Offshore News Digest for Week of February 9, 2004

GLOBAL BUSINESS

POLITICAL RISK COULD COST WORLD ECONOMY $1 TRILLION

Uncertainty surrounding terrorism, globalization and other risk factors is turning the world into a relatively unstable place to do business. That is the verdict of a recent report by Aon Corporation’s Trade Credit and Political Risk practice group, which estimates that political risk could cost the world economy $1 trillion this year in reduced corporate spending, investments and growth. The figure for 2003 was more than $800 billion, said the Chicago-based consulting firm.

Before Sept. 11, 2001, political risk -- defined as political, security and business practices and their impact on the business climate -- was estimated at $200 billion per year. According to Aon, global risks today are subtler than in previous years, as they arise from legal and regulatory changes, government transitions, environmental and human rights issues, currency crises and terrorism.

BAHAMAS FIGHTS AGAINST “MIAMI VICE” STEROTYPE OF OFFSHORE CENTERS

With the negative connotations that many in the international community associate with an offshore jurisdiction and The Bahamas still healing from the scars of the blacklisting three years ago, Cherise Cox-Nottage has her work cut out for her as she champions the cause to portray The Bahamas as the respectable and credible financial jurisdiction that it is to the world.

Mrs. Cox-Nottage, who wears several hats -- president of The Bahamas Association of Compliance Officers (BACO), Attorney and Associate Compliance Officer at Banca del Gottardo, describes the archaic view that some in the international financial world have of jurisdictions like The Bahamas as the “Crockett and Tubbs, Miami Vice stereotype”.

“They still think that people can come, walk in with wet money in a suitcase and bank managers look the other way in this part of the world,” she said. “They have no idea; when you reel off the sort of rigors that you go through and the requirements they are shocked. But these are the perceptions that we fight and we have to keep fighting.”

ABUSE OF “SPECIAL PURPOSE ENTITIES” AT HEART OF PARMALAT SCANDAL

But SPEs don’t kill companies, people do.

It was a small irony buried deep in the morass that is the Parmalat scandal. While investigators across the globe were trying to fathom how billions of euros disappeared through an archipelago of hidden offshore “special purpose entities”, Standard & Poor’s quietly reaffirmed the AAA credit rating of one little Parmalat vehicle. It was a missed debt payment by a Parmalat subsidiary in Brazil that triggered the €9 billion Italian food giant’s implosion in December. And it was in Brazil that an S&P credit analyst reaffirmed the top rating of a Parmalat FIDC, on January 15th, explaining that the SPE “has sufficient receivables isolated from the originators to provide the appropriate level of credit enhancement.”

The fact that the Parmalat FIDC did what it was supposed to, and all the investors (mainly Brazilian pension funds) have now gotten their money back, may provide a little ammunition to those trying to make the case for legitimate off-balance-sheet financing. SPEs were fundamental to the growth of the mortgage- and asset-backed markets in the US in the early 1980s, which spread to Europe and beyond in the 1990s, and are now worth more than a trillion dollars world-wide. Securitization hit its peak at the end of the 1990s, when companies like Enron argued that virtually everything could be securitised -- from credit card debt and car loans to future receipts on David Bowie’s recordings and even the weather.

US RECONSIDERS INTERNET BETTING PROHIBITION

Senior American politicians have canvassed the UK Treasury for its views on whether the US should ban its citizens from gambling over the internet. The move has been taken by some leading betting industry figures to signal a potential change of attitude in America, potentially opening up the $20 billion a year US online market. With the exception of horse-racing in California, American nationals are not allowed to place internet bets. Despite this, American citizens account for half the $40 billion a year internet gambling market, betting via offshore sites.

S&P COMMENTS FAVORABLY ON LUXEMBOURG BANKING SYSTEM

The Luxembourg financial sector, cornerstone of the Luxembourg economy, is expected to continue to quickly adapt and seize opportunities to ensure that it remains attractive in an increasingly competitive and changing environment, Standard & Poor’s said in a just-published report.

THE TRUTH ABOUT THE CAYMAN ISLANDS

Contrary to the mythology from movies and novels, Cayman did not become rich by catering to criminals. The truth is just the opposite. Think about it for a moment. If you were looking for a place to put your money, would you choose a bank run by incompetents or criminals in a jurisdiction run by the mob, or would you put your money in a bank run by honest and competent bankers in a country with the rule of law?

The fact is that big offshore financial centers, such as Cayman and Bermuda, and other big financial centers, such as Switzerland, the U.K. and the U.S., are all characterized by having honest courts and competent administrators. Most of the money in Cayman is institutional rather than individual, and it is more difficult for an individual to open an account in Cayman than in the U.S. Cayman also has agreements with the IRS and the U.S. Justice Department for exchange of information on suspected criminals, tax evaders and terrorists. If you are a crook, it is not wise to try to open an account in well-run jurisdictions like Cayman and Switzerland, because neither the banks nor the governments will protect you.

Honest people, however, do benefit from reasonable bank privacy in these jurisdictions. Another fact is that more money is “laundered” in New York and London than in places like Cayman and Switzerland. What Cayman and some of its competitors provide is a place for large companies and financial institutions to consolidate funds -- in electronic form -- without being taxed or subject to unnecessary costly regulation, until these funds are productively reinvested. Most of the money that flows into Cayman is invested in the United States. It is not well understood that the world would be poorer and there would be more people in poverty if places, such as Cayman, did not exist.

EU TO TARGET OFFSHORE CENTERS AFTER PARMALAT

EU regulators plan to target firms’ activities in offshore centres to tighten corporate governance after the Parmalat scandal, EU Internal Market Commissioner Frits Bolkestein has said. Bolkestein said he was planning to force European Union firms to fully disclose their activities in jurisdictions where supervision is scarce, and that the European Commission would also take steps to improve financial supervision in offshore centers. “The role and regulatory control of off-shore centers needs to be tightened,” Bolkestein told the European Parliament. “We are considering the options -- although this is not easy.”

Government officials and financial experts have pointed the finger at the lack of control in offshore centres after a probe into Italy’s food firm Parmalat revealed that a four billion euro account held by its Cayman Islands unit Bonlat was fake.

EU tells company bosses to shape up after Parmalat affair.

Europe’s company bosses must get their act together if they want to avoid regulators doing it for them, EU commissioner Frits Bolkestein said. Following Parmalat’s failure, Bolkestein is planning to strengthen proposals on EU auditing practices and corporate governance first put forward last May. The review will look at beefing up oversight by independent directors, and the role of auditors, credit rating agencies and investment banks -- which have been heavily criticized in the recent spate of corporate scandals. But some said the EU must not respond to the corporate scandals of recent years with a heavy hand -- a criticism leveled at the US government by EU member states after legislation was rushed through in the wake of Enron.

SURVEY: SWITZERLAND LESS “SPECIAL” THAN IT USED TO BE

“Swissness” covers a range of attributes that Switzerland has been using to good effect to sell itself to other countries -- and perhaps even to itself. It stands for democracy, fairness, stability, quality, meticulousness, punctuality, thrift, efficiency, openness and all sorts of other desirable things. For the buyer of a Swiss watch, it means clockwork reliability. The rich man will confidently entrust his money to a Swiss bank. The holidaymaker is sure to have a comfortable night, courtesy of Swiss hotel-school training. And Swiss chocolate will be dependably delicious.

In those and all kinds of other ways, Switzerland is special. It is the oldest democracy in the world, with a political system that many foreigners envy. It remains fiercely independent, having stayed out of two world wars by being deadly serious about its armed neutrality. For much of the 20th century, its people were richer, on average, than those of any other country, and it remains close to the top of the wealth league. For a small, landlocked country of 7 million people with a difficult geography and no natural resources to speak of, Switzerland has done remarkably well.

However, this survey will argue that the Swiss island of calm is becoming a little more like other countries. In recent years it has found itself battered by a few storms. Neutral Switzerland was revealed to have behaved rather less well in World War II than everybody had wanted to believe. The country has always prided itself on small government, but the share of GDP taken up by taxes and deductions is now moving closer to the share elsewhere in Europe, and government borrowing has shot up. Unemployment is around 4% and shows no sign of coming down. Now that it is surrounded by EU countries on all sides, Switzerland feels less need to be armed to the teeth to repel potential invaders. This will save money and manpower, but in some people’s minds it will also make Switzerland a little less special.

TAXES

STALEMATE IN EU TALKS WITH TAX HAVENS

Frits Bolkestein, the EU’s commissioner for the single market, is expected to tell EU finance ministers that insufficient progress has been made in recent negotiations with Liechtenstein, Andorra, San Marino and Monaco to reach a deal on sharing information and introducing withholding taxes. “It’s a case of nobody wanting to make the first move,” an EU official said.

The legislation, the EU savings tax directive, was agreed last year by EU ministers with the proviso it would only come into force in 2005 if other financial centers pledged to adopt the rules by the end of June 2004. Countries such as Luxembourg are concerned that EU financial centers could lose out if non-EU rivals ignore the legislation, which is designed to help the fight against tax evaders.

Switzerland rejects EU tax demand.

Switzerland has dismissed European Union demands that it sign a treaty aimed at combating tax evasion. Swiss finance minister Hans-Rudolf Merz said that Switzerland would not sign the accord until stalled negotiations on closer security cooperation and tax fraud had been concluded.

Last year, Switzerland agreed to introduce a withholding tax on EU residents’ savings in Swiss banks. But it can only be implemented if an accord on similar rules is reached with third countries including Switzerland. EU ministers are particularly irate that the Bern government is linking agreement on savings tax with parallel negotiations on the EU’s Schengen system of free movement of people. Switzerland is also pressing for an exemption from cooperation in fight against fiscal fraud. Bern fears that banking secrecy might be compromised by the exchange of information between police and justice authorities. Brussels is refusing to budge on this issue.

French Finance Minister Frances Mer is urging the EU tax commissioner Frits Bolkestein to take a hard-line stance on the issue, and to “put the screws on Switzerland in the coming weeks.”

“CRACKPOT” VAT LAWS AID OFFSHORING SAY TORIES

“Crackpot” VAT laws are encouraging British firms to outsource jobs to foreign countries, says Shadow Chancellor, Oliver Letwin, who claims a tax loophole is effectively “providing a subsidy of 17.5% to people who want to go offshore”. His comments follow remarks made by Foreign Secretary, Jack Straw, who, on an official visit to India, said that “offshoring” jobs, such as calls center positions, could boost the UK economy.

CANADIAN PM’S FIRM MORE FOREIGN THAN CANADIAN

Canada Steamship Lines operates more vessels abroad than it does in Canada, contrary to Prime Minister Paul Martin’s claim that his family shipping company is mostly a domestic operation paying Canadian taxes. In fact, the company’s U.S.-based shipping subsidiary, CSL International, has 19 vessels in its fleet, which are registered in foreign locales such as the Bahamas or Vanuatu and are often crewed by lower-paid seamen from Ukraine or the Philippines. By contrast, the Montreal-based parent company, Canada Steamship Lines, sails just 17 ships domestically, according to CSL’s own fleet listings.

Mr. Martin claimed that he did not know what percentage of CSL income is funnelled through the offshore tax haven of Barbados, where a tax treaty allows businesses to pay just 2.5% corporate tax and then send the profits back to Canada without paying more tax. A Bloc Quebecois study released this week estimated CSL had avoided paying $103 million in Canadian taxes between 1995 and 2002 by setting up nine corporate entities in the Barbados.

IRWIN SCHIFF TELLS FEDERAL COURT THAT HE IS “DELUSIONAL”

Schiff, the nation’s best-known promoter of claims that no law requires the payment of income taxes, suffers from delusions including a fantasy that he alone can properly interpret the tax laws, according to papers that he had his lawyers file in Federal District Court in Las Vegas. The filing, made on Jan. 23, is highly unusual, especially in a civil lawsuit. The document asks a judge to deny a summary judgment in favor of the Justice Department that Mr. Schiff owes $2.5 million in income taxes, fraud penalties and interest.

An e-mail message sent on to Mr. Schiff’s thousands of supporters by his girlfriend, Cindy Nuen, said “We are sick about having to use this defense. It is ridiculous.” She wrote that this defense is the only way for Mr. Schiff to escape fraud penalties because, she wrote, his lawyers are “scared” to tell judges that “the income tax law is meritless and frivolous.” Mr. Schiff’s personal psychiatrist wrote last year, in notes placed in the court file, that Mr. Schiff has suffered from paranoid delusions about the tax system for decades.

Judges skeptical of U.S. efforts to ban Irwin Schiff’s book.

Two federal appeals court judges repeatedly expressed skepticism about the government’s effort to ban the sale of a book that purports to show people how they can legally stop paying income taxes, a theory that one judge called nonsense. The two judges on the United States Court of Appeals for the Ninth Circuit were even more skeptical about whether the author, Irwin Schiff of Las Vegas, can be required to give the I.R.S. a list of everyone who bought his book, The Federal Mafia: How the Federal Government Illegally Imposes and Unlawfully Collects Federal Income Taxes.

Michael Stein, the lawyer for Mr. Schiff and his bookstore, Freedom Books, said that however wrong Mr. Schiff’s arguments might be they were protected under the First Amendment. He compared Mr. Schiff’s theories to those of abolitionists who opposed slavery in the first six decades of the 19th century. And, Mr. Stein said, giving the I.R.S. a list of those who bought the book “would have a major chilling effect” on dissent and free speech.

During the hearing in San Francisco, Judith A. Hagley, a Justice Department lawyer, said past rulings established that “the First Amendment does not protect fraud.” Judge William A. Fletcher, who said that the legal theories in the book were “nonsense” and “a sure way to get in trouble” with the I.R.S., frequently interrupted Ms. Hagley. “Tell me why this is fraud,” the judge asked.

Court convicts tax preparer who claimed income tax is voluntary.

A tax preparer who ran hotel seminars to teach people how to avoid paying federal income taxes has been convicted of multiple counts of preparing false returns. Steven Swan of Manchester, New Hampshire was convicted in U.S. District Court in Concord on 15 counts of preparing false tax returns and amended returns, two counts of preparing false amended returns for himself and one count of corruptly impeding the administration of the federal tax laws.

Prosecutors said that from 1997 to 2002, Swan, 51, prepared more than 200 so-called “zero-income” tax returns for clients, making false claims for refunds of more than $1 million. Former clients, including an IRS agent who posed as a potential client, testified against him. On those returns, Swan reported that the clients did not have any income even though he knew that they had received substantial wages, salaries and other compensation, prosecutors said. Swan filed two amended returns for himself reporting that he had no income for tax years 1993 and 1994. The government said those returns sought refunds of taxes Swan had paid previously for those years.

Swan, who represented himself at trial, did not dispute the government’s case. He testified that he was a former disciple of tax protester Irwin Schiff.

IRS AUDITING TO GET TOUGHER UNDER NEW BOSS

The IRS’s new boss has revised the tax-collection agency’s mission: to be kinder, gentler -- and tougher. Saying that cheating has jumped alarmingly since the IRS sacrificed enforcement to make the agency more taxpayer-friendly in the 1990s, new commissioner Mark W. Everson is heading into his first tax-filing season determined to reverse plunging audit rates, beef up enforcement and scare tax cheats straight. IRS audit rates have plunged dramatically the past decade, and Everson says they might not ever rebound to previous levels.

Critics remain skeptical, however. Audit rates and other enforcement activity have plummeted so low, they say, that the statistics have nowhere to go but up. The agency still needs to upgrade its computer systems. And the IRS continues to struggle to attract, train and retain top-notch auditors.

IRS CLAIMS IT HAS COLLECTED $170 MILLION HIDDEN OFFSHORE

The IRS announced it had collected $170 million in taxes and penalties on money hidden offshore and has shared with state tax agencies information about 20,000 taxpayers using scams and shelters to avoid taxes. The IRS uncovered the money hidden offshore by offering amnesty last year to taxpayers who came forward. More than 1,300 taxpayers took the offer to avoid criminal prosecution.

Those taxpayers were required to reveal the person or company who sold them the offshore scheme. In all, 479 promoters were identified, more than half of whom were previously unknown to the IRS, the agency said. The IRS has started pursuing the promoters, using their customer lists to identify those taxpayers who did not come forward and are hiding money offshore to avoid paying U.S. taxes.

IRS HOLDING $2.5 BILLION IN UNCLAIMED TAX REFUNDS

Unclaimed refunds totalling more than $2.5 billion are awaiting nearly 2 million people who failed to file a 2000 income tax return. According to the IRS, half of those who could claim refunds would receive more than $529. In some cases, individuals had taxes withheld from their wages, or made payments against their taxes out of self-employed earnings, but had too little income to require filing a tax return. In cases where a return was not filed, the law provides most taxpayers with a three-year window of opportunity for claiming a refund. There is no penalty assessed by the IRS for filing a late return qualifying for a refund.

KOREA TAX SERVICE TO ANNOUNCE MORE FRIENDLY POLICY TOWARDS FOREIGN INVESTORS

The Korean National Tax Service is to announce later this month a new, more lenient policy in its dealings with foreign companies, as the country attempts to present a more friendly face to foreign investors. In particular, the NTS plans to reduce the number of transfer pricing investigations it carries out on foreign firms. The Tax Service has announced that these are to be merged into the standard corporate audit procedure from August of this year. In addition, the length of such investigations will be reduced from five fiscal years to three years.

AUSTRALIAN FIRMS HIT BY US TAXES ON REPATRIATED INCOME

Australian tax advisors are becoming increasingly concerned over the effects of an IRS ruling last year that will take a larger chunk of tax from income repatriated from the US back to Australia. Although the ruling became apparent some six months ago, tax advisors are only now beginning to see an increasing number of firms hit by the new interpretation of the rules. The Australian Tax Office meanwhile, has stated that it is happy with the current interpretation of the US/Australian tax treaty.

ISLE OF MAN BUDGET LIKELY TO FOCUS ON CHANGES TO THE TAX SYSTEM

Next week’s Isle of Man budget is likely to focus on changes to the tax system in order to stay on the right side of its international obligations, although reports suggest that there are to be no major surprises for business in the jurisdiction. Kevin Cowley, senior taxation manager at Deloittes, believes that the UK budget, to be announced by Gordon Brown in March, is likely to have a more significant impact on the island, as it is probable that it will contain changes directly affecting offshore jurisdictions. The main candidates for change if this is the case will be the tax rules concerning foreign domiciles resident in the UK, and offshore fund shareholdings, according to Mr. Cowley.

AN EU TAX ON MEMBER STATES REMAINS ON EC PRESIDENT’S AGENDA

The President of the European Commission, Romano Prodi, has hinted that a direct tax collected at EU level will be an inevitability in the longer term, as the executive body seeks to meet its spending commitments over the coming decade. Supporters of an EU wide levy argue that a single tax will dramatically simplify the process of raising the Commission’s budget from national VAT, customs and direct tax revenues. However, the proposal is likely to be met with hostility from some of the more euro-sceptic member states, which are unwilling to cede taxing rights to the EU.

TRUST BENEFITTING JOHN KERRY’S WIFE MADE KILLING FROM “CORPORATE INVERSION”

As the John Kerry Campaign heats up, so does the scrutiny of his affairs -- and those of his wife. Now the latest edition of Newsweek has revealed that in 2002 the conversion and sale of shares in Ingersoll-Rand stock netted between $100,000 and $200,000 for a trust of which his wife is a beneficiary, after stock rose in price following the company’s move to Bermuda.

So what? Well, one of Kerry’s best applause lines is his pledge to end tax breaks for what he calls “Benedict Arnold” firms that move offshore -- to places such as Bermuda. Kerry spokesman Michael Meehan said the sale was made by professional fund managers for Teresa Heinz’s trust and that Kerry was not even aware of it. [Ed: note the sloppy language, by the spokesman and/or the reporter, implying Ms. Heinz owned the trust.]

CONFLICTING REPORTS OVER CAYMAN ISLANDS COMMITMENT TO EU TAX DIRECTIVE

At a meeting of EU finance ministers on Tuesday, the British Chancellor Gordon Brown briefed his EU counterparts on negotiations with Britain’s offshore territories, such as the Cayman Islands, which has been the only British territory still holding out against coming in line with new EU savings tax rules. Brown again signalled a get-tough approach, warning that Britain could use legislation to force the island’s authorities to come into line. London has rarely used such measures, a notable exception being over capital punishment.

This statement contrasts with a report in the Financial Times over the weekend that the Cayman Islands have now conditionally agreed to comply with its terms. The Cayman Islands had been the only UK dependent territory holding out against the directive because of fears its financial services industry would be damaged. The EU directive obliges countries to exchange information on savings held by non-residents, so that they can be taxed in their country of origin.

“Pirates of the Caribbean” refuse to play ball.

The Cayman Islands claim a kind of allegiance to the British Crown. Chancellor Brown has promised to make them comply with the EU Savings Tax Directive, a law aimed at catching tax cheats that requires banks automatically to disclose to EU tax authorities details of interest paid to EU residents. But the Cayman pirates are dithering, playing a game of chicken with the Chancellor, daring him to legislate and making demands for quid pro quos.

Sensing weakness, the Swiss are retreating fast from their reluctant acquiescence last year. Jersey, Guernsey and the Isle of Man, meanwhile, surrounded by the EU, know they have no choice but to appear co-operative. But any sign of a concession to the Swiss or Cayman, and the game is over, say the Channel Islanders. It is a bit like herding cats, and the Chancellor’s threat of neo-colonial rule by Westminster diktat is an indication of his frustration.

The sensible thing would be to scrap this EU directive and refer the whole matter back to the OECD. This is a deal that was unnecessary because the directive contains a loophole so large that the entire island of Jersey could sail through undetected.

US TREASURY URGES SWIFT RESPONSE TO CORPORATE LEASE-BACK TAX LOOPHOLE

Assistant Treasury Secretary for Tax Policy Pamela Olson has urged legislators to close a tax loophole exploited by corporations in the leasing of public infrastructure to local governments. The issue concerns so called LILO schemes (lease-in lease-out) where municipalities are paid an up-front accommodation fee to lease their infrastructure to a corporation. Critics of these schemes point out that the cash received by the municipality pales in comparison to the federal tax benefits received by the corporations, which are able to depreciate taxpayer-funded bridges, subways, and rail systems as a result of the lease.

LARGER NUMBERS PAYING AMT AND TAX SHELTER INFORCEMENT ARE SUBJECTS OF IRS WEBCAST

Predictions that a larger number of taxpayers will pay an alternative minimum tax this year appears to be accurate based upon the experience of tax professionals now preparing those returns. Responding to a survey conducted on the February Tax Talk Today Webcast, 70% said more of their regular clients will be subject to the alternative minimum tax this year, compared to three years ago.

The Webcast, co-sponsored by the IRS focused on another topic: IRS tax shelter enforcement efforts. Tax practitioners were told to expect more aggressive enforcement against abusive tax schemes as transactions are investigated in more coordinated efforts by federal and state tax authorities. “In my thirty years with the service, I have never seen such a coordinated, aggressive approach -- not only by the IRS operating divisions, but with the U.S. Department of Justice and coordinated partnerships with the states,” an IRS representative on the Webcast stated, “It is a drastic increase in enforcement resources.” A private consulting CPA on the show’s panel said tax preparers can no longer rely on the “audit lottery”.

IRS posts info on abusive tax shelters.

The IRS, as part if its effort to combat abusive tax shelters, launched a new section today on its Web site to warn and educate employee retirement plan professionals about shady schemes and transactions. The information is located in the Retirement Plans section at www.irs.gov, where IRS identifies “listed transactions” involving employee retirement plans. It also provides guidance, such as Treasury Department regulations and IRS revenue rulings, designed to stop transactions the IRS deems abusive.

DEDUCT IT: ODDS AGAINST AN AUDIT ARE GOOD

I am not advocating cheating on your taxes. What I am suggesting is that there are situations where the tax law may be vague or subject to different interpretations and, with good substantiation, you can use the law to trim your tax bill. But there is risk in the strategy. The IRS might disallow your move, and you have to pay up. Remember, our tax code is not known for its clarity or its simplicity. There have been many tax decisions where four out of nine of our top jurists on the Supreme Court got the answer wrong!

In a study by IRS investigators from July to December 2002, IRS Service Centers gave incorrect answers to 43% of the tax law questions. About 500,000 taxpayers who visited the Centers during that period were estimated to have received incorrect responses. So, if you are going to push the envelope, will you get audited? Probably not, but you need to understand how people come to be audited. Here is what you need to know.

IRS “TAXPAYER ADVOCATE SERVICE” ADVOCATES FOR THE IRS INSTEAD

“I am from the government and I am here to help you,” is a well-known oxymoron again proving to be true. A decade ago, we had a mean IRS that did all sorts of terrible and unjustified things to innocent taxpayers. The people got mad, and the people’s representatives -- the House and the Senate -- held hearings where they beat up on the IRS, and the IRS folks pledged to reform. They promised a new, kinder and gentler IRS that would be helpful to taxpayers.

We, the taxpayers, actually did get a nicer and more helpful IRS for several years, but it was not to last. To help protect us, Congress passed the Taxpayer Bill of Rights. As part of this legislation, Congress established an independent office within the IRS, called “The Taxpayer Advocate Service”. The goals of this Service were “to protect individual and business taxpayer rights and reduce taxpayer burden.” On Jan. 18, the National Taxpayer Advocate, Nina E. Olson, sent a report to Congress that identified “sole proprietor tax noncompliance” as one of the “top two” problems faced by taxpayers. Ms. Olson then went on to recommend that “Congress enact a withholding requirement on payments to independent categories of nonwage workers.”

In other words, the “taxpayer advocate” is saying small businesses need to be taxed more and also suffer an increased paperwork and compliance burden. Advocates for small business are justifiably outraged. The office has been hijacked by the pro-tax mafia at the IRS. The IRS presented no data to show the proposal would satisfy sound cost-benefit analysis, nor unduly interfere with civil liberties. One suspects the IRS did not provide such information because it would contradict their costly proposal. The Bush administration should immediately remove Ms. Olson as Taxpayer Advocate because she clearly does not understand her job description. In addition, it should set up a truly independent office within Treasury staffed by competent economists and civil libertarians with the authority to review and block any IRS or Treasury regulation or legislative proposal that does not meet sound cost-benefit and civil liberties tests.

ASSET PROTECTION

LITIGATION BOOM SPURS EFFORTS TO SHIELD ASSETS

The drumbeat of litigation against doctors, accountants, business executive and other professionals is prompting a growing number of people to play defense: They are putting their money where creditors cannot get to it. A key technique is the so-called asset-protection trust. The idea is to put a big chunk of your money in an irrevocable trust. The trust is run by an independent trustee, who may opt to give you payments from time to time. If done correctly, the trust -- which has to be located in a jurisdiction that has passed special laws -- generally cannot be touched by creditors if you are sued or file for bankruptcy protection.

Doctors have been setting up asset-protection trusts for years to protect themselves from malpractice litigation. But with the latest round of corporate scandals and the passage of the Sarbanes-Oxley Act, which makes top executives and directors accountable for their company’s financial results, more executives are seeking asset-protection trusts. Nobody tracks exactly how many asset-protection trusts are drafted each year, especially since many are located in offshore jurisdictions, which have attracted sizable trust business by enacting laws that protect trusts from U.S. creditor claims. But the number of U.S.-based trusts is now picking up as states change their laws, partly to lure people who are worried about putting their wealth abroad.

Domestic asset-protection trusts are controversial, because they have not yet been tested in court and it is still unclear how well they will hold up. Article IV of the Constitution says that each state should have “full faith and credit” in the legal judgments made in other states. Lawyers, therefore, worry that a plaintiff who wins a judgment in a New York court might be able to enforce the ruling against an asset-protection trust created in Delaware. While creating an offshore asset-protection trust may sound sketchy, they are legal as long as they are not used to evade income taxes. Another caveat: People should not set up an asset-protection trust if you know you have a potential legal action looming on the horizon. Courts are likely to rule against such a trust, calling it a “fraudulent conveyance”, if it is set up right before a lawsuit, bankruptcy or divorce.

Domestic asset-protection trusts also can also be used to ease estate taxes. Because you give your assets to the trust, the funds are out of your estate for estate-tax purposes. However, the trust cannot make payments to you on a regular basis, or that would invite the scrutiny of the IRS.

MILLIONS TAKEN IN “TRADING” SCAM

The bait: a can’t-miss, lucrative return on a secret overseas investment. The fish: hundreds of Southwestern Ontario residents who were wined and dined and even treated to a private concert by an award-winning singer. The haul: millions of dollars, willingly handed over by hopeful investors, most of whom have never seen a cent of it again. The story: yet another doleful page out of the “bank-debenture/high yield” con history.

One area woman, who asked her real name not be used because others trust her business acumen, told The Free Press recently she lost $5,000 US. A relative had learned of the plan through a church group and told the woman she might be included in an offshore bank-debenture plan open only to an elite group. At the end of 10 months, the “investment” organizers staged a big party for fund participants at a downtown London hotel. Luther Vandross, an award-winning R&B artist, was even brought in to give a private concert, as investors celebrated their imminent windfall. After that, nothing.

DO YOU TRUST A TRUST?

Americans have gone trust-happy. But before you join the crowd, ask yourself what you want a trust for and whether you can accomplish your aims by simpler means. There are four main reasons to use trusts: to save on estate taxes; to provide for your children if you and your spouse both die; to protect assets from your heirs’ creditors and ex-spouses; and to maintain control, after your death, over the behavior of heirs. Within these categories there is a wide range of necessity for a trust. One compelling case, for example, is providing for a disabled adult child who would be disqualified from receiving government health care if left too much in assets directly.

Yet even if you do need or want a trust, you can build in escape hatches to make sure it does not become an expensive pain for your family. The thousands you will pay a lawyer to draft a trust is nothing compared with the cost of maintaining it for decades, particularly if you name a bank or other institution as trustee. Robert Wolf, a trusts and estates lawyer in Pittsburgh, is advising a client to terminate a $200,000 trust held at a bank with a $5,000 minimum annual fee for administration and investment services. Shop around -- fees vary widely, particularly for small trusts.

OFFSHORE JURISDICTIONS: CHOICES, CHALLENGES AND CHANGES

This article is based upon an offshore jurisdiction’s perspective, in particular the Republic of the Marshall Islands. Over the last decade, I have spoken to many lawyers, accountants, management & service companies, bankers and end-users worldwide about the offshore jurisdiction industry. This article is based upon that information. I would like to discuss 1.) the information necessary to review the choices when considering an offshore jurisdiction, 2.) the challenges that offshore jurisdictions are confronted with, and 3.) the changes facing the offshore industry.

The use of a tax haven, or as those in the industry prefer to call it an “offshore jurisdiction”, has been an accepted part of tax and estate planning and asset protection arrangements since World War I. Today, offshore jurisdictions exist for a variety of reasons. The most important reason is that as our world becomes smaller, and fewer businesses are local, there is an increasing need for internationalization. We think, plan and work with an eye toward expanding our horizons both at home and abroad. No longer will a domestic corporation satisfy the needs of a beneficial owner. Corporate structuring and planning have achieved higher levels of complexity than ever before, while the need for anonymity remains strong.

Since there are so many offshore jurisdictions an initial problem is how to select from the available options. Professionals and ultimately beneficial owners must keep pace and have a clear understanding of the characteristics of offshore jurisdictions. Therefore, it is important to identify some of the necessary choices that should be reviewed when considering an offshore jurisdiction.

PRIVACY

PRIVACY CONSTITUENCY DEVELOPING

Of the 13 states that signed up for the MATRIX law-enforcement database, better than half have quit. The furor over MATRIX demonstrates something important -- and surprising: Privacy advocates have gained a lot of ground in the two years since September 11. And the pendulum is swinging back in their favor. Witness the Security & Freedom Ensured (SAFE) Act, a bill introduced last October that aims to curb the most objectionable sections of the Patriot Act. Even if President Bush vetos it or any legislation that curtails the Patriot Act, challenges to government privacy invasions are bubbling up elsewhere.

There is still a long way to go before the U.S. reaches an acceptable balance between privacy and public safety. First, the Bush Administration should abandon the notion that technology can unearth terrorists. Second, all government agencies that collect information need to be upfront about what they are doing and how they are doing it, rather than allowing programs with spooky names, such as MATRIX and Total Information Awareness, to be outed by privacy activists. Maybe they will learn from MATRIX’s demise. It is about time.

60,000 FINN PASSPORTS “GONE”

About 60,000 valid Finnish passports are missing, and many of them are thought to have been stolen, border officials revealed on Friday. While it is impossible to know how many passports have been stolen and how many have simply been lost, a lieutenant commander in the Finnish Frontier pointed out that Finnish passports were very attractive in many criminal circles.

US Embassy cautions public against buying “Conch Republic” passports.

In a press release, the embassy noted that Conch Republic documents were being sold for $900 over the Internet. The US Government did not accept these as valid travel documents, it said. The website offering Conch Republic passports for sale clearly stated: “We do not represent our passports as valid travel documents,” it added.

ONLINE SEARCH ENGINES HELP LIFT COVER OFF PRIVACY

Cybersecurity experts say an increasing number of private or putatively secret documents are online in out-of-the-way corners of computers all over the globe, leaving the government, individuals, and companies vulnerable to security breaches. At some Web sites and various message groups, techno-hobbyists are even offering instructions on how to find sensitive documents using a relatively simple search. Though it does not technically trespass, the practice is sometimes called “Google hacking”.

In the decade they have been around, search engines like Google have become more powerful. At the same time, the Web has become a richer source of information as more businesses and government agencies rely on the Internet to transmit and share information. For a variety of reasons -- improperly configured servers, holes in security systems, human error -- a wide assortment of material not intended to be viewed by the public is, in fact, publicly available. Once Google or another search engine finds it, it is nearly impossible to draw back into secrecy. That is giving rise to more activity from “Googledorks”, who troll the Internet for confidential goods, security engineers said.

PRIVACY REDUCTION’S NEXT ACT

The U.S. Congress is hard at work trying to punish Internet users who value their privacy. That is not how Capitol Hill politicians describe a new bill introduced last week, of course, but that is what it would accomplish if it becomes law. Called the Fraudulent Online Identity Sanctions Act, the measure would increase prison sentences by up to seven years in criminal cases if someone provided “material and misleading false contact information to a domain name registrar, domain name registry, or other domain name registration authority.” That is a reference to the Whois database that lists information about who owns each domain name. In civil lawsuits, such as when the movie studios or the Recording Industry Association of America (RIAA) sue someone over copyright infringement, the bill would make it far easier for them to claim $150,000 in damages for each violation.

The justification? To make it easier to track down miscreants. The copyright and trademark lobbyists do have a point: Scammers and reprobates lie when typing in their Whois information. But if a law actually has been violated, there already are plenty of ways to unearth someone’s identity. By bowing to corporate special interests, Washington politicians are heading in the wrong direction. They are ignoring the real problem, which is that Whois is broken.

The open nature of the Whois database is no longer a boon to people who own domain names. Who wants to make personal information public for the benefit of spammers, direct marketers and snoops? You should not have to publish your home address -- and other personal details -- to everyone in the world just to own a domain name. And if you decide to lie by typing in “1 Nowhere Road”, I do not see why you should be punished for attempting to protect your and your family’s privacy.

PRIVACY IMPACT LAW IS BEFORE CONGRESS

For the third year in a row, a bipartisan congressional coalition is pushing a bill that would require all government agencies to study the privacy impact of new rules before they put them into effect. The Defense of Privacy Act would complement the E-Government Act of 2001, which requires agencies to submit privacy impact assessments whenever they buy new technology. Rep. Steve Chabot (R-Ohio) introduced the bill. It is backed by three Republicans and a handful of Democrats.

Former Republican Rep. Bob Barr, who now works with the ACLU, introduced a similar bill, known as the Federal Agency Protection of Privacy Act, in 2002. Barr’s bill and a similar one introduced in 2003 passed the House of Representatives, but were never taken up by the Senate. Privacy groups, ranging from the Free Congress Foundation to the Center for Democracy & Technology to the ACLU, hope the third bill will be the charm. Gregory Nojeim, the associate director of the ACLU’s Washington office, called the bill a very sensible and modest piece of legislation. “The bill doesn’t tell agencies they can’t issue regulations that violate people’s privacy rights,” Nojeim said.“qIt simply tells them they must consider alternative, privacy-sensitive regulations.”

REDUCING THE RISKS OF IDENTITY THEFT, AND PROCEDURES TO FOLLOW IF IT HAPPENS

Most Americans are, on a day-to-day basis, incredibly cavalier with the information that makes us, financially and legally speaking, who we are. We fail to safeguard vital codes, numbers, and facts, blithely handing over credit cards to clerks or waiters who take them out of our sight or filling in online forms without considering who is receiving them or whether they really need the information they are requesting.

It is no wonder that identity theft is growing at such a phenomenal rate. According to a Federal Trade Commission survey, one in eight respondents were victims of ID theft in the past five years. This equates to about 27 million Americans -- 10 million of them in 2003 alone. The figures may even be low, because reporting has not kept pace with the crime and many ID thefts go undetected.

There are ways to minimize the risk of ID theft. If you have time to balance your checkbook, shop online, or apply for a passport, you have time to check up on your personal information and take action if something is amiss. While you can never completely safeguard your identity, there are common ways to distance yourself from the crime. As they say on The X-Files, “Trust no one” -- at least not when it comes to your personal information. This advice comes to late for some unfortunate people.

BRAZIL RATIFIES FINGERPRINTING, PHOTOGRAPHING OF U.S. VISITORS

The Brazilian government has made permanent the requirement that visiting Americans be fingerprinted and photographed. It was imposed as retaliation by a judge who was offended by new U.S. immigration procedures that he characterized as Nazi-like. While American visitors to Brazil will continue to endure the same processing that Brazilian visitors face when they enter the United States, new rules put in place call for immediately installing electronic fingerprinting equipment and Web cameras to speed the process.

FOES ASSAULT PASSENGER SCREENING

Privacy groups, business travelers and members of Congress asked the federal government this week to reconsider its plans to implement a passenger-profiling system because agencies have not adequately addressed privacy concerns or shown effectiveness in detecting potential terrorists. House Minority Leader Nancy Pelosi (D-California), joined by 25 other Democrats, sent President Bush a letter asking his administration to protect passenger privacy. The group also proposed that airlines should tell passengers exactly what information they pass along as travelers make reservations.

Reps. Dennis Kucinich (D-Ohio) and Barbara Lee (D-California), along with other legislators, went even further in their own letter sent to David Stone, the acting director of the Transportation Security Administration, or TSA, which manages airport security. “Members of Congress and the public have no real assurances that the system will not rely upon medical, religious, political or racial data,” wrote the representatives, who also questioned whether the system would even be effective. CAPPS II will require passengers to give more personal information when buying airline tickets, information that will then be checked against mammoth commercial databases, watch lists and warrants to screen for suspected terrorists and people wanted for violent crimes.

Airport terrorist screening fails test.

A new computer screening system designed to identify potential terrorists among airline passengers has failed a series of tests lawmakers established as a condition for funding, a congressional report says. “Key activities in the development of have been delayed and the Transportation Security Administration has not yet completed important system planning activities,” says a draft summary of the report prepared by Congress’ investigative arm, the General Accounting Office.

The summary says that as of Jan. 1 the TSA also had not finalized exactly how the system would work, or identified a timetable or budget for its implementation. The critical report may prevent funds for CAPPS II from being released by Congress.

“I’m even more worried now about the implementation of this system than I was before,” said former Georgia GOP congressman Bob Barr, a long-standing critic of the proposal. “This should be the death knell for this idea, but I think it will take a great deal of courage and perseverance by Congress to kill this off.”

UK PROPONENTS CLAIM ID CARDS ARE VITAL FOR FRAUD PREVENTION

The Director General of the Finance & Leasing Association (FLA) gave evidence to the Home Affairs Committee Inquiry into Identity Cards, as part of an active campaign to support their introduction and reduce the levels of finance fraud in the UK. Representing consumer credit, motor and asset finance sectors, the FLA and its members have considerable experience of the difficulties in establishing verifying and identifying individuals. Such a requirement is fundamental to the finance industry both from a commercial and compliance point of view.

As well as the card itself, FLA is calling for a centralised database holding core information and linking together existing data sources, for example, electoral roll information, births and deaths registers and passport database. The new database should be available for all legitimate users to confirm identity.

HAIR COULD TELL DRINKING SECRETS

Scientists have developed a range of hair, blood and urine tests which can show how much someone has drunk over the past days, weeks or even months. Alcohol disappears from the body within hours, but drinking produces chemicals which stay in the body much longer.

The new tests could have a range of uses. Airlines could test a hair from a pilot’s head to show if they have been drinking. And police may be able to use the tests hours or even days after an accident to find out if someone had been drinking when it took place.

VOICE OVER INTERNET CALLS NOT SO EASY TO TAP

While many voice over Internet Protocol (VoIP) providers are more than willing to hand over whatever information they can about subscribers, they cannot reliably, if at all, get what police really want: the content of the calls they make. Difficulties lie in gathering the millions of bits of information that represent a voice call as well as the fact that there is no standardized way for distinguishing voice calls from the terabits of other data on the Internet.

One proposed solution being mulled over by the FCC is to give wiretapping responsibility to broadband providers, whose high-speed Web connections are necessary to make VoIP calls. But broadband providers say they, too, would have problems, for very much the same reasons as VoIP companies.

LAW

CRITICS QUESTION U.S. TOOLS AGAINST TERROR FUNDING

U.S. officials may be using the wrong tools to fight terrorist financing by focusing on large sums in the banking system instead of smaller amounts, alternative channels for moving them and improved intelligence, banking and financial officials say. About a thousand delegates at an anti-moneylaundering conference here spent several days this week discussing compliance with the complex rules of the USA Patriot Act against what they called “the scourge of terrorist financing,” but some wondered if it would really help curb the crime. “From my view in the banking sector, we don’t seem to be getting anywhere on terrorist financing,” said one Caribbean-based offshore banker who requested anonymity.

While only amounts above $10,000 usually get official scrutiny, officials and bankers say militants often deal in much smaller sums. Some of the Sept. 11 hijackers transferred their remaining money in increments as small as less than $500 back to the Gulf just days before the attacks. “Nothing the Sept. 11 hijackers did in their bank accounts was illegal or set off any alarm bells, such as large transactions might. That would be something somebody could track,” said one U.S. bank official. Some critics say U.S. rules focus too much on sophisticated financial networks and paperless payment systems, even though many militants may be using small-scale savings accounts or cash, carried into the United States by hand.

THE LIFE AND TIMES OF JUDGE ROY MOORE

Several years ago, Moore was an obscure state judge in Etowah County, Alabama, who became famous by posting the Ten Commandments on the wall behind his courtroom bench. Federal judges have spoken in the past, and their message is that nothing shall be permitted to go before the Great God of Secularism that Congress, the executive branch, and the courts have determined to be the True State Religion. (So much for the “establishment” clause.) Not surprisingly then, Moore lost the showdown (that he knew all along he would lose).

During the litigation period and the ruckus that followed, however, Moore lost all of the brief opportunity to raise the real Constitutional issues in this matter. While he declared -- rightly -- that the federal courts do not have jurisdiction over what a state judge places in the lobby of the state Supreme Court building, he quickly passed over that line of reasoning to insist that the governments of Alabama and the United States of America must openly acknowledge “Almighty God”.

Moore had an opportunity to remind all of us of our lost liberties and to help rekindle the federalism debate that supposedly was settled with the ratification of the U.S. Constitution in 1787. Instead, we received yet another nauseating version of the intractable and unwinnable Culture War. I am not sure whether Americans in this day and age deserve anything better, but it would have been a wonderful and educational moment had Moore dealt with the real issues of law and justice. Instead, he took the money and ate fried chicken.

COURT DECLARES 1998 MONEY LAUNDERING STING ILLEGAL

Four Mexican bankers accused of laundering drug money have been released after a federal court ruled a massive U.S. sting in 1998 was illegal. The men, mainly bank branch managers, were released after a court ruled that the U.S. sting was unconstitutional, in part because U.S. agents tricked the suspects into laundering money.

BRITAIN TO GET ITS OWN “FBI”

A new FBI-type agency announced by the British government is set to counter growing concern about organized crime, fraud, money laundering and trafficking in drugs, and illegal immigrants at a time when British borders are expected to come under new challenge from 10 new countries joining the EU. The Serious Organized Crime Agency, the new body, is the largest shakeup in British policing since new boundaries were created for 43 county-based police districts 40 years ago. It will merge some 5,500 staff in four agencies into one and see the disappearance of the National Criminal Intelligence Service and the National Crime Squad. It will also take over the investigative functions of the Home Office and Customs and Excise. Home Secretary David Blunkett did not mention any FBI-type anti-terrorist activities for the agency, which is handled in Britain by MI5, GCHQ and Scotland Yard’s Special Branch

THE “AMERICAN” CIVIL LIBERTIES UNION?

The ACLU has filed a complaint against the government of the United States with the United Nations Working Group on Arbitrary Detentions. In their January 27 petition, the ACLU claims that thirteen people detained as part of the September 11 investigation were “simply non-citizens who had overstayed their visas or committed similar civil immigration infractions that, in the ordinary case, would not have led to detention at all.” The ACLU petition states that “the Working Group should exercise its authority to rule on the arbitrary character of each of the Petitioners detentions and to address the legality of the policies described herein.”

International law based upon the United Nations’ body of work adds significance to this question. Protection of civil liberties is very weak within the UN conventions cited in the ACLU’s complaint. The UN’s and US Constitution’s views towards the scope of individual rights cannot be easily reconciled. How do the law-abiding government officials and citizens of the world decide which set of principles is to be followed? The first possibility is to declare that one set of principles overrides the other. An ACLU petition could be based on the idea that principles of international law trumps conflicting principles in American law. If this is the case, the very basis of civil liberties finds itself on the kind of slippery slope that the ACLU is usually keen to avoid. Ultimately, allowing the UN as a final legal authority with regard to a particular end is the equivalent to asking a dictator to make the trains run on time. If you think that this is either pedantic legalism, or a black-helicopter, fever-swamp hallucination, try a thought experiment.

A second interpretation acknowledges that International law is not truly law; people are free to pick and choose the sections they would like to follow and the sections they would prefer to ignore. For those who believe in protecting civil liberties and respecting international law neither explanation is satisfactory. The conventions of the UN relating to civil liberties contain prima facie limitations of those liberties. An ACLU appeal based on the authority of these conventions undermines the basis for civil liberties everywhere.

WHO POLICES THE POLICE?

For more than a year, the Royal Canadian Mounted Police have been conducting a supposedly intense investigation into a federal sponsorship scam which fleeced Canadian taxpayers of more than $250 million. Oops. Turns out the federal police force was itself up to its red tunics in the sponsorship fiasco it is supposed to be investigating, taking taxpayers for a $3 million musical ride of financial squandering, disappearing documents and even a secret bank account in Quebec.

FRENCH LAWYERS STRIKE OVER CRIMINAL JUSTICE BILL

French lawyers went on strike on Wednesday as the parliament prepared to enact a new criminal justice law. The government has presented the new law as a necessary tool for fighting organized crime. Its main provisions introduce the idea of plea bargaining -- the US-style mechanism by which a defendant can plead guilty to receive a reduced sentence -- and extends the period under which a suspect can be held without access to a lawyer from 36 hours to 48. It also gives police beefed-up powers, notably in terms of tapping telephones and other forms of surveillance in private homes.

A government spokesman said the measures were “only aimed at fighting crime and criminal organizations” and would be limited to stop them being applied against more run-of-the-mill lawbreakers. But France’s 40,000 lawyers view the law as a “Big brother” reform that threatens the rights of defendants and undermines their role and that of judges. Their strike on Wednesday was only the third in their profession’s history since the end of World War II.

EC WARNS SIX EU MEMBER STATES OVER MONEY LAUNDERING DIRECTIVE

The European Commission announced that it has sent formal requests to Italy, Portugal, Greece, Sweden, Luxembourg and France regarding their failure to incorporate the Second Anti-Money Laundering Directive into their national laws. If the member states in question fail to take action, they may be sent before the European Court of Justice (ECJ).

The Directive extends the scope of the First Directive on money laundering, in particular, extending the coverage of the First Directive, which was limited to the financial sector, to a series of non-financial activities and professions that are vulnerable to misuse by money launderers.

“DIRTY BOMB” SUSPECT, U.S. CITIZEN JOSE PADILLA ALLOWED TO SEE LAWYER

An American citizen held incommunicado by the military for more than a year as an alleged al-Qaida supporter will be allowed to see a lawyer, the Pentagon said Wednesday. Padilla, who the government says plotted to detonate a radioactive dirty bomb in the United States, is being held at a U.S. Navy brig in Charleston, S.C. No meeting has been scheduled. In a statement, the Pentagon said it had determined that providing Padilla access to an attorney would not compromise national security or interfere with efforts to use him as an intelligence source. Still, the Pentagon maintained it was not required to let him speak with a lawyer and that “... such access ... should not be treated as a precedent.”

Padilla’s attorneys have challenged the government’s right to hold him indefinitely, without charges or trial, as a violation of his rights as a U.S. citizen. The government, meanwhile, calls him an enemy combatant who can be held for the duration of the war on terrorism. In December, the 2nd U.S. Circuit Court of Appeals, in a 2-1 ruling, ordered Padilla released from military custody unless the government charges him. That ruling is on hold while the Supreme Court considers taking the case.

PROPOSALS FOR SECRET TRIALS WILL SHAME THE UK

In the course of 12 months, 13 years ago, more than 20 innocent Irish men and women were branded “terrorists” and convicted by English courts. That the evidence was false was known only to the accused and their accusers. For the accusers, even that clarity undoubtedly became blurred, since in their minds the means -- twisting and coercing evidence -- justified the ends: combating terrorism. Brutality, falsification, exaggeration of scientific evidence, concealment of prosecution evidence and of intelligence pointing in a different direction was the order of the day.

So is it possible that the Home Office is suffering from collective amnesia? What lessons should any home secretary have learnt from these terrible cases? David Blunkett, adopting the same dangerous justification of the means justifying the end, this week proposes trials based on evidence that will never see the light of day, the abolition of juries, substitution by judges, and a reversal of the burden of proof so that suspicion is enough.

The lack of protest over the imprisonment of innocent men and women in 1974 is a badge of shame for this country. The confidence with which this home secretary can express so unchecked an appetite for further powers that violate every international minimum norm is in itself a further badge of shame that hardly needs legislation to compound it. For this time, unlike those convicted in 1974, the men and women detained or convicted now will never have the possibility of knowing, let alone undoing, the false testimony that has buried them alive.

OPINION & ANALYSIS

THE FED’S LITTLE GREEN LIES

The voters know that politicians in general are liars who will say anything to get elected. But they except their Congressman, who shook hands with them once at a fund-raiser. Parents know that the American public schools are disintegrating. But they except the local public school to which they send their children, which somehow has avoided the decay. And so it goes, liar by liar, fraud by fraud. People want to believe. The more dependent they are, the more they want to believe.

Let us assess the success of part of the Federal Reserve’s supposed mandate, “provide a monetary climate that is in the interest of the entire economy.” Gold today is about $400/oz. In 1913, it was $20. Compare this to the resulting figure in the Inflation Calculator. What we see is an endless supply of lies about economic stability, stable money, and the need for a government monopoly to control monetary policy independent of the government. The footnotes get revised, new editions are published, but the lies remain the same. These are not errors. They are lies. Anyone in academia or banking or government who starts telling the truth finds that his income, as denominated in dollars, falls a lot faster than the dollars depreciate. So, the lies are not challenged. They are accepted.

DADACRACY NOW, TOTALITARIANISM NEXT

Our founding fathers gave us a republic, if we could keep it. The United States’ Constitution was crafted to strictly limit government so as not to deprive citizens of their natural rights to life, liberty, private property, and the pursuit of happiness. Ever since the Civil War (which it really was not), the founding of the Federal Reserve, two world wars, FDR’s New Deal, and LBJ’s Great Society, American government has transformed into a democracy. So now we must worship, and abide by, the will of the majority at the expense of our liberty. This is a particularly frightening thought considering that what passes for wisdom today is based upon feelings and emotions while logical and rational thinking have been eviscerated. When combining democracy with a dazed and confused citizenry, the United States has devolved into a dadacracy.

From where does the term “dadacracy” come? The Dada movement, which began in 1916, and, in essence, survives to this day, embodies what it means to be illogical, self-referential, and emotional. Dadaism was an artistic and literary movement that was nihilistic and anti-Western civilization. For those who shared the Dada state of mind, the following were considered to be positive attributes of Dadaism: All forms of modern civilization were found to be disgusting, one of its aims pertained to the relativization of all values, it sought a complete break with tradition, and it sought the systematic destruction of culture and of civilization.

When examining moral relativism, multiculturalism, and political correctness, it is quite apparent that those who are part of today’s alleged intellectual vanguard are simply modern-day Dadaists. These college professors, public school teachers, newspaper editors, television anchors, and countless others, undermine Western civilization every time they open their mouths or put pen to paper. With enough repetition in the classroom, on the TV, in the newspaper, and elsewhere, Dada indeed does become a state of mind. Emotion and feelings are celebrated as the pinnacle of intellect while logic and true scholarship are eschewed as worthless relics. The mind dies as it becomes infected by illogic.

In the United States, Dada has become a state of mind. Right under our noses, the Constitution has become a joke. It has become more like a menu from which our guardians (politicians and judges) can pick and choose which rights shall and shall not be granted to citizens. Ah, but the Dadacrats are carefree. They feel great about themselves. In this soil, fertilized by smug and sterile minds, the seeds of totalitarianism have been planted. In an election coming soon, Americans may prove capable of voting for their own masters.

AMERICA’S PLATONIST PRESIDENT

The big-picture notion of reality, existence, and the world as it is dates back 2,400 years to the Greek philosopher Plato. Plato believed that what is real is not the things you can touch and see: your computer, your desk, those empty barrels in Iraq that Bush thought were full of chemical weapons. What is real is the general idea of these things. The idea of a computer. The idea of a desk. The idea of an Iraqi threat to the United States. Whether you actually have a computer or a desk, or whether Saddam Hussein actually had chemical weapons, is less important than the larger truth. The abstraction is the reality.

Plato’s successor, Aristotle, took a different view. He thought reality was measured by what you could touch and see. That is the definition of reality on which modern science was founded. It is the definition Colin Powell used when he told the world Saddam had weapons of mass destruction. It is the definition David Kay used when he set out to find the weapons. Kay and Powell are dismayed by our inability to see and touch the weapons. But Bush is not. He is not going to let Aristotle’s reality distract him from Plato’s. In Bush’s Platonic reality, the world is dangerous, threats exist, and the evidence of our senses must be interpreted to fit that larger truth. The more you study Bush’s responses to unpleasant facts, the clearer this pattern becomes.

What are the consequences of such a Platonic presidency? The immediate risk is the replacement of Saddam with a more dangerous fundamentalist regime. Bush is certain this will not happen, because some nice men told him so. Beyond Iraq, the risk is that the rest of the world will not believe anything the U.S. government says. Republicans used to observe derisively that Clinton had a difficult relationship with the truth. Bush has a difficult relationship with the truth, too. It is just a different -- and perhaps more grave -- kind of difficulty.

THE AGE OF THE STATE

In 1960, when I was 14, I was nuts about JFK. I did not realize that JFK was establishing a lasting style of campaigning for the presidency: offering “idealism” and “leadership”, meaning proposing extravagant missions for government. JFK promised a “New Frontier,” which took form (sort of) in the “space race” that culminated in putting a man on the moon before the Russians did. Utopian reflexes have become part of the job description of the American presidency. We take them for granted. The idea that the president is merely an “executive”, that is, executing the laws passed by Congress, seems pathetic and pusillanimous. Today the president is supposed to think big, like Buzz Lightyear: “To infinity -- and beyond!”

We have been living amidst one of the great revolutions of human history, and we hardly know it: the penetration of the State into every aspect of human life and society. Some people regard this as good and “progressive”, others regard it as tyrannical; but either way, it’s a fact, a transformation as great as, say, the Industrial Revolution. Absolutely nothing is now beyond the scope of State power. You might think people would at least notice. But so far this age has received no tag, unlike the Stone Age, Feudalism, the Renaissance, the Reformation, the Enlightenment, and other eras of profound change that left nothing as it was before. No presidential candidate proposes to reverse it, because none is even aware of it. The only question is how to carry it on.

Rulers like Nero and Caligula have achieved notoriety for their personal cruelty, but they did not really change -- or want to change -- the way people actually lived. Their impact was superficial. However shocking their own conduct, their subjects were not particularly less free than they had always been. In the 1940s, Friedrich Hayek intuited the great change, which he called “the road to serfdom.” He was attacked for suggesting that the Nazi, Fascist, Socialist, Communist, and Democratic regimes were all in agreement on the basic premise that the State’s power must keep expanding. Today, when a “conservative” Republican president assumes that same premise, who can doubt that Hayek was right?

CHANGING THE IDIOT BOX

MTV has recently provided a thought-provoking Superbowl halftime show that is raising all kinds of interesting questions about the American entertainment industry. In this piece, I would like to address some of these questions, and propose some actions to improve the consumer choices available in TV and film. Hollywood continues to produce works that are boring, un-intelligent, politically correct, anti-Christian, anti-rural, and involving a significant number of gratuitous explosions and car chases. Indeed, Hollywood produces almost nothing besides such works. Why does this occur? Having spent my early years living just a few miles from Hollywood, and moreover having had many friends and acquaintances involved in The Industry, I have a few ideas here. One is that most of the people working in Hollywood are politically correct, anti-religious types with no respect for Americans with traditional cultural values.

There have been a good many conservatives who defend Hollywood on the grounds that “it gives the people what they want.” But it does not. The people get the 10% of what they want that matches up with the reigning political and social ideologies in Industry LA. That, my friends, is capitalism, at least of a sort. People with capital don’t always just want more capital. Sometimes they want more capital, and also want to feel like they are advancing THE CAUSE. You know, THE CAUSE of bringing about de facto One Government rule, because it is necessary for the environment, after all, the environment that the sad little non-media capitalists are constantly fowling with their hideous, racist desires for economic and technological expansion.

If you are serious about improving media culture, charity and/or ethically-directed capital is the only answer. Consumer choice alone will not work in a mixed-economy; there are too many forces limiting the flow of capital and the development of consumer preferences. What we have today is a situation of de facto monopoly by a web of government-buttressed, interlocking media companies, and supported by a not merely undereducated, but wrongly educated consumer. If you want to change this, forget about going into the media business for direct head-to-head competition for profits. What is instead necessary, is the gaining of support of wealthy, religious capitalists in setting up an alternate media production system to the one we currently have in this country (one which is, I might add, globally dominant). There is of course a precedent for this, in the great patrons of the arts who once dominated Venice and other European cities.

STARTING A BRUSH FIRE FOR FREEDOM: AN INTERVIEW WITH US REP. RON PAUL

When asked what advice he would give to Americans concerned about the growing power of the federal government and the various threats to our liberties, Congressman Ron Paul (R-Texas) quoted Samuel Adams: “Every individual has a responsibility to be informed, to know what is going on and to know the issues. As Samuel Adams once said, ‘Go out and start a brush fire.’ And you can do that with one individual or many. You can become a teacher or a writer or help somebody in politics. But you can only start a brush fire for freedom if you feel confident that you understand the issues and really can defend liberty as being the best system for all of us.”

THE COMMISSION TO COVER UP 9/11

As they listened to the taped voice of a courageous flight attendant as she calmly narrated the doomed course of American Airlines Flight 11 there was scarcely a dry eye in the Senate hearing room, where 10 commissioners are probing the myriad failures of our nation’s defenses and response to the terrorist attacks of 9/11. But answers? Not many. The most shocking evidence remains hidden in plain sight.

The politically divided 9/11 commission was able to agree on a public airing of four and a half minutes from the Betty Ong tape, which the American public and most of the victims’ families heard for the first time on the evening news of Jan. 27. But commissioners were unaware of the crucial information given in an even more revealing phone call, made by another heroic flight attendant on the same plane, Madeline (Amy) Sweeney. They were unaware because their chief of staff, Philip Zelikow, chooses which evidence and witnesses to bring to their attention. Mr. Zelikow, as a former adviser to the pre-9/11 Bush administration, has a blatant conflict.

THE NEW INTELLECTUALS

It might be illusion, or it might just be reality, that the entire Bush presidency and everything for which it stands is in a state of slow collapse. It is slowly dawning on people that the whole rationale for the billions spent, the tens of thousands of dead, and all the hysteria, was a hoax. Of course the same could be said of most or all wars. Why is the truth making a difference this time? Because ideas have been denationalized, and the world populated for the first time in fifty years with independent intellectuals.

After World War II, academia went through a dramatic change for the worse. It was simultaneously democratized and given the primary mission of serving the state. The change in mission was nothing more than a continuation of wartime culture over which the state was completely dominant. The state secured many (though not all) of its gains made during wartime and the effects rippled throughout American society.

We know what it is like in our time to suffer under a state that uses events as a form of political intimidation to shut down critics. Object to the police state in our time and you confront teeming hordes of bureaucrats and state apologists screaming “9-11” at you. Back then it was worse. The terrifying power of the state throughout the war (drafting, taxing, planning, censoring), and then at Nagasaki and Hiroshima (instant torching of mass civilian populations) was the psychological lever by which the state effectively nationalized the culture -- far more completely and effectively then now. Intellectuals were owned. Whether in academia or journalism, everyone who aspired to think and exercise intellectual influence knew the right course of action. The state was where the action was. There was a national culture that the neocons say we should recapture -- and it was awful.

But we live in times that devour anyone who aspires to be the one all-controlling national or international will. Real intellectuals -- and they are everywhere today -- will never stand for it. Maybe the work of those who dared dissent from approved opinion in the 1940s, 50s, 60s, and 70s, is finally coming to fruition. Mises, Hayek, Rothbard, and all the other courageous people who never bought the line back then, gave a great gift to the world, which we are just now unwrapping.

RON PAUL ON FOOLISH VS. WISE CONSISTENCY

A wise consistency is the foundation of a free society. Yet everyone knows, or thinks they know, that consistency is the hobgoblin of little minds. How many times has Ralph Waldo Emerson been quoted to belittle a consistent philosophy defending freedom? Even on this floor I have been rebuked by colleagues with this quote, for pointing out the shortcomings of Congress in not consistently and precisely following our oath to uphold the Constitution.

It is quite a distortion of Emerson’s views to use them as justification for the incoherent and nonsensical policies coming out of Washington today. But, the political benefits of not needing to be consistent are so overwhelming that there is no interest in being philosophically consistent in one’s votes. It is a welcome convenience to be able to support whatever seems best for the moment, the congressional district, or one’s political party.

Emerson clearly explained the consistency he was criticizing. He was most annoyed by a foolish consistency. He attacked bull-headedness, believing that intellectuals should be more open-minded and tolerant of new ideas and discoveries. To Emerson, being unwilling to admit an error and consistently defending a mistaken idea, regardless of facts, was indeed a foolish consistency. His reference was to a character trait, not sound logical thinking.

Since it is proven that centralized control over education and medicine has done nothing to improve them, and instead of reassessing these programs, more money is thrown into the same centralized planning, this is much closer to Emerson’s foolish consistency than defending liberty and private property in a consistent and forceful manner while strictly obeying the Constitution. The truth is that Emerson must be misquoted in order to use him against those who rigidly and consistently defend a free society, cherish and promote diverse opinions, and encourage nonconformity. A wise and consistent defense of liberty is more desperately needed today than any time in our history.