Offshore News Digest for Week of July 10, 2006

GLOBAL LIVING & BUSINESS

THE FORBES 2006 INTERNATIONAL INVESTING GUIDE IS OUT

Do-it-yourself international indexing using ETFs.

What is your benchmark for foreign stocks? If you are like most investors, it is Morgan Stanley’s Europe, Australia and Far East Index. Better known as EAFE, the index covers 21 foreign countries and 1,200 common stocks. You can own the index by buying an EAFE fund such as the Merrill Lynch International Index. But this kind of passive investing may be a little too passive. It leaves you at the mercy of the country weightings built into the index. The version of EAFE commonly used in the investment community weights countries on the size of their stock markets. This forces an EAFE fund to allocate 49% of its assets to Japan and the U.K. The allocation to the far more dynamic economy of Ireland is only 0.8%. Austria gets 0.5%.

What about buying an actively managed fund? You will pay a lot more for it than for an index fund, and you will still run the risk of a lopsided portfolio, one that shares the big-market bias of the index. Most international equity managers will hug the index’s country weightings or deviate from them only slightly. This state of affairs presents the independent-minded investor with an opportunity to beat the averages. Buy index funds within each market, but weight your countries according to their price levels (P/E multiples, that is), degree of governmental fiscal discipline, growth potential, capital flows, currencies and pace of market reforms.

An excellent investment tool for implementing this strategy involves the 22 country-specific exchange-traded funds that go under the iShares banner. These ETFs, sponsored by Barclays Global Investors, have a combined $193 billion of investor money. Before deciding which countries to buy, you can look under the hood of an ETF by going to its Web site. Three of the five-largest holdings in the Singapore iShares are in banking. If you do not like banking, underweight that country.

Annual fees for country iShares range from 0.50% to 0.74% of assets. Compare those figures with the Class A shares of the Templeton Foreign Fund, which carry annual expenses and 12b-1 fees for marketing totaling 1.40% of assets and a 5.75% upfront sales charge. The discount brokerage commission on 100 iShares Australia is $7, or 0.3%. More important, iShares have not distributed any capital gains during the past four years. Exchange-traded funds trade like stocks, so you can buy and sell them throughout the trading day. You can also use risk-management tools like trailing stop-loss orders or options. Sponsors do not hedge ETFs against the dollar, which means currency swings can work for or against you.

Which iShares are attractive? The Austrian iShares are an excellent way to take a stake in low-P/E eastern European markets. Singapore and Hong Kong allow you to bet on China’s economic growth. Australia represents a well-developed and diversified economy at the heart of Asia-Pacific growth and now capitalizing on the commodity booms. Switzerland is a safe haven in times of instability, and Canada provides an energy play. To tap into the high growth rates of emerging markets consider the iShares of countries such as Brazil and Malaysia. For countries that do not yet have an ETF, reasonable proxies are closed-end funds like the Morgan Stanley India Investment Fund.

Cheap growth in foreign markets.

The recent global run-up in commodity prices has added meat to the bottom lines of many cyclical foreign stocks. For example, Australian metals miner BHP Billiton has quadrupled its earnings over the past few years. Now trading at 14 times projected next 12-month profit, BHP might seem like a value buy. Not at all, says Dominic Freud, manager of the Oppenheimer Quest International Value Fund. For Freud, commodity outfits such as BHP are near the top of the profit cycle and thus overvalued. He prefers searching developed economies for companies in sectors, such as wireless communications, that are not usually favorites among value investors.

Freud notes that in early 2000, the European technology sector sold for 60 times earnings, while less glamorous industries such as mining carried price-to-earnings ratios in the ten to 12 range. “Now there’s not a sector in Europe at more than 20 times earnings,” says Freud. “Between 12 and 15, you’ve got about half the market.”

Why Ireland has winners.

Smaller stocks were the stars of the U.S. market over the past three years. During that time the Russell 2000 Index returned an annualized 16.2%, compared with 9.3% for the S&P 500. But small caps did even better abroad. The Morgan Stanley Capital International EAFE Small Cap Index rose 32% in dollar terms while Ireland’s ISEQ Small Cap Index put all three to shame with a 42% annual rise. Ireland’s small- and midcap stocks – companies with market caps below $3 billion – are not the bargains they were before the rally began, and with only 31 stocks in the index the choice is narrow, but analysts say it is still not too late to get in. “If you’re a small-cap company, there’s still plenty of room to grow,” claims John Sheehan, head of company research at NCB Stockbrokers in Dublin. Ireland, which doubled real GDP in the past decade, has one of the most promising outlooks in Europe.

The prospects might be bright, but Irish small-cap stocks have not been immune to the recent turmoil in world markets. The ISEQ Small Cap Index is off 13% from its May high. “Particularly with the recent setback, we still see that valuations [of small- and midcaps] aren’t overly stretched,” says John Mattimoe, an analyst with Merrion Stockbrokers of Dublin. Small- and midcaps are trading around 14 times prospective earnings in 2006.

Stepping south of the border.

Latin America’s largest stock markets have been on a tear since 2003, thanks to falling interest rates, lower inflation and relatively stable currencies in the region. You could kick yourself for missing out on this boom. The Mexican IPC index better than tripled in dollar terms from January 2003 through early May this year. Brazil’s Bovespa index was up 6-fold. And then came the hiccup. The Brazilian and Mexican markets have fallen 29% and 19% in dollar terms since May 9 amid a broad downturn in global markets. Investors, worried about inflation and higher interest rates, have sold off risky assets, and just about any piece of paper from Latin America is risky. This marked the worst rout in emerging markets since the 1998 Asia-Russia panic.

But the fundamental economic picture in Brazil and Mexico is solid, says Gonzalo Pangaro, who runs the $1.5 billion (assets) T. Rowe Price Latin America Fund, which Forbes rates A for bull market performance and B for bear markets. “This is a very significant correction that’s only happened a handful of times in Latin America. It’s a good buying opportunity for long-term investors,” says Pangaro.

Because of their size and well-developed markets, Pangaro finds the best opportunities in Mexico and Brazil. Chile has a smaller economy with good growth, but Pangaro finds stocks there largely overpriced. Argentina, which had a currency crisis in 2002 and defaulted on its sovereign debt, still suffers from excessive government control. Oil-drunk Venezuela is led by the left-wing Hugo Chávez, who has little respect for contracts or foreign capital.

Blue Danube

Nestled between sclerotic Western Europe and oil-rich Russia, countries like Hungary have delivered strong growth with their cheap and well-educated workforces. And eastern European stocks have delivered, too. But the last few weeks have been rocky for these former Soviet satellites, as well as for other emerging markets. From its peak in mid-May the Nomura Central and Eastern European Index has fallen 30%.

But now may be the time to buy. At least that is the view of Markus Brück, manager of the Metzler/Payden European Emerging Markets Fund (assets: $71 million). He weathered the storm by selling some of his holdings and increasing his cash position to 20%. By the end of June, though, he was back buying and now has a mere 1% cash position. “We believe the correction is now over,” he says. “Valuationwise, we are back to attractive levels.”

Brück’s fund has most of its assets in the largest eastern European economies – Poland, the Czech Republic and Hungary, as well as a slew of fast-growing economies like Romania. These nations are rapidly transforming, attempting to create the macroeconomic conditions that would allow them to one day join the eurozone currency club – a boon for consumers already clamoring for Western goods and lifestyles. “This is not an investment story for just one to three years,” Brück says. “This is an investment story for one to two decades.”

One downside to this part of the world: Many companies lack ADRs, making their stocks tougher and costlier for U.S. investors to buy. Other risks lurk as well. Standard & Poor’s recently downgraded Hungary’s sovereign debt, saying its high ratio of public debt to GDP would effectively prohibit the nation’s entry into the eurozone currency until 2014. Poland and the Czech Republic are in better shape.

Minor Asia

“All of Asia will run on the back of China and India to some degree,” says Edmund Harriss, who manages Guinness Atkinson’s Asia Focus Fund. But Southeast Asia’s economies have their own stories, too. Singapore has become a center of banking and financial services. Thailand has a young and growing consumer market. Living standards in Indonesia and Malaysia are improving as financial reforms take hold and high commodity prices boost export earnings. Harriss, who has 15% of his fund’s assets in those four countries, finds Thailand the most interesting now. Its market is cheap – trading at 10 times trailing earnings, versus the S&P at 17 times. Part of that can be attributed to recent political upheaval: In April Prime Minister Thaksin Shinawatra resigned under pressure from vocal opponents. (He has since returned in a caretaker role.) Some portions of the country are still rebuilding from the devastating tsunami that hit the region in 2004. Rebel groups in the south have caused havoc of late.

Harriss believes that Thailand’s political situation provides more opportunity than threat. Thai companies are strong, he says, and are generating cash. “You’re going to be left with a market where stock prices are not only cheap,” he says, but also “the underlying economy isn’t doing too badly.” Thailand is also more of a manufacturing base than any other country in the region, notes Andrew Foster, portfolio manager at Matthews Asian Funds. He points out that a number of U.S. and European automakers now have assembly plants there. In sum, it is more economically well-rounded than its Southeast-Asian neighbors.

For investors with a smaller risk appetite, Singapore provides “a stock market you can have faith in,” says Timothy Dickson, portfolio manager at Scottish Widows Investment Partnership, with $3 billion invested in far east Asia. The city-state once relied on low-end manufacturing, but Singapore is now moving into higher value-added manufacturing. It has also developed its banking sector. Malaysia and Indonesia both depend on commodities for much of their economic growth. Harriss says that since Mahathir Mohamad stepped down as prime minister in 2003 after running Malaysia for two decades, there has been a push for more transparency in government and more freedom of the press. The ringgit last year was unpegged from the dollar. Indonesia, the only OPEC member in the region, has sizable oil and gas reserves. That nation’s GDP growth has picked up in recent years, from 3.8% in 2001 to an expected 6.2% this year.

The Chinese pharmaceutical industry is fragmented and low on innovation. Time to invest?

Only one in ten Chinese citizens has health insurance. Latest figures show annual spending on drugs in China comes to only $10 per capita versus $623 in the U.S. Yet analysts from Boston Consulting Group expect China to have the world’s fifth-largest pharmaceutical market, at $24 billion, by 2010 and the largest by 2050. Combine a population of 1.3 billion with a 9.9% economic growth rate and you have the potential for a robust medical market.

Multinational and Chinese drugmakers stand to profit. Foreign companies such as Johnson & Johnson, Pfizer and GlaxoSmithkline have brought their strong marketing skills and large sales budgets to more than 600 joint ventures in China as that country's 2001 entry into the World Trade Organization has opened domestic markets. These companies still face obstacles. Weak patent protection means that Chinese companies are reluctant to invest in research and development. Most locally produced drugs are generics, and new patented drugs are mainly imported and thus more expensive.

And yet Chinese pharmaceutical companies still offer the prospect of fast growth. Today 6,000 such companies compete in a fragmented market in which the top ten firms hold a 15% share. Among the biggest outfits are Shanghai Pharmaceutical and Harbin Pharmaceutical. The Chinese government has stakes in these companies, and many have publicly traded shares. Most drugs in China are sold through hospitals, which favor locally produced generics. These drugs are often up to four times cheaper than foreign-made alternatives, notes Benjamin Ye, a partner at PricewaterhouseCoopers, who works on M&A deals in China.

The vast, turbulent stretches of central Asia are not without investment potential.

High plateaus, austere mountains, huge deserts. Mile upon mile of grassy, windswept steppes. Sparsely populated, nomadic and arid. You would have to be a rugged traveler, and an even hardier investor, to be attracted to central Asia. John H. Doede, a 35-year investment industry veteran, finds it irresistible. Doede, who chairs the private equity AIG Silk Road Fund, spent an average of a week a month for 4½ years looking for “a neglected opportunity” in the politically and economically dicey part of the world stuck between Russia to the north, China to the east and Iran and Pakistan to the south.

Central Asia has been a geostrategic crossroads of people, capital and ideas since the first Han dynasty caravans traveled the ancient Silk Road. Today natural resources are the draw. Kazakhstan has oil. Tajikistan, Turkmenistan, Azerbaijan and Georgia have oil and gas, as well as agricultural goods. Kyrgyzstan, where the U.S. maintains a military base, has gold, uranium and mercury and hydroelectric energy.

A land mass greater than western Europe is home to only 73 million. The number of publicly traded stocks is equally sparse. Doede advises potential investors in these autocratic and often opaque regimes that tribal and family ties count for a great deal. Assets may be expropriated on a whim in some of the more corrupt countries. AIG Silk Road, for example, was initially hurt when a land development was derailed by such circumstances. Despite the recent selloff in emerging markets, two sectors reflect central Asia’s potential. The first is oil, and the second is telecommunications. In both sectors Doede seeks Western companies or Western-oriented joint ventures.

EXILES ETERNAL

Exiled from our homeland … far from kith and kind … thus we write to our countrymen. A man does not choose what he is. His culture sinks in to him without his knowing, like the scent of the trees and the swamps. He can ignore it. He can disguise it. But he can never get the smell out of his nostrils. Traveling in a strange country, even many decades after leaving home, he catches a faint aroma that seems to waft into some part of the brain that is normally closed off, like a room in an old house where the dearest memories are stored. And then it comes back to him. Not distinct images. Not words. Not even actions. But a feeling that picks him up and transports him thousands of miles to a place he once knew and had forgotten all about. And that is what he really is. He knows it. He is not necessarily happy or sad about it. But he cannot get away from it.

We cosmopolitans are cut off. Exiles from everywhere, and nearly everything. We work in the office on the Fourth of July, and miss the Super Bowl, too. We have no voice in local politics. We get involved in no local action committees. And we only read the local newspapers for entertainment. “What will those dumb frogs do next?” we ask ourselves. Meanwhile, the dumb things yanks do irritate us so much we cannot bear to read the headlines at all. Are we lonely? Not so we have noticed. Do we miss the Rose Bowl? We never watched it anyway. Are we starved for information? On the contrary, at a distance, we see more clearly what goes down in the homeland than people living in the middle of it.

But who protects us? Who looks out for us? Whom can we turn to get our highways and speeding tickets fixed? We exiles are exposed to the harsh elements – always in danger of getting rounded up and shipped off. We are in danger of having our visas revoked, or having our property confiscated. But why would anyone want to get rid of us? We are no trouble. We do not vote. We do not ask for any services or benefits. We do not complain. What would be the point? We spend money and pay taxes. Who could ask for better citizens?

But the more cosmopolitan we become, the more we wonder about home. Out on the Maryland tidewater, the old families spoke their own tongue – derived from a 17th century dialect from Southwest England, we are told – for 300 years. With the language and time came history and eccentricities that made local life rich and interesting. But then came a homogenization that washed out the particularities. In a few decades, the place came to resemble every other suburb of America. Local customs were replaced with national rules and regulations. Toss an empty beer can into the river and it is a federal case.

Ol’ Cap’n Earl used to live out on a pier in the West River. He had built himself a rickety cabin over the water to get away from his wife. He would sit outside, drink his beer and throw the cans into the water. In the summer, after work, when the river smells rose up so strong they were almost overpowering, men would gather out on the pier with him. They would talk. And drink. Sometimes they would pull a crab up out of the water. And the hours would pass. But then some agency showed up. His cabin was condemned by about 12 different government agencies. Cap’n Earl, an old man by that time, was moved onto dry ground and died soon after. And then, the sailboats came, owned by Washington lawyers. They were soon so thick on the river that you could walk from one bank to the other, hoping from boat to boat.

We are happy here on the other side of the globe. And then, when the wind comes off the Atlantic, we sometimes get a whiff of it … a ghostly trace of what we once knew. We pause. We stagger. And then, we remember. There are a lot of exiles in this world. Each one has his own reason. We have ours. Long before we left America, the America we knew left us. We travel not to get away from it, but to find it.

FINANCIAL SERVICES REMAIN MAJOR PILLAR OF BAHAMAS ECONOMY

The financial services industry continues to account for a major share of the Bahamas’ economy after a steady year of performance in 2005, the country’s Central Bank has reported. In its latest Quarterly Review, the Regulatory Authority revealed that according to official estimates, the financial sector’s share of value added in the Bahamas’ GDP is between 15% and 20%. A significant share of this contribution is derived from the marketing of international products and services.

The Central Bank stated that there are a number of reasons why the Bahamas maintains a competitive edge in these activities, including “its ability to support functional operations, backed by a sizeable pool of skilled labour, and a comprehensive regulatory infrastructure which sustains international confidence in the jurisdiction.” Of particular note is that banking sector employment increased, with gains concentrated in the positions held by Bahamians. The banks’ total outlays in the economy amounted to some $419 million during 2005, with salaries representing the major component of expenditures, at 49.5%. The total number of banking licensees fell to 250 from 266 in 2004. Estimated employment among domestic banks and trust companies increased by 48 (1.5%) to 3,300 during 2005, contrasting with nine (0.8%) fewer positions in the offshore sector at 1,105.

Data from the Securities Commission revealed that the number of fund administrators, which supported the bulk of the sector’s employment and expenditure, remained at 59 in 2005. Although the number of active funds under management decreased to 699 from 838, indications are that business activity increased during the year as the value of assets under management rose by 7.2% to $175.2 billion. Fund administrators also reported an increase in the number of IBCs under management.

ORGANIZATION OF EASTERN CARIBBEAN STATES WILL NOT CLASH WITH CARICOM, ASSURES ST. KITTS PM

Dr. Denzil Douglas, the Prime Minister of St. Kitts and Nevis, has assured the Caribbean Community that the intention of the member states of the OECS to form their own economic union will not clash with the aims of bringing about a pan-Caribbean single market. Addressing the 27th Meeting of the Conference of Heads of Government of the Caribbean Community (CARICOM), Dr Douglas stated that the nations of the sub-regional integration movement are already reaping the benefits of closer integration in relation to judicial matters, central banking and financial sector supervision, pharmaceutical procurement, civil aviation, foreign representation, and telecommunications regulation.

Dr. Douglas went on to explain that the OECS members would continue along the path of closer harmony in these areas, but he stressed that this should not run counter to the aims of CARICOM. “It is our aim that the OECS Union would be seamlessly integrated into the Caribbean Single Market and Economy. In other words, it is our intention that the OECS Economic Union Treaty would give due recognition to the provisions of the Revised Treaty of Chaguaramas, and that in creating the Economic Union we would be able to build on the legal framework already established in respect of the Single Market and Economy,” he stated. Last month, Heads of Government of the OECS signed a Declaration of Intent signaling their desire to form an Economic Union.

ELECTION BRINGS CHANGE OF LEADERSHIP IN NEVIS

The island of Nevis, part of the twin island federation of St. Kitts and Nevis, has a new leader following the Nevis Reformation Party’s victory at the polls earlier this week. The NRP won three of the five seats in the island’s assembly, meaning that the party’s leader, Joseph Parry, will replace former Nevisian leader, Vance Amory of the Concerned Citizens Movement (CCM). The CCM had been in power in Nevis for the past 14 years and was the party most closely linked with seceding from neighboring St. Kitts. Nevis came close to seceding in a 1998 referendum, falling just short of the required two-thirds majority. Members of the Nevis Assembly serve five year terms, although elections can be called after four years.

Nevis’s new administration sworn in.

By virtue of having won three of five seats in the Nevis Island Assembly following the July 10th elections, the Nevis Reformation Party became the official party to run the affairs of the Nevis Island Administration for the next five years. During a historical ceremony on July 11, at Grove Park in Charlestown, The Nevis Reformation Party (NRP) led by the Hon Mr. Joseph Parry was sworn into government before thousands of supporters and well wishers.

Addressing the enthusiastic crowd after taking office, Premier Parry expressed his gratitude to the people of Nevis for exercising their democratic right. “This is a democratic process and I’ve argued and reasoned that we all have the right to vote for the person whom we wish to vote for but we also have the right to change our minds if we feel that those persons were not performing and on the 10th of July you have exercised your mind and the Nevis Reformation Party were returned to office,” he said. “I must remind the people of Nevis that the Nevis Reformation Party is a party of inclusion and just like in the past we sold lands cheap all around Nevis, from Rawlins Village right down to Bath, from Pinneys right across to Potworks, from Brick Kiln right across to Eden Browne, once again the NRP will make lands and will make sure that the whole island and all of the people of this island benefit from the efforts of the NRP.”

In saluting the young voters, Premier Parry expressed that his party had made several promises which it intended to keep. “We believe and we continue to believe that those promises were not only sincerely but they were implementable. … Many of the promises are so good because free lunches, free text books, free tuition fees, they were done right here between 1993 and 1995. Its only a matter of going back to what we had done before. We must do it because we want all of our children to be strong, we want all of our children to be able to concentrate in school and we want all of our children to perform to the best of their ability. Nobody must feel left out, nobody must feel disadvantaged.”

U.S. HOUSE LAWMAKERS SET TO DEBATE BAN ON INTERNET GAMBLING

The U.S. House of Representatives is this week set to debate proposals that would restrict access to online gambling sites for American punters – a move which would have major implications for the offshore jurisdictions where many online gaming firms are domiciled. The bill, sponsored by Rep. James Leach, an Iowa Republican, would make it unlawful for credit-card companies to collect payments for transactions with online-gaming sites. Leach’s bill will be blended into existing proposals drafted by Rep. Bob Goodlatte, a fellow Republican and a long-standing opponent of online gambling.

It is thought the proposals have widespread support among conservative and Christian groups, who are worried about how online gambling services could be easily accessed by children. However, the proposals are not likely to make it onto the statute book in this Congress, given that they would have to pass the House, go to the Senate and then be reconciled before mid-term elections this fall. However, an eventual strengthening of the Wire Act is likely to occur as a result.

According to Goodlatte and Leach, the global online gaming industry is worth about $12 billion annually, and the U.S. market accounts for about half of this. A U.S. ban on the industry would therefore have a major effect on the global industry. PartyGaming, which launched on the London Stock Exchange amid much fanfare last year and is one of the major global players, is said to derive about 90% of its revenues from American punters.

Jurisdictions which have established themselves as favorable environments for online gaming firms to base their operations would also feel the effects of a U.S. ban. The tiny Caribbean jurisdiction of Antigua & Barbuda, which is locked in an unequal struggle with the US over the jurisdiction’s gambling industry, is reckoned to account for as much as 25% of total global turnover in the industry. Gibraltar, where PartyGaming is domiciled, and the Isle of Man are also establishing themselves as prominent e-gaming jurisdictions.

UK gambling minister hoping to learn a trick from Gibraltar.

The UK government’s Minister for Sport and Gambling, Richard Caborn, touched down in Gibraltar earlier this week at the inivitation of Chief Minister Peter Caruana. Mr. Caborn was visiting the jurisdiction after expressing an interest in seeing how Gibraltar operates in its role as a leading global jurisdiction for online gambling. The visit also gave the Gibraltar government and industry players the opportunity to continue their lobby of the UK and other governments in relation to on-line gambling access to their markets.

LIECHTENSTEIN MARKS 200TH BIRTHDAY

The small mountain principality maintains extremely close economic, political and diplomatic ties with its Swiss neighbor. “We both have strong identities that are manifested in different democratic cultures and political institutions,” the Swiss president stated. The two countries' histories are inextricably interlinked. Liechtenstein participates in a customs union with Switzerland and has used the Swiss franc as its national currency since 1923. Liechtenstein is often represented by the Swiss diplomatic service abroad. Both countries use the same postal service and Liechtenstein football teams even play in the Swiss football leagues.

Over the years Liechtenstein has fought hard to maintain its sovereignty and independence. To do so, it has been forced to seek out partners, rely heavily on its neighbors and integrate into various supranational organizations. “To defend its sovereignty, a small nation has to find a balance between self-determination and voluntary cooperation,” said Otmar Hasler, Liechtenstein’s prime minister. Liechtenstein set itself apart from Switzerland by voting in 1992 to link up with the EU through the European Economic Area (EEA). National officials insist its future is closely tied to the continent’s integration process. Liechtenstein was admitted to the UN in 1990. Switzerland only joined in 2002.

The country was a poor farming community well into the 20th century. It suffered economically during the world wars despite its neutrality. It then aligned itself with its neutral western neighbor and after the Second World War focused on its financial services industry, rapidly getting rich on its status as an offshore tax haven, with strict rules on banking secrecy. Today, almost a third of its GDP of SFr4.2 billion ($3.4 billion) comes from financial services, including banking.

Low business taxes – the maximum tax rate is 18% – have encouraged around 75,000 so-called “letter box” companies to establish nominal offices in Liechtenstein. But like other tax havens, the principality has come under heavy international financial scrutiny. Its banking sector was shaken in 1999 when it was blacklisted over reluctance to join the fight against money laundering. After introducing radical reforms, Liechtenstein was taken off the list. As in Switzerland, tax evasion is not a crime. The principality does not provide legal assistance to other countries investigating alleged tax evasion and wants to maintain as much of its banking secrecy as possible. The government admits that it has had a big problem with its image, but insists that it is working on it, with the country likely to join Europe’s “Schengen” zone, which allows passport-free travel across borders while also increasing the exchange of information between national authorities.

MEDICAL TOURISM

Why have routine (and not so routine) medical and dental services performed in the U.S. when you can have them done cheaper elsewhere and get a free vacation out of it to boot? “Medical Tourism India” is a developing concept whereby people from world over visit India for their medical and relaxation needs. The most common treatments are heart surgery, knee transplant, cosmetic surgery, and dental care. The reason India is a favorable destination is because of its infrastructure and technology, which is in par with those of the USA, U.K., and Europe. India has some of the best hospitals and treatment centers in the world and the best facilities.

When you can fly to India or Thailand and get world-class care for 20% of the U.S. cost, saving $80,000 on a heart operation, something has to give. That something is U.S. prices for goods and services. How much longer will it be before some HMOs require someone to fly to India or Thailand for treatment? Better yet will be an HMO that offers reduced prices for those willing to do so. Obviously, if you are in an accident and need services immediately, there is no choice. But on major dental work or elective procedures, or even scheduled heart transplants, for those in the know it may be foolish to have those procedures performed in the U.S.

CANADA $BILLIONS FINDING WAY TO BARBADOS

Barbados continues to be an attractive location for significant funds being managed by Canadian offshore companies. Information published by the Canadian statistical office shows these funds are fast approaching the C$35 billion mark. However, these funds do not represent foreign direct investment from Canada into Barbados. The study demonstrates that the funds being managed by the Canadian companies in Barbados have been consistently on the rise since 2002. According to the report, Barbados is the third highest territory for which Canadian firms have been undertaking this business, with only the U.S. and U.K. ahead. Total Canadian direct investment abroad reached C$465.1 billion. Barbados is the only CARICOM country which is ranked among the top states where Canadians have been looking to do business in a major way, despite that a number of other CARICOM countries currently having double taxation treaties with Canada.

TAXES

GUERNSEY PARLIAMENT APPROVES TAX REFORMS

Guernsey’s parliament has passed a set of economic and taxation changes that includes a zero rate of corporate tax and the capping of personal tax at £250,000. The package of measures recently approved includes:

• A zero rate of income tax on company profits, except for specific banking activities which will be taxed at 10%
• Guernsey residents continue to pay tax at 20% on assessable income
• Personal tax capped at GBP250,000 on non-Guernsey income and investment income
• Taxation of Guernsey-resident shareholders on distributed company profits only
• Wealth taxes such as inheritance tax and capital gains tax will not be introduced

“I am delighted that this package has been agreed by the States – it really is very good news for what is an already buoyant finance industry,” Peter Niven, the Chief Executive of GuernseyFinance, announced last week. “Firstly, this decision provides the industry and its clients with certainty going forward and secondly, the set of measures agreed will further enhance the environment for doing business in the island. … The measures reinforce the message that Guernsey is very much open for business and welcomes high net worth individuals.”

SPANISH TAX AUTHORITIES CLAMPING DOWN ON FOREIGN PROPERTY OWNERS

Foreign property investors who have invested in Spanish real estate have been warned that the country’s authorities are taking a tough new stand on the non-payment of local property taxes. They are planning to “name and shame” all property owners who are not up to date with their taxes. Their names will first be published in the government’s daily newspaper, the Boletin Official. Investors’ details will also be placed on local government websites in the regions.

Last week it was estimated that 100,000 properties in Spain are now owned by Irish investors, but it is thought that as many as three quarters of these owners have not been compliant with Spanish tax regulations. Reasons for this include a general lack of awareness of Spanish tax laws by foreign investors, in addition to the language barrier. Local taxes typically range from between €500 to €1,000 per property and are generally paid annually. However, homeowners face penalties of up to 300% of any outstanding taxes. Failure by investors to pay their taxes can result in the Spanish authorities putting a charge on the property, and in certain circumstances, some investors have had their properties seized by the authorities.

Foreign buyers of Spanish properties are urged by professional advisors to seek out the services of an independent lawyer to check whether there are any outstanding taxes owing on the property. Such taxes are levied against the property rather than against the owner, and it has been reported that the tax authorities may take up to three years to issue bills to new owners.

IRS SENDS OUT WARNING AFTER NEW WAVE OF “PHISHING” SCAMS

The IRS has warned taxpayers to be on the lookout for bogus e-mails claiming to be from the tax agency after receiving an increase in complaints. Such “phishing” scams are designed to trick the recipients into disclosing personal and financial information that could be used to steal the recipients’ identity and financial assets. The IRS has seen a recent increase in these scams. Since November, 99 different scams have been identified, with 20 of those coming in June – the most since 40 were identified in March during the height of the filing season.

Many of these schemes originate outside the U.S. To date, investigations by the Treasury Scam Web sites have been located in Argentina, Aruba, Australia, Austria, Canada, Chile, China, England, Germany, Indonesia, Italy, Japan, Korea, Malaysia, Mexico, Poland, Singapore and Slovakia, as well as the U.S. The current scams claim to come from the IRS, tell recipients that they are due a federal tax refund, and direct them to a Web site that appears to be a genuine IRS site. The bogus sites contain forms or interactive Web pages similar to IRS forms or Web pages but which have been modified to request detailed personal and financial information from the e-mail recipients. E-mail addresses ending with “.edu” – involving users in the education community – currently seem to be heavily targeted.

Once the fraudsters have obtained an individual’s personal information, it is used to to steal their identity and financial assets. Typically, identity thieves use someone’s personal data to empty the victim’s financial accounts, run up charges on the victim’s existing credit cards, apply for new loans, credit cards, services or benefits in the victim’s name and even file fraudulent tax returns. IRS Commissioner Mark Everson stated that the agency never sends out unsolicited e-mails asking for personal information.

Flood-damaged IRS headquarters to remain shut for several months.

“The average taxpayer shouldn’t feel this at all,” said John Dalrymple, IRS deputy commissioner for operations support. “There should be no impact.” [What a relief!]

OFFSHORE INVESTORS BEAT EU DIRECTIVE TO AVOID TAX

Tens of thousands of investors with money tied up in offshore financial centers have been successfully exploiting loopholes in the new EU savings directive, allowing them to escape the scrutiny of tax authorities or bypass withholding taxes introduced last year under the new law. Figures released by the Swiss Finance Ministry reveal only €100 million (£69 million) was raised by Switzerland – the world’s largest offshore financial center – in the second half of 2005, the first six months of the new law’s operation. Over the same period, Jersey raised just £9 million and Guernsey just over £3 million, a tiny fraction of the £70 billion of assets held in these offshore financial centers.

Tax accountants said the surprisingly low figures were the latest signs that many offshore savers had channelled their money to centers such as Singapore which are not covered by the EU savings directive or had re-organized their offshore savings so they escaped the scrutiny of tax authorities. Tax experts said there was evidence that as well as moving money to offshore jurisdictions not covered by the directive, many savers had taken less dramatic steps to escape the directive – including moving money into deferred interest accounts where interest is paid only when the account is finally closed. Offshore insurance “wrappers” have also become more popular as these also escape the directive. “The average amount held in these accounts before the EU savings directive was about £50,000 but now it is just shy of £100,000,” said Tim Harvey, director of HR Independent Financial Services. Offshore insurance bonds are exempt from the directive because all the assets in the bonds are technically held by the life company running it rather than by individuals.

Many savers also appear to have set up corporate accounts as companies are exempt from the directive. Andrew Watt, head of tax investigations at Chiltern, a firm of accountants, said there was strong evidence that this was happening widely. “It’s the easiest thing in the world to do. You just leave the money where it is and instead of being held by Joe Bloggs it will be held by Joe Bloggs Ltd.”

NEW SOUTH KOREAN TAX CHIEF SIGNALS HARD LINE STANCE ON FOREIGN FUNDS

The incoming head of South Korea’s National Tax Services stated yesterday that the tax authority will endeavor to tax Lone Star’s multi-billion dollar profit when the U.S. fund disposes of its stake in Korea Exchange Bank. Jun Goon-pyo, who has been named the next tax agency chief, told a parliamentary conformation hearing that he was “confident” that the agency will be able to tax the gains. “We’ve got to go through a series of battles full of logic and evidence to win the case against speculative foreign investments including Lone Star, but I’m confident we will win eventually,” he stated.

If recent reports are correct, Lone Star stands to make a tax free gain from the sale of its majority stake in KEB by using South Korea’s double taxation avoidance treaty with Belgium. The 50.5% stake was acquired by Lone Star’s Belgian subsidiary in 2003 for about $1.2 billion. It is now reportedly worth about $5 billion. However, it will not only be Lone Star in the taxman’s sights, as Jun signalled that there would be no let-up of pressure on foreign investment companies under his regime, and promised “stern measures” to prevent foreign funds from trying to exploit loopholes in the double-taxation avoidance treaties.

Jun was appointed by President Roh Moo-hyun after the unexpected departure of his predecessor Lee Ju-sung. As head of the tax service, Lee oversaw the first ever tax probes into foreign investment funds – a policy that now looks set to continue under his successor. However, domestic firms look in for an easier ride under Jun’s tenure at the tax service, as he pledged that the number of tax probes into local companies will be “greatly reduced”.

IRS WINS KEY COURT BATTLE IN “ABUSIVE” TAX SHELTER WAR

The IRS has won a key victory in its war against abusive tax shelters, after a U.S. appeals court overturned a previous ruling in favor of Coltec Industries, which is a former subsidiary of Goodrich, a major manufacturer of aircraft landing systems. The three judges on the U.S. Court of Appeals for the Federal Circuit panel agreed with the IRS that Coltec had used a transaction known as a contingent liability deal to artificially generate capital losses which the firm then used to offset capital gains from the sale of a business unit in 1996.

Applying the much-debated “economic substance” test, the judges wrote that the law as it stands “does not permit the taxpayer to reap tax benefits from a transaction that lacks economic reality.” The judges went on to write that a lack of economic substance “is sufficient to disqualify the transaction without proof that the taxpayer’s sole motive is tax avoidance.” Their decision overturns a 2004 U.S. Court of Federal Claims judgment, which rejected the IRS’s argument that the transactions had no economic purpose. Judge Susan Branden stated that, in her opinion, Coltec had complied with all the statutory requirements laid down by Congress and awarded the company an $82.8 million refund.

In the event that the government ultimately prevails in the case, Goodrich may be required to make cash tax payments, including interest (net of federal benefit), of approximately $50 million, based on accrued interest through June 30, 2006.

ASSET PROTECTION / LEGAL STRUCTURES

IS THERE A “BEST” JURISDICTION FOR AN OFFSHORE ASSET PROTECTION TRUST?

Trusts have existed for hundreds of years, yet remain one of the best ways to achieve asset protection. From the time the first English knight conveyed property to a trusted friend for the benefit of his wife and children, trusts have preserved assets from family squabbles, spendthrift descendants and legal claims. Nearly 1,000 years later, trusts still provide highly effective asset protection. Virtually any property can be conveyed to a trust, including cash, securities, real estate, shares in private companies, artwork, jewelry, etc. Generally speaking, the beneficiaries’ creditors cannot reach a properly configured trust’s assets. But, a number of jurisdictions have enacted favorable laws that augment their wealth preservation possibilities. In a nutshell, that is why we recommend offshore asset protection trusts, or OAPTs.

Before discussing how to evaluate an offshore jurisdiction for an OAPT, let us review the nuts and bolts of any trust relationship. And a relationship is the operative word. Unlike a corporation, foundation, limited liability company or other structure, a trust does not have a separate legal identity. It is instead a contract between three parties [details here].

You can form a valid trust in any jurisdiction that inherited English law. That gives you nearly 60 jurisdictions to choose from—any of England’s current or former colonies. A few civil law countries, including Panama and Liechtenstein, also have laws authorizing the formation of trusts. Most of these jurisdictions have trust laws similar to those in England. That presents a potential problem, because when two countries’ laws are similar, it is possible one country’s judgments will be honored in the other country. Thus the first and most important requirement in any trust jurisdiction you might be considering is, make sure the trust jurisdiction does not honor foreign judgments against assets transferred to a valid trust formed there. There may be exceptions if the assets are derived from fraud or other criminal activity, but otherwise, the assets should be protected. That is the whole point of an OAPT!

Considering this factor and six others, you may find that dozens of jurisdictions may serve your purposes when considering an offshore trust. The easiest way to sort through the choices is to eliminate those jurisdictions that have attributes you do not like. The bottom line is that there is no “best” jurisdiction for an offshore trust. Depending on your specific objectives, many different ones may be suitable. Assuming your chosen offshore jurisdiction meets your requirements, it is more important to select the proper trustee for your OAPT rather than select a “perfect” trust domicile.

Offshore trusts are not asset protection panaceas. Problems may arise if you retain too much control over your trust or if you settle the trust after a liability arises. In these situations, there is a risk that a judge (especially in the U.S.) may find you in contempt and throw you in jail until you find a way to repatriate the trust’s funds for your creditors’ benefit. In addition, OAPTs generally cannot reduce your tax liabilities, and you should not count on them to “hide” assets. If you are sued, assume your opponent’s lawyer will find your OAPT.

THE U.S. EXPAT BILLION DOLLAR LOOPHOLE MAY BE LIVING ON BORROWED TIME

What do Getty Oil heir Tara Getty, Campbell Soup heir John Dorrance III, former Star-Kist Foods Chairman Joseph Bogdanovich, former Wheelabrator-Frye Chairman Michael Dingman, investment manger J. Mark Mobius, Templeton Group founder Sir John Templeton, Carnival Cruise Lines founder Ted Arison and Robert Miller all have in common? They have all taken advantage of the so-called the “billionaire’s loophole”. Here is how it works. You acquire foreign citizenship … get a second passport and set up residence overseas … then you give up your U.S. citizenship … and as a result, you save billions of dollars in future U.S. income, capital gains, gift taxes and estate tax.

The ultra-rich can save millions or even billions of dollars in future taxes by giving up their U.S. citizenships. E.g., if an Irish citizen, who lives outside of Ireland, dies with a $1 billion dollar estate, there is zero gift tax and estate taxes for all bequests outside of Ireland. But for an American citizen, living outside of the U.S., who dies with a $1 billion dollar estate, his heirs would have to pay a maximum combined U.S. gift and estate tax of more than $450 million. And that is true if the American had not spent one day in the U.S. in the last 40 years. The arithmetic is almost as compelling for individuals with smaller estates. A U.S. citizen with a $20 million estate could save over $8 million in estate and gift taxes by giving up his citizenship.

Until the mid-1990s, the billionaire’s loophole went pretty much unnoticed. But in 1994, Forbes made it famous in a seminal article entitled “The New Refugees”. Congress responded with outrage. The image of unimaginably wealthy former U.S. citizens living tax-free in tropical paradises was (and remains) an irresistible populist target. The result has been a series of increasingly stringent laws that put real teeth into rules penalizing U.S. citizens who give up their U.S. citizenship for “tax motivated” reasons. The most extraordinary law – on the books but never officially invoked – bars former U.S. citizens from ever re-entering the United States, if it is deemed they relinquished their citizenship for tax reasons.

Current anti-expatriation tax provisions are relatively easy to avoid. Persons giving up U.S. citizenship after June 3, 2004 are deemed to do so for tax avoidance purposes if they have assets of more than $2 million or have paid more than $620,000 in federal income taxes in the five years before expatriation. The law also applies to long-term U.S. residents who have lived in the U.S. more than eight years. Tax motivated expatriates must pay income tax on U.S.-source income and income “effectively connected” with a U.S. trade or business for 10 years after giving their U.S. citizenship or their long term residence. U.S. property remains subject to estate tax for this period as well. But by moving property offshore before giving up U.S. citizenship, the tax consequences of a tax-motivated expatriation are not that severe.

Because the anti-expatriation rules are not difficult to circumvent, there have been periodic calls to make them stricter. One proposal introduced in Congress every year since 1995 is for an exit tax on the unrealized worldwide gains of tax-motivated expatriates. On two occasions, most recently May 2006, exit tax legislation passed in the Senate, but faltered in the House of Representatives. Such a tax would affect many more people than just a handful of wealthy Americans who relinquish their U.S. citizenship. It would also affect tens of thousands of wealthy U.S. residents who are not U.S. citizens. An exit tax would accelerate the emigration of these persons if they have not already spent more than eight years in the U.S., and discourage wealthy foreigners from long-term residence.

The U.S. Constitution guarantees rights to end U.S. citizenship, to live and travel abroad freely and to acquire citizenship from other nations. Every one of these rights have been affirmed by the U.S. Supreme Court. An exit tax also harkens back to the notorious departure tax of Nazi Germany, in which wealthy Jews were stripped of their property before being allowed to leave, and of similar laws in the Soviet Union and apartheid-era South Africa. Instead of penalizing the most successful Americans, Congress should fix the problems with U.S. tax law – punitive estate tax rates and pervasive double taxation of savings and investment – that motivate them to take the drastic step of giving up their U.S. citizenship. But don’t hold your breath. The November 2006 mid-term elections are likely to result in a more liberal Congress with even less sympathy toward wealth and prosperity than the one that nearly passed an exit tax in May.

SITE-LOOKUP SERVICE FOILS FRAUD

Few netizens think about the internet’s domain name system – the architecture that invisibly translates a browser’s request for a URL, e.g., wikipedia.org, into the numeric IP address where the site is hosted. But a new startup is hoping to make DNS into a household word and usher in an age where smarter DNS service is offered competitively, like e-mail service or spam filtering today. The OpenDNS system wants to be a more user-friendly name resolution service than those provided by ISPs, with technology to keep fraudulent sites out of its listings, correct some typos and help browsers look up web pages faster.

Setting up an internet connection to use OpenDNS is about as difficult as setting up a POP3 e-mail account, and more advanced users can tinker with their router settings to make the change across a small network. In return, sites like the notoriously sluggish MySpace.com load significantly faster, thanks to the way OpenDNS caches IP addresses. Users who mistakenly type “wordpres.sorg” or “craigslist.or” into their browser’s address field are automatically routed to the correct address, instead of getting an error page.

Those who click on a link in a phishing e-mail that attempts to take them to a fake site and con them into entering their credit card number will not even make it to the website, if OpenDNS knows about it. OpenDNS can identify the sites both from monitoring abnormal DNS behavior and from relationships with services like Spamhaus that track online fraudsters. “In short, it’s a safer and faster DNS service,” says OpenDNS CEO David Ulevitch, who already runs a DNS company called EveryDNS that lets websites list their home address for free.

But the long answer to the question of why he started the service is far more interesting. Ulevitch’s 7-person startup is an attempt to revolutionize a layer of the internet’s architecture in order to clean its underbelly of scammers and spammers. …

THE TAX HAVEN THAT TODAY’S BRITISH SUPER RICH CITY COMMUTERS CALL HOME

A new generation of Britain’s super-rich are moving to the Riviera to avoid the Inland Revenue, largely thanks to tax loopholes which allow them to commute to work from Monaco. Such well-known residents as the recently-knighted retailer Philip Green and the Easyjet founder Stelios Haji-Ioannou have been joined in this tax haven by a new class of astonishingly-wealthy hedge fund managers, property developers and internet entrepreneurs. The Guardian has traced more than 650 directors of British companies who give their current address as Monaco, and the top 10 residents there with UK interests alone control family assets worth more than £13.5 billion. “It’s very commutable. It’s as easy as living in Birmingham and working in London,” says Roger Munns, who sells £3 million-plus apartments to those referred to in the City as “the Monaco boys”.

His sales territory is a corner of the principality reclaimed from the sea at Fontvieille, where new apartments are christened with reassuringly English estate-agents’ nomenclature. The Maseratis and Mercedes convertibles cruise by blocks called “Seaside Plaza”, while the rows of London-based yachts in the small harbour have names which tell their own story of modern English attitudes – “Sledge Hammer” and “New Flash”. Around the corner is the Columbus hotel, UK-owned, where visiting Britons sit in the bar discussing property prices, personal tax accountants and the relative merits of Monaco schools for their children versus those in the rival tax haven of Guernsey. Most of the snatches of mobile phone conversations overheard on the streets of Fontvieille are in English. One of Seaside Plaza’s key attractions is that it is next to the heliport, where helicopters shuttle British businessmen along the coast to Nice airport in a mere seven minutes.

The crucial tax loophole, dating from the steamship age, allows non-residents 90 days a year in Britain, plus the day of travel out and the day of travel back. This means businessmen can fly in on Monday morning, work four days, fly out on Thursday night, and do this for most weeks in the year without breaking the rules. The tax authorities have also allowed non-residents, since 1993, to keep a UK house without losing their status. Coupled with the laptop and a mobile phone, this makes it easy to run a British business from Monaco.

Traditionally, elderly Britons used to sell up their firms and retire to Monte Carlo with the proceeds, which were free of capital gains tax in return for a minimum of five years residence spent playing golf and lazing in the sun. Many still do this. But now they are being joined by the 30- and 40-somethings who treat the crowded principality more as a British suburb. There is zero income tax to pay on their dividends, and the Sûreté Publique will hand out a residence permit in return for evidence of a hefty deposit in a Monaco bank, and a willingness to pay sky-high prices for property.

PRIVACY

UK ID CARD SCHEME NEAR COLLAPSE, AS BLAIR PUSHES CUT-DOWN “VARIANT”

The UK ID card scheme is doomed to fail, and an attempt to put a face-saving downscaled version into place threatens to wreck the project sooner, rather than later, according to civil service correspondence. An email exchange between David Foord of the Office of Government Commerce and Peter Smith, acting commercial director of the Identity and Passport Service, leaked to the Sunday Times, paints a picture of an impossible mission, a “Mr. Blair” driving a cut-down “early variant” card and a Passport Service already making contingency plans in anticipation of ID cards crashing in flames.

Foord produces the most detailed damnation of the state of the scheme, revealing that currently it has no approved business case, and describing the construction and approval of one by March 2007 as “a reasonable target but by no means guaranteed.” It appears that the two civil servants (writing in early June) were trying to thrash out achievable objectives that could put the ID procurement programme back on track. We can presume from the correspondence that Blair and the Home Office were at this time aware that the scheme as planned was in deep trouble and would need to be pushed back by several years, but that Blair’s insistence on having the first ID cards in place by 2008 had resulted in the early variant, together with the construction of a nebulous TNIR (Temporary National Identity Register, apparently) to do service prior to the actual NIR being ready to roll.

The strong possibility of an early death for the ID scheme still leaves troubling aspects to IPS’s “business as usual” plans. The organization formerly known as the Passport Service has over the past few years been roadmapping the ID scheme into its long-range business plans. The removal of ID cards from the equation would therefore still leave the other ID scheme under construction, and it could not be readily disentangled from Passport Service planning without a conscious, politically-driven change of strategy. So it is not over by a long chalk.

FBI PLANS NEW NET-TAPPING PUSH

The FBI has drafted sweeping legislation that would require Internet service providers to create wiretapping hubs for police surveillance and force makers of networking gear to build in backdoors for eavesdropping. FBI Agent Barry Smith distributed the proposal at a private meeting last week with industry representatives and indicated it would be introduced by Sen. Mike DeWine, R-Ohio, according to two sources familiar with the meeting. The draft bill would place the FBI’s Net-surveillance push on solid legal footing. At the moment, it is ensnared in a legal challenge from universities and some technology companies that claim the Federal Communications Commission’s broadband surveillance directives exceed what Congress has authorized.

The FBI claims that expanding the 1994 Communications Assistance for Law Enforcement Act is necessary to thwart criminals and terrorists who have turned to technologies like Voice-ove–Internet-Protocol, or VoIP. “The complexity and variety of communications technologies have dramatically increased in recent years, and the lawful intercept capabilities of the federal, state and local law enforcement community have been under continual stress, and in many cases have decreased or become impossible,” according to a summary accompanying the draft bill.

Complicating the political outlook for the legislation is an ongoing debate over allegedly illegal surveillance by the National Security Administration – punctuated by several lawsuits challenging it on constitutional grounds and an unrelated proposal to force Internet service providers to record what Americans are doing online. One source, who asked not to be identified because of the sensitive nature of the meeting, said the FBI viewed its CALEA expansion as a top congressional priority for 2007.

HACKERS TARGET STATE DEPARTMENT COMPUTERS

Widespread break-ins appear aimed at headquarters, East Asian office.

The State Department is recovering from large-scale computer break-ins worldwide over the past several weeks that appeared to target its headquarters and offices dealing with China and North Korea. Investigators believe hackers stole sensitive U.S. information and passwords and implanted backdoors in unclassified government computers to allow them to return at will, said U.S. officials familiar with the hacking – who spoke on condition of anonymity because of the sensitivity of the widespread intrusions and the resulting investigation.

The break-ins and the State Department’s emergency response severely limited Internet access at many locations, including some headquarters offices in Washington, these officials said. Internet connections have been restored across nearly all the department since the break-ins were recognized in mid-June. Tracing the origin of such break-ins is difficult. But employees told AP the hackers appeared to hit computers especially hard at headquarters and inside the Bureau of East Asian and Pacific Affairs, which coordinates diplomacy in countries including China, the Koreas and Japan.

IRISH FINANCE MINISTER CRITICIZES SECRECY OF CIA ACCESS IN EU

Finance Minister Brian Cowen said he would have liked to have been told in advance that the CIA was monitoring financial transactions between Europe and the U.S. The minister said that instead he learned from the media that SWIFT, the company owned by Europe’s banks, was secretly handing over data to the U.S. intelligence agency. Mr. Cowen’s comments came after German industrialists said they feared CIA activities were more to do with industrial espionage than the war on terror. The New York Times made public the existence of the arrangement between the CIA and SWIFT last month, even though it has been on-going for over three years.

Last year, over 16.6 million Irish transactions were conducted using the Belgian-based SWIFT centre. All the agencies have passed the buck in relation to who has power to investigate, except for the Belgian Government, which is holding an enquiry. But Ireland’s Data Protection Commissioner, Billy Hawkes, said the CIA interception of money transfer information from Ireland to the U.S. is not a breach of privacy. “You give the bank consent to transfer the necessary information to the U.S. and you take the risk that the local security authorities may require the local entity to give them access to it,” he said.

“COPS” IN THIS TOWN DON’T WEAR BADGES

SANBORN, Minnesota – The mooning was an act of outrageous protest. Recorded in all its glory last fall, it was transmitted onto the television screen in Judy Trebesch’s office at City Hall. And while nearly everyone in this town of 417 people knows about the incident – and a few think they know the person attached to that bottom – the offense is accepted now as the price one must occasionally pay for the comfort of security. Nine cameras eyeball Main Street and the only roads into Sanborn, a southwestern Minnesota town plopped among some of the most fertile soybean fields in America. There is a bank but no stoplight, no school, no grocer and, since the digital cops started keeping their 24/7 vigil last fall, not as much anxiety about crime.

“Things have calmed down pretty good,” said Tom Platz, who runs Tom & Jerry’s Corner Bar. From the cool darkness of his saloon, Platz, which is pronounced “plates”, has a 3-decade-long perspective of what goes on along Main Street – including a break-in that netted boxes of cigarettes and booze. Right now, Platz likes what he sees – and does not see. “I’m probably the only one up at 1 or 2 in the morning, and I don’t see kids up squealing their tires and raising hell like they used to,” Platz said.

In recent years, big cities – Chicago, Los Angeles, Boston, Minneapolis and others – have embraced security cameras as a deputy or a snitch, of sorts, helping law enforcement monitor public activity in downtowns and on streets. With nine cameras, or one for every 46 residents, Sanborn is establishing a new threshold in the fight against crime. And in such a small city, some might wonder just how many moments a secret can last before it is spilled at Tom & Jerry’s or passed around at the pinochle game at City Hall.

But consider the point of view of the people of Sanborn. The Redwood County sheriff, in Redwood Falls, is 23 miles away. People here say they cannot afford their own police force – it would cost well into six figures annually. And they are convinced through recent experience that rent-a-constable from a town down the road just does not stop drug deals, break-ins or otherwise keep the peace. “By the time he gets his socks on, the crook’s gone,” said Martin Ziegler, a local sausagemaker. It was Ziegler who pushed to get the cameras installed after a stranger chased his daughter, then 10, in broad daylight. Among those who believe in security cameras, Ziegler would undoubtedly be described as an evangelist. So is his wife, Joyce.

It is not that this town or county is a high-crime zone. While its 2004 totals would comprise a pretty tame weekend in some cities, crime is one of those things that does not have a uniform definition. One town’s misdemeanor is another town’s outrage. Security also has proved to be a state of mind, as reflected by public opinion polls in the 1990s that showed angst about crime, even as violent-crime rates plummeted.

Ziegler said some men worried that their wives would soon learn how much time they were spending at Tom & Jerry’s or the American Legion hall across the street. “If your wife doesn’t want you sitting at the bar so much, then maybe you shouldn’t do it,” is what Ziegler said he told them. That remark did not go down well with some, which apparently led to the protest pants-dropping episode. Over time, though, Ziegler, Platz and others say people have grown accustomed to the stationary cameras, partly because they are aimed at the streets and do not record anyone going into Tom & Jerry’s or the legion hall.

Sheriff Rick Morris, in Redwood Falls, said he stopped hearing complaints about crime in Sanborn shortly after the cameras were installed. “It was like ‘kaboom’. The complaints quit,” Morris said. But are the cameras making any difference? It is debatable in terms of measurable crime. Shortly after the cameras went up, someone broke into the lumber company and stole the safe. The opened safe was recovered in Iowa but authorities never nabbed the thieves, despite catching a look at the pickup truck on the camera.

For many, the perception of security cameras is Orwellian, dominated by some faceless Big Brother watching your every move. That is not the reality in Sanborn, where the video is streamed to a 15-inch TV set on a kitchen countertop in Judy Trebesch’s small office. She hates it. In fact, the set is usually turned off. “I can’t watch it,” she said

LAW

BUSH, RUMSFELD AND THE SUPREMES

Many are hailing last week’s Supreme Court 5-3 ruling in the case Hamdan v. Rumsfeld. Detainees now have a right to at least the minimum protections guaranteed in the Uniform Code of Military Justice (UCMJ). It was a 5-3 ruling. It would have been 5-4, but Chief Justice John Roberts was recused for having ruled for the government in an earlier hearing along these same lines. The Supreme Court ruled that the military commissions or tribunals were unauthorized by federal and international law. It upheld the idea that Geneva Conventions apply to all detainees. This ruling succeeds in making the U.S. appear to be more like a Republic, instead of a military empire led by tinpot trollops of the Bush, Cheney and Rumsfeld variety.

The court appointed military defender of Bin Laden driver Salim Ahmed Hamdan is Navy JAG officer, Lt. Cmdr. Charles Swift. William Arkin calls him “The Hero of Guantanamo”. Commander Swift’s arguments on the law, and justice too, convinced a narrow majority of Justices to admit that maybe, just maybe, it is not prudent to return to the days of Lincoln. Unlike 150 years ago in America, there is no war today. Yet, the historic actions of another obsessive over-reaching executive may foretell the future as we watch this timid Supreme Court dare to rule, with hesitancy, caution and caveats. George W. Bush, with Cheney and Rumsfeld holding his train continues to strut. He incessantly refers to himself as Commander in Chief of the American people.

He is not, of course. We hear morning, noon, and night about the “war” in Iraq, in Afghanistan, on terrorism, even still the “war” on drugs. But the only real war the government of the U.S. is fighting today is a war on our republic, a war on the Constitution. Perhaps this false idea that America is “at war” is why so many are elated that the Supreme Court has ruled for the Constitution, for law and justice. In fact, there should have been little judicial debate on the outcome of the case. It should have been, as George Tenet famously lied to the President, a “slam dunk”.

In our constitutional republic, dilapidated as it may be, protections of the individual from the state are paramount – and fundamental. Untrained monkeys in dresses could have determined the correct outcome of Hamdan v. Rumsfeld. In fact, the case should have never reached the Supreme Court. Lower ranking monkeys in dresses (this would include Chief Justice Roberts at the time) ought to also have been able to figure out constitutional from dictatorial. Yet – we the people in America, and indeed the world – breathe easier that this ruling of five to three on a court of nine robed judges. We hope against hope that this means classical liberal ideals have been sustained, and ultimately sustainable, in America.

But the importance of the Supreme Court ruling may have been overstated in the American press. This small battle is already fomenting both executive and congressional actions to ensure a further strangulation of freedom and liberty in this country. In a sense, it does not lead us away from militaristic nationalism or imperial conceit. Because the UCMJ is quoted as a minimum standard of detainee rights, Bush will seek to alter it. The ruling notes that if the Congress is unhappy with the ruling on Hamdan v. Rumsfeld, it may legislate accordingly.

VERMONT JUDGE REJECTS U.S. SUPREME COURT SEARCH RULING

A Vermont District Court judge has rejected a recent U.S. Supreme Court ruling on the power of police to search a private home, concluding that the state offers greater protections in such cases. Judge Robert Bent said that under the state Constitution police must knock and announce themselves before conducting a search, even if they have a warrant, or face the prospect that any evidence they find could be thrown out. The Supreme Court said June 15 that evidence obtained without first knocking could be used at trial, but Bent said that would not apply in Vermont. “Evidence obtained in violation of the Vermont Constitution, or as the result of a violation, cannot be admitted at trial as a matter of state law,” Bent wrote, citing an earlier state case as precedent. “Introduction of such evidence at trial eviscerates our most sacred rights, impinges on individual privacy, perverts our judicial process, distorts any notion of fairness and encourages official misconduct.”

A defense lawyer in the Vermont case said Bent’s ruling was an important statement. “Sanity prevails in Vermont,” said attorney David Williams. Bent agreed with the dissenting opinion in the federal case, which said allowing otherwise illegally obtained evidence to be used could lead law enforcement officers to ignore the law. “The exclusionary remedy should remain in full force and effect,” Bent wrote, “at least in our small corner of the nation.”

Unless the attorney general’s office appeals Bent’s ruling to the Vermont Supreme Court, it applies only to the drug case he was hearing and would not be binding on other judges, legal experts said. But other judges are likely to take it into consideration if they have similar issues, said Cheryl Hannah, a Vermont Law School professor. It was unclear whether the state would appeal to the high court. The prosecutor on the case was on vacation and unavailable for comment.

CRAZY-LONG COMPUTER HACKER SENTENCE UPHELD

A federal appeals court upheld a 9-year prison term for a hacker who tried and failed to steal customer credit-card numbers from the Lowe’s chain of home improvement stores. Brian Salcedo, now 23, has been in custody since 2003, when an FBI stakeout caught him and a partner breaking into several Lowe’s networks over an unsecured Wi-Fi connection at a suburban Detroit store. Under the ruling, Salcedo will not be eligible for release until May 2011. Assistant U.S. attorney Matthew Martens, who prosecuted the case, said the sentence is long, but appropriate. “I hope it achieves, not only justice in this case, but deterrence to other people thinking about doing something similar.”

Salcedo’s partner in the abortive caper, 22-year-old Adam Botbyl, has less than two months left on a sentence of 26 months for his role in the plot. After serving most of that time in custody, Botbyl is now in a halfway house in Detroit. According to court records, Botbyl stumbled across the unsecured wireless network at the Southfield, Michigan, Lowe’s in the spring of 2003, while he and a roommate were wardriving the area in search of Wi-Fi hot spots. He returned six months later with Salcedo, who was on the last month of a three-year probation term from a juvenile computer crime conviction. Together, the pair discovered they could jump from the Southfield Lowe’s to the company’s central data center in North Carolina, and from there to the local networks at stores around the country. Lowe’s detected the intrusions and called in the FBI, who staked out the store parking lot.

Though there is no evidence either man saw a single stolen credit-card number, and despite cooperating to help Lowe’s boost its security after his arrest, Salcedo was sentenced to what the government described at the time as the longest U.S. prison term for a hacker in history. The sentence was largely based on the amount of harm that would have resulted had the plan succeeded. On appeal Salcedo’s lawyer argued that the hacker’s sentence should have been commensurate with the actual damage he caused, but a three-judge panel of the U.S. 4th Circuit Court of Appeals disagreed. “We find that the district court did not err in using Salcedo’s admitted intentions to harm 250 or more victims and to traffic the stolen information to enhance his sentence,” the decision reads.

The prison term far outstrips the sentences handed down for more successful online thieves. For example, last month 24-year-old Andrew Mantovani, one of the leaders of the Shadowcrew fraud ring, was sentenced to 32 months in prison after admitting to using phishing and spamming techniques to steal credit-card numbers, which he used to make online purchases.

FINCEN DROPS HAMMER ON LATVIA’S VEF BANKA

The Financial Crimes Enforcement Network (FinCEN) withdrew its finding of April 26, 2005 which determined that Latvia’s Multibanka was a financial institution of primary money laundering concern and also withdrew the notice of proposed rulemaking against Multibanka. In a separate action, FinCEN issued a final rule which imposed a special measure against VEF Banka as an institution of primary money laundering concern. U.S. financial institutions are prohibited from opening or maintaining correspondent accounts for or on behalf of VEF Banka.

Multibanka is headquartered in Riga and is the oldest commercial bank in Latvia. VEF is also headquartered in Riga and is one of the smallest of Latvia’s 23 banks. It has one branch in Riga and one representative office in the Czech Republic. VEF maintains correspondent accounts in countries worldwide but currently reports none in the U.S. U.S. financial institutions, however, should be aware that VEF may still attempt to gain indirect access to the U.S. financial system through nested correspondent accounts.

FinCEN had found VEF to be of primary money laundering concern, pursuant to the USA PATRIOT Act, and issued a notice of proposed rulemaking. FinCEN determined that VEF was a banking resource for illicit shell companies in financial fraud rings. VEF permitted ATM withdrawals in significant amounts, which is an essential component of the execution of large financial fraud schemes. Since then, VEF has revised its policies and procedures, closed approximately 600 questionable accounts, and changed its management. “Despite the steps VEF already has taken, we have continued concern with reported links between the bank’s ownership and organized crime groups that are suspected of facilitating money laundering,” said Robert W. Werner, Director of FinCEN.

OPINION & ANALYSIS

DANGER TO THE REPUBLIC

Commander-in-Chief: an officer who has supreme command of military forces; in the U.S. the president; used as an honorific title to denote the President of the United States, as commander of the nation’s armed forces. Generalissimo: a supreme commander of the combined armed forces in some countries, who often also has political power.

The major crisis facing American democracy and its long-standing Republican form of government, especially the carefully crafted tri-partite separation of powers into executive, judicial and legislative, is at root the result of the deliberate conflation by President Bush and Vice President Cheney of the title commander in chief with the concept of generalissimo – a role exemplified by such benighted leaders as Mussolini, Franco, Chiang Kai-shek, and a host of Latin American dictators. The authors of America’s Constitution added the title and role of commander in chief to that of president, specifically out of concern about a possible military coup. Their idea was to ensure that as commander in chief, a president answerable to Congress and the people would outrank any general in the American governmental system.

Bush has taken that bare bones role, which has no relationship to his political duties as chief executive, and conjured up out of thin air the theory that “in time of war” his position as commander in chief allows him to assume the powers of both the legislature and the judiciary, and to override such inconvenient hindrances to executive authority as the Bill of Rights and common law protections such as habeas corpus dating back as much as 800 years. He has, in effect, converted the very limited concept of commander in chief, which was really never anything more than a rank placing him above 5-star general, to that of generalissimo, which is just another term for dictator. A generalissimo answers only to himself, and makes and enforces the laws as he sees fit. This is exactly the power that President Bush is claiming as commander in chief.

Ideally, Congress would be challenging this assault on its own authority by a megalomaniacal president. Ideally the federal courts would be slapping down this affront to the Constitution. But Congress is in the hands of the president’s party, and Republicans in Congress are content to sit on their hands as the Constitution they swore to uphold and defend is trashed. The Democratic “opposition” party, meanwhile, has been so afraid of being accused of “treason”, or of being “soft on terrorism” that they have done little or nothing to block the president’s power grabs. Many Democrats in Congress have even endorsed the nomination of judges like John Roberts and Sam Alito who back the president’s dictatorial ambitions. And the Supreme Court, as well as the lower courts, are being packed with apologists for unfettered presidential power.

Italy suffered mightily as a strutting small-minded man with a grotesquely inflated ego launched that country into pointless wars of aggression in the Middle East, and usurped all governmental power, calling himself generalissimo. America today is perilously close to a reprise of that tragedy.

A LETTER TO THE NEIGHBORHOOD FLAG FREAKS

Upon arising this morning I discovered a small Yankee War Flag had been planted in my front yard. A tag on the flag stick listed your email address so I must assume you are responsible for this trespass. If this particular flag was merely a common symbol of American individuals and communities I would have no objection to it. However, this flag also represents the U.S. Federal Government and its long, sordid history of murder and plunder – at home and abroad. This flag represents those who have unbending allegiance to the American state and defend its existence and actions no matter how absurd, no matter how criminal, no matter how obscene, no matter how unjust. This symbol is held dear by full time apologists who confuse defending their government with defending their home. This symbol is displayed by those who ignore their conscience to satisfy their bloody, nationalistic appetites.

This flag has flown over every federal building where conniving politicians and meddlesome bureaucrats tirelessly work, thinking of new ways to restrict my individual freedom. This flag has flown with every unit of the U.S. military as it blindly follows any order to kill, destroy and torture anyone, anywhere, its meddlesome master deems not worthy of the right to life. This flag has even flown sacrilegiously in corrupt, American pseudo-Christian churches that cannot seem to decide which master, God or the state, they will obey.

I understand that you placed this flag on my property to celebrate the Fourth of July federal holiday – you know, one of those monthly days when government employees take the day off from work, yet still force the taxpayer to pay them. This holiday supposedly marks that day in 1776 when the Declaration of Independence was signed. If Thomas Jefferson was alive today how do you think he would view the recent status of his cherished republic? I feel confident he would have immediately destroyed your little flag in a fit of righteous rage upon examination of the “long train of abuses and usurpations” suffered by the American servile class. He would be greatly disturbed that lives and fortunes were lost to overthrow the governance of a tyrannical king, only to have the inheritors and beneficiaries of that act willingly live subservient to the edicts of a despotic state.

During Jefferson’s time and the early years of the new American Republic the stars and stripes was an inspiring symbol to those who cherished liberty and a life’s pursuit free from the choking shackles of the state’s enslavement. From its birth through the next 230 years, the American state/empire has grown into a brutal beast while continuing to fly that same bold, radiant, colorful flag that represents its hopeful beginning. That flag symbol may still fly true and colorful to the eye, but the ideals it originally represented have been tarnished and cast aside. How can I possibly declare that state corrupt and illegitimate yet respect and admire its symbol?

The act of planting that flag on my property without permission is a great symbolic act of how the American Empire imposes its will on other parts of the world without benefit of peaceful discussion and persuasion. The day after the flags were placed, I noticed several on the block that had been removed. Apparently, you placed these flags too close to driveways as I noticed a couple of them had obviously been run over by automobiles. I was a bit more considerate, if not “code conscious”, with your flag gift. I merely rolled it up and tossed it in the trash bin which is certainly more respect than this symbol of tyranny deserves. That little flag is now on its way to permanent burial in the local landfill.

THE NEW YORK TIMES TO THE RESCUE?

A few of days ago I was listening to an early morning radio program hosted by Lee Rodgers, when I heard somebody saying something that made my blood boil. Lee was interviewing Peter Mulhern, a Washington D.C. lawyer who also writes for The American Thinker. When Lee asked Mulhern what he would do to a traitor like New York Times’s editor Bill Keller, Mulhern’s answer was quick: I would send a swat team to the NYT, grab him, bring him to an undisclosed location, try him, and shoot him! Apparently, Mr. Mulhern is not an isolated case, but his words reflect a growing consensus among the American people about the proper treatment of people in the press who do not follow the official government lines.

Before going on, I would like to explain a few things about me. More than ten years ago I reached the conclusion that it is much better to be misinformed than disinformed, and I stopped watching TV and reading the mainstream media. Currently I get most of my information from books, old newspapers and magazines (when they are three or four months old, they lose almost 95% of their disinformation power), the Internet, and radio. I distribute my radio listening time almost evenly between a right wing local radio station (which in my mind I call Radio Berlin), and the local Public Radio station (which I call Radio Moscow), and listen to both in a very critical way. That explains why it was just two days ago I heard for first time about the brouhaha around the NYT’s revelation of one of the many secret spying programs that, in order to protect us, our government is running behind our backs.

Now, some time ago I became addicted to the literature of intelligence and espionage, and I learned that one of the main principles of the profession is that things are seldom what they seem. Therefore, in the most pure James Jesus Angleton tradition, let us apply a little convoluted thinking to the NYT’s latest stunt. It is good to remember that the “prestigious” New York Times has always been the flagship of the oligarchy’s controlled mainstream media – working hard in dubious, convoluted ways to advance the interests of the globalists whose ultimate goal is to destroy this country as a first step to implement in the North American continent, and eventually in the whole world, the neo-fascist nightmare they call the New World Order.

The NYT has always been on the front line of muddying the informational waters, so people cannot see the enormous treason the ruling class of this country is perpetrating on its citizens. It is known that the NYT is probably the U.S. mainstream newspaper with the largest concentration of globalist secret operatives of the dreaded Council on Foreign Relations (in July 2002, the NYT Company Foundation and the CFR joined to create a “fellowship for journalists who want to explore in-depth issues related to homeland security”) and CIA agents (but I am being redundant). So, how can we explain that the NYT has committed such an egregious act of treason against its masters? Has the NYT turned against them, biting the hand that feeds it? Or was this act the result of the reckless actions of a splinter, patriotic-minded faction inside the newspaper?

Probably the correct one is none of the above. There is, however, an explanation more consistent with the previous behavior of the NYT’s on behalf of its masters. The revelations may be part of a psychological warfare operation, the goal of which is to generate a state of opinion among the American people so they will not oppose coming government laws to repress dissidence by the systematic application of censorship. Strange as this may sound, this is actually not the first time the conspirators have used the NYT for a psy-op. …

So, be very careful with the “patriots” at the New York Times. If, because of the growing sentiment among the American people, eventually some anti-freedom of speech laws are passed, you can bet that they will never be applied against Rush Limbaugh, Sean Hannity, Bill O’Reilly, Noam Chomsky, Mother Jones, The New York Times, or any other member of the CFR-controlled mainstream media. Most likely the ones to be affected are people like Joseph Farah of World Net Daily, Alex Jones of Infowars (who already was detained in Canada and interrogated for several hours when he tried to report on a secret Bilderberg meeting), George Noory of Coast to Coast AM, and many of the new media publications that do not play the deception game, like News With Views and Strike The Root.

Now, let me make a final prediction: Nothing will happen to Bill Keller, and as soon as the brainwashers realize their error, nobody will mention the issue again, and it will vanish without leaving any trace. Why I am so sure about this? Because there is a non-written rule common to brainwashers of both persuasions, and it is that all things wrong in this country are the result of either partisan politics, stupidity, or incompetence. No other option is allowed. But with the NYT case, the brainwashers made the big mistake of breaking a big taboo, by mentioning the dreaded “T” word – treason. And once the people realize that there is such a thing as treason, some of them may think twice, reach their own conclusions, and presto! A lot of unexplainable things will suddenly become easily explainable. As you may guess, the conspirators do not want to open that mental floodgate on the brainwashed people’s carefully erected mental levies.

RENT-SEEK AND YOU WILL FIND

“I don’t know if we should stay in this business.” That city official was just being honest, but his framing of the problem surprised me. The “business” he was referring to was writing and winning grants from the Department of Housing and Urban Development (HUD), the federal agency charged with improving home ownership and low-income housing availability. 15 years ago, when I had this conversation, I did not understand what he meant. Public grants were the mother’s milk of city management. Why would any city official think twice about getting free money to help citizens?

The answer is one of the paradoxes of public choice. “Free” money is not free. In fact, you have to pay for free money twice. First you have to collect the money, out of tax revenues. And then you have to pay for the money again, because the benefits are dissipated by what economists call “rent-seeking”. Let me explain.

The technical definition of rent is any return to investment, or effort, that exceeds the opportunity cost rate of return. Rents encourage competition. And in most economic situations, that competition for profits produces benefits. But in politics, competition for those rents is often destructive. The greater the rent, the greater the costs people are willing to incur to win it. When government hands out what appears to be free money, people are going to scramble to get some of it, incurring costs as long as those costs raise the chances of winning the “free” money sufficiently.

Robert Tollison, one of America’s premier students of public choice and government, defines rent-seeking this way: “Rent seeking is the expenditure of scarce resources to capture an artificially created transfer.” Competition for government goodies – rent-seeking – is a wild goose chase, no matter how well-intentioned the goose or the chasers.

The city official told me that his office employed 15 people whose sole jobs were to identify and win federal grants. Their total salaries, and the staff and utilities required to support them, exceeded one quarter of the federal funds they had secured in grants the previous year. It seems like a pretty good deal to spend only 25 cents to win a dollar. But if you think about all the other cities doing the same thing, you realize that this system of distributing grants has some pretty perverse costs.

In my classes, I ask students to imagine an experiment that I call a Tullock lottery, after one of the inventors of the concept of rent-seeking, Gordon Tullock. The lottery works as follows: I offer to auction off $100 to the student who bids the most. The catch is that each bidder must put the bid money in an envelope, and I keep all of the bid money no matter who wins. So if you put $30 in an envelope and somebody else bids $31, you lose both the prize and the bid. When I run that game with students I can sometimes make $50 or more, even after paying off the prize. In politics, the secret to making money is to announce you are going to give money away. My students ask why anyone would play this sort of game. The answer is that the rules of our political system have created that destructive kind of political competition.