almost all Fortune 500 companies. KPMG, the smallest of the four, has 1,600 partners in the U.S. and reviews the books of more than 1,000 companies.

WELCOME TO AMERICA, DAIMLER-BENZ

It has been a quiet few months since last we heard of a big U.S. company getting in hot water with the Feds over violations of the Foreign Corrupt Practices Act. Or as the saying goes, “Quiet …/ too quiet.” Last week, the U.S. Department of Justice broke the silence with an announcement that it has joined an investigation, already begun by the SEC, into as many as 12 cases of DaimlerChrysler bribing government officials in Africa and Latin America. The SEC’s own investigation was first announced late last year, when a Chrysler accountant turned whistleblower after learning that Daimler-Benz, which Chrysler merged with in 1998, maintained about 40 offshore bank accounts used to fund the payment of bribes.

The practice of maintaining such corporate “slush funds” was not only common but also actually condoned in Europe up until 1999. That was the year in which U.S. pressure to crack down on corruption, and level the foreign trade playing field, resulted in passage of a Convention on Combating Bribery of Foreign Public Officials in International Business Transactions among member-states of the Organization for Economic Cooperation and Development. Prior to the Convention’s passage, many European nations actually permitted companies to deduct the cost of bribes paid from their profits, viewing the bribes as just another cost of doing business.

Investors would be well-advised to watch the intersection of these two trends: the hopefully now-defunct one of European institutionalized bribery, and the one that may have begun with this DaimlerChrysler investigation. With Europe being less than vigorous in prosecuting cases of foreign bribery by its corporations, American regulators may no longer defer that role.

HUMAN VS. PROPERTY RIGHTS

In the wake of the U.S. Supreme Court’s recent 5-4 ruling in Kelo v. New London, there have been statements about property rights demonstrating the paucity of understanding among some within the legal profession. Carolyn Lochhead’s July 1 San Francisco Chronicle article, “Foes unite in defense of property,” reports on the coalition building in Congress to deny federal funds to cities that use laws of eminent domain to take private property for the benefit of another private party. But it is the article’s report on a statement by a representative of People for the American Way, lead opponents to appointing constitutionalists to the U.S. Supreme Court, that I would like to address. According to Ms. Lochhead’s article, “Elliot Mincberg, the group’s legal director, said the case [Kelo v. New London] had been brought by the Institute for Justice as part of an effort by conservatives to elevate property rights to the same level of civil rights such as freedom of speech and religion, in effect taking the nation back to the pre-New Deal days when the courts ruled child labor laws unconstitutional.” To posit a distinction between civil or human rights and property rights reflects little understanding. Let us look at it.

My computer is my property. Does it have any rights – like the rights to life, liberty and the pursuit of happiness? Are there any constitutional guarantees held by my computer? Anyone, except maybe a lawyer, would agree that thinking of property as possessing rights is unadulterated nonsense. So where do property rights come in? Property rights are human rights to use economic goods and services. Private property rights include your right to use, transfer, trade and exclude others from use of property deemed yours. It is bogus and misguided to suppose there is a conflict or difference between human rights to use property and civil rights.

Let’s go back to my computer example. Suppose someone steals my computer. Has he not violated my rights to my property and hence, my human or civil rights? Or, alternatively, if I throw my computer through your window, my computer did not violate your human rights; I did. Why? Because I have used my computer in a fashion that infringes on your human rights to your property. As President John Adams (1797-1801) put it, “Property is surely a right of mankind as real as liberty.” Adding, “The moment the idea is admitted into society that property is not as sacred as the laws of God, and that there is not a force of law and public justice to protect it, anarchy and tyranny commence.”

DEBUNKING THE DRUG WAR

America has a serious drug problem, but it is not the “meth epidemic” getting so much publicity. It is the problem identified by William Bennett, the former national drug czar and gambler. “Using drugs,” he wrote, “is wrong not simply because drugs create medical problems; it is wrong because drugs destroy one’s moral sense. People addicted to drugs neglect their duties.” This problem afflicts a small minority of the people who have tried methamphetamines, but it afflicts most of the law-enforcement officials and politicians who lead the war against drugs. They are so consumed with drugs that they have lost sight of their duties. Like addicts desperate for a high, they have declared meth the new crack, which was once called the new heroin (that title now belongs to OxyContin). With the help of the press, they are once again frightening the public with tales of a drug so seductive it instantly turns masses of upstanding citizens into addicts who ruin their health, their lives and their families.

Amphetamines can certainly do harm and are a fad in some places. But there is little evidence of a new national epidemic from patterns of drug arrests or drug use. Nor is meth diabolically addictive. Drug warriors point to the dangers of home-cooked meth labs, which start fires and create toxic waste. But those labs and the burn victims are a result of the drug war itself. Amphetamine pills were easily available, sold over the counter until the 1950’s, then routinely prescribed by doctors to patients who wanted to lose weight or stay awake. It was only after the authorities cracked down in the 1970’s that many people turned to home labs, criminal gangs and more dangerous ways of ingesting the drug.

It is the same pattern observed during Prohibition, when illicit stills would blow up, and there was a rise in deaths from alcohol poisoning. Far from instilling virtue in Americans, Prohibition caused them to switch from beer and wine to hard liquor. Overall consumption of alcohol might even have increased. Today we tolerate alcohol, even though it causes far more harm than illegal drugs, because we realize a ban would be futile, create more problems than it cured and deprive too many people of something they value. Amphetamines have benefits, too, which is why Air Force pilots are given them. “Most people took amphetamines responsibly when they were freely available,” said Jacob Sullum, the author of Saying Yes, a book debunking drug scares. “Like most drugs, their benefits outweigh the costs for most people. I’d rather be driving next to a truck driver on speed than a truck driver who’s falling sleep.”

In Georgia they are prosecuting dozens of Indian convenience-store clerks and managers for selling cold medicine and other legal products. As Kate Zernike reported in The Times, some of them spoke little English and seemed to have no idea the medicine was being used to make meth. The prosecutors seem afflicted by the confused moral thinking that Mr. Bennett blames on narcotics. “Drugs,” he wrote, “undermine the necessary virtues of a free society – autonomy, self-reliance and individual responsibility.” If you value individual responsibility, why send a hard-working clerk to jail for not divining that someone else might manufacture a drug? And why spend three decades repeating the errors of Prohibition for a drug that was never as dangerous as alcohol in the first place?

SECRET U.K. TERROR COURTS CONSIDERED

Special courts sitting in secret for pre-trial hearings in terror cases are being considered by the Home Office. Security-vetted judges would weigh up sensitive evidence against suspects before cases went further. In a separate move, judges may oversee plans to allow terror suspects to be held for longer before being charged. Lord Chancellor Lord Falconer has also said it is “extraordinarily unlikely” treason charges will be used against outspoken Islamic radicals. Police and lawyers were due to discuss the treason idea this week.

“There is no question of secret trials, there is no question of jury less trials, there is no question of any sort of internment,” said Lord Falconer. Civil rights group Liberty said the involvement of a judge in the special courts could not “sanitize an unfair process”. Director Shami Chakrabarti said, “The thought of secret hearings where once again the accused will never hear the case against them fills me with dread.”

U.K. terror threat forcing justice rethink.

The disclosure that the government is considering a radical new pre-trial process to play a key role in the prosecution of terrorist suspects highlights an uncomfortable truth. This is that Britain’s adversarial system of justice is considered by many politicians and perhaps the majority of senior police and security officials to be failing to meet the challenge posed by Islamic extremism.

One of the thorniest issues in such prosecutions is surveillance, especially the product of phone taps. If a way can be found to get this material into a trial without compromising sources and methods then it would probably result in more convictions. The Home Office hopes to achieve this by placing a security-cleared judge in charge of the pre-trial procedure – but it presents a problem. Home Secretary Charles Clarke sees merits in the French and Italian systems of powerful examining magistrates who play a robust role in the process of arrest and custody ahead of trial. But such inquisitorial practices are at odds with an English legal process which regards the police and the judiciary as exercising entirely separate functions, and the presumption of innocence as sacrosanct.

Changes to the pre-trial process would also require a fundamental shift of the rules. Allowing a judge to determine how long the questioning and evidence-gathering should continue would certainly give the police more latitude. But it would also place a severe strain on two long-established principles: that detention without charge is inimical to the rule of law and that a defendant has a right to know what case is being presented against them.

NEW RULES FOR U.S. PASSPORTS

Frank Moss knows there is confusion about passports. When do you need one? Why are rules changing? I cornered Moss, U.S. deputy assistant secretary for passport services at the State Department, when he visited Detroit recently. I asked about strict new rules that will require citizens to have a U.S. passport to get back into the country after visiting even our friendliest neighbors.

Among the answers he supplied: 1.) With regard to the new rules for the Caribbean, Mexico, Canada, and Central and South America, if you are traveling by airliner or cruise ship it will go into effect December 31, 2006, while if you are going across a land border it goes into effect December 31, 2007. 2.) They cannot issue a passport to someone who is more than $5,000 in arrears on child support, or who is under indictment by a federal or state government. 3.) The “totally new” U.S. biometric passports will start being issued this winter.

Electronic passports set to thwart forgers.

The U.S. passport is joining the digital age. After three years of research and discussion, the State Department has finalized most of the technical and logistical details of new, supposedly tamper-proof passports embedded with a “smart-card” chip. A “contactless smart chip and antenna” is flexible enough to embed in the cover of a standard passport booklet. If current plans hold, they will become standard issue for U.S. travelers as soon as February. Proponents say the chip, which will contain the holder’s personal data and digital photo, should allow speedier entry at borders for most travelers. Because the chip’s data cannot be altered, proponents say, forging passports will be virtually impossible. That, they say, gives authorities a potent new anti-terrorism weapon. The new passport will cost $97, or $12 more than the traditional version.

Initially, U.S. diplomats will use the e-passport as a test, probably starting in December, says Frank Moss, deputy assistant secretary of State. If successful, the new passport will be available to the public next year, possibly as early as February, Moss says. The e-passport has raised concerns among critics who say it lacks adequate privacy safeguards. Wireless transmission of data compromises security, and important personal data could fall into the wrong hands, they say. With proper equipment, someone could remotely intercept personal data, they say. Wireless transmission could lead to “skimming” or “eavesdropping”, says Cedric Laurant of the Electronic Privacy Information Center, a Washington, D.C.-based advocacy group. In skimming, an intruder secretly uses a device to read the chip’s data from as far away as several feet. Americans walking with their passports could be essentially broadcasting their nationality and other personal information, Laurant says. Eavesdropping could occur at border checkpoints if someone intercepts the information as it is being transmitted from the chip to a reader.

Moss says those concern are outdated. The agency has made technical adjustments to address them. The State Department has added a metallic anti-skimming material to the passport’s cover and spine. It limits retrieval of the data to within an inch of the passport, Moss says. The State Department is also considering adding a layer of protection by encrypting the information so it can be read only by authorized devices, Moss says. Bill Connors, executive director of corporate-travel advocate the National Business Travel Association, says the government has adequately addressed the privacy concerns of his organization.

DISNEY 101

Delaware Chancery Court’s Chancellor William B. Chandler III could be a poster boy for the best that capitalism – and the free market – has to offer. Buried in his encyclopedic, and if I may, since this is an opinion column, Solomonic ruling in a trial that reached the peaks and plumbed the depths of corporate perfidy, gluttony and just plain piggishness, is a most extraordinary lesson in corporate governance. Coming in the post-Enron era, when America’s corporate officers and directors often seem to have lost their way, it serves as an excellent refresher course in how to run a company. Now Chandler is careful to point out one critical fact – that Delaware law does not necessarily translate into perfect corporate governance. Still, in my book, and after reviewing his entire 174-page ruling, Chancellor Chandler, when you retire, I have a proposition for you. How about a chair at Harvard Business School? And bring your opinion along as a case study in free-market management.

EMINENT DISASTER HAS PARTIAL REMEDY

As if small business owners did not have enough to worry about. In addition to the trials of satisfying customers, inspiring employees and paying the electricity bills, entrepreneurs now have to sweat the not-so-distant chance that they could wake up to a Caterpillar bulldozer plowing through their parking lots. About a month ago, the U.S. Supreme Court dusted off an age-old legal maneuver called “eminent domain”. Traditionally, eminent domain laws have granted local governments the power to seize property for public projects as roads, parks and libraries – not for economic development projects such as hotels and shopping malls that promise to pep up economically sluggish areas, fill tax coffers and – more to the point – fatten developers’ wallets. But in late June, the court gave the city of New London, Connecticut, the right to take property belonging to Susette Kelo and some other local home owners in order to build a hotel, offices and a pedestrian river walk to complement a nearby Pfizer research facility (see: Supreme Court Takes On The Public). Typically, a local authority must show that the surrounding area has fallen into blight before it can seize the property; not so in the Kelo case. The ruling has since touched off a torrent of protest nationwide – and has encouraged other local authorities to push the eminent domain envelope.

The original purpose of eminent domain was to make it easier for governments to set up their operations. If a local authority needed a courthouse, it could seize the land, at some price, and build one. What is an entrepreneur to do? The good news is the Fifth Amendment establishes that private property shall not be taken for public use “without just compensation.” So while most property owners and tenants have slim chance of stopping an eminent domain proceeding in its tracks, say, by lobbying their local jurisdictions, they can make the best of a bad situation by taking pains to ensure they are fully compensated for the damages wrought by the condemning authority.

The key: Know what your assets are worth. At a minimum, this will involve enlisting lawyers, accountants, real estate appraisers and perhaps an engineer or two to help you determine the “highest and best use” for your property.

RENEWING THE POLICE STATE

So the USA Patriot Act was reauthorized by the junior tyrants in Congress again. But fearing that it was unconstitutional, the House put in a 10-year sunset clause, which begs one to point out, if the Act’s powers were constitutional, there would be no need for a sunset clause. But since it is unconstitutional, why not abolish it? Because these great leaders of the people, the people’s representatives, are cowards. So what powers did the regime, on its own authority, grant to itself? How does the “Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism” Act endanger the liberty of Americans? Let us take a look.

Section 206 permits “roving wire-taps” (whether these are actually conducted by Karl Rove is still unclear). This allows government agents to tap any telephone or computer a suspect might use, i.e., any public phone in your neighborhood area. This allows the government to spy on and record the conversations of anyone who uses a public phone, not just those who are the subject of a current investigation. Beware of what you say when you use a public phone or even the phone in a business. You could be prosecuted for idle conversation (perhaps derogatory remarks about a certain politician, or “hate speech”). You could be confronted with your own words on tape.

Section 213 changes the standards that used to govern obtaining search warrants. It allows so-called “sneak and peek” searches in any investigation. And instead of serving the suspect with the warrant in person, the federal agent can snoop first and let you know he let himself in and rifled through your stuff, and probably raided your fridge, sometime later. Like perhaps, years later. Section 214 allows the government to track your incoming and outgoing phone calls without a warrant and even without probable cause, all by simply uttering the magic phrase “It’s relevant to a terrorist investigation.” Unchecked police spying? Why … that only happens in grubby despotisms like Mexico or Russia. Surely not in America? Section 215 allows the FBI to obtain a subpoena from its pet judiciary, the Foreign Intelligence Surveillance Courts, for your personal records from your bank, bookstore, library, church, video store, and other businesses, and all without proving probable cause. Not only that, the subpoena cannot be challenged in court and it is illegal for you to even be told about it!

Section 216 allows, with only the approval of a judge, federal agents to collect data on the online activities of suspects in any criminal investigation. Section 218 allows secret searches of homes and businesses, based on the authorization of secret courts when the federal agents allege they possess classified information obtained from foreign sources. And this secretly obtained “evidence” can be used against a suspect in U.S. courts, including the allegations of these secretive foreign sources. Section 220 curtails judicial oversight of roving wire-taps, giving the state an unchecked, rather than a cursory rubberstamp power, to eavesdrop on unsuspecting and innocent Americans for possible future extortions … er, I mean, prosecutions.

After more than nine hours of tedious and often ridiculous “debate” that largely consisted of fear mongering and other general insults to the intelligence of the average person, the House renewed the Patriot Act 257 votes for it and 171 against it. The 257 votes included 214 brown shirted Republicans and 43 quisling Democrats. House Republicans cast the law in apocalyptic terms and most Democrats echoed their support, but added tepid concerns about civil liberties. Way to be courageous. Some opposition. What was that old “mee-tooism” appeal of FDR-era Republicans? “The same, but better.” I guess today’s Democrats offer Americans “the same, but less.”

OPINION & ANALYSIS

THE FAILED “WAR ON TERROR”

U.S. government officials, both politicians and career bureaucrats, always imply that a tradeoff exists between security and liberty and that we cannot have both. This view, however, depends on buying into key erroneous assumptions made by those same officials. The Bush administration’s high-octane “war on terror” has undertaken an active and highly publicized agenda domestically and overseas to rid the world of “evildoers”. Unfortunately, after the September 11 attacks, the American public would have been freer and safer, both at home and when traveling and doing business abroad, if the administration’s security bureaucracies had taken a long vacation. In short, the administration’s activism – whether it be for ulterior motives, as in the invasion of Iraq, or to win public relations points with voters – ensures that Americans will see both their security and liberty eroded.

The administration’s strategy in the war on terror has been that the “best defense is a good offense.” Both domestically and overseas, this strategy involves casting a wide net in the quest for enemies. Abroad, instead of focusing finite government resources and attention on neutralizing al Qaeda, the perpetrator of the September 11 attacks, the administration used 9/11 as an excuse to threaten the nations of a make-believe “axis of evil”, invade one of them, and topple its leader, who had nothing to do with those attacks. In addition to the deaths of almost 2,000 U.S. forces and many more innocent Iraqis, the resulting quagmire in Iraq has acted both as a motivator and training ground for the swelling number of anti-U.S. jihadists worldwide, which hardly increases the security of Americans anywhere.

Had the administration really wanted to lessen anti-U.S. attacks, it should have realized that the only way to stop terrorism is to remove its underlying cause – U.S. foreign policy toward Arab and Islamic nations. Most Americans are unaware – or choose to ignore – their government’s profligate meddling in the affairs of those countries after World War II. Poll after poll in Islamic countries indicate that their people admire U.S. freedoms – both political and economic – wealth, technology, and even culture, but hate U.S. foreign policy toward Islamic nations.

Instead of toning down U.S. foreign policy and shrinking the bull’s eye painted on back of the American public, the administration has tried to assuage the public’s fears of losing their liberties by creating the toothless President’s Board on Safeguarding Americans’ Civil Liberties, a panel with few resources, no enforcement clout, and little presidential enthusiasm or backing. Even such window dressing to cover the needless loss of liberties would be unnecessary if the United States got rid of its outdated interventionist foreign policy, which is a relic of the Cold War.

GLOBAL STRUGGLE AGAINST VIOLENT EXTREMISM: MARKETING GIMMICK OR OMINOUS TURN?

Say good-bye to the GWOT and, so far as the Bush administration is concerned, good riddance, too. This acronym for the “global war on terrorism” – often rendered “global war on terror” – an unpronounceable monstrosity with all the charm of the verbiage in a Pentagon planning document, never caught on with the public anyhow. So nothing is lost. The question is, what does the administration seek to gain by relabeling its efforts as the “global struggle against violent extremism”? Is the shift to a new slogan nothing more than that, or does it signify a move toward a different approach to the government’s ongoing exploitation of the “opportunity” the president’s most influential advisers perceived in the events of 9/11?

The government’s successive labels for its actions in response to 9/11 have attracted ridicule from the start. “War on terror” made no sense – you cannot drop a bomb on an emotion. “War on terrorism” scarcely made any more sense, inasmuch as terrorism is not something you can blast with a howitzer, but a tactic available to countless millions of determined persons in one form or another. Evidently none of the government’s public-relations geniuses ever saw any merit in the more sensible phrase “war on terrorists”. In due course, the GWOT came along, attracting it own share of ridicule (“gigantic waste of time,” and so forth). It did have the merit of emphasizing the worldwide reach of the government’s actions, giving fair warning that nobody on earth can occupy a neutral zone, that anyone on the planet might be visited by a Predator drone’s Hellfire missile if he raised sufficient suspicions at Langley.

Whatever the previous terminology’s deficiencies in helping the government sell its program to the public, the latest shift of catchwords bespeaks a more substantial difficulty. Prosecution of the war in Iraq is going from bad to worse, and the slumbering public is finally beginning to rouse itself and to notice that something is amiss. Politicians are always trying to deflect the public’s attention from their policy failures. If the government’s most recent terminological shift were nothing more than another instance of such political skullduggery, we might simply dismiss it as more of the same old same old. The explanations government officials have given, however, suggest that we may have more substantial cause for concern.

U.S. policy makers want to pursue a policy of global hegemony and to impress it with special force on the areas of the world located atop great deposits of petroleum or astride pipeline routes for transporting oil and gas to world markets. They want to prop up tyrannical but cooperative governments in places such as Egypt, Pakistan, and Saudi Arabia. U.S. policy makers pretend to believe that in the midst of all their provocations of Muslims and other people far and wide, they can either kill or hoodwink those who resist and who fight back sometimes by terrorist means morally reprehensible in their own right, to be sure, yet nonetheless comprehensible. In sum, U.S. leaders seek to achieve the impossible. Unfortunately, no matter how absurd this course of action may be in relation to achieving its ostensible public purposes, it serves the private interests of key parties in the upper reaches of the administration, the Congress, the military, certain sectors of industry (most notably military contracting and the oil business), and at the same time it caters to the ideological yearnings of neoconservative zealots and the religious fantasies of certain fundamentalist Christians.

Only the American people in mass can effectively demand an end to such U.S. foreign policy. At present, the people do seem, ever so slowly, to be coming around, although history shows that often they can be deflected from their natural tendencies by artful propaganda, bogus crises, or other political trickery. We can only hope that eventually the American people at large will weary of playing the patsies for their duplicitous leaders and tell them emphatically that enough is enough, that the government must change the policy, not the slogan.

LIBERTY IS NOT EASY

Sometimes I find myself enchanted with what I should reject. That is true both in my personal and public concerns. For example, I am a fan of rail travel – just finished several legs of it in England and Europe. When I can afford first class, reserved tickets, I am especially delighted. I settle into my comfortable state subsidized seat, look out the window all the time, enjoy as we rush by scene after scene, some familiar and some new to me. I am fond of all those little villages in Germany, Austria and Switzerland, but I also enjoy watching the great variety of vehicles racing up and down the Autobahns or Autostradas next to the tracks. And then there are all those lakes and the beaches and whatnot – I can never get enough, except when I begin to have to deal with the bureaucracy that seems to be present everywhere, with its endless dilly-dallying and inefficiency that taxes my patience.

But I feel conflicted, too, because, after all, nearly all of these trains run at the expense of the population that no longer really wants to ride trains a lot. Not only trains, either. Buses are running about throughout the continent with hardly a soul using them other than at some peak hours. And all those “public” realms throughout the continent bother me because I realize how used people become to them, how they tend to induce complacency about privatizing it all, as it should be. Even in the USA, of course, this attachment to what statism has and had to offer someone is difficult to overcome. People are often so fond of their public education, public TV and radio, public parks, forests and beaches, and a whole lot else, that the idea of possibly changing these into private sector provisions sets them virtually permanently against the idea of a truly free society.

I recall many occasions when, while defending the privatization of education, the emotional response, aside from how this would affect the poor – yes, it usually beings with the poor and their children and ends with subsidies for massive inefficient industries and professions – involved, mainly, how everyone in the audience went to public schools and how unlovely it would be to abandon them all. Most of us have lived in the shadows of major and petty tyrannies and have become quite used to how things are done in such regimes. Few of us knows anything else, really. It is necessary, then, for revolutionaries to understand that millions of people are not likely to be eager to part with their habits, even once they found them to be bad ones. Statism is a very ancient bad habit indeed, the “governmental habit” (as Jonathan R. T. Hughes called it in his book by that name). Vigilance is of the utmost importance in the face of this realization.