Offshore News Digest for Week of May 2, 2005

GLOBAL BUSINESS

POLITICIAN ARRESTED IN CRISIS-HIT BELIZE

Police in tiny Belize arrested an opposition politician on Thursday as the normally laid- back Central American country grapples with its worst political crisis since independence in 1981. The government has been fending off calls for it to step down ever since a rash of strikes and riots last week plunged Belize – best known for its coral reefs, Caribbean islands and Mayan ruins – into mayhem. At the heart of the crisis lies nearly $1 billion of public debt, which has forced spending cutbacks and tax increases, and persistent allegations of government corruption. Patrick Farber, a member of parliament for the opposition United Democratic Party (UDP), was arrested along with a trade unionist after they pushed past riot police blocking the entrance to a university where Prime Minister Said Musa was answering student questions about corruption, witnesses said.

IMF says Belize’s economy is robust.

After the riots, strikes, and constant shortage of one utility or the other, Belize received unexpected news last week. After a meeting with the IMF in Belize, the Belize Business Bureau’s (BBB) executive committee stated that IMF had described Belize’s economy as “robust”. After meeting with Belize’s industry representatives, IMF representatives stated that all discussions were “frank and friendly.” Other IMF conclusions included that economic growth has increased by 50% and that Belize needed to keep away from fraudulent investments. IMF reiterated the recommendation they had previously given Belize to minimize their consumption, particularly by the public sector. It was agreed that Government of Belize needs to “tighten its belt” for a prudent time so as to maintain fiscal deficit under 3%.

Other conclusions by the IMF team were that that the peg of the Belize dollar to the U.S. dollar is excellent and devaluation would not be good. IMF stated that the present tax system is not keeping with growth. They endorsed the Government of Belize’s intention for further tax reform. The team also agreed that anti-trust legislation would be an asset to the country’s economic outlook, however with respect to foreign direct investment, Belize and small countries must seek genuine investors with a “social face”.

It was concluded that a second tier bank is the way forward for the facilitating of affordable financing in the rural areas and for the productive sector, and IMF also noted that the profitability of the monopolies might be skewing the profit and losses of the small and medium enterprises. Finally, IMF stated unequivocally that there is an urgent need to come to a social consensus to move Belize forward – continued social upheaval as in the immediate past and present was the way down the road to economic and social collapse after which recovery would be painful and lengthy.

BLEAK PICTURE FOR U.S. VIRGIN ISLANDS PAINTED

While V.I. government officials try to put a positive spin on what is happening to the V.I. Economic Development Commission program, some in the private sector are not so optimistic. James T. Carney, a Christiansted CPA who does tax accounting and EDC consulting, calls one change “outrageous, a killer.” Donovan Hamm, an attorney who also represents EDC companies, agrees with Carney about the change. And he says the change is in the statute passed by Congress last year, so it cannot be modified in the proposed regulations now being circulated. Hamm said, “You can blame the IRS for a lot of things, but you can’t blame them for this.”

What they are referring to is a section that states a person cannot be considered a resident of the Virgin Islands for tax purposes if that person, at any time during the year, had a closer connection to the U.S. than they had to the Virgin Islands. This means that if a person lived one day in the states as a resident she would not qualify for tax benefits. This basically takes away the tax break for the first year of a company, which could be discouraging for companies starting up.

Carney said, “If they wanted to shut down the program, this is one way to do it. Shut down on the companies coming down here.” He said he believes officials in Washington, D.C. were concerned about losing billions of dollars in tax money to the Virgin Islands. He said, “They wanted to get that money.” Carney had been going over the regulations and the statue concerning the EDC companies ever since they came out. He said his analysis indicated to him that there was going to be trouble ahead, but he waited for confirmation before telling his clients the bad news. He received confirmation that his interpretation was correct from two sources recently.

ROCK ON A ROLL

You would have to be in a really generous mood to call Gibraltar a beautiful place, although I am sure that to British sailors of old, returning to the Mediterranean from some long, arduous patrol in far-off waters, it must have been a very welcome sight. It certainly was for Nelson’s comrades on board HMS Victory, when they entered the harbour after the Battle of Trafalgar, two centuries ago this year, bearing the admiral’s body on its final journey back to England. The Rock does not simply sit in the sea just off the coast of southern Spain, to which it is attached by a narrow isthmus, it very thoroughly dominates the entire coastline. It is almost as if Winston Churchill were standing guard with his arms folded, preventing any foreigner from proceeding beyond the border.

Gibraltar has been British since 1704, when the Treaty of Utrecht ceded the Rock to the British crown “in perpetuity”. That, of course, has not stopped Spain trying a number of times to take it back. And the Spanish have not given up yet, even though today it is politicians rather than troops who cross swords. It was in the 19th century that Gibraltar really came into its own, as a vital staging- post for ships trading with India. It saw plenty of action during the Second World War, too, when it was the headquarters of naval fleet Force H, from where Eisenhower planned and executed the North Africa landings in 1942.

Visit the Rock today and you simply cannot escape its history. Take a walk down the main street and familiar British names and sights will spring out at you at every step. In fact, if not for the warm weather and the ever-present towering peak above you, you could be forgiven for thinking you had never left home. Once inside some of the shops, however, you will be very pleasantly surprised. Almost everything you find on sale here – the majority of it exactly the same as you get at home – is much cheaper. Not only is Gibraltar one of Britain’s last remaining colonies, it must be one of the best-value places on earth to stock up on alcohol, cigarettes, perfume and dozens of other luxury goods. The whole place is virtually duty-free. But it is not just the fact that Gibraltar is a tax-free home from home that encourages holidaymakers to visit – there is plenty more to do here than simply go shopping.

BEIJING PUTS 2-YEAR LIMIT ON TERM FOR HONG KONG’S ACTING LEADER

The authorities in Beijing ordered that the next chief executive of Hong Kong serve only the remainder of the term of the previous chief executive, a ruling that critics of mainland policies toward the territory described as a further erosion of Hong Kong’s autonomy. The Standing Committee of the National People’s Congress, China’s Communist Party-controlled legislature, issued a legally binding interpretation of Hong Kong’s Basic Law, its miniconstitution. The interpretation will limit the chief executive to be selected this summer to the two years remaining in the second term of Tung Chee-hwa, who resigned on March 12.

SWISS GOVERNMENT ATTACKED OVER PRO-EU SCHENGEN CAMPAIGN

A eurosceptic group has launched a violent attack on the government over its support for the EU Schengen/Dublin accords on security and asylum. The Campaign for an Independent and Neutral Switzerland (CINS) demanded that the government stop its pro-European “propaganda” and refrain from “muzzling” opponents. The group held its annual meeting in Bern five weeks before the June 5 nationwide referendum on Swiss adherence to the Schengen and Dublin agreements. The latest opinion poll carried out on behalf of the Swiss Broadcasting Corporation showed 62% of voters were in favor of the agreements. The around 1,000 members present at the CINS meeting unanimously passed a resolution accusing the government of using “falsehoods and half-truths” to convince the electorate of the benefits of Schengen membership. Police officers, border guards and other government officials had been prevented from speaking out against Schengen “in a way reminiscent of the former East Germany”, the resolution claimed. It called on the government to “immediately stop this abuse of power” which was “burying Switzerland’s democracy”.

OECD REPORT COMPARES RETIREMENT BENEFITS ACROSS COUNTRIES

The average employee in an advanced country can expect a government pension of 70% of his or her after-tax earnings at retirement. But a huge variety of state pension systems around the world means it is much more comfortable to retire in Luxembourg than in Ireland, much better to be poor in New Zealand than in Germany, and much nicer to be nearing retirement and well-off in Italy than in the UK or the U.S. The findings, published by the OECD, show countries differ in the sustainability of their pension promises as societies age as well as the generosity and the amount of redistribution in their systems. “Pension systems around the world are probably more diverse than any other element of tax and social security systems,” said Edward Whitehouse, one of the authors of the OECD report.

The Paris-based body, charged with improving the economic performance of advanced countries, has been concerned that countries have largely focused pension reforms on improving fiscal sustainability and have often overlooked pension adequacy and redistribution in the process. The good news for current workers, according to Mr. Whitehouse, is that pension systems are designed to provide an adequate income in nearly all advanced countries, “We are unlikely to see a resurgence of pensioner poverty if the current systems are stable.” But there are many more differences across countries than there are similarities. At one extreme, countries such as New Zealand and Ireland offer only a flat-rate state pension for all workers. This is worth much more to those on low earnings than those on high earnings.

In Ireland, employees on half average earnings can expect a retirement income after tax of 63% of their previous earnings, but workers earning twice average earnings can expect to retire on only 22% of their former earnings. This type of scheme benefits from being cheap, simple and good at preventing poverty. But the lack of any link to earnings risks future Irish pensioners voting for political parties that promise higher benefits. According to the OECD, the U.S. and the UK systems are similar in effect, redistributing heavily towards the poor, but as neither is flat-rate, they do not have the benefit of simplicity. At the other extreme are countries, including many European nations, that relate state pensions closely to earnings. These give good benefits to workers on average earnings and above, but are expensive.

And in some countries, such as Germany and Italy, poorer employees lose out badly. The OECD estimates that German employees on half average earnings can expect to receive 62% of their after-tax incomes as a pension from the state, while those on 1½ times average earnings would receive 79%.

PRESIDENT OF PANAMA ANNOUNCES POSSIBLE REFERENDUM ON CANAL

President Martín Torrijos addressed the Organization of American States’ (OAS) Permanent Council in Washington, revealing that his government is considering a possible referendum on the future of the Panama Canal, including expanding the inter-ocean waterway. President Torrijos urged member states to help Panama’s quest “to keep this important world trade waterway permanently neutral,” and he told the ambassadors about studies being conducted on modernizing the waterway.

IDB supports initiative to improve business climate in Panama.

In a ceremony held at the Inter-American Development Bank’s headquarters, Panamanian President Martín Torrijos and IDB President Enrique V. Iglesias agreed to launch an initiative to improve the business climate in Panama. The business climate initiative complements the IDB’s traditional programs to support economic and social development in Latin American and the Caribbean. President Torrijos, who is in Washington, DC for an official visit to the U.S., said his government foresees it will secure around $400 million in new IDB loans for programs to increase competitiveness and fight poverty. “We agree on the pressing need to reduce and eliminate poverty by promoting reforms to build a competitive economy that will ensure sound and sustained growth, generating more job opportunities,” he said in a speech at a luncheon with IDB directors, managers and special guests.

President Torrijos underscored how important it is for his country to guarantee a high quality and efficient operation of the Panama Canal. The IDB has approved financing for a sustainable development and poverty reduction program in the canal’s watershed. President Iglesias said the IDB stands ready to support Panama as the country faces challenges and pursues opportunities stemming from free trade agreements and an eventual expansion of the canal, a vital crossways for world trade. “We’re seeing a dynamic Panama that is fully aware of the great opportunities as well as of the great responsibility it has due to its geographic position,” he said.

Panama may switch ties to China, official says.

National Security Council Deputy Secretary-General Parris Chang revealed in Washington yesterday that Panamanian President Martin Torrijos Espino sought the U.S.’s consultation on Panama’s plan of switching diplomatic allegiance from Taipei to Beijing. Chang said Torrijos discussed the plan with U.S. officials during his visit to Washington last week. Torrijos respects the U.S.’s opinion on the possible diplomatic change, and it remains unclear what Washington told him, Chang said. He was speaking at a seminar held by the Center for Strategic and International Studies, a Washington-based think tank, on the expansion of China’s influence in Latin America. The Taiwanese government is doing its best to salvage its ties with Panama, one of Taiwan’s 12 diplomatic allies in Latin America, Chang added. China promises benefits to Taiwan’s diplomatic allies if they agree to sever ties with Taiwan, but has often failed to keep its word, Chang said.

CHILE’S MAN AT THE OAS

The crowning of Chilean Minister of the Interior José Miguel Insulza as Secretary-General of the Organization of American States (OAS), marks the end of a long and hotly contested hemispheric campaign. With the sudden, but not entirely unexpected, withdrawal of Mexican Minister of Foreign Affairs Luis Ernesto Derbez, Insulza achieved victory by default. Although the OAS race has received significant media coverage in the last several months, Insulza’s election is of little significance to hemispheric relations as he is not likely to embark on a new binge of innovative inter-American policy making. However, the Chilean’s victory is the first time in the more than a half century history of the organization that Washington’s preferetti has not been elected to the OAS’s secretary-general position.

The coveted OAS position has a rather tumultuous history. The previous secretary-general, former Costa Rican president Miguel Angel Rodriguez stepped down last October after only three weeks in office. In 1994, just like in 1975, the OAS race was marred with allegations of Washington using its clout to influence other nations to switch their vote in favor of former Colombian President Cesar Gaviria over then Costa Rican Minister of Foreign Affairs Bernd Niehaus. This provides a particularly lurid example of how Washington used its clout to have its preferred candidate, Gaviria, snatch victory at the last moment from Niehaus.

The April 8 withdrawal of the former Salvadorian President Francisco Flores before the first round of elections ensured that the U.S. would not get its way in 2005. Insulza’s election, following a five-round stalemate, where each Derbez and Insulza each received 17 votes, represents the first time in OAS history that a Washington-tapped candidate was not chosen. Luckily for the U.S., the OAS is not a powerful supranational organization like the European Union, and even if Washington looses effective control of the organization due to Insulza’s victory, the U.S. will retain plenty of other means to exercise its influence and protect its hemispheric interests.

It will take generations, not years, for the OAS to become a significant player in hemispheric affairs, if that is meant to be its destiny. Ever since Simón Bolivar first attempted to create a South American confederation of states, there have been attempts to promote integration and unity, which always have ended in failure, or at best, brief success. Recall that Bolivar himself eventually gave up and declared that “America cannot be governed.”

NERVOUS VENEZUELANS SEEK SAFETY IN SOUTH FLORIDA REAL ESTATE

Juan Carlos Murio has never met Venezuelan President Hugo Chávez, but the 38-year-old real estate broker would like to send out a shout of gratitude to the controversial leader for sending so much business his way. “I owe Chávez a big referral fee,” said Murio, who travels each month from Miami to Caracas to court rich clients who dislike the populist president and are looking for a safe haven for their capital. “We get at least 200 people who attend our seminars and, from that, we get several referrals and sales.” Murio is among a growing number of real estate agents who have discovered new customers for South Florida real estate among rich Venezuelans.

Florida has long been a safe haven for Latin American investment, especially during periods of economic and political turmoil. In recent years, Argentines, Brazilians and Colombians have poured money into South Florida. While no group keeps statistics on foreign purchases of residential property in the U.S., brokers and real estate developers agree Venezuelans are currently among the biggest Latin American buyers. This latest wave of Venezuelan investment is facilitated by real estate agents such as Murio, who are part of small teams that travel south, sealing deals in hotel rooms and country clubs and helping fuel South Florida’s real estate boom.

Liliam Bensayan Tassini and her husband, Guido, are among Murio’s clients. The Tassinis moved from Caracas to a spacious Weston home in late 2001. They have since invested in West Palm Beach and St. Petersburg properties. “I feel more comfortable investing here than back home,” Tassini said. “I suppose we are doing what many people in Latin America do – finding a place where they can put their money. I know a lot of people feel like Florida is a good investment, and certainly people are more comfortable talking to someone who is Venezuelan and understands what we are looking for.”

WITH HIS STAR RISING, MEXICAN POPULIST FACES NEW TESTS

He is mayor of the largest city in the hemisphere, and Mexico’s latest political phenomenon. He can summon tens of thousands into the streets at will. In a whirlwind three weeks he staged the biggest protest in Mexico’s recent history and turned back a legal challenge from the Mexican president and Congress that threatened to end his political career. Now Andrés Manuel López Obrador is considered the favorite to be elected president next year.

Indeed, while Mr. López Obrador, a 51-year-old widower and father of three sons, has proven that he can motivate this country’s vast underclass, what remains unclear is whether he will be able to keep pro-American businesspeople and the fragile middle class on his side. He is better known for picking political fights than building bridges. And his left-leaning, hard-charging political style has many in the ruling elite and analysts abroad worried that Mexico could go the way of Venezuela, which is embroiled in a class war as President Hugo Chávez rides a wave of anti-American sentiment. It is a wave that has swept leftist politicians into power across Latin America. And like Luiz Inácio Lula da Silva in Brazil and Tabaré Vásquez of Uruguay, Mr. López Obrador personifies the angry disappointment with Washington-backed promarket economic policies that have stabilized the economy for the rich but failed to lift up the poor. His rise to power would move that frustration to the U.S.’s door.

In the interview, Mayor López Obrador rejected comparisons to leftist movements across the region. He said he considered himself a purely Mexican phenomenon, shaped by a devout Catholic mother, a devastating family tragedy and a poet who wrote about Mexico’s beautiful landscapes and introduced him to this country’s grimmest struggles. At his core, the mayor said, he remains an underdog activist from the tropics, where politics can be a rough-and-tumble affair. But, he said, he has been a player in national politics for nearly a decade, having served as head of the leftist Democratic Revolutionary Party before becoming mayor in 2000.

The embattled mayor, known in Mexico – JFK-like – as AMLO, defies easy labels. He holds daily news conferences at 6:30 a.m., but brushes off most substantive questions and has blocked enforcement of freedom of information laws. He has been criticized by conservatives for spending lavishly on welfare for the elderly, a shelter for prostitutes too old to work and double-decker freeways to ease traffic. He rattled the left when he blocked laws that would have legalized gay unions, forged agreements with business tycoons to restore this citywts historic center and brought former Mayor Rudolph W. Giuliani of New York to help design zero-tolerance crime policies. And in what even his closest aides considered a major blunder that alienated the middle class, he said the organizers of a citizens’ march against crime were pawns in a right-wing conspiracy against him.

THE COST OF PUTIN’S REPRESSION

Morality aside, President Vladimir Putin’s gradual strangling of democracy in Russia provides a valuable case study in the relationship between freedom and competent governance. So far, as freedom dwindles, competence seems to be losing also. That may have implications for U.S. policy. History does not suggest a one-for-one correlation between democracy and economic growth. Singapore has restricted political freedom yet built a world-class economy. Democratic India is growing quickly now, but for many years it embraced self-defeating economic policies. Yet it is not surprising that societies that tolerate criticism of the powerful generally self-correct more readily and advance more quickly – a lesson that Russia seems ready to reteach the world.

“It is becoming evident,” says Yegor Gaidar, “that those who invented the system of checks and balances were not the stupidest in the world.” Gaidar is a Russian economist and former prime minister, and also one of the world’s clearer thinkers. With respect to Putin, he has been at times cautiously supportive, at times moderately critical. But on a recent visit to Washington he was notably gloomy, not only about the decline of democracy but also about the practical consequences. Though “he was never a very great believer in democracy,” Putin came to power in 2000 with a sound economic policy and a pragmatic foreign policy, Gaidar said, and in his first term he accomplished some significant reforms. He did so in a Russia that still enjoyed some checks and balances: media and a business establishment not controlled by the Kremlin; regional authorities with their own bases of support; a parliament with a viable opposition.

These were “more or less entirely eliminated, step by step, through the end of 2003,” Gaidar said. So when Putin recently proposed a reform of social programs, there was no one to raise questions: not in Duma committee, not on television, not in any chamber of commerce. The reforms, as it happens, were badly needed but stupidly designed, which became clear only when angry protests broke out across the country. Then Putin retreated. Now the government is unlikely to try again, and other needed reforms also are on hold – “a textbook example of how to misuse a window of opportunity,” Gaidar said. Macroeconomic policy, well-managed in Putin’s first term, is untethered. One foreign policy mistake has followed another. Senior advisers privately complain of drift and uncertainty.

CELEBRITY POLITICAL PUNDITS: BERMUDA THE LEAST OF CONCERNS ON U.S. AGENDA

Celebrity-status political pundits Mary Matalin and James Carville say Bermuda might come up in damning news reports about offshore centers and occasionally be blamed by Capitol Hill legislators for America’s job woes – but the Island really is not the problem. Nor is it ever likely to register at the top of American lawmakers’ political agenda, the couple told The Royal Gazette.

The Island has been caught up in recent years in a high-profile U.S. legislative and media debate on the impact to America from corporate inversions – U.S. companies that move their headquarters offshore for tax reasons. Calls to shut down a so-called “Bermuda tax loophole” became a frequent reference by Senator John Kerry in his fight for the Presidential office last year. More recently, New York Attorney General Eliot Spitzer, another Democratic hopeful – in his case for the office of New York Governor – renewed a focus on offshore areas like Bermuda and Barbados after a high-profile insurance probe highlighting questionable transactions between some US insurance carriers and their offshore subsidiaries. Just this week, Mr. Spitzer said reporters should be be doing their story digging in offshore locales.

But sitting down with The Royal Gazette, Democrat Mr. Carville and Republican Ms. Matalin – a partisan husband and wife team that first caught media attention when each was strategic in the 1992 race for president: He for Clinton, she for George H.W. Bush – said Bermuda was the least of concerns on the American agenda.

COUNTRIES WITH THE BEST BUSINESS ENVIRONMENTS

Which countries do you think have the best business environments? Economists, politicians and business people fiercely debate this question. There is obviously no one correct answer because there are many variables, depending on such things as whether a particular business is capital- or labor-intensive, import- or export-dependent, etc. Forbes magazine has just issued its list of the “2000 biggest, most powerful public companies on the globe”, providing some new empirical evidence on this subject. One can take issue with some of the Forbes criteria, but the measures are probably as good as any. We reviewed the Forbes list and did a country-by-country analysis, looking for common measures of success and failure.

To put the 52 countries represented on an equal plane, we calculated the number of companies (from the 2,000 list) per million population. For instance, 711 companies were U.S.-based, or 2.4 companies per million U.S. residents. It is obvious and expected there would be a high correlation between the number of companies and per capita income. The top 10 range in per capital income (on a PPP basis) from Singapore at $24,180 to the U.S. at $37,750. Several countries immediately jump out as not neatly fitting the per capita income measure. First there is Switzerland, whose per capita income is high but less than that of the U.S. on a purchasing-power basis, with more than twice as many large companies on a per capita basis as one would expect. The second anomaly is that France, Italy, and Germany not only do not make the top 10 (despite having high per capita incomes) but the number of large companies per capita is roughly half what would be expected. As a result they are far down the list.

Why have the top 10 built a good corporate environment? They all have a strong respect for the rule of law and reputations for reliable judicial systems and personal honesty. They are among 15% of the world’s least-corrupt countries, according to the Transparency International Corruption Perceptions Index. Half are English-speaking nations, and most citizens of the others have at least some fluency in English, except for Japan. All have had relatively stable money for many years. All have relatively free trade regimes with free markets for the most part. All but Sweden, Finland and the Netherlands have lower government spending as a percentage of GDP than the average for members of the OECD. All but the U.S., Japan and the Netherlands have a lower-than-OECD average rate of corporate income tax. And all but Japan score in the top 10% of the Heritage Foundation/Wall Street Journal Index of Economic Freedom.

The new Forbes list provides further evidence businesses and capital flow to those regions where they are well protected and not unduly abused. Businesses do not expect a perfect environment. But they do need reasonable legal, tax and regulatory environments to grow and prosper.

BRITONS RELUCTANTLY BACK BLAIR, MAJORITY CUT SUBSTANTIALLY

Britons have grudgingly returned Prime Minister Tony Blair to power for a third time, according to an exit poll of voters, but with a vastly reduced mandate after a bruising election campaign dominated by Iraq. After a month of electioneering in which his opponents labeled him a liar over the U.S.-led war, a poll issued as voting closed predicted Blair would have a majority of only 66 seats in the 646-seat parliament, down from 161 last time. With 640 of 646 seats declared, Labour has won 355, the Conservatives 197, the Liberal Democrats 62, and other parties or undeclared 26. A much-shrunken majority would curb Blair’s authority in his third and last term. It could also hasten his fall, with powerful finance minister Gordon Brown waiting in the wings and now far more popular both in the party and with the public.

Liberal Democrat leader Kennedy hails “party of future”.

Charles Kennedy has pledged to hold Labour to account as the “real alternative” in the next Parliament. The Lib Dem leader said Labour’s reduced majority meant the government could no longer “ride rough-shod” over people’s views and instincts. The Tories were relegated to south east England, while the Lib Dems were a national party of the future, he said. Mr. Kennedy thanked party workers for helping to achieve victories in 62 seats – the highest since the 1920s. The party fared particularly well against Labour, taking 12 seats, but also lost more seats to the Conservatives than they gained. Of the three main parties, the Lib Dems have seen the biggest rise in their share of the vote. It could reach 23%, up from 18.3% in 2001.

TAXES

CASH-STRAPPED GERMANY STEPS UP WAR ON TAX DODGERS

Long considered a legitimate pursuit, tax evasion has grown increasingly difficult – and increasingly perilous – as Hans Eichel, finance minister, has tightened the noose around reluctant payers. Estimates put the amount stashed away by Germans, among the highest and most heavily taxed earners in Europe, at €300 to €500 billion, the bulk of which sits in accounts in Switzerland, Austria, Liechtenstein, Belgium and Luxembourg. For Friedrich Schneider, professor of economics at the Johannes Kepler university in Linz, Germany’s Schattenwirtschaft, or shadow economy, the sum of mercantile activities that elude taxation and social security levies totals €370 billion a year, about 17% of GDP.

In 1999, spiriting away ill-gotten gains was made harder with the abolition of anonymous money transfers, forcing tax-dodgers to ferry cash and other liquid assets across the border. Then, earlier this month, a law came into force giving investigators access to a nationwide database of private bank accounts, allowing them to determine how many accounts an individual holds at the touch of a button and without having to first establish a suspicion of tax evasion. Last week, the Düsseldorf tax authorities disclosed that they were investigating 25,000 holders of life insurance policies suspected of being used to launder untaxed assets.

The bar rises again on July 1, with a EU directive forcing EU member states and associated countries to share information on accounts held by nonresidents. The crackdown has had a deterring effect. Each year, repenting tax dodgers voluntarily register about €500 million in untaxed income. Some 15,000 individuals have taken advantage of a 15-month amnesty that expired on April 1 to repatriate €1.26 billion from foreign bank accounts. Yet the amnesty brought far less than the €5 billion Mr Eichel had hoped for and the bulk of Germany’s mountain of Schwarzgeld, or “black money”, remains undetected.

“For each euro we put our hands on, I do not want to know how much goes through,” says Mario Wappner, as he waves through some of the 30,000 cars that pass the Weil-am-Rhein crossing into Switzerland every day. Once the team picks a traveler for closer examination, however, escaping detection becomes unlikely. If pointed interrogation, full body searches, and the dismantling of their cars yield nothing, then chances are Branco, a German Shepherd trained to find euro notes, will sniff out the hidden stash.

EU TAX PLAN PUTS GUERNSEY’S REPUTATION ON LINE

The island’s finance sector needs to pull together to make sure the proposed EU savings directive is implemented properly. Julian Parker, the chairman of the Guernsey Association of Compliance Officers, said it was the biggest issue facing the industry and that the sector needed to work together. “Those who know me have heard me speak or seen my editorial comments and know that reputation is a key word of mine,” he said. “Make no mistake, Guernsey’s reputation is on the line here, but, as with all challenges, if we all work together, we can ensure a positive image is given to the international finance community. That is my goal.”

The directive is due to come into on force on July 1, although Income Tax assistant administrator Rob Gray said that the island was waiting for confirmation of a level playing field with EU member states, Jersey and the Isle of Man. “The Law Officers have been scratching their heads trying to come to terms with some of the provisions,” said Mr. Gray. He said there had been some room for manoeuvre when it came to formalizing the text of the bilateral agreements that will be signed with the other jurisdictions. Mr. Gray said it would be up to companies, particularly those in the finance sector, and their advisers to confirm how the directive would affect them and their clients.

BILL WOULD END TAX LOOPHOLE FOR INVESTORS

The Senate’s top tax writers said that they intend to crack down on an arrangement between charities and investors that uses life insurance policies as a tax shelter. The senators want to prohibit investors from using a church or a charity to obtain benefits from a life insurance contract that they could not otherwise receive. The deals under scrutiny typically involve an investor teaming with a charity to buy life insurance on a donor to the charity. When the donor dies, the charity is promised a portion of the benefits. Critics of the arrangement, including the White House, say it is the investors who benefit the most.

The Treasury Department said the “arrangements do more to facilitate investment by private investors in life insurance contracts than to further a charity’s exempt purposes.” The White House proposed a 25% penalty tax on benefits flowing to investors from the arrangements. The proposed legislation instead intends quash such deals entirely by imposing a 100% penalty tax on money paid into the life insurance arrangements.

STATES HUNT DOWN ONLINE CIGARETTE BUYERS

More than 1,500 Michigan residents recently were mailed bills for the cigarette and sales taxes they had avoided by buying their smokes from online retailers. After 30 days, one recipient’s letter informed her that a 100% penalty would be added to her existing debt. Since February, the letters to online cigarette purchasers have garnered Michigan more than $2 million, said Terry Stanton, spokesman for the state treasury department. Michigan is just one of the states looking to recoup revenue lost through sales of cigarettes on the Internet, where smokes often are cheaper precisely because the transactions almost never include cigarette and sales taxes owed to to the purchaser’s state.

States’ efforts to snuff out online cigarette retailers got a boost in March when the major credit card companies announced that they would no longer accept payments for tobacco products bought online. The action cut off the payment method relied on by the vast majority of online cigarette retailers. The credit card industry also is collaborating with the federal Bureau of Alcohol, Tobacco and Firearms and with 10 state attorneys general who also announced their intention to crack down on the online cigarette market. The issue has caught officials’ attention because in a growing number of cases, states are relying on revenue generated by smokers to balance their budgets.

Grover Norquist, who heads the anti-tax group Americans for Tax Reform, issued a statement decrying Michigan’s efforts to collect taxes on cigarettes purchased online, saying state officials had resorted to “police state tactics to get their money.” But according to the National Association of Attorneys General, virtually all Internet cigarette sales violate one or more state and federal laws.

TAX ADVISORS VS. TAXPAYERS

New legislation passed in October 2004 (American Jobs Creation Act) and revised regulations issued by the IRS in early 2005 (Circular 230) will effectively prevent taxpayers from avoiding potential penalties by seeking advice from tax professionals. The legislation and regulations will require anyone offering any tax advice to either issue a prominent disclaimer that the advice can not be used to avoid penalties – or – to issue a written opinion that covers all relevant and potentially relevant legislation, regulations, court cases and IRS rulings that may have any bearing on the subject for which the opinion is being given. The effect is that written tax opinions will be become extremely expensive as a way to secure some assurance that a proposed transaction is not likely to lead to any penalties.

If construed aggressively by the IRS, these rules could apply to financial planners, insurance agents and stock brokers as well as to tax preparers, tax lawyers and public accountants who are not tax specialists. The regulations could also be applied to lawyers who are not tax specialists but who give advice that have tax implications – such as divorce law or asset protection law. Appraisers who certify to the value of various assets for the purpose of making charitable deductions or allocating the cost elements of the purchase or sale of a business could also be affected by these regulations. Some legal commentators have gone so far as to suggest that the IRS could conceivably attempt to apply the regulations to authors, reporters, editors and publishers of any tax information, as well as to anyone who expresses any written opinion regarding the tax consequences of any transaction. Some commentators believe that these rules will cause many of the professionals who now give tax advice to refuse to do so and that many tax lawyers and tax accountants will find another specialty with which to make a living.

The required content of a disclaimer in a written tax opinion must include the following. 1.) That additional tax issues may exist that could affect the tax treatment of the tax shelter (transaction) addressed in the opinion (see the broad and ambiguous meaning of a tax shelter later in this article), 2) that the opinion does not consider or reach a conclusion with respect to those additional issues, and 3.) that the opinion was not written and cannot be used by the recipient for the purpose of avoiding penalties under IRC section 6662(d) with respect to those issues outside the scope of the opinion. The following is a detailed discussion of the changes in the rules affecting tax practitioners.

Circular 230: Regulation of Tax Preparers and Advisors

This document provides selected web links to Internet articles, analysis and commentary regarding the highly controversial revisions to the Circular 230 – Regulations Governing the Practice of Attorneys,. Certified Public Accountants, Enrolled Agents, Enrolled Actuaries and Appraisers before the Internal Revenue Service.

ASSET PROTECTION

PONZI SCAMS STILL RAMPANT IN MICHIGAN

Ask Linda Cena, the state’s new securities watchdog, what investors are complaining about these days and she does not hesitate for a second. “The big scam is still the Ponzi scheme,” said Cena, who manages Michigan’s regulation of brokerage firms and others. Ponzi schemes? The old too-good-to-be-true scams that pay big bucks to initial investors and then burn lots of folks big time? Yep, people are still getting taken. “It’s a tried and true scam,” Cena said. This spring, the North American Securities Administrators Association listed Ponzi schemes as the No. 1 threat to investors. Regulators have reported Ponzi scams involving life insurance policies, oil and gas wells, an Internet-based investment club, and the sale of unregistered promissory notes in auto leasing companies.

Cena said that scammers tend to target people, including the elderly, who have worked hard to build a nest egg. Everybody knows that it is a struggle to find a safe investment that is paying more than a 3% CD. So it is easy to get somebody’s attention when you promise 10% or 20%. Cena said some scams have touted gains of 10% each month – or the chance to more than double your money in a year. Some of the scammers make out-of-the-blue phone calls to savers. Or others may target people in a specific church or community. All promise a sure-fire way to make a quick buck. And too many people fall for the false promises.

But if something sounds too good to be true, well, it usually is. And it is not necessarily a safe bet, even if friends and neighbors are bragging that they made big money on this so-called can’t-miss deal. Con artists gain our trust by making sure that the initial investors are paid off well. The fast cash encourages the lucky few to invest more money and spread the word so that other … err … investors cough up their cash, too. The scam blows up when those who invest later in the game lose everything.

TINY NATIONS HOLD MUCH WEALTH

Although they have only 1% of the world’s inhabitants, they hold a quarter of U.S. stocks and nearly a third of all the globe’s assets. They are tax havens, 70 mostly tiny nations that offer no-tax or low-tax status to the wealthy so they can stash their money. Usually, the process is so secret that it draws little attention. But the sums – and lost tax revenues – are growing so large that the havens are getting new and unaccustomed scrutiny. When London’s Tax Justice Network (TJN) reported a month ago that rich individuals worldwide had stashed $11.5 trillion of their assets in tax havens, it caused a fuss in Europe. “Super-rich hide trillions offshore,” blazed a British newspaper headline.

“If we are serious about reducing poverty, one of the first things we need to tackle is an international financial system run by the rich, for the rich, at the expense of the poor,” states David Woodward, director of the New Economics Foundation, a London think tank. By cracking down on capital flight and corruption in developing countries, “we wouldn’t have so much poverty in the world,” says Robert McIntyre, executive director of Citizens for Tax Justice. He offered to find funding for the TJN group in the U.S. and recruit a paid director. Not everyone sees it this way. The Center for Freedom and Prosperity in Washington, for example, sees tax havens as “an escape hatch for overburdened taxpayers”. It relishes “tax competition” between nations. The center also argues that bank secrecy in countries like Switzerland can protect the money of those who face persecution by repressive regimes.

Now, a pioneer opponent of tax evasion through tax havens, Sen. Carl Levin (D-Michigan), has joined with Sen. Norm Coleman (R) of Minnesota to sponsor the Tax Shelter and Tax Haven Reform Act. It would enable the Treasury secretary to designate a tax haven as “uncooperative” with IRS investigations. Though not a panacea, the bill, soon to be reintroduced in the current Congress, would give tax investigators a weapon: Income from such designated tax havens would lose some tax advantages.

U.S. bill introduced to tax tax-haven CFCs.

Senator Dorgan (D-N.D.) has introduced a bill (S. 779) to amend the Internal Revenue Code to treat controlled foreign corporations established in tax havens, or “tax-haven CFCs”, as domestic corporations, and thus subject to U.S. income taxes. The tax havens listed in the bill include Bermuda, the British Virgin Islands, and the Cayman Islands. The corporation must be a controlled foreign corporation for an uninterrupted period of 30 days or more during the taxable year in order to be treated as a tax-haven CFC. Generally, a foreign corporation is treated as a controlled foreign corporation if more than 50% of its vote or value is owned by U.S. persons owning 10% or more of its voting stock.

NEW YORK AG SPITZER CALLS OFFSHORE INSURANCE SUBSIDIARIES “BLACK HOLE”

New York Attorney General Eliot Spitzer, engaged in a wide-ranging probe of the insurance industry, is calling for more scrutiny of offshore subsidiaries of insurance companies. Spitzer’s office is already investigating insurer American International Group for accounting issues, but he told a meeting of the Society of American Business Editors and Writers that they should send reporters to Barbados and dig deeper into what insurance companies are doing offshore. He called this aspect of the insurance industry a “black hole” and called for a fundamental rewriting of insurance laws. “The states have ultimately failed in their regulation of the insurance industry,” Spitzer said. “The Feds can get the data and they have refused to do it.” He criticized the Bush administration for its emphasis on tort reform while ignoring deeper problems in the insurance industry.

SO MANY TAX HAVENS AND SO LITTLE TIME

Feeling jaded after the (U.K.) election? Looking to escape higher tax? And desperate to avoid the Holyrood election in just two years’ time? Then join what may well be Scotland’s fastest-growing club this morning, the Escape Club. There are no fees or dues. Membership simply comprises those looking for a quick exit and prepared to travel to the furthest corners of the world. High on the escape list must be the South American republic of Paraguay, a haven, of sorts, for political refugees in the past. The economy there is so “informal” it is hard to work out whether it is growing or slowing. Paraguay does have taxes. But judging by the large number of people with guns, it seems these may be optional. Fraud and corruption are rife. And you never know who you might bump into. There is a risk the harmless old codger next door has a disconcerting line in Nazi memorabilia.

More alluring, surely, have to be the Cayman Islands, an English-speaking dependent territory of the UK with a population of 30,000, some of it intermarried. There are no taxes in the Cayman Islands. Government revenue comes from customs duties and annual fees on corporations. But opening a bank account can be tricky. Having filled in a detailed form at a bank in the capital, George Town, a few years back to open an account, I was asked to pay in a minimum deposit … of $50,000. Stamp duty is also a little steep, at 5%. The problem here is that, as last year sadly proved, the islands can be vulnerable to hurricanes that could blow your biggest investment away.

Alternatively, there are the British Virgin Islands (population 22,000). There is no capital-gains tax, wealth tax or gift taxes. Income tax is being scrapped this year and replaced by a payroll tax of 14%, of which 8% is payable by employers. However, like the Cayman Islands, it has chosen to apply a withholding tax on savings paid to nationals of EU member states. Not so good. The Seychelles (population 80,000) are a byword for tropical beauty. They comprise 115 islands near the Equator and outside the cyclone belt. There is no income tax to speak of, but social-security payments and tax on locally sourced businesses can range up to 40%. High on any tax refugee’s list must be Vanuatu, a group of 80 mountainous tropical islands on the eastern seaboard of Australia. There is no crime of tax evasion on Vanuatu, since Vanuatu has no taxes. Economic growth is slow because of adverse climatic conditions, most goods are imported and import duties are high. More worrying still is that some of the islands have active volcanoes.

My personal favourite, both for its topographical similarity to Scotland and ease of entry (and exit, should things go wrong) is the American state of Wyoming (population 501,000). The landscape is in many parts similar to Scotland, but the state website instantly proclaims the difference. Wyoming does not levy a personal or corporate income tax, there are no taxes on bank accounts, stocks or shares. The state does not assess any tax on retired income earned or received from another state. So where is the catch? Those familiar with the wonderful stories of the writer Annie Proulx will know the feeling. When you start reading her description of the awesome beauty of Wyoming, you cannot help but wonder why so few people live there. But after describing what “bad dirt” life can really be like for its inhabitants, you end up puzzling why anyone lives in Wyoming at all. Better surely, then, to stay put at home. But sadly, staying home in Scotland is not at all the same as staying put. For we are slowly drifting north-east towards Sweden. This is the cradle-to-grave welfare model our politicians crave.

If you are feeling restless this morning and in need of a change, there is no lack of places to choose from. The good news is, the grass certainly looks greener on the other side. The bad news? Perhaps it really isn’t.

PRIVACY

AUTOMATING CAMERA SURVEILLANCE FOR SOCIAL CONTROL AND MILITARY DOMINATION

Though some organizations have objected to video surveillance of cities and borders, the public is less aware that recent computer vision innovations are making it possible to data mine surreptitiously acquired movie data in possible defiance of the Fourth Amendment. The U.S. government has lavished generous funding upon video surveillance technology in hopes of revolutionary advances in data mining and robotic vision that would allow nationwide surveillance of public areas. Defense industries attempt to apply such technology to autonomous, robotic combat vehicles that can fight “bloodless” wars, ostensibly sparing the lives of American soldiers.

To a casual observer, surveillance cameras resemble lampposts. Some of the cameras have a 360º view and magnify by a factor of 10–17 compared to human sight at that range. Some are equipped with night vision; they can zoom in on a target well enough to read text on a written page or look into a building. In reaction, privacy advocates who view these surveillance measures with alarm have begun to publish the locations of surveillance devices in major American cities, to allow others who object to the technology to chart surveillance-free paths through the streets. Even if someone were willing to take this precaution, there is no guarantee against hidden or fake cameras unaccounted for in planning the route.

Recent developments in computer vision, robotics, and pattern matching increase the possibility of drastic social transformations. The application of data mining methods to massive video data sets enables a sufficiently organized power to outmatch humans in carrying out surveillance. Though the robot soldier and the robot policeman are not yet reality, present technological achievements can lead to this future possibility.

SECURITY CONCERNS PROMPT PASSPORT REDESIGN

The State Department plans to improve technology that will be embedded in new U.S. passports after tests this month revealed that information in the documents could be vulnerable to identity theft. Frank E. Moss, the State Department’s deputy assistant secretary for passport services, said the agency will include new high-tech security features that will minimize the risk of identity theft, even if the change delays plans to start issuing the passports to new applicants later this year.

The agency’s decision was a small victory for civil libertarians and privacy groups who for years had warned the State Department that its plans to embed passports with radio frequency identification (RFID) technology were flawed. Travel groups and European countries including Germany also warned of the technology’s security vulnerabilities, and the State Department received more than 2,400 comments from the public – many of them critical. Many critics such as the American Civil Liberties Union would prefer that the government not use RFID technology at all.

Moss said earlier this month that there was only a slim chance that data on passport chips could be read from more than four inches away. Recent tests conducted by the National Institute of Standards and Technology concluded that he was wrong, he said.“qWe admit the chip, with a more powerful reader, can be read at a distance of 24 inches,” Moss said. The agency now plans to include metal inside U.S. passport jackets that will help shield the chip from being read by anyone except U.S. Customs and Border Protection agents. The data on the chip also will be encrypted, meaning that it must be scanned through a reader at an airport or a border to be read; it cannot simply be waved across an electronic reader. The additional security measures are not expected to result in any additional costs. The new system will be funded by fees paid by passport applicants.

Government may be rethinking idea of embedding wireless tracking technology in passports.

Some worry domestic and foreign governments could access that data whenever they scan passports. “We have not had a debate over the questions that we need to have a debate about,” said Edward Hasbrouck, an expert on travel and a civil-rights activist. “Should the government be gathering this data? That’s a public policy question that needs to be addressed.”

Activists in the U.S. continue to worry about passport abuses by the government and private sector. Those concerns were not addressed by a recent State Department statement about encrypting the chips. Activists said a travel dossier can be compiled on every American who uses the passports, and commercial airlines and other travel companies could surreptitiously track the comings and goings of travelers as well. The electronic passports have the potential to emerge as a national ID card, or what Hasbrouck described as “a globally unique, government assigned and administered personal identifier for data aggregation and data mining.”

“I’m curious as to what all the uproar is about,” said David Abel, an attorney in the intellectual property law practice at Squire, Sanders & Dempsey in Los Angeles. “If you use the speed pass at the gas station, or smart keys for automobiles, or security badges at the office – these are RFID-enabled.” Abel also downplayed fears terrorists could use the technology to pinpoint Americans overseas. The tags in the passports can be read from a maximum distance of about 10 feet.

U.S. DRIVER’S LICENSE APPLICANTS COULD NEED 4 ID’S

Motor vehicle bureaus would require four types of identification from Americans seeking driver’s licenses under a proposed law designed to prod states into verifying the citizenship of applicants. Uniform requirements for driver’s license applications were among proposals accepted by House and Senate negotiators trying to resolve differences in their versions of a bill to pay for military operations in Iraq and Afghanistan. They also agreed on changes in asylum laws but remained divided over how much money to spend on border security. Both chambers will eventually consider the negotiated bill. The House could take it up later this week, but the Senate will not vote until after it reconvenes May 9.

A copy of the legislation, obtained by The Associated Press, indicated an applicant for a driver’s license would be asked to show a birth certificate, a photo ID, proof of Social Security number, and a document with full name and home address. How it would affect the renewal of licenses for U.S. citizens was unclear. Motor vehicle departments would be required to verify the documents and Social Security number. States still could give licenses to illegal immigrants, but they would have different designs or colors to alert security officers that they are unacceptable as IDs for boarding planes or entering federal buildings.

Governors and state motor vehicle departments had opposed the driver’s license provisions as too costly. They also complained state motor vehicle officials will be forced to take on the role of immigration officers. Civil liberties and gun rights supporters opposed the measure on privacy grounds, saying they fear driver’s licenses will evolve into a national identification card. States will have three years after the bill becomes law to meet the standards or their driver’s licenses will not be accepted by federal officers for identification. All but one of the 19 hijackers in the Sept. 11, 2001, attacks had some form of U.S. identification, some of it fraudulent, the Sept. 11 Commission found. The commission recommended the federal government set standards for birth certificates and other identification documents, including driver’s licenses.

LAW

WIRETAPS IN U.S. JUMP 19% IN 2004

The number of secret court-authorized wiretaps across the country surged by 19% last year, records show. As law enforcement authorities scurried to keep apace of improving technology favored by criminals, not a single application was denied. State and federal judges approved 1,710 applications for wiretaps of wire, oral or electronic communications last year, and four states – New York, California, New Jersey and Florida – accounted for three out of every four surveillance orders, according to the Administrative Office of the U.S. Courts. That agency is required to collect the figures and report them to Congress. The numbers do not include court orders for terror-related investigations under the Foreign Intelligence Surveillance Act, known as FISA, which reached a record 1,754 warrants last year, according to the Justice Department.

In non-terrorist criminal investigations, federally-approved wiretaps increased 26% in a year, to 730 applications, while state judges approved 980 wiretaps, an increase of 13%. Timothy Edgar, legislative counsel for the American Civil Liberties Union, said the figures show that old-fashioned law enforcement surveillance is catching up with increases in anti-terror wiretaps. “W’qre still seeing a huge trend toward increased surveillance,” said Edgar.

Officials said most of the applications, some 1,308, were for drug investigations, while racketeering or gambling wiretaps accounted for a combined 128 wiretaps around the country. Homicides and assaults produced 48 wiretap orders. Most of the wiretap applications, some 1,507 wiretaps, targeted portable devices, such as cell phones and pagers. By the end of the year, the surveillance had generated 4,506 arrests and 634 convictions based on wiretap evidence. Federal and state judges are required to file a written report about each application within 30 days of the expiration of the court order. Between 1994 and 2004, the number of wiretap authorizations have increased 48%, according to the report.

CLEARER ANTI-MONEY LAUNDERING LAW RULES FOR BANKS URGED

South Florida’s U.S. House members are spearheading an effort to prod regulators to give banks clearer instructions on complying with anti-money laundering laws. Bankers around the country have been asking for new guidelines on those laws since late last year. They are concerned that uncertainty on the information regulators are seeking could lead to fines and other penalties. New support from 46 members of Congress, in a letter to regulators dated April 8, should spur regulators to act more quickly, said Alex Sanchez, CEO of the Florida Bankers Association. “When Congress talks, people listen,” said Sanchez, who has traveled to Washington, D.C., several times this year to meet with members of Congress and bank regulators on money-laundering compliance issues.

And regulators are starting to act, as well as listen. Sheri James, spokeswoman for the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCen) said that agency and four federal bank regulators have “mid-summer” as their goal for issuing a manual of uniform compliance procedures on the USA Patriot Act and the Bank Secrecy Act. That is the clearest timetable those agencies have given for the manual bankers have been requesting. Treasury, through FinCen, oversees bank regulators’ enforcement of the BSA, a 1970 law that requires banks to have programs for monitoring accounts for illegal activities.

As a first step, FinCen and bank regulators issued new guidelines for banks in monitoring accounts of “money services businesses”, including check cashing stores, currency dealers and retailers that issue travelers checks and money orders. The guidelines are posted on FinCen’s Web site. They include details on how banks should seek more information on transmitters that are higher risk, basically with foreign customers, than other transmitters. Several South Florida banks this year have closed accounts of money transmitters because they were uncertain about how to monitor that business, said Debbie Wasserman Schultz, D-Pembroke Pines, one of nine South Florida House members who signed the letter.

FINANCIAL CROOKS FACE HIGH-TECH SLEUTHS

Governments around the world have found a high-tech ally in their fight against tax cheats, money launderers, corporate crooks, and perhaps the most pernicious of all bureaucratic enemies, paperwork. The technology, a computer language developed by accountants, turns financial information into the equivalent of a bar code, allowing software to scan and comprehend information that would otherwise be left for armies of analysts to retype and sort out. Extensible business reporting language, as it is called, is gaining a critical following inside the halls of government. Officials from Brussels to Washington have begun encouraging and requiring financial statements to be prepared in XBRL, to counter the cool reception so far in the business community.

“It’s the killer technology,” said Michael Bartell, the chief information officer of the Federal Deposit Insurance, the U.S. banking regulator, speaking at a conference on the technology held last week. “We are drowning in data. We’re buying storage faster than we can cut the purchase orders.” The technology affixes digital “tags” to virtually every kind of financial information, making it possible for software to spot suspicious or erroneous information and flag reports for more thorough review. While all data can be stored electronically, XBRL provides a standard structure that can be run through many types of analytical software.

In October, after a year’s delay, the FDIC will become the first federal agency to require XBRL reporting, a change that could cut weeks from the task of reviewing 9,000 quarterly bank reports and sharing them with the investing public. A similar, but voluntary, program is underway at the U.S. SEC, and the IRS is exploring XBRL as a way to speed the hugely time-consuming task of auditing businesses. The EU is spending €1 million to promote the technology across member states. Markets in Asia are also pressing forward with XBRL, hoping the technology can increase financial transparency in their markets. The technology has also been put to use for more creative purposes. An anti-money laundering group in Spain wants to use XBRL to spot suspicious financial deals. Canada’s environmental agency is exploring the technology for a program designed to highlight the business costs of pollution.

TAX HAVENS AND MONEY-LAUNDERING

The first initiative President George W. Bush sought to impose after the September 11 attacks was that of financial vigilance, i.e., the control of money being handled by terrorists. This was easier said than done, given that much of this money is in tax havens, and there is no legislation to control it. With their usual pragmatism, the Americans made some changes. The Patriot Act placed banks under the obligation to report any “suspicious” activity; and the law reforming the secret services, enacted late last year, contained a clause that allows the government discreetly to inspect international bank transactions to detect supposed terrorist activities.

The laundering of “black” money is not just an illicit financial operation. It also stimulates criminal activities and spurs organized crime. The authorities have never really tried to make public opinion aware of its real significance. Right now, in Spain, the police and judiciary are forging ahead with the so-called “Operation White Whale”, aimed at searching out the origins of a vast network of “black money”, apparently of largely criminal origin, in the southern coastal resorts of the Costa del Sol. This network might appear to be unusual. But in fact these sorts of money laundering operations are an everyday occurrence.

CONSTITUTIONAL CHAOS: WHAT HAPPENS WHEN THE GOVERNMENT BREAKS ITS OWN LAWS

Beltway pundits tell us the Bush presidency will be remembered for two overarching issues, the Iraq war and Social Security reform. Don’t believe it. It is way too early for such predictions. Few people seem to recall that, prior to 9/11, the issue of the day was stem cell research. Before al Qaeda’s attack, Bush himself thought his stem cell policy would likely be the most important decision of his presidency. The political scene can change very rapidly – so be forewarned that a political earthquake is looming on the horizon. Just watch what happens once the news wires report the resignation of a Supreme Court justice. Virtually all of the attention that is now on Iraq and Social Security will turn to the president’s nominee, the confirmation battle in the Senate, and constitutional law.

Several new books on the Constitution and the judiciary are hitting the bookstores in anticipation of the coming political and legal battle. One of these is Constitutional Chaos: What Happens When the Government Breaks Its Own Laws, by Andrew Napolitano. Judge Napolitano is the senior judicial analyst on the Fox News Channel where he does a terrific job of cutting through legal jargon to explain cases and controversies to laypeople. He has now written a primer on constitutional law for a lay audience.

But Napolitano’s book is not a disinterested, this-is-how-the-law-has-developed-over-years type of book. The judge has a definite point of view, that the Bill of Rights has been under relentless assault from government officials who have no compunction about breaking the legal charter that they are sworn to uphold. Napolitano believes that this constitutional corruption is rampant, but that most citizens are blissfully ignorant of the problem because they simply assume that their rights are “guaranteed” on the off chance they would ever really need them. To remedy the widespread naivete, Napolitano presents vivid horror stories of government agents running amok in the U.S.A. Everyone knows that abuses occur from time to time, but the picture that Napolitano paints is downright depressing.

Napolitano has earned respect from lawyers across the political spectrum because of his nonpartisan approach to legal and constitutional analysis. He has wisely brought the neutrality that everyone expects from a judge to his job as a commentator at the Fox Network and to his book about the Constitution. He calls ‘em as he sees ‘em. Thus, in some places he criticizes Janet Reno; in other places, John Ashcroft. And it is refreshing to see a judge defend not only the First Amendment, but the Second Amendment as well. Napolitano reminds the reader that we ought not to take a cafeteria approach to our constitutional liberties. Hear, hear.

RECONSIDERING THE PATRIOT ACT

When Congress passed the Patriot Act in the emotional aftermath of the September 11th terrorist attacks, a sunset provision was inserted in the bill that causes certain sections to expire at the end of 2005. But this begs the question: If these provisions are critical tools in the fight against terrorism, why revoke them after five years? Conversely, if these provisions violate civil liberties, why is it acceptable to suspend the Constitution for any amount of time? Congress is scheduled to review those sections this year, but there is little chance any portion of the Act will be allowed to lapse. If anything, many members of Congress are eager to expand federal police powers. Supporters of the Patriot Act argue that its provisions have not been abused since its passage in 2001. In essence, Justice Department officials are claiming, “Trust us – we’re the government and we say the Patriot Act does not threaten civil liberties.”

But this argument misses the point. Government assurances simply are not good enough in a free society. The overwhelming burden always must be placed on government to justify any new encroachment on our liberty. Now that the emotions of September 11th have cooled, the American people are less willing to blindly accept terrorism as an excuse for expanding federal surveillance powers. Many of the most constitutionally offensive measures in the Act are not limited to terrorist offenses, but apply to any criminal activity. In fact, some of the new police powers could be applied even to those engaging in peaceful protest against government policies. The bill as written defines terrorism as acts intended “to influence the policy of a government by intimidation or coercion.” Under this broad definition, a scuffle at an otherwise peaceful pro-life demonstration might subject attendees to a federal investigation. We have seen abuses of law enforcement authority in the past to harass individuals or organizations with unpopular political views. Congress has given future administrations a tool to investigate pro-life or gun rights organizations on the grounds that fringe members of such groups advocate violence.

It is easy for elected officials in Washington to tell the American people that government will do whatever it takes to defeat terrorism. Such assurances inevitably are followed by proposals either to restrict the constitutional liberties of the American people or spend vast sums from the federal treasury. We must understand that politicians and bureaucrats always seek to expand their power, without regard to the long-term consequences. If you believe in smaller government, ask yourself one simple question: Does the Patriot Act increase or decrease the power of the federal government over your life? The answer is obvious to those who understand that freedom cannot be exchanged for security.

ACLU urges Congress to modify “sneak and peek” Patriot Act power, says provision lacks proper judicial checks against abuse.

The American Civil Liberties Union today called on Congress to revisit a provision of the Patriot Act that permits so-called “sneak and peek” searches with diminished judicial oversight. Former Representative Bob Barr (R-Georgia), who now leads Patriots to Restore Checks and Balance, echoed those concerns as he appeared before the House Judiciary Subcommittee on Crime, Terrorism and Homeland Security. “I have grave concerns about covert searches of people’s homes or businesses in general and about the design of this statute in particular,” Barr said. “I would hope the members of the Judiciary Committee would agree with me on one fundamental premise of American law: the idea of strangers, including government agents, secretly entering the privacy of our homes and examining our personal possessions is a threat to the fundamental freedoms our Fourth Amendment was written to protect.”

OPINION & ANALYSIS

FREE-MARKET JUSTICE IS IN THE CARDS

Nearly everyone takes it for granted that if government did not protect consumers from fraud, no such protection would be provided. The free market, however, protects consumers in countless ways, all without any government intervention. In fact, it does so more efficiently and effectively than the government can. One of the most impressive examples of free-market justice involves something that might be in your pocket right now: your credit card. Through voluntary contractual arrangements – motivated by nothing more than a desire for customers and profit – credit-card companies provide an entirely private means of recourse when a merchant wrongs a customer.

Visa and MasterCard, the two most popular credit cards, are brand names jointly used by banks that have gotten together to issue the cards. Credit-card companies know that the presence of their logos on merchants’ doors and in advertisements is interpreted as a seal of approval, even if not intended as such. It is not good for Visa and other brands to appear to be associated with crooks or anything unpleasant to consumers. Thus the card companies have created their own system for pleasing consumers who have problems with credit transactions. This is called the chargeback. Under the card companies’ chargeback procedures, a consumer can inform his card issuer of his dispute and the issuer will then help him settle things.

One might argue that the relationships among the banks, merchants, and cardholders are governed by contracts, and those contracts, even if they contain private-arbitration clauses, are ultimately subject to review in government courts. That is true, but not really important. What primarily holds these arrangements together is not the threat of government intervention, but the desire of all involved to do business with one another.

THE PARADIGM CYCLE MODEL

Over the last four years I have written about a variety of cycles I employ to develop economic or financial forecasts. The Stock Cycle defines secular bull and bear markets and was used to forecast that money markets would outperform stocks for twenty years in my 2000 book Stock Cycles. The Kondratiev cycle defines long-term movements in interest rates and commodity inflation. This cycle forecasts that 10 year interest rates will not rise above 5.5% in the coming years. The political cycle suggests that the decline in small-government conservatism since 2000 is not a transient anomaly, but the beginning of a long-term trend. The hegemony cycle projects that there will be no showdown between the U.S. and China in this decade and that Asian central banks will continue to support U.S. borrowing when necessary for the rest of the decade.

I believe all these cycles are linked in that they are all generational in nature and act largely through politics. Government and other institutional behavior shapes the socioeconomic landscape, giving rise to historical cycles. This behavior reflects the beliefs of the people occupying the top positions in government, business and other institutions. I hypothesize that beliefs change in a predictable fashion because the changes arise out of the replacement of one generation by another, each with its own particular set of beliefs. This article presents my paradigm model for how these generations and the cycles they create arise.

BUSH ADMINISTRATION BLUSTER EXACERBATES NUCLEAR PROLIFERATION

As North Korea tests a short-range missile and Iran threatens to resume its enrichment of nuclear fuel, President Bush and his administration continue their counterproductive bluster against these two nations. The U.S. is preparing to echo its hard-line rhetoric as 180 countries meet this month for the periodic review of the Nuclear Non-Proliferation Treaty (NPT). Yet only fantasy generals on the big screen use macho bombast against their fictional foes. The best real-life commanders try to walk quietly in the enemy’s moccasins to best predict their next move. The Bush administration spends so much time strutting and flexing before the world gallery that it fails to realize that such behavior accelerates nuclear proliferation.

Although Iraq, Iran, and North Korea are tyrannical regimes, they may have legitimate security concerns that drive their efforts to acquire so-called weapons of mass destruction (WMD). They may want these weapons to deter neighbors or even a self-righteous superpower from attacking them. One does not have to be an apologist for the abysmal human rights records of those regimes to caution against feeding into their paranoia. But dictators in small, relatively poor third world countries do not have to be paranoid to worry about attack from an interventionist superpower. The world saw that the non-nuclear states of Grenada, Panama, Serbia, and Iraq got a lot less respect than the likely nuclear-armed North Korea.

Most liberals and conservatives in the U.S. wring their hands over the proliferation of WMD – especially nuclear arms – but rarely acknowledge that an aggressive U.S. foreign policy overseas is a major cause of the problem. The perception is that nuclear arms are the only weapons powerful enough to deter a potent superpower attack. In addition, Americans often see these “rogue” states as uniformly evil but do not recognize the hypocrisy of their own government. The U.S., fearing that other nations will withdraw from the NPT, has criticized North Korea for overtly doing so, but mutes its criticism of more friendly nuclear-armed countries – Israel, India, and Pakistan – that have never signed the treaty. Meanwhile, the U.S. has never had any intention of fulfilling its commitment under the NPT.

AMERICA’S MORTAL SECRET

The holiest acreage in America was consecrated in an act of revenge. Beating a retreat back to Washington from their defeat at the First Battle of Bull Run, Union soldiers crossed into the property of “Arlington House”, Robert E. Lee’s home on the Potomac River. They buried the remains of their dead comrades in Mrs. Lee’s rose garden. From then on, the Confederate leader’s estate was used as a Union graveyard – a vindictive payback. The place is now known as Arlington National Cemetery.

The blind impulse to respond to hurt by striking back is part of human make-up, yet the urge, opening into the forbidden irrational, is a deep source of shame, too. Humans clothe the act of vengeance in all sorts of other justifications. When we go to war, or then behave savagely in combat, we hardly ever explain the act by saying we simply must settle the score. But once, we did. When Harry S. Truman announced the dropping of the atom bomb on Hiroshima in an August 9, 1945 radio address, he offered three justifications: the second was to shorten the war, and the third was to save American lives. But the first thing he said was that the atom bomb was used “against those who have starved and beaten American prisoners of war, against those who have abandoned all pretense of obeying international laws of warfare.”

Sept. 11, 2001, left the U.S. in the grip of an unarticulated need for payback. No one takes a blow like that without wanting to strike out. Stated justifications aside, that need fueled the subsequent American attacks on Afghanistan and Iraq, which is why it meant so little when those justifications (bin Laden dead-or- alive, WMD, etc.) evaporated. And why it meant so little when the brutalities of American methods were made plain, from torture to hair-trigger checkpoints to ruined cities. The misbegotten character of the war in Iraq was crystal clear last fall, yet John Kerry was unable to challenge it. Why? The answer has as much to do with the American unconscious as with his. The nation’s war establishment, and those who support it, are driven by a motive they cannot admit, even to themselves. Their critics have mostly fallen mute because they have yet to find the language for what is really at work in this war.

The bombing of German and Japanese cities in World War II, carried on even after studies had shown such bombing to be strategically futile, amounted to terrorism campaigns. That remains a harsh truth with which the American conscience has never reckoned. And after losing in Vietnam, the U.S. imposed a punitive 20-year embargo on that country for no other reason than the hurt we felt at having lost. This is not how we see ourselves. Arlington National Cemetery is a garden again, a beautiful memorial to the many who died with only good intentions. But revenge remains its mortal secret, and America’s.

BUSH AND BOREDOM: THE BURDEN OF THE HOUR

I have an enormous sense of ennui vis-à-vis the regime that rules us. It is a horrible boredom, rather like what I would guess is the boredom and hopelessness of hell. May I never get any closer to it than this. I think the boredom serves to cover over and even somewhat suppress my now almost wordless rage at the immense world-girdling horror in which we are all implicated: the really hell-like war in Iraq following the illegal invasions of Afghanistan and Iraq, the blood-sucking nature of increasingly invasive government at home, and the life-destroying Drug War, which has us monkeying with the internal affairs of any number of nations and throwing hundreds of thousands of our own people in jail for crimes that a century ago were not crimes at all.

Over several centuries the free American polity, the best governed in the world because the least governed (until Lincoln), built a fabulous infrastructure and spread real wealth among a larger population than had ever had any before. Now we are in the final stages of hollowing that out, replacing wealth with debt, infrastructure with munitions, freedom with tyranny, pride in our nation and its government with shame for its murderous behavior wherever it goes to meddle.

For some years I was involved in a close study of the teachings of G.I Gurdjieff and P.D. Ouspensky, sometimes called the Fourth Way. I still regard it highly and now employ without thought many of its insights. One of Gurdjieff’s rather shocking points was that “man cannot do”. That is, we delude ourselves with our notions of the plans we will put into action, the effects we will have, the results we will achieve, all as the result of our deliberate and of course quite intelligent volitions. Not so, said Gurdjieff, it is all the action of an automaton. What! Was Gurdjieff then a mere behaviorist, a sort of glorified B.F. Skinner? Almost, in that he viewed men as mostly and most of the time so many pigeons or dogs responding to stimuli. But only most of the time and not necessarily. We have a glorious, built-in potential, to become fully human, fully man – but this takes immense work, immense wakefulness, a coming out of the dreadful waking sleep that engages most of us most of the time. Gurdjieff’s question: Is anybody up for the task?

INTEREST-GROUP CONSERVATISM

In the late 1960s, the great political scientist Theodore Lowi coined the phrase “interest-group liberalism” to describe an emerging system of government he viewed as untenable. In a classic book, Lowi argued that national policymaking had become the province of organized lobbies, which worked to the detriment of the overall public interest and spawned an uncontrollable, amoebalike federal bureaucracy.

Interest-group liberalism survived the presidencies of Richard Nixon, Gerald Ford, Jimmy Carter, George H.W. Bush, and even Ronald Reagan. When Republicans occupied the White House, liberal lobbying groups pursued their goals of creating new programs, adding regulations, and expanding legal rights through Democratic allies in Congress, pliant federal agencies, and the courts. Only the antagonistic combination of the Clinton presidency and the Gingrich Congress reversed interest-group liberalism’s momentum. Under eight years of Clinton, the size of the federal government actually shrank substantially in relation to the economy.

In this, the third year that Republicans have controlled everything, a variation on the old interest-group liberalism has emerged as the new governing philosophy. One might have expected that once in command, conservative politicians would work to further reduce Washington’s power and bury the model of special-interest-driven government expansion for good. But one would have been wrong. Instead, Republicans have gleefully taken possession of the old liberal spoils system and converted it to their own purposes. The result is the curious governing philosophy of interest-group conservatism: the expansion and exploitation of government by people who profess to dislike it.

When Democrats held power, liberal officials became beholden to the party’s biggest financial and political backers. These included unions (in particular public employees and teachers unions), women’s lobbies, civil rights lobbies, lobbies, senior citizens, welfare advocates, the entertainment industry, and trial lawyers. Today the dominant conservative interests form a rival constellation: corporations, especially in the energy and military contracting sectors, evangelical Christians, wealthy investors, gun owners, and the conservative media. In the daily business of Washington, the old pattern remains in place, only with the substitution of these new supplicants and their new benefactors in the GOP. As in the old days, lobbyists work the halls of Congress and the regulatory agencies, functioning like carpenter ants to build a federal government ever bigger in size and more intrusive in scope.

WHAT ARE YOU CALLING FAILURE?

A common rejoinder to the program of laissez-faire is that market failures require government intervention. Just what does market failure mean, and how can such claims for or against it be evaluated? A well-accepted definition of market failure is “a case in which a market fails to efficiently provide or allocate goods and services” in comparison to some ideal standard, such as the perfect competition model. This definition is applied and “market failure” has been demonstrated by many economists in the particular cases of external economies, network effects, asymmetrical information, principal-agent relations, etc. What is objected to here is not that the free market has flaws, but that the term “market failure” is a persuasive definition (see How to Think Straight, para 5.47), seeming to say more than it really does by improperly applying the emotive word “failure”.

Many erroneously believe that if a case of market failure, as defined above, has been proven, then the case for government intervention is a fait accompli. The problem does not lie with correct descriptions of an imperfect world. The problem, in part, lies with the term “market failure”, as it is commonly used. Let us subject this term “market failure” to some critical inquiry, suggest an alternative definition, and see what is necessary to demonstrate a case of true market failure.

Failure, generally speaking, occurs when actions do not result in their intended consequence. A pole-vaulter fails when he does not clear the bar. An engineer fails when his design is not sound. But, what of an institution? What does it mean for a government or business or market, to fail? Governments are organizations that have stated goals, such as establishing justice and insuring domestic tranquility. When, despite their actions, these organizations do not establish justice, or insure domestic tranquility, then they have failed. Governments both succeed and fail in their endeavors, as we would expect of an institution composed of men. A business, considered as an economic institution, is that type of entity, whose primary goal is to turn a profit. When a business, despite its efforts, does not turn a profit, it fails.

A market, though a social institution, is not a consolidated phenomenon. The market has no written constitution, no membership list. It is, in Adam Smith’s memorable phrase, the simple system of natural liberty. A market, not being a monolithic institution, does not have a single set of goals against which one can compare its performance. We must dig deeper. The most puzzling use of the term market failure is in comparison to an impossible theoretical world, as noted above. The subjective nature of goods and the entrepreneurial nature of human action must inform our understanding of the term market failure. It will not do to claim that cars are generally not safe enough, or that electricity rates are too high, or that the stock of influenza vaccines is too low. Market failure, if the term is to mean anything useful, must mean that there are fundamental defects in the nature of human ability to achieve certain goods through voluntary, as opposed to coercive, institutions. With this definition, the case for market failure is synonymous with the case for government intervention. This definition allows us to shift the focus of our inquiry to where it should be: institutional analysis.

A gap exists in many treatments. If a deficiency in the free market against some standard is noted, then there exists the possibility that government intervention could improve things. But, there are three major difficulties that one must confront in moving from market imperfections to market failure. If one is to make the case for market failure, one must show how incentive structures and constraints result in plainly worse outcomes in voluntary institutions of every conceivable stripe when compared to a highly specific coercive institution. Further, one must show that this highly specific coercive institution would be adopted by the government, and that the reasonable evolution of the institutions will result in no chronic government failure.