Offshore News Digest for Week of December 26, 2005

GLOBAL BUSINESS

GOOD GROWTH CONTINUES IN PANAMA IN Q3

Panama’s economy grew by 5.9% in the third quarter of the year, giving year-on-year growth of 6.1% for the first 9 months of 2005. Growth was not expected to continue at this pace after real estate tax breaks were toned down. It looks as if Panama’s booming re-export business, and capacity traffic through the Panama Canal are behind the good performance. The latest trade figures from the extensive Colon Free Zone (CFZ) show that business is well up on last year. The CFZ is at the Atlantic end of the Canal. August turnover in the CFZ, for instance, was over $1.1 billion, 25.9% up on last year. Turnover in the first eight months of 2005 was $7.45 billion, 14% up on 2004, while re-exports for the first eight months of the year stood at $3.73 billion, a 13% increase. “The expansion of China in the commercial sector has played an important role in the recuperation of the Colon Free Zone,” said the CFZ's statistics office.

The government had forecast economic growth this year of between 4.5% and 5%, below the 6.1% growth witnessed in 2004, which was partly a result of temporary real estate tax breaks. The tax breaks, which gave exemption from real estate taxes for up to 20 years, had led to a construction boom in 2004. The tax breaks were extended into 2005, but finally came to an end in June, although tapered relief continues to be available for shorter periods on new constructions. Fiscal austerity measures being implemented by the government, with the IMF’s strong approval, including a 1% levy on CFZ turnover, had been expected to dent the economy this year.

U.S. TO IMPLEMENT CAFTA IN JANUARY 2006 DESPITE COSTA RICA’S FAILURE TO RATIFY

The U.S. government has announced that it will implement the Central American and Domincan Republic Free Trade Agreement (CAFTA-DR) on January 1, 2006 despite the fact that Costa Rica has yet to ratify the agreement. Signed into law by President Bush in April, the CAFTA is designed to reduce trade barriers between the U.S. and the Central American signatories, which comprise Costa Rica, the Dominican Republic, Guatemala, El Salvador, Honduras and Nicaragua. CAFTA would immediately eliminate duties on more than half the value of U.S. farm exports to the region, expand IP protections and open telecommunications and other markets.

Costa Rica’s government wants to move towards freer trade with the country’s partners, but legislators and the unions are not so sure. After some delay, President Abel Pacheco submitted the CAFTA to the Legislative Assembly in late October, in the face of threatened strikes, but the legislative process is expected to take several months. However, in a statement by U.S. Trade Representative spokesperson Cristin Baker, it emerged that the U.S. intends to forge ahead with the implementation of the agreement in January regardless of Costa Rica’s preparedness or otherwise.

A LOOK AT COLLEGE LIFE FROM A BACKWATER

There was not much of a doubt for me as to whether or not I should study at university more than 20 years ago. I was bright enough for it. At that time, these outfits charged no tuition fees in Germany. However, I was the first member of my tribe in Germany who went to and graduated from that sort of thing. Along the way I lost a little hair. The drop out rate at German law schools makes me almost speechless, and that does not happen very often. On the other hand, it would be a slight exaggeration to claim that I was a brilliant student. We may describe my academic performance as a little less than stellar. Some of the few contests in which my performance may be described as above average was beer drinking and playing soccer. Looking at it with the benefit of hindsight, who cares? I do not.

Grades at university do not tell you heaps about practical life skills. You develop them along the way. To spot the latest trend in investments, for example, you rather need a little practical experience. Reading the right sort of books and financial newsletters does no harm either. Rick Warren puts it very well in his book The Purpose Driven Life, “Unfortunately, those who follow the crowd usually get lost in it.” In a nutshell, if you would ask me today “would you again go to university” my response would be “yep, but gain practical experience along the way, preferably in an international environment”. You may have ended up already wondering “why’s he rambling about this now”. Quite simple. Since turning my back on international business and law I spread my wisdom at a private college in the less developed world.

Anyway, I tend to look at the purpose of universities a little different now to my more innocent days as a student. Of course you often need a university degree to do some sort of executive work. The university degree does not necessarily imply that you are going to make a pot of money. To make a pile of money or to be successful in life (which is not the same) it is a lot more significant to become a self starter, an independently thinking businessman or an entrepreneur. To put it a little provocatively again, based on my experience so far – in particular in the less developed world – there are a bunch too many obedient clerks on college campuses. Tell them to jump, and they ask “how high?”. Needless to mention that yours truly tends to be quite busy making a difference in this respect. In my humble opinion, it boils down to the question “do you want to be popular or consequential?”. Being polarizing is great fun.

Finally, even though there are presumably more obedient clerks at colleges and universities in the less developed world than in the more developed world, it is definitely worth studying a semester or a year at such an outfit in the less developed world. The experience will expand your horizon. Just suss the outfits carefully out before making a commitment. After all this, what does college life look like in a Latin American backwater like Colima, Mexico? …

LIVING OFF THE LAND

“I owe, I owe, so it’s off to work I go.” ~ American national anthem

Earn and spend, earn and spend, earn and spend. Slave to the credit card. Mortgage is due. Job you hate. Sound familiar? What if you could find a way to live that broke that cycle? If you are prepared to completely rethink everything about your life, to learn to live with the earth, rather than fight against it, then permaculture may be the answer you are looking for.

What if you could be self-sufficient? Grow your own food, spin your own wool, bake your own bread, brew your own beer. Barter or trade for the few things you could not make yourself. Instead of being a slave to an economic system whose very existence depends upon you to spend money you do not have on crap you do not need, why not cut yourself free, and simplify your life to what is truly essential, to what you actually need? Permaculture, or “permanent agriculture”, was the brain child of Australian Bill Mollison. It is a design for living on the land, and with the land, and can be implemented just about anywhere, although it is easiest and cheapest in the temperate and tropical climes. It is no great surprise, then, that it was first perfected in Australia. It is has also gained significant popularity in New Zealand, parts of Europe, and, surprisingly, Japan, and could easily be implemented in South or Central America.

Permaculture is more than just having a vegie garden. It is about designing a property to minimize human labor, to create a self-balancing miniature ecosystem of which you, the owner, are merely a part. In farming, as in life, control is merely an illusion. The permaculturist becomes instead a custodian of the land, rather than its master. Laziness is a supreme virtue in permaculture. Do not get me wrong – this is a lifestyle that means dirt under the nails, and callouses you will never lose. But by good design, you can create a largely self-perpetuating property of animals, vegetables, and fruit trees (and humans!) that requires minimal effort from you to keep it ticking along.

Something is very, very rotten in our modern world. Television, junk food, religion, and other drugs are used increasingly to mask the symptoms. You cannot solve the problem. You cannot change the system. But you can refuse to be part of that system. You can insist on your right to live a quiet life in your small corner of the world. If you take a plot of fertile earth and make it live, then you can say, “I did this. This land is mine.” This is what our forefathers did when they first came to America. This is what man was born to do, what your ancestors have done for a hundred centuries and more. If they can do it, so can you.

A CONVERSATION WITH AN INTERNATIONAL PROPERTY CARETAKER

Interested in living rent-free overseas as a housesitter? Maryanne Lowell is a single woman nearing retirement who recently completed a housesitting assignment in Australia. She shares her experiences as an international property caretaker in a conversation with Gary Dunn, publisher of The Caretaker Gazette.

“I opted to take off work for a year and do some volunteering and travel,” said Maryanne. “I knew that now could be just the time to respond to one or more tempting ads in The Caretaker Gazette. The one which truly stood out for me read something like, ‘An animal lover needed to pet and house sit for a Cranbourne, Australia (Melbourne area) family going on holiday for two weeks.’ I hadn’t really thought of going to Australia, but why not? I immediately replied to the ad. The family, Vic and Kerry Bennett, and their daughters Aimee and Rebecca, eventually responded with news that I was the person they had chosen for the position. I was to arrive a week or so before their holiday and stay until at least the family returned from holiday and then I could stay as long as I wanted. Between the time of our commitment to each other and the actual trip, we corresponded, emailing info about ourselves and photos, so I felt I already knew the Bennetts. …”

TELEVISION AND AMERICAN ALIENATION IN LATIN AMERICA

SAN JOSE, COSTA RICA – The theme of the lonely Tico is a popular one in Costa Rica media. The last time I checked, the Teatro Nacional had commissioned an original play called Un Tico A Pesar, (a Tico to Pity) which was produced at the flagship theatre’s secondary venue in downtown San Jose. The theme was an ordinary Joe who takes a vacation but gets into trouble because he is so unaccustomed to having time off he does not know what to do with it.

The theme arose again for me when I tuned in to La Pension, a local sitcom produced by Channel 7. It is a sort of Costa Rican Melrose Place, but with the broad physical comedy of On The Buses, in which the main characters all live together in a boarding house, or pension, and just cannot seem to stop getting enmeshed in each other’s lives. In the last episode I watched as they all went to the beach for a weekend (I think it was Jaco, on the country’s mid Pacific coast) and unhappily ended up in adjoining rooms, where their individual character flaws led them into the usual peck of trouble. (Incidentally I could not help but notice the main difference between La Pension and Melrose Place – and especially On the Buses – lies in the sexiness of the two youngest female members of the cast, who look especially fetching in bikinis. They have a genuine sexiness, unlike their U.S. pseudo television counterparts.)

But it was interesting to note that unlike the retirees and PT’s (perpetual tourists) and assorted extranjeros who coagulate at places like Jaco, the characters in La Pension seemed more or less indifferent to their exotic surroundings. In fact, they seemed incapable of going out and enjoying it. This may stem either from their over familiarity with the place in question, or general inexperience with leisure. It was certainly essential to the episode’s plot, which had more to do with the interaction of the characters (of course) than the surroundings. But the point is this: The more Costa Ricans seek to understand and even emulate their guests, they less they seem to understand them. This has led to a kind of malaise in the culture here, where you have some – actually quite a few – aggressively pursuing the American dream of house and career and two cars in the garage (and apparently ending up miserable because of it), and the rest who seem to feel as though their countrymen are forging ahead and leaving them behind.

The net result is a kind of alienation felt by many young people, articulated recently by a young friend of mine went he confessed he “feels like a stranger” in his own country. I think a growing number of Ticos feel that way, which is odd because I always thought that alienation was a particularly North American disease. Apparently it is not, or perhaps we are merely spreading it throughout the world. I decided to test this and other theories recently during a short business trip to South America.

THREE CHRISTMASES ON A CARIBBEAN ISLAND

Approaching my third Christmas season on Isla Margarita (Venezuela), I find I have seen and done a lot. There have been many changes on the island since I first arrived here. Then, Venezuela was in a state of political turmoil. Prices were down and many wealthy locals were leaving the country. They were afraid of what might happen, but no one I talked could tell me exactly what that might be. Just that they did not like the political situation. Since I hated current administration in the U.S.A. and after looking over the possibilities here, I decided it was a good time to buy. At the time, I was selling my house in the States and wanted to use the equity to invest outside the U.S. Margarita looked like a good investment to me. Well, I am not the brightest light on the tree, but so far this was a GREAT investment!

I bought a house, then less than a year later I bought a rental unit in a very nice hotel to be used as income property. So far, one property has almost doubled in value and the other is not far behind. I just turned down 50% more than I paid for it. Recently I bought another rental unit in a small condo complex and have just completed remodeling in time for Winter Season rental. In addition, a couple of years ago I made an investment in the taxi business. To date, all of these have paid very nice dividends in cash as well as equity. After living here for several years and learning what is necessary to navigate through the red tape involved with immigration, getting a Cedula (National I.D. card), a driver’s license, buying property, etc., I decided to start a small company to help people who want to relocate, start or buy a business, find investments, and in general to provide the information someone needs if they plan to live here full time.

O.K., enough about me – here is what has been happening on the island in the last few years. First, I have seen the government stabilize and things are calm – except when Bush and Chavez start rattling their sabers. Even then the people here just laugh at the stupid American President and some frown at the “loco” Chavez. Personally, all I have seen of Chavez’s presidency is an improvement in the country’s infrastructure, more education and medical care for the poor as a result of Venezuela trading oil for doctors from Cuba (who cares about his doctor’s nationality if he seriously needs a doctor?) More of the wealthy are having to pay taxes on their incomes. There are more efforts to stop many illegal activities and government corruption. Actually, I think what Chavez is doing is what the President of a country is supposed to do.

Since I have been here I have seen a monster building boom on the island. You can drive in any direction on the island and see vacation houses and condos being built, roads being repaired and older existing homes being renovated. Is it still a good time to invest? Personally, I think it is a great time to invest and to find good growth opportunities. You can still find an ocean view condo in the $35-40,000 dollar price range. It may not be in the newest building, but try to find an ocean view condo at that price anywhere in North America or the rest of the Caribbean! If you do not mind living outside the city, large country houses can still be found for as little as $20,000! These will probably need some remodeling to bring them up to North American standards, but labor is inexpensive here.

What will conditions be like next Christmas? I think just bigger and bigger. This island is large enough to accommodate a lot more growth and I think the Macanao peninsula (the western half of the island) will start to grow just like Arizona – but imagine its rate of growth if it had had an ocean!! This is still Latin America, and will never be the same as the U.S. or Canada in many respects. On the plus side, the hassle and hustle of North America has not been imported to Margarita – yet! We recently attended a delicious Thanksgiving Feast at an ex-pat friend’s house. Much to our surprise the other guests were in the 30-40 age group and several families told us that they left the States and moved to Margarita Island to find a safer, less superficial world in which to raise their children.

You might be able turn your skills or hobbies into a good living here, and the cost of living is so affordable at this time you could find yourself working less and enjoying life more! Margarita island and Venezuela in general abound with opportunities. Meanwhile, I am going to enjoy the holidays with my 10 cent gas, my 20 cent beer and warm tropical weather! FELIZ NAVIDAD TO ALL!

BILLIONAIRE BUILDER OF CHINA

There are only 10 known billionaires in China, and he is one of them. His name is Xu Rongmao, and he is no Donald Trump, Sam Zell or Mortimer Zuckerman. He is bigger. Xu Rongmao is said to be a secretive man. Little is known about how he earned his early fortune and developed his network of political allies. Mr. Xu, who is the chairman of the Shimao Group, controls much more land than any private developer in America and builds luxury real estate projects that put even Mr. Trump to shame for their sheer scale and flamboyance. But unlike the ubiquitous Mr. Trump – who is never at a loss for words and goes out of his way to attract the attention of cameras – Mr. Xu almost never grants interviews and is highly secretive about his operations.

For all his reserve, Mr. Xu, a former textile factory worker, is one of China’s wealthiest entrepreneurs and a prime example of the nation’s first generation of real estate tycoons. “I don’t know much about Mr. Xu, but Shimao has this uncanny ability to find the right projects at the right time,” says Michael T. Hart, director of research in Shanghai at Jones Lang LaSalle, a real estate consulting firm. “Their North Bund project has one of the best views in all of Shanghai.” In a country that started permitting people to buy homes only in the 1980’s, developers like Mr. Xu (pronounced SHOO) found a way to gain rights to prime land in the nation’s biggest cities. Now they reap huge profits by building large residential projects, often with hotels and other commercial buildings.

An industry that emerged only a decade ago suddenly has annual sales of $130 billion, making real estate one of the biggest engines in this nation’s roaring economy. By all accounts, Mr. Xu, who in his listed companies uses his Cantonese name, Hui Wing Mau, is a pioneer, willing to take big gambles. Through Shimao, he created one of China’s first luxury real estate brands. He bought prime land in Shanghai in the late 1990’s when others, fearing that the city was becoming overbuilt, were fleeing the market. And now, with housing prices rising, the Shimao Group is so profitable that Goldman Sachs and Morgan Stanley are negotiating to take the company public in 2006.

China tries again to control construction boom.

China will launch a new attempt in 2006 to control soaring house prices and the shortage of affordable housing by fine-tuning its development planning and tax policies. Construction Minister Wang Guangtao said that the new policies would be designed to restrict land available for high-end developments while encouraging medium to low-priced projects. In China, rapid urbanization in recent years has led to an explosion in the urban population and a severe shortage of housing in many cities. Last May, the government attempted to head off a real estate bubble by raising home-loan interest rates, limiting urban demolition and levying taxes on housing sales.

Mr. Wang said that despite these efforts, the amount of housing available to low and middle-income families was inadequate. In fact, this year’s measures do seem to have had an effect on housing prices, which rose “only” at an annual rate of 8% in the last six months, compared with 2004’s increase of 14%. The taxes imposed this year, which were in addition to existing real estate use taxes, were aimed at penalizing land speculation by charging gains realized within two years of a real estate purchase. The Construction Ministry says that investment in real estate in 2005 will have increased by 21% year-on-year, down from 28% in 2004 – still, obviously, a stellar rate of growth.

ECUADOREAN PYRAMID SCHEME SPARKS A PANIC

A 71-year-old provincial notary who died in a luxury hotel room earlier this year left behind a teenage girlfriend and a crumbling $800 million pyramid scheme that has blossomed into a nationwide scandal. Jose Cabrer’qs sudden death sparked panic among thousands of people who gave him a minimum of $10,000 each over two decades in exchange for up to 10% monthly interest. Most were rank-and-file police and military personnel – more than 6,500 of them – and residents of Machala, the port city where Cabrera was based. But the scandal has spread to high-ranking current and former military officials, judges, politicians and their families. The head judge of the Machala Superior Court resigned after acknowledging that he had invested $15,000. Ecuador’s former commander of the Joint Chiefs of Staff put in $45,000 and the wife of a former defense minister contributed $125,000, local media have reported.

Interior Minister Alfredo Castillo said last week that the scheme was probably linked to money laundering for the drug trade, illegal arms dealing or counterfeiting. Cabrera died of an apparent heart attack on October 26. Cabrera’s son and daughter denied their father, a former president of the national association of notary publics, was involved in any shading dealings. They promised publicly to sort out the financial mess, before they disappeared last month as arrest warrants were issued. Authorities believe they are in the U.S. and are preparing extradition requests.

Hundreds of investors laid siege to Cabrera’s notary office over three days in mid-November. They were joined by several police and soldiers assigned to guard the building. Local television broadcast images of police and soldiers leaving the scene with cash stuffed in their pockets, shoes and protective vests. Criminal charges were lodged against 17 members of the armed forces who allegedly used two Air Force planes to fly from Quito to Machala to search for their money. Another 28 military personnel have been relieved of duty. Eight police officers face graft charges for their alleged involvement in the scheme. Machala residents who invested with Cabrera dug up his grave on November 14 to make sure he was truly dead and had not faked his demise to get away with their life savings. Cabrera, who as a notary was prohibited from handling investment funds, “managed around $800 million,” said Congressman Carlos Gonzalez, who is leading a legislative investigation of the case.

Ecuador is no stranger to financial scandals. Its corruption-riddled banking system collapsed in 1999 after years of financial mismanagement, prompting a switch to the U.S. dollar as the official currency to stem the country’s worst recession in decades.

TAXES

CHINA CONTINUES MODERNIZATION OF TAX REGIME, SCRAPS ANCIENT FARM TAX

Speaking last week, China’s Finance Minister, Jin Renqing revealed that the government would be abolishing the unpopular farm tax ahead of schedule, as part of a program of tax and economic reforms in China. The 2,000 year-old tax has traditionally been disliked by the country’s rural community because it is levied at a flat rate, while taxes imposed on city-dwellers are imposed in relation to profit levels. Observers have suggested that the tax has contributed to the growing income gap between the country and the city, and have attributed various cases of civil unrest in recent years to anger over the the rural tax.

COMMODITY-INDEX CONTRACTS DO NOT QUALIFY FUNDS FOR TAX BENEFITS, SAYS IRS

The IRS has issued new guidance which states that income from commodity-index derivative contracts does not help a fund qualify for the tax benefits usually enjoyed by mutual funds. Some funds have entered into these derivatives to provide their shareholders with a total-return exposure to changes in the value of commodity indices. Many investment managers consider commodity exposure an important component of investors’ overall portfolio, in part as a hedge against inflation.

Investments that create this exposure include exchange-traded commodity futures contracts and interests in commodity-trading partnerships. Historically, however, mutual funds did not offer this exposure directly, because, under the tax law applicable to these funds, direct investments in commodities do not generate qualifying income for a mutual fund. The IRS has received a number of inquiries from mutual fund sponsors concerning whether commodity-derivative investments, particularly derivative contracts on a commodity index, give rise to qualifying income under 1986 tax legislation liberalizing the qualifying income requirement. In recent months, even in the absence of guidance from the IRS, some funds filed prospectuses with the SEC, indicating that the funds may enter into these investments. Revenue Ruling 2006–1 provides guidance in this area. The IRS will not apply the holding of the revenue ruling adversely to income that a mutual fund recognizes on or before June 30, 2006.

NUMBER OF TAXPAYERS WHO PAY AMT FOR 2006 COULD SOAR WITHOUT LEGISLATION

The alternative minimum tax is becoming even stickier – and could entangle even more taxpayers next year. Congress is expected to recess for the holidays without an agreement on how to limit the effect of the AMT for 2006. While the AMT is expected to affect about 4 million taxpayers for 2005, that number will swell to about 21.6 million for 2006 unless Congress acts to lessen the impact. Congress has said it will do so next year, making it retroactive to Jan. 1, but it is still unclear exactly how that will play out, since other initiatives, like extending cuts on capital gains and dividends, loom in the background.

In the current tax year, married couples filing jointly with income above $58,000 may be subject to AMT, though that figure, or exemption, is dropping to $45,000 next year unless new legislation is passed. The exemption is phased out for those with higher incomes, or $150,000 for married couples filing jointly. The AMT was never intended for the masses. It is a parallel tax system that was installed in the late 1960s to ensure the wealthiest Americans were paying their fair share of taxes by reducing the amount of deductions they can take. However, it was never indexed for inflation and has increasingly trapped more middle-class taxpayers. Indeed, both proposals to revamp the tax code announced last month by the Federal Tax Reform advisory panel recommended eliminating the AMT.

To determine AMT tax liability, two calculations are necessary: one under the traditional tax system and another under the AMT system, where various deductions – such as state and local income taxes, property taxes, miscellaneous deductions and personal exemptions and others – are added back. You must pay the greater of the two. Though the AMT rate is either 26% or 28% – a lower rate than the highest marginal tax bracket of 35% – it is applied to a wider base of income, making that tax bill more costly. Also, unlike the traditional tax code, the AMT is not a progressive tax, but rather a flat tax. For taxpayers concerned they might be subject to the AMT in 2006 – even if Congress does limit its reach next year – there are certain strategies to consider. Here is a list of simple strategies if you expect to become ensnared next year.

TAX SERVICES GENERATE MOST CPA MALPRACTICE CLAIMS, INSURER FINDS

Findings from a recent claims study conducted by the CAMICO Mutual Insurance Company, the second largest provider of professional liability insurance for CPAs in the U.S., indicate that well over half of all claims reported by CPAs that are insured by the firm stem from tax engagements. The study, conducted in October, included the claims experience of all of the insurer’s nearly 7,000 policyholder firms in 44 states, focusing on the major causes and types of claims incurred by CPAs nationally.

According to CAMICO, tax was identified as the most frequent type of claim and largest total of claim dollars for two principal reasons: 1.) complexity and continual change in the tax code, and 2.) issues regarding the engagement between CPAs and their clients. “There is usually a limit to how much the CPA can ask the client to decide in technical tax issues. It’s much like a patient seeing a doctor about a serious, complex medical condition; the problem and treatment are so critical that the patient will ultimately go with the treatment the doctor recommends,” Ron Klein, vice president of Claims for CAMICO, explained.

BILLIONS IN VAT REFUNDS GO UNCLAIMED ACROSS THE EU

Lowendal UK, a cost reduction consultancy, said that businesses throughout Europe are missing out on millions of pounds worth of reclaimable VAT incurred in cross-border transactions. Ann Jones, Lowendal’s MD, says, “A recent study of the 15 member states of the old European Union showed that 53.4% of all cross-border VAT which could be recovered is not being claimed. In the 15 states, cross-border transaction VAT payments amount to about €10 billion (£6.8 billion). Only €4.5 billion is being reclaimed – and 2.5 billion of that is in the Netherlands. This means that vast numbers of companies across Europe are not reclaiming cross-border VAT.” Ms. Jones, who specializes in recovery of VAT for companies, says that if businesses planned their approaches to this it would pay them handsomely, despite difficulties such as linguistic complications, bureaucratic obfuscation and the lack of resources.

This is hardly a new problem. The European Commission has been slaving away for years to try to get Member States to agree to a move towards origin-charging, which would largely solve the problem. Since national treasuries are getting away with so many billions of foreign companies money, it is hardly likely they are going to agree. In July, the European Parliament voted in favour of the EC’s one stop shop proposal under which a business could comply with all its EU-wide VAT obligation through a single Member State registration. But to become law the proposal requires the unanimous approval of the Governments of the EU Member States – a pipedream.

In theory, all VAT incurred for business purposes can be recovered. However, each member state has its own rules, and restrictions are applied to the recovery of VAT on certain categories of expenditure. Despite the EC’s best efforts, Member States have been allowed to keep these restrictions if they were in existence in 1977.

EU AGREES TO EXTENSION OF CANARY ISLANDS FISCAL REGIME

The EC last week approved the prolongation of the Economic and Fiscal Regime (REF) of the Canary Islands until the end of 2006. The measure is intended to promote economic activity in the Canary Islands, enabling companies established in an area qualified as a peripheral region to overcome their natural structural handicaps. The aid, with a budget of €270.5 million, provides an incentive to business creation and expansion by supporting productive investments and by contributing to their capitalization.

Competition Commissioner Neelie Kroes said “This aid measure will significantly contribute to offset the permanent handicaps of the Canary Islands arising from their peripheral geographical location by giving the necessary incentives to facilitate productive investment and economic diversification”. The Canary Islands are one of the outermost regions of the EU. The EC Treaty recognizes the specific permanent handicaps of outermost regions: remoteness, insularity, small size, difficult topography and climate, and economic dependence on a few products. The Commission therefore allows operating aid which is not progressively reduced and restricted in time, provided it is limited to offsetting the additional costs arising in the pursuit of economic activity in these regions – which was found to be the case with the Canaries.

LIGHTLY-TAXED EU COUNTRIES TOP PER CAPITA GDP RANKINGS

Luxembourg and Ireland – both “low tax” countries – topped the EU’s GDP per capita rankings in purchasing power parity figures in 2004. GDP per capita in the Member States ranged from 43% to 227% of the EU25 average in 2004. GDP per capita in Luxembourg was more than twice the EU25 average, while Ireland was about 40% above average.

Following up, with GDP around 20% above average, were the Netherlands, Austria, Denmark, Belgium, Sweden and the U.K. Finland, France and Germany recorded figures about 10% above the EU25 average, and Italy and Spain were at the level of the average. Cyprus, Greece and Slovenia were about 20% below the EU25 average. Portugal, the Czech Republic and Malta were around 30% below average, and Hungary about 40% below. Slovakia, Estonia, Poland and Lithuania were around half the average, while Latvia was just below 45% of the EU25 average.

Eurostat points out, a touch sourly, that GDP per capita in Luxembourg is very high partly due to the large share of cross-border workers in total employment. While contributing to GDP, they are not taken into consideration as part of the resident population which is used to calculate GDP per capita. That simply means, of course, that Luxembourg is more successful than the countries around it at attracting workers.

H&R BLOCK SETTLES SUIT FOR CHARGING “USURIOUS” RATES ON TAX REFUND ANTICIPATION LOANS

H&R Block Inc. announced that it has reached an agreement with plaintiff class representatives and class counsel that would settle four state class action lawsuits related to refund anticipation loans (RALs) as well as potential claims of RAL purchasers in 22 other states and the District of Columbia. RALs are short term advances that tax preparers can extend to their customers, who then sign over their official tax refund cheques when they are issued. However, Block was accused in the class actions of charging “usurious” rates for this service.

The proposed settlement provides for $62.5 million in the settling jurisdictions. Payments will be made to class members who submit a timely proof of claim for RALs they had obtained from as early as 1989, in some instances, to 2005. The proposed settlement also requires H&R Block to put in place “industry-leading disclosure practices” for future refund anticipation loans provided to its clients.

TAX COMPETITION HEATS UP IN SWITZERLAND

At least 18 of Switzerland’s 24 cantons are planning to cut rates of taxation in 2006, following the lead of Obwalden whose electorate voted to reduce both personal and corporate income tax from January 1. A number of other cantons are also considering cutting taxes in the near future. Recently, voters in the small central Swiss canton of Obwalden approved new laws which will substantially cut income tax for individuals and corporations, and are aimed at attracting higher numbers of wealthy persons and encouraging more companies to locate offices in the area. From January 1, corporate tax in Obwalden will be cut to 6.6%, making it the lowest rate in Switzerland. For individuals, those earning up to CHF70,000 will pay 8% (down from 10%), those with income up to CHF300,000 will pay up to 6%, and those earning more than CHF300,000 will see tax cut to 1% from 2.35%. Property tax will also fall by at least 30%.

In Switzerland, cantons are free to set their own tax rates within the framework of the 2001 Tax Harmonization Act, and the direct link between voters and tax policy has helped to push local tax rates lower. However, the Swiss tax system has raised eyebrows in Brussels, and EC officials have suggested that certain parts of the corporate tax regime “may be incompatible” with Switzerland’s obligations under the 1972 Free Trade Agreement between Switzerland and the EU. In a letter made public in October, the EC made particular reference to the tax regimes in Cantons Zug and Schwyz which, officials warned, could “grant fiscal advantage to undertakings for … economic activities taking place outside Switzerland.” Currently, the tax rate for companies in Zug ranges from 14% to 17%.

Not all in Switzerland are supportive of tax cuts, and the Social Democratic Party has pledged to help coordinate a Europe-wide campaign against what it calls “increasing competition” among countries seeking to attract the rich and famous, and has warned that a “race to the bottom” on tax will endanger public finances.

ASSET PROTECTION

HOW ONE OF AMERICA’S TOUGHEST TORT LAWYERS LET HIMSELF BE SCAMMED

There was no good reason for John O’Quinn’s Ferrari 575M to be at the mechanic’s, recovering from a fender bender. He had not been driving it, and he had not paid $192,000 for someone else to take it out for a spin. Then he discovered that his 1965 Ford Shelby Mustang GT350 was banged up and in the shop. A cursory glance through his garage showed other cars missing. That was December 2004. O’Quinn, now 64, tried to get in touch with Zev Isgur, a 32-year-old ex-con whom he had befriended and entrusted with the management of his fast-growing collection of classic cars. On his behalf, Isgur had traveled the country, buying Duesenbergs, Bugattis and Packards. But suddenly Isgur was not returning his calls. O’Quinn had noticed the young man seemed to be living outside his means – weekends in Las Vegas, sporty duds, flashy girls. Where was Isgur getting his money? He was embezzling it, from right under O’Quinn’s nose.

A tenacious and competitive workaholic, O’Quinn is one of the most successful plaintiff lawyers in the land. Among his biggest scalps are a $1 billion verdict last year against Wyeth Labs for its fen-phen diet drug, a $17.3 billion tobacco settlement for the state of Texas, and $100 million for probably harmless silicone breast implants made by Dow Corning. Total estimated take for O’Quinn, Laminack & Pirtle of Houston is $1.5 billion. How could such a smart guy have been duped? Turns out he is a bit of a sucker for a sob story. O’Quinn met Isgur in the late 1990s. He had read in the Houston Chronicle a letter Isgur’s mother had written, begging someone to give her son a second chance. During a job interview at his law firm, O’Quinn looked past Isgur’s two years in prison, judged him a smart kid with a good heart and gave him a job as a gofer. The two clicked, and Isgur eventually became a confidant and a personal assistant.

O’Quinn’s childhood passion for cars was reignited two and a half years ago when he saw a 1932 Duesenberg Durham Tourister for sale at a Houston auction of antique autos. He bought 14 cars that day, including the Duesenberg for $405,000. O’Quinn has since spent upward of $100 million to buy 618 cars. Isgur helped out with the cars, managed deliveries, handled invoices. And with no yen to spend the rest of his life in the law office, he lobbied O’Quinn and got the job of managing the collection. By late 2003 Isgur was crisscrossing the country to scout cars and make deals on O’Quinn’s behalf. Though Isgur did not have check-writing authority, he simply sent a memo, which O’Quinn signed off on and then faxed to his accountants, who cut the checks. Too good an opportunity for a con to pass up. …

LIECHTENSTEIN CONFERENCE TO DISCUSS FUTURE OF WORLD FINANCIAL SERVICES

Experts from the worlds of business, science, and politics will next year meet in the principality’s capital Vaduz for the third “Liechtenstein Dialogue on the Future of Financial Markets”. The Liechtenstein Dialogue 2006, to be held on the 5th and 6th of October under the working title of “Money, Values and Trust” will feature a number of panels and focus groups, high-quality speakers and participants who will discuss topics including the significance of foundations, trusts, and similar institutional investments for asset management now and in the future; the type of demands placed on financial service providers in the future; the importance of tax practice and transparency; and how financial centres can position themselves better in the global marketplace.

“The widespread encouragement and positive feedback we’ve received in the last two years show that our topics are at the cutting edge of the debate,” stated Prime Minister Otmar Hasler. “This topic is increasingly becoming a focus of public interest – not only in Liechtenstein, but worldwide,” he added.

ECONOMIC CITIZENSHIP ALIVE AND WELL IN THE EASTERN CARIBBEAN

So you want to move to one of the Eastern Caribbean islands and start a new life? There are many decisions and even more options involved in such a move, and one of them can be economic citizenship. Why economic citizenship? Economic citizenship programs in the region allow foreign nationals a fast track to full citizenship of a participating country, through a government sponsored investment program. For both personal and professional reasons, this can be a perfect solution for a number of reasons. If you have made a commitment to a lifestyle change, economically, physically and emotionally you want to move forward and finalize that commitment as soon as possible, which can include becoming a citizen.

Of course, its not going to be a cheap option, but a great alternative to waiting the normal five or seven years for full citizenship with passport and voting rights. Although it can take up to 30 years in the worst case countries, and even then, there are no guarantees of success. So you must do your research carefully and find out which countries are most welcoming to new citizens. Most Eastern Caribbean countries do not have an economic citizenship program, although many are amenable to an approach from a private individual with a very deep pocket. Most Eastern Caribbean countries do not have an economic citizenship program, although many are amenable to an approach from a private individual with a very deep pocket. Over the years different countries in the EC region have tried or implemented an economic citizenship program but times change, and few of them have been particularly well done.

Caribbean countries whose economic citizenship programs are alive, kicking and working well are Dominica and the Federation of St.Kitts and Nevis. There are many, many good reasons for relocating to any of these three countries, and much of this has been said in previous articles, but it is important to know that behind the excellent framework of these programs sponsored by elected governments, there is a genuine desire from the ground up to welcome new citizens and help them start a new life. For both countries an application can be made on behalf of an individual, or an entire family (applicant, spouse and two unmarried dependant children). Those meeting the requirements of the investment programme are rewarded by full citizenship, including a passport and the right to permanently reside, vote and work in the participating country. Set out below is everything you need to know in order to apply to one of these programs.

SOME BERMUDIAN FUNDS TO GAIN EXEMPTION FROM SWISS DISCLOSURE RULES

Bermudian Finance Minister Paula Cox has announced that certain funds registered with the Bermuda Monetary Authority which have been unintentionally caught by disclosure rules under the European Savings Tax Directive in Switzerland will be removed from its scope under amendments to fund regulations. While Bermuda is not directly affected by the Directive, which seeks to facilitate the sharing of information about individuals’ overseas savings income with their home states, funds domiciled in Bermuda can be adversely impacted if they have “paying agents” located in EU member states or third party countries (such as Switzerland) that have signed up to the legislation.

There are currently 1,220 funds regulated under Bermuda’s Collective Investment Scheme Regulations 1998 (CIS) which would fall within the scope of the Swiss home rules, but modifications to the CIS Regulations by the Bermudian government will mean that that non-retail funds offered only to sophisticated investors can seek exemption from the regulations. As a result, this will enable about two-thirds of regulated funds registered with the BMA to apply for exemption from regulation when the amended CIS regulations come into force at the end of the year.

The measure will alleviate fears of an exodus of funds to rival jurisdictions, notably the Cayman Islands which, as a third party to the ESTD, was able to negotiate to exempt about 98% of its funds from the reporting obligations of the directive. More than 80 funds have transferred to the Cayman Islands since the EUSD went into effect on July 1, 2005, including 25 from Bermuda representing a net asset value of almost $6 billion – a small fraction of the $179 billion under management in the jurisdiction in 2005.

ALLIANZ GLOBAL INVESTORS TO TARGET EUROPEAN INVESTORS FROM LUXEMBOURG

Allianz Global Investors, the asset management arm of the German based financial services group Allianz, has announced that it has established a subsidiary in Luxembourg from where it plans to boost its investment fund business targeted at European investors. Until now, AGI has concentrated on its home market in Germany and in the U.S., but chief executive Joachim Faber said that the company plans to expand into more markets during 2006 and is aiming to raise European investment fund assets to €100 billion excluding Germany.

Recently, Luxembourg has emerged as an increasingly popular domicile for funds targeting the continental European market. Total net assets in U.S. dollar terms for all collective investment funds domiciled in Luxembourg recorded growth of 25% over the year to 31 December 2004. The total number of funds and subfunds rose from 7,444 to 7,777 during the twelve month period as funds industry assets topped $1.5 trillion.

Luxembourg’s decision in July 2004 to allow the listing of offshore hedge funds has also made it possible for the jurisdiction to attract offshore funds and to compete on a level basis with Dublin, removing a barrier that had acted as a handicap to the growth of the hedge fund sector in the Duchy in the past. While Luxembourg is a relative newcomer as a hedge fund domicile, it has nevertheless seen rapid growth in alternative investment fund assets, primarily hedge funds, which more than doubled during 2004 to reach $18.7 billion by the end of the year.

PROPOSED LAW COULD HARM CHARITABLE GIVING BY SENIORS

Charitable giving by seniors could decrease significantly if the federal budget reconciliation bill passes in Congress in its current form. With a close 51-50 vote decided by Vice President Dick Cheney, the U.S. Senate last week approved the conference agreement on the budget reconciliation bill, which includes provisions that could discourage seniors from donating to charitable organizations. Under current law, Medicaid includes a provision that penalizes seniors who have transferred assets for less than fair market value within three years of applying for long-term care coverage. That language includes charitable donations seniors made within three years from applying for Medicaid.

The goal is to deter seniors from transferring assets to become eligible for Medicaid. The penalty period lasts as long as the donated amount would have paid for long-term care under Medicaid starting at the time the donation occurred. In other words, if a senior’s care would cost $5,000 a month and the senior has donated $10,000 to a charity within the past three years, the elderly individual would not be able to qualify for Medicaid for two months. However, because that two-month penalty period starts when the donation is made, the penalty period is often over by the time the senior applies for Medicaid long-term care.

The proposed budget reconciliation bill contains two key changes to that current Medicaid provision. For one, the three-year period currently used to determine money transfers would be lengthened to five years, and secondly, the penalty period would not start (as the law is now) when the donation occurs, but when the senior applies for Medicaid long-term care services. So using the same example, under the proposed law, if a senior donates $10,000 within the past five years, the donor would not be able to receive Medicaid long-term care coverage for two months after applying for it.

PRIVACY

TRACKED BY CELLPHONE

Recent court cases in the U.S. raise the question of the standard required when the police want to know exactly where you are, using your cell phone to track you down. The issue again raises the question of how new technologies can invade privacy rights, and how quantitative changes in the type and amounts of data collected and stored result in qualitative changes in privacy rights. These require a reexamination of even established laws of privacy and of probable cause. These precedents also apply to entities like ISPs and telephone companies that routinely collect massive amounts of data about individuals which may be subject to eventual discovery or disclosure. It is important that we establish and apply the correct legal standard for obtaining this information now.

Whenever you carry (much less use) a cell phone that is turned on, the cellular network is constantly “scanning” to determine where you are so that it can route telephone calls to the appropriate cell location. With relatively low level of precision, the cell provider can determine where you are at any point in time. Other technologies employed by cell providers, such as those employed with E-911 services, can determine your location with greater precision. This digital location information, coupled with high-speed internet access in some cell phones, can be a great boon to users. They can use cell phones to locate restaurants, theaters, or other entertainment in their area, make reservations or arrange for carry out as they travel. They might use such technology to locate family members, including children. In a disaster situation (assuming the cell towers continue to work), the technology might be useful in locating survivors – or at least locating the survivor’s cell phones. One can imagine their use by law enforcement agencies in kidnapping cases.

Such data is already being used by cellular providers to determine demand for and therefore location of new cell towers. It is not difficult to imagine the economic usefulness of this data as well. Cell providers can collect this information, link it to specific users as well as the demographic information provided when the subscriber initiated the cellular contract. They can then sell, lease or otherwise provide this information to third parties. In addition, cell providers are increasingly becoming indistinguishable from internet service providers, as people use their handheld devices to access the internet from anywhere. Thus, cell providers will have the ability to collect records of every place you have been, who you have talked to, and collect location and content of text messages, e-mails, web traffic, IP video and downloaded or streaming audio. It is time to set some rules on what information can be collected, and what can be done with all of this information.

In at least three separate cases, the U.S. government has attempted unsuccessfully to obtain court order to require the cellular providers to provide them information about the location of a cellular customer. This in and of itself is remarkable. When the government wants a court order to obtain a wiretap, a pen register, or to search for or seize documents or records, it files the paperwork ex parte and in camera – only the government is represented. If the government believes that a certain law applies, it and only it presents the law to the magistrate judge. In fact, for virtually all such applications, the records relating to the application are sealed – either automatically by statute or as a matter of routine by application of the government. Thus, we have no idea how many times the federal government has gone to court to obtain cell phone location data and been granted the data, with no questions asked. The fact that three magistrates refused the government’s request is itself amazing. At issue was the legal standard the government had to meet to obtain the information.

The real issue is whether people have a reasonable expectation of privacy in the location data in the first place. As a general rule, the U.S. Supreme Court has adopted what I call the “breeze rule”. Effectively, if I am outside (and can feel a breeze), I probably do not have an expectation of privacy in what I am doing. Thus, if I am growing pot in my backyard with a 20 foot unscalable fence, the cops with a helicopter and a telescope can monitor me without probable cause or a warrant. If I am walking or driving down the street, the cops can follow me without a warrant or even suspicion. The same goes for using technology to enhance the ability to search. Thus, drug, money or explosive sniffing dogs can sniff me, my briefcase, my car, and presumably my house (if there is no trespass to do so) without any legal restriction. If I walk into my house however, the Supreme Court has ruled, the cops cannot, e.g., use an infrared detector to monitor my activities in the house without some kind of warrant.

The real problem here is that the cell phone providers have the ability to collect, store, collate and aggregate location data on hundreds of millions of people. These records then become a commodity, subject to use, sale, transfer, subpoena or other discovery. Congress needs to step in and establish guidelines for both private, public, law enforcement and intelligence acquisition and use of this passive tracking information.

NSA, THE AGENCY THAT COULD BE BIG BROTHER

Deep in a remote, fog-layered hollow near Sugar Grove, West Virginia, hidden by fortress-like mountains, sits the country’s largest eavesdropping bug. Located in a “radio quiet” zone, the station’s large parabolic dishes secretly and silently sweep in millions of private telephone calls and email messages an hour. Run by the ultrasecret National Security Agency, the listening post intercepts all international communications entering the eastern U.S. Another NSA listening post, in Yakima, Washington, eavesdrops on the western half of the country.

A hundred miles or so north of Sugar Grove, in Washington, the NSA has suddenly taken center stage in a political firestorm. The controversy over whether the president broke the law when he secretly ordered the NSA to bypass a special court and conduct warrantless eavesdropping on American citizens has even provoked some Democrats to call for his impeachment. According to John E. McLaughlin, who as the deputy director of the CIA in the fall of 2001 was among the first briefed on the program, this eavesdropping was the most secret operation in the entire intelligence network, complete with its own code word – which itself is secret. Jokingly referred to as “No Such Agency”, the NSA was created in absolute secrecy in 1952 by President Harry S. Truman. Today, it is the largest intelligence agency. It is also the most important, providing far more insight on foreign countries than the CIA and other spy organizations.

But the agency is still struggling to adjust to the war on terror, in which its job is not to monitor states, but individuals or small cells hidden all over the world. To accomplish this, the NSA has developed ever more sophisticated technology that mines vast amounts of data. But this technology may be of limited use abroad. And at home, it increases pressure on the agency to bypass civil liberties and skirt formal legal channels of criminal investigation. Originally created to spy on foreign adversaries, the NSA was never supposed to be turned inward. Thirty years ago, Senator Frank Church, the Idaho Democrat who was then chairman of the select committee on intelligence, investigated the agency and came away stunned.

“That capability at any time could be turned around on the American people,” he said in 1975, “and no American would have any privacy left, such is the capability to monitor everything: telephone conversations, telegrams, it doesn’t matter. There would be no place to hide.” He added that if a dictator ever took over, the NSA “could enable it to impose total tyranny, and there would be no way to fight back.” At the time, the agency had the ability to listen to only what people said over the telephone or wrote in an occasional telegram. They had no access to private letters. But today, with people expressing their innermost thoughts in e-mail messages, exposing their medical and financial records to the Internet, and chatting constantly on cellphones, the agency virtually has the ability to get inside a person’s mind.

The NSA’s original target had been the Communist bloc. The agency wrapped the Soviet Union and its satellite nations in an electronic cocoon. Anytime an aircraft, ship or military unit moved, the NSA would know. And from 22,300 miles in orbit, satellites with super-thin, football-field-sized antennas eavesdropped on Soviet communications and weapons signals. Today, instead of eavesdropping on an enormous country that was always chattering and never moved, the NSA is trying to find small numbers of individuals who operate in closed cells, seldom communicate electronically (and when they do, use untraceable calling cards or disposable cellphones), and are constantly traveling from country to country.

According to an interview last year with Gen. Michael V. Hayden, then the NS’qs director, intercepting calls during the war on terrorism has become a much more complex endeavor. On September 10, 2001, for example, the NSA intercepted two messages. The first warned, “The match begins tomorrow,” and the second said, “Tomorrow is zero hour.” But even though they came from suspected al Qaeda locations in Afghanistan, the messages were never translated until after the attack on September 11, and not distributed until September 12. What made the intercepts particularly difficult, General Hayden said, was that they were not “targeted” but intercepted randomly from Afghan pay phones. This makes identification of the caller extremely difficult and slow. “Know how many international calls are made out of Afghanistan on a given day? Thousands.” General Hayden said.

“I don’t want to see this country ever go across the bridge,” Senator Church said. “I know the capacity that is there to make tyranny total in America, and we must see to it that this agency and all agencies that possess this technology operate within the law and under proper supervision, so that we never cross over that abyss. That is the abyss from which there is no return.”

DOMESTIC SURVEILLANCE AND THE PATRIOT ACT

Recent revelations that the National Security Agency has conducted broad surveillance of American citizens’ emails and phone calls raise serious questions about the proper role of government in a free society. This is an important and healthy debate, one that too often goes ignored by Congress. Public concerns about the misnamed Patriot Act are having an impact, as the Senate last week refused to reauthorize the bill for several years. Instead Congress will be back in Washington next month to consider many of the Act’s most harmful provisions.

Of course most governments, including our own, cannot resist the temptation to spy on their citizens when it suits government purposes. But America is supposed to be different. We have a mechanism called the Constitution that is supposed to place limits on the power of the federal government. Why does the Constitution have an enumerated powers clause, if the government can do things wildly beyond those powers – such as establish a domestic spying program? Why have a 4th Amendment, if it does not prohibit government from eavesdropping on phone calls without telling anyone?

We are told that September 11th changed everything, that new government powers like the Patriot Act are necessary to thwart terrorism. But these are not the most dangerous times in American history, despite the self-flattery of our politicians and media. This is a nation that expelled the British, saw the White House burned to the ground in 1814, fought two world wars, and faced down the Soviet Union. September 11th does not justify ignoring the Constitution by creating broad new federal police powers. The rule of law is worthless if we ignore it whenever crises occur. The administration assures us that domestic surveillance is done to protect us. But the crucial point is this: Government assurances are not good enough in a free society. The overwhelming burden must always be placed on government to justify any new encroachment on our liberty.

PHONE GIANTS MUM ON ROLE IN SPYING

In the days following revelations that the Bush administration ordered the National Security Agency to spy on domestic telephone and Internet communications without a court order, one involved party has remained silent. The nation’s telephone giants – which control the data pipelines – have neither commented on nor denied their reported participation, nor have they reacted to the charge that they may have been complicit in violating privacy rights. But historically the telecom companies have cooperated with the government on wholesale wiretapping, and the Bush administration’s anti-terrorism programs appear to be no exception. Without commenting directly on a classified topic, industry officials – when asked – suggested that they would not stand in the way of a request for help. During the Cold War, telecom organizations freely cooperated with government agencies regarding national security, and there seemed to be little worry about whether the requests were accompanied by court orders, one expert said.

The question of what the telecom companies can help find is difficult to answer because of the highly classified nature of the work. But experts say the computer technology that enables eavesdropping on a national scale may well generate enough data to overwhelm human agents. “Their idea of finding a needle in a haystack seems to involve getting more hay,” said David Isenberg, a fellow at the Berkman Center for Internet and Society at Harvard University. Isenberg said people who wish to evade government eavesdropping probably can do so by encrypting their communications. For example, calls made using Internet telephony from the European-based Skype service are all encrypted, Isenberg said. While government agencies might decrypt targeted communications, it is not possible to do this with the vast amounts of information apparently targeted by the NSA, he said.

The decentralized nature of the Internet and the multiplicity of ways to communicate further complicate the task of wholesale eavesdropping, said Daniel Berninger, a communications analyst with Tier 1 Research. Tapping into modern communications lines will yield billions of packets of voice and data all mixed together that is the electronic version of getting the slivers of paper that come out of a shredder, Berninger said. While there is equipment available to put the signals back together as email, voice conversations, downloaded music and the like, “once you add encryption to the mix, the game’s over,” said Berninger.

HACKERS REBEL AGAINST SPY CAMS

BERLIN – When the Austrian government passed a law this year allowing police to install closed-circuit surveillance cameras in public spaces without a court order, the Austrian civil liberties group Quintessenz vowed to watch the watchers. Members of the organization worked out a way to intercept the camera images with an inexpensive, 1-GHz satellite receiver. The signal could then be descrambled using hardware designed to enhance copy-protected video as it is transferred from DVD to VHS tape. The Quintessenz activists then began figuring out how to blind the cameras with balloons, lasers and infrared devices. And, just for fun, the group created an anonymous surveillance system that uses face-recognition software to place a black stripe over the eyes of people whose images are recorded.

Quintessenz members Adrian Dabrowski and Martin Slunksy presented their video-surveillance research at the 22nd annual Chaos Communication Congress here this week. 500 hackers jammed into a meeting room for a presentation that fit nicely into CCC’s 2005 theme of “private investigations”. Slunksy pointed out that searching for special strings in Google, such as axis-cgi/, will return links that access internet-connected cameras around the world. Quintessenz developers entered these Google results into a database, analyzed the IP addresses and set up a website that gives users the ability to search by country or topic – and then rate the cameras. “You can use this to see if you are being watched in your daily life,” said Dabrowski.

The conference, hosted by Germany’s Chaos Computer Club, featured many discussions on data interception and pushing back the unprecedented onslaught of surveillance technologies. CCC member and security researcher Frank Rieger said hackers should provide secure communications for political and social movements and encourage the widespread use of anonymity technologies. He said people on the other side of the camera need to be laughed at and shamed.

LAW

JACKBOOT SOCIETY: PURE TYRANNY ON THE STREETS OF AMERICA

We never stop talking about martial law and that is because we are constantly fed with new examples of how America has turned into a police state right in front of our very eyes. The latest instance comes out of Ohio and has been labeled “the Ohio Patriot Act”. According to News Net 5, One state representative said it resembles Gestapo-style tactics of government, and there could be changes coming on the streets of Ohio’s small towns and big cities. The Ohio Patriot Act has made it to the governor’s desk, and with the stroke of a pen, it would most likely become the toughest terrorism bill in the country. The lengthy piece of legislation would let police arrest people in public places who will not give their names, address and birth dates, even if they are not doing anything wrong. WEWS reported it would also pave the way for everyone entering critical transportation sites such as train stations, airports, and bus stations to show ID.

Simultaneously, the Miami Police Department announced an identical “shock and awe” program in which cops would randomly conduct sieges on buildings with no evidence linking them to terrorist activity and randomly check identification. It makes absolutely no sense unless it is designed to scare people into groveling to the overlords in black ski masks. Concurrently also is the introduction of TSA VIPER squads to patrol mass transit facilities in major cities conducting searches and checking ID’s. The VIPER teams have nothing to do with preventing terrorism, they are there to get people to cower and accept they are under control. Air marshal spokesman David Adams has commented that there is no new intelligence indicating that terrorists are interested in targeting transportation modes.

This is total Stasi America and it has nothing to do with keeping you safe as they tag on blanket amnesty provisions to the latest immigration bill. The borders are wide open and border patrol have in the past been ordered to stand down and not arrest illegals. The one place where all this security and police presence would be its most useful, the border, is the only place that the federal government is willing to turn a blind eye to. Test runs where terrorists smuggle dummy nuclear bombs across the border without being apprehended were successfully conducted by Glenn Spencer’s American Border Patrol on three separate occasions. The federal government is not concerned about that but they are concerned about demanding middle aged women present ID on buses in Denver and arresting men for donating travel tokens to people without the right change in New York.

This is textbook, mechanized, classic tyranny. The very same people who grope pregnant women and make 90-year-old men remove their shoes in airports are now going to be on American streets. Senate bill 742 in Oregon which was slimly defeated by just three votes would have classified terrorism as a plethora of completely unrelated actions. Downloading music, blocking traffic, writing a hot check, or any form of protest. All these would be punishable by life in prison unless you agreed to attend a “forest labor camp” for 25 years of enforced labor. These are actual bills being drawn up by our supposed representatives in government. Does this sound like a sick joke? Yes, but the bill is real and it nearly passed. Not even Communist China or Stalinist North Korea put people in labor camps for writing a hot check but this was actually debated in the “land of the free”.

In Rhode Island, governors proposed a bill that would have outlawed criticism of the government, defining it as anarchy under World War One era rhetoric. As the elite externalize their plans to the point where the agenda is crystal clear, more credible individuals of conscience step forward to oppose the slaughter of America. Maybe we should pay attention when Congressman Ron Paul warns that martial law is being implemented, or when Former Republican Congressman and CIA official Bob Barr says a military dictatorship is emerging. Or perhaps it is noteworthy when Dr. Paul Craig Roberts says the Government is in the hands of total psychopaths hell bent on martial law.

GHOSTS IN THE VOTING MACHINES

Concerned about reports of election fraud and vote suppression in the 2004 election, Rep. John Conyers (D-Michigan), the ranking Democrat on the House Judiciary Committee, asked the Government Accountability Office (GAO), the investigative arm of Congress, to examine the allegations. In September, the GAO released a report that found electronic voting systems “have caused local problems in federal elections – resulting in the loss or miscount of votes.” In the 2004 general election, about 64% of voters cast ballots on one of two types of electronic voting systems: optical scan systems, which read marked paper ballots, and direct recording electronic systems (DRE), which have a touchscreen that voters use to make their choice. The GAO highlights one major problem with electronic voting systems - they can be hacked because of woefully inadequate security systems. The report goes on to say that flaws in electronic voting security protections “could allow unauthorized personnel to disrupt operations or modify data and programs that are critical to the accuracy and the integrity of the voting process.”

Rep. Conyers responded to the report, “I am shocked at the extent and nature of problems that GAO has identified. … It is incumbent upon Congress to respond to this problem and to enact much needed reforms such as a voter verified paper audit trail that protects all Americans’ right to vote.” Former President Jimmy Carter has voiced concerns similar to Conyers’s. In a September 2004 Washington Post article, Carter predicted that the looming presidential election would be as contentious as the one in 2000, with Florida again at the center of the storm. He wrote that “some basic international requirements for a fair election are missing in Florida. … With reforms unlikely at this late stage of the election, perhaps the only recourse will be to focus on maximum public scrutiny on the suspicious process in Florida.” As Carter predicted, in 2004 Florida again featured prominently, if less publicly, as a state where incidents of voter suppression and alleged election fraud tilted the vote toward George W. Bush. But the big story in 2004 was the swing state of Ohio, where the presidential election is thought to have been decided.

On October 28, New York University professor Mark Crispin Miller met Senator John Kerry at a political event and gave him a copy of his new book about the 2004 presidential election, Fooled Again. In a November 4 interview on Amy Goodman’s “Democracy Now!” radio show, Miller said, “He told me he now thinks the election was stolen … He said he doesn’t believe that he is the person who can go out in front on the issue because of the sour grapes … question.” According to Kerry spokeswoman Jenny Backus, none of the conversation Miller reported on “Democracy Now!” occurred. Yet Miller is not the only person Kerry reportedly voiced concerns to. Robert Parry, who as a reporter for Newsweek in 1987 helped break the Iran-Contra story, reported on ConsortiumNews.com that Kerry “suspects that the election was stolen, but that he didn’t challenge the official results because he lacked hard proof and anticipated a firestorm of criticism if he pressed the point.”

Jonathan Winer, a former longtime Kerry adviser and a former deputy assistant secretary of state, and now an attorney specializing in information security, told Parry it is conceivable that Republican operatives hacked the DRE voting systems in 2004. Without the confession of a credible witness, he noted, such crimes would be hard to prove. Parry observes, “Kerry’s decision not to fight has left millions of Americans wondering if their democratic birthright has been stolen – along with the last two presidential elections.”

HOW BUSH’S SICK “DICTATOR” JOKE BECAME PUBLIC POLICY

“A dictatorship would be a heck of a lot easier, there’s no question about it.” So declared George W. Bush in July 2001, just weeks prior to 9/11. This was at least the third occasion on which Mr. Bush spoke wistfully, in public and on the record, about exercising dictatorial powers. Once would be a lame joke. Twice, a symptom of a seriously impaired sense of humor. Three times, however, is suggestive of seriously malevolent intentions. In our system of government, which remains in form – if not in practice – a constitutional republic, chief executives simply do not joke about dictatorial ambitions.

Here is a useful parallel. It is a serious federal offense even to joke about wanting to kill the President of the United States. Doing so even one time is sufficient to provoke a visit from the Secret Service. Were someone to do so three times, he would almost certainly face prosecution, as well as an invasive psychological evaluation. Should it not be considered just as grave an offense for a president, who swore an oath in God’s name to uphold our Constitution, to make jokes about murdering our republic in order to erect a dictatorship?

We now know that Mr. Bush was not merely repeating one of his favorite thigh-slappers. In the hours immediately following the 9/11 attacks, the legal alchemists in Mr. Bush’s court sought to transmute his insipid, adolescent joke into a tangible reality. Of course, the assumption that Bush can wield quasi-dictatorial powers has been woven into the extravagant claims he and his underlings have made regarding the supposedly illimitable “Commander-in-Chief” authority permitting him to imprison people at will, wage aggressive war without a congressional declaration, order illegal surveillance of American citizens, and otherwise do pretty much anything he is not explicitly forbidden by Congress to do.

But thanks to a badly overdue disclosure offered by former Senate Majority Leader Tom Daschle, we now have a better understanding of just how arrogantly lawless the Bush regime has become. In a December 23 Washington Post op-ed column that was prompted by the unfolding “Snoopgate” scandal, Daschle testifies that the Senate specifically denied to the Bush regime the plenary powers it now claims were given to it. The president and the senator who was his chief legislative ally at the time, who like Daschle were directly involved in those events, have not contested those allegations. Bush’s “jokes” about wanting the powers of a dictator were troubling evidence of malevolent intentions. His silence regarding Daschle’s revelations is terrifying testimony that those intentions have, in principle, been fulfilled. He has the power he sought, and will use it to the extent he can, until it is taken back from him.

OPINION & ANALYSIS

THE ROMAN EMPIRE’S NORTHERN NEIGHBORS WERE HARDLY “BARBARIANS”

The Roman Empire has been well documented. Over the years written history and archaeology have brought to the surface, sometimes literally unearthed, a whole society. Thus Roman architecture, religion, military strategy and legal structures hold little mystery. Compared to this depth of knowledge, many of those living outside the boundaries of the Empire are lost in time. But now an archaeological excavation in the north of the Netherlands had begun to tell the story of the Romans’ neighbours.

At first glance the “De Bloemert” excavation, in the northern Dutch province of Drenthe and named after the holiday resort De Bloemert, seems an archaeological site like any other … dark colorations in the ground, people digging carefully, artefacts and broken pottery being photographed, nothing unusual. But according to Johan Nicolai, archaeologist from the University of Groningen and project leader of the excavation, this dig is very special indeed. First, the location has clearly been a good place to live since prehistoric times – one of the more spectacular finds was a grave dating back to the Stone Age, 2800 BC. An early medieval village existed on the spot. But the aspect of the dig that has made the Bloemert instantly famous among archaeologists is the finds from the Roman period. They prove without a doubt that at the time this place was more than just a hamlet – it was a big village and center for farmers and craftsmen, with an industrial area and international contacts.

What is special about this is the fact that the village stood outside the Roman Empire – 150km to the north of the border formed by the Rhine, in fact. In those days that represented many days of travel, and yet the finds from the Roman period indicate that there was a lot of contact with the Romans. To the locals these foreigners may have been intimidating – representatives of the superpower of their time – but were also people with whom one could deal. There is evidence that the inhabitants also appreciated the good things in life. Beautiful pottery and weapons have been found, imported from Gaul and Rome itself. It appears the old inhabitants of Drenthe were a far cry from the “barbarians” we know from Roman authors.

TWO ROTTEN BRANCHES

Every time there is a congressional election, the senators promise to “fight” for their state. Thus, Chuck Shumer and Hillary Clinton, when the circumstances call for it, devotedly proclaim their resolve to wage battle on behalf of New York. There are two ways to interpret such bellicosity. One, the state of New York is literally at war with the other states of the Union. Two, there is a need for some of the resources hoarded by the federal pirates to be distributed among the shipmates, and a quarrel usually arises regarding who should be getting how much. The “fight” involves attempting to snatch as much loot for the senators’ own friends in each state at the expense of all other states.

It is useful to keep in mind that this is one essential function of the Congress: to transfer wealth forcibly from those who cannot defend themselves from being robbed to the members of the political elite. The second and no less important function of the Congress is to empower the executive branch. “Live and let (the federal bureaucrats) live,” is the motto of the congressional hippies. The vast majority of congressmen never even read the bills presented to them. They merely rubber-stamp whatever the federals demand, precisely as matters stood in the Soviet Union. We should not fault them for this, however, for as a rule, congressmen are benighted and corrupt creatures and cannot help themselves. The third function of the Congress is to allocate the resources to various government bureaus and contractors engaged in Projects That Are Too Important To Be Left To The Market. It must be torture for the congressmen to sacrifice one such Important Project in order to finance another. Poor guys. Now it is clear why the government needs every red cent you have!

A critic may, of course, object that the “real” job of the Congress is to look after the “general welfare”. It may never occur to such a critic that the best thing the congressmen could do to promote general welfare would be immediately to abdicate or, what amounts to the same thing, be recalled never to return. Does this position appear to be “extreme”? If so, then let our critic examine the recent legislation and attempt to identify the last decree that truly was in the interest of the common good. It is unlikely that this attempt will succeed.

Beyond the imperial presidency.

President Bush is a bundle of paradoxes. He thinks the scope of the federal government should be limited but the powers of the president should not. He wants judges to interpret the Constitution as the framers did, but does not think he should be constrained by their intentions. He attacked Al Gore for trusting government instead of the people, but he insists anyone who wants to defeat terrorism must put absolute faith in the man at the helm of government. His conservative allies say Bush is acting to uphold the essential prerogatives of his office. Vice President Cheney says the administratio’qs secret eavesdropping program is justified because “I believe in a strong, robust executive authority, and I think that the world we live in demands it.” But the theory boils down to a consistent and self-serving formula, that what is good for George W. Bush is good for America, and anything that weakens his power weakens the nation. To call this an imperial presidency is unfair to emperors.

Even people who should be on Bush’s side are getting queasy. David Keene, chairman of the American Conservative Union, says in his efforts to enlarge executive authority, Bush “has gone too far.” He is not the only one who feels that way. Consider the case of Jose Padilla, a U.S. citizen arrested in 2002 on suspicion of plotting to set off a “dirty bomb”. For three years, the administration said he posed such a grave threat that it had the right to detain him without trial as an enemy combatant. In September, the U.S. Court of Appeals for the 4th Circuit agreed. But then, rather than risk a review of its policy by the Supreme Court, the administration abandoned its hard-won victory and indicted Padilla on comparatively minor criminal charges. When it asked the 4th Circuit Court for permission to transfer him from military custody to jail, though, the once-cooperative court flatly refused.

In a decision last week, the judges expressed amazement that the administration suddenly would decide Padilla could be treated like a common purse snatcher – a reversal that, they said, comes “at substantial cost to the government’s credibility.” The court’s meaning was plain: Either you were lying to us then, or you are lying to us now. If that is not enough to embarrass the president, the opinion was written by conservative darling J. Michael Luttig – who just a couple of months ago was on Bush’s short list for the Supreme Court.

The disclosure that the president authorized secret and probably illegal monitoring of communications between people in the U.S. and people overseas again raises the question: Why? The government easily could have gotten search warrants to conduct electronic surveillance of anyone with the slightest possible connection to terrorists. The court that handles such requests hardly ever refuses. But Bush bridles at the notion that the president should ever have to ask permission of anyone. What we have now is not a robust executive but a reckless one. At times like this, it is apparent that Cheney and Bush want more power not because they need it to protect the nation, but because they want more power. Another paradox: In their conduct of the war on terror, they expect our trust, but they cannot be bothered to earn it.

WHO WILL FIGHT FOR THE CONSTITUTION?

The Year of Vanished Credibility

Start with Bush. Never at ease before the cameras, he now has the glassy stare and mirthless smile of a cornered man with nowhere left to run. Nixon looked the same in his last White House days, and so did Hitler, according to those present in the Fuehrerbunker. As Hitler did before him, Bush raves on about imagined victories. Spare a thought for the First Lady who has to endure his demented and possibly drunken harangues over supper. The word around Washington is that he is drinking again. At this rate he will be shooting the dog and ordering the First Lady to take poison, which I am sure she will have great pleasure in forwarding to her mother in law.

I am sure millions of Americans yearn to approve of Bush. He is officially scheduled to be in the White House another three years, and who wants a lemon in the garage that long? And indeed, the president does still have his die-hard fans, clustered in their places of worship in the remoter regions of the country. A mid-November poll by SurveyUSA found that in only seven states – Utah, Idaho, Wyoming, Nebraska, Oklahoma, Alabama and Mississipp – did Bush’s current approval rating exceed 50%. In 12 states, including California, New York, Illinois, Pennsylvania and Michigan, his rating was under 35.

All the same, we have mishandled the situation. When Bush landed on the aircraft carrier and said Mission Accomplished, we all sneered. Wrong move. We should have applauded, and said Now leave! Same thing when there turned out to be no weapons of mass destruction in Iraq. We sneered again. We should have said, Great! So America is safe. Let’s quit while we are ahead. Now Bush is saying that the job will be done when Iraqis enjoy the democratic freedoms guaranteed Americans. We should say, They do! Bought news stories, secret surveillance of phone calls, emails and faxes, arrest without warrant, disappearances, torture … you have brought our democracies into sync. Call it a day, bring the troops home, and then we can start impeaching you.

But who would do the impeaching? The Democrats have lost as much credibility as the President and the Republicans. Ever since the New York Times loitered a year late into print with its disclosure about the NSA spying program (only the latest in a sequence of unconstitutional infamies by that Agency stretching back for decades, mostly against domestic political protesters). I have seen it argued that if the Times had gone with the story last year, Kerry might be president. But if the Democrats had cared about the Constitution they could have broken the story themselves last year. Democratic congressional leaders knew, because the whistleblowers from the NSA desperately tried to alert them, only to get the cold shoulder.

We are heading into a year when the Democrats could be making hay, by actually doing the right thing. In 2005 is a pointer, they never will. The latest evidence is that Rahm Emanuel, in charge of selecting Democratic Congressional candidates for 2006, is choosing millionaires and fence-straddlers on the war. For years Democrats have been dreaming of having a brawny, non-nonsense type, preferably draped in medals, lead them into political battle. They picked a clunker last year, in the form of John Kerry, who had a glass jaw, six houses, a silly billionaire wife and an infinite capacity for talking out of both sides of his mouth. Along comes John Murtha, who was actually a Marine drill sergeant at Parris Island, who has 100% credibility on military matters, who showed how to talk about the war, how to say it is quitting time. And they fled him like a poisoned thing. They still do.

So that is it for Christmas, 2005: No credibility for the President, or for the Democrats, or for the New York Times, which took a year to figure out whether the Constitution is worth fighting for.

REMEMBERING GENE MCCARTHY

When famous people die, they are usually overpraised in fulsome superlatives, well-meant but losing all proportion. I have complained about this before, and I try to resist the temptation. I will try to resist it today. It will not be easy but respect for the man himself forbids exaggeration of his virtues. He would not have welcomed compliments he did not deserve. I am not sure he relished even the ones he did deserve.

I barely knew of Gene McCarthy until he created a sensation by challenging Lyndon Johnson in the 1968 Democratic presidential primary in New Hampshire. He lost, but his strong showing against a sitting president stunned the country and caused Johnson to withdraw from the race a couple of weeks later. McCarthy’s theme was simple: the Vietnam war was a mistake. Suddenly the anti-war movement had a major candidate, a liberal with an attractively conservative demeanor. Shaggy college students, getting “clean for Gene”, got haircuts and adopted middle-class camouflage, including even neckties, in order to serve his cause among ordinary voters. “Working within the System,” it was called. Opposition to the war no longer seemed subversive or radical.

No sooner had McCarthy shocked Johnson than Bobby Kennedy was emboldened to jump into the race; he and Johnson hated each other anyway. McCarthy regarded them both with cool contempt, but that was his problem. His cool, aloof personality was not to every taste. Bobby had star power inherited from his assassinated brother, plus lots of money, with no inhibiting scruples. He pretty much muscled McCarthy out of the race, and it looked as if the contest for the nomination would be a duel between him and Hubert Humphrey. Kennedy crushed McCarthy in the California primary, delivered his short victory speech, and went backstage, where Sirhan Sirhan was waiting for him. In November Richard Nixon narrowly beat Humphrey in a three-way race, George Wallace taking a fat chunk of the vote, while McCarthy seemed not to care who won. By 1980 he was favoring Ronald Reagan and heading in a libertarian direction.

I met McCarthy briefly in Minneapolis about that time. When I told him I was now writing for Bill Buckley’s National Review, he smiled: “I’ve always thought Bill was playing poker with Monopoly money.” It was the kind of gently barbed, slightly enigmatic witticism you would expect from him. I met him again in Baton Rouge a few years later, where I was supposed to debate him. But the debate turned into an all-out tribute from the moment he was introduced. Everyone remembered him as the hero of 1968. I could only join the roar of the crowd.

Politics, I reflected, was a strange business for a man like Gene McCarthy to have been in at all. George Will has written of his “condescension” to the public, but I think his appeal was just the opposite of that. He never talked down to you, whether you were part of a cheering crowd or a companion at the breakfast table. He was that rare thing, a politician without bombast. After an hour with a man like that, you realize how inflated John McCain’s “straight talk” really is. So in Gene McCarthy’s honor, I think it is enough to say that he spoke with intelligence and candor, he raised our expectations of politicians, and, once upon a time, he was there when we really needed him. No hyperbole is necessary. He is gone now, and it hurts.

A VET SPEAKS OUT ABOUT BUSH

Tim Abbott is a Vietnam veteran who lives in the Southwestern Virginia town of Hillsville, a conservative, blue-collar community that tends to vote Republican and bleed red, white and blue. But, like an increasing number of veterans, Abbott is fed up with President George W. Bush. “Bush talks a lot about freedom, courage, transparent government and the rule of law. He talks,” Abbott says. “His speeches are carefully choreographed before audiences of his faithful – often Christian fundamentalists or, to paraphrase Bush, Christian-fascists – and they must sign loyalty oaths to Bush. He speaks before audience after audience of soldiers and sailors who cannot speak except as directed by the White House.”

Normally, such comments would be risky in a mountain town where Patriotism rules supreme but Abbott expressed his views this week in an op ed article for The Roanoke Times and found many people agreeing with him. “When I think of Bush, I do not think of liberty and courage, compassion and justice. No, I think of arrogance, greed and lies,” Abbott wrote. “He is a thug, a buffoon and a coward. Not only is he incompetent, he is corrupt.” In normal times, these would be fighting words and Abbott would do well to avoid lunch at the Hillsville Diner, the Main Street eatery where the locals gather to discuss politics. But George W. Bush’s times are not normal times and Abbott is greeted warmly on the streets of Hillsville.

In recent weeks, I have spoken with dozens of vets of Vietnam, Desert Storm and the present invasion of Iraq and most speak with anger towards Bush and his policies. Soldiers serve under a code of honor, something they say Bush lacks. “Bush is of a kind with the dictators; a strutting, sanctimonious buffoon who talks democracy but acts like Saddam Hussein,” Abbott says. “Bush might differ in degree from Hussein, not having been in power as long, but in behavior, with torture and the corruption of government, they are of a kind.

“While al-Qaida is an enemy of the values and principles of the United States and Western civilization and must be confronted, it can do no more than kill people and destroy property. “Bush can subvert our principles and institutions. He is the greater enemy.”