Offshore News Digest for Week of June 19, 2006

GLOBAL LIVING & BUSINESS

LATIN AMERICA’S BEST BUSINESS CITIES RANKED

Sao Paulo, Brazil has replaced Santiago, Chile as Latin America’s best business city, according to a new ranking of 40 cities in the region. The ranking was developed by America Economia, a Spanish-language biweekly magazine covering Latin American business, and looked at 10 key factors, ranging from the size of the cities’ economies and population to quality of life and regional brandname. Although it scores low on security, Sao Paulo does well in terms of telecommunications competitiveness and innovation potential and it has a good regional brandname. Added to that is the city’s large economy and high population.

Santiago came in second this year. While it is considered to have an excellent regional brand name, very good security and telecommunications competitiveness and does better than Sao Paulo in terms of quality of life, GDP per capita and GDP per capita adjusted for quality of life and violence, Santiago is considered to have less potential for innovation than Sao Paulo and of course scores lower in terms of size of population and city. Monterrey, Mexico came in third, scoring well in terms of GDP per capita and GDP per capita adjusted for quality of life and violence.

With Miami used as the Latin America headquarters for a significant number of multinational companies, the magazine also included that city in its survey. However, Miami fell from second to fourth place on the 2006 ranking. Mexico City, the capital of Latin America’s second-largest economy, came in 7th place. It was pulled down by a higher cost of living and lower quality of life, bad security, and average scores on innovation potential and regional brand name. Buenos Aires, the capital of Latin America’s third-largest economy, came in 9th place.

Caracas, Venezuela, the capital of Latin America’s 4th-largest economy, managed to come in second-to-last place (39th), only better than Paraguayan capital Asuncion. Caracas has very bad security and a weak brand name. In terms of quality of life and security it scores lower than Asuncion. While Caracas is at the bottom within the Andean region, Bogota is on top. The Colombian capital came in at 12th place. Colombian cities Medellin and Cali placed at 34 and 37, respectively. San Jose is the best city in Central America for business, the survey shows. The Costa Rican capital comes in 17th place, a decline of one spot from last year. Panama City comes in 14th place.

PHILIPPINE EFFORT TO LURE EXPAT REAL-ESTATE INVESTMENT FROM U.S. MAY SERVE AS TEST CASE

Dozens of potential home buyers milled about at a reception on New York’s Fifth Avenue, checking out swanky properties. But the buyers were not shopping for New York penthouses. They were eyeing luxury oceanfront condominiums and Mediterranean-style villas thousands of miles away in Philippine resort communities. The event at the Philippine Consulate was one stop on a 5-city roadshow sponsored by the Philippine government to help its country’s home builders market houses and condos directly to Filipino-Americans.

The Philippine economy has been relatively weak. But Manila is hoping that Filipinos living in the U.S. will bring American-style enthusiasm for homeownership to the Pacific Ocean archipelago, lifting the economy in the process. According to U.S. Census data, the median household income for people of Filipino descent was $63,930 in 2004, far above the $44,684 median household income for all Americans. “The hottest market for Philippine residential real estate is the Filipino-American community, since they have the income and the motivation to acquire condos or houses back home,” says Albert del Rosario, the Philippine ambassador to the U.S. “We hope these roadshows will serve to boost foreign investment, sell domestic property abroad and demonstrate confidence in our economy.”

It is the latest twist in efforts by developing countries to boost remittances by expatriates, many of whom are graying in America and thinking about how they want to live out their golden years. Growing remittances to their homelands by immigrant workers in the U.S. and other Western countries have become a vital economic development tool for poor countries. Last year, about $170 billion of remittances world-wide were sent to developing countries by overseas workers, about twice the level of foreign aid that went to those countries, according to the World Bank. If estimates for remittances that are not sent through formal channels are included, the total could be more than $250 billion.

Mexico, Jamaica and some other Latin and Caribbean nations have been marketing to expats for years. But the Philippines is specifically targeting potential retirees with large-scale development projects and new communities that include recreational outlets, shopping and entertainment designed to appeal to people used to similar amenities in the U.S. Landco Pacific Corp. of Manila, best known for its high-end beachfront condos and land sales in the mountains, estimates that during the winter months as many as 80% of its buyers in some projects are Filipino-Americans. Most of these buyers are tapping the equity in their U.S. homes. Landco was showing luxury properties, including some with extra-high ceilings, outdoor Jacuzzis, Asian fusion architecture and picturesque views of the South China Sea. The prices, $175,000 to $215,000, are bargains by U.S. standards. The company also is developing a self-contained agricultural resort community called Leisure Farms in rural Batangas, designed to appeal to hobby farmers. If the Philippine experiment succeeds, more countries are likely to follow.

NEVIS PREMIER REITERATES DESIRE FOR INDEPENDENCE FROM FEDERATION WITH ST. KITTS

Vance Amory, Prime Minister of Nevis, partner of St. Kitts in the Federation of St Kitts and Nevis, said in a televised statement last week that independence for his island was still a goal of his government. Nevis has created separate “offshore” legislation parallel to Federation legislation, and believes that its economic progress has been due to having greater control over its own affairs. “I must remind everyone that the journey has not yet ended. If, as a people, we can achieve so much with autonomy, the possibilities after full independence are limitless. Our people are determined and resilient. These are attributes that will enable us to surmount difficulties in our quest for political and economic advancement and independence,” said Amory.

St. Kitts and Nevis are islands in the Caribbean Sea, about one-third of the way from Puerto Rico to Trinidad and Tobago. The two volcanic islands, which are renowned for their beautiful mountain scenery, total 261 square kilometers in area and are separated by a 3-km-wide channel called The Narrows. Nevis Peak sits in the center of its almost circular namesake island and its ball shape complements that of its sister island. The Federation of St. Kitts and Nevis finally attained full political independence in 1983 and, in order to relieve the anxiety of Nevisians, Nevis acquired autonomy within the Federation, together with its own Legislature and Cabinet. In 1998, a vote in Nevis on a referendum to separate from Saint Kitts fell short of the two-thirds majority needed.

On January 1st, 2004, Federation Prime Minister Dr. Denzil L. Douglas proposed Round Table talks with the Cabinets of the Federal Government and the Nevis Island Administration, major social partners and key operatives, to examine the options and ramifications of the posible secession of Nevis from the Federation. However, he said that his preference was for both islands to stay together. Amory says that his government continues to recognize the need for support of more than 67% of all the people and that he would not make the issue of self determination partisan.

NEW COMPETITOR ENTERS BARBADOS TELECOMMUNICATIONS MARKET

A new high-speed telecommunications service launched last week by TeleBarbados Inc. promises to bring more competition to the island’s telecoms sector and the wider Caribbean region, according to the company. TeleBarbados’s $70 million investment will provide long distance service, international private line and data service, fixed wireless internet and local exchange telephone services. “We have invested in building a submarine cable system. This ensures our complete independence from Cable & Wireless and ensures us longevity in the market here,” Mike DeGraw, TeleBarbados’s director of sales and marketing, explained at the launch ceremony. Mr. DeGraw said that consequently, the investment would help to bring “true competition” to the sector.

TeleBarbados is serviced by a 940 kilometer, 20 gigabit submarine fiber-optic cable. At the moment, the service is being offered only to corporate customers, but the company plans to start offering residential high-speed Internet access and VoIP for international calling by the end of the year, and to the entire island by the end of 2007. The Barbados government commenced the liberalization of the telecoms market in October 2001. Cable & Wireless agreed to a memorandum of understanding under which the government replaced C&W’s license with a non-exclusive one, thus paving the way for new competitors to develop in the industry.

HAS THE BERMUDA STOCK EXCHANGE OUTGROWN SMALL FIRMS?

Masters Limited, one of the first local companies to list on the Bermuda Stock Exchange (BSX), has announced its intention to delist from the exchange, citing costly fees and burdensome regulatory requirements as the key reasons. At the company’s annual general meeting, held on June 14, shareholders voted in favour of the motion to withdraw from listing on the BSX.

President and CEO of Masters, Susan Wilson, was quoted as stating that the decision to delist has come about because the BSX has become a “very large, company orientated” exchange. “The burden for us to remain on the exchange is just too great given our very limited administrative resources. The BSX started out as a formalisation of trading of local shares with basically only local people doing it. Then all of sudden we had this BSX with all these fancy rules and requirements and whopping big fees and everything.”

The BSX has put in place an ambitious strategy of transforming itself from a small and relatively unknown offshore exchange into an internationally recognized institution capable of attracting listings from international entities. However, in order to do this the BSX has had to put in place more stringent investor protection regulations to gain recognition from onshore regulators such as the UK’s Financial Services Authority, which granted the BSX Designated Investment Exchange status in 2005. The bourse also has Designated Offshore Securities Exchange status from the U.S. SEC.

Masters is the third local company to announce plans to delist from the BSX in the past year, according to the report. Ms. Wilson went on to stress that she is not opposed to the BSX’s new direction, but stated that the company has been “outgrown” by the exchange. There are currently well over 400 listings on the BSX, but only 23 of these are from domestic issuers. At the end of 2005, total market capitalization, excluding fund listings, stood at over $300 billion, of which approximately $2 billion represented the domestic market.

CARIBBEAN TOURIST GROUP URGES U.S. TO DELAY PASSPORT INITIATIVE

Caribbean tourism officials are pushing for an additional extension to the implementation date of the U.S.’s Western Hemisphere Travel Initiative (WHTI). The WHTI, due to take effect on January 1, 2007, will make it mandatory for all Americans returning home from the Caribbean and other countries in the Western Hemisphere to have a passport to reenter their country. Regional tourism officials, working through the Caribbean Community Council for Foreign and Community Relations (COFCOR) and Caribbean ambassadors in Washington, successfully argued against the original implementation date of January 1, 2006, saying it put the region at a disadvantage, since Americans returning from Mexico and Canada by air would not need a passport before January 1, 2007. Those returning from the two U.S. border states by land have been given an additional year, and will require a passport by January 1, 2008.

According to Vincent Vanderpool-Wallace, secretary general of the Caribbean Tourism Organization (CTO), the Caribbean region would still be at a disadvantage if the passport law were enforced next year. “The reason for a further postponement must be that the pick up of new passports by U.S. citizens has been nowhere near the numbers that we would like to see,” he told journalists at the closing of Caribbean Week 2006. “We recognize that we have an added problem which is that so many people have been so accustomed for so long to waking in the morning and deciding to go to the Caribbean because they didn’t need a passport, that there has to be an extensive campaign to let a lot more people know about this new requirement.” The CTO secretary general said the October date by which the U.S. government intended to begin its educational campaign was too late for the Caribbean.

SURVEY: ENTERING EMERGING MARKETS INCREASES THE RISK OF FRAUD

Emerging markets may offer the greatest prospects for growth, but according to a new report, those markets also present the greatest risk of fraud. In a global fraud survey by Ernst & Young, 60% of respondents said they perceive a greater threat in their emerging market operations than in their developed markets. E&Y also noted that 40% of companies still have no formal or documented anti-fraud policy, a percentage hardly changed since the firm’s previous fraud survey, in 2003. For this latest survey, the firm conducted telephone interviews earlier this year with 586 senior executives – including chief executive officers, chief financial officers, chief risk officers, internal audit directors, and business unit directors – across 19 countries.

“Companies who do business overseas are increasingly concerned about risks in emerging markets,” noted Ernst & Young partner Dale Kitchens, in a statement. “But to defeat or mitigate such fraud, they need a more programmatic, comprehensive approach.” Among the multinational companies tripped up by overseas operations are (1) Xerox, whose accounting scandal began in 2000 as an investigation of accounting practices at its Mexican operations. (2) United Parcel Service, which is investigating possible violations of the Foreign Corrupt Practices Act based on its acquisition of a freight forwarding business from Fritz Companies. (3) DaimlerChrysler, which dismissed or suspended several employees after determining that “improper payments” were made in Africa, Asia, and Eastern Europe. (4) Halliburton, which disclosed that the Department of Justice and the SEC are looking into possible bribery of officials in Nigeria.

E&Y maintained that according to its survey, respondents with formal worldwide anti-fraud policies were overwhelming most likely to decline a potential investment following a thorough assessment of the fraud risks. Of companies that do assess fraud risk before entering a new market, one in five decides not to move forward, the firm noted. The survey also found that robust internal controls remain the first line of defense against fraud for companies in all markets. However, anti-fraud controls are not always integrated into an anti-fraud program and monitored for compliance.

CHINA CANNOT COOL ITS ECONOMY WITH HALF MEASURES

Every year of “no landing” is increasing the risk of an eventual “hard landing”.

The receding tide of global liquidity has left many emerging markets high and dry in the past month, but not China. The challenge facing the People’s Bank of China is the opposite. It has to prevent its monetary policy from being swept away by a deluge of surplus cash, which has created a property bubble and is fanning credit growth that is too rapid and risky. The monetary authority’s strategy will be what People’s Bank Vice Governor Wu Xiaoling has evocatively described as “removing the firewood from under the cauldron.” If only it were that simple.

The root of the problem with the Chinese monetary policy is well-known. It is compromised by the authorities’ desire to keep the exchange rate under tight control. As the Chinese central bank buys dollars to keep the yuan stable at about 8-to-1 against the U.S. currency, it ties itself to a low interest-rate regime because an even bigger deluge of capital inflows into China may happen from a closing of the rate differential with the U.S. Federal Reserve. The one-year benchmark deposit rate in China is 2.25%, as much as three percentage points lower than in the U.S. It was last raised by 27 basis points in October 2004. Credit Suisse economist Dong Tao estimates that Chinese deposit rates must rise by 200 basis points – and lending rates by 300 points – to reach the neutral zone.

The net result of all the tightening may be a big zero. Analysts almost unanimously expect the Chinese economy to expand 9.5% or more in 2006, not much slower than 9.9% last year. Every year of “no landing” is increasing the risk of an eventual “hard landing”. People’s Bank of China badly needs to raise the cost of money significantly. And that necessitates a move on exchange rates, sooner rather than later.

CHARITABLE GIVING IN U.S. NEARS NEW HIGH

The urgent needs created by three major natural disasters – the tsunami in Asia, earthquake in Pakistan and hurricanes Rita, Katrina and Wilma – drove American philanthropy to its highest level since the end of the technology boom, a new study showed. The report by the Giving USA foundation estimates that in 2005 Americans gave $260.28 billion, a rise of 6.1%, which approaches the inflation-adjusted high of $260.53 billion that was reached in 2000. About half of the overall increase of $15 billion went directly to aid victims of the disasters. The rest of the increase, meanwhile, may still be traced to the disasters since they may have raised public awareness of other charities. “When there is a very significant need, when people are clearly aware of that need, they will respond,” the chairman of Giving USA, Richard Jolly, said. “Were it not for the disasters, what we would have expected is more of a flat number. With the staggering need generated by the disasters, it’s very in keeping with what has happened in the past – the American public stepped forward and provided additional support.”

The three natural disasters generated about $7.37 billion, which was 2.8% of total giving. Of that amount, individuals contributed $5.83 billion, or 79%, while corporations added $1.38 billion, or 19%. Excluding disaster relief, the report indicates that there still would have been a rise in gifts from both individuals and corporations. In the 41 years that Giving USA has tracked philanthropy, giving has increased with the wealth of the nation. Since 1965, total contributions have been between 1.7% and 2.3% of GDP. The highest level was reached at the end of the technology boom in 2000. For 2005, it was estimated to be 2.1% of GDP. Disaster relief may have “crowded out” giving to other recipients of international aid. Without the $1.14 billion in relief contributions, giving to this sector fell to $5.25 billion, a decline of 1.9%, or an inflation-adjusted drop of 5.1%.

One area of gifts that declined in 2005, according to the Giving USA report, were bequests. The report estimates that they fell by 5.5%, a drop that is mainly attributed to a decline in the number of deaths in 2004 and an expected decline for 2005. For the first time since 1998, contributions slated for arts, culture and humanity groups fell. Jolly said the drop could be due to the fact that a few museums had completed major campaigns the year before so were less active in 2005, or that the decline in bequests translated to a decline in arts giving. The chief executive of Zeum, a nonprofit children’s museum in San Francisco, said the fundraising climate for arts organizations has indeed grown more difficult in recent years. CEO Adrienne Pon said that Zeum, founded in 1998, has seen its fortunes rise and fall with those of technology companies.

TAXES

SYMANTEC PREPARES TO BATTLE IRS OVER $1 BILLION TAX CLAIM REGARDING TRANSFER PRICING

Symantec Corp. has announced that an agreement in principle has been reached with the IRS to settle an outstanding claim concerning the audit of the company’s 2003 and 2004 fiscal years, but the firm indicated that it intends to fight a much larger tax claim which totals almost $1 billion. The company, which makes the popular Norton anti-virus software, expects to settle the first outstanding tax obligation for $36 million, excluding interest – substantially lower than the original IRS assessment of approximately $100 million.

Symantec also revealed that it is forging ahead with an appeal against a separate IRS claim concerning a tax audit of Veritas Software Corp., which the company acquired in July 2005. According to a recent filing with the SEC, Symantec reported that it had received a Notice of Deficiency from the IRS on March 29, 2006, which claimed that the company owes $900 million in additional taxes, plus interest and penalties, for the 2000 and 2001 tax years. The back tax claim also relates to transfer pricing in connection with a technology license agreement between Veritas and a foreign subsidiary. Symantec stated that it “strongly believes” that the IRS claim is “inconsistent with applicable tax laws and existing Treasury regulations” and intends to pursue the matter in the U.S. Tax Court.

“TAX FREEDOM DAY” HAS ARRIVED IN CANADA

Tax Freedom Day arrived five days earlier in 2006 compared to last year as tax cuts filtered into the system, although Canadians must still effectively work for almost half of the year before all of their tax liabilities are paid, according to the Fraser Institute, the free market think tank. This year, Canadians started working for themselves on June 19th. Last year, it was June 24th and the latest that Tax Freedom Day has ever fallen in Canada was on June 25th, in 2000. Tax Freedom Day then decreased to June 18 in 2001 before increasing to June 22 in 2002 and 2003, and June 23 in 2004.

“Although this year marks a reversal of the recent upward trend in taxation, Tax Freedom Day falls over a month and a half later than it did 45 years ago,” noted Niels Veldhuis, senior research economist at the Institute. “In 1961, the earliest year for which the calculation has been made, Canada’s Tax Freedom Day was May 3," he added. The Fraser Institute calculates Tax Freedom Day to provide a simple reference point about the impact of government tax collection. The Institute has been researching the comprehensive tax burden on the average family in Canada and in each of the provinces since 1977. However, Veldhuis points out that Tax Freedom Day is not intended to measure the benefits Canadians receive from governments in return for their taxes.

Tax Freedom Day calculations include all taxes levied on Canadians such as income taxes, property taxes, and sales taxes, as well as profit taxes, health, social security and employment taxes, import duties, license fees, taxes on the consumption of alcohol and tobacco (“sin” taxes), natural resource fees, fuel taxes, hospital taxes, and a host of other levies. According to the Institute, tax relief announced in the 2006 federal budget has contributed to the decline. The reduction in the Goods and Services Tax (GST) from 7% to 6% accounted for one day of the five day decrease in Tax Freedom Day. In addition, many provincial governments also reduced taxes in 2006.

Government expectations of tax revenues can also contribute to a decline in Tax Freedom Day, which is calculated using provincial and federal government tax revenue forecasts. “The good news for Canadian taxpayers is that the federal government and most provincial governments reduced tax rates in 2006,” commented Veldhuis. However, conservative projections of tax revenues, especially relative to projected increases in personal incomes, can result in the reduction of Tax Freedom Day, Veldhuis explained. “Unfortunately, given the conservative budget estimates of tax revenues there could well be an upward revision to Tax Freedom Day once actual tax revenues are tallied,” he warned.

In 2006, the average Canadian family (with two or more individuals) earned C$79,396 in income and paid a total of $36,650 in taxes. The cash income of the average Canadian family increased by 4.2% ($3,172) between 2005 and 2006. This compares to a much smaller increase of 1.4% ($510) in the total tax bill of the average Canadian family.

TELEWORKERS SLAM “REVISION” TO NEW YORK STATE TAX CODE

A group representing the interests of the growing ranks of America’s teleworkers has denounced a revision in New York state’s tax law as as “misleading” and “useless”. Under New York’s tax rules, non-residents who telecommute some or most of the time for their New York employers may be forced to pay New York taxes, not only on the income they earn when they work in New York, but also on the income they earn when they work at home, in a different state – often leading to double taxation of the income by New York and their home state.

Unlike many of its neighbors, New York applies the “convenience of the employer” test when deciding how to tax telecommuters, rather than basing its assessment on the residence status of the worker in question. This was a policy upheld by the Court of Appeals in March 2005, in the case of a computer programmer who lived and worked in Tennessee, and spent just 25% of his working days during the period in question physically present in New York, but who state tax authorities believed was liable to pay tax there on 100% of the income that he earned.

On May 15, 2006, New York announced that it had revised its telework tax policy. However, according to the Telework Coalition (TelCoa), a telework advocacy group headquartered in Washington, DC, while the wording of the revised policy is new, the policy itself is essentially the same, retaining a clause requiring teleworkers to prove that the work they are doing at home is an employer “necessity” that cannot be performed in a New York office. TelCoa, and another lobbying group, the Association for Commuter Transportation (ACT), are urging Congress to take up a bill called The Telecommuter Tax Fairness Act. This piece of legislation aims to eliminate the dual taxation of income in the case of teleworkers. “With telework playing such an important role in the nation’s pandemic planning – and with gas prices as high as they are – it is outrageous for New York to continue punishing people who telecommute,” said Chuck Wilsker, TelCoa’s President and CEO. “Since New York won’t get rid of the tax on interstate telework, Congress has to do it.”

U.S. HOUSE TAKES UP ESTATE TAX BATON

Rep. Bill Thomas (R-California) Chairman of the tax-writing Ways and Means Committee in the U.S. House of Representatives, has introduced legislation that would reduce the number of Americans subject to the estate tax by raising the per-person threshold for the tax. According to Thomas, the Permanent Estate Tax Relief Act of 2006 would give individuals greater flexibility to make estate planning decisions during life by reunifying the estate, gift and generation-skipping transfer taxes. The proposals would increase the exemption amount to $5 million per person effective January 1, 2010 while reducing the rate of tax on estates up to $25 million to the capital gains tax rate (currently 15%, set to increase to 20% in 2011 unless extended). Estates of $25 million or more would pay tax of twice the prevailing capital gains tax rate.

Thomas’s bill would also simplify estate tax planning by allowing married couples to take full advantage of the $5 million exemption by carrying over any unused exemption to the surviving spouse. While 2001 tax legislation will cut the estate tax rate and raise the threshold over the next four years, it will be reinstated at the pre-2001 rate of 55% in 2011. The House has taken up the estate tax baton after the Senate rejected a motion to debate a full repeal of the tax and Senate Majority leader Bill Frist, an advocate of full estate tax repeal, signaled his willingness earlier this week to reach a swift and permanent compromise that would be capable of winning 60 Senate votes.

PRIVATE TAX DEBT COLLECTION IN THE U.S. GETS GREEN LIGHT FROM GAO

The IRS has been given the go-ahead to proceed with its controversial project to outsource tax debt collection to private firms, after a number of objections to the bidding procedures were rejected. A Government Accountability Office official confirmed that it has issued its decision to deny the bid protests. An official announcement from the GAO is expected later this week. The IRS confirmed in the report that it has since rescinded its stop work order.

The IRS announced in March that it had awarded contracts to three firms to participate in the first phase of its private debt collection initiative. The project, authorized by the 2004 American Jobs Creation Act, aims to collect an estimated $1.4 billion in additional taxes over the next 10 years. A total of 33 firms took part in the competitive bidding process, and the contracts were awarded to the three of the competitors. However, the project stalled after two unsuccessful firms filed three protests. The first cases of delinquent taxes are expected to be handed to the company in September.

The project has provoked criticism from privacy advocates and lawmakers who fear that sensitive taxpayer data could be compromised by allowing private third parties to do a job normally done by the IRS. Others have also criticised the cost of the project. The collection firms will be allowed to keep 25% of the outstanding tax that they collect, but according to Rep. Steven Rothman, IRS employees can do the same job at a cost of only three cents for every dollar collected. Rothman has succeeded in getting an amendment added to the IRS fiscal budget 2007, part of a transportation funding bill, that will effectively cut off funding to the private companies, although at this early stage (the Senate has yet to draft its proposals) it is unclear whether the amendment will gather enough support to make the final version of the bill.

SOUTH AFRICAN ASSEMBLY APPROVES BUSINESS TAX AMNESTY LAW

South Africa’s National Assembly has approved legislation putting in place a tax amnesty for small businesses. The legislation has been forwarded to the National Council of Provinces. Under the amnesty, an incremental levy will be imposed on income declared, up to a maximum level of 5% based on declarations of income for the 2005/6 tax year. A 2% rate will be applied to taxable income of R35,000-100,000, 3% on income of R100,000-250,000, 4% on income of R250,000-500,000, and 5% on income of R500,000 or above. This replaces the original plan to impose a 10% flat rate of tax on the previously undeclared income.

The amnesty will begin on August 1, 2006 and will remain in place until May 31, 2007. Companies with an annual turnover of less than R10 million are permitted to participate in the scheme. The amnesty is designed to entice the substantial number of small businesses currently operating in the “informal economy” to regularize their tax affairs while encouraging a compliance culture and broadening the tax base.

The approved legislation also includes the tax measures announced by Finance Minister Trevor Manuel in the budget last February. Despite the fact that corporate and personal income tax revenues are running well ahead of government targets thanks to a growing economy and more efficient tax collection methods, Manuel decided not to loosen the fiscal reins, leaving most major tax rates on hold, including the 29% corporate tax rate and the unpopular secondary tax on companies, a 12.5% charge on dividends.

U.S. EXPATS HIT BY NEW TAX RULES

After recent legislation worseneed the position of U.S. citizens working abroad, the Center for Freedom and Prosperity Foundation has released a research study indicting Section 911 as hurtful for the economy. On June 20, the CFPF released a research paper examining the taxation of Americans living and working abroad. Entitled “Making Section 911 Universal is Good Economic Policy and Good Tax Policy”, the study is authored by Dr. Yesim Yilmaz, a research fellow with CF&P Foundation. Dr. Yilmaz finds that imposing a second layer of tax on overseas Americans is bad tax policy. Double-taxation hurts the American economy and employment, both domestic and overseas. The solution is for Congress to make Section 911 universal so that there is no double-taxation of foreign earned income, just as Senator Jim DeMint has proposed in his legislation the Working American Competitiveness Act (S. 3496).

Dr. Yilmaz also suggests that lawmakers should remove all caps and limitations that are currently attached to Section 911. The forgone revenues would be trivial, especially compared to the gains to employment, exports and the overall economy, and improvements in the tax code. CFPF’s Andrew Quinlan said, “Policy makers recently made the tax law more onerous for overseas Americans. Dr. Yilmaz’s study explains why this was a mistake and points the way to a pro-growth, territorial system.” Daniel Mitchell of The Heritage Foundation agreed: “In a competitive global economy, the United States cannot afford to impose discriminatory taxes on American workers and American companies. The CF&P Foundation’s new study shows how double-taxing overseas Americans is anti-competitive.”

From the study: “A last-minute amendment attached to the bill has curtailed – and for some expatriates, effectively eliminated – Section 911 benefits, which allow U.S. workers abroad to protect a portion of their overseas compensation from being hit by a second layer of taxation by the [IRS]. (Overseas Americans must pay all applicable taxes to the government of the country where they live and work, just as foreigners who live and work in the U.S. pay tax to the IRS). The amendment retroactively increases the total allowable foreign-earned-income exclusions from $80,000 to 82,400. But this limit now includes housing benefits (which were previously separate from income exclusions), and also requires expatriates to stack their residual income on top of the excluded amount before determining the rate at which they ought to pay taxes. Both these changes will lead to significant tax increases for many overseas Americans.”

“Senator Chuck Grassley (R, Iowa), who slipped the last minute amendment into the Act, maintains that this move will help pay for the tax breaks introduced by the same Act, and make the U.S. tax system fairer by closing the tax gap between U.S. residents and expatriates.” Senator Grassley is wrong on both counts, says the CFPF.

TRUST GORDON BROWN TO MOVE UK INHERITANCE TAX GOALPOSTS

Chancellor Gordon Brown is prone to changing his mind. His latest U-turn comes in the form of a retreat on strict new rules governing the taxation of trusts. Many agree that common sense has, at last, prevailed. Accountant PKF this week said Brown had underestimated the scope of the trust changes – and that his latest about turn was a salutary lesson for any government seeking to introduce legislation without consultation. However, the recent U-turn will exempt only a number of trusts – and the Finance Bill still has sweeping implications for inheritance tax (IHT) planning.

As it originally stood, the legislation would have hit thousands of trusts set up for reasons wholly distinct from tax, obliging millions of people to review and possibly change their wills to avoid triggering IHT charges. In the Budget, the Chancellor effectively announced the abolition of potentially exempt transfers (PETs) on the creation of trusts. Until then, a gift to an interest in possession (IIP) or accumulation and maintenance (A&M) trust would constitute a PET, as no IHT would apply if the donor survived for seven years and there was no charge within the trust itself in the future.

But the crackdown meant that all new lifetime trusts would fall within the discretionary trust regime – giving rise to an immediate 20% IHT charge when the trust was created, if the transfer exceeded the current zero-rate band of £285,000. There would also be further IHT charges within the trust of up to 6% every 10 years and an exit charge on funds. There were to be few exceptions, but these included trusts set up for disabled people and those created on the death of the parent of a minor child, but only where the child was fully entitled to assets at 18. Mike McCusker, a tax partner at Grant Thornton, branded it a “petty move”, because many people used trusts for various reasons other than to avoid the taxman’s clutches.

UK tax burden increased more than £6,000 since 1997.

New research recently published by the UK’s Centre for Policy Studies has pointed to a significant increase in the tax burden of individual taxpayers since Labour came to power in 1997. The study, entitled “The tax double whammy: More tax costs more than you think”, suggested that by the time of the next election, the tax burden will have gone up by 4.2% of GDP.

The report’s author, Charlie Elphicke, argued that since 1996-97, the tax burden has increased by the equivalent of £6,182 a year in real terms for every household in the UK (or by £9,098 in nominal terms. “This additional tax burden has an effect on growth. Latest estimates suggest that the increased tax burden will reduce the UK’s annual economic growth by between 0.3% and 0.5% a year.”

Unsurprisingly, the research was seized on by the rival Conservative Party, with Shadow Chancellor George Osborne observing that, “This excellent piece of work by the CPS shows that Gordon Brown has been a one-man tax creation industry. The longer he remains in power the more we will see the burden of taxation on Britain’s hard working families rise.”

AUSTRALIAN TAX LAW SIMPLIFICATION GATHERS STEAM

Australian Treasurer Peter Costello has introduced a bill into Parliament that will repeal more than 4,100 pages of Australia’s tax legislation. The bill will remove a number of inoperative provisions that no longer apply to taxpayers, either because they have no effect after a date in the past or because all the transactions or events they did affect have now concluded. The bill also makes other improvements to the tax laws, such as replacing multiple definitions of some terms with a single definition for each term, as recently recommended by the Banks taskforce report “Rethinking Regulation: Report of the Taskforce on Reducing Regulatory Burdens on Business”.

The Commissioner of Taxation, Michael D’Ascenzo, has said that approximately 200 public rulings which contain references to provisions which are being repealed, will be either revised or withdrawn. The Commissioner is also working with tax professionals to improve the readability from the ATO’s legal database of other public rulings affected by the Bill. According to Costello, the Government will continue to look for opportunities to improve the tax laws in the future.

ASSET PROTECTION / LEGAL STRUCTURES

HOW TO FOIL IDENTITY THIEVES

Data breaches and identity theft are in the headlines again following dueling stories from government agencies who together allowed outsiders to get their hands on sensitive personal information of more than 28 million government employees, reservists, soldiers and contractors. The massive Department of Veterans Affairs breach began when a burglar broke into the house of an analyst and stole a laptop and external hard drive containing the names, birthdates and Social Security numbers of 26 million veterans and 2.2 million active-duty National Guard and Reserve troops. At hearings following that breach, the Energy Department admitted its computers had been hacked eight months ago, and though the Social Security numbers of 1,500 employees and contractors had been compromised, almost no one, including law enforcement, the head of the department and the affected individuals, was notified.

While the newest breaches have rejuvenated efforts in Congress to enact federal rules regarding notification, information-security and consumer-protection mechanisms, citizens worried about identity theft already have limited tools available to them under state laws – some of which could be overridden by proposed federal legislation. It is not likely, however, that Congress will put an end to identity theft any time soon. Fast and easy credit is too big a business and too powerful a lobby to expect Congress to clamp down on card issuers, according to Chris Hoofnagle, the former West Coast director of the Electronic Privacy Information Center.

Still, several tools are available now to individuals that reduce their risk of identity theft, according to Hoofnagle and Tom Fragala, a volunteer with the Identity Theft Resource Center who is working on a free, do-it-yourself credit-monitoring and identity-theft recovery service.

• Opt out of pre-screened credit card offerings that come in the mail by calling 888-5OPTOUT (888-567-8688). This prevents would-be identity thieves from stealing your mail and then getting credit in your name (which seems possible even if you tear the applications into pieces).
• Check your credit reports frequently. Federal law allows you to get a free credit report from each of the three credit bureaus once a year. Mark your calendar every four months and check one bureau each go-round to make sure there are no accounts in your name that you have not opened.
• Review your credit-card, debit-card and bank statements every month. If you do not report fraudulent activity on your debit card or checking account within 60 days, your liability is not capped.
• More-vigilant citizens can place a renewable 90-day fraud alert on their credit reports for free by phone, although this is supposed to only be for people who suspect they might be victims of identity theft. Credit issuers then have to take steps to verify your identification, though they are not required to contact you.
• Victims of identity theft should file a police report and then send a letter requesting a 7-year fraud alert on their reports. This alert requires creditors to contact you before issuing a line of credit.
• 10 states currently allow individuals to place credit freezes on their credit reports, which means that would-be card issuers cannot even see your report until you tell the credit bureaus to unlock it (13 more states have passed laws that are not yet in effect).

Credit freezes are the only sure way to prevent identity theft, but some bills currently in play in Congress would override state laws and make freezes only available to identity-theft victims who file a police report, according to Scott Mitic, co-founder of TrustedID, a startup vying to be an easy, $8-a-month identity-theft protection and recovery service.

AS OUR DEBT RISES, DOLLAR VALUE SINKS

D.B. in Plano, Texas links two major sources of worry. “I am a recipient of both Social Security and Medicare. I remember the Nixon-era economic panics. Would you hazard a guess as to when, in your judgment, we can reasonably expect a devaluation of the dollar as a fix for the current economic dilemma?” History is a lot more meaningful than my judgment, so let us look at history.

The devaluation of the dollar is not something that happens on a particular day. It is something that happens every day. In the last 50 years, the dollar has lost 86% of its purchasing power, reflecting an annual inflation rate of 4%. Just as we should not think of the devaluation of the dollar as a single event, we should not think of problems with Social Security and Medicare as a single event. Neither program will simply disappear. The reality will be gradual but painful change. We are in an environment of ever-increasing pressure as the costs of these programs soar. There will be increasing pressure on health care providers and recipients. There will also be an increasing mismatch between official inflation and experienced inflation. It will be ugly.

Since the reforms of 1983, payroll tax collections have exceeded the benefits promised and paid out. That surplus is ending. Payroll taxes will fail to cover promised benefits sometime between 2010 and 2015 – according to the “intermediate” and “high cost” estimates made by the Social Security and Medicare trustees. It will probably be closer to 2010 than 2015, because our experience has been closer to the high-cost estimates than the intermediate estimates. When benefit payments exceed payroll tax collections, our government will have to redeem the Treasury obligations in the trust funds. It will probably do this by trying to borrow the redeemed amounts from the global lending markets. By then, foreign lenders may want to exchange their dollars for harder assets than IOUs from the U.S. Treasury.

The primary reason for the devaluation of the dollar – as measured by exchange rates, inflation or the price of gold – is our debt. A secondary reason may be foreign worries that they will be stuck with our paper money – some foreign purchases of U.S. assets have been thwarted. To the extent that our politicians make it difficult to buy U.S. hard assets, foreigners will worry about the real value of their dollars.

One of the most telling things I have read in recent weeks is a comparison of our finances in the 1960s with our finances today, which appeared in the May 19 edition of Grant’s Interest Rate Observer. “As they did in the mid- and late 1960s, war and deficits will push the gold price higher, we believe. It’s not that the United States can’t afford Iraq and Afghanistan. It’s rather that we can’t afford ourselves.

“In the 1960s, some 40 percent of the federal budget was earmarked for defense; today, it’s only 19 percent. But in 1964 (the year of the Tonkin Gulf affair and the resumption of the bear bond market), health and human services and debt service absorbed 4 percent and 9 percent of the federal budget, respectively. That compares to 23.5 percent and 16.5 percent, respectively, today.”

Many would like to blame the inflation of the 1970s on OPEC. But the reality is more complicated. When Richard Nixon ended the convertibility of the dollar into gold in 1971, oil producers had no assurance their dollars had any value. That is where we are today, in spades.

REQUIEM FOR THE FAITH-BASED GREENBACK

The great dollar sell-off has begun in earnest, although to a large extent, it is being concealed from the public. Wary currency traders have been expecting a dollar-slide for months but were nervous about the possibility of widespread panic. Everyone from Bill Gates to Paul Volcker has predicted that the current trade deficit of $800 billion (7% of GDP) would inevitably produce a weaker dollar, so it is only natural that China, Japan and other foreign lenders would begin to cut back on their purchases. The danger to the U.S., however, remains extreme. If the transition does not go smoothly, it could precipitate a run on the dollar and trigger economic pandemonium. No one wants to see the world’s economic powerhouse pirouetting through the ether in flames. By the same token, no one wants to be the last man holding onto stockpiles of scrip that are diminishing in value.

The delicacy of the situation explains the sudden appointment of Henry Paulson as Treasury Secretary. Paulson is a brainy insider who has the bone fides to manage a very tricky “retreat” from the dollar. America’s economic future will depend heavily on his ability to steer the ship of state through troubled waters. As we said, there was no doubt that China, Japan and others would eventually reduce their dollar-holdings as America’s debt continued to mount. What is surprising though is that a sell-off did not occur earlier when Bush enshrined his reckless tax cuts and profligate spending as “permanent”. The administration’s fondness for living beyond its means has never been in doubt, now greenback will pay the price for Bush’s excessiveness.

Of course, Bush is not the main scoundrel in this morality play. The Federal Reserve has weakened the dollar enormously by engineering one monetary-coup after another. Greenspan’s “cheap mone”q policy has created massive equity bubbles that appear whenever interest rates are absurdly low. When the stock market crashed in the late 90s, millions of working class people lost their retirement and life savings overnight, while wealthy insiders walked away unscathed. Undaunted by the economic carnage he produced, Greenspan again lowered interest rates to a ridiculous 1% in 2001 which created a $9 trillion housing bubble, “the largest equity bubble of all time” (says The Economist). Now, as interest rates inch higher, the housing industry is lumbering towards the power-lines and certain death. The effects on the world economy will be catastrophic.

It is clear that Bush believes that the dollar can survive “devaluation” if the U.S. is able to control the vast oil resources in the Middle East. Foreign countries will be forced to use the dollar in their oil purchases regardless of the staggering trade deficits. The dollar’s value will continue to be pegged to oil while its future will increasingly depend on the military’s success in Iraq and, potentially, Iran. Needless to say, the results are far from certain. Even if the administration’s plans in the Middle East succeed, there are stormy times ahead for the greenback. The U.S. has reached an unsustainable level of debt in government, business and personal finances. Personal savings are down, mortgage payments are up, and credit card debt is higher than ever. The entire country is mired in swamp of red ink for which there is no easy remedy.

Newly-appointed Treasury Secretary Henry Paulson has been given the daunting task of closing ranks with the Federal Reserve and supervising an “orderly devaluation” of the dollar. There is great concern that a “sudden disorderly adjustment” will precipitate a run on the dollar, traumatizing the markets and sending the economy into a tailspin. Regrettably, there are no easy choices. The dollar is losing air, and fast. The accumulated weight of unfunded tax cuts, extravagant military expenses, personal debt, and global trade imbalances have taken a wrecking-ball to the greenback and left little room for hope. Paulson’s job is to turn the dollar’s downfall into a “controlled demolition” rather than a full-system meltdown.

U.S. MINT GIVING GOLD BUGS A NEW OPTION

Investors craving pure gold now have an American supplier. The U.S. Mint will unveil the nation’s first 24-karat gold coin at an official strike ceremony at its West Point, N.Y., facility. Modeled on the traditional buffalo nickel, the American Buffalo coin has a buffalo on one side and a Native American on the other. It comes in two versions, both stamped with a $50 face value but worth substantially more because they are made of pure gold. A “proof” version with a high-relief, mirror finish aimed at collectors will sell for $800, while the less flashy bullion version of the coin will retail for the price of an ounce of gold plus a 5% to 7.5% markup to cover the cost of making and selling it. The $50 face value is symbolic and set by Congress, just as most commemorative silver coins sold by the mint have a face value of $1 but are sold for $35 or more because of their silver content.

The U.S. Mint has sold 22-karat gold coins known as American Eagles since 1985, but Deputy Director David A. Lebryk said the new offering is aimed at investors who want coins that are pure gold. He estimates that the world market in gold coins is divided between sales of 24-karat coins such as the Canadian Maple Leaf, which account for 60% of the market, and more durable 22-karat coins, a category dominated by the American Eagle. Last year the mint sold 420,000 American Eagle coins, which also have a face value of $50 and contain 1 ounce of gold plus some alloy metal for durability. “There appears to be a market for both,” Lebryk said. The mint will produce only 300,000 proof-quality American Buffalo coins but will mint enough bullion coins to meet demand, he said.

The coin’s debut comes at a time after gold prices hit a 26-year high of $732 an ounce in mid-May but then dropped more than 22% to close at $568.80 on Monday. The fall has already prompted the mint to drop the planned price of the collector’s edition coin from $875, and the bullion coins will rise and fall with the market. That volatility makes some financial advisers leery of recommending the coins as an investment. “I don’t think it makes any sense at all as an investment,” said Greg Evans, a fee-based financial planner. “Commodity prices are already way up, [and] if you put a high percentage of your assets into things that have already gone up a lot, you’re guaranteeing yourself poor returns.” Demand for gold for jewelry and other uses has already started to slump in the face of much higher prices, according to World Gold Council data.

Yahoo Finance columnist Robert Kiyosaki, best known for his “Rich Dad” series of books, has been investing in gold since 1972 and said he thinks it is still a good investment. “I still think gold will go to $1,500 an ounce. I’m betting against the U.S. dollar. Gold is a hedge against U.S. government mismanagement,” said Kiyosaki, adding that his family members have a tradition of saving all their spare change for months on end and then trading all the coins in for a single gold coin. He said he prefers bullion coins like the South African krugerrand because it is readily exchangeable and carries a relatively small premium over its value in pure gold.

Gold has another drawback as an investment. Generally it is taxed as a collectible rather than at the lower long-term capital gains rates associated with investments in mutual funds and stocks. In the end, small investors would do best to use gold as a small part of their portfolio, said David M. Darst, chief investment strategist for Morgan Stanley’s Global Wealth Management Group. He recommends investors put 4% of their money in gold because it tends to move in the opposite direction from stocks and bonds and hold its value in times of crisis when other investments fall apart. “It’s an insurance policy you hope not to collect on.”

INSOLVENCY: INCORPORATED CELL COMPANY DISPELS CONCERNS

In April, Guernsey introduced a new type of segregated cell company (SCC) structure known as an incorporated cell company (ICC). This follows the protected cell company (PCC), which Guernsey pioneered in 1997 and is now emulated in 39 other jurisdictions. An SCC allows different economic interests to be represented in a single corporate vehicle, while protecting the assets of each economic interest from the insolvency of one or more of the other interests, thereby altering the normal pari passu rules of distribution upon liquidation or insolvency.

With an SCC, for example, a hedge fund manager can run different strategies within different cells of the same PCC, thereby reducing overheads in having multiple corporate entities to manage and administer, while potential losses of one “cell” remain isolated from the losses of another. This structure has been particularly useful for such umbrella investment structures and for segregation of risk in insurance companies and captive insurers. In essence, a third party contracting with a PCC is unable to attack assets other than those in the cell with which he contracts.

While many substantial international organisations have welcomed the PCC structure, the use of which is expanding globally at a substantial rate, some lawyers outside the offshore world have expressed doubts about the validity of protections between the cells of a PCC in the event of insolvency. The main source of such concern is the lack of any formal validation of the robustness of the legislation through litigation. Although such concerns are unwarranted, provided that a PCC is correctly organized and administered, the new ICC aims to dispel such concerns.

An ICC has cells like a PCC, but which are separately incorporated, registered, identifiable and are separate legal entities in their own right. Each cell and the cell company itself has the same directors and same registered offices. The ICC has responsibility for maintaining registers of shareholders of each incorporated cell and each cell may have a different memorandum and articles to the other incorporated cells and the cell company. The ICC and each cell submit one combined annual return. The ICC is the only entity within the structure which is required to create separate accounts, which provide a true and fair view of incorporated cell accounts. This would allow an incubator business to be sold off without restructuring at some point in the future. Potential advantages of the structure follow.

First ICC established in Jersey.

Law firm Ogier has acted for Société Générale in establishing the first Incorporated Cell Company (ICC) to be set up in Jersey. Societé Générale selected the ICC as the most efficient structure in a complex asset financing transaction, in order to facilitate ring-fencing the assets and liabilities attributable to the initial portion of the financing. It is anticipated that additional cells will be added for subsequent financings.

PRIVACY

MINE DATA, NOT DETAILS

As new disclosures mount about government surveillance programs, computer science researchers hope to wade into the fray by enabling data mining that also protects individual privacy. Largely by employing the principles of cryptography, the researchers say they can ensure that law enforcement, intelligence agencies and private companies can sift through huge databases without seeing names and identifying details in the records. For example, manifests of airplane passengers could be compared with terrorist watch lists – without airline staff or government agents seeing the actual names on the other side’s list. Only if a match were made would a computer alert each side to uncloak the record and probe further.

The concept of encrypting or hiding identifying details in sensitive databases is not new. Exploration has gone on for years, and researchers say some government agencies already deploy such technologies – though protecting classified information rather than individual privacy is a main goal. Even the data-mining project that perhaps drew more scorn than any other in recent years, the Pentagon’s Total Information Awareness research program, funded at least two efforts to anonymize database scans. Those anonymizing systems were dropped when Congress shuttered TIA, even while the data-mining aspects of the project lived on in intelligence agencies.

Still, anonymizing technologies have been endorsed repeatedly by panels appointed to examine the implications of data mining. And intriguing progress appears to have been made at designing information-retrieval systems with record anonymization, user audit logs – which can confirm that no one looked at records beyond the approved scope of an investigation – and other privacy mechanisms “baked in”. The trick is to do more than simply strip names from records. Latanya Sweeney of Carnegie Mellon University – a leading privacy technologist who once had a project funded under TIA – has shown that 87% of Americans could be identified by records listing solely their birth date, gender and ZIP code.

Even if data-miners were eager to adopt privacy enhancements, researchers worry that the implementing programs’ obscure details might be difficult for the public to trust. Steven Aftergood, who heads the Federation of American Scientists' project on government secrecy, suggested that public confidence could be raised by subjecting government data-mining projects to external privacy reviews. But that seems somewhat unrealistic, he said, given that intelligence agencies have been slow to share surveillance details with Congress even on a classified basis. “That part of the problem may be harder to solve than the technical part,” Aftergood said. “And in turn, that may mean that the problem may not have a solution.”

EC CHANGES DATA RULES FOR AIR PASSENGERS SO THAT DATA CAN BE FORKED OVER TO THE U.S.

The EC has adopted two changes to the way it gives information about plane passengers to U.S. authorities. At the end of May the European court ruled that existing procedures were illegal. The court has no problem with the content of the agreement but with its legal basis – the directive which allowed for the transfer is not meant to be used for security purposes. The court recomended that the commission renegotiate the agreement with the U.S. Nothing will change until 30 September, by when the commission hopes to have sorted out a new agreement. That agreement will then last until November 2007 when a new reciprocal agreement is due.

ALTERNATIVES TO SOCIAL SECURITY NUMBERS NEEDED FOR PROOFS OF IDENTITY

A Social Security Number (SSN) is essential to employment, to pay taxes, to even get a drivers license. But how secure is all the information connected to that number? In the move to a paperless society, those SSNs are put into databases and held on servers around the globe. With other personal information tacked to them, they are attractive targets for a hacker or a laptop thief. With the latest SSN and personal data thefts, the privacy of citizens is at issue, and identity theft cases are becoming high profile. On June 9th the Georgia Merit System announced that a file was hacked which contained the names, SSNs and locations of 12,000 active Georgia state employees. Although officials are unsure if information was downloaded, the point is that the information was accessed.

Like the recent theft of information on U.S. military personnel and families, the Department of Energy announced on June 11th that the names, SSNs, birthdates and phone numbers of 4,000 employees was found in a home in Washington state during an unrelated police investigation. It is unclear how this list came to be in the home, and investigations are still under way. According to Gartner Group, “[I]t [is] clear that Social Security numbers can no longer be relied on as proof of identity.” The fact is that SSNs are used for many everyday purposes, and the security of databases containing them is not reliable. Perhaps it is time to upgrade our technology.

There are several options, one being the Smart Card. This card is designed with a chip which can be loaded with the necessary personal information, and then read by authorized scanners. As with any new technology there is still some controversy. The proximity style smart card requires that the card is only in close range of a scanner, begging the question of who might be reading the signal. But the contact style card, which is inserted into a scanner in much the same way as an ATM, is seen as a more secure form. Such cards could securely hold personal information while also verifying identification. Of course, cards can be lost or stolen, but can be replaced without the loss of data on thousands of individuals. Smart cards could also have multiple applications such as credit, driving, passports, medical and more. Another option is the development of biometrics. California requires both a thumbprint and a SSN to apply for a drivers license.

Americans once carried their SSNs on printed cards in their wallets or purses, and information was kept in paper files. Citizens have allowed their personal information to be digitized and collected in centralized databases. New technologies have created the problem of identity theft, and newer technologies offer possible solutions.

Biometrics more popular with Asian banks.

Biometrics is being used more and more at banks in Asia, according to Financial Insights, part of the IDC group, which is a research company that specializes in analyzing the information technology industry. Financial Insights said that automated biometric authentication devices are becoming more prevalent and effective across the banking system in the region. “It is not really an issue of whether banks are ready for biometrics but an issue of whether biometrics is ready for banks. Numerous banks in Asia have already implemented biometrics for internal security purposes, but problems arise when they try and implement customer-level biometric authentication,” said Abhishek Kuman, market analyst of the Asia-Pacific IT benchmarking advisory service at Financial Insights.

LAW

THE NO-KNOCK STATE

Have no fear, America! Despite the claims of alarmists, the United States is not coming underneath the type of steely totalitarian gauntlet where we need fear a knock at the door. No, your Supreme Court has eliminated that fearful scenario. Instead, there will be no knock. In its June 15th ruling in Hudson v. Michigan, the Supreme Court has basically eviscerated the requirement that there be a knock on the door by authorities before the execution of a search warrant. While the prohibition essentially remains in form, the penalty for the failure to knock has lost its major deterrent force – the exclusionary rule.

Quite simply, what the exclusionary rule did was to exclude from the available evidence at trial any evidence that was obtained from a violation of the standards for execution of a search warrant. One of these search warrant standards is (or more aptly, was) the requirement that police knock and announce themselves. While the court has formerly whittled away at this requirement through the use of certain “exigent circumstances”, Hudson effectively lays the practice of knocking in a shallow grave. While the death of the knock is in itself troubling enough, the Court’s rationale may be even more troubling. The Court, relying on the ever arbitrary and equally dubious “balancing test”, weighed the “deterrence benefits” of the use of the exclusionary rule against its “social costs”. Such social calculus always provides an interesting insight into the mind of the Court.

For the majority, “social costs” consist of such factors as (1) “a constant flood” of legal challenges for alleged failures to observe the knock and announce rule, (2) the risk that “officers would be inclined to wait longer than the law requires” after knocking (and we all know that SWAT team types truly tend to agonize decisions before springing into action), and (3) that the delay after knocking (in the past, three seconds has been viewed by the Court as adequate wait time) provides time for the destruction of evidence and the arming of dangerous suspects. Conversely, the “deterrence benefits” of the exclusionary rule as a check on rampant police aggression are viewed as minimal. But even more surreal is the Court’s contention that such law suits might not even be necessary because of the “increasing professionalism of police forces, including a new emphasis on internal police discipline.” Who could argue with that?

One can almost take a perverse pleasure in watching the “originalist” and “textualist” Justice Antonin Scalia hypocritically perform the arbitrary balancing test that girds so many of the Court’s pro-State rulings. It is not explained (if explainable at all) how the supposed “constant flow” of legal challenges to the knock requirement at criminal trial is somehow more onerous to the court system than the constant flow of civil rights law suits which the Court views as a more proper remedy. Of course the real benefit to the aspiring authoritarian state is that those civil rights law suit would most likely be pursued by people in prison. A deterrent to police abuse indeed!

The heralding of contemporary law enforcement as the new Soviet man is instructive as to how the Court sees itself. There is no thought of “inalienable rights” or the 9th Amendment. The much-feared “natural law” of Clarence Thomas is not to be found. Instead, with the Hudson decision, the Supreme Court has not only laid a firm foundation for a police state, they have reminded us that we the people are the ruled and they are the rulers. They are the wise balancers of scales. They are the sole guardians of justice. They are the ultimate guarantors of our rights. So help us God.

JAPAN BAR ASSOCIATION RAPS MONEY-LAUNDERING BILL

Say it will undermine the foundation of lawyer-client confidentiality.

A draft bill requiring lawyers and real estate agencies to report suspicious money-linked transactions has been criticized by the Japan Federation of Bar Associations because of confidentiality issues. The government shifted supervisory authority for dealing with money-laundering issues away from the Financial Services Agency (FSA) to the National Police Agency (NPA) last year and intends to submit the bill to an ordinary Diet session next year. But faced with strong opposition from lawyers, passage of the bill is not expected to progress smoothly.

The bill has been compiled by the government’s Headquarters for the Promotion of Measures against Transnational Organized Crime and Other Relative Issues and International Terrorism in line with global moves to strengthen measures against money laundering and the flow of money used for terrorist activities. This month, the headquarters released the draft bill, which aims to widen mandatory reporting of suspicious monetary transactions with lawyers and real estate agencies.

A senior NPA official said, “Some lawyers act as a witness in illicit financial and real estate dealings, sometimes with no intention of doing so. We are only seeking information.” JFBA Vice President Hideaki Matsuzaka, however, criticized the draft bill. “It will undermine the foundation of lawyer-client confidentiality,” he said. Other lawyers said their work relies on having a confidential relationship with their clients and if they inform the police about transactions, clients would shy away from consulting with them and could not be told to abide by the law. On May 26, the JFBA decided to campaign against the bill the government has tentatively called a “bill concerning measures to prevent distribution of money earned through crime.” The federation criticized the bill as a scheme that would make them whistle-blowers against their own clients.

The JFBA decided at a board meeting in June last year to cooperate with the enactment of the bill. “We decided we couldn’t oppose a bill designed to fight terrorism [when we made the decision],” Matsuzaka said. But after the government changed the supervisory authorities from the FSA to the NPA in November 2005, the JFBA reversed its stance. A senior official of the Justice Ministry, which has a central role in negotiations with the JFBA, said, “As the police are considered the most powerful of the nation’s security authorities and because the lawyers’ federation has long opposed the power the police have, the federation strongly opposes the bill.”

The bill was triggered by a new recommendation issued in 2003 by the Financial Action Task Force (FATF) of the OECD, which urged member countries to expand the mandatory reporting of suspicious transactions from financial institutions to other professions, including accountants, jewelers, lawyers, notaries public and real estate agents to cope with increasingly sophisticated forms of money laundering. In response to the OECD request, the government decided in December 2004 to present the bill during the current Diet session. But the targets covered by the bill expanded as did the authorities involved.

LANDMARK RULING IN GUERNSEY SECURES $2.65 MILLION FOR FRAUD VICTIMS

A landmark receivership case has been brought to Guernsey’s Royal Court by law firm Ogier. Partner Simon Davies acted with Paul Clements, partner of UK law firm Rooks Rider, to recover the assets of a Bahamian company, Vavasseur Corp., which had swindled $121 million from investors. The funds were fraudulently obtained from investors in the U.S. and Europe through the sale of fictitious securities and were traced to various jurisdictions. This included $2.65 million in a Guernsey bank account.

As receiver of the assets, Roy Terry, of U.S. attorneys DuretteBradshaw, was acting to recover funds owed to those defrauded by the scheme. Mr. Terry instructed Rooks Rider, who appointed Ogier to seek recognition of the U.S. receivership order in Guernsey. Ogier succeeded and the Royal Court ruled that the $2.65 million frozen in the Vavasseur bank account in Guernsey be remitted to DuretteBradshaw. The case set a precedent for all common-law jurisdictions, as this was the first time that a U.S. receivership of a foreign company had been recognized in Guernsey.

“This judgement is a clear demonstration that the Royal Court of Guernsey will not tolerate those who attempt to misuse the financial services industry in Guernsey for illegal or improper purposes,” said Advocate Davies. “It will be welcomed by legal and insolvency practitioners alike and it is hoped that the decision will set a new international standard which is likely to be upheld for years to come.”

Mr. Clements said the case was a highly complex factual situation in an area of great legal uncertainty and complexity. “Despite the political consensus among Western governments since 9-11 – that asset tracing in criminal cases should be made easier–- most legal systems have historically put real obstacles in the way of asset recovery,” he said. “It is in this vital area that this case has achieved such a breakthrough.” Under the current state of Guernsey corporate law, the concept of receivership is restricted to a few very specialist fields, notably protected cell companies.

DON’T LET GOVERNMENT DEFINE MARRIAGE

On June 7, the U.S. Senate voted to kill an amendment to the U.S. Constitution which would have, in part, defined a marriage as a legal union between a man and a woman. But regardless of its fate, the issue is far from dead. There are compelling reasons to oppose any such amendment and to analyze the mistaken assumptions behind it.

First, we must deal with the popular misconception that a state-sanctioned marriage is a “right”. A state-sanctioned marriage is a government-proffered benefit, granting unique government treatment by law, and forcing certain actions by private industry under the law. It grants the sole license of conducting legal marriages to a select few, and excludes others from operating freely to conduct legal marriages. These facts alone stand in sufficient contravention to the concept of individual liberty to warrant opposition to state-licensed marriage. George and Martha Washington never had a marriage license, and most Americans did not need them until the mid-1800s. It is likely they would be appalled by the degree to which we have gotten the government involved in a sacred religious ceremony.

Regardless, homosexuals claim to have a “right” to be married by the state, just like heterosexual couples do, and this claim has been recognized in certain jurisdictions in the U.S. Since, under the “full faith and credit clause” of the U.S. Constitution, any legally binding contract from one state must be recognized as legally binding in all others, supporters of “traditional marriage” fear that marriage licenses granted to homosexuals in other states would have to be recognized in their home states. As a result, they attempt to pass laws or constitutional amendments to protect them against this prospect, which seems rather a waste of time, since supporters of homosexual marriage will challenge state laws or state amendments, expressing their belief in “equal treatment” under the law, as supposedly codified in the Fourteenth Amendment of the U.S. Constitution. Hence the impetus for supporters of “traditional marriage” to amend the U.S. Constitution in order to explicitly state that only heterosexual weddings will be recognized in the U.S.

But many on the pro-amendment side have not considered all the moral implications of getting the state involved in what constitutes a governmentally “acceptable” union for the upbringing of a child. They seem blissfully unaware that once the power to define words is given to the state, it merely depends on who runs the state in order for the definition to be changed, and they seem too ready to tinker with the U.S. Constitution in order to manage something that should have absolutely nothing to do with the state. If conservatives believe that they can, in the words of President Bush, “trust the voters rather than the courts” to decide what is a marriage, then why not let the people truly decide, and remove the power to define marriage from the hands of government entirely? Is it any better when a majority, or supermajority, imposes its will than when a team of judges imposes it? Of course not. Democracy does not excuse tyranny. It merely provides a gentle-looking mask for the tyrants.

Proponents of the “Marriage Amendment” have said that they favor family values. Hypocrisy is not such a value.

OPINION & ANALYSIS

CIVIL SOCIETY’S RULES OF ORDER

When I was in high school, I was exposed to Robert’s Rules of Order. Daunting to master at first, I found that the Rules of Order paid dividends in my ability to participate in and run meetings – Drama Club, Chess Club, Science Club, etc. I joined and formed other clubs as I went through college and into adult life – college fraternity, reading and discussion groups, language learning, political parties, professional societies, homeowners’ association, etc. I continued to reap the benefits time and again.

The acid test of Robert’s Rules of Order is their utility, but they can be useful only where there are societies and clubs. But rights violations and encroachments by governments batter the institutions of civil society. There is a tendency for civil society to shrink when the power and scope of the state is enlarged. The modern rise of homeschooling is a hopeful counterpoint to this theme. And there still exist wonderful community groups of long tenure, such as Sertoma International and Rotary International, not to mention church groups, community associations, sports clubs, and even bunko circles and dinner circles. The libertarian individualist might say, “Well, I am not a joiner.” I once received an email from a prominent anarcho-capitalist theorist saying that he never joined clubs of any sort because he did not want to be pigeon-holed. Scandalous!

It is these institutions that protect us against the state. They are the intermediating institutions that can, with their size and resources, effectively lobby against ill-conceived plans and render unnecessary the tax-and-regulate “solutions” promulgated by “planners” in myriad ways. Mr. or Ms. Libertarian, it is not enough to be anti-state. You must be pro-civil society.

But from my vantage point, Robert’s Rules are on the decline. My wife tells me of the chaos in her Writer’s Guild. I have witnessed the demise of a homeschool coop and support group. I have seen a community association lose its vitality. I have seen the magic of a dads-and-kids program wane. I have even heard of an international society of great promise that seems to have no clear direction. Why? In large part, because of ignorance of Robert’s Rules of Order. Ignorance (or ignoring) the Rules of Order means meetings go nowhere and degrade into chat sessions where nothing is decided, important items are not discussed, people become bored, volunteer opportunities are unclear or absent, attendance drops, the group becomes ineffective, and the vitality of the group is enervated.

It was not Mr. Robert that originated the rules that bear his name. Having fumbled a bit at a church meeting, Robert undertook study of parliamentary procedure to improve his skills. Robert was an engineer. This may have made him particularly well-suited to understand the internal logic of, explicate, and extend the system of parliamentary procedure. What is usually not well appreciated is that most of Robert’s Rules of Order are not merely one way to lead a deliberative assembly – the rules describe the best way. There is a good deal of empirical content to Robert’s Rules, but every rule has a logical justification.

Perhaps my perception of a decline in the familiarity and use of the Rules of Order are an indication of a shrinking civil society. In preparing this article, I talked to many people who are members of no societies or clubs, and have only attended meetings at work, where clear lines of authority, alignment of interests (serving clients’ wishes), and small meeting sizes obviate the use of Robert’s Rules of Order. Are people not involved in civil society any more? Or are my perceptions in error? Please let it be the latter. There is something we all can do. Defend civil society! Learn Robert’s Rules of Order, practice them, and teach them where you have to!

FABULOUS ONLINE LIBRARIES

The Internet is bearing fruit on providing mankind’s growing treasure trove of knowledge every day at very low cost to the consumer. It is on demand, no charge. Digital libraries are springing up all over. Some of them are well-funded by philanthropists such as Larry Ellison (Oracle) and Gordon Moore (Intel). The information provided range from the classics of literature, to free on-line submission of scholarly articles to up-to-the-moment publication of scientific articles and results. Access to information need no longer retard that intellectual growth of the benighted masses, since computers are becoming ubiquitous in the western world and are starting to proliferate in the third world. These resources have tremendous potential to provide the truths that will set men free. An abbreviated list of what is available can be found below while a much larger compendium exists at Yahoo.

LIFE IS GOOD (VOTING IS INSANE)

Questioning state authority is considered a sin by those who worship it. Negative comments about the state and its agents challenge the core beliefs of those who believe that benevolent rulers can be created out of the magical democratic process. The energy required resisting pressures to conform to the consensus opinion imposed by state education and media organs can become burdensome. Constructive criticism of our existing political operating system can make life seem like a drag and burn cynicism into our moods. Admitting that you do not vote can make you a pariah among the faithful. However, the cause of liberty need not be a heavy cross to bear simply because life is good.

Understanding the seemingly subtle difference between gentle (non-violent) persuasion and zealous (violent) persuasion is a significant factor influencing one’s sanity, both inwardly and outwardly. The theatrical shows that elections really do point to the true birthplace of “reality TV”. That so little difference can be seen between supposed archenemies is evidence of collective insanity institutionalized. People keep going back into the voting booth election after election thinking that this time their vote will make a difference, yet it never does. This is a classic case of insanity.

Persuasion and spreading the word of liberty is important in order to expose ignorant and/or brainwashed people to a vital message that has bearing on our mutual survival and individual happiness. People need rules and liberty requires justice. There are bad people and good people should resist them. The questions we need to discuss include how do we agree to agree? Agree to disagree? How do we choose to cooperate on justice? Is common law discovered or dictated? Are individuals or representatives of the majority the primary deciders of the answers to these questions? They all come back to the question of sovereignty. Who owns your body?

There are three basic ways to persuade: personal example, rhetoric and force. Voting sanctions force. This simple fact must be trumpeted. Stop voting and become an example while offering peaceful discussion on the matter for those who choose to listen. Forget the masses and go personal. It is true that there is no silver bullet to take down the beast with one shot, but small actions can lead to expanding awareness and larger triumphs that may not be visible today. Forming a monopoly on the use of force (the ability of specified individuals to legally incarcerate, kill and steal) does not eliminate the “animal spirits” in people. It just harnesses them and focuses them in the directions chosen by the elite. The elite use the state to institutionalize barbarism by dressing it up as the savior of civilization. This is how individuals who control the state are able to get good people to do bad things.

A vicious cycle of institutionalized barbarism springing from and then enslaving civilizations seems entrenched as a recurring condition in human history. But it is unsustainable in the long run. Worshiping the false idol of democracy will lead to its own demise. Civilization must mature beyond this cycle if our species is to survive. Our society needs to grow up and quit being distracted by trivial pursuits when it comes to speaking to the power elite. Boycotting elections would undermine the whole system and allow it to collapse upon itself. The state claims control over our economies, laws, property, homes, families and even lives. But the state is able to control your mind only when you let it make choices for you.

Life is too good to pass up fretting over what everybody else is doing. Focus on the people you have chosen to cooperate with and built trust in – your friends, family and associates. It is difficult to ignore people who steal and rob from you to provide “services” you neither want nor asked for and then threaten you in the name of protecting you. Taking conscious control of your decisions will inspire a spiritual revival. This process of maturing enables the confidence needed to enjoy life for what it is. Understanding follows and giving may then be seen as the true nature of the human spirit. Show that spirit. Be an example and choose to not support the state by participating in rituals used to provide that support. Do not vote and tell others about the alternative of choosing peaceful cooperation and personal sovereignty. Choose the good life and spread the word.

BEYOND FEAR AND GREED

Economics is not physics. It does not obey the laws of physics. In truth, economics is not even a science – not yet, anyway. This is why Adam Smith was the chair of moral philosophy at Glasgow University and not, say, an actuary. Smith’s moral philosophy was the study of choices people made with money. The money was a secondary phenomenon. The basis for choice – the rules that govern what we do and why we do it – were primary. Smith and other economists thought those rules were moral. Today, some economists tell us those rules are natural, but have benign moral consequences.

Human action is not based on cold, hard, rational economic calculation. It is based on fear, greed, hope, jealousy, kindness, pettiness, love, hate, and indifference. That is why any science of economics will always be somewhat philosophical. The discussion of what is moral is really a discussion of what is good. And who can pretend to know what is good without at least examining the issue a bit? And even then, who can presume to know what is good well enough to order other people around? Still, there are general rules in life and in economics. These rules form the basis of an environment that even people who radically disagree can live in. In America, we call those general rules the Constitution and “the free market”. What you and I do behind closed doors might be completely different, but our Fourth Amendment and property rights allow us a wide degree of liberty upon which the government (or nosy neighbors) cannot constitutionally intrude.

With the law, the fewer the rules the better, and general rules work best. Everyone knows what they are, and the laws do not favor any one group over another. That leaves people free to fail and succeed on their own merits. The tendency to tinker with the law to make people “more free” or make things “more equal” is the same tendency economists have when they talk about maintaining equilibrium. They believe that the economy is not a dynamic and open system (like common law, for example), but a static thing that needs to be tinkered with and then frozen in time and kept in the same working order with the same fixed relationships, forever and ever, Amen.

In nature, static is dead. Closed systems do not have access to energy inputs. Without them, nothing new is created. Resources are eventually exhausted. Thankfully, despite the tinkering of the rationalists, the world remains a dynamic place, if not an entirely open system. Luckily, the enemies of an open system and a free market (governments) are not immune from the forces buffeting the world. They face the same threats that every institution faces in a world that demands adaptation. Guns can stave off those threats for a long time. So can taxes. But the more closed a system is, the more likely it is to die. It takes a lot of energy to hold a gun to the head of your population forever. Sooner or later, unless you are Castro (who seems to get his energy from some ungodly place), you will tire and fail and your system will collapse. Sic semper tyrannus.

The pace and scale of global commerce is shaking the postwar system to its foundations. In a world without a gold standard, all values seem relative. Without a solid point of reference – whether it is gold, God, or the Constitution – the world is just a mishmash of things moving and colliding relative to one another. But what if I told you that this seeming chaos really signaled the emergence of a new system? Call it the system of the world. This system will determine how money and commerce works and return us to how value is determined. This system will preserve the elements of some existing institutions. Other institutions like Fannie Mae and its culture of fraud – entire nations, even – will be demolished. And this system that favors smaller, adaptive, innovative, and imitative firms and individuals will have a different kind of energy input. If the previous cycle of global growth favored size and centralization and flawless global logistics and distribution of raw materials and goods by virtue of cheap energy and cheap credit, the next cycle and system will favor independent and self-sufficient actors who have their own sources of energy, capital, and ideas.

HOW PUBLIC EDUCATION CRIPPLES OUR KIDS, AND WHY

I taught for thirty years in some of the worst schools in Manhattan, and in some of the best, and during that time I became an expert in boredom. Boredom was everywhere in my world, and if you asked the kids, as I often did, why they felt so bored, they always gave the same answers. They said the work was stupid, that it made no sense, that they already knew it. They said they wanted to be doing something real, not just sitting around. They said teachers did not seem to know much about their subjects and clearly were not interested in learning more. And the kids were right. Their teachers were every bit as bored as they were.

Boredom is the common condition of schoolteachers, and anyone who has spent time in a teachers’ lounge can vouch for the low energy, the whining, the dispirited attitudes, to be found there. When asked why they feel bored, the teachers tend to blame the kids, as you might expect. Who would not get bored teaching students who are rude and interested only in grades? If even that. Of course, teachers are themselves products of the same 12-year compulsory school programs that so thoroughly bore their students, and as school personnel they are trapped inside structures even more rigid than those imposed upon the children. Who, then, is to blame?

We all are. My grandfather taught me that. One afternoon when I was seven I complained to him of boredom, and he batted me hard on the head. He told me that I was never to use that term in his presence again, that if I was bored it was my fault and no one else’s. The obligation to amuse and instruct myself was entirely my own, and people who did not know that were childish people, to be avoided if possible. Certainly not to be trusted. That episode cured me of boredom forever, and here and there over the years I was able to pass on the lesson to some remarkable student. For the most part, however, I found it futile to challenge the official notion that boredom and childishness were the natural state of affairs in the classroom. Often I had to defy custom, and even bend the law, to help kids break out of this trap.

My own experience had revealed to me what many other teachers must learn along the way, too, yet keep to themselves for fear of reprisal: if we wanted to we could easily and inexpensively jettison the old, stupid structures and help kids take an education rather than merely receive a schooling. We could encourage the best qualities of youthfulness – curiosity, adventure, resilience, the capacity for surprising insight – simply by being more flexible about time, texts, and tests, by introducing kids to truly competent adults, and by giving each student what autonomy he or she needs in order to take a risk every now and then.

But we do not do that. And the more I asked why not, and persisted in thinking about the “problem” of schooling as an engineer might, the more I missed the point. What if there is no “problem” with our schools? What if they are the way they are, so expensively flying in the face of common sense and long experience in how children learn things, not because they are doing something wrong but because they are doing something right? Is it possible that George W. Bush accidentally spoke the truth when he said we would “leave no child behind”? Could it be that our schools are designed to make sure not one of them ever really grows up?