Offshore News Digest for Week of June 21, 2004

GLOBAL BUSINESS

TRIUMPH OVER EU CONSTITUTION GIVES WAY TO GLOOM

Triumph over the EU’s adoption of a landmark constitution gave way to gloom on Saturday as leaders of the 25-nation bloc returned home fuming with each other and split over who to select as European Commission chief. The accord on a new set of rules for a Union of 450 million citizens that now straddles the old Iron Curtain was a welcome relief for leaders who suffered a wave of public apathy and Euroskepticism in last week’s European Parliament elections. “It is a big step forward for the EU,” said Pat Cox, president of the European parliament. “It is the first proof that the EU of 25 is working well and delivering.”

The constitutional treaty was drafted by a convention, led by Valéry Giscard d’Estaing, the former French president, which self-consciously compared itself to the Philadelphia convention that drafted the US constitution. However, the European version is a dense legal document, lacking the clarity that its authors originally hoped would make it memorable to generations of European school children. In its final form the constitution creates a new EU president and foreign minister, to sharpen Europe’s presence in foreign affairs, and establishes an EU diplomatic service.

More democratic control over EU activities will be exercised by national parliaments and the European parliament, and the Union will have a greater role in tackling international crime and asylum and immigration policy. Last-minute negotiations focused on a new voting system for the EU Council of Ministers, where a vote is carried if it is supported by at least 15 member states representing 65% of the population. Britain was happy with a deal that preserves the national veto in tax matters and offers new legal guarantees that the treaty will not have an impact on national labor laws. But Prime Minister Tony Blair now faces an uphill task winning a referendum on the constitution probably late next year in a country where, as the EU elections underlined, euroskepticism is running high.

All 25 countries have to ratify the constitution for the accord to take effect, either through parliamentary votes or through referendums that may be hard to win in such countries as Britain and France. Europe’s leaders badly needed a success after last week’s elections to the European parliament, when voter turnout fell to a record low of 45%, with a rise in anti-EU parties.

European voters should reject the new constitutional treaty and demand something better.

The task of agreeing a new constitutional treaty for the EU with 25 countries around the table, all with their own interests and aims, was no doubt a difficult one. Compromise, fudge and imperfection were inevitable. The text that European governments ended up with on June 18th may be, as they say, the best that could be done in such circumstances. Fortunately, however, there is now a chance for those circumstances to be changed: at least ten countries will put the new treaty to their voters in referendums, while the others seek to ratify it solely through their parliaments. Those voters would do themselves, and the EU, a great service if they were to reject this treaty and jolt governments into coming up with a better version.

Some European politicians and EU devotees have argued that the consequences of a rejection would be catastrophic. That is hyperbole. It might be true that if merely one country out of 25 -- Britain, say -- were to vote no, the situation would be awkward for all concerned. Yet that can be dealt with when and if it occurs (Britain’s referendum may well not take place until 2006, the last or nearly last of all the polls). It would be bizarre indeed -- unconstitutional even -- if governments were to be holding referendums in which only one outcome is deemed acceptable. If you cannot take no for an answer, why ask the question? The EU badly needs more popular legitimacy, as the big anti-incumbent votes and quite sizeable anti-EU votes in this month’s European Parliament elections showed. And the big flaw in the proposed constitutional treaty is that it does little or nothing to make Europeans likelier to feel comfortable with the whole enterprise.

BUSH OPPOSES BAN ON OFFSHORE BUSINESSES COMPETING FOR GOVERNMENT CONTRACTS

The Bush administration is opposing a provision in a US House bill that bars companies based overseas such as Tyco International Ltd. from competing for Homeland Security contracts, saying it could violate World Trade Organisation rules and other agreements. “The pending legislation is overly broad and may have unintended negative consequences”q the White House Budget Office said in a statement. Tyco, Ingersoll Rand, and Accenture Ltd. are among companies incorporated in countries such as Bermuda and the Cayman Islands that may be excluded from bidding on Homeland Security contracts. On Tuesday, Republican leaders removed from the bill a provision revoking existing deals such as a $10 billion contract awarded June 1 to Accenture, though House Democrats then revived efforts to block the Accenture contract.

“Unpatriotic” Expatriates

As the offshore outsourcing debate continues to rage on, another group of companies has come in for severe criticism in the US: “expatriate” services firms. Companies including Seagate Technology and Tyco have moved their headquarters from the US to offshore tax havens, and are now being branded as “unpatriotic” by critics who say they are taking money from the hard-working US tax payer and possibly doing US IT contractors out of a job. The anger being expressed by both state and government representatives is getting more and more fierce, as they attempt to expose the next case of unpatriotic villainy.

Facing the strongest attack is Accenture. Incorporated in Bermuda, its critics argue that it is based there not to take advantage of the year-round tanning, but rather the favorable tax breaks. The company has made some enemies among members of the House of Representatives since winning the single largest IT services contract ever awarded to an IT outsourcer, a $10 billion 10-year contract with the Department of Homeland Security to build a virtual border system for the US-VISIT contract.

Connecticut Democrat, Rosa DeLauro, who attempted to block Accenture from performing the project, said it is “outrageous and wrong” that such companies are being rewarded for “abandoning” the US. Other less hysterical views however suggest quite assiduously that the tax breaks firms get for being incorporated in overseas locations can enable them to undercut the competition. In the end, arguments focusing on “unpatriotic” acts and the lack of favoritism for local companies and workers really boil down to this -- the US is putting up barriers to stifle competition from overseas, and maintain the incumbent status quo.

ISLE OF MAN “SLEEPWALKING” INTO BEING A DEPENDENT TERRITORY OF THE EU

Dr. Dick Horsnell, of Douglas, is a leading light in the Manx EU Realist Group which has been urging the Island to realize its position is being threatened by bureaucrats in Brussels. After an approach from the UK Independence Party, Dr. Horsnell agreed to join the European parliamentary election campaign and became campaign manager for Mr. Kilroy-Silk, a former TV presenter and Labour MP. The UKIP shocked the three main parties with its success in last week’s elections. The party secured 12 European seats and 16.1% of the vote, just 7% behind Labour and ahead of the Liberal Democrats.

The incredible success of the littleknown party, which is calling for a complete withdrawal from the EU, has been credited to Mr. Kilroy-Silk’s celebrity status. Dr. Horsnell said polls over the past two years have revealed between 50% and 58% of UK voters want out of the EU, but they are not represented by the main political parties. He said it is also time people in the Isle of Man took more interest in the EU. With the Isle of Man being a Crown dependency and “70% of legislation that British people obey [] now passed in Brussels by an undemocratic EU” he warned that “This Island is sleepwalking into a position where it will be a dependent territory of the EU.”

THE OECD’S TAX ATTACK REVEALS TRUE AGENDA

The high-taxing, welfare states in “old” Europe are trying to prevent the migration of business to economies that do not engage in “transparency and effective exchange of information for tax purposes” (translation -- have comparatively “lower” taxes). In addition to the usual “offshore” suspects, the OECD is now reportedly targeting Singapore, Hong Kong and Dubai. This merely emphasizes the true agenda, which is to ensure that, because the OECD cannot build a physical equivalent of the Berlin Wall to keep capital within Europe, no other country can be allowed to offer a more attractive home for that capital.

In fact, Singapore and Hong Kong represent the entry point for foreign investment into China. Dubai, already an entry point for India, is rapidly developing as the financial entry point for the Middle East. The OECD therefore appears to be trying to slow down the economic development of China, India and the Middle East, which each represent a huge competitive threat to the moribund European economies, by targeting their financial jugular veins. The OECD’s tax harmonization effort is designed to deny the developing countries of Asia and the Middle East access to the same fiscal incentives that its developed members all used when they were still growing and which are often critical for attracting foreign investment.

BELIZE’S CREDIT RATINGS MAY BE CUT

Moody’s said it may cut Belize’s ratings amid concerns its debts are too big for it to pay back, a move that would raise the tiny nation’s borrowing costs. The former British colony, a country of 250,000 inhabitants of coral quays and jungles, has enjoyed strong economic growth in recent years as part of a tourism boom. Moody’s said an accompanying increase in Belize’s debt burden had led to a deterioration in the country’s credit indicators.

Belize has two international bonds outstanding -- a $125 million bond due in 2012 with a coupon of 9.5%, and a $100 million bond with a 9.75% coupon due in 2015. Belize Central Bank Governor Sydney Campbell said the country was considering issuing an international bond for $225 million with a maturity of between 15 and 20 years primarily for refinancing high cost debt. He said the government was waiting for favorable market conditions to issue the bond.

“They are growing very quickly, but you have to take into account the size of their economy,” a Wall Street source said.

TYCOON’S SHOW TRIAL A TEST FOR CAPITALISM IN RUSSIA

Since his incarceration eight months ago, Russia’s richest man, Mikhail B. Khodorkovsky, has made only fleeting public appearances -- behind bars on a prison video screen, hustled from police vans amid a phalanx of security guards, or, as his trial began on Wednesday in a Moscow courtroom, seated inside a cage. In these glimpses, Mr. Khodorkovsky looks pale, resolute and unemotional, much as he did in the years before the state police arrested him at gunpoint aboard his private jet in October, charging him with looting public assets and evading hundreds of millions of dollars in taxes.

And until his arrest, Mr. Khodorkovsky’s past as one of Russia’s wiliest and most hard-nosed tycoons seemed a rapidly fading memory. He began his career as a banker who built his fortune on a series of highly criticized privatizations of state-owned companies, like Yukos. The deals were plagued by inside maneuvering and fire-sale prices, giving rise to a group of powerful businessmen, including Mr. Khodorkovsky, who became known as oligarchs.

Perhaps inevitably, given the arc of his career, Mr. Khodorkovsky’s showcase trial -- freighted with the possibility of a lengthy prison term and a Yukos bankruptcy -- promises to offer one of the first public referendums on the state of Russia’s riches. Its outcome could help shape for years the nature of the country’s experiments in capitalism. “This should be Russi’qs O. J. trial and should be the most public and most important bit of jurisprudence in modern Russian history,” said Bernard Sucher, a Moscow investment banker.

GUERNSEY PROPOSES TO SIGN BILATERAL TAX AGREEMENTS WITH EACH EU MEMBER STATE

Chief Minister Laurie Morgan introduced the proposal to sign bilateral agreements with the 25 EU member states on the taxation of savings income, saying that a quick end to a long process had also helped to secure greater recognition of the island’s “independent international personality”. He claimed that, “The very fact we need bilateral agreements is a very practical demonstration of our independence from the EU” -- saying that with the EU unable simply to extend the directive to the Crown Dependencies, the model agreements drawn up by Guernsey, Jersey and the Isle of Man stressed that nobody else had any right to intervene in agreements made between the islands and member states. “Member states cannot expect the UK to act for us. We are quite capable and respected enough to implement our own agreements,” said Chief Minister Morgan.

SWISS GOVERNMENT REJECTS MANDATORY SCHENGEN VOTE

The government wants none of the nine treaties agreed with the European Union last month to be put to mandatory nationwide votes. The second set of bilateral agreements includes the controversial Schengen accord, which governs cross-border crime. While the Social Democratic, Radical and Christian Democratic parties welcomed the decision, the rightwing Swiss People’s Party called it a “scandal”. The People’s Party is opposed to plans for security cooperation with Brussels saying Switzerland’s sovereignty was at risk.

The decision means that opponents of Schengen, in particular the People’s Party and the isolationist Campaign for an Independent and Neutral Switzerland (CINS), will have to collect 50,000 signatures to force a vote on the issue. The government would probably have an easier time pushing through the Schengen accord in such a ballot, which only requires a majority of the people. A mandatory vote, however, would require a majority of both voters and cantons.

UP TO 30% OF CHINESE FOREIGN DIRECT INVESTMENT INVOLVES ROUND-TRIP FUNDING

The practice of sending capital from China to offshore tax havens and then reinvesting the money in China -- known as “round tripping” -- may be exaggerating the statistics about foreign direct investment in China by as much as 30%, according to a source at the Chinese Academy of International Trade and Economic Co-operation. Based on that figure, China’s 2004 FDI inflows, currently predicted to be approximately $84 billion, may actually be closer to $58 billion.

Mei Xinyu reports that Hong Kong and three offshore tax havens in the British Virgin Islands, the Cayman Islands and Samoa, accounted for $23.5 billion in FDI from China during 2003. Much of that money may have been directed back to China, which means the money would appear to have been coming from outside China and contributed to an inaccurate total for the year. The mainland attracted $53.5 billion in 2003.

GRENADA LAW AND POLITICS: CONFUSION AND DISTURBANCE EVERYWHERE

It seems that as the topic of the visit by Grenada Prime Minister to the private home of fraudster Eric Resteiner escalates and assumes international proportions, the local scenario is becoming rather confusing and very disturbing. With three former diplomats of scandal-plagued Grenada, Viktor Kozeny, Van Brink, and Mr. Resteiner, all now Indicted in the U.S.A. -- on charges of defrauding U.S. citizens of hundred of millions of dollars -- quite naturally Grenada will be the centerpiece of questions and answers sessions. That would be the worst kind of publicity Grenada could get, and because of the transparency of the U.S. System, everything revealed in those sessions will one way or another find space in worldwide publications.

EXPATS RETURNING TO A CHEAPER SINGAPORE

Expatriates, who left Singapore in droves in the last two years, are coming back. Five agencies and head-hunting firms said they have been receiving more calls from “senior-level executives” from the United States, Britain, Australia and Asia. Many are looking for jobs in the IT and banking sectors. There is a fair mix of people who have worked here before and first-timers. One pull factor -- Singapore has become a much cheaper city for expatriates, dropping 14 notches in the rankings of an annual survey, to 46 -- cheaper than cities in countries such as Vietnam, Indonesia and China.

So why has Singapore become so much cheaper? Relocation experts and economists gave The Straits Times three reasons: the weak US dollar, cheaper housing and the lower cost of cars.

ICELAND PRIME MINISTER UNDERSTANDS WISDOM OF LOW TAX RATES

After years of economic stagnation, unemployment and fiscal disarray, an Icelandic government led by Prime Minister David Oddsson implemented a series of Reaganesque reforms that have turned the economy around. In the 1990s, he reformed the income tax moving it towards a simpler and flatter structure. He also lowered the corporate marginal tax rate from 48% to 30%. And he also managed to contain spending, got rid of inflation, privatized large public companies and got the government out of the banking industry.

The results were astonishing. Unemployment dropped, the deficit disappeared, as did inflation, and Iceland is now one of the fastest growing countries in Europe -- 5% a year on average for the last 10 years. According to Mr. Oddsson, “This success has been achieved not in spite of extensive tax cuts but, to a great degree, because of them.” In 2002, the corporate rate was cut again, from 30% to 18%. Today, Iceland has the third lowest corporate income tax rates of all the OECD countries behind Ireland’s 12.5% and Hungary’s 16%. And according to the Prime Minister, personal income tax will be reduced again this year by four percentage points, the income tax surcharge on the highest incomes will be removed and plans are formed to cut the corporate income tax rate further down to 15%.

Some small countries with stable political and monetary arrangements have become quite wealthy by offering a business-friendly environment and low tax rates to individuals and corporations: Switzerland, Luxembourg, and the two Channel Islands, to name a few. Clearly, Iceland has joined their rank with great success. This choice makes a lot of sense. Iceland is a small, isolated country of less than 300,000 inhabitants. Like most tiny countries, it cannot compete with large nations on things requiring large infrastructure. Iceland would also have a hard time accommodating a large number of immigrants. On the other hand, there is plenty of legitimate capital looking for a friendly environment and Iceland is committed to grab it. This is called tax competition.

JUNE ISSUE OF ESCAPE FROM AMERICA MAGAZINE IS OUT

Sample articles from this issue include:

Some Thoughts On Living In The Less Developed World : Loads of articles in this magazine revolve around countries like Argentina, Brazil, Mexico, South Africa, Panama, Belize, the Dominican Republic etc. What do these countries have in common? They all fall into the category of emerging markets. No matter what the differences and similarities of these countries may be, one way or another, they all belong to the less developed world. Taking the drawbacks into account, is it worth living in a less developed country? Yes, it is. Based on my own experience in South Africa and Mexico, there appear to be less rules and regulations that dominate your life, both privately and professionally. The individual often enjoys more freedom in terms of what you can do and how you can get things done. In a nutshell, there are more opportunities to make your mark.

Moving To Canada: Choosing The Right Destination : You have decided to move to Canada but before you go you must choose a destination in which to settle. Canada, with over 10 million square kilometers of territory, is the second largest country in the world, with many wonderful cities, towns and rural communities beckoning the newcomer. The vastness of this country makes choosing a destination all that more difficult. Do you choose to live near the ocean, in the mountains, in a large city, on the prairies, or in the lake regions? Suddenly, choosing somewhere seems overwhelming! Choosing to move to where your relatives live, or picking a city that is well known might seem like an obvious and logical thing to do under the circumstances, but it may not always be the wisest choice. Strategically choosing your settlement destination may bring greater rewards in the short and longer term.

Moving To The Caribbean, Phase 1: Research And Preparation : There probably are very few among us that have not considered moving to the Caribbean after a vacation there. After all, the Caribbean is one of the most scenic and friendly areas of the world. For me, that feeling of being drawn there has not gone away since my first visit in 1997, and it is for that reason, among others, that has led me to moving there to start a small business. This will require doing some serious investigation into the realities of such a venture. It is this information that I would like to share with you in hopes that it helps you, and in hopes that it might motivate others who have already made the move to share their knowledge and experience as well. I have separated my moving plan into phases so that it will not be so overwhelming. This article covers Phase 1.

Living In Bocas del Toro, Republic of Panama : My husband and I moved to Isla Colon last year. It is the largest island in the Bocas del Toro archipelago, in the Caribbean Sea not far from Panama’s border with Costa Rica. We visited friends here years ago and fell in love with the place immediately. After all our travels around the world we felt we had finally found the one spot having everything we wanted: good weather, warm and clear water for diving, great surf with no crowds, an abundance of tropical wildlife and flora, a laid-back population in a democratic country with a sound economy, and a primitive existence with modern conveniences. It helped that the currency is U.S. dollars (called balboas in Panama).

The Expatriation Option : Expatriation has been called “the ultimate estate plan” and it is a legal, step-by-step process that can lead to the legal right for you to stop paying U.S. or other national income taxes -- forever. It requires professional consultations, careful planning, movement of assets offshore and acquisition of a second nationality. When all that is done (and done exactly right), you must leave behind your home country and become a “tax exile” with an established domicile in a low or no-tax jurisdiction. And, for U.S. citizens, this unusual plan requires, as a final step toward tax freedom, the formal relinquishment of citizenship. A drastic plan? You bet. But for U.S. citizens and long-term residents who seek a permanent and completely legal way to stop paying all U.S. taxes, expatriation is the only option.

BAHAMAS FINANCIAL POSITION MAY BE STRONGER THAN PERCEIVED

The financial position of the Bahamian economy could prove to be much stronger than current perception, as the country’s GDP data may have been substantially underestimated, the Minister of State for Finance said. Leading off the Senate debate on the 2004/05 budget, Senator James Smith told the group that a recent technical assistance mission by the IMF has indicated that the GDP data for the country has been substantially underestimated for many years.

COSTA RICA CORRUPTION SCANDALS

There are currently three major scandals and a couple of minor ones. With the country mired in corruption, the President and the traditional political parties still want to raise taxes. The President has forgotten his statement during the 2002 campaign where he said that the current taxes were sufficient, money was just wasted in corruption and that was what had to be addressed. We will continue to remind him and the Costa Rican people.

ASIA PACIFIC SET FOR PRIVATE BANKING BOOM

Research conducted by accounting firm KPMG has found that one third of private banking institutions are planning acquisitions in the next three years, with the Asia Pacific region identified as a particular hot spot. According to KPMG, the Asia-Pacific region accounted for 41% of all private banking acquisitions in 2003 (by volume). This compares with a figure of 23% in 2000 and is a trend the firm forecasts is set to continue, with the research suggesting that private banks around the world see Asia-Pacific as being the most noteworthy market in terms of growth potential.

The study also identifies the continued predominance of domestic acquisition activity in the private banking and wealth management sector, the proportion of which has increased from 63% of all private banking transactions in 2000 to 85% in 2003. The study also observed that most deals are likely to be made with either North American or Swiss institutions and at the larger end of the market. The banks least likely to be involved are smaller banks.

TAXES

HONG KONG LAWMAKERS APPROVE TAX RAISING MEASURES

Hong Kong’s Legislative Council approved a bill designed to help shore up the territory’s public finances by closing various tax loopholes and strengthening anti-avoidance provisions. The Inland Revenue (Amendment) Bill 2000, which was approved in a 31-8 vote (with 9 abstentions), will tighten procedures concerning the deduction of interest expenses, the depreciation of commercial and industrial buildings and the payment of royalty income. It also revises rules relating to the determination of certain costs and fees for tax appeal cases handled by the Board of Review.

PROPOSED BILL WOULD REWARD WHISTLE-BLOWERS IN TAX CASES

Pass along the inside information to the IRS and you stand to collect up to 30% of taxes and penalties recovered under whistle-blower legislation aimed at snaring high-dollar tax cheats. The proposed IRS Whistleblower Office is designed to give tax agents an inside advantage when fighting complicated, often invisible tax shelters developed for and used by wealthy taxpayers and corporations. It would go after individuals and corporations with more than $200,000 in income who use shelters that hide $20,000 or more. Informants who blow the whistle on tax evasion stand to win 15% to 30% of the recovered taxes and penalties if they contribute substantially to the case. Those who make less substantial contributions can win up to 10% of recovered money.

The chairman of the Senate Finance Committee, Charles Grassley, R-Iowa, modeled the office after the False Claims Act, which lets people file lawsuits against companies and individuals that defraud the government in arenas other than tax. The Justice Department reported that lawsuits filed under the False Claims Act recovered $1.5 billion in 2003. Whistle-blowers were granted $319 million in rewards. More than $12 billion has been recovered since Congress strengthened the law in 1986.

The IRS currently has a fraud hot line and its own criminal investigation unit. Informants can apply for rewards when taxes are recovered based on their tips, but critics say the program has too many obstacles to lure many informants. IRS statistics show that the agency has paid an average of 2.74% of recovered taxes as rewards to informants since 1967.

IRELAND’S TAX MAN ASKS FOR MORE POWERS TO ENFORCE RESIDENCY RULES

Ireland’s Revenue Commission is hoping to step up its enforcement of Ireland’s tax exile rules by gaining access to commercial flight passenger lists and private jet schedules, in order to prevent individuals falsifying the amount of time spent out of the country. At present, investigators are only able to make cursory checks on the movements of individual taxpayers and a review has been called for to consider whether more thorough access to passenger rosters and other information is needed to police the system.

Current rules stipulate that commissioners must obtain a High Court order to gain access to such information, although this avenue has hitherto not been pursued by the tax man. Reports also indicate that the Commission wants to reduce the number of days that non-residents may reside in Ireland for tax purposes. As in many countries, residence is assumed if an individual is present in Ireland for more than half of a tax year, or for 280 days in two consecutive years. However, such rules are governed at the EU level.

CANADA WILL CELEBRATE TAX FREEDOM DAY ON JUNE 28

Tax Freedom Day will finally arrive in Canada on June 28 this year, according to the calculations of the economic and social think-tank The Fraser Institute. Tax Freedom Day is now calculated in most industrialized nations, and provides a simple reference point as to the true tax burden placed on citizens by their governments. In this case, it effectively means that all income earned by Canadian taxpayers prior to June 28 was used to pay the government’s tax demands at all levels: federal, provincial and local.

For the average Canadian, Tax Freedom Day has been steadily slipping over the last four years. According to revised figures from Statistics Canada and government financial information, Tax Freedom Day fell on June 25 in 2001, June 26 in 2002, and June 27 in 2003. Niels Veldhuis, senior research economist at the Institute, points out that the measure is used simply to assess the price that citizens pay for government, rather than as an assessment of the quality of service governments provide.

According to the Institute, the average Canadian family experienced a $1,327 increase in their total tax bill between 2003 and 2004, more than 40% of which was the result of increases in social security, pension, medical, and hospital taxes. The figures contrast sharply with those of the United States, where taxes have been generally falling, and Tax Freedom Day fell well over two months earlier than in Canada this year, on April 11.

IRS TARGETS HIGH SALARIES PAID TO LEADERS OF TAX-EXEMPT BODIES

Commissioner Mark Everson said that the agency will contact hundreds of organizations beginning this summer in an aggressive program that will include audits. “We are launching a comprehensive enforcement project to explore the seemingly high compensation paid to individuals associated with some exempt organizations,” Mr. Everson said. He announced the initiative before a Senate Finance Committee hearing on abuses among tax-exempt and charitable organizations. About 3 million groups have registered with the IRS as tax-exempt entities. One-third are charities, and the rest include groups as diverse as business leagues, labor unions and Indian tribal governments.

Later stages will involve investigations into loans or sales to executives and officers, as well as a thorough review of the disclosure forms that charities must file with the IRS. Noticing a growth in the number of private foundations, Mr. Everson said the IRS wants to contact about 400 of those groups to ensure compliance with laws and regulations.

Mr. Everson also highlighted involvement of tax-exempt entities in tax shelters and abusive transactions. He said five of the eight abusive transactions identified by the IRS this year could involve tax-exempt groups such as employee retirement plans, state and local governments, and Indian tribal governments. Others profit from the tax-free status of charities by establishing foundations to pay for family vacations and other private expenses, exploiting rules governing the donation of cars and boats, and abusing rules involving tax-free life insurance, witnesses said.

ANGRY INVESTORS SUE DEUTSCHE BANK OVER TAX SHELTER ADVICE

German financial giant Deutsche Bank faces two lawsuits from investors, who were sold tax shelters that the IRS declared invalid in August 2000. The tax shelters in question are known as Cobra, which stands for currency options bring reward alternatives, and MLA, which stands for market-linked deposit. The two shelters are nearly identical, the New York Times reported. The plaintiffs in both cases owe the federal government tens of millions of dollars and seek to recover fees, interest and penalties.

EU DELAYS NEW TAX TO COINCIDE WITH SWISS MEASURES

Europe’s new savings tax system will be delayed until July 1 2005 because of a six-month extension agreed by EU diplomats to allow equivalent measures in Switzerland to come into force. Countries such as Germany and the UK hope the new system will crack down on tax dodgers, who move their money abroad. The system, under which some countries exchange banking information and others increase tax on interest on foreigners’ accounts, depends on equivalent measures in third countries taking effect simultaneously. In recent discussions, the Swiss government has made clear it could not give assurances its own savings tax regime would be ready by the original January 1 2005 target date. As a result, EU ministers will rule that the necessary third country arrangements will not be in place in time.

Luxembourg, Switzerland’s banking rival, had indicated it would be unhappy with an agreement that automatically put the EU's new regime in place before it was certain that Switzerland was following suit.

Switzerland’s main political parties have welcomed a decision by Brussels to delay the introduction of new pan-European tax rules. Non-EU member Switzerland has denied any blame for the delay, arguing that its parliamentary procedures could not be completed on time.

RUSSIAN TAX POLICE TAKING SANER APPROACH TO TAX CRIME

Following President Putin’s decision to disband the notorious Tax Police as part of administrative reforms last year, businesses in Russia will be relieved to hear that the government’s tax investigators are now taking a much more level-headed approach to the task of enforcing tax law. The Tax Police was born in 1993 out of the Chief Department of Tax Investigation, itself created a year earlier. It was charged with cracking down on the more serious corporate and high level tax crimes, though it quickly began to gain a reputation for targeting smaller businesses with increasingly “paramilitary” methods, giving rise to a popular soap on Russian TV.

However, the enforcement side of the tax police was disbanded last year as the 40,000 strong division was merged into the Interior Ministry, whilst many of its officers, along with their high-powered sniper rifles and other equipment and facilites, were transferred to the narcotics department. One factor which probably hastened the demise of the Tax Police was the growing number of accusations that it was riddled with corruption, and effectively promoted unfair business practices by receiving pay-offs from many businessmen. Some firms were additionally alleged to have used the tax police to nobble their business rivals. However, the authorities now appear to be taking a much more calm and even-handed approach to the investigation of alleged tax crime.

ASSET PROTECTION

SWISS PARLIAMENT MOUNTS DEFENCE OF BANKING SECRECY

The Swiss parliament has voted in favor of enshrining the concept of banking secrecy in the Swiss constitution. The proposals -- which now have to go before parliamentary committee -- are being seen as a symbolic stand against European Union interference. Jean-Christian Lambelet, a professor of economics at Lausanne University, said that parliament’s show of support sent a signal to the EU. “It is a gesture -- a demonstration, if you like -- but it doesn’t have much practical significance,” he said. The parliamentary votes come as Switzerland continues to negotiate a second round of bilateral accords with the EU.

TORONTO ACCOUNTANT SENTENCED TO PRISON IN U.S. FOR FRAUD

A Toronto accountant, Ronald J. Bogart, 50, was sentenced in United States District Court in Columbus, Ohio to 18 months in prison. Bogart pleaded guilty in June 2003 to three conspiracy charges in connection with schemes to defraud creditors and the IRS and a conspiracy to obstruct a grand jury investigation in the Southern District of Ohio. The judge also sentenced Bogart to three years of supervised release after his imprisonment, and ordered Bogart to pay restitution to the scheme’s victims in the amount of approximately $3.3 million.

At his plea hearing in June, 2003, Bogart admitted assisting Richard D. Schultz, former Chief Executive Officer of National Revenue Corporation, in a fraud and money laundering scheme to conceal millions of dollars of Schultz’s funds through fraudulent transactions and the use of offshore bank accounts in foreign countries such as the Cayman Islands and Guernsey of the Channel Islands. Schultz then claimed false tax losses claiming millions of dollars in deductions based on the false transactions facilitated by Bogart. Bogart was the fifth Schultz co-conspirator sentenced to date.

Richard Schultz, 52, received a sentence of 30 months imprisonment on September 30, 2002, and was ordered to pay $1.26 million in restitution to the IRS, serve 416 hours of community service and pay a $28,500 fine. Schultz pled guilty plea on August 9, 2001 to filing a false income tax return in 1994 in connection with the scheme. Between 1994 and 1998, Richard Schultz was President and Chief Executive Order of National Revenue Corporation, a Columbus-based collections agency.

THE USE AND ABUSE OF DOMESTIC ASSET PROTECTION TRUSTS

We live in an era of unprecedented litigiousness where doctors, lawyers, accountants and business owners frequently become defendants in lawsuits seeking damages in the tens of millions of dollars. Clients concerned about these potentially devastating liabilities are increasingly inquiring about the efficacy of establishing an asset protection trust (APT) as a part of a comprehensive estate plan to provide a measure of protection for their family’s core savings.

An APT is an irrevocable, self-settled spendthrift trust that protects a portion of an individual’s assets from creditors. Since the late 1970s, APTs have been formed by U.S. citizens in offshore jurisdictions including Bermuda, the Isle of Man, and various Caribbean nations. Until recently, no U.S. jurisdiction extended spendthrift protection to trusts in which the grantor had retained an interest, at least to the extent of such retained interest. APTs have now been authorized in five U.S. jurisdictions: Delaware, Alaska, Nevada, Rhode Island and Utah.

Nowhere is it written that an individual must preserve his or her assets for the satisfaction of unknown future claims and claimants. With the enactment of legislation in five states expressly authorizing the establishment of domestic APTs, asset protection planning has entered a new era. APTs formed under the proper circumstances and with the requisite due diligence can be expected to play an increasing role in the estate planning process for professionals and business owners.

SEC STEPPING UP ENFORCEMENT, BUT FEW OFFSHORE BOILER ROOMS SNARED

The SEC’s Office of Internet Enforcement routinely patrols cyberspace to look for fraudulent investment offers. It also helps manage the agency’s complaint center, which gets 1,200 to 1,300 tips a day. Although the SEC brought a record number of enforcement cases last year, critics say it still is not doing enough to stop some types of fraud, such as the sale of dubious U.S. securities by unlicensed, offshore brokerages known as “boiler rooms”. The shares are routed overseas through a securities rule known as Regulation S. It allows companies to raise money directly from foreign investors without having to go through the time and expense of a formal stock offering.

James Martin, a U.S. businessman who says he lost control of his company after agreeing to merge with another being used by a boiler room ring, thinks the only way to stop the overseas stock fraud is to scrap Regulation S or seriously restrict its use. Martin now lives in New Zealand and runs the Securities Investigation Research Society, a nonprofit group formed by boiler room victims to help other investors determine the legitimacy of international stock offers. The SEC contends that closer cooperation with foreign securities regulators is the key to making the global markets safer.

Despite criticism from some investors and activists, regulators in the United States are bringing more cases than ever. Boiler room cases have taken a back seat to other types of crackdowns, on everything from insider trading and accounting fraud to market manipulation and sales of unregistered securities. The SEC filed 679 enforcement actions last year against individuals and companies suspected of violating federal securities laws, compared with 598 in 2002. Of last year’s cases, nearly 30 percent involved allegations of fraud. However, only one involved an offshore boiler room. That is because false addresses and false identities make those cases harder to develop, and because most of the schemes are conducted beyond America’s borders and the agency’s jurisdiction.

PRIVACY

BIOMETRICS -- GREAT HOPE FOR WORLD SECURITY OR TRIUMPH FOR BIG BROTHER?

As the war on terror increasingly comes to rely on biometric technology -- the use of physical characteristics unique to individuals such as iris pattern, DNA and fingerprints to verify identify -- western police and intelligence agencies are drawing up plans for sophisticated biometric databases which would allow them to share sensitive information. The FBI, which has more than 75 million fingerprints on its criminal and civil computer records, is adding biometric details from suspects detained in Iraq, Afghanistan and elsewhere.

The UK immigration service is already fingerprinting visa applicants in Sri Lanka and east Africa as well as asylum seekers who arrive in the UK. The fingerprints are checked against a computer database called Eurodac -- based in Luxembourg and developed by a British company, Steria Ltd -- to see if there have been previous applications for asylum in any other EU country. If so, the asylum seeker may be deported. The main UK police computer storing fingerprints is also due to be replaced soon.

Civil liberties campaigners are voicing concerns about governments sharing biometric data through international databases. “There is now a total obsession with this technology as a way of combatting anything and everything and it’s a fallacy,” said Barry Hugill of Liberty. “Once you begin to compile massive databases it’s a matter of common sense that you are going to get the most horrendous mix-ups, with the wrong people being accused and the the wrong information being shared around the world.”

NEVER MIND WHO I AM, WHO ARE YOU?

Everyone from banks, retailers, and insurance companies to online media worries that you might not be who you say you are. They assume, conversely, that their own identity is not in question. In the case of a bank or credit card company, the risk is that you might be an imposter committing identity theft for fun and profit. In the case of an online newspaper, the risk is that somewhere a subscriber may have shared his paid-for logon information with a million others, crippling the business. Despite the frequent warnings their security departments send out about never divulging your password and saying that the company will never ask for your information, these are apparently never communicated to the customer service people or translated into company policies, and the broad assumption is that it is always obvious that the company is genuine. They do not see things from our perspective, which is: guy phones, could be anybody. They seem to think all security breaches come via a computer.

What needs to happen is for the procedures for opening an account to become a two-way process instead of the one-way process it is now. For every application form that asks you to state your mother’s maiden name, your date of birth, your city of birth, and the name of your first childhood pet, there should be one you get them to fill out that asks them to state the mother’s maiden name of their corporate founder, their date of incorporation, the city of their registered office, and the name of the person whose bust stands in the lobby of corporate headquarters. There should also be an agreed upon password they use when they call you to identify themselves.

U.S. UNIVERSITIES SLAM VISA FEE COLLECTION SYSTEM

US universities stung by falling applications from foreign students are seeking to block a proposed government system for collecting security screening fees from international students. The Department of Homeland Security is weeks away from finalizing a rule governing how a $100 security fee will be collected. But universities are mounting a last-minute lobbying effort to change the proposed system, which would require international students to pay the fee with a credit card or a cheque in US dollars. The universities are concerned that the proposed system would create another barrier for students wanting to study in the US. Tightened visa rules have been blamed for a 32% decline in graduate student applications to US universities this year.

Tom Ridge, homeland security secretary, and Colin Powell, secretary of state, have said they were eager to make the US more welcoming to international students. Mr. Powell said recently that the US could not afford to lose foreign students because of “procedural frustrations”. But some university officials accuse the departments of stubborn reluctance to bend on the security fee issue, with some frustrated universities considering paying the fee themselves. The State Department has declined to collect the fee at consulates -- where officers already collect visa processing fees -- because it does not want to administer a homeland security program. And the Homeland Security officials do not want to collect the fee at ports of entry because their agents are overburdened.

PATRIOT ACT SQUEEZES BANKS, CUSTOMERS WITH PAPERWORK

It is a whole new era for the hedge-fund industry in the era of the Patriot Act. No longer are banks and other financial-services providers simply trying to spot transactions tied to organized crime or drug trafficking. The Patriot Act was written to uncover deals that fund terrorist organizations. So far, the law’s biggest impact has been on private-equity firms, mutual funds, brokerages and investment banks.

Unlike commercial banks, these industries have been operating in a culture of privacy that paid little -- if any -- attention to what is dubbed in the business as “know your customer”, or KYC, said Danforth Newcomb, a litigation partner at Shearman & Sterling who specializes in money-laundering laws. As a result, they have not only been thrust into a new regulatory cauldron. They have been plunged into an area full of confusion. “It was a political response to 9/11,” Newcomb said, “with little thought to the difficulties it posed and without a great deal of meaningful discussion.”

Despite any private misgivings, U.S. financial institutions are trying to show “that they are good corporate citizens” commented Lauren Resnick, a litigation attorney at Baker & Hostetler in New York. Right now, “there is a fear of making a mistake,” added Peter Djinis, a lawyer who formerly worked for the Treasury Department’s financial-crimes unit. That has resulted in more filings of suspicious-activity reports with the Treasury.

MONEY LAUNDERING OR MONEY MARKETING?

Following new regulations, most people accept they will be asked for detailed personal information during any kind of financial activity. But when does a request for information go too far? And how do you know the information you provide will be used in the right way? Opening an account in the U.K. is not as simple as it once was. You have to prove who you are -- in duplicate -- and give other information. Banks blame tough new laws on money laundering and financial crime. But will the information be passed onto the financial institution’s marketing department? In the case looked at if the customer does not tick an opt-out box in the application process, then all the information “will be looked at in a marketing capacity”.

PENTAGON SEEKS DOMESTIC SPY POWERS

A Pentagon effort to persuade Congress to allow military intelligence agents to work undercover in the United States met with resistance in the House when the provision was left out of the highly secretive intelligence funding bill. However, the Senate’s version of the Intelligence Authorization Act of 2005 still includes the provision, which exempts Department of Defense intelligence agents from a portion of the Privacy Act, a 30-year-old law that outlaws secret databases on American citizens and green-card holders.

The bill would allow Pentagon intelligence agents to work undercover and question American citizens and legal residents without having to reveal that they are government agents. That exemption currently applies only to law enforcement officials working on criminal cases and to the CIA, which is prohibited from operating in the United States. Pentagon officials say the exemption would not affect civil liberties and is needed so that its agents can obtain information from sources who may be afraid of government agents, e.g., a green-card-holding professor of nanotechnology who formerly lived under a repressive government.

David Sobel, the Electronic Privacy Information Center’s general counsel, said that while the Defense Intelligence Agency does have responsibility for providing intelligence about attacks on domestic military bases, the agency should not be engaged in covert domestic spying. “Why can the DIA work undercover (in the United States) if the CIA can’t?” Sobel asked. “This is about the DIA playing an undercover intelligence role in the U.S.”

PUBLIC’S RIGHT TO KNOW VS. PRIVACY IS IMPORTANT BATTLE FOR EVERYONE

You could stuff in a broom closet the number of folks who gave a hoot last week when Ohio’s newspapers complained about the lack of compliance with the public-records law. Who cares that half the time a secretary will stall or flatout refuse a request to see a school superintendent’s salary or the minutes of the last board meeting for a public agency? Well, the public needs to start caring, and not just because a few reporters and editors are trying to assert their rights under the law. Like it or not, certain records belong to the public. People ought to be able to read them and make copies, at cost, during reasonable hours.

We are approaching a crossroad on the issue of personal privacy vs. the public’s right to know. Ever since 9/11, the government has been intent on retaliating and protecting American soil. A cabinet-level agency was established for the latter purpose, and new federal and state rules were devised, some of which inhibit the distribution of information. Investigations are kept secret and, in some cases, rights are suspended with the justification that terrorists do not play by our rules. The tug-of-war over information will not cease. There will be continual tension over the public’s right to know. But the possible ramifications must be examined.

MORE AIRLINES THAN THOUGHT SHARED SENSITIVE PASSENGER DATA

Firms working on a passenger-screening system obtained sensitive data from more airlines than previously reported, the top official for the Transportation Security Administration told Congress. David Stone, currently serving as the acting TSA administrator, said America West Airlines, Continental, Delta Air Lines and Frontier Airlines gave passenger data to four companies working on the risk-assessment program known as the Computer-Assisted Passenger Pre-screening System. Previously, it was revealed that American Airlines and JetBlue Airways provided such data.

According to TSA, the agency entered into “cooperative agreements” with four companies to prove the feasibility of the computerized system to screen passengers. The companies “independently obtained” the sensitive data, and TSA has not accessed any passenger records, Stone said. But the companies violated the Privacy Act by not notifying the public about its record system. The law requires government contractors to publicly describe the type of information obtained and how people can gain access to their information. House and Senate appropriators significantly reduced funding for the CAPPS II program next year because of privacy concerns about using passenger data to test the system.

LAW

PATRIOT ACT PROVISION INVOKED WEEKS AFTER ASHCROFT DENIED USING PART OF LAW

The FBI asked the Justice Department last fall to seek permission from a secret federal court to use the most controversial provision of the USA Patriot Act, four weeks after Attorney General John D. Ashcroft said that part of the law had never been used, according to government documents disclosed this week. A one-paragraph memo -- saying the FBI wanted to use the part of the law that allows investigators in terrorism and espionage cases easier access to people’s business and library records -- was in a stack of documents the government has released under court order, as debate persists over whether use of the anti-terrorism law violates civil liberties.

The 383 pages of documents, many with names and other information blacked out, are the first results of a Freedom of Information Act request and lawsuit filed against the Justice Department by a coalition of civil rights groups. Last month a federal appeals court judge ordered the agency to release certain documents indicating how the FBI is carrying out the law, denying the government’s request to withhold such information for another year.

The newly disclosed documents, and a second batch the judge has ordered to be issued next month, come as an election-year fight is raging over whether several parts of the law should be extended beyond the end of next year, when they are scheduled to expire. “A veil of secrecy has shrouded the Patriot Act for two and a half years. The fragments of information that we have managed to pry out of the Justice Department raise serious questions and provide few answers,” said David Sobel, General Counsel for the Electronic Privacy Information Center. “It is time for an open public debate on this controversial law.”

HIDING THE AMERICAN GULAG

As the prisoner-abuse scandal in Iraq spirals out of control, it is all too easy to forget that just last month, the Supreme Court heard three cases concerning the rights of “enemy combatants” being held at Guantánamo Bay, Cuba, and in US Naval brigs off the American coast. One issue at stake in these cases is whether the government -- specifically President Bush -- should be trusted to handle prisoners in an appropriate manner. We now know, of course, that top military officials knew of the Abu Ghraib prisoner abuse at least as early as January. And evidence is mounting that the abuse was not, as Secretary of Defense Donald Rumsfeld claims, merely carried out by a few “bad apples”, but the result of secret directives approved by high-level military and CIA officials. Yet last month, in oral arguments before the Supreme Court, government lawyers -- seeking to persuade the court to back off and let the administration run the war on terrorism as it sees fit -- solemnly assured the justices that such things were not happening at US-run detention centers.

So what gives? Did the deputy solicitor general deceive the court? Probably not. Most likely, defense officials deliberately hid knowledge of torture and prisoner abuse from the government’s own lawyers. Fortunately, this maneuver was thwarted in the nick of time -- before the Supreme Court actually decided the “enemy combatant” cases, which it is expected to do this month -- by a handful of digital photos and the blessings of a free press. All that, of course, signals to the courts exactly what Donald Rumsfeld did not want them to see: that the courts can no longer trust what government lawyers tell them. In a government where plausible deniability has become routine, the notion that courts can rely on lawyers’ assurances becomes a quaint fiction.

Had the Abu Ghraib photos not come to light, Bush and Rumsfeld might well have been able to seal the doors of their own nascent gulag in Guantánamo. And the single-island gulag could have then spread to the entire “archipelago” (to use Aleksandr Solzhenitsyn’s metaphor) of American military detention centers scattered throughout the world. Earlier, the Supreme Court might have been inclined to give the administration carte blanche to run Guantánamo with no judicial scrutiny. But the ugly facts from Abu Ghraib make that less likely. Immediately following oral arguments in all three “enemy combatant” cases, legal commentators predicted that the court would be closely divided, with the administration winning or losing by one vote. Recent developments might just shift the outcome in liberty’s favor.

SWISS ANTI-MONEY LAUNDERING CHIEF DEFENDS HER RECORD

Switzerland’s Money Laundering Control Authority (MLCA) has come in for regular criticism since its inception in 1998. But three years after taking control of the organization, Dina Balleyguier said that it had succeeded in “weeding out the lawbreakers”. The MLCA, which is charged with monitoring the non-banking sector, investigated 245 financial institutions last year -- a 57% rise on the previous year. The federal body says its increased workload is proof that Swiss anti-money laundering systems are working. The government maintains that existing legislation has made money laundering in Switzerland all but impossible.

THE STORY OF THE RISE AND FALL OF FOURTH AMENDMENT PROTECTIONS

On May 29, 2004, Sam Dash, who had served as Chief Counsel of the Senate Watergate Committee, died. Throughout his career as a practicing attorney, prosecutor and law professor, Sam Dash found himself challenging those who abused their powers. When I talked with him shortly before he was hospitalized with the heart problem that would take his life, he was planning to do so again. “This guy Ashcroft is a very dangerous attorney general,” he told me during our last telephone conversation. We were talking about the book he had just finished, The Intruders: Unreasonable Searches and Seizures from King John to John Ashcroft, which has now been published.

Sam was not a partisan, but rather a consummate professional. He never looked for gratuitous combat, yet when so engaged, he never shied from saying what needed to be said. As Chief Counsel to the Senate Watergate Committee, Dash found it necessary to take to task some of the most powerful men in government for abusing their authority. He was deeply troubled, for good reasons, about the Nixon White House’s illegal wiretaps and unfounded break-ins to obtain information without a search warrant.

In our last conversation, Sam told me of his plans to tell Americans that Attorney General John Ashcroft was ignoring the lessons of history in fighting terrorism. He had been working on a book about history of the Fourth Amendment’s protections against unreasonable searches and seizures -- a body of law he had studied throughout his professional career. Sam was deeply concerned that Ashcroft had asked Congress for, and then received, new laws as part of the USA Patriot Act that further narrowed the proscription of the Fourth Amendment. For there was no chance, he thought, that the present conservative U.S. Supreme Court would strike down the new law as unconstitutional, despite the fact that it pushed even further than the High Court’s present limits.

The Intruders offers a compressed history of the 800-year struggle for individual privacy rights that ranges from the Magna Carta to writing of the Fourth Amendment. For this nation, those rights were central to the American Revolution. The book masterfully digests important history that is essential to understanding a freedom many Americans take for granted. But the true reason underlying Dash’s work becomes apparent only in its last two chapters. There, it takes Dash less than fifty pages to show how we are now rapidly losing rights and liberties it took us some 800 years to acquire.

U.S. ATTEMPTS TO EXTRADITE BANKERS LINKED WITH ENRON FRAUD

Three British bankers should hear this week if they are to be extradited to the US over an alleged multi-million dollar fraud. Gary Mulgrew, 42, was charged in the US two years ago with Giles Darby, 42, and David Bermingham, 41, of stealing nearly £4 million from Greenwich NatWest, their then employer, an investment banking division of the finance giant now owned by the Royal Bank of Scotland. The three appeared at Bow Street Magistrates Court in London yesterday, where the US government applied to extradite them for conspiracy to defraud.

It is alleged the men, through offshore companies, conspired with two Enron executives to persuade NatWest to sell its interest in a company for only £550,000 ($1 million) when it was worth about £16 million ($30 million). It is alleged that they siphoned funds out of Greenwich NatWest through a partnership controlled by Andrew Fastow, convicted finance chief of Enron. US prosecutors have accused the men of “wire fraud”, or illicitly gaining money through transactions which, in part, went through the US banking system.

DID CONGRESS QUIETLY MAKE IT A CRIME FOR LAWYERS TO DEFEND TERROR SUSPECTS?

On May 17, 2004, the left-wing lawyer Lynne Stewart will go on trial in New York for allegedly helping a convicted terrorist leader direct jihad operations from inside a federal prison. Stewart has admitted in interviews since her indictment that in June 2000 she broke an agreement with the Justice Department and violated Bureau of Prisons restrictions to help her imprisoned client, the “blind sheik”q Omar Abdel Rahman, issue a press release to the Reuters news service recommending that his followers in the Islamic Group in Egypt abandon a two-year-old “cease-fire”. The Islamic Group was responsible for the 1997 gun-and-knife massacre of 58 foreign tourists and four Egyptians at Luxor as well as other attacks.

Stewart claims that in issuing Abdel Rahman’s press release, she did “nothing more than any other lawyer would ever do,” helping her client communicate with the outside world and exercising her own right to free speech. She says she is being singled out for representing a reviled client.

Casual observers may be forgiven for dismissing the Stewart prosecution as an anomalous case of a reckless lawyer facing repercussions for irresponsible conduct, with no broader implications for the justice system. Yet Stewart’s prosecution has revealed a broad and troubling Justice Department strategy. This strategy goes far beyond the need to make sure lawyers abide by restrictions on prisoner communications -- restrictions motivated by the legitimate security concerns that cases like this raise. Instead, the Justice Department is pursuing a course that threatens the Sixth Amendment right to legal representation by exposing just about any attorney who represents a suspected terrorist to the risk of prosecution, thereby discouraging lawyers from taking such cases or, if they do, from representing their clients zealously.

Had the timing of her actions been different, Stewart could have been charged with violating a little-noticed provision of the PATRIOT Act that makes it a crime to provide “expert advice or assistance” to a terrorist group. Although the Justice Department cannot use that provision against Stewart, the department’s court submissions in her case take the position that legal representation of alleged terrorists is a crime under the PATRIOT Act if the lawyer can be portrayed as acting under “the direction and control” of a foreign terrorist organization. The law does not require any intent to further illegal activities, and the Justice Department contends that there is no exception for “good faith” or “bona fide” legal representation. All lawyers work “under the direction and control” of their clients, within the limits of the rules of ethics.

PEOPLE MUST GIVE POLICE THEIR NAMES, U.S. SUPREME COURT RULES

People stopped by the police must give their names, a divided U.S. Supreme Court said, ruling that it did not violate their constitutional right to privacy or to remain silent. By a 5-4 vote, the high court upheld a Nevada law that requires detained individuals to identify themselves when asked to do so by the police, based on reasonable suspicion of wrongdoing. Twenty other states have similar laws. The ruling was a victory for the U.S. Justice Department and state officials who said forced identification represented a “minimal” intrusion on privacy rights, helped solve crimes and contributed to police and public safety.

The case involved Larry Hiibel, who was convicted of resisting an officer after refusing 11 times to give his name when Sheriff’s Deputy Lee Dove questioned him on May 21, 2000, as he stood beside his parked truck in Humboldt County. Based on a report from a witness, Hiibel was suspected of hitting his daughter, who was inside the truck. Hiibel also was suspected of driving under the influence of alcohol, based on his eyes, mannerisms, speech and the smell of alcohol. Hiibel told Dove he would cooperate, but refused to give his name because he said he did not believe he had done anything wrong. He was arrested, found guilty of the misdemeanor offense of resisting an officer and fined $250.

What’s in a name?

“What’s in a name?” asked Shakespeare’s Juliet. This week, the Supreme Court gave a partial answer to the question. Not, they insist, anything necessarily incriminating. If a cop wants you to give him your name and a state statute requires it, there are no constitutional protections to say otherwise. Paradoxically, an arrestee may now refuse to answer any question without opening himself up to punishment while Larry Hiibel could not. Many people filing amicus briefs for Hiibel, including the Cato Institute and the Electronic Privacy Information Center, believed the Court needed to think harder about what we are really doing when we give a police officer our name.

A name becomes a powerful key. It can be checked by police against the National Criminal Information Center database, which the Justice Department exempted last March from federal requirements that the info in it be “timely, relevant, complete, and accurate”q Names can also be checked against the Multistate Anti-Terrorism Information Exchange -- MATRIX -- which the ACLU believes contains some of the data-mining aspects of the controversial, supposedly mothballed Total Information Awareness program.

It is simply not true that only the guilty have reason to fear this world we are moving into -- one in which all sorts of standard activities of a private citizen, from traveling by air to standing by one’s truck at the side of the road, leave you vulnerable to an officious police check on every bit of information any source -- public or private -- has gathered about you. Anyone concerned with his own privacy and dignity has reason to fear this decision.

The Hiibel decision does not say that one has to carry a state-approved I.D. It merely says that one is obligated, as the Nevada statute requires, to supply a name if a state statute so requires. However, the logic of the request demands that something more substantive and certain than a mere verbal declaration be given to satisfy an officer. A combination of Hiibel and the 1982 decision in Kolender v. Lawson -- which decided that a California statute demanding I.D. was unconstitutionally vague since it did not specify what kind of I.D. is “credible and reliable” -- both point toward a national I.D. card. We have been approaching this sad destination from many byways now, and Hiibel will take us very close to the final destination.

SAY GOOD-BYE TO THE ATTORNEY-CLIENT PRIVILEGE

Once upon a time the US Department of Justice respected the legal rights that make law a shield of the innocent rather than a weapon in the hands of government. No more. What the great English jurist William Blackstone called “the Rights of Englishmen” have been eroded beyond recognition. The last remaining right -- the attorney-client privilege -- is under full-scale assault by DOJ prosecutors in the tax shelter case involving the accounting firm, KPMG. The Justice Department has demanded, and the accounting firm has agreed, to waive the attorney-client privilege for communications between lawyers and KPMG employees involved in marketing tax shelters that the IRS has challenged.

The attorney-client privilege was long championed by jurists because they realized that the privilege promoted equality under the law. Convictions can result from a lack of access to legal knowledge as well as from actual wrongdoing. To ensure defendants would avail themselves of legal counsel, their communications with attorneys were made confidential, outside the reach of prosecutors. In recent years, the DOJ has taken the position that winning its cases is more important than historic rights centuries in the making. Arguing that the innocent have nothing to fear from their attorneys’ disclosures of their confidences, the DOJ has employed various means of subverting the attorney-client privilege.

Whether or not a company is indicted and the severity of punishment can depend on its “cooperation” with the investigation. A January 2003 memo written by Deputy Attorney General Larry D. Thompson, currently a fellow at the Brookings Institution, defines “cooperation” in a way that drives a wedge between a company and its employees. A company that pays its employees’ legal fees is defined as “uncooperative”. Faced with the threat of being declared “uncooperative”, KPMG announced that it would pay its employees legal fees only if they waived the attorney-client privilege and “cooperated” with the investigation. Invariably, “cooperation” requires self-incrimination and negotiation of a guilty plea. By making it impossible for a defendant to defend, the government never has to have a real case.

Americans need to think seriously about the quality of “justic”q that is coming from the Justice Department. Prosecutors have defined “cooperatio”q as aid in convicting oneself or a fellow employee, as waiving all constitutional rights and privileges, as betrayal of fellow employees, and as helping prosecutors create the appearance of guilt even when no crime has been committed.

Conservatives who prattle about Americans living under a rule of law are speaking of a bygone era. The rule of law came to an end during the New Deal when President Franklin Roosevelt turned Congressional statutes into authorization bills for federal bureaucrats to legislate via regulations. Today there is even less accountability. What we are witnessing is the emergence of a fascist legal order in which law and legal procedure are whatever unelected officials decide serves the interest of government. How else can we explain how the four foundations of our legal system -- no retroactive law, no crime without intent, no self-incrimination, and the attorney-client privilege -- have been swept aside in the federal case against KPMG?

OPINION & ANALYSIS

THE WRONG WAR

In his now-famous 2002 State of the Union, President Bush named Iraq, Iran and North Korea as an “axis of evil”. He vowed that America would not allow any one of the three to acquire weapons of mass destruction. In 2003, we attacked and invaded the only one of the three that did not have a secret nuclear program. And since that State of the Union, the other two have accelerated their programs to acquire the atomic weapons President Bush said they would not be permitted to have. At this point, the success of the Bush Doctrine has to be judged as limited.

Given the mess in Iraq, neither the American people nor the White House appears to have the desire or will to force an end to the Iranian or North Korean bomb programs. If North Korea already has an atomic bomb and Iran will not be stopped from acquiring one, what does a new world of 10 nuclear nations, six of them in Asia, mean for U.S. foreign policy? We had best begin to consider the possibility.

Put bluntly, if Pyongyang and Tehran acquire atomic weapons, there are no more axis-of-evil nations with which we can risk war. For there is nothing to be gained from such a war to justify running the risk of nuclear retaliation on U.S. bases in Asia or the Middle East, or on Israel, an almost certain target in any war with Iran. As they used to say in the West, “God may have created all men, but it was Sam Colt who made them equal.” Nuclear weapons are the great equalizers. If Iran and North Korea become full-fledged members of our nuclear fraternity, the idea of an American empire will become as outdated as the British Raj.

WHAT IS WORTH DEFENDING?

When you are fighting a war, you have to decide what targets you want to defend. Just what is it about “the West” that we want to hold up to the world as being worth defending with our blood and treasure? Are we defending“qour way of life,” in the immortal words of former Secretary of State James Baker? Like the right to engage in soccer hooliganism? Reality TV? Young girls wearing dog collars and lots of skin piercings and tattoos? Supermarket shelves filled with processed foods full of salt and high fructose corn syrup? Two million people incarcerated in U.S. jails and prisons at any give time, many for non-violent offenses? If that is what we are defending, then let’s surrender.

Historically, a period of warfare has been the time during which the nation and its society were overhauled to some extent, maybe minor or more likely major. Look at the before-after pictures of the U.S., with respect to the Civil War, Spanish-American War, WWI, WWII and Vietnam. These are different places, different value systems, different economies, different cultures, different obligations to the world at large, and different civilizations, in a sense. Whatever we do to confront radical Islam and battle al-Qaeda, the U.S., in all likelihood, will not be the “same” nation after the fight as it was before it. We need to figure out what it is that we want to keep safe from the tumult and shouting, what is worth preserving intact, and not giving it to the breakers. And we ought to figure out what is not worth defending about what we do as a society, so as not to waste resources fighting for losers and losing causes.

CAPITALISM, HAPPINESS, AND BEAUTY

Critics level two charges against capitalism: First, they say, that the possession of a motor car, a television set, and a refrigerator does not make a man happy. Secondly, they add that there are still people who own none of these gadgets. Both propositions are correct, but they do not cast blame upon the capitalistic system of social cooperation.

People do not toil and trouble in order to attain perfect happiness, but in order to remove as much as possible some felt uneasiness and thus to become happier than they were before. A man who buys a television set thereby gives evidence to the effect that he thinks that the possession of this contrivance will increase his well-being and make him more content than he was without it. If it were otherwise, he would not have bought it. The task of the doctor is not to make the patient happy, but to remove his pain and to put him in better shape for the pursuit of the main concern of every living being, the fight against all factors pernicious to his life and ease. It may be true that there are among Buddhist mendicants, living on alms in dirt and penury, some who feel perfectly happy and do not envy any nabob. However, it is a fact that for the immense majority of people such a life would appear unbearable.

No less absurd is the second reproach thrown upon capitalism -- namely, that technological and therapeutical innovations do not benefit all people. Changes in human conditions are brought about by the pioneering of the cleverest and most energetic men. They take the lead and the rest of mankind follows them little by little. The innovation is first a luxury of only a few people, until by degrees it comes into the reach of the many. It is not a sensible objection to the use of shoes or of forks that they spread only slowly and that even today millions do without them. If those who have today the means to buy a television set were to abstain from the purchase because some people cannot afford it, they would not further, but hinder, the popularization of this contrivance.

Again there are grumblers who blame capitalism for what they call its mean materialism. They cannot help admitting that capitalism has the tendency to improve the material conditions of mankind. But, they say, it has diverted men from the higher and nobler pursuits. It feeds the bodies, but it starves the souls and the minds. It has brought about a decay of the arts. They contrast, e.g., old furniture as preserved in the castles of European aristocratic families and in the collections of the museums with the cheap things turned out by big-scale production. They fail to see that these collectors’ items were made exclusively for the well-to-do. Only romantic prepossession can induce an observer to ignore the fact that more and more citizens of the capitalistic countries live in an environment which cannot be simply dismissed as ugly.

I PLEDGE MY ALLEGIANCE TO THE STATE

Many people were rightfully taken aback a couple years ago when a western liberal appeals court struck down the phrase “under God” from the Pledge of Allegiance, saying it violated the “establishment clause” of the U.S. Constitution that “separates church and state”. Only problem is the so-called “establishment clause” (When the framers wrote the constitution, they had no idea that what they were writing included all these “clauses”) was never intended to block saying nice things about God in public, it was designed to prevent the “establishment” of a state religion as was the case in Mother Britain before the Revolutionary War, where subjects were forced to belong to the Church of England. That was the whole purpose of the “establishment clause”, but now liberals have went wild in the post FDR era with their blatant anti-Christian interpretations of law in their efforts to create a secular utopia.

The phrase “under God” was not even added until 1954, in an attempt to basically, as Lew Rockwell has said, “deify the State”. It was added by Eisenhower and his Congress as a political tool during the Cold War to fight the “godless Communists” (as if the US has been the pristine example of being Godly). “Under God”, therefore, was basically a political tool, used in a political war, by political people, to exert more political control over the masses.

The real scandal of the Pledge is not the phrase “under God” it is the whole Pledge itself and the concept behind it. The criticism of “under God” is a slap in the face to religious people, mainly Christians; but the real problem is not church-going people who worship the Lord, it is statists who worship the government. Yes, there is some indoctrinating going on with the Pledge, but the indoctrination is not religious, it is political and statist.

THE FINAL VICTIM OF 9/11: THE MYTH OF GOVERNMENT COMPETENCE

If a novelist of Dostoevsky’s caliber set out to illustrate the inherent incompetence of government, he could not surpass the impact of a third-rate journalist’s account of what the federal government “did” on September 11, 2001. Then, add in for good measure what we know about the state’s pre-9/11 and post-9/11 screw-ups, and the myth of the modern state as our indispensable protector has been destroyed.

This myth is easily propagated. All it takes is some wishful thinking and jawboning. “Government is great, blah, blah, blah... Without government, Arab terrorists would hijack planes and crash them into the World Trade Center, blah, blah, blah...” On 9/11, this idea, this will o’ the wisp fantasy, was sorely tested. All we asked was that it emerge from the craniums of state-worshipping hacks such as Mario Cuomo and Rudy Giuliani and have the nerve to meet Mr. Reality. It chickened out and checked out and is currently hiding out.

Let me back up a bit before I indict the state for criminal negligence. They cannot complain about money. The agencies in question had a combined budget of over $300 billion. They cannot complain about power. Defense, Justice, CIA, FAA, et al. had plenty of power. They cannot complain that we did not centralize power enough. The feds, not local yokels, were in charge. Manpower was not lacking. They had millions of warm bodies. Education was not lacking: Ph.D’s and Ivy League B.S.’s were falling all over each other.

Then, when all that talent, brains, money and power was desperately needed, what happened? Utter incompetence, confusion, delay, indecisiveness, ill-preparedness, and stupidity from start to finish. Our much-vaunted and ballyhooed government, when it really mattered, on the worst day in American history, blew it; stunk up the joint. Worse yet, it actively generated the conditions that gave rise to the attack! And it responded to the attack by means that will increase terrorism in the future. And please, do not tell us it will do better next time. So will the attackers, and we will get our butts kicked again. It is time to realize that the federal government is led by a bunch of incompetent, brain-less morons who are a threat to our personal and national security.