Offshore News Digest for Week of August 15, 2005

GLOBAL BUSINESS

POLL: WESTERN CANADIANS CONSIDERING SEPARATION FROM FEDERATION

More than one-third of western Canadians surveyed this summer thought it was time to consider separation from Canada, a poll suggests. In the survey, 35.6% of respondents from Manitoba, Saskatchewan, Alberta and British Columbia agreed with the statement, “Western Canadians should begin to explore the idea of forming their own country.” Albertans, at 42%, were most apt to consider independence, followed by Saskatchewan at 31.9%. Residents of B.C. and Manitoba were the least likely to consider separation, at 30.8 and 27.5% respectively.

The survey was commissioned by the Western Standard, a right-leaning bimonthly news and opinion magazine based in Calgary, to assess how well the federal government has been managing the issue of western alienation – something that Prime Minister Martin promised to reduce as part of his 2004 election campaign. In the poll’s supplementary questions, 64% of respondents said Martin had done a “poor job” at ending western alienation.

BETWEEN ROCK AND A HARD PLACE, HOPE RISES

It has been 292 years since the British Navy finished muscling Gibraltar, a speck at the tip of the Iberian Peninsula, away from Spain. But for residents here, the fine print of the 1713 Treaty of Utrecht, which officially ceded Gibraltar to Britain, is as effortlessly quoted as this year’s soccer standings. No historical slights are ever forgotten in Europe, but few flourish quite as robustly as the one between Gibraltar and its formidable neighbor, Spain.

This is the heart of the feud: The Spaniards want to rule Gibraltar, claiming that the land is rightly theirs. Gibraltar scoffs, saying it has been ruled by Britain for nearly three centuries and is not about to trade down (as most people here view it). Britain, which has grown weary of the sniping and squabbling, has said, with an almost audible sigh, that it will respect Gibraltar’s wishes. Meanwhile, each year seems to give rise to a series of indignations and counterindignations between the two aggrieved parties, with the more dramatic complaints typically coming from tiny Gibraltar and its 30,000 residents.

The disputes, all appear to agree, sometimes reek of the ridiculous. This year, there is a flickering of hope that Spain and Gibraltar can strike an amicable détente, not unlike the sort of let’s-be-civil rapprochement between parents divorced long ago. In addition to the solemn mood of Europe these days, two specific things have changed: The Spanish socialist government, led by José Luis Rodríguez Zapatero, is pursuing a more inclusive diplomacy. And, last December, the Spanish agreed to give Gibraltar a seat at the negotiating table, alongside Britain, on issues that jointly affect Gibraltar and Spain.

THE NEW HONG KONG

Hong Kong is all-enveloping. The city that defines the word is crowded, polluted and expensive. And it is also celebrating. After some tough years marred by economic collapse and the threat of SARS, the tourists are back. The buzz and building work is everywhere. In the old fishing villages out of town, government-owned tower blocks climb into the smog, and underground lines extend further and further beneath delicate yellow landscapes. The city is opening its arms outwards, littering skyscrapers and shopping malls in its wake. The old 1960s buildings still standing as a testament to British rule may well have expiry dates stamped on their bottoms. Even though this expansion is threatening the very last breathing spaces of the city, the Identikit buildings never seem to alter Hong Kong’s character: despite 156 years of British rule, the city is palpably Chinese.

The scenery is a sideline for visitors, expats and wealthy natives, all intent on spending money. They drop dollars at the malls that fight for air space on the crowded skyline, over expensive meals with ringside seats for the daily harbour-view light show, and at extravagant, champagne-fuelled nights out in some of the best bars and clubs in the world. It is impossible not to get caught up in the glamorous whirl – so buy now and hide the credit-card statement later.

How Hong Kong can help you unlock China’s treasure chest.

You may have seen the film National Treasure, in which Nicolas Cage has to unlock a multi-layered puzzle to find a vast treasure. China is like that for many investors – a virtually limitless treasure chest with an enormous number of investment opportunities, if only you can find the darned key. It is certainly worth the effort. Within China, one will find many doors and boxes guarding different fortunes for manufacturers seeking low cost production, traders sourcing inexpensive products, companies with unique products they want to sell to the 100+ million consumers with relatively high disposable income, and pure investors who want to play the real property market or invest in non-performing loans or China “B” shares.

Finding the correct keys to access China’s treasures is no easy task. The good news is that Hong Kong is not only the gateway to China, it holds the golden key to China’s many treasure chests. And once you know the keys that Hong Kong offers, we will look at the treasures that can be unlocked in China.

Japan’s wartime savagery in Hong Kong? Better to forget it.

From the graceful dome of the Legislative Council building to the gaudy entertainment district of Wan Chai to the touristy warren of small shops in Stanley, Hong Kong seems as peaceful and prosperous a city as any in Asia. Yet 60 years ago, this city suffered some of the worst ravages of World War II. The Legislative Council building was a torture center run by the Japanese secret police. Military-run brothels were set up in Wan Chai after numerous rapes of local civilians by Japanese soldiers. And Stanley held an internment camp for allied civilians, with those who violated the rules risking execution on a nearby beach.

What is remarkable is that despite all the wartime horrors – which cut the city’s population to 600,000 from 1.6 million through starvation, killings and flight to better-fed communities – the war is little remembered here. The 60th anniversary of the Japanese surrender announcement was observed only by a few small gatherings: a talk by a war veteran at a local museum; a protest against Japanese war crimes that drew 400 people by the organizers’ count and only 200 according to the police.

By contrast, millions in China and South Korea have signed Internet petitions or joined street demonstrations this year to denounce Japan’s reluctance to teach its children about its wartime atrocities, helping make the issue one of the most contentious in Asia. Many Japanese, in turn, have defended their country’s wartime record. But here in Hong Kong, residents have shown a surprising willingness to put the war behind them. “Sixty years is a moment to remember, but people pay more attention to economic development” these days, said Ho Pui-yin, a historian at the Chinese University of Hong Kong. Professor Ho and other historians cite several factors contributing to the city’s willingness to move on. The large majority of Hong Kong’s 6.8 million people are not descendants of wartime survivors, but are part of families that left mainland China later, fleeing the rise of Communism.

MONEY CAN BUY HAPPINESS, BUT ONLY IF YOU HAVE MORE MONEY THAN YOUR PEERS

Money can buy happiness, researchers find – but only if you have more money than others in your age group. Even after controlling age, health, education and other correlates of happiness, “the higher the income of others in one’s age group, the lower one’s happiness,” researcher Glenn Firebaugh, of Pennsylvania State University, said in a prepared statement. “Families whose income earners are in jobs with flat income trajectories are likely to become less happy over time,” he added. His team presented the findings at the annual meeting of the American Sociological Association in Philadelphia.

He and a colleague used data from the 1972-2002 U.S. General Social Survey to assess the age, total family income and happiness of people aged 20 to 64 years. Overall, they found that physical health was the best single predictor of happiness, followed by income, education and marital status. They also found that relative income (comparing one’s income to the income of other people) has more impact on happiness than absolute income (the things that money can buy). Firebaugh said the importance of relative income may lead people onto a self-indulgent treadmill, because incomes for most Americans continue to increase for most of their adult lives.

THE CARIBBEAN FACES PROSPECT OF A LIFE WITHOUT SUGAR

As they trudge back from a morning spent clearing irrigation ditches on the banks of the Demerara River, the exhausted workers from La Bonne Intention, a government-owned sugar estate in Guyana, look like a defeated army. A few miles away in George­town, the down-at-heel capital of the poorest country in what was once known as the British West Indies, trade union leaders talk of treachery. Two months ago, the EU announced its intention to cut the price it pays for the sugar produced in Guyana and 17 other poor countries from the Caribbean, Africa and the Pacific by 39% over the next five years, plunging the depressed industry into even deeper uncertainty.

DOMINICA: A ROLE MODEL FOR SUSTAINABLE TOURISM DEVELOPMENT

Caribbean destination Dominica was featured as a role model for sustainable tourism development, at the First International Conference on Environmental and Sustainable Development held in Santo Domingo, Dominican Republic, August 10-12, 2005. In a presentation entitled “Adopting Geotourism Strategies for Sustainable Tourism Development,” Deirdre Shurland, Director of the Caribbean Alliance for Sustainable Tourism (CAST), analyzed the case of Dominica, which is currently pursuing destination certification under the Green Globe 21 Community standard and as reported in a 2003 study funded by USAID and conducted by PA Consulting Group.

She highlighted the challenges faced by the island, and the opportunities presented by this certification. Shurland then brought to light some of the challenges faced by Caribbean destinations around the region and emphasized the necessity for committed leadership to drive the charge for tourism sustainability. “Green Globe 21 destination certification can offer critical opportunities for Dominica to reverse the declining trend in visitor arrivals since 1999. Everyone should assist, wherever possible, to ensure that Dominica successfully attains its objective,” says Shurland.

AUSTRALIA HOPES TO BOOST SKILLED WORKER IMMIGRATION

The Australian government hopes a A$3 million migration drive in Europe and Asia will help attract 20,000 skilled workers to save key industries from labor shortages. The government will hold expos in London, Berlin, Chennai, and Amsterdam in September and October, touting Australia’s lifestyle and culture to workers in a bid to address the country’s skills shortage. Trades-people, engineers, and doctors will be targeted, with various industry groups asked to nominate the occupations they consider most in demand. The Immigration Department will advertise in overseas newspapers from next month, inviting prospective skilled migrants to meet with employers and state and government representatives. The skills road show will offer migration options under recently relaxed regulations. The government is also considering holding a further round of expos next year in Seoul, Bangkok, Los Angeles, and Manila.

Immigration Department acting deputy secretary Abul Rivzi said the campaign harked back to the 1950s’ “ten pound pom” drive for skilled migrants. “If you think about what we did in the 1950s and the impact that had on Australia, well, we’re doing it again,” Mr. Rivzi said. More than one million Britons emigrated to Australia after 1945, under various assisted migration schemes. The move comes after John Howard announced earlier this year that the 2005-06 skilled migration quotas would be increased to 20,000 to tackle the country’s skill shortfall – the biggest increase since the 1970s.

New Zealand expats initiative launched.

Prime Minister Helen Clark and Immigration Minister Paul Swain said that the government is launching new initiatives to bring expatriate New Zealanders up to date with job opportunities at home. “The government wants to make it easier for expats to come home and find the right job by giving them the best information about the country, economy and job opportunities. This programme brings all that together,” Helen Clark said. “Expats have the skills employers are crying out for with unemployment at just 3.7 per cent. It makes sense for the government to help New Zealand employers connect with expats,” Ms. Clark said.

“New Zealanders have always traveled abroad for new experiences and opportunities, and there are at least 460,000 New Zealanders living overseas. Yet studies show that half of our expatriates think they’ll come home and 25 per cent are still deciding. The key factors people consider when thinking about returning home are lifestyle, friends and family, and work and career. These new initiatives aim to provide information relevant to a decision to return home,” Ms. Clark said. She said Labour’s recently announced student loans policy which will wipe off interest on student loans for people living in New Zealand adds another incentive for Kiwis to come home. In addition, the Department of Labour is looking at ways to help make the process smoother for foreign partners of expats by prioritising their applications for residence.

PRESIDENT TORRIJOS CLIMBING BACK IN PANAMA

More adults in Panama express satisfaction with Martín Torrijos, according to a poll published in La Prensa. 45.5% of respondents rate the presidents performance as excellent or good, up 6.7 points since July. Torrijos won the May 2004 presidential election as a candidate for the Revolutionary Democratic Party (PRD) with 47.4% of the vote.

In July, the Panamanian government officially opted to “suspend” a series of proposed Social Security reforms for three months. The Central American country was the site of public demonstrations in June, after the government announced plans to gradually rise the retirement age for men from 62 to 65 years, and for women from 57 to 60 years. The proposal also sought to establish that workers would contribute to the fund for 20 years instead of 15 in order to retire with a pension. Panama’s Social Security system is currently facing a $4 billion deficit.

DUBAI-BASED LAWYERS CAST DOUBT OVER FIRMS’ GOLD RUSH

“We’ve heard the talk – but we’ve yet to see the action.” So says one veteran member of Dubai’s expat legal community in response to reports in The Lawyer last week of the start of a scramble on the part of UK law firms wanting to open up shop in the key financial center of the United Arab Emirates (UAE). The alleged frenzy is being fuelled by an energy and property boom, plus the growth of the Dubai International Financial Center (DIFC).

“It’s not clear to me to what extent people are actually bringing real execution capability, or whether they're just building shop windows for work based in London,” comments Robin Abraham, a partner based in Clifford Chance’s Dubai office. “If you have three or four lawyers on the ground, you can do a lot of marketing, but you can’t do a lot of big transaction work.” Clifford Chance has 30 lawyers based on the 18th floor of the Dubai World Trade Center, where it has been for more than 30 years. “The reality is that, largely, our counterparties on transactions are based in London,” he adds.

Anthony Garrod, a Dubai-based partner at Clyde & Co, strikes a similarly sceptical note. It just becomes “a toe in the water” exercise unless there are the people on the ground to do the work effectively, the lawyer reckons. Clydes has been in Dubai for 20 years, where it has around 40 lawyers. Garrod is far from convinced about the assertion by new entrants that their new practices are being driven mainly by projects work. “How many projects are there?” he asks. The market for the newcomers, he reckons, has to be “pretty limited”.

AMERICAN INVESTORS MOVE AWAY FROM U.S. ASSETS

American investors diversified away from the UU.S.S at the fastest rate in 10 years, even as foreign buyers stepped up their purchases of U.S. assets, data released on this week suggested. U.S. investors bought $146 billion of overseas bonds and equities in the past 12 months more than at any time since 1994. But despite anxieties about the still-growing U.S. current account deficit, overseas investors poured a net $71.2 billion into US assets, up from a revised $55.8 billion in May, according to the Treasury. The capital flows, which more than covered the $58.5 billion trade deficit for June, suggest that confidence in the strength of the U.S. economy will be sufficient to sustain the external deficits. The U.S. needs to attract more than $2 billion in net inflows each working day to cover the current account gap, of which the capital and trade accounts are the most visible and biggest components.

U.S. financial markets have paid particularly close attention to foreign appetite for U.S. assets amid concerns that Asian central banks could be curbing their purchases of U.S. bonds. Lower demand from overseas could push U.S. borrowing costs sharply higher. The inflows into the U.S. were led in June by the corporate bond market. Foreigners bought a record net $52.2 billion in corporate debt compared with a 12-month average of $27 billion as bonds rallied strongly after credit market turmoil in May which had largely shut down the market for new borrowing.

But overseas investors remained wary of U.S. stock markets. Foreigners bought a net $0.1 billion of U.S. stocks which took the 3-month rolling average to just $1.7 billion, the lowest in eight months. “That they’re buying bonds and not stocks has to be a bit of a concern,” said Sean Callow, senior currency strategist at Westpac Bank. “It suggests investors are happy to take fixed coupon payments on bonds but not convinced enough to bet on equity market appreciation.” U.S. investors bought $9.64 billion of foreign equities, up from $4.7 billion in May and taking the 12-month total to $96.2 billion. “It is partly because of the dollar, partly corporate scandals. Both have been a wake-up call to investors with too much exposure to U.S. equities,” said Brian Garvey, strategist at State Street bank.

BRITAIN HAS A SHARED HISTORY WITH ITS IMMIGRANTS – UNLIKE AMERICA

Unlike America, Britain is not a country that has tended to import people. Indeed, it continued to export people until well into the post-war period. One of the iconic British movies of those years, Brief Encounter, ends with Trevor Howard telling Celia Johnson that he is emigrating to southern Africa. The arrival of immigrants in large numbers, and of a darker skin color, changed things dramatically, but we are still not a country of immigrants.

Nor has the British experience of color been remotely similar to that of America, as the examples of Ranji and Jackie Robinson illustrate. Ranji, an Indian prince, played cricket for England in 1896, scoring a century on his debut against Australia at Old Trafford. It was more than half a century later, in 1947, that Robinson became the first black man to play major league baseball. The British Empire certainly had a racial curtain, inspired by a belief in white supremacy, but the curtain had gaps through which other races could creep. The Americans had a racial wall, first erected by the U.S. Constitution, decreeing that a black man was to be considered equal to 4/5’s of a white man. The wall has now been smashed, but the idea of an irreconcilable difference between citizen and alien has survived. Whereas Britain, in her complicated way, recognized dual identities, the U.S. forces people to choose between place of origin and place of settling.

The difference is simple but profound: America can impose a coherent historical narrative on immigrants because the countries they come from had no previous involvement with America. Settlers are able and encouraged to discard their native histories and accept the American version. But the vast majority of non-white immigrants to Britain have come from former colonies, and bring not only their own cultures but also their own versions of their shared history. So, in trying to construct a single coherent narrative for this island, we are faced with trying to marry two historical streams, the “home” version and the “export” version.

It can be done. The Australians and Irish like to mock, and even rail against, the British, inspired by historical memories that are often antagonistic. The Australians remember Gallipoli with bitterness – not towards the Turks, but towards British generals they hold responsible for the slaughter. The Irish sat out Britain’s gravest threat in the Second World War, and many sympathized openly with the Nazis. Yet both nations see themselves, and are seen by us, as part of the same family – the arguments are held within the walls of the same house. Relations with the Indian subcontinent and with her people – especially those who have come to live here – are very different.

LUXEMBOURG LAWYER TRIES TO GET PRO-EU CONSTITUTION REFERENDUM RESULT ANNULLED

Luxembourg lawyer Roy Reding filed a lawsuit at an administrative court here aiming to get a July 10 referendum annulled in which the EU’s beleaguered constitution won the backing of 56.5% of the tiny country’s voters. Reding’s case calls into question the legality of the government’s publicity campaign and its financing, which he claims had a decisive impact on the outcome of the vote. In particular, he is targeting television advertisements that aired shortly after the French and Dutch voted the constitution down at the end of May and beginning of June which had “absolutely no information content” about the treaty “but consisted entirely of psychological manipulation of the voter.”

The lawyer alleges that Prime Minister Jean-Claude Junker asked for changes in the message of the ads inviting Luxembourgers to vote in favor of the constitution. “Any objective observer, Luxembourg or otherwise, has to come to the conclusion after having read, heard or seen the ads that it was undeniably a campaign calling for a yes vote in the referendum,” Reding’s suit said.

WESTERN BANKS OFFER RUSSIA BILLIONS IN LOANS DESPITE FEARS

Lured by booming oil prices and friendly Kremlin ties, Western banks want to extend Russia the largest loans in its history, brushing aside fears of bad debts, the ghosts of fallen YUKOS and high levels of borrowing. The biggest loans include $7 billion to fund Russia’s purchase of a 10.7% stake in gas monopoly Gazprom, $2 billion for state oil firm Rosneft, and up to $10 billion for Gazprom to buy oil firm Sibneft. One group of banks even temporarily waived covenants protecting their rights in a dispute over a defaulted loan with Rosneft so they could lend it even more money, bankers said.

Bankers say such compromises are critical to winning the Kremlin’s favor and doing business in Russia, the world’s largest gas producer and second-largest exporter of crude oil and a booming market for banks awash with money to lend. One banker likened the interlocking financial interests to a close-circle medieval dance, with everyone tied in it together. “We are all locked in a circle of Farandole, holding each others’ hands. But it could all end in tears,” he told Reuters.

Rosneft’s creditors are dangerously exposed, warned Elena Anankina, credit analyst at international rating agency Standard & Poor’s, who said the deals looked risky when stress-tested. A sharp drop in oil prices could quickly change the logic of many of the loans, as could a repeat of the YUKOS affair.

Pervasive corruption in Russia is “just called business”.

A businessman in Moscow recently formed a company to supply equipment used in new office and apartment buildings. Despite the country’s construction boom, it nearly foundered. That is, until this summer, when two “intermediaries” arranged to fix the bidding for contracts from a regional government. He has since received four new contracts, he said, and expects more. Success has its cost, though. He had paid bribes, he said, amounting to 5 to 10% of each contract. The largest, so far, totaled $90,000. The amount of each bribe was punched out on a desktop calculator to avoid any paper trail. He expressed disgust but said the bribes were an unavoidable cost of doing business in Russia today. “If you want to be competitive you have to play the game,” he said, agreeing to speak in a lengthy interview only if he, his company and the regional government were not identified. He said he feared legal difficulties and being harmed or even killed. “It used to be called bribery,” he added. “Now it is just called business.”

Bribery is certainly not new to Russia, but according to several recent surveys and interviews with dozens of Russians, it has surged in scale and scope in recent years under the presidency of Vladimir V. Putin, so that today it touches just about every aspect of life. With greater urgency than ever, anticorruption campaigners and even some government officials warn that the government has become so ensnared by corruption that it threatens to undo Russia’s progress since the dismantling of the Soviet Union 14 years ago.

The Indem Foundation, a research group in Moscow that has conducted the most extensive efforts to measure bribery here, estimated last month that Russians paid more than $3 billion in bribes annually and that businesses paid $316 billion – nearly 10 times the estimate of its first survey just four years ago. The total is more than two and a half times what the government collects in budget revenues, the survey found. That means that vast amounts of Russia’s wealth flow in a shadowy netherworld of corrupted officials – unreported as income, untaxed by the government and unavailable for social or economic investments. Other surveys also rank Russia among the world’s most corrupt nations, placing the former superpower on a par with developing countries. Transparency International, the worldwide corruption watchdog, said in its latest report that Russia was now following the path of countries like Nigeria, Azerbaijan and Libya – rich in oil but soaked by graft.

In defense of bribery.

Why should bribes to state officials be illegal? Sure, the best situation is one where the state is tightly constrained, has little to offer in terms of privileges, and where consequently bribing officials is not done. The worst situation is one where the state is all powerful and state officials cannot be bribed, except at very high cost (in terms of expected penalties) or in convoluted ways. Between the best and the worst case, there is a second-best situation, where powerful state officials can be bribed to let the briber carry on his peaceful activities.

A FRENCH PRIVILEGE IS THREATENED

August is the month of vacation for the French, who enjoy an average of seven weeks of paid time off annually. But with unemployment at 10$ and travel costs rising, nearly 40$ of the French no longer take an extended trip away from home, a trend threatening the summer ritual that has symbolized the good life a la francaise.

“Holidays have gotten very expensive, and more and more employed people who used to go find that they can’t anymore,” said Jean Froidure, a tourism expert at the University of Toulouse. He called the trend “very worrisome. The vacation is a potent symbol in French society, a visible sign of a certain social standing. Not going on vacation can cause people to lose confidence not only in their own future, but also in French society in general.”

CAYMAN HEDGE FUND REGISTRATIONS’ RECORD FIRST HALF

A record number of new hedge funds was created in the Cayman Islands during the first six months of the year – despite an overall slowdown in the inflow of capital to hedge funds, according to leading offshore law firm, Walkers. With a 13% increase at the end of the first six months of 2005, as compared to the record-setting second half of 2004, the Cayman Islands continue to dominate the global hedge fund industry as the venue of choice. More than 80 percent of the world’s hedge funds are registered with the Cayman Islands Monetary Authority (CIMA), which reported that the first half of 2005 saw the total number of registered funds grow from 5,932 to 6,527.

The strengthening position in the Cayman Islands is in sharp contrast to a report earlier this month from Tremont Capital Management, a hedge fund data analysis and research firm. The report indicated that the second quarter of 2005 saw the smallest net quarterly inflow of assets into hedge funds generally since the fourth quarter of 2001. “It is clear that fund managers are under pressure to deliver results for their investors, but hedge funds are still an increasingly common part of most investment strategies,” Mark Lewis, a partner at Walkers and joint head of the firm’s investment funds team, noted.

CARIBBEAN PASSPORT DEADLINE WITHDRAWN AMID COMPLAINTS

The U.S. has withdrawn a proposed December deadline for implementing new rules that would require Americans to show passports when returning from the Caribbean. Caribbean tourism officials had complained that the measures would hurt the vital industry. Similar rules were also proposed for Canada, Mexico and Bermuda, and Caribbean officials also complained that Mexico and Canada would have gain an edge because Americans returning from those countries would not have to show passports until Dec. 31, 2006. Americans have needed only birth certificates or driver’s licenses for travel to and from the countries. The U.S. government had set a tentative December 31 deadline for the Caribbean, but is now reconsidering the date, said State Department spokesman Steve Pike.

TAXES

NEW TAX RULES WILL DRIVE US OUT OF LONDON, SAY BIG CITY FIRMS

Big City firms – including Goldman Sachs and Morgan Stanley – are understood to be threatening the Treasury that they will scale back their London operations in a row about the tax paid by employees from abroad. HM Revenue & Customs has moved to outlaw the use of dual contracts for those staff from overseas who also spend large parts of the year working outside the UK. This is part of a long-standing review of the rules covering so called “non-domiciled” residents, who live and work in Britain but pay a fraction of UK taxes.

The Chancellor announced a review of the tax rules governing non-doms in the 2003 Budget. However, little was done until earlier this year when the Revenue said it had “new legal opinion” that the use of dual contracts was illegal. The practice is a common wheeze of investment banks. A Norwegian, e.g., working for a U.S. bank in London, who visits clients outside the UK, has two employment contracts. One pays him in the UK, so that he pays UK tax. The other pays him offshore for the work done abroad, avoiding UK tax.

BANKER PLEADS GUILTY IN TAX SHELTER CASE

Federal prosecutors investigating abusive tax shelters struck a plea agreement with a banker in the first criminal charges brought in the case. Domenick DeGiorgio, the former managing director of HVB Group, pleaded guilty to four counts of conspiracy, wire fraud and tax evasion relating to his participation in selling a tax shelter known as BLIPS or Bond Lined Issue Premium Structure, created and marketed by KPMG. DeGiorgio said he knew the tax structure lacked economic justification. At his court appearance DeGiorgio described how BLIPS worked and the bank’s role in the tax shelter.

“An essential part of creating reported tax losses depended on the Bank purporting to provide a loan structured in a particular way,” he said. “The loan proposed by the BLIPS promoters was a sham because, among other things, as designed, no money ever left the bank, and because HVB never set aside any of its own money or procured funds from the banking market in order to fund any of these loans.” Mr. DeGiorgio continued, “BLIPS was falsely represented to be a three stage, seven year investment program when, in reality, it was a short-term transaction designed to create tax losses.”

The tax-evasion charge did not relate to DeGiorgio’s use of BLIPS, but his failure to report income he earned for promoting and participating in the tax shelters to the IRS or to his employer. The plea agreement which comes at a time when federal prosecutors are negotiating with KPMG and several of its former partners, raises the possibility that DeGiorgio may be cooperating with the government.

KPMG strikes back on ex-clients’ tax-shelter suits.

The accounting firm KPMG is quietly putting the boxing gloves back on. Even as KPMG is in discussions with federal prosecutors to settle a criminal investigation over its sale of what the I.R.S. says are bogus tax shelters, the firm has been taking on former clients who have sued it over those same shelters. Among those former clients are two wealthy sons of Robert C. McNair, a Houston oilman and the owner of the Houston Texans of the National Football League. The McNair brothers, R. Cary and D. Calhoun, sued KPMG in a state court in Houston in December 2003, contending that the firm in 1999 knowingly sold them bogus tax shelters.

Last month, KPMG filed an unusual related lawsuit in a state court in Houston against two Texas law firms and a Texas-based investment adviser that the McNair brothers used to evaluate the KPMG tax shelters that each bought. Such a get-tough approach with investors like the McNairs represents a “new directed strategy, a big change” for KPMG, a senior executive involved in the matter acknowledged.

In challenging investors now suing it, KPMG is hoping to prove that its former clients and their personal advisers were at least partly to blame for their woes with the I.R.S., because, according to KPMG, they were sophisticated individuals who knew the risks of buying aggressive tax shelters. A spokesman for KPMG, George Ledwith, said, “We look forward to resolving the civil litigation expeditiously, and with full and fair accountability.” But the senior executive involved put it more bluntly. KPMG, this person said, is “not going to be solely accountable in a transaction in which others should be also accountable. Look how many lawyers and accountants were also in this.”

EASTERN EUROPE’S FLAT TAX REVOLUTION

A new type of revolution has started in eastern Europe. Eight countries have embraced the flat tax system in a dramatic departure from Karl Marx’s 1848 manifesto, which propounded a “progressive” income tax. Everyone pays the same rate under the flat tax system. It eliminates the complexity of the 10,000 pages of tax law in Britain, the U.S. and Australia and allows governments to save on collection costs. In its purest form, a flat tax is applied to any income, whether personal or corporate. Tax credits and exemptions do not exist, making it nearly impossible for companies and high earners to evade taxes.

Countries that have adopted flat tax – Hungary is likely to do so soon – have enjoyed higher revenues and lower taxpayer and tax collector angst. Russia has increased revenues by 105% since adopting flat taxes in 2001, according to Stanford University economist Alvin Rabushka. The tax revenue growth in 2004 alone was 26.1% higher than 2003. But only three countries have over a decade’s worth of data: Estonia, Lithuania and Lativa, which switched in 1994-95. And these three also have the highest tax rates. Lithuania levies 33%, Lativa 25% and Estonia 24%.

The success or failure of flat taxes hinges on the rate of the tax. A rate set too low causes the government to lose revenue, since upwards of 90% of revenues come from the top 2% of earners. A rate set too high would choke workers and cause companies to leave the country. Proponents of a flat tax highlight the fact that many of the countries using the system have very low rates. Russia and Ukraine impose tax at 13%, Serbia 14%, and Georgia 12%, and it is possible to set up a system of “personal allowances” to aid lower income workers. Economists will be watching to see if Georgia gains a competitive advantage with its 13% corporate tax versus Poland’s 15% and Slovakia’s 19%.

TAX PROTESTER WHO DARED U.S. TO PROSECUTE HIM IS CONVICTED OF NOT FILING RETURNS

Larken Rose, who dared the Justice Department to indict him so he could prove to a jury that the tax laws are a fraud, was convicted on five counts of willfully failing to file tax returns. The jurors took less than 90 minutes to come to a decision. The verdicts are the latest setback for followers of Mr. Rose, two of whom are now serving long prison sentences. A handful of others face trial, including his wife, Tessa David. Despite these convictions, the small but growing number of Americans who say that the federal government is a criminal organization that illegally extracts taxes, appears undeterred.

Mr. Rose’s weeklong trial in Federal District Court in Philadelphia drew a larger crowd than the courtroom of Judge Michael M. Baylson could seat. One supporter, a minister, handed out brochures saying that God had condemned to hell congressmen and senators who voted for the tax laws as well as I.R.S. workers. Mr. Rose, 37, a medical transcriptionist from Jenkintown, Pennsylvania, is the leading promoter of the so-called 861 position, which holds that wages earned by Americans working for domestic companies are not taxable. Section 861 of the tax code specifies that wages are taxable. Mr. Rose’s claim is based on regulations, written by I.R.S. lawyers, explaining the code section. Judges, in detailed rulings since 1966, have held that the theory is “nonsensical” and frivolous. Despite this, Judge Baylson let Mr. Rose explain the theory.

Mr. Rose, who represented himself, delivered a fiery hourlong closing argument denouncing the federal government. He likened it to a bully wielding a baseball bat who demands that his victim say that two plus two equals five. “Wham!” Mr. Rose shouted, swinging his arms as if wielding a bat at someone who insists that the answer is four. He said the government “wants to oppress other people” and is “a throwback to medieval times.” And he said that starting in 1998 he stopped filing tax returns because that would “be lying and committing a fraud.” Mr. Rose argued for his acquittal because, he said, he sincerely believes he does not have to pay taxes. Floyd Miller, the prosecutor, belittled this claim and said that Mr. Rose could have taken the I.R.S. to civil court to test his theory. He said Mr. Rose just wanted to find an excuse to not pay his taxes.

The prosecutor said that “Mr. Rose selectively educated himself,” picking language from 18th-century court rulings, “but ignoring recent rulings by judges in three recent cases” in which Mr. Rose was involved. In two of those cases judges upheld injunctions against other promoters of the 861 position. In the third, Mr. Rose testified on behalf of a Texas businessman, Richard Simkanin, who stopped withholding taxes from his employees’ paychecks. An appeals court last week upheld the conviction and sentence of Mr. Simkanin. When the verdicts were read, Mr. Rose dropped his head into his hands. Later he waved off a request for comment.

Judge Baylson ordered Mr. Rose confined to his home until he is sentenced November 15. The maximum prison time he could face is five years. The judge said that if Mr. Rose filed his tax returns and arranged to start paying his taxes he would be lenient at sentencing, but that if he did not, the sentence would be harsh.

DEATH TAX? DOUBLE TAX? FOR MOST, IT IS NO TAX

When Congress comes back from its summer recess, one of the first things Senate Republicans will try to do, again, is kill the estate tax. Perhaps no other tax has so many passionate, persevering and politically organized opponents as the estate tax, or “death tax”, as they have branded it. As Michael J. Graetz and Ian Shapiro of Yale recount in Death by a Thousand Cuts, their entertaining account of the repeal movement, opponents of the estate tax have already achieved a remarkable political feat by building broad public support for abolishing a tax that currently affects only 2% of all estates. But repeal would be costly – more than $70 billion a year, once it was complete – and many of the populist arguments in favor of repeal are misleading. If estate or inheritance taxes were frozen at today’s levels, they would have almost no impact on family farmers and most small-business owners. And while opponents contend that the estate tax is a “double tax”, many of the earnings that are subject to it were never taxed in the first place.

The tax opponents, many of whom began as political neophytes more than 20 years ago, lead a powerful coalition of small-business owners, farmers, trade associations and corporate lobbying groups. Killing the estate tax is one of President Bush’s top priorities, and the House of Representatives has already passed a repeal measure four different times. But Senate Republicans, despite attempts to cut a deal with conservative Democrats before the summer recess, have been stalled on the issue. Unable to muster the 60 votes they need to overcome a Democratic filibuster, Senate leaders are now vowing to push for full repeal as soon as they come back in September.

Hoping to pressure Democrats from conservative farming states just before Congress adjourned, two business-backed advocacy groups spent about $500,000 on television ads last month in states including Montana, North Dakota, Arkansas and Louisiana. The ads focused on images of soldiers fighting on D-Day in World War II. “The I.R.S. hits this greatest generation with an unjust double tax, the death tax,” the narrator intoned in an ad aimed at North Dakota. Viewers are urged to “tell Kent Conrad,” the state’s Democratic senator, to “change his vote.”

But despite the populist rhetoric and oft-repeated horror stories about families being forced to sell their farms in order to pay estate taxes, the battle is over a very large amount of money held by a very small number of families. A report last month by the Congressional Budget Office found that in 2000 only 2% of all estates – about 52,000 – were subject to any estate tax. At that point, taxes were imposed only on estates worth $675,000 or more. The limit rose to $1.5 million in 2004, and if that limit had been in effect in 2000, only 13,771 estates – fewer than 1% – would have been subject to the tax. All but 740 of them would have had enough in liquid assets to cover estate tax liabilities, the office estimated. At the moment, taxes are imposed only on estates worth more than $1.5 million. Under Mr. Bush’s tax cut of 2001, the estate tax is set to shrink steadily over this decade and disappear in 2010. But the 2001 bill called for the estate tax to reappear in full force in 2011.

PANAMA’S SCHOLARLY TAX LAW JOURNAL

The difference between development and underdevelopment is not just measured in GDP, the state of various infrastructures or the percentages of the population engaged in the manufacturing or service sectors. It also matters whether ordinary people have been sufficiently exposed to libraries to have acquired proper library etiquette, and whether the better educated members of the population know what a world class library is and how to use it. The state of academic and professional publishing is another indication.

One of this Panama’s few scholarly journals was celebrated at a July 28 gathering of CPAs and tax attorneys at which this reporter was the only person wearing neither a suit nor a dress. The publication being feted on this night was the Gaceta Fiscal 2005, the second annual edition of a tax law journal whose principal editor, Carlos Urbina, works at Deloitte & Touche and whose staff is largely composed of graduate students in the CPA program a the Universidad Especializada de Contador Publico Autorizado. The journal, though about the rather narrow subject of tax law, encompasses the disciplines of both the legal and accounting professions, and gets into theoretical, historical and international perspectives as well as the nuts and bolts of current Panamanian tax law.

SUCCESS OF RUSSIA OFFER OF TAX AMNESTY TO BRING FUNDS BACK HOME IS NOT LIKELY

Last week, the administration approved a draft law on tax amnesty. Russian authorities hope that the law will help them return at least some of the money that has been seeping out to offshore companies for years. But those hopes look dim. It is still a lot more comfortable for Russian money in tax oases than at home.

In the report “On the Results of Socioeconomic Development in the Russian Federation in the First Half of 2005,” published on July 29, the Ministry of Economic Development and Trade notes that the outflow of private capital from Russia is increasing. In the first half of this year, $32 billion left the country, while only $24.4 billion entered it. The Economics Ministry makes the sad conclusion that “Economic subjects are not yet ready for the calls by the authorities to repatriate exported capital.”

ASSET PROTECTION

SHOULD YOU MOVE TO A FREE COUNTRY?

I get hordes of mail (though I am not sure how many emails in a horde) saying “Dear Fred, I too am sick of my job, the country, dumb-ass wars, the creeping mommy-state, and the hyper-regulation of practically everything, and I too want to live in paradise with a dusky maiden and sip funny drinks with lots of tequila in them and maybe die of cirrhosis but everybody has to anyway and it is more dignified than a car crash on the Fourteenth Street Bridge. How?” This is my nickel guide for people thinking about expatriation to Mexico. It may bore most people, but it is supposed to be useful instead of scintillating. (Utility is a new departure for this column.)

Mexico is not for everybody. Lots love it. Lots do not. As a very rough rule, there are two types of gringos here: Those who do not like Mexico but want good weather and cheap maids, and those who are adventurous, self-starting, and independent. Some of the latter are married couples, or at least couples. If you are really interested, spend a grand and come down for a week. (For how, see below.) Then you will not have to wonder. If you do not want to stay, call it a vacation. For what it’s worth, the country seems to appeal powerfully to those who want to be left the hell alone. The U.S. tries to control your every move, thought, and minute. Here in Mexico, unless you break a major law or do something awesomely stupid, the government is not much interested in you. This lack of interest is perhaps government’s greatest virtue.

To begin with, the Mexican government is perfectly gringo-friendly and, no, you will not be used for a piñata by the Federales. Crime is not much of a problem unless you go to bad neighborhoods or look filthy rich in Mexico City. You will not die of exotic diseases, or even mundane ones. Now, where in Mexico? In central Mexico, the only part I know well, you have several choices, depending on who and what you are.

Laboring as I have done in the vineyards of journalism, I know that foreign countries and war zones always sound more forbidding from outside than they do from within. I have watched friends fall in love with Mexico. Of course, my friends may not be quite normal, but maybe you are not either. If the darkening clouds over the U.S. bother you, the regulation and regimentation and surveillance, think about giving Messico a shot. A lot of people have, and they seem content – funny drinks, dusky maidens, empty beaches, and all.

BULK MAILER CONVICTED OF DATA THEFT SCAM

A Florida man has been convicted of stealing vast amounts of personal information from Acxiom, one of the world’s largest database companies, in order to inflate the value of his spamming firm. Scott Levine, 46, of Boca Raton, Florida, was last week found guilty of 120 counts of unauthorized access to data, two access device fraud charges and a single obstruction of justice offence, AP reports. The former head of defunct bulk mail outfit Snipermail.com was cleared of 14 conspiracy charges and money laundering at the end of a trial that lasted almost a month.

Prosecutors described the case as the “largest ever invasion and theft of personal data” ever tried. In court, Levine and Snipermail.com were accused of stealing a jaw-dropping 1.6 billion customer records containing details of the name, address and email of millions of Americans from Acxiom databases during a total of 137 hack attacks. The purloined data was used to inflate the value of Snipermail, a Boca Raton-based company controlled by Levine. There is no suggestion that the accused engaged in identity theft. Weak access control allowed Snipermail.com to illegally access swathes of information thanks to a business relationship between Acxicom and one of Snipermail’s clients.

AUSTRALIAN TAXATION OFFICE PROBES OFFSHORE CREDIT CARDS

The ATO is investigating more than 3600 people suspected of using offshore credit cards to return money from tax havens. The secret 3-year investigation has detected more than $10 million a day leaving Australia for the Channel Islands, Caribbean and other tax havens. The ATO identified 15,320 debit and credit cards issued from tax havens being used in Australia, with 11,548 found to be legitimately used by overseas tourists and students, as well as business transactions. Officials are investigating the remaining 3682 cards, which appear to have no legitimate purpose in Australia. It is part of a tax haven crackdown involving seven countries, targeting both promoters and participants.

Those under investigation include local employees of multinational companies who are paid through an international credit card account, as well as an internet business operator who drew down international profits using an offshore debit card. The information was mainly gathered from banks, credit card companies, and credit card insurers. ATO assistant commissioner of international relations Graham Whyte said offshore cards were actively marketed over the internet as tax avoidance vehicles.

OFFSHORE INCOME IN FOCUS AS U.K. TAX HAVEN DRIVE HOTS UP

UK authorities have stepped up their campaign targeting tax avoidance via offshore arrangements, as firms that have used aggressive tax-avoidance schemes to pay benefits and shares to employees are also now facing a crackdown. Experts have claimed a “heavy handed” approach adopted by Her Majesty’s Customs and Revenue on offshore accounts could alarm many people. And a recent House of Lords ruling has been branded the “latest blow” in a long line of government attacks on employee benefit trusts used for tax avoidance. HMCR’s offshore fraud projects team has written to a string of people with offshore accounts, giving them 30 days to reply with an explanation of why there is no tax liability arising from those accounts.

U.K. withholding taxpayers may also be forced to disclose information.

A crackdown by UK revenue and customs on UK resident savers with investments in the Isle of Man could force people opting to pay withholding tax to disclose their offshore savings details. The operation is going ahead in isolation from the European Savings Tax Directive (ESTD) and does not recognize the protection from information exchange afforded by withholding tax. The revenue has set up an Offshore Fraud Projects Team (OFPT), to identify individuals with funds in offshore financial centers.

More than 500 individuals have been identified as using offshore accounts to evade UK taxation. Letters have been sent out asking them to justify why they think no tax liability arises from their offshore accounts and reminds them that interest income on offshore accounts needs to be declared in the UK. The actions of the UK revenue are in conflict with the recently introduced ESTD. It allows UK resident individuals to keep account information from HM Revenue & Customs in exchange for payment of a withholding tax of 15% of their savings interest.

The UK government is using information gained from unknown sources to force offshore account holders to provide account details. If it continues this policy, it may render the option of paying withholding tax to protect personal savings information useless. Phillip Dearden, director at PKF, said, “When the directive first came around the idea was to provide information, so that tax authorities would get to know what people were earning. Some countries (Isle of Man among them) have managed to get a deal, whereby savers can retain information for a limited period. That doesn’t change people’s liability in the UK. If they were taxable in the UK, they are still taxable, they will just get credit for any withholding tax paid. The UK really want 40 per cent on interest plus penalties.” He added that, although the UK only receives withholding tax in bulk, they have been able to access information on savings account in offshore locations. “The interesting thing is that no one knows where the revenue got the information to attract these clients. We don’t know why they have chosen these particular clients. My personal opinion is that they got it from money laundering records.”

CREATIVE STOCK SCAMS – WHAT WE NOW KNOW

Stock scams have been around since, well, probably about five minutes after the invention of stocks. Over the years, their variety has been limited only by the collective ingenuity of the scammers. The classic scam of our time is the pump-and-dump, recently popularized on TV in The Sopranos, and in films such as Boiler Room. In the pump-and-dump, a semi-legit “brokerage office” quietly buys up a block of stock in a company that is selling cheap and has not moved for a while. Then a team of “agents” cold calls prospective buyers from one of the lists of investors that are readily available, and touts the stock as being just about to make an explosive move (based on “insider information” of course). The buyer is badgered mercilessly, while being told that he or she needs to get in on the action immediately, or miss out. When enough suckers have bought, driving up the price, the scammers sell out and close down their office, leaving their victims holding the bag when the stock’s value plunges back to its real worth. The Internet has made a variation of the pump-and-dump even easier.

Another fraud involves a creative use of coin tossing, while one of the latest and cleverest of these is the “wrong number” scam. No doubt this is not the last word in stock scams. Future advances in technology will surely spawn schemes yet undreamed of. But for now investors would be wise, as always, to be wary. The old saw – if it sounds too good to be true, it probably is – is as applicable as ever. And if you do think you have been contacted by a scammer, the SEC wants to hear from you. It asks investors “who receive these kinds of calls to let them know the company being touted, the exact date and time the call was received, the number called, and the number from which the call was made, if available. E-mail the information to Enforcement@sec.gov, or call the SEC at 1-800-SEC-0330.”

PRIVACY

BABIES CAUGHT UP IN “NO-FLY” CONFUSION

Infants have been stopped from boarding planes at airports throughout the U.S. because their names are the same as or similar to those of possible terrorists on the government’s “no-fly list”. It sounds like a joke, but it is not funny to parents who miss flights while scrambling to have babies’ passports and other documents faxed. Ingrid Sanden’s 1-year-old daughter was stopped in Phoenix before boarding a flight home to Washington at Thanksgiving. “I completely understand the war on terrorism, and I completely understand people wanting to be safe when they fly,” Sanden said. “But focusing the target a little bit is probably a better use of resources.”

The government’s lists of people who are either barred from flying or require extra scrutiny before being allowed to board airplanes grew markedly since the Sept. 11 attacks. Critics including the American Civil Liberties Union say the government does not provide enough information about the people on the lists, so innocent passengers can be caught up in the security sweep if they happen to have the same name as someone on the lists. That can happen even if the person happens to be an infant like Sanden’s daughter. (Children under 2 do not need tickets but Sanden purchased one for her daughter to ensure she had a seat.) “It was bizarre,” Sanden said. “I was hugely pregnant, and I was like, ‘We look really threatening.’”

Well-known people like Sen. Edward M. Kennedy, Rep. John Lewis, D-Gaeorgia, and David Nelson, who starred in the sitcom The Adventures of Ozzie and Harriet, also have been stopped at airports because their names match those on the lists. The government has sought to improve its process for checking passengers since the Sept. 11 attacks. The first attempt was scuttled because of fears the government would have access to too much personal information. A new version, called Secure Flight, is being crafted. But for now, airlines still have the duty to check passengers’ names against those supplied by the government.

The Joys of Flying

Homeland security is serious business. Preventing would-be terrorists from entering the country is one of the most important things that DHS must do. Yet managing a no-fly list should be a relatively simple and straightforward affair. Yet the evidence suggests that we cannot do something this simple right. And if we cannot do the simple things right, what are the prospects that we will be able to do the more difficult tasks of homeland security – like screening for weapons of mass destruction?

AIRPORT SCANNER UNDRESSES PASSENGERS

Human rights workers in Mexico are objecting to an airport security scanner that shows passengers “naked”. The scanner, at Mexico City’s international airport, is designed to help the police detect guns, drugs and hidden money. It consists of a cabin where x-ray images of passengers are taken from various angles and sent to a monitor. Mexico’s National Commission of Human Rights wants the scanner removed, but airport communications secretary Pedro Cerisola said that “If people want to travel, that is the condition.”

FLORIDA PEST WORKERS TO SPY FOR POLICE

One of Central Florida’s largest pest control companies has been recruited by police to help fight crime. Technicians from Truly Nolen Pest Control of America are being trained by local law enforcement to spot anything unusual as they visit customer’s homes. “Our vehicles really get into the bowels of the neighborhood and we’re back there where all the homes are, in the cul-de-sacs,” Truly Nolen spokesman Barry Murray said. “And part of being a good neighbor is looking out for one another.” The pest control workers will call police if they see something unusual during their stops, according to the report.

U.S. COURT OF APPEALS OVERTURNS EMAIL TAPPING CASE

The U.S. Court of Appeals for the First Circuit overturned a landmark ruling that it was not a violation of criminal wiretap laws for the provider of an email service to monitor the content of users’ incoming messages without their consent. Privacy groups had argued that, unless reversed, the ruling would have a serious effect on email privacy in the U.S.

The case was brought by the Justice Department against Bradford Councilman, a seller of rare and used books. His company, Interloc, of which he was vice-president, provided an email service to certain book dealer customers. However, Councilman had configured the mail processing software so that all incoming email sent to dealers from Interloc’s biggest competitor, Amazon.com, was copied and sent to Councilman’s mailbox as well as to the intended recipient’s.

To the great alarm of privacy activists, in July 2004 a three judge panel of the Massachusetts First Circuit Court of Appeals upheld the ruling of a lower court, concluding that there was no breach of the Act, because the tapping took place while the messages were stored on Councilman’s computer, rather than being continuously in motion, as is the case with traditional telephone calls. The indictment against Councilman was therefore dismissed. The U.S. Justice Department requested an appeal of the ruling before the entire First Circuit Court of Appeals, warning that the decision could allow for the monitoring of email and other electronic communications by ISPs or even criminals.

THE FCC’S INVITE TO BIG BROTHER

It is cheaper and easier than ever to make phone calls over the Internet, thanks to innovative gadgets like a Wi-Fi handset from ZyXel. With the ZyXel phone, you can make phone calls wherever there is an accessible Wi-Fi connection. But if the federal government has its way, you will be tracked wherever you go. Buried in the convoluted 91-page legalese of a recent FCC release on voice over Internet Protocol (VoIP) is a proposal with worrisome privacy implications. In it, the FCC suggests ways to “automatically identify the location” of all VoIP callers with handsets that connect to the telephone network.

The justification for those regulations sounds reasonable enough: to let emergency services identify an Internet caller’s location when he or she dials 911. It is part of an ongoing proceeding in which the FCC gave VoIP operators until October to route 911 calls to the geographically appropriate call center. It is easy enough to identify the location of office VoIP phones that stay in one spot. But the FCC is worried about the arrival of mobile VoIP phones such as ZyXel’s, as well as business travelers taking a Vonage-like wired handset on the road.

The FCC’s proposal raises a number of questions: Who will have access to the location data stored by VoIP handsets? What rules will govern police monitoring of your moment-to-moment location? Should the federal government really be in the business of compiling a database of every wireless or wired access point in the country? And once such a database is created, what is to stop the Feds from saying that computer users also must have their locations registered? The Internet is not the telephone network, and it is not wise to copy regulations crafted for analog phone networks and apply them to a packet-switched universe.

LAW

FREE SPEECH RESTRICTIONS PROPOSED IN U.K.

Trying to prevent rebellious impulses from taking hold is a difficult thing for a parent to do, let alone a government. So Britains Labour government is looking instead at clamping down on the people who inspire terrorists. Many of these people, it thinks, are foreign-born, and therefore the state ought to be able to deal with them, without the liberties that British citizens enjoy getting in the way. That was the impulse behind a plan launched by Charles Clarke, the home secretary (interior minister), to define what counts as unacceptable behavior by Muslims in Britain. It was also behind the 12-point plan that Tony Blair, the prime minister, announced on August 5th, while Mr. Clarke was on holiday, before he too headed for the beach.

Mr. Blair’s agenda is wide-ranging and vague. It includes speeding up the deportation of foreign-born radicals, extending a proposed ban on glorifying terrorism to cover people who justify or glorify terrorism anywhere in the world, holding pre-trial hearings to allow sensitive evidence to be admitted (these have already been dubbed “secret courts”), banning some Islamist organizations from Britain, and closing troublesome places of worship. That was more than enough to frighten libertarians. “Just having undergraduate debates about whether it is ever right to take up arms could get you into this,” reckons Shami Chakrabati, director of Liberty, a pressure group.

Part of this is politicking. But Mr. Blair’s insistence that “the rules of the game are changing”, plus a nagging suspicion that Britain’s legal system might be less well equipped to deal with Islamic extremism than those of other European countries, has left the government looking for ways to make Britain a bit more like France.

Britain has a long tradition of sheltering firebrands, which is reflected in the law. Victorian London was an excellent place for foreign radicals, like Karl Marx, to set up shop. Some have suggested that the flurry of announcements, coupled with a lack of detail on how they might work, is really aimed at scaring the firebrands away. If so, it might be working. Omar Bakri Mohammed, a Syrian-born imam who could be caught out by the new laws, recently left Britain to visit his mother. He told reporters he would be coming back (not to foment terror, but to have a heart operation on the state-run National Health Service). On August 12th, however – following Mr. Mohammed’s brief detention by the Lebanese authorities – the British government said that he would be barred from returning as his presence was not “conducive to the public good”.

STATES RACE TO RESTORE PRIVATE PROPERTY RIGHTS

Less than two months after five justices on the U.S. Supreme Court ruled that it was constitutional for local governments to seize private property for private development, Alabama became the first state in the nation to enact legislation designed to thwart the Court’s ruling for homeowners and small businesspeople in the state. Calling the Supreme Court’s Kelo decision “misguided” and a “threat to all property owners,” Governor Bob Riley signed a bill into law, which prohibits governments from using eminent domain to take privately owned property for “nongovernmental retail, office, commercial, residential or industrial development or use.” The legislation was passed unanimously by a special session of the Alabama legislature.

Upon signing the legislation Governor Riley stated, “A property rights revolt is sweeping the nation, and Alabama is leading it.” He is right. Legislative leaders in more than two dozen states and dozens of localities across the country have proposed legislation and/or state constitutional amendments designed to limit the eminent domain power of local governments granted by the Kelo decision. In Connecticut, currently one of six states that expressly permits the government to seize private property for economic development, Governor Jodi Rell recently asked cities and counties to resist condemnation of private property for private development until state legislators can better define how and when to use eminent domain. Rell has described the public outrage that has resulted from the Kelo decision as, “the 21st-century equivalent of the Boston Tea Party.” The Kelo decision came from Connecticut when the City of New London took the homes of long-time residents like Susette Kelo to clear the way for a business park.

California State Senator Tom McClintock pre-filed a proposed constitutional amendment to further limit eminent domain power. The amendment would “specifically prohibit the seizure of one person’s property for the private gain of another.” In Florida, where eminent domain controversies over waterfront development projects are about as common as an afternoon thunderstorm in summer months, Governor Jeb Bush recently approved House Speaker Allan Bense’s creation of a statewide committee to develop eminent domain guidelines. Other legislators have gotten even more creative in their response to the Kelo decision. E.g., Tennessee State Representative Frank Niceley is calling for the government to pay businesses and homeowners triple a property’s assessed price if it is condemned for economic development. And, both the U.S. House of Representatives and U.S. Senate are considering legislation to withhold federal funds if and when local governments use eminent domain for private development. As House Majority Leader Tom DeLay has rightly observed, in the wake of the Supreme Court decision, “There is no reason your city council cannot kick you out of your house and give it to a wealthier family.”

LONDON INQUIRY REFUTES POLICE IN THEIR KILLING OF A SUSPECT

An official investigation was reported Tuesday to have directly contradicted the police account of the killing of a young Brazilian man after the bombing attempts in London on July 21, including the assertion that he had been fleeing officers when he was shot. The man, Jean Charles de Menezes, a 27-year-old electrician, was shot several times in front of horrified passengers on July 22 on a subway train at Stockwell station, in South London. The killing came a day after four attackers failed to detonate bombs in what seemed to be a copy of the deadly bombings two weeks earlier, and it intensified an already emotional debate over the introduction of armed police units. At the time, the police said Mr. Menezes wore a bulky jacket on a hot day, began running from officers despite commands to halt, vaulted the ticket turnstile and ran stumbling onto the subway train.

Now, however, a news report on British television said an inquiry led by the Independent Police Complaints Commission had contradicted every one of those points. The report said that the officers had misidentified Mr. Menezes as one of the failed July 21 attackers and that he was killed even though he walked into the subway station wearing a light denim jacket, did not vault the turnstile and was sitting on the train when the officers moved in. Neither the police nor the Independent Police Complaints Commission heading the inquiry denied the news report, but both declined to comment substantively on it.

The killing brought alarm from opponents of arming police units and from Muslim groups who feared that officers were singling them out after the July 7 bombings, in which 52 civilians and 4 bombers were killed. Initial accounts quoting witnesses said the man had been pursued and shot as part of a “shoot to kill” policy intended to prevent potential bombers from detonating their explosives.

Can the U.K. afford to ignore civil liberties?

We are facing a real and present danger. The government, confronted with grave peril at the hands of a brutal and relentless attacker, must consider draconian measures to combat that threat. However, a newspaper argues that if such measures are enacted, the nation will have lost the essence of what it is fighting to preserve. This might easily be describing a chain of events from the last few days, but it is in fact recalling what happened 60 years ago when the Glasgow Herald took a controversial yet highly principled stance. The wartime government had proposed the suspension of the ancient legal tradition of habeas corpus in order to round up German, Italian and other “aliens” and send them to prison camps. However, Sir William Robison, editor at the time, argued that such a step was so grave, so retrograde, that in defeating the Nazis we risked becoming just like them.

Deep down, almost everyone admits to a suspicion that current proposals owe more to the tabloid demand for “something to be done” than to constructive ideas about engaging in the issues. The multi-point plan put forward by the government has shifted from the use of treason laws through to the latest plans for deportation. The latter policy had already caused deep suspicion given the stark contrast with the practice of “rendition” used by the U.S. and other Western countries to pass suspects through countries where they could face treatment which would be illegal at home.

To look back at the common sense of the Glasgow Herald more than 60 years ago, we recognized that saving democracy operated at both ends. We protested, “Clearly many thousands of people were interned whom the government knew to be not only friendly toward this country but also bitterly opposed to our enemies. There were others who had spent most of their Leven in this country and who owed their internment solely to an accident of nationality: Most of those were as British in outlook as Britannia herself.” How many ordinary people being targeted by the new laws are as British in outlook as Britannia herself?

BERMUDA LAUNCHES ANTI-MONEY LAUNDERING WEBSITE

Bermuda’s National Anti-Money Laundering Committee has launched a website detailing the initiatives being taken by government to combat and reduce the incidence of money laundering in the jurisdiction. The website contains information on current anti-money laundering legislation, such as the Anti-Terrorism Financial and Other Measures Act 2004, Proceeds of Crime Money Laundering Regulations 1998, and Proceeds of Crime Act 1997. The website also contains the Caribbean Financial Action Task Force (CFATF) Country Situation Report on Bermuda, and links to other relevant bodies such as the Bermuda Monetary Authority and government departments.

OPINION & ANALYSIS

9/11 REVISIONISM, REVISITED – THE MYSTERY OF “ABLE DANGER”

In January of this year, Rep. Curt Weldon (R-Pennsylvania) made a speech to the House of Representatives – a speech which no one took notice of, and which hardly anyone heard, except maybe inveterate C-SPAN watchers – in which he made a number of extraordinary assertions:

“Mr. Speaker, I rise because information has come to my attention over the past several months that is very disturbing. I have learned that, in fact, one of our Federal agencies had, in fact, identified the major New York cell of Mohamed Atta prior to 9/11; and I have learned, Mr. Speaker, that in September of 2000, that Federal agency actually was prepared to bring the FBI in and prepared to work with the FBI to take down the cell that Mohamed Atta was involved in in New York City, along with two of the other terrorists.

“I have also learned, Mr. Speaker, that when that recommendation was discussed within that Federal agency, the lawyers in the administration at that time said, you cannot pursue contact with the FBI against that cell. Mohamed Atta is in the U.S. on a green card, and we are fearful of the fallout from the Waco incident. So we did not allow that Federal agency to proceed.”

Something about this does not quite ring true. None of the hijackers had a green card. Most came in on tourist visas: some had made easily detectable false statements on their visa applications, and might have been legally deported. And what does Waco have to do with anything? However, let us pass over that, for the moment, and concentrate on Rep. Weldon’s further remarks. He avers that two weeks after the Sept. 11 attacks, his “friends” at the Army’s Information Dominance Center – “in cooperation with special ops” – brought him a chart that had been created by a secret military unit known as “Able Danger”: using “data-mining” techniques, this top secret military intelligence unit had identified Mohammed Atta and three of the hijackers as being part of an Al Qaeda cell in the U.S. This chart, with a visa photo of Mohammed Atta at its center, was created a year before 9/11. Weldon says he took the chart to Stephen Hadley, at the National Security Council, who said he had never seen any such chart, and that he would bring it to “the man”, i.e., the President.

Now it is not all that surprising that neither Hadley, nor the President, had any inkling of Operation “Able Danger”. Wha is truly startling, however, is that when Weldon talked to those who made the chart, he discovered that not only had they identified the New York cell of Mohammed Atta and two of the other terrorists, but also that a recommendation had been made to take out the cell – and it had been vetoed. By whom – and why? As Weldon put it in his speech, “That is a question that needs to be answered, Mr. Speaker.”

The list of “mistakes”, glitches, and tales of staggering incompetence that preceded the worst “intelligence failure” since a certain wooden horse was brought behind the walls of Troy, is getting rather suspiciously long. Here is another: The National Security Agency intercepted two messages on the eve of the Sept. 11 attacks, and the Pentagon warning that something was going to happen the next day, but the messages were not translated until Sept. 12. The Arabic-language messages said, “The match is about to begin” and “Tomorrow is zero hour”.

As we approach the fourth anniversary of the 9/11 terrorist attacks, the official story of what happened that day, and how it happened, is beginning to unravel in a spectacular manner. The official version is that the 19 conspirators, acting alone and without the foreknowledge or even the suspicion of any outside agency, pulled off a complex series of operations involving at least four separate airplanes, all carried out within minutes of each other, pirouetting in the sky in perfect synchronicity before barreling down on their targets nearly simultaneously. This fiery moment was the climax of years – as many as 5 years – of plotting, preparations, and a largely subterranean existence lived by the conspirators, until they emerged, on that fateful day, like avenging angels of darkness coming down from the sky.

We are supposed to believe that, if only we had passed the PATRIOT Act before 9/11, and subjected ourselves to a regime of total surveillance, giving up such remnants of our civil liberties as still existed, we might have escaped the wiles of Bin Laden and his fellow Islamist supermen. Now, according to this all-too-familiar refrain, we will just have to get used to having our email read, our phones tapped, and our every movement kept under close surveillance by our beneficent and all-knowing government. The only alternative is living at the mercy of terrorists. As we are beginning to learn, however, that is lie, and a rather self-serving one to boot. It was not the lack of information, or an inability to detect the death cultists in our midst, that prevented us from stopping the plot dead in its tracks. Rather, it was a persistent obstructionism coming from some quarters.

I can hear the skeptics now: It’s a “conspiracy theory”! Yikes! But what explanation for how and why 9/11 happened is not a “conspiracy theory”, after all? Atta & Co. certainly did not advertise their plans. The question is, will we accept the Official Conspiracy Theory, or an alternative one that comports with all the known facts?

Officer says military blocked sharing of files on terrorists.

A military intelligence team repeatedly contacted the F.B.I. in 2000 to warn about the existence of an American-based terrorist cell that included the ringleader of the Sept. 11 attacks, according to a veteran Army intelligence officer who said he had now decided to risk his career by discussing the information publicly. The officer, Lt. Col. Anthony Shaffer, said military lawyers later blocked the team from sharing any of its information with the bureau. Colonel Shaffer said in an interview that the small, highly classified intelligence program, known as Able Danger, had identified the terrorist ringleader, Mohamed Atta, and three other future hijackers by name by mid-2000, and tried to arrange a meeting that summer with agents of the Washington field office of the F.B.I. to share its information. But he said military lawyers forced members of the intelligence program to cancel three scheduled meetings with the F.B.I. at the last minute, which left the bureau without information that Colonel Shaffer said might have led to Mr. Atta and the other terrorists while the Sept. 11 attacks were still being planned.

State Department says it warned about bin Laden in 1996.

State Department analysts warned the Clinton administration in July 1996 that Osama bin Laden’s move to Afghanistan would give him an even more dangerous haven as he sought to expand radical Islam “well beyond the Middle East”, but the government chose not to deter the move, newly declassified documents show. In what would prove a prescient warning, the State Department intelligence analysts said in a top-secret assessment on Mr. bin Laden that summer that “his prolonged stay in Afghanistan – where hundreds of ‘Arab mujahedeen’ receive terrorist training and key extremist leaders often congregate – could prove more dangerous to U.S. interests in the long run than his three-year liaison with Khartoum,” in Sudan.

IT IS NOT ONLY IRAQ THAT IS OCCUPIED. AMERICA IS TOO

It has quickly become clear that Iraq is not a liberated country, but an occupied country. We became familiar with that term during the second world war. We talked of German-occupied France, German-occupied Europe. And after the war we spoke of Soviet-occupied Hungary, Czechoslovakia, eastern Europe. It was the Nazis, the Soviets, who occupied countries. The United States liberated them from occupation.

Now we are the occupiers. True, we liberated Iraq from Saddam Hussein, but not from us. Just as in 1898 we liberated Cuba from Spain, but not from us. Spanish tyranny was overthrown, but the U.S. established a military base in Cuba, as we are doing in Iraq. U.S. corporations moved into Cuba, just as Bechtel and Halliburton and the oil corporations are moving into Iraq. The U.S. framed and imposed, with support from local accomplices, the constitution that would govern Cuba, just as it has drawn up, with help from local political groups, a constitution for Iraq. Not a liberation. An occupation.

But more ominous, perhaps, than the occupation of Iraq is the occupation of the U.S. I wake up in the morning, read the newspaper, and feel that we are an occupied country, that some alien group has taken over. I wake up thinking: the US is in the grip of a president surrounded by thugs in suits who care nothing about human life abroad or here, who care nothing about freedom abroad or here, who care nothing about what happens to the earth, the water or the air, or what kind of world will be inherited by our children and grandchildren. The “war on terrorism” is not only a war on innocent people in other countries, it is a war on the people of the U.S. … on our liberties, on our standard of living. The country’s wealth is being stolen from the people and handed over to the super-rich. The lives of the young are being stolen.

Someone tell the President the war is over.

Like the Japanese soldier marooned on an island for years after V-J Day, President Bush may be the last person in the country to learn that for Americans, if not Iraqis, the war in Iraq is over. “We will stay the course,” he insistently tells us from his Texas ranch. What do you mean we, white man?

A president cannot stay the course when his own citizens (let alone his own allies) will not stay with him. The approval rate for Mr. Bush’s handling of Iraq plunged to 34% in last weekend’s Newsweek poll – a match for the 32% that approved L.B.J.’s handling of Vietnam in early March 1968. (The two presidents’ overall approval ratings have also converged: 41% for Johnson then, 42% for Bush now.) On March 31, 1968, as L.B.J.’s ratings plummeted further, he announced he would not seek re-election, commencing our long extrication from that quagmire. But our current Texas president has even outdone his predecessor. Mr. Bush has lost not only the country but also his army. Neither bonuses nor fudged standards nor the faking of high school diplomas has solved the recruitment shortfall. Now Jake Tapper of ABC News reports that the armed forces are so eager for bodies they will flout “don’t ask, don’t tell” and hang on to gay soldiers who tell, even if they tell the press.

The president’s cable cadre is in disarray as well. At Fox News Bill O’Reilly is trashing Donald Rumsfeld for his incompetence, and Ann Coulter is chiding Mr. O’Reilly for being a defeatist. In an emblematic gesture akin to waving a white flag, Robert Novak walked off a CNN set and possibly out of a job rather than answer questions about his role in smearing the man who helped expose the administration’s prewar inflation of Saddam W.M.D.’s. (On this sinking ship, it is hard to know which rat to root for.) As if the right-wing pundit crackup is not unsettling enough, Mr. Bush’s top war strategists, starting with Mr. Rumsfeld and Gen. Richard Myers, have of late tried to rebrand the war in Iraq as what the defense secretary calls “a global struggle against violent extremism.” A struggle is what you have with your landlord. When the war’s über-managers start using euphemisms for a conflict this lethal, it is a clear sign that the battle to keep the Iraq war afloat with the American public is lost.

“INORDINATE FEAR” REVISITED

During the Cold War, some of the greatest believers in communism were anti-communists. When in 1957 the Soviet ruler, Nikita Khrushchev, boasted, “We will bury you,” he was believed by many of the same Americans who usually insisted that communism could never work. That same year, the Soviets launched the first satellite into outer space, Sputnik I, and Americans panicked. Obviously Soviet education and science were far superior to our own. We had a lot of catching up to do! In due course we calmed down. Communism was a shabby system, based on basic errors about human nature, and all we really had to do was wait for it to collapse. Sometimes I think it lasted as long as it did chiefly because the West believed in it. We overestimated its efficiency, its military power, and its popular appeal around the world. President Jimmy Carter later deprecated our “inordinate fear of communism.” I was one of many conservative pundits who mocked him for this at the time, but he was quite right. You could hardly hate communism too much, but we certainly feared it too much.

Osama bin Laden can match Khrushchev in bold bluster, but it is highly likely that he has his own frustrations. Only a small fraction of the world’s Muslims are responding to his summons to sacrifice and martyrdom. After a spectacular debut on the global stage – his Sputnik I, you might say - his movement looks pretty feeble. Some of his agents are being arrested and have started singing to the London police. Not exactly an airtight operation of iron-willed fanatics. We understandably began by overestimating our enemies again, and Bush has tried hard to sustain the apocalyptic note. But there comes a time when it sinks in, however gradually, that most of us are in no danger – and never were. We have spent billions on everything from airport security to duct tape. We are still wasting other billions on the space program that originated in our previous inordinate fear.

TERRORISM NOTHING NEW TO AMERICA

John Brown. Leon Czolgosz. Bernardine Dohrn. These are the faces of American terrorism – as much as Timothy McVeigh, Eric Rudolph, or Osama bin Laden. All of them are reminders that terrorism is as old as America itself, having manifested itself in many different ways and for many different causes. These individuals share space with Ku Klux Klan robes, anarchist bombs and grizzly reminders of the September 11, 2001, attacks at “The Enemy Within: Terror in America”, an exhibit at the International Spy Museum in Washington, D.C. “We want people to come away with an understanding that this is not the first time that Americans have felt terror; that there were other periods in American history when groups either from within or outside the country used terrorism against us,” says Peter Earnest, the museum’s executive director.

The exhibit brings these characters to life. Brown led the militant abolitionist raid on the Harpers Ferry Arsenal in October 1859. Czolgosz, an anarchist, assassinated President William McKinley in 1901. And Dohrn belonged to the Weather Underground, which carried out a bombing campaign in the 1970s in pursuit of an anti-capitalist and anti-war agenda. Their rationalizations are as interesting as the characterizations. In an exclusive taped interview with the museum, Dohrn (who surrendered after years in hiding) talks about bomb-making, life on the run, and why she and her comrades should not be called terrorists – because they targeted buildings, rather than people. As for Brown, convicted of treason and executed two months after the Harpers Ferry raid, Earnest says he is “a classic case” of the debate about defining terrorism: “One man’s patriot is another man’s terrorist.”

Earnest says the museum, which is independent and privately run, has no political agenda. The exhibit’s introduction cites the government’s definition of terrorism – “the unlawful use of force or violence against persons or property to intimidate or coerce a government, the civilian population or any segment thereof, in furtherance of political or social objectives” – and says its aim is to address how and when Americans felt under threat, and from whom.

Perhaps the timeliest reminder of U.S. terror, on the heels of Edgar Ray Killen’s recent conviction for his role in the 1964 killing of three civil rights workers, deals with the Ku Klux Klan. “Would blacks have considered the Klan a form of state terrorism in places where the local sheriff and others were involved? Absolutely,” says Earnest, explaining why it forms a large part of the exhibit. Whatever one’s political take, Earnest says the exhibit not only deals with how Americans have reacted to terrorism, but also “in some cases, [how they have] overreacted to the threat of terrorism.”

FROM REPUBLIC TO HEGEMON

I recently watched the old (I guess 1968 counts as old) British movie The Charge of the Light Brigade, a bitterly satirical look back at the British role in the Crimean War more than a century earlier, when Wellington and Waterloo were still names to conjure with. The film was probably meant to comment on the Vietnam war, like everything else in 1968. A couple of days earlier I had had a message from a military officer who often writes me in friendly disagreement. Given my views on the Iraq war, he asked me what I proposed to do if certain unpleasant developments should occur overseas. What if, for example, mainland China should attack Taiwan? Or if North Korea should use nuclear weapons against Japan?

Tough questions, but let us back up a bit. I think we should give due praise to the Buchanan and Lincoln administrations for keeping the U.S. out of the Crimean quagmire. Not that they were under much pressure to intervene, what with events in this country at the time. But credit where credit is due, I always say. Just about any recent president would have jumped in with both feet.

Now we are at war in the Middle East (again), and I am asked how I would respond to hypothetical, but by no means impossible, crises in Asia. I have before me a tiny globe, which comes in handy when I need to know about where Madagascar or Malaysia is, and it reminds me that when the American Republic was founded, Americans were much concerned about foreign entanglements on a small portion of the earth: Europe, and chiefly three powers in western Europe, England, France, and Spain. None of these erstwhile superpowers looms very large today, but the U.S. has since then managed to keep itself busy abroad, all the way to the Far East.

Quite a change over the years for a modest republic that once sought an amicable divorce from Europe. By 1940 Roosevelt was stigmatizing the philosophy of the Founding Fathers, and Ernest Hemingway was quoting John Donne’s homiletic “No man is an island” as if it were a guiding principle of foreign policy. Today, it seems, every man is a tripwire, demanding U.S. intervention. It is odd to recall that President Bush, during the 2000 campaign, spoke sensibly about the limitations of what government can achieve, both at home and abroad. He expressed special scorn for the idea, chiefly associated with Democratic foreign policy in those days, that American political habits can be transplanted to other countries. So it is disconcerting to find Bush adopting “democracy” as the universal yardstick of progress. But today’s Democrats are tomorrow’s Republicans, and today’s Republicans are outdoing yesterday’s Democrats in carrying on Roosevelt’s dual legacy of domestic and foreign intervention.

Neoconservatives are touting these old ideas as a new inspiration of their own, but there is no need to dignify bad habits as a theory. Power tends to expand until something stops it, and so far nothing has stopped the expansion of the U.S. Government from modest republic to global hegemon. The U.S. Constitution might almost as well be an officially classified document. Not much need for conspiracy theories when nearly all the mischief is committed right out in the open, if anybody cares to pay attention. Just read what the Founding Fathers said, then watch what our politicians do, and you will get the general picture.