Offshore News Digest for Week of November 1, 2004

GLOBAL BUSINESS

A CLEAR VICTORY THIS TIME

It was every bit as close as advertised, but in the end, George Bush and his vaunted campaign team have attained victory in America’s presidential election, held on Tuesday November 2nd. Several factors magnify the scope of Mr. Bush’s victory. One is the overall vote tally. Fortunately for the president, and for the bitterly divided country, he seems to have won the popular vote by a clear majority of 51% to 48% (with 98% of the national vote counted) -- a lead of more than 3 million votes over Mr. Kerry. And this came on record turnout of about 115 million, which the Democrats had hoped would work in their favor.

In 2000, Al Gore took some half a million more votes than Mr. Bush, causing many of the Democratic Party faithful to call their man the real winner for the duration of Mr. Bush’s first term. This time, with the electoral-college and popular votes in harmony, the result looks more like the true verdict of the American people than the result of an outdated system.

Another wound from 2000 may be healed with this year’s election as well. Four years ago, Mr. Bush won the election after a 36-day recount that included allegations of disenfranchisement of blacks, misleading ballots and other shenanigans. The fiasco, ended by a Supreme Court decision, gave Mr. Bush Florida and thus electoral-college victory, but it was a tainted win. This year, thousands of lawyers and monitors flocked to polling stations, especially in Florida and Ohio, to check for voter fraud and the like. Pundits fretted that legal troubles could prevent a clear result for days or even weeks. But no major irregularities were reported on election day -- it seems that Democrats will have no butterfly ballots or hanging chads with which to question the legitimacy of Mr. Bush’s re-election.

Expanded Republican Congress set to back Bush.

Republicans got ready on Wednesday to flex their muscles as an expanded majority in the U.S. Congress and help push President Bush’s largely stalled conservative agenda in his second term. Republicans eyed a number of targets, ranging from putting more anti-abortion judges on the bench and finally winning approval of a comprehensive energy bill to expanded tax cuts and medical liability reform. Republicans also plan another crack at winning approval of a proposed White House-backed constitutional amendment to ban gay marriage.

“With a bigger majority, we can do even more exciting things,” House Majority Leader Tom DeLay, a Texas Republican, told a local television station in his home state. Election returns and projections showed Republicans would hold at least 55 of the 100 Senate seats, four more than they now have, and pick up at least a few seats in the 435-member House of Representatives, where they now hold 227.

An industry-by-industry look at the implications of the election.

From Wall Street to Detroit, there were plenty of sighs of relief as it became clear that President Bush had won another term. As one auto executive said, “Bush has been a good president to work with.” But even as stocks rose on the news, the exuberant mood of business executives was tempered by worries about continuing high prices of oil, the nation’s ballooning budget deficit and the increasing cost of health care. Military contractors, for example, expect that the Pentagon budget will flatten out.

And all employers -- but particularly the auto industry, which is footing the bill for health benefits for thousands of retirees -- are worried about the brisk rise in medical costs and whether the administration has a realistic plan for dealing with the problem. The telecommunications and media industries expect the White House and their regulators to continue to step back and allow greater industry consolidation, even as regulators are faced with major decisions about the future of Internet and telephone services. But the biggest smiles yesterday came from Wall Street executives, who were pleased with the tax cuts in the first Bush term and hope for more of the same from the second.

Bush to press war on terrorism, tax code changes in new term.

The president vowed to help Iraqis defeat insurgents and ensure that elections are held in January. Aided by expanded Republican control of Congress, Bush will try to carve out private retirement accounts from Social Security, change the tax code, open up more U.S. lands to oil drilling and make permanent his $1.7 trillion in tax cuts, undeterred by record deficits.

Bush and Vice President Dick Cheney received 58 million votes, or 51% of the national popular vote, becoming the first candidates to garner more than 50% in a presidential race since 1988, when Bush’s father was elected. Kerry and his vice presidential choice, North Carolina Senator John Edwards, received 54.5 million votes, or 48%, with 98% of precincts reporting, CNN said. “I earned some political capital and now I intend to spend it,” he said.

Bush enters his second term with the outlook for economic growth stronger than when his father, George H.W. Bush, unsuccessfully sought re-election in 1992 -- even though he is the first president since Herbert Hoover in the Great Depression to preside over a net loss of employment. Since Bush became president in January 2001, 821,000 jobs have been lost. The economy will expand 4.4% this year, it is fastest since 1999, according to a survey of economists last month.

Swiss press worried by Bush re-election.

The Swiss press is concerned that the re-election of President Bush could have negative consequences for both the U.S. and Europe. “Are 62 million Americans simply stupid?” asked the tabloid Blick in its front-page headline. But others were more worried by the fact that Bush’s re-election could lead to a more hard-hitting US foreign policy. The French-language La Liberté said that the Republicans would now be able to continue their unilateral foreign policy regardless of the international community. But the Berner Zeitung went further, saying that Bush was convinced that he had a Christian mission to fulfil and this, combined with power, was a “dangerous mix”.

Some newspapers commented on the future of the -- already shaky -- relationship between the US and Europe. The Neue Zürcher Zeitung (NZZ) made the point that although Bush was not popular in Europe, he had strengthened his position at home. “President Bush has this time definitely and incontestably won and fought off the Democrat onslaught,” said the newspaper. But it also drew attention to the fact that the second term of office is traditionally difficult for US presidents. But the paper added that Bush at least has a majority in Congress, unlike his predecessors Clinton, Reagan and Nixon. The NZZ also raised the question of whether Hillary Rodham Clinton, the senator and wife of former Democrat president, Bill Clinton, would run for president in the next elections.

With a handful of exceptions, most see results as dispiriting.

Much of the world went to bed Tuesday night hoping and believing that John Kerry might win the White House but woke up Wednesday morning to find President Bush -- the most internationally unpopular American leader in decades -- on his way to a second term. For many people outside the United States it was a dispiriting result that underscored the deep rift in policies and perceptions that has opened between the U.S. and many of its allies since Bush took office in January 2001. “America has missed a great chance to reunite with the world,” said Graham Allen, a member of the British Parliament from the ruling Labor Party. “I fear the tragedy for all of us is that if America doesn’t reach out to its friends, then its enemies will reach out to America.”

Political leaders in a handful of countries such as Russia, Italy, Britain and Israel were enthused by the result, analysts said. But the large numbers of people across the world who had dismissed the Bush administration as a one-term aberration that had come to office illegitimately were stunned to see the president win. “It will confirm those who feel there’s a difference in basic values between the U.S. and Europe,” said Charles Grant, director of the Center for European Reform here. “Although we have many common interests and values, when you get to things like religion, gun control and the death penalty, we just live on a different planet.” Poll after poll taken abroad showed sizable majorities opposed to Bush in virtually every country except Israel and Russia in a U.S. election that the world watched more closely than any in recent memory.

In France, the center of opposition to the war in Iraq, Bush’s victory shocked many analysts. “The rest of the world has to face reality,” said Philippe Labro, a novelist and journalist who specializes in American issues. “We have the same president in power, the same team and probably the same policies. Both the U.S. and the rest of the world have to realize that we need each other, because if we don’t, we’re all in trouble.”

The U.S. election process raised many eyebrows abroad. Francois Heisbourg, director of the Paris-based Foundation for Strategic Research, called it “totally bizarre” and “outdated”. Le Monde newspaper expressed dismay in an editorial. “What an example for a democracy to give to the world, electors voting late into the night in Ohio, waiting for votes, faulty voting machines, these unending recounts!” it wrote.

BUSINESS FEARS OVER SLUGGISH EU ECONOMY

As European leaders gathered in Rome last week to sign the new EU constitution, many companies are focusing on matters much closer to home -- namely now to stay in business. In several countries, unemployment is high, while the euro seems to have done little to increase trade and wealth in the eurozone.

Frederic Sawicki, a politics lecturer at the University of Lille, says that “In the region today the unemployment rate is 12%, in some areas it is 15%. They don’t see what Europe is doing for them, so there is a kind of euroscepticism, especially in the working classes.” Which is strange because Lille is at the crossroads of Europe -- if anywhere should be benefiting from the euro it is there.

The euro was designed to increase trade within the eurozone, but the biggest increase in trade has been with the rest of the world. Much of that trade passes through the world’s largest port, Rotterdam, in Holland, home to specialist crane maker Huisman Itrec. Its cranes help build oil rigs and lifted the sunken Russian submarine Kursk from the sea bed, but Huisman Itrec is now setting up a factory in China, where costs are cheaper and its main customers are closer.

Boss Henk Addink blames the low growth rate in Europe for the lack of orders closer to home. “In the US growth is something like 6%, in China they are estimating 15%, and in the EU it is more or less 1%,” he says. Mr. Addink blames the euro for stifling demand. He much preferred the old currencies of Europe, which moved in relation to each country’s economic performance. The EU set itself the target of being the most efficient economy in the world by 2010. Four years into that process, and the target seems further away than ever.

E.U. “failing” on economic promises.

EU leaders are failing to deliver on economic reform promises made at the beginning of the decade, according to a high level report. The EU’s aim to become the world's most competitive economy by 2010 amounts to a series of “missed objectives”, former Dutch Prime Minister Wim Kok has said. National leaders meeting in Lisbon in 2000 set the EU the goal of outpacing the US economy within 10 years.

The EU appointed Mr. Kok to examine how the Lisbon objectives were progressing. His document, which will be presented to EU leaders at a summit in Brussels, says the EU needs to focus more closely on growth and employment. Mr. Kok’s report recommends, among other things, that an annual list should be published showing which countries are failing to do enough to rejuvenate their economies.

CUBANS RUSH TO SWAP DOLLARS FOR LOCAL FUNDS

Thousands of Cubans queued up Thursday to swap US dollars -- which have been legal tender here for over a decade -- for local convertible pesos, in a mad rush ahead of November 8, when U.S. currency will be locked out of commercial transactions. Starting then, hotels, restaurants, car rental agencies and taxi drivers will accept only “convertible pesos”, a local currency that can be used in specialized stores on the island but has no international value. Cubans will still be able to hold some U.S. dollars, but using them in commercial transactions or in retail will be banned.

Banks will soon stop conducting dollar transactions, and companies or business people with dollar-denominated accounts will have to change them into convertible pesos. So what is the rush? Anyone who exchanges dollars after November 8 will have to pay a 10% surcharge to the government. Most in line were retirees who receive hard currency remittances from relatives abroad. Family members send more than $800 million a year to Cuba, making the foreign remittances a staple of the Cuban economy alongside tourism and ahead of sugar.

10 SURVIVING OUTPOSTS OF THE BRITISH EMPIRE

Pitcairn’s recent appearance in the headlines has been a shock. Who knew Britain still had territories in the Pacific, let alone ones where the populace descended from the mutiny on the Bounty? What other bits of the globe are shaded pink? Might we still be hanging on to Calais? So, just to check we have not forgotten about any medium-sized African nations, we decided it was time to open an atlas. Heard of Akrotiri and Dhekelia? How about Tristan da Cunha, the most isolated inhabited place in the world?

Alderney is strictly for those who want peace and quiet.

With 2,400 residents, Alderney is the third largest of the Channel Islands. It has 20% income tax and no VAT, stamp duty or inheritance tax. Yet there are no gin-palace Sunseeker yachts in the bay or fake-tanned lotharios driving Ferraris. Instead, Alderney is small-island life at its smallest. The place is as quirky as the people. Alderney’s main street is cobbled and there are no parking meters in sight. The train service consists of two 1938 former London Underground carriages. The airport departures and arrivals hall is like an entrance hall in a house. And, sitting next to you on the tiny aircraft may well be a box of cabbages destined for the greengrocer.

Eccentricities aside, Alderney is ruggedly beautiful and has well-preserved period homes. It has escaped the planning free-for-all of Jersey and Guernsey, where fields of bungalows and houses spoil the views. Instead, most of Alderney’s 2,000 acres are designated Green Belt, allowing the island’s farmland landscape to dominate. Even extensions to Alderney’s 1,100 homes -- mostly Victorian and Georgian -- cannot exceed 15% of existing floor space ... although exceptions to the no-development rule are found in some of the 12 grey-and-pink-granite forts encircling the coast, built in the 1840s to protect the Channel Islands from the French.

SWISS BANKS TURN THEIR BACKS ON “MERGER MANIA”

The 2004 Finance Forum is focusing on the theme, “The bank of the future -- strategies for increasingly competitive markets”. The event comes at a time when Europe’s major banks are exploring the idea of cross-border mergers and alliances, in the wake of several major tie-ups between banks in the U.S. But UBS and Credit Suisse -- the two largest Swiss banks and among the biggest in Europe -- appear to have turned their back on the idea of further consolidation. Professor Beat Bernet of the Swiss Institute of Banking and Finance says that, despite the recent takeover of Britain’s Abbey by Spain’s Santander, the “hands-off” approach taken by the Swiss may end up carrying the day across Europe:

“In my opinion, big mergers belong to the 1990s. Today we have to focus more on new business models which open up opportunities to profit from economies of scale… without all the costs of full integration. I think that is why our big banks are now following a strategy that is not the same as the one they were pursuing in the 1990s.”

Swiss bank employees face uncertain future.

Banking is often referred to as a “people business” -- but what does the future hold for the people who actually work for Switzerland’s 300-odd banks? Two banking experts talk about the challenges facing employees in this rapidly changing sector.

CAYMAN ISLANDS REMAIN A STRONG LURE FOR CAPTIVE INSURERS

Six weeks after Hurricane Ivan, and with the country’s infrastructure slowly coming back on stream, the Cayman Islands Monetary Authority has reported that strong interest continues to be shown in the jurisdiction’s captive insurance sector. According to CIMA, in the weeks that have followed the devastating hurricane, nine licences have been granted to captive insurance companies, and the authority has also issued an insurance management licence.

According to CIMA, the Caymans continue to do brisk business in other sectors of the financial services industry as well. The Authority revealed that it has processed more than 120 mutual fund registrations, while granting approval for three securities investment business licences, two companies management licenses, one trust company, and a banking entity in the weeks following Hurricane Ivan.

BERMUDA’S HEDGE FUND INDUSTRY

Bermuda’s well-established reputation for political and economic stability, and a balanced approach to regulation, are the main drivers of a burgeoning hedge fund industry that has grown by nearly 900% in the last seven years. There is now some $72 billion under administration on the Island, up from $8.1 billion in 1997. Bermuda funds have been accepted for listing on a number of prominent stock exchanges, including Hong Kong, Ireland and Luxembourg. Worldwide, the U.S. Securities and Exchange Commission has estimated that there are currently 6,000 to 8,000 hedge funds and overall hedge funds investment could reach $1 trillion by the end of this year, a 3-fold growth since the end of the bull market.

The Bermuda Monetary Authority (“the Authority”) regulates all pooled funds under management for investment purposes. The Authority’s general philosophy is to ensure that those parties affiliated with a Bermuda fund are fit and proper persons having the requisite experience and expertise to carry on the fund’s business. Under Bermuda law there is no differentiation between a mutual fund and hedge fund, which may take the form of open-ended or closed-ended companies. The mutual funds are referred to as collective investment schemes and are subject to supervision, regulation and inspection by the Authority.

CHINA’S CENTRAL BANK TRIES TO SLOW ECONOMY WITH FIRST RATE RAISE IN 9 YEARS

The step aimed at slowing breakneck economic growth and inflation, but it could risk social unrest if heavily indebted state companies respond by laying off more workers. Beijing also removed the ceiling on what banks could charge for loans, a measure that paradoxically could make more loans available to risky private enterprises and ultimately enhance China’s long-term growth prospects and give its economy much greater stability.

The two moves shift China further toward a Western-style financial system in which markets determine the allocation of credit, rather than government officials. The interest rate increase, a little more than a quarter of a percentage point, is not big enough by itself to change the direction of the Chinese economy. But it is widely expected by economists to be the first in a series of increases that could lift rates by as much as two percentage points in the coming year, which could seriously curtail economic growth. That would damp demand for products offered by the U.S. and other countries rushing to take advantage of the Chinese market. But the effect on American consumers is likely to be quite small, as Chinese companies are expected to take the steps needed to keep prices low and maintain their exports.

For Beijing, the interest rate increase is a historic embrace of free-market tools of economic management despite possible internal political repercussions, said Tao Dong, the China economist at Credit Suisse First Boston’s office in Hong Kong.

China Tradeoffs

China’s hike in interest rates is good news, in my view. It is a plus for an overheated Chinese economy, and it is a positive development for an unbalanced global economy. But there are always winners and losers when a nation opts for policy restraint. China is no exception. Three such tradeoffs loom particularly important in assessing the domestic and global implications of China’s monetary tightening.

UNHAPPY DEMOCRATS NEED TO WAIT TO GET INTO CANADA

Disgruntled Democrats seeking a safe Canadian haven after President Bush won Tuesday’s election should not pack their bags just yet. Canadian officials made clear on Wednesday that any U.S. citizens so fed up with Bush that they want to make a fresh start up north would have to stand in line like any other would-be immigrants -- a wait that can take up to a year.

There are anywhere from 600,000 to a million Americans living in Canada, a country that leans more to the left than the United States and has traditionally favored the Democrats over the Republicans. But recent statistics show a gradual decline in U.S. citizens coming to work in Canada, which has a creaking publicly funded healthcare system and relatively high levels of personal taxation. Government officials, real estate brokers and Democrat activists said that while some Americans might talk about a move to Canada rather than living with a new Bush administration, they did not expect a mass influx.

“It’s one thing to say ‘I’m leaving for Canada’ and quite another to actually find a job here and wonder about where you’re going to live and where the children are going to go to school,” said one government official. The other main way to move north on a long-term basis is to find a job, which in all cases requires a work permit. This takes from four to six months to come through.

FORMER TORY MP WARNS ISLE OF MAN OF E.U. THREAT TO BUSINESSES

A former Tory MP and Euro rebel has visited the Island to talk about the unacceptable threat of the EU to the freedom of the British Isles and its business community. Christopher Gill, former MP for Ludlow in Shropshire and present chairman of The Freedom Association, was invited to speak on the topic by The Manx EU Realist Group. He is a former vice-chairman of the Conservative European Affairs Committee but relinquished the post when he joined seven other Tory MPs in rebelling against the Maastricht Treaty.

He warned that Britain and its economy would be suffocated by bureaucracy and have its freedoms severely restricted if it fully supported the constitution. “If mainland Britain accepted the European Union Constitution, it would not be long before we accepted the single currency and everything that goes with that. There would then be such a lot of arm twisting as far as the Isle of Man is concerned that it would be very very difficult to resist going along with the UK,” he said.

Mr. Gill highlighted several areas of law that will differ greatly from the Common Law practiced in Britain and the Isle of Man. Two of the laws that will be affected could have a dramatic effect on the protection that companies and employees currently enjoy. The continental system has no law that allows previous convictions to be withheld. This would mean that people looking for employment would have no legal right to keep their past record from employers. Continental law also has no provision for reporting restrictions, so any company involved in an active legal case would have no right to anonymity.

After a bitterly fought election, Democrats and liberals will hope that Mr. Bush now governs from the center. But they have hoped that before, and were disappointed. With a more decisive victory under his belt, expect him to try to consolidate and expand the gains of his victorious conservative movement.

PANAMA AND COLOMBIA DISCUSS BUILDING A ROAD LINKING NORTH AND SOUTH AMERICA

Panama’s Martin Torrijos and Alvaro Uribe of Colombia discussed building a road linking North and South America, as well as electricity sharing and the possible construction of a natural gas pipeline that would send gas to Panama. Currently, highways span the continents from Alaska to Argentina, except for an 85-mile stretch in the jungles of the Darien Gap straddling the Colombian-Panamanian border. Environmentalists say such a link would increase development and deforestation. Many Panamanians fear a road would cause more violence related to Colombia’s 40-year rebel conflict to spill into their country.

Mexico, Panama, agree to work toward deals.

Mexican President Vicente Fox said his administration will do everything possible to strengthen relations with Panama and to promote trade and investment agreements that have been stymied in the past. Panama and Mexico enjoy warm political ties, but have faced differences that have gotten in the way of efforts to finalize a free-trade agreement between the two countries. The two sides also expect to finalize within a month an agreement to protect and stimulate investments. Mexico has nearly $1.2 billion in investments in Panama, and the two countries have a combined trade balance of $400 million.

Among the sticking points holding up a free-trade agreement has been Panama’s inclusion on a list of countries known as fiscal havens for offshore bank accounts. Both Fox and Torrijos said progress had been made on removing Panama from the list.

DENZIL DOUGLAS RETAINS POWER IN ST. KITTS/NEVIS

Prime Minister Denzil Douglas’s Labour Party won a third term in parliamentary elections on Monday, clinching seven seats in an election marked by intense debate over the two-island nation’s sagging economy. Douglas called the elections early and led a campaign touting efforts to boost the economy, noting the recent opening of a new Marriott hotel with more than 600 rooms. Elections in the former British colony of more than 46,000 people were not due until next year. In the 2000 elections, Douglas’s party won all eight seats in St. Kitts, while in Nevis, the Concerned Citizens Movement won two and the Nevis Reformation Party came away with one. More than 38,000 registered voters were choosing among five parties, for eight seats in St. Kitts and three in smaller Nevis.

The campaign pitted the Labour Party against the opposition People’s Action Movement, which focused its campaign on unemployment, poverty and crime in the economy based on tourism and a fading sugar and banana industry. Opposition leader Lindsay Grant criticised unemployment estimated at more than 10% and a national debt that has grown to nearly Eastern Caribbean $2 billion (US$742 million). Like other Caribbean islands, St. Kitts saw a drop in visitors following the September 11, 2001, terrorist attacks but has been regaining tourists.

Nevis’s island government makes laws and collects its own taxes and fees. But supporters of independence say the federal government in St. Kitts takes a disproportionate share of corporate and other taxes without giving back enough. Nevis came close to seceding in a 1998 referendum, falling just short of the required two-thirds majority. The constitution, enacted when the islands became independent from Britain in 1983, spells out Nevis’s right to hold such a vote. Douglas has warned Nevis may not be able to sustain itself if it were independent.

Are the high profiles other Caribbean states had in the St. Kitts election appropriate?

Although the Douglas administration did not gain the historic second clean sweep of St. Kitts, their election emerged as the Caribbean election which recorded the largest number of Prime Ministerial endorsements from neighboring countries. In that election, the St. Kitts and Nevis Labour Party (SKNLP) received the support of the Prime Ministers of Dominica, St. Lucia and St. Vincent. In his article “Our Caribbean”, Rickey Singh suggested that this was political misbehavior on the part of our regional leaders. Interestingly enough, prior to that, one perceptive caller to the talk show “Tell It Like It Is” quizzed this author on his view on this recent development in regional politics and argued a point similar to Singh’s.

At risk of being called a “flip flopper”, I am inclined to argue both for and against this development, which does appear unconventional. Certainly, the traditional approach to politics in the region treated all English-speaking territories as independent territories and their leadership was as inclined to participate in the politics of a neighboring island as Tony Blair would be to comment on his preference for the leadership of the U.S.

This hands-off policy during an election arises from a time-worn convention of international politics that mandates friendly states to recognize the government selected by the people of a nation and not seek to influence their choice one way or the other. Essentially, one state should respect the sovereignty of another state and a nation’s right to select their government, without influence from outside. Presumably, this is the logic behind the arguments of Singh and others and this would seem reasonable. However, this author would also argue that there are several alternative perspectives, not least of which is the fact that such thinking can be associated with the heavily criticized Realist school of international politics. This school argues that the views and opinions of the leadership of a country is tantamount to the view of that country itself and this author would disagree.

TAXES

HOOTERS FOUNDER ACCUSED OF TAX EVASION

A founder of the Hooters restaurant chain is accused of failing to pay $4 million in income tax. An indictment in U.S. District Court in Tampa, Florida accuses Lynn Stewart of two counts of tax evasion and two counts of filing a false tax return. Stewart failed to pay $1.7 million in income taxes for 1997 and $2.3 million for the following year, the indictment states. He earned $12.1 million in taxable income in those two years, but he declared $910,044, according to court documents.

Stewart’s lawyer, Anthony LaSpada, said Stewart will fight the charges. LaSpada said Stewart followed the advice of an accountant who set up offshore accounts that concealed his income from the IRS. Stewart was told the system was legitimate and has since hired new financial advisers

U.S. NOW HAS THE LOWEST TAXES AMONG OECD COUNTRIES

The U.S. now has the lowest taxes of any large industrial country, the OECD reported this past week as it released its annual survey of taxes among its members. Only Mexico collected a lower rate of taxes, as a percentage of GDP. Sweden, the high-tax leader, collected exactly twice as large a share of its GDP in taxes, 50.8%, as did the U.S. Whether that means that U.S. taxpayers face a lower burden over all is not as clear, however, since the OECD statistics make no effort to adjust for the differing services, health care and higher education among them, that countries provide.

Over most of the past 30 years, the trend in taxes in the developed world was up, as countries provided more services and as bureaucracies grew. But that trend turned around in 2000, with taxes beginning to decline. Over time, most developed economies put more emphasis on consumption taxes, and 29 of the 30 members of the OECD now levy such a national tax, with the U.S. being the sole exception, although most American states levy sales taxes. That fact may be one reason Americans have shown a much greater willingness to consume, and a much smaller willingness to save, than have most other nationalities in recent years.

U.S. SHIFTING TOWARDS FLAT TAXES

The recently enacted U.S. corporate tax bill has attracted a lot of criticism, but the legislation actually is rather impressive considering the political obstacles. All things considered, it is a case of good, better, best. Good: The legislation will force the EU to eliminate more than $4 billion of taxes on American exports. Better: A substantial portion of the bill is devoted to much-needed tax reforms that will boost U.S. competitiveness. Best: These provisions represent another step on the road to a simple and fair flat tax.

One of the least appreciated aspects of the Bush presidency is that the tax cuts of the last four years have moved the United States toward genuine tax reform, as can be seen by reviewing two of the most important principles of the flat tax: First, there should be just one tax rate and it should be very low. This ensures fairness by treating everyone equally, and it promotes growth by minimizing the tax burden on productive behavior. Second, no income should be taxed more than once. This feature eliminates the bias against saving and investment and ends the double-taxation of income earned outside U.S. borders. Based on these two principles, the Bush tax cuts deserve high grades.

Would it be better for the United States if the president and Congress had gone with a flat tax instead of enacting four different tax bills in the last four years? Of course, but the perfect should not be the enemy of the good. Like sausage-making, the legislative process is not a pretty sight. But we should not complain too loudly if the net result is a better tax code and a more competitive United States.

JERSEY CAPITAL GAINS TAX COULD CATCH “ASTUTE” TAX AVOIDERS

A Capital Gains Tax would thwart the efforts of “financially astute” taxpayers to flout the Island’s tax rules, says the Comptroller of Income Tax. But it would require “massively complex” legislation to close all loopholes, says Malcolm Campbell. The pros and cons of Capital Gains Tax are revealed in a background document which Mr. Campbell prepared for the States Scrutiny Panel, who are looking into CGT.

The Finance and Economics Committee have not included CGT in their new fiscal strategy. They say it would raise only £5 million a year, is costly to collect, needs complex legislation, and risks making the Island less competitive as a finance center. But some politicians believe CGT has not been considered carefully enough and that the advantages might outweigh the costs.

Mr. Campbell says that there is not enough information to gauge the likely yield accurately, but basing a projection on UK data he estimates the potential would be much less than £5 million. Nevertheless, a CGT in Jersey would catch those who currently manipulate their returns.

EUROPEAN COURT OF JUSTICE RULING ALLOWS EU RESIDENTS TO SHOP AROUND FOR BEST TAX DEAL

An opinion released last week by an advocate general at the ECJ is expected to have favorable implications for EU taxpayers, allowing them to “shop around” for the best tax deals. Commenting on the case of a German taxpayer who had asked to be taxed in the Netherlands as a Dutch taxpayer, referring to a tax treaty between the Netherlands and Belgium which entitles Belgian non-resident taxpayers to the same tax reductions as Dutch residents, the ECJ ruled that individuals and firms can examine an European countrywts international tax arrangements and demand to be treated in line with the most favorable.

Speaking regarding the likely impact of the ruling on Irish taxpayers, Grant Thornton’s Bernard Doherty suggested that significant capital gains tax savings could be made on investment properties. The decision is also expected to have a beneficial effect on non-resident British firms and individuals who pay tax in Ireland.

IRS DATA REVEALS LESS CHEATING BY BUSINESSES

The push by the commissioner of Internal Revenue for quick completion of audits of big corporations -- a move criticized by many longtime agency auditors -- has led to a sharp drop in the discovery of tax cheating at the 11,000 largest businesses, new I.R.S. data indicated. The data indicated that the amount of additional taxes recommended after audits at the biggest companies would be down more than $8.5 billion in fiscal 2004 from the previous year, a decline of almost 70%.

Leaders of the National Treasury Employees Union, which represents most I.R.S. workers, as well as dozens of I.R.S. corporate auditors, have complained about orders to close audits quickly without regard to how much additional tax might be owed. Auditors warned that the practice would cost the government billions of dollars while rewarding tax cheats at the expense of honest taxpayers. In voice-mail messages to the audit staff, the I.R.S. management acknowledged the complaints but insisted that requiring auditors to close cases quickly would not have a negative effect on uncovering tax cheating or on tax revenues.

IRS disputes watchdog’s audit report.

IRS Commissioner Mark W. Everson has been saying that the long slide in tax enforcement is at an end and the agency is turning up the heat on businesses and high-income taxpayers. A watchdog group said that the latest IRS numbers do not support Everson’s contention. For the first half of fiscal 2004, audits of corporations continued to decline, as did the amount of additional tax IRS agents recommended collecting from them, according to the Transactional Records Access Clearinghouse (TRAC) at Syracuse University. The IRS countered that it is not meaningful to compare six months of data with a full year because of seasonal shifts and other changes.

THE ELECTION WILL HAVE A PROFOUNDLY POSITIVE IMPACT FOR TAX COMPETITION

What does the election mean? For advocates of tax competition, the election will have a profoundly positive impact. A Kerry victory would not have meant the end of the world (especially if Republicans had maintained control of the House and Senate), but a left-wing Treasury Department would have been bad news for low-tax jurisdictions. By contrast, a Republican White House, augmented by additional GOP seats in the House and Senate, is a nightmare scenario for the bureaucrats at the EU and OECD. On a wide range of issues, ranging from OECD funding to corporate inversions, and from the IRS regulation to tax reform, the elections represent a dramatic victory for tax competition and a staggering defeat for tax harmonization.

Halting the French economic thrust.

France and its statist allies have been losing the war for economic supremacy to the lower-tax developing and developed countries, like the United States. The French are well aware that their economy and those of other statist European countries perform relatively poorly because they are noncompetitive with lower-tax-burden countries. Rather than correctly cut their own taxes and government spending, they actively try to force others to raise taxes so they might also have stagnant economies. (It appears the French never learned envy is a sin.)

The French try to disguise their real agenda by calling for “tax harmonization” so all countries would have the same tax rates. However, they do not mean harmonization at low but at high rates like the French have. The French, Germans and some of the other high-tax EU countries also developed what they called the European Savings Directive that forces other independent financial centers, like Switzerland and Luxembourg to report financial information on individuals to the EU governments or withhold taxes for the EU governments.

The French have “captured” (as a result of U.S. neglect) important parts of the Paris-based OECD. The OECD was originally created by the developed countries to collect and disseminate statistical data and to promote pro-growth, free market economic polices. However, in recent years, France and her allies have been using the OECD’s Fiscal Affairs Committee to promote their tax harmonization and anti-tax competition agenda. With the urging of more than 30 public policy organizations, the U.S. Senate Appropriations Committee has approved a funding bill that would prohibit the OECD from receiving U.S. taxpayer funds if OECD has tried “to identify, report on, or penalize any country that encourages foreign investment through tax incentives.” As you would expect, the OECD and the French are unhappy with the Senate action, and are trying to use their influence in the U.S. government and the news media to stop it.

Most members of Congress and representatives of interested public policy organizations have no desire to kill the OECD’s legitimate statistical collection and reporting. The sensible approach would be for the OECD to agree to cease and desist from all activities designed to discourage tax competition, and for the Treasury Department to withdraw its related French-inspired, proposed interest reporting regulation in exchange for continued U.S. funding of the OECD. Under this compromise, the taxpayers of the world would win, but the French socialists would lose -- a win-win for economic growth and human rights.

EU-INSPIRED TAX CHANGES MEAN EXTRA COSTS FOR OFFSHORE FIRMS IN HUNGARY

Planned changes to the double taxation treaty between the U.S. and Hungary, together with prescheduled modifications to the Hungarian tax regime at the end of next year, may hurt the operation of offshore entities in Hungary, and could lead to the mass exodus of such firms, tax experts warn. The over 650 offshore companies registered in Hungary pay around 20 billion Hungarian forints (€81.2 million) in taxes annually. The total amount of paid taxes represents a minimum of Ft 600 billion in profits posted by these companies, and some Ft 3,200 billion in total financial assets.

According to Gabriella Erdos, senior tax partner at PricewaterhouseCoopers, incentives that might persuade offshore firms to stay include increasing the corporate tax benefits of royalty and interest income to 75% from the current 50%, as well as further reducing the corporate tax rate. Local business tax and the innovation contribution will be major blows once these firms lose their offshore status, and exemptions are not compatible with EU legislation, she noted.

Hungarian offshore companies currently enjoy several tax advantages, making them popular as intra-group financing vehicles for international corporate groups, as well as intellectual property and royalty holders. Under Hungarian tax law, such companies cannot be legally involved in business activities within Hungary, so their activities are exclusively focused on foreign markets. Local offshore firms pay 4% Hungarian corporate tax on their income, and are exempt from both the local business tax, of up to 2%, and the innovation contribution, a revenue-based mandatory R&D tax similar to the local business tax. Additionally, interest income received by Hungarian offshore companies on loans granted to related foreign companies, as well as royalty and dividend income, is not subject to withholding tax. Offshore companies are also allowed to keep their books in currencies other than the Hungarian forint.

Pursuant to its agreement to join the EU, Hungary stopped granting Hungarian offshore company licenses at the end of 2002. It also agreed to eliminate the Hungarian offshore company regime entirely as of Jan. 1, 2006, after which Hungarian offshore companies will be taxed similarly to regular companies.

ALL TAX SHELTERS ARE NOT ILLEGAL, ANOTHER COURT TELLS IRS

For the third time in less than a month, the government this week lost a multimillion-dollar case in which a federal judge concluded that a deal that saved a company large sums of taxes had a legitimate business purpose and thus was not an illegal tax shelter. In two of the cases, the judges specifically told the IRS that if it has a problem with the outcomes, the solution lies with Congress, not the courts.

In the most recent case, a U.S. district judge in Connecticut determined that an arrangement by which General Electric Co., through subsidiaries and partnerships, shifted $310 million in income to two Dutch banks that do not pay U.S. taxes was not a sham and, as a result, GE was entitled to a $62 million tax refund. GE, which through its GE Capital subsidiary owned a large number of commercial airplanes that it leased to airlines, contributed those planes, along with some cash, to a partnership in which the Dutch banks participated. The banks got a large share of the rental income that would have been taxable to GE, and GE, the judge noted, got to “re-depreciate” the planes for tax purposes.

However, the judge held that the arrangement was a real business deal, since it helped GE accelerate income from the leases on the planes, as well as save on taxes. “In short,” wrote Judge Stefan R. Underhill, “the transaction, though it sheltered a great deal of income from taxes, was legally permissible. Under such circumstances, the IRS should address its concerns to those who write the laws.”

Court sides with Coltec in tax-shelter lawsuit.

For the second time in two weeks, a federal court has handed the IRS a major setback in its fight against abusive tax shelters. Coltec Industries Inc., which makes aircraft-landing systems, used a strategy that involved transferring a $375 million promissory note to a subsidiary that was set up to take on liabilities associated with asbestos litigation. Coltec sold stock in the subsidiary to banks and law firms handling the litigation, producing a huge loss.

The U.S. Court of Federal Claims in Washington ruled that Coltec deserved an $82.8 million refund. The decision by Judge Susan Braden said that the actions did not represent sham transactions, as the IRS had claimed. The IRS said that they lacked economic substance even though they technically followed the tax code. Braden wrote that “where a taxpayer has satisfied all statutory requirements established by Congress, as Coltec did in this case, the use of the ‘economic substance’ doctrine to trump ‘mere compliance with the code’ would violate the separation of powers” clause of the U.S. Constitution.

ARUBA’S INTERNATIONAL TAX COUNSEL REVEALS IMPACT OF E.U. TAX RULES

International tax counsel to the government of Aruba, John Sanders, argued that the EU’s Code of Conduct on Business Taxation is unfair on the affiliated territories and dependencies of EU member states, which are forced to comply with more strict rules than their non-EU counterparts. He went on to explain that although offshore finance centers with no EU links are encouraged to come into line with the rules on tax competition laid out by the OECD, the multilateral body has softened its approach in recent years, shifting its focus to the issues of transparency and tax information exchange. The EU rules, however, still contain provisions outlawing so-called “ring fencing” and preferential tax regimes for companies on the basis of their origin.

“Many of the UK territories have said that because they cannot have preferential regimes they will abolish corporate taxes altogether,” Mr. Sanders explained. “They can easily do that because the nature of their economies means they will hardly suffer from it. [However, t]he situation now is that the member states get the benefits [of eradicating harmful tax competition, which protects tax revenues], most associated territories can deal with it and the only places that have a problem are the Netherlands Antilles and Aruba. This creates the most uneven playing field imaginable.” According to the LMG report, Aruba has committed to end its tax-exempt company scheme by the end of next year in order to comply with EU rules.

CHINA CONTINUES TO DEBATE MERITS OF AN INHERITANCE TAX

With the rapid pace of economic growth adding to the ranks of China’s wealthier classes, the debate amongst observers and academics continues on the merits of the introduction of an inheritance tax. One advocate of an inheritance tax, Wang Minggao, a social scientist and expert on property and anti-corruption, cited economic data revealing that 60% of the country’s private deposits are in the hands of 20% of the population, with one million families said to possess assets worth more than 1 million yuan ($121,000). Other advocates of an inheritance tax argue that most wealthy Chinese citizens are able to circumvent current income tax rules, and the levying of death duties will reduce the incidence of tax evasion.

However, with a per-capita GDP of $3,000, some argue that China is not yet ready for an inheritance tax, which should be considered when the nation is more prosperous. The cost of implementing and administering the tax is also deemed by some to be prohibitive.

ASSET PROTECTION

OFFSHORE: ITS PLACE IN THE SUN

Are offshore financial centers receiving more than their fair share of attention? According to Peter Harwood, head of Ozannes’ corporate department in Guernsey, most certainly. “The offshore centers have been under the cosh now for a number of years,” he told the recent Legal Week breakfast roundtable on Offshore Financial Centers (OFCs) in the 21st century. “There has been a constant stream of international auditors coming to the islands to look at us.”

The roundtable, held in association with Ozannes and chaired by Harwood, met on 14 October to consider the position of the offshore financial centers in a changing world. With many governments and NGOs keen to crack down on criminal financing in the wake of 9/11 and on commercial wrongdoing following the Enron scandal, the financial regulation of the OFCs has become an increasingly pressing issue.

Not everyone was convinced that the scrutiny under which the OFCs were finding themselves was justified. While the offshore jurisdictions were a popular target for the financial watchdogs, Harwood said, noone was looking in the same way into the regulatory system of onshore jurisdictions such as Delaware in the U.S., which was popular with a mass of US companies due to its less than stringent regulatory regime. By the same token, is it any longer possible to define in simple terms what was meant by an “offshore center”? Is London, for example, offshore?

Shoring up the foundations.

As well as political storms, parts of the offshore world have been devastated by the real kind. Last year Bermuda was ravaged by Hurricane Fabian, while this September saw Hurricane Ivan wreak havoc in the Cayman Islands with winds of 150 miles per hour, leaving the territory without electricity, telephones or running water for days. Large areas were flooded and up to half of all dwellings were left uninhabitable. More than $1 billion worth of damage is thought to have been caused and, in the circumstances, it would be understandable if the island’s business had ground to a halt, at least for a while.

But the general consensus is that Cayman did a very good job of ensuring business continuity. Few of George Town’s office buildings were badly damaged -- most of them were built to withstand such freak conditions -- and there was just a week when it was not possible to register new companies. The law firms evacuated large numbers of staff, who seem to have operated effectively from elsewhere. Maples and Calder, the island’s leading law firm, moved 30 lawyers off the island. “After Hurricane Andrew hit Miami [in 1992], we became very focused on contingency planning and we established back-up systems off island,” says the firm’s senior partner Anthony Travers.

But there are those who wonder what the long-term impact of the hurricane will be on Cayman’s reputation as a leading offshore financial center. Perhaps Cayman’s importance in the offshore world is best demonstrated in the actions of law firms, as many expand or merge their way into the jurisdiction. Many in the offshore world share the view that, after years of relative inactivity, the offshore world is finally seeing a consolidation that is long overdue.

Offshore, on radar.

In recent years governments worldwide have moved to tighten up the regulation of financial services in the wake of a wave of corporate scandals and terrorist activity. Has the tightening up of the regulatory regime meant that offshore has lost its appeal to foreign investors? The offshore centers say no. They say these measures have even increased business. This is partly because transparency legislation was already in place and the majority of business being done was legitimate. A further reason why the offshore centers have not been disadvantaged by the changes in regulation is, Jonathan White at Ogier & Le Masurier in Jersey says, because regulatory changes have not just affected offshore but all the world.

There is one trend that has been extremely notable since this last wave of transparency legislation started to bite -- a wash of cross-border mergers and consolidations between firms have made this one of the most acquisitive sectors of the legal market. Not surprisingly, this has led commentators to look for a link between the two phenomena. The players resoundingly assert that there is no link, largely because the firms deny that the regulatory changes have impacted upon their practices. The feedback from the offshore firms is that the mergers are, in fact, motivated by nothing more complex than a desire to provide pan-offshore services to their big investment fund clients.

U.S. Government confirms that low-tax jurisdictions are not money laundering havens.

The State Department, CIA, and IRS each independently assess whether countries are money laundering centers and/or have systems that make them vulnerable to dirty money. All of these government agencies -- as well as the OECD’s Financial Action Task Force (FATF) -- conclude that tax havens do not attract a disproportionate share of the world’s criminal loot. Indeed, the reports indicate that dirty money is far more likely to be laundered in high-tax nations.

TALK OF BERMUDA INDEPENDENCE DISTURBS BUSINESS

International companies are wary of moves to Independence. And a clear message has been sent to Premier Alex Scott saying that, as far as the sector is concerned, there are “almost no positives” and “a number of potential negatives” should Bermuda move toward Independence. In a letter to the Premier, the Association of Bermuda International Companies said Independence is both an economic and emotional issue which is best decided after full and frank debate and a referendum. The letter came practically on the eve of Premier Alex Scott’s announcement of the imminent launch of a Bermuda Independence Commission. ABIC represents 133 international companies with a physical presence on the island. “Independence should not be forced on a reluctant population,” the letter said.

The letter said all constituencies should be consulted and that international companies, as the “primary engine of the economy” should be included in the discussion. The legal and judicial system is the “next most important” issue, ABIC said. “It is essential that stability be maintained in this area. Clarity on who would appoint the judiciary, rights of appeal to the Privy Council, or other body, the overall governance structure and corporate and individual rights must be determined in advance.” And it added that a number of constitutional and other issues, such as who should be the Head of State, control of the Regiment, renegotiation of treaties, and how the constitution is changed, should be predetermined as well. The ABIC letter also highlighted the sector’s concerns about work permits and the Island’s Immigration regime.

ABIC also asked what would happen to Bermudians who had taken up UK passports, whether Bermudians would still have the right of abode in the UK and Europe and whether residents and visitors would enjoy US Immigration and Customs preclearance. And, it added, that Bermuda was far from being a tax haven, and that the costs of Independence should be made clear. “Increased taxes to pay for Independence would weaken the appeal of Bermuda as a business base and potentially increase the attractiveness of other jurisdictions.”

THEY’RE STILL HERE: FUNDS VANISH IN YET ANOTHER OFFSHORE “HIGH YIELD” SCAM

Two men have gone on trial in the Auckland, New Zealand District Court accused of sinking US$1 million of investors’ funds into an overseas scam. The money has vanished. They are said to have received the money from investors on the basis that it remained in New Zealand, but transferred the funds to an account at the Wells Fargo Bank in Arizona. The dozens of investors had been promised “extraordinary” returns of 500% for a 6- to 8-week term on so-called “offshore high-yield investments”, or as the Serious Fraud Office called them, “prime bank instrument fraud”.

Investors’ funds were supposed to be “blocked” in a New Zealand account and therefore risk-free. A letter from the bank was to be sent to an overseas trader who would somehow use the letter as evidence of the fund’s existence to operate a trading program. Then they received an offer from the States offering a “lucrative” trade. But the $1 million had to be transferred to the U.S. immediately. Though the money would be out of the country and out of the control of accused, the pair, though nervous, decided it was “too good an opportunity to miss”. The money was sent by telegraphic transfer and “has never been seen again”.

None of the investors had been consulted about their money going abroad. “Whether or not the offshore investment was a scam is irrelevant. The accused at this point acted blatantly, disregarding the basis on which they had been given the investors’ funds,” the prosecutor told the jury.

PHISHING FOR YOUR MONEY TAKES A NEW TWIST

UK computer users could be being “recruited” as money launderers for phishers. This stark warning from spam researchers at IT security specialist Sophos follows the discovery of a new email scam that disguises itself as a money-making opportunity. Recipients of these emails, allegedly coming from a bona fide financial institution, are asked to accept sums of money between £2,000 and £2,500 wired directly via Western Union into their bank accounts. People who agree are then offered a cut of 10% and told to transfer the money, again via Western Union, to another bank account.

This is because the money, believed to be gained from drug trafficking and phishing attacks on people’s bank accounts, cannot be transferred directly into the criminals’ accounts and has to be laundered. By persuading UK computer users to act as unwitting “mules”, the phishers create a complicated, practically untraceable system of transfers. The emails are entitled “Work From Home; Prepare to Succeed” and offer a job as a transaction manager to people living in the UK with a computer who will work for two to three hours a week.

A law enforcement officer at Scotland Yard’s Computer Crime unit said that it was aware of the scam but believe it to be old-fashioned fraud, not money laundering. It believes that the phishers will not only get the bank account details of the victim, but lure them into a false sense of security by wiring small amounts of money at first. Then they will send fake cashiers cheques. These will clear a bank account before these are found to be forged, but after the victim has sent the funds on leaving them out of pocket.

PRIVACY

RFID IN PASSPORTS COULD LEAD TO IDENTITY THEFT

Personal privacy is fast becoming a thing of the past. And helping secure its demise is a technology called Radio Frequency Identification (RFID). RFID systems typically consist of a small tag containing a microprocessor, a small amount of memory, and an antenna. An RFID device communicates with an external system using radio waves. These external systems can then, in turn, be connected to networks of computers, enabling rather sophisticated information processing of the collected data. The core application of RFID systems is to enable the tracking of objects and people. The beef industry, for example, was an early adopter of RFID technology, using it to monitor the movement of cattle from grazing to slaughter. Governments also are planning to use RFID, in this case to monitor the movement of people by embedding RFID technology into our principal systems of identification.

The most recent news on this front came from the U.S. State Department, which revealed that it would begin including RFID devices into all new passports starting around the middle of next year. The State Department says the idea is to make passports more difficult to forge, and to ensure that the bearer of the document matches the identification. This means that each RFID device, in each passport, will contain at least the name, address, and birthplace of the holder, along with a digital photo. The first set of devices, equipped with 64 kilobyte, of memory, will likely be capable of storing additional information, as required.

Immigration and border officials will no longer need to physically swipe the document through a reader. Instead, since the RFID device uses radio waves to communicate, the passport only needs to come within reasonable proximity of a listening device in order for the information to be read. And herein lies the chief problem, as identified by privacy advocates. Without requiring the passport to be physically handled in order to retrieve information, just about anyone will be able to read your passport contents, remotely, and without your knowledge. It all seems like a massive recipe for disaster.

NEW TRICKS FOOL CALLER ID

It was not long after caller ID became popular that some people signed up for telephone services to block their number from being displayed. Now comes another trick: Companies are marketing systems to help callers fool telephone identification services into thinking they are someone else entirely. The Web-based systems allow callers to spoof their identity by taking on the name and number of another legitimate caller. A company calling itself Camophone says its Privacy Guard service will handle the spoofing on a call-by-call basis for as little as $5. Another, Star38, said it is marketing its software only to law enforcement agencies. At least one other start-up plans to release its version soon.

The systems have hit a nerve among consumers who fear that such tools could give stalkers and debt-collection agencies an insidious new weapon. When Star38 launched in September, it decision to market to debt-collection companies generated so much anger among consumers that the small firm quickly changed its sales tactics. Star38 now says that approach was “flawed”.

Camophone was content to let word of mouth circulate on the Internet until the widely followed news site Slashdot drew attention to an article about its product on SecurityFocus. The Camophone Web site is registered to a third-party Web hosting firm in New Jersey called Registerfly.com, which keeps the identities of its customers confidential on the grounds that this protects its users from identity theft, unsolicited commercial e-mail and telemarketing calls.

In a world where consumers have finally gotten some relief from annoying telemarketer calls, thanks to the Federal Trade Commission’s Do Not Call Registry, technology that tampers with caller ID could mean a new avenue for scammers and tricky sales tactics. Marketing associations were quick to condemn the use of caller ID-altering products for marketing purposes.

IMPLANTABLE MICROCHIP MAY NOT BE A “HOME RUN” FOR ITS MAKER

The recent news that the F.D.A. had approved an implantable microchip for humans has garnered a lot of attention. But that does not mean that the idea of chips as personal identity tags will ever generate profits. The device, called the VeriChip and marketed by Applied Digital Solutions, horrified privacy advocates, who were concerned less with its F.D.A.-approved use than with where the technology might lead, declaring that people could become walking bar codes.

It is far from clear, however, whether the F.D.A. approval actually moved Applied Digital far enough toward its long-term vision to make it a less risky stock. Scott R. Silverman, Applied Digital’s chairman and chief executive, said that investors in the company see VeriChip as “the proverbial home run” and said that he was not about to discourage that view. The F.D.A.’s approval is for VeriChip’s use in a system that would give health care workers quick access to the medical records of anyone who had been implanted with the device.

But the average ballplayer has a far better chance of hitting a home run than the average investor has of picking big winners among the thousands of new technologies that small companies like Applied Digital are trying to take to the market. In this case, investors also face the challenge of understanding Applied Digital’s intricate finances and relationships with its publicly traded subsidiaries, Digital Angel and Infotech USA.

U.S. CONDUCTING TESTS OF PASSPORTS EMBEDDED WITH RFID CHIPS

The U.S. Government Printing Office (GPO) is testing electronic passports embedded with RFID chips that the agency hopes to make standard within the next year. To carry out the tests, the GPO awarded four companies with contracts. First, the GPO will manufacture test passports embedded with RFID chips. NIST will test the passports for durability as well as ensure they meet security and electronic requirements. Some of these tests will include verifying that the chips can be read and can withstand 10 years’ of normal wear and tear and stamping by customs’ officers.

Following testing, the Department of State hopes to begin distributing limited numbers of electronic passports to American travelers in December 2004. These passports will become fully available to the public in the first quarter of 2005, with as many as 1 million provided being issued. By late 2005 the Department of State hopes that all the passports it issues annually (about 7 million) will carry RFID chips in their covers printed by the GPO and embedded with chips manufactured by a company that has not yet been selected.

This technology will mean having passport scanned by RFID readers at points of entry into foreign countries and in the U.S. Customs officials can scan the information encoded on the embedded chip by holding the passport within a few centimeters of a stationary or handheld reader. The chip will contain all the passport-holder information that is also printed on the passport, as well as a digital image of the passport holder. The printed information on the passport can then be compared against information encoded on the embedded chip. The data on the chip will not be encrypted, but it will be digitally signed by the issuer in order to verify that the data is genuine and not counterfeit or tampered with.

UK BIOMETRIC PASSPORT TO COST £85 EACH

The cost of a passport will more than double to £85 when new biometric national ID cards are introduced, Home Secretary David Blunkett announced. He also said that by 2008-2009 it will cost £415 million a year to operate biometric passports to comply with U.S. demands for the secure electronic travel documents. The annual cost of running the new compulsory ID cards will be £85 million on top of that figure, he said.

The controversial biometric cards will begin to be phased in from 2007-2008 when everyone applying for a new or renewed passport will have to get an ID card as well. Previous costings indicated each card would cost a maximum of £77. But a decision last week to introduce stand-alone ID cards rather than a combined ID and passport was thought to have pushed up costs.

A passport currently costs £42 so a rise to £85 amounts to an 102% increase. British citizens will be able to apply for a stand-alone ID card without a passport but the cost of this option has yet to be finalized. It will not be possible to apply for a passport without an ID card.

U.S. PATRIOT ACT COULD AFFECT DATA ON CANADIANS, B.C. PRIVACY HEAD SAYS

There is no way to prevent the long arm of U.S. anti-terrorism legislation from extending into Canada and plucking out otherwise confidential information about individual Canadians, B.C.’s privacy commissioner has concluded. In a comprehensive report released yesterday, commissioner David Loukidelis found that the Patriot Act gives U.S. agents the right to obtain such data from U.S. companies doing business in Canada or storing Canadian information.

All that can be done is to minimize the risk of that happening, said Mr. Loukidelis. To that end, he called for tough legislation in Canada imposing fines up to $1-million and/or heavy jail terms for anyone who complies with U.S. demands for information in defiance of privacy safeguards in Canada. Mr. Loukidelis agreed that such a move would put firms operating here on the spot if a U.S. court subpoenaed them for access to their Canadian data bases. “These companies would have to make a choice. That’s why the penalties [for compliance] have to be so tough,” he said.

The issue has sparked widespread controversy in British Columbia over the government’s intention to contract out administration of the province’s Medical Services Plan to a U.S. company. Critics have charged this would give the FBI and other U.S. agencies the right to get confidential medical records of B.C. residents under the Patriot Act. The B.C. Government and Service Employees’ Union took the issue to the privacy commissioner. Mr. Loukidelis rejected the union’s suggestion that outsourcing the administration of sensitive personal information be banned. But he agreed there was “a reasonable possibility” that special anti-terrorism courts in the United States could issue orders affecting British Columbians located in British Columbia.

LAW

SECRET SERVICE BUSTS SUSPECTED ID FRAUD RING

In an investigation that led from online forums to a passport-forging facility in Bulgaria, law enforcement officials arrested in the last 48 hours suspects from eight states and six foreign countries on charges of identity theft, computer fraud, credit card fraud and conspiracy. Dubbing the enforcement action Operation Firewall, the Secret Service said individuals working together stole more than 1.7 million credit card numbers and other financial information costing more than $4.3 million. Federal law enforcement agents -- cooperating with officials from the United Kingdom, Canada, Bulgaria, Belarus, Poland, Sweden, Ukraine and the Netherlands -- have arrested 28 suspects and stressed that the investigation continues.

The worldwide investigation is the third in the last three months to take on organized cybercrime. In August, the U.S. Department of Justice made arrests in five states on charges of criminal copyright infringement in an action dubbed Operation Digital Gridlock, while the FBI and U.S. Postal inspectors announced that more than 103 arrests were made in an extensive computer crimes investigation known as Operation Web Snare. The group traded stolen credit card numbers and bank account information as well as counterfeit passports, drivers’ licenses, Social Security cards, credit cards, debit cards, birth certificates, college student ID cards, and health insurance cards, according to the indictment.

COURT HEARS ARGUMENTS IN ACLU NO-FLY CLASS-ACTION LAWSUIT

At a hearing in Seattle, the American Civil Liberties Union presented arguments to advance the first nationwide class-action lawsuit challenging the government’s controversial No-Fly lists, which are distributed to all airlines with instructions to detain or interrogate passengers whose names match thousands of names listed.

“As a result of flawed and ineffective No-Fly lists, innocent passengers are being singled out virtually every time they fly and subjected to delays, interrogations and even detentions,” said Reginald T. Shuford, lead counsel in the case. “The government’s mismanagement of the No-Fly list not only violates the constitutional rights of the innocent Americans who have no way of clearing themselves from the list, but expending resources to repeatedly detain and interrogate individuals already verified as innocent is counterproductive to national security.”

The ACLU lawsuit, which was filed on April 6, asks the court to declare that the No-Fly lists violate airline passengers’ constitutional rights to freedom from unreasonable search and seizure and to due process of law under the Fourth and Fifth Amendments. The ACLU is also asking the TSA to develop satisfactory procedures that will allow innocent people to fly without being treated as potential terrorists and subjected to humiliation and delays.

OPINION & ANALYSIS

CONGRESSMAN RON PAUL INTERVIEW FROM 2002 IS JUST AS TIMELY TODAY

An interview that took place in Congressman Ron Paul’s congressional office in Washington in February 2002 is as timely today as it was when it was done, and given the political events in the last 2 1/2 years, maybe it is even more so. This article is a chapter in my upcoming book on the importance of character, in which about a dozen notable people talk about the development of their character, values and perspective on life. In addition to that main theme, I asked each person to provide me a quotation that summarized themselves, their view of life, or had special meaning to them which I have placed at the beginning of their respective chapter.

Everything in the first part of the article, up to the “Editor’s Commentary” is composed only of Ron Paul’s words, organized into a chronological and topical order. The commentary is my comments. Any incidents I report were given to me from other sources. For example, Ron did not tell me about the election shenanigans. But then, given his character, he would not would he? I decided to include these in my commentary because they shine a light on Ron’s character and give us further insight into this fascinating and admirable man.

BUSH IS RIGHT AT HOME IN THE PARTY OF LINCOLN

I do not much like the Republican Party, but it was not always this way. For years I considered myself a libertarian conservative, and, for a while, even after distancing myself from conservatism, I still regarded the Republican Party as the obvious lesser of two evils. No more. But it is not just George W. Bush that has made me rethink the Republican Party. I have determined that the GOP has always been, from its very beginning, a party of big government and a plague on freedom. Despite the deafening claims from the Left that Bush and modern Republicans have “betrayed the Party of Lincoln” or from the Right that Bush has turned his back on the “small government principles” of the Grand Old Party, the fact is that Bush perfectly represents what the GOP has stood for since its birth.

The party began as a coalition of Americans who wanted to expand federal power. Its heritage was with the Hamiltonian Federalist Party, which more or less transformed into the big-government Whig Party. When the Whig Party became defunct, the Republican Party emerged to include centralist big-government Americans and other opponents of the Democrats without a party. Most small-government conservatives and libertarians feel betrayed by Bush, and yet are thinking of lending him their helping hands on election day. They hope the Republican Party will return to its supposed roots in small government and liberty. They hope that Bush will improve in his second term.

Give it up. The Republican Party -- the Party of Lincoln, McKinley, Teddy Roosevelt, Hoover, Nixon, Reagan and both of the Georges Bush -- is not, will never be, and in fact never has really been a party of smaller government. There were aberrations in history where they appeared to be the clear lesser of two evils, but it was usually illusory and always short lived. If anything, the Republican Party is the “Party of Bigger Government That Once In A While Gives Small Government A Bad Name”.

Like clockwork, Republicans have always managed to prove their hostility to liberty every time they actually gained power -- during Hoover, during Nixon, during Reagan and during George W. Bush. There hostility to liberty rivals and at times even exceeds the contempt for freedom manifested by the Democrats. Whenever there has been an excuse to increase government -- to “save the Union”, “liberate the Philippines”, “fight monopolies”, “combat alcoholism” or “stamp out drugs”, “strengthen the economy”, “stop Communism”, “stop terrorism”, “protect American jobs”, “keep the Democrats out of office"” -- you name it -- not only have Republicans jumped at every chance to sacrifice tax dollars and liberty on the alter of Leviathan, they have relished each opportunity so visibly and bragged so loudly so as to become totally incapable of concealing their wretched excitement to outspend and out-govern the other big-government party in Washington.

Republicans might like to think or say otherwise, but there are no authentic small-government roots to which the Republican Party can return. All there is in the fertilized soil from which the GOP has grown are seeds of Caesarian imperialism, corporate socialism, and power lust. Operation Iraqi Freedom, like all Republican wars in history, gives a good glimpse into the militarism and despotism Republicans really mean when they speak of freedom and liberation. Whereas the Democrats often resembled a party of liberty until Wilson and FDR permanently led them astray, the Republicans have always been a corrupt gang of conniving government-worshipping crooks.

‘04: THE MOST IMPORTANT ELECTION IS OVER

It is over. There is no doubt in my mind that the Presidential election of ‘04 was by far the most important election of the century. The American people had a real choice, and they made it. The fork of the road is now behind us. We have clearly crossed the Rubicon. The U.S. will never be the same again. You may be skeptical. You may think the election was an echo, not a choice. You are wrong. This was a turning point comparable to the election of Abraham Lincoln. The wrong man won. Frankly, I do not think the country will ever fully recover.

I am of course speaking of the landslide defeat of Alton B. Parker. When, in 1904, Teddy Roosevelt defeated him by 336 Electoral College votes to 140, it was over for the Old Democracy. Immediately after the election, William Jennings Bryan, whose “cross of gold” speech in 1896 had won him the Presidential nomination, and who had won it again in 1900, announced the obituary of “Clevelandism”, as he called it, and so it was. Bryan would win the nomination again in 1908.

Parker was the last Presidential major party nominee who openly campaigned in support of the gold standard. In fact, he was so committed to the gold standard that, prior to his nomination, he telegraphed the convention to insist that it not nominate him if it did not agree with his views. The Old Democracy had been hard-money, all the way back to Andrew Jackson and his war against the Second Bank of the United States. Grover Cleveland was the last great defender of the gold standard elected by the Democrats. His wing of the Democratic Party preached hard money and low tariffs.

This wing had been undermined by the unexpected success of Bryan in 1896. Constitutionally, Bryan’s defense of silver over gold was probably correct. The dollar in 1787 had been a Spanish silver “piece of eight”. But in Bryan’s eloquent speeches, silver was a means of inflation. He opposed gold because the gold standard kept rural banks from issuing more credit. Bryan was a radical. He favored easy money, Federal regulatory legislation, and a laundry list of populist and socialist schemes. He prided himself of being the most radical politician in American history. A case to this effect is still plausible, especially in comparison with the candidates of his era. Bryan supported Parker for the sake of Party loyalty, but he rejoiced at the results in 1904. He predicted that Clevelandism, if not dead, would not soon revive. It never has.

In 1908, Bryan ran against William Howard Taft. Taft was Roosevelt’s hand-picked successor. Taft was a Progressive. He was an interventionist domestically and internationally. So was Roosevelt. So was Woodrow Wilson. They all ran in 1912. In 1912, the consummate “echo, not a choice” Presidential election took place, the election in which it was “heads, the State wins; tails, the State wins; and if the coin lands on its side, the State wins.”

The last opportunity that the non-Progressivist Old Democracy had at the national level was 1904. Bryan saw clearly that its defeat had put an end to the limited-government philosophy that had guided the Democratic Party ever since the days of Jefferson. So, let us shed a tear for the election of ‘04. Let us then drink a toast to Alton B. Parker. “To the loser who set the pattern. It was all downhill after him.”

SOME FREE ADVICE TO DEMOCRATS

Democrats will begin to discuss just how the heck they managed to lose this one. The economy is fairly stagnant, the war in Iraq is going badly, everyone knows that Al-Qaeda is going to strike hard here in the near future, and Bush’s approval ratings have stayed below 50% for more than a year. In other words, the Republicans generously had set the table for Democrats, only to find that once again those jackasses had decided to eat at McDonald’s. No doubt, one person who will be listening to this concession speech is Hillary Clinton, who certainly is going to be a candidate in 2008. I have some advice for Democrats who believe that Hillary is The Answer: Don’t even go there. If you think that the Christian fundamentalists crowded the polls to stop Kerry, just wait until Hillary is on the ballot. Entire congregations of fundamentalist and evangelical churches will line up at the voting booths.

The Democrats have a much deeper problem than the incompetence of their presidential candidates. After all, Bill Clinton steamrolled a couple of Republicans on his way to serving two terms, and that was with one hand (and Ross Perot) tied behind his back. No, the problem is not charisma or the lack thereof. Instead, every Democrat wants to emulate the party’s Big Hero, Franklin D. Roosevelt. Let me suggest a new hero for Democrats, a person whose integrity could not be challenged, and who governed as well as any president in the last century: Grover Cleveland. In my opinion, Cleveland was the last great U.S. president, a man who took his duties to “protect and defend” the U.S. Constitution to heart. He governed as a true liberal, recognizing the dangers of the overreaching state.

Between taxes, government spending, regulation that grows faster than a cancer cell and the expansion of the categories of “white collar crime”, the amazing thing is not that we have relatively low growth and high unemployment, but that this economy creates any wealth at all. It is testament to the institution of private property (which is quickly disappearing in this fair land) and the relentless drive of entrepreneurs -- the same ones that the political classes want to have consigned to the dungeons. Cleveland was mindful of how government can choke a healthy economy.

Most Democrats today consider Franklin D. Roosevelt to be the standard of the party, just as Republicans like to call themselves the “party of Lincoln”. As far as I am concerned, you can let them have Lincoln and Teddy Roosevelt. The closest thing that Republicans can have as heroes are Warren G. Harding and Calvin Coolidge, but even in their best moments they could not compare to Cleveland as defenders of freedom and men who understood the predations of the state. But FDR is NOT a hero. How can a man who extended the life of this country’s worst economic calamity, the Great Depression, be anything but a villain? Here is someone who openly assaulted the U.S. Constitution and made mockery of liberty.

Just think how people might have reacted to John Kerry quoting Cleveland, and promising to protect the rights of individuals. Instead, we got someone who tried to out “law-and-order” the Republicans. Just as the Republicans cannot outdo the Democrats on promoting the welfare state (although the Republicans are trying to do just that), Democrats cannot successfully run on expanding the police state. Yes, going to such a platform and embracing Grover Cleveland would mean that there would be major cracks in the current coalitions that keep the Democrats together. But let’s face it; the Democrats no longer are a real political party. Democrats are a hodgepodge of the very wealthy (from inherited wealth), the educated elite, the very poor, minority groups, rabid environmentalists, feminists, and the American Trial Lawyers Association, which funds this whole unwieldy operation.

A coalition is not a political party. Cleveland presided over a real political party, one whose members believed in individual rights, the sanctity of private property and contract, limited government, and principles of non-intervention abroad. That this organization was hijacked first by William Jennings Bryan in 1896 (running on a platform of silver-based inflation, a reminder of the days that even inflationists wanted “sound” money as compared with Alan Greenspan today) and the warmongering Woodrow Wilson in 1912 does not take away from what the Democrats once believed.

Democrats, go back to your roots. Let the Republicans have Leviathan. If you choose liberty, private property, and a real rollback of the state, you will win election after election. In fact, you will become a real political party again. In the aftermath of this latest election loss, remember this one important point: you never will win national elections trying to out-Republican the Republicans. No, you can win if and only if you once again become real Democrats.

LIBERTY YET LIVES

Not for the first time in world history, U.S. voters on November 2 faced a choice between two varieties of statism, two forms of central planning, two types of duplicity, two approaches to rule by the central state. One won, one lost. In this, our times are not unlike the 1930s, when during a crisis just about everyone believed that there were only two political options worth pursuing. You were either some variety of communist (a.k.a. socialist, Bolshevik, Troskyite, etc.) or some variety of fascist (a.k.a. corporativist, national socialist, new dealer, etc.). To reject the idea of government control and centralization, it was believed, was to stand outside the main current of history.

In the presidential election, one central plan wanted to soak the rich, the other wanted to spend now and pay later. One had a plan for national life at home, and the other had a plan for the whole world. One emphasized bread and the other circuses, one wanted unilateral war while one wanted lots of consultations and more troops before doing the same thing, but neither knew or cared anything for the great tradition of thought which gave birth to this nation or which built the prosperity of our times.

The missing piece in all of this is the forgotten liberal tradition, which affirms the dignity of all human life, believes in the rights of all, and fights for freedom against the never-ending attempts by government, all government everywhere, to restrict and destroy it. The liberal tradition believes that individuals and society can work out their own problems in the absence of top-down management. It denies to government any role in managing the nation or the world. It embraces private property, cherishes freedom of association, and sees peace as the mother of civilization.

The great intellectual strain of this liberal tradition spans 500 years and longer, and his survived every onslaught from left and right, and will continue to do so. It is the liberal tradition to which we owe the world’s prosperity and well being, all technological innovations, and improvements in health, housing, nutrition, and information distribution. The liberal tradition will continue to thrive, but with no help from the elites in power.

That this tradition is not represented as a political option is not particularly surprising. As Mises wrote in 1929, “government is essentially the negation of liberty”. This is why “A liberal government is a contradictio in adjecto. Governments must be forced into adopting liberalism by the power of the unanimous opinion of the people; that they could voluntarily become liberal is not to be expected.” But elections such as this one present an opportunity for learning. We learn, for example, who the true friends of liberty are, and how to distinguish them from the partisan hacks who are glad to sell out in exchange for getting and staying close to those in power. That is a pretty good description of just about everyone in DC who works to have “good relations” with the party in power. This is a tendency you find on the left, right, and center, and even among supposed libertarians.

We have also learned something about the nature of liberty’s most formidable enemies of today as versus most of the 20th century. In 1989–1990, the party of liberty was witness to the thrilling fact that socialism around the world had collapsed like a house of cards. The ghastly intellectual tradition that had given rise to the bloody communist experiment suffered a blow from which it is not likely to recover. How pathetic is the soft leftism of today’s mainstream Democrat. Kerry went from place to place seeking dependents for the state among minorities, the aging, public employees, union workers, and anyone else looking for a favor from government. He dutifully invoked those tired soft-left themes about all the wondrous things government will do at home if we could just soak the rich a bit more. His domestic program looked ridiculous. We know these issues hurt him among swing voters because it was precisely on these grounds that the Bush camp ridiculed his entire domestic program. If there is a silver lining to the election, it is in the defeat of this program, once again.

However, it is about time that the friends of liberty realize the main threat to liberty in our time in our country comes not so much from the left but from the militarist and imperialist right, which has shown itself uninterested in fiscal discipline, peace, civil liberties, constitutional restraints on power, decentralist decision-making, privacy, or freedom of association. Pillars of Western law and justice have been broken and tossed aside by this regime, under the guise of national emergency and security against threats real and imagined.

In the end there was no great choice to be made. Voters were being asked to choose between two forms of central planning, one domestic, tired, and uninspiring, and another international and promising to conquer ever more countries until the whole region and world bent the knee. One plan required higher taxes and more economic regimentation, and the other required higher debt and more death. At brief moments during the campaign, the regime trotted out the old rhetoric about how Bush was for freedom and for you, whereas his opponent was for the government. This goes beyond cynical. After all, here is an administration that inflated government spending at a rate that compares only to Lyndon Johnson at his Keynesian worst. One form of central planning has been defeated but another form has raised its ugly head. It too must be fought, and on principled grounds.

But the party of liberty is so much better off today than it was in the 1930s. Our intellectual foundation is far stronger. Ours is an international movement with brilliant writers and activists in most all countries of the world, and in all sectors of society. With allies from all walks of life, from many countries, and with passion for truth, the party of liberty works for and joyfully anticipates liberation from despotism -- left, right, or center.