Offshore News Digest for Week of August 22, 2005

GLOBAL BUSINESS

SITTING PRETTY IN SHANGHAI

Frank Rexach, who runs the Asia operations for Haworth Furniture, likes to keep things light and mobile. Rexach does not have his own office at his home base in Shanghai. He simply uses whatever cubicle is available and brings his computer and files in a piece of rolling luggage. Fluent in Mandarin, Rexach likes to chat with everybody on the staff. “As a leader, you have to be seen as locally integrated in your local organization. They really look to see if you are on an expat assignment and just enjoying the perks,” he explains. “Some staff call me an egg – white on the outside, yellow on the inside.”

Unconventional approaches are working well for Rexach – and especially well for Haworth, a $1.4 billion Holland, Michigan-based maker of office furniture. The family-owned company has seen its Middle Kingdom sales grow 50% annually for the past three years. What is particularly impressive is that Haworth is beating many Chinese manufacturers at their own game – and doing it on the locals’ turf. For the past five years, U.S. furniture makers have been under siege from Chinese imports. Hundreds of U.S. furniture factories have shut, unable to compete with high-quality Chinese-made furniture costing 30% to 40% less. Few U.S. furniture makers have even contemplated taking the fight to China by manufacturing there and selling to the domestic market.

Haworth’s secret? In short, recognizing that the China market is fast becoming just as sophisticated and demanding as those of the U.S. and Europe. As in the West, corporations in China are growing more concerned about keeping and motivating talent. As a result, they are willing to pay more for quality and extra service, rather than make decisions only on price. Haworth was not always so successful in China. Four years ago, its Shanghai factory was operating at 20% capacity. The turnaround happened after Haworth brought its more modern business model to China.

China syndrome.

Six years into a Chinese joint venture, Michael Allen was ready to shut down his fledgling stereo equipment company, Jolida. His Shanghai-made amplifiers and CD players were burning out and breaking down, paint bubbled and peeled, volume knobs made buzzing sounds. Overwhelmed by returns of faulty products, in 2001 Allen was losing money, being hounded by creditors, struggling to make payroll and fending off his wife, who insisted he should flip the “off” switch on his crazy hi-fi venture and find something else to do for a living. “It seemed to me there was no way out,” recalls Allen, who had to sell a small apartment building to keep Jolida afloat. “I just wanted to curl up and make it all go away.”

Instead he spent four hard years fixing problems and learning a painful lesson. “Americans think they’re just going to start sending orders to some factory in China and bing-bang start getting whatever they want for 80% less,” says Allen, chief executive of Jolida in Annapolis Junction, Maryland. “It doesn’t work that way. You’re dealing with people who grew up in a communist system. Quality control? There is none.”

The Scots go a-hunting.

Royal Bank of Scotland is leading a $3.1 billion investment to take a minority stake in Bank of China. The deal is risky given the parlous state of the country’s banking system. But the pitfalls may be exaggerated.

Foreign money pours in, but corporate governance lacking in China’s banks.

Foreign investors are making headlines by pouring huge sums of money into China’s largest banks, but it remains to be seen whether it will help improve corporate governance in the sector, analysts say. “It really takes a long time to make fundamental change,” said May Yan, vice president and senior analyst with ratings agency Moody’s Investors. “Whether the banks eventually will be on the right track and will improve and become commercially viable entities – that is something that we need to wait and see about,” she said.

Royal Bank of Scotland Group announced last week it is leading a consortium that will spend £1.7 billion ($3 billion) to buy a 10% stake in Bank of China, the nation’s second largest lender. The deal is the third in as many months between foreign and major state-owned banks. The multi-billion-dollar acquisitions are set to continue, as the Chinese government pushes local banks to secure foreign strategic investors ahead of planned listings in coming years.

But lingering over past and future deals are the problems China’s big state-run banks have long had with corporate governance – and with senior executives running afoul of the law. Only days before Royal Bank of Scotland unveiled its deal, the former chief executive of Bank of China’s Hong Kong operation was handed a suspended death sentence for graft. “Eventually they need to improve their profitability to be able to absorb any economic, macro changes and, fundamentally, they need to improve their corporate governance,” Yan said. “But if you’re talking about a bank with 14,000 branches around the country, it’s not easy to implement.” Despite all the risks, no major player in the global banking business denies the need to have a significant presence in China.

CANADA’S TRADE SURPLUS WIDENS

Canada’s trade surplus widened more than expected in June after exports rose in all but one categories. Rising exports suggest companies have coped with the Canadian dollar’s 30% appreciation over the past three years, in line with Bank of Canada Governor David Dodge’s July assessment. As Canadian wares become more expensive abroad, exporters have to find ways to remain competitive, such as increasing their output per worker or producing higher quality goods, Dodge said.

CUBA AND PANAMA RESTORE DIPLOMATIC RELATIONS

Cuba and Panama have restored diplomatic ties a year after they were broken off when Panama’s former president pardoned four Cuban exiles. The men had been accused of attempting to assassinate Cuban President Fidel Castro five years ago. They included Luis Posada Carriles, branded by Cuba as the hemisphere’s worst terrorist. The states restored ties at a ceremony in the Cuban capital attended by Mr Castro and Panama’s current president.

FREE MARKET REFORMS LEAD TO RECORD GROWTH IN AUSTRALIA

We should feel sorry for supporters of higher taxes and more spending. Every country that tries that approach – like Japan, Germany, and France – endures economic stagnation. Nations that lower the burden of government, by contrast, enjoy more prosperity. Ireland and Slovakia are obvious examples, but an article explains that Australia is booming thanks to tax cuts, deregulation, and other market-based policies. Interestingly, many of the free market reforms were implemented by the “left-wing” Labor Party in the 1980s and 1990s.

QUELLING YOUR INNER JERK

Tough, blunt, sure-handed and successful – that is how the chief executive saw himself in his role at a famed financial services giant (anonymous here). Until June. Then Marshall Goldsmith, a Zenlike, gentle soul who makes $1.5 million a year coaching some of the most powerful senior executives in the world, stepped in with the shocking truth. The boss’s dozen lieutenants do indeed see him as “smart, gifted and dynamic,” Goldsmith told him, citing comments gleaned in confidential interviews. But they nonetheless feel their boss is “disrespectful, intimidating and arrogant,” Goldsmith said in soft, soothing tones. His client was wounded. “I’m an asshole,” he blurted out. “This is like a knife in the gut.”

Goldsmith is a rock star in the inward-looking, sometimes backbiting world of executive coaching. In the past 28 years he has counseled the brass at Boeing, Northrop Grumman, General Mills, Toyota and elsewhere. He culls comments from his clients’ colleagues to let the bosses “find out how other people perceive them,” aiming to “develop a tightly structured program of more acceptable behavior,” he says.

Business is booming in this post-Enron era, when corporate chieftains are prone to atone and tone down. In the 1990s chief executives were capitalism’s heroes, celebrated for a can-do, stab-‘em-in-the-chest style. Now they are encouraged – by experts who can charge upwards of $10,000 a day – to drop that pose, rev down and look inside themselves for traits they need to change. A key component of this pricey navel-gazing is peer pressure, in the form of “360-degree” reviews with the underlings. They are conducted anonymously by the coach and are aimed at a peculiar pursuit: trashing the boss. It is enough to stir paranoia in any thin-skinned, insecure leader (which arguably covers most of corporate America).

“CEOs are waking up to the new reality that they can’t be SOBs and get away with it,” says Goldsmith, 56, an inveterate optimist and self-promoter who meditates, believes in the curative spirit of Buddhism and has worked with 40 or so chief executives in the past five years. But the brass hats are “so damned busy and always facing a crisis,” he says, that they need an outsider like him to deliver a needed smack upside the head.

WELFARE FOR NEW ZEALAND’S “WEALTHY”

Give her her due, Helen Clark is a wily old fox. First the interest-free student loan sweetener to woo the youngsters and their parents. Now the benefits boost dressed up as tax relief, designed to spike National’s tax cuts. However, it was Labour’s pre-emptive strike last Friday that is more interesting. Tax rates have gone up and down over the years, reaching giddy heights in the Muldoon era, then dropping to lows, also under National, before spiking up again under Labour. Now, despite having more revenue than it knows what to do with, plus an additional unexpected windfall when the books were opened last week, Labour does not dare risk being seen deserting its political ideology of soaking the rich to shower others with their hard-earned money.

The problem though, is that many middle-income New Zealanders are now becoming victims of taxes introduced originally to penalize the affluent for Labour’s political gain, as the tax brackets have not been adjusted for more than two terms of government, and will not be, by Labour, for another term. So to prevent higher-income tradesmen, teachers and police officers from defecting to Don Brash’s philosophy of lower taxes, Labour announced an expansion of its Working for Families package last week. The result will be that the welfare programme will now cover 75% of all New Zealand families with children.

While the boost in cash will be welcomed by those struggling from week to week, the thought of families with just two children and an income of $85,000 becoming beneficiaries is a little scary. When this government came to power, those earning more than $60,000 were classed by Labour as wealthy parasites who deserved to be punished with an increase in the top tax rate from 33% to 39%. Now Labour sees those same people as being so hard up they need State benefit. Would it not be easier to admit to an error, wind back the tax rates, push up the income levels at which the higher rates apply and let people keep a little more of what they earn?

BRANDING THE ISLE OF MAN AS A BUYER

The Isle of Man is the best kept secret of the century according to a leading marketing expert. Professor Malcolm McDonald from Cranfield University made the statement, prior to visiting the Island next month to address Manx business leaders. He will be giving advice to companies on their marketing strategies, but said that the Island’s branding strategy was crucial to protect its special status. He believes it should concentrate on promoting only what it wants the Island to stand for, and become a buyer not a seller. “The question has to be, does the Isle of Man really want to reveal its secrets to the world and its wife – I would say, no it doesn’t. It’s obviously something very special, with a lengthy history and lots of talent. It must decide precisely what it wants the Island to stand for and understand the target market to whom one wants to relate that asset base. The last thing anyone wants, is to be all things to all people.”

He added, “All I would say is that the Isle of Man, must be one of the best kept secrets of the century, or past 10 centuries. I would be very surprised if 75 per cent of the UK population had the foggiest, where it was. It should stand for what you want it to stand for. It should get itself into a position where it is buying not selling. This means determining who it is going to deal with and the terms it is going to deal with them on.”

He believes that the Island should look to the successful towns and cities in the UK as a branding benchmark, rather than large countries. “Places like Singapore have done it brilliantly, but most countries are on a different Rictor Scale to the Isle of Man. I would say that you are only talking about a place the size of a smallish British town. If you look at the big success stories, the City of London has a very clear image as the epicenter of financial services. Even somewhere like Milton Keynes – it has been a fantastic success, with lots of inward investment and many people moving to live there.”

His talk, entitled “finding and developing the right customers” is aimed at helping Island businesses succeed in the international market. He said the principles of marketing apply to all companies, regardless of geographical location or size, but he does have some advice for Manx firms.

“CHILLING EXPOSE” DIVES INTO MURKY WATERS

William Brittain-Catlin, a former investigator for Kroll Associates Inc., nurses a dark vision of capitalism. Capital, as he describes it, is a protean beast, a “wild animal let out of a cage.” The nation state has become “a servant of stateless capital,” its citizens suppressed by the “controls of bourgeois capitalist society, in particular the work ethic.” Never mind his hyperventilating style. Offshore: The Dark Side of the Global Economy is a convincing description of a perverse world in which capitalism is a giant shell game, where mainstream multinationals shunt assets and liabilities around the globe to evade taxes, hide debt and buy political favor. The fall guys for this scam are shareholders, taxpayers and society at large.

Offshore has many strengths, offering a solid primer on how capital slithers in and out of brass-plate subsidiaries as companies ranging from GE and Wal-Mart seek to lower their taxes. The author chooses to bring offshore finance into focus through the lens of the Cayman Islands. In lean prose, the author captures the convoluted story of U.S. energy trader Enron in 20 pages and boils the fraud at Italian food company Parmalat down to nine. The summations create crisp snapshots on how multinationals funnel profits offshore even as they milk governments onshore.

Offshore blames the mess on Western philosophy. Brittain-Catlin traces the roots to Immanuel Kant, who argued that the individual had absolute moral autonomy – a vital bulwark against the utilitarianism of the age. Along the way, though, this freedom was subverted in the struggle against absolutism, the author argues. Political freedom suppressed individual rights, forcing us to conform with bourgeois mores. “What was billed as freedom in fact turns out to be a pretext for coercion,” he says. It does not take too much imagination to draw a line from the age-old urge for autonomy to a modern German’s desire to protect himself from punitive taxation by dragging a suitcase full of cash to a bank in Luxembourg. Unfortunately, Brittain-Catlin muddies the argument with a sometimes-tortuous line of reasoning that leads from Greek mythology to the hypocrisy of the European bourgeoisie.

Equally irritating is the author’s failure to offer any solution. He challenges neocons and reformists alike, yet offers no answers of his own. One thing is clear: Brittain-Catlin rejects the argument that there is a legitimate use for offshore finance.

Book review: delving into dirty cash.

Nick Kochan is an investigative journalist and financial expert who, in The Washing Machine: How Money and Terrorist Financing Soils Us, gives a history and analysis of the global money-laundering problem. The narrative is colorful and occasionally cynical, particularly about the UK regime. Kochan looks at the global threat from money laundering which, according to the IMF, accounts for 2%-5% of the world’s GDP. This book has its origins in the events of 9/11 when “the world at large was alerted to the importance of the money trail left by terrorists.” [Ed: through New York, London, and other world financial power money centers, actually.]

Kochan identifies four “key groups” of those who close their eyes to criminal money: global corporations engaged in fraud, organized criminals who trade in drugs, corrupt governments, and terrorists. He then sets out to show how the behavior of these groups can influence regime stability, how organized gangs have grown rich on the proceeds of drugs and what has been learned about terrorist money through 9/11. He analyzes the size of the black economy and looks at the victims of money laundering.

Kochan says that the UK is “beset by an ambiguity” and is a haven for the rich, with a reputation for flexible non-bureaucratic regulation that so appeals to roving companies and executives. He believes that London is still vulnerable to invasion by launderers, despite new laws. London’s problem is, he believes, that the Government has failed to invest in sufficient skilled law enforcement officers or regulators to curb its sprawling financial system. Overall, a very readable if somewhat opinionated book.

WASHINGTON’S CHAVEZ PROBLEM

At 79, Fidel Castro has outlasted 10 U.S. presidents, outfoxed 15 CIA directors, defeated a U.S.-organized invasion by Cuban exiles, survived eight U.S. assassination attempts, the Cuban missile crisis, a 45-year-long U.S. embargo and the collapse of the Soviet Union, which abruptly ended an annual subsidy of $4 billion, and found a worthy successor.

He is Castro with money. Big money. Where Castro may be flagging, Venezuela’s Hugo Chavez is a Latin American firebrand who is now in total control of the world’s 5th-largest oil producer. The U.S. gets 15% of its oil from Venezuela and Chavez is now threatening to bypass major oil companies and sell it directly to U.S. consumers. With oil at $60 a barrel, Venezuela’s daily output of 2.6 million barrels brings in $156 million every 24 hours. Chavez’s opponents all seemed to have sustained charisma bypasses. He has charisma to spare and millions to give away to the poor.

His first state visit as president was to China where he embarrassed his hosts by praising Mao Zedong. His best new friends included Libya’s Moammar Gadhafi, Saddam Hussein, Iran’s theocrats and North Korea’s hermit communist monarch. He has also given privileged sanctuaries to the Marxist Revolutionary Armed Forces of Colombia’s drug-dealing guerrillas. More importantly, he has a huge following among countless millions of poor Latinos. He is Robin Hood in Che Guevara clothing. Chavez is not a social democrat, but a Marxist believer, unencumbered by fealty to the klutzy Soviet leaders of yesteryear, and therefore more attractive to working classes that he constantly agitates against the “rancid oligarchy”. He easily (58% to 42%) beat a recall vote in mid-August, certified by former President Carter as fair. While the U.S. has been fighting wars in Afghanistan and Iraq, two-thirds of Latin American governments have taken a left turn.

Chavez has the combustible materials to fire up a revolution. Five percent of the population owns 80% of the land and 75% of the people live below the poverty line, 40% in “critical poverty”. Caracas, surrounded by slums that cling like barnacles to the high ground, suffered 28,000 homicides in the past five years with only 7% that went to trial.

Conservative TV evangelist and former presidential candidate Pat Robertson caused an uproar on his daily television show “700 Club” when he suggested Bush order the assassination of Chavez – which he said would be more cost efficient than fighting another $200 billion war. Neither option comes to grips with reality. Chavez dead or alive, the U.S. still has a huge image problem in Latin America. The freshly minted undersecretary of state for Public Diplomacy, Karen Hughes, has the most challenging assignment in the Bush administration.

Chavez and Castro “troublemakers”? Bring the evidence.

As personal relations between Presidents Fidel Castro and Hugo Chavez continue to deepen, and cooperation at state level between Cuba and Venezuela expands, worrying allegations are being made by the George Bush administration in Washington. Allegations are of a Cuba-Venezuela axis to foment destabilization of governments in the Latin American-Caribbean region that could ultimately pose national security problems for the USA. Such allegations, now being expressed more frequently, though without any supporting evidence, should be of concern to governments of the Caribbean Community, all of which are on record as favoring close and mutually satisfactory relations with Havana and Caracas.

If the Bush administration does possess evidence of Chavez and Castro as “troublemakers” in Latin American-Caribbean governance politics, then it should share some of it with allies of the USA within Caricom and the Organization of American States.

U.S. diplomacy toward Latin America: a legacy of uneven engagement.

As the United States has become increasingly dependent on foreign oil and flooded by migrating populations, troubles in Latin America take on greater importance. However, our engagement with this region has been uneven – that is, guided less by strategy than by tactical response. Perhaps Latin America is not as important as trade partners in Europe and Asia, or the problematic Middle East. But it is a close and populous neighbor, and one that teeters between stable self-sufficiency and chaotic menace. More significant, it is being drawn into the orbits of other global actors.

That does not mean we have to solve the region’s problems. Its peoples and leaders should bear the burden of making their own choices, reaping the benefits of good ones and learning from the bad. But the U.S. can be more consistent in cultivating relations that serve our own interests as well as those of our neighbors. To stave off future problems, the U.S. should have a comprehensive plan of engagement, practice hands-on diplomacy, and nurture enduring partnerships. Sustained U.S. commitment is essential to assure Latin America’s stability and continued peaceful, democratic development – all very much in our national interest.

U.S. HOMELAND SECURITY CHIEF TELLS OF PLAN TO STABILIZE BORDER

Acknowledging public frustration over illegal immigrants, Homeland Security Secretary Michael Chertoff said Tuesday that the federal government’s border control efforts must be significantly strengthened. “We have decided to stand back and take a look at how we address the problem and solve it once and for all,” Mr. Chertoff said at a breakfast meeting with reporters. “The American public is rightly distressed about a situation in which they feel we do not have the proper control over our borders.” The unusually blunt assessment by the nation’s top immigration official follows border-related emergency declarations by the governors of New Mexico and Arizona, who cited a surge in smuggling and violence associated with a steady flow of illegal immigrants.

The strategy that Mr. Chertoff said his department was preparing goes far beyond hiring more Border Patrol agents and installing more surveillance cameras, infrared and motion detectors, and fences, initiatives that are already planned or under way. In addition to those apprehension efforts, the secretary intends to bolster the deportation process so that an overwhelmed detention system does not cause illegal immigrants to be set free instead of being sent home. He plans to add beds for detainees, expedite deportations by making more judges and lawyers available, and try to track down more illegal immigrants who do not appear for deportation hearings.

Over the last decade, the number of Border Patrol agents has climbed to about 11,000 from 4,000. The number of arrests of illegal migrants along the border, meanwhile, a figure that had dropped after the Sept. 11 attacks, has surged in the last couple of years, and again tops more than a million annually. So many illegal immigrants from countries other than Mexico are being caught – 142,500 so far this fiscal year, compared with 39,555 in all of 2000 – that thousands are released within the U.S. before deportation proceedings because there is not enough space at detention centers.

Homeland Security officials have provided no estimate of how much the secretary’s new initiatives will cost. The government is already spending $7.3 billion a year in border-related expenses, they say, a 58% increase since the Sept. 11 terrorism. Mr. Chertoff, a former federal prosecutor and judge who took over the Homeland Security Department in February, is far from the first Washington official to promise a solution to the border control problem. But in his remarks he said his staff was mapping every mile of the Mexican border and preparing estimates of how many illegal immigrants use each of the various entry corridors so he could best decide how to deploy 1,000 or so new Border Patrol agents Congress appears likely to provide for the coming year.

Mr. Chertoff said he sympathized with the governors of New Mexico and Arizona, each of whom declared a state of emergency in the last 11 days and dispatched additional state and local law enforcement teams to border areas. Some immigration experts questioned whether this latest push to stabilize the border would result in much change. For example, these experts said, the Bush administration has not indicated any willingness to crack down on employers who hire illegal immigrants.

TAXES

ESTATE-TAX SPIN

Just after the 2001 tax bill was enacted, I noted that the estate tax would be repealed “only for one year (2010). In that same year, assets would begin to be inherited at their purchase price rather than market value (carryover basis), so heirs would inherit old capital-gains tax liabilities. … If carryover basis were maintained after 2010 … then heirs could end up brutally taxed on both the value of inherited assets and old gains on those assets.” A Wall Street Journal fact-checker called, thinking I surely must have made a mistake. But Congress made the mistake and has to fix it.

There are not enough Senate votes for repeal, so the debate is now down to choosing between a 45-55% tax rate with a hypothetical $10 million exemption or Republican Sen. Jon Kyl’s plan of a 15% tax rate with a $3.5 million exemption. Washington Post writers Jeff Birnbaum and Jonathan Weisman put too much spin on this, putting economics aside and depicting it as nothing more than a contest between the very wealthy (who would pay zero estate tax with a huge exemption), and the extremely wealthy (some of whom might pay less with a lower rate, despite the smaller loophole). They did note, however, that the estate-planning industry is lobbying hard against a 15% estate tax, which would kill its costly tax-avoidance schemes.

For the few who might put economics before politics, this is no contest. Combining huge loopholes with high marginal tax rates is the textbook definition of a foolish tax – one that maximizes economic distortions while minimizing revenue. All the self-interested and ideological efforts to rationalize high tax rates on estates are as indefensible as were similar efforts to rationalize higher tax rates on dividends. Because we have a tax on capital gains, it makes sense to impose the same tax rate on estates to avoid distorting the timing of asset sales. Any estate tax higher than the tax on capital gains is socially counterproductive, hurting the economy and overall tax receipts, while benefiting nobody except estate-tax planners.

Beating death taxes.

Even plaintiff lawyers cannot beat death, but they can sometimes beat death taxes. Thanks to their efforts, thousands of heirs of folks who died in Ohio, Pennsylvania and Washington State have won tax refunds, and heirs of Illinois and New Jersey decedents could be in for a similar payday. Here is why: Many states tied their death taxes to the federal tax, so that in 2001, when Congress raised the amount exempt from federal estate tax, it lowered state levies, too. Yet 17 states and Washington, D.C. continued to collect all the tax they had before, and some cut corners to do so.

In February Washington State’s highest court ruled that 2,400 heirs were due $152 million in refunds. Pennsylvania handed out $5 million in refunds to a few hundred estates taxed before the state legislature properly reimposed that state’s tax. In Ohio 140 estates are due a total of $4.5 million. In New Jersey, where a new tax was passed in July 2002 but made retroactive to Jan. 1, 2002, a trial judge ruled in favor of the estate of a woman who died during the period of retroactivity. He agreed that imposing a new tax on the already dead was a “manifest injustice”.

BREAK ON FOREIGN-PROFIT TAX MEANS BILLIONS TO U.S. FIRMS

Prompted by a one-time tax holiday on profits earned abroad, pharmaceutical giant Eli Lilly and Co. announced early this year that it would bring home $8 billion to boost research and development spending, capital investments and other job-creating ventures. Six months into the year, Lilly’s R&D spending had increased by 10%. But that $134 million is only a small fraction of the $8 billion that is boosting the company’s coffers.

For proponents of the tax holiday, including the corporations that lobbied for it, Lilly proves that the tax provision is working. For skeptics, it means the opposite: A measure designed to create jobs is instead rewarding the companies that are most adept at stashing overseas profits in tax havens, allowing them to bring money home at a severely discounted tax rate. Once here, that money is simply freeing up domestic profits that would have been spent on job creation and investment anyway.

A well-organized business coalition, led by pharmaceutical firms and high-technology companies, pushed hard last year to get a long-sought tax holiday into the corporate tax bill moving through Congress, called the American Jobs Creation Act. Treasury Secretary John W. Snow objected that the measure would unfairly benefit multinational corporations over domestic firms, while White House economists said it would produce no substantial economic benefit. But with bipartisan backing, the business groups prevailed. Most companies with substantial cash holdings overseas have until the end of this year to bring them home at an effective tax rate of 5.25%, rather than the standard corporate tax rate of 35%.

So far, the effects have been muted. Martin Gonzalez, a principal at Banc of America Securities, estimated that by midyear, $30 billion to $40 billion in foreign profits had been brought home, just 10% of the $300 billion to $400 billion he said could be repatriated by the end of the tax holiday. This week, Hewlett-Packard announced it will repatriate $14.5 billion in the second half of the year, mainly for “strategic acquisitions”, said Ryan Donovan, an HP spokesman. Robert S. McIntyre, a critic of corporate tax policy at Citizens for Tax Justice, questioned why “strategic acquisitions” would create jobs. “Usually it means layoffs. That’s the strategic part,” he said.

Of the roughly 100 companies that disclosed permanently reinvested foreign earnings over $500 million in 2002, 20% announced repatriation plans in the first three months of the year, said Susan M. Albring of the University of South Florida and Lillian F. Mills of the University of Arizona, who are tracking the response. 15% said such plans were likely. “Companies are making the decision,” Mills said. “‘Would I ever have repatriated these earnings?’ If the answer is yes, they’re taking it. If it’s no, they will not even want to pay a 5.25 percent rate.”

RUSSIAN TAX CHIEF GIVES TIPS ON MINIMIZING TAXES

One of the authors of a new textbook that encourages budding lawyers to be aggressive in minimizing taxes for corporate clients is none other than the head of the Federal Tax Service, Anatoly Serdyukov. The book, entitled Tax and Taxation, urges the use of tax minimization schemes and is critical of the government for shutting down several tax havens in December 2003. One section in the 752-page book says the goal of tax planning is to “pay the minimum of what is required.”

The book, which is recommended by the Education and Science Ministry for use in university classrooms, goes on sale after the much-publicized demise of Yukos due to huge back tax claims. Last year, tax authorities fined oil major Yukos $27.5 billion, in part because it had reduced its tax bills by setting up subsidiaries in low-tax regions. Those tax professionals who are too coy about using tax optimization schemes “will find themselves in a weaker position compared with other market participants,” the book says. The textbook’s cover includes the names of three authors, led by Serdyukov. It was not clear which parts of the book, if any, were written or overseen by Serdyukov.

U.K. TREASURY BLOCKS MOVE TO FLAT RATE INFLATION

The Treasury has suppressed arguments in favor of introducing a flat tax – a radically simplified system charging the same rate on all income – documents passed to The Daily Telegraph show. The system is being backed by free market reformers worldwide but a Treasury paper released under the Freedom of Information Act last month had key sections detailing the advantages blacked out. As a result, it was interpreted as showing that the Government had dismissed as “misleading” arguments for abolishing all exemptions and charging the same rate of tax on all personal and corporate income.

The uncensored paper presents a more balanced picture, acknowledging that a flat tax could increase economic activity and tax revenue, making Britain more attractive to foreign investors. It could create a “mini-economic boom” and would “eliminate distortions”, the paper says. Part of a two-page section that was removed says, “The reduction in rates and thus the tax burden faced by individuals should, in theory, stimulate further economic growth” and would establish “a one-off virtuous circle from tax cuts to economic growth to tax revenue”. Eleven countries, mostly in fast-growing eastern Europe, have successfully adopted the flat tax system. Greece is expected to announce one next month.

George Osborne, the Conservative shadow chancellor, who is examining flat taxes as part of a review of the tax system, accused the Treasury last night of seeking to mislead the public. Gordon Brown, the Chancellor, has been forced on the defensive by the growing interest in flat taxes. His handling of the tax system has also attracted widespread criticism since it emerged last month that 2.6 million people could have to pay back as much as £1.9 billion because of wrongly paid tax credits. Tax revenues have repeatedly fallen short of Mr. Brown’s forecasts, causing a deficit of £34 billion last year.

Hong Kong has had a flat tax of 16% since 1947. President George W. Bush’s advisory panel on federal tax reform is examining the system and Angela Merkel, who is challenging Chancellor Gerhard Schröder in the forthcoming German election, has hired a leading flat tax advocate as her economic adviser. The censored document originally published by the Treasury gave prominence to what it identified as the many difficulties involved in introducing a flat tax.

The flat tax secrets that worried Brown did not want us to see.

Flat taxes are spreading across the world. What is fascinating about the leaked documents The Daily Telegraph discloses today is that the Treasury has evidently woken up to this and Gordon Brown is starting to worry. The original version of secret work by officials posted on the Treasury website – after freedom of information request – pooh-poohed the claims of flat tax advocates as “misleading”. But large parts of the work had been removed. The complete version reveals that most, but not all, of the elements which were blacked out present compelling arguments in favor of the flat tax.

A flat tax means scrapping all income tax bands and the various exemptions and loopholes and replacing them with a single low rate – typically between 13% and 19% – and a bumper personal allowance. The result, so its advocates claim, is higher revenues as tax evasion and the exploitation of loopholes are reduced, enhanced social justice because the low paid are exempted from tax, people working harder as incentives improve, and faster economic growth. The only losers are the armies of tax collectors and accountants.

The most potent excised piece of the Treasury’s original work is a two-page section entitled “Efficiency and compliance”. In one passage, the Treasury suggests that a flat tax regime would mean the end of Mr. Brown’s complex tax credits system, which has been dogged by computer failures and errors. In fairness to the Treasury, the removed passages are not exclusively ones showing that officials are attracted to flat taxes. But even the excised passages which are hostile to a flat tax provide a fascinating insight into the arguments which will be used by ministers to attack the idea.

Germany’s flat tax debate.

Whatever the outcome, next month’s German election is already turning into the first serious public debate on the prospects of flat tax in any advanced and industrialized nation with a strong welfare system. This follows a decision by Angela Merkel, standard-bearer for the conservative Christian Democrat (CDU) party to bring radical tax reformer Paul Kirchhof onto her campaign team. Even though the party’s manifesto avoids any commitment to a flat tax, Kirchhof’s own advocacy of a single tax rate of 25% for companies and for individuals has caught the popular imagination – for good or ill.

The German media, which has for a decade chronicled Germany’s economic decline through low-growth and high unemployment into the status of “the sick man of Europe” have leaped onto the flat tax debate as a way to invigorate campaign coverage in the low-key holiday month of August, when many voters are on vacation. The left-liberal press condemns the flat-tax plan as a way to bring about the raw Anglo-Saxon capitalism of winner-takes-all, with hire-and-fire for the ordinary employee and tax cuts for the rich.

That is the real question that underlies the flat tax. How much of his or her money does the taxpayer want the government to spend? Perhaps the average taxpayer would rather give the state less money and take care of his or her own medical, unemployment and old age insurance. But the U.S. experience suggests that if they have a choice, many of the poor do not bother, and rely on charity and the emergency center at the local hospital. That means that those with insurance are really paying for those without – while also facing the higher risk of epidemics (like TB or HIV) in countries without public health systems.

One way or another, these social goods have to be paid for, whether by flat tax, payroll tax or progressive income tax. That may be too open-ended and complex a debate for a country like Germany, whose elections are now less than a month away. But as pension systems across the industrialized world head into demographic crisis, it is a debate we all should have.

ASSET PROTECTION

A DEATH KNELL FOR TAX HAVENS?

The retiring Supreme Court Justice Sandra Day O’Connor wrote an opinion in the famous John Doe summons case, acknowledging that the Court had “sounded the death knell for Boyd,” which Justice Brandeis had said was a case that “will be remembered as long as civil liberties live in the United States.” The case of Boyd v. United States in 1885, struck down a tax law that forced taxpayers to bring in their records for examination. Said the Court, “And any compulsory discovery by extorting a party’s oath, or compelling the production of his private books and papers … is contrary to the principles of a free government. It is abhorrent to the instincts of an Englishman; it is abhorrent to the instincts of an American. It may suit the purposes of despotic power; but it cannot abide the pure atmosphere of political liberty and personal freedom.”

Not only has the Court sounded the death knell for Boyd, so has our generation. Every generation has the right and does, throw out many of the beliefs of the generations that went before. We fully accept the right of the government to snoop into all our affairs, especially our financial affairs. Governments today see no problem with the destruction of the right of privacy in your financial affairs. They use an innocuous name for this, “transparency”, like when the Oklahoma City bombers called murder “collateral damage”. The above quote from Boyd makes it clear that the “instincts” of an American or an Englishman, were with another generation. We have no such instincts today.

Today the OECD is on a world-wide campaign to destroy financial privacy everywhere by blackballing the tax havens and their banking privacy. Their policy is to ban them from using the banking systems of Europe like the U.S. embargo on Cuban cigars. Seems tax havens are the infidels in the modern world of high taxes. Any country with unduly low taxes, or no taxes, is suspect as having harmful tax practices if it maintains banking privacy for its customers. It has been believed until the OECD gave us a new definition of “harmful taxes” – that harmful tax practices were taxes that were too high, driving businesses and people to move to lower tax realms, like so many businesses that have left California for Nevada and other states with lower taxes. Or, many of Europe’s great athletes or actors who have moved to tax havens in Monaco, the Bahamas and elsewhere. Now the OECD’s philosophy would seems to say, that Nevada and other states are engaged in harmful tax practices, by enticing businesses to come and operate in a lower tax environment. So, which is it? It was once believed that high taxes were a threat to liberty, like when Thomas Paine extolled the virtues of America, as a “Land of liberty because it was a land of low taxes.”

The days may be gone when you could simply waltz into any number of tax havens and enjoy privacy from the world. Today you will have to work at it. You need not engage in great complexity, just a certain amount of common intelligence should enable you to have financial privacy and no or low taxes. The days of financial privacy are not over. And when the world wakes up and sees what the OECD has done, like a death knell for financial privacy, there will be a demand for the old days, when a man’s castle was beyond the surveillance of the king.

AUSTRALIAN TAXATION OFFICE ASKS VISA FOR HELP IN CATCHING TAX EVADERS

The ATO has asked the world’s biggest credit card companies to help investigations into offshore tax havens after ATM transactions led the agency to tax avoidance schemes. Visa said the ATO had approached the organisation for help in investigating 3600 potentially illegal uses of credit cards to bring money held offshore into Australia. The tax office has enlisted the help of credit card companies and banks to gather transaction data for offshore-issued credit cards used here.

Visa said it could not assist in investigations into offshore tax havens but was assisting crime agencies on other types of money laundering. “We told the tax office that we’d love to help but we can’t because Visa doesn’t appropriate transactions in Australia,” a spokesman for Visa said. “Visa in Australia doesn’t have accounts with members of the public. Accounts are held between banks and the public, we don’t know cardholders.” First requests from the tax office were made in 2001, but communication was ongoing, the spokesman said.

Credit card transactions helped lead investigators working on Operation Wickenby to investors in offshore tax havens who were repatriating the funds using local ATMs.

DEBTORS IN RUSH TO BANKRUPTCY AS CHANGE NEARS

Rushing to beat an October deadline when the biggest overhaul of the bankruptcy law in a quarter century goes into effect, rising numbers of Americans have filed for protection in the four months since the law was changed, seeking to have their debts erased. Since President Bush signed the new law in April, bankruptcy filings have jumped, particularly in the heartland. Filings in the four months through July are up 17% this year over last in Cleveland, 14% in Milwaukee and 22% in northern Iowa, according to court filings, matching similar patterns in the Midwest and parts of the South and rural West. Nationwide, bankruptcy filings for April, May and June were up by 12% over the same period last year, according to LexisNexis, the data collection service, which tracks filings ahead of the quarterly reporting done by the federal courts. The rise is coming after bankruptcy had leveled off and even started a slight decline last year.

Under the revised law, debtors who earn more than the median income in their state and who can repay at least $6,000 of their debt over five years will no longer be able to have their debts wiped out for a fresh start under the more generous provisions of Chapter 7 of the bankruptcy code. Instead, they will have to seek protection under Chapter 13, which requires a repayment schedule. In addition, under the new provisions, they will have to enroll in a court-supervised financial counseling program.

The rise, which lawyers and bankruptcy experts say is driven in large part by people who say they fear that it will become much more difficult to escape debt and seek a clean slate under the new law, appears to have caught some bankers and lawyers by surprise. When the new bankruptcy bill was passed by Congress last spring, bankers predicted it would turn many people away from the protection of the courts by making it harder to extinguish debt. That may still turn out to be the case. But thus far, it has been a rush to the courts in many places.

Bankruptcy filings rose eightfold over the last 30 years, from 200,000 in 1978 to 1.6 million last year. Although filings vary from month to month, the pace for this year, if it holds up, projects to about 1.8 million bankruptcies. The overwhelming majority of them are personal, not business. Economists say bankruptcy has become more likely as household debt has continued to rise while the savings rate has fallen precipitously. The Federal Reserve reported that household debt hit a record high last year, relative to disposable income.

LIECHTENSTEIN AND THE EU SAVINGS TAX DIRECTIVE

Liechtenstein has come to an agreement with the EU on the EU Savings Tax and will therefore retain the same withholding tax as Switzerland. As everybody expected, Liechtenstein developed within the frame according to what Switzerland has already worked out. Therefore a short look to what has happened in Switzerland is important to understand the treaty and the differences to Switzerland. Switzerland has finished its negotiations on the nine treaties called “Bilaterals II”. This article will only focus on the cooperation pertaining to the EU savings tax (on interest of savings accounts of physical persons living in the EU).

Instead of an automatic exchange of information between national tax authorities within the EU and relevant states being participants to this directive, Switzerland will withhold a 15% tax on interest during 3 years. This percentage will be increased to 20% for another 3 years, and after this period to 35%. This tax is due thereafter for any interest payments by a so-called paying agent to a physical person with tax relevant domicile in the EU. 75% of the retained tax will be distributed by Switzerland to the EU member states. Liechtenstein will accept these percentages. However it is still not clear, either in the EU or here in Liechtenstein, what exactly a paying agent is. There is much interpretative room left.

It has to be noted that Switzerland has to all intents and purposes practically given up bank secrecy whenever we talk about indirect taxes like subsidies, duties, VAT, excise tax on tabacco, alcohol or mineral oils. Switzerland already disclosed information before this treaty and has co-operated whenever there has been a fraud or falsification of documents involved (documents, deeds, tax evasion in conjunction with forged documents, money laundering or issuing false invoices). The practice of court rulings in the last years in Switzerland or in Liechtenstein has shown that attempts to avoid indirect taxation was usually accompanied with fraud or falsification, which led to cooperation with the foreign authority and remittance of documents abroad.

However Swiss – and especially Liechtenstein – privacy laws do not accept that foreign tax authorities can move in freely on bank accounts of physical or juridical persons. Here such rights should not be touched and it should be the person’s right to decide upon the moment to disclose transactions. It is fully understood that the taxable person reports income and balances on his tax return in full and accurately.

SELECT YOUR OFFSHORE TRUST COMPANY CAREFULLY

Having an offshore trust is a far more complicated matter than in the past where everyone simply opened a blind offshore trust in a tax haven. Tony Barrett, regional manager at BJM Private Client Services who has lived and worked in the Channel Islands says that since the tightening on money laundering internationally no reputable trust company will accept blind trusts where the beneficiaries remain unidentified. However there is still place for an offshore trust, depending on an investor’s specific requirement. “It is unfortunate that because the issue has become more complicated many financial advisors are steering away from offshore trusts yet they can offer huge benefits in certain circumstances,” says Barrett.

For example an offshore inheritance paid into an offshore trust is the ideal way to preserve the inheritance, draw an income and avoid estate duty. “By foreign executors paying the money directly into an offshore trust, the funds do not accrue to you or your estate and any amount of the initial capital from the inheritance that you draw down from the trust is tax free,” says Barrett.

Although you will pay tax in South Africa on any income or capital gains that is distributed to you as a beneficiary, if you are drawing down the initial capital to supplement your income locally, this will be seen as a capital distribution from the trust which is not taxable. Barrett says for this reason it becomes extremely important to have an expert trustee who keeps reliable records. The trustee must be able to prove to the receiver of revenue what portion of your distribution from the trust is made up of capital, interest or capital gains.

Barrett says when selecting a trust company you need to make sure you are getting value for money. “Be careful of simply going for the cheapest because it could end up costing you far more if the trustees are not keeping proper records in order to cut cost.” He adds that when choosing a trust company you need to find out who is making the investment decisions. A trustee is not necessarily an investment expert; you need to make sure your investment decisions are being made by the person with the right qualifications.”

ID THEFT SPYWARE SCAM UNCOVERED

Security firm Sunbelt Software said it stumbled across a US-based server storing megabytes of data stolen from compromised computers while researching spyware infections. The server held passwords for online accounts from 50 banks, Ebay and Paypal logins, hundreds of credit card numbers and reams of personal data. The FBI has reportedly now started investigating the ring of ID thieves.

The bug that has stolen all the data is thought to be a variant of a family of trojans known as Dumaru or Nibu that exploit a vulnerability in Microsoft’s Internet Explorer browser. The trojan, a malicious piece of code, automatically downloaded itself on computers when people visited sites harboring the program. What made this bug so effective was its ability to grab text stored on the clipboard and by Internet Explorer, said Eric Sites, vice president of research and development at Sunbelt Software. IE has a feature, called AutoComplete, that automatically populates boxes on web forms where people typically fill in names, addresses, e-mail addresses, credit card numbers and other biographical details. The feature is supposed to make filling in forms on websites less of a chore. In this case, said Mr. Sites, it helped the ID thieves get hold of enormously valuable data.

Typically a keylogger produces a file containing an unbroken string of characters, said Mr. Sites. “It’s usually very hard to take that and do anything with it,” he said. By contrast, AutoComplete data is already labeled and sorted because the browser has to know where to put each item. “The way the data is laid out, the quality of it, i’qs very easy to go through and use it for nefarious purposes. This is about getting money and stealing.”

The BBC News website was shown the server and some of the files containing personal data that it was storing. Each file was full of login names, e-mail addresses, credit card details and everything needed to steal someon’qs identity or simply empty their bank account. Mr. Sites said that, so far, the trojan had been found on porn sites and websites offering cracks for pirated software. But, he said, the trojan was likely to be on many other websites as it had managed to infect so many users. Sunbelt believes the trojan has been circulating for about three weeks and in that time has probably infected thousands of victims.

IRS WANTS TO TIGHTEN RULES FOR DIVERTING PROFITS OFFSHORE BY UNDERVALUING IP

Computer and drug companies such as Microsoft and Pfizer may face a higher U.S. tax bill after the Bush administration said it would tighten rules on diverting profit to offshore tax havens. The Treasury Department issued regulations this week limiting cost-sharing arrangements that allow companies to undervalue patents, licenses, trademarks and other intellectual property transferred to a subsidiary from a parent company. The new rules would require companies to value these assets at the same price they would charge a competitor to acquire them. The IRS is increasingly questioning such transfer pricing, a legitimate business practice that can be abused when companies inflate or undervalue the price of goods sold between their international subsidiaries to reduce taxable income.

The tax break has been particularly useful to drug and computer companies because much of their income comes from patents and licenses. The companies divert their income to low-tax countries and seek to claim as many deductible research and development expenses as possible in the U.S. to lower the tax bill on U.S. profits.

PRIVACY

NO REASONABLE EXPECTATION OF PRIVACY IN INTERNET SUBSCRIBER INFORMATION

Court dismisses civil suit against city and police officers for obtaining information about AOL subscriber without warrant. Plaintiff Freedman used his AOL e-mail account to anonymously send a message to two other residents of his Connecticut town. The message contained the statement “The end is near”, and the recipients interpreted this as a threat to their safety. They immediately filed a police report. A Detective Young and an Officer Bensey drafted an affidavit and application for a search warrant to seek information that would help them identify who sent the complained-of e-mail. Without submitting the paperwork to the state’s attorney’s office or a judge, Young faxed it to AOL’s legal department. A week later, AOL provided Freedman’s name, address, phone numbers, and various pieces of information relating to his account with AOL, including his screen names. No charges were ever filed.

Angry that his subscriber information had been released, Freedman filed suit against AOL, the City of Bridgeport, Detective Young, and Officer Bensey. (The case against AOL was transferred to federal court in Virginia.) Freedman argued, among other things, that the release of his account information was an intrusion into his privacy that violated his Fourth Amendment rights. The defendants moved for summary judgment, arguing that Freedman’s Fourth Amendment rights could not have been violated, because he did not have a reasonable expectation of privacy in his subscriber information. The court agreed, and granted the motion for summary judgment on this issue. Freedman was unable to show that any expectation of privacy he had regarding his subscriber information was objectively reasonable. The court pointed to three different reasons why one would not reasonably expect his or her subscriber information to be private for Fourth Amendment purposes.

NEW CAMERAS TO WATCH OVER NYC SUBWAY SYSTEM

Officials unveiled the high-tech future of transit security in New York City yesterday: an ambitious plan to saturate the subways with 1,000 video cameras and 3,000 motion sensors and to enable cellphone service in 277 underground stations – but not in moving trains – for the first time. Moving quickly after the subway and bus bombings in London last month, the Metropolitan Transportation Authority awarded a three-year, $212 million contract to a group of contractors led by the Lockheed Martin Corporation, which is best known for making military hardware like fighter planes, missiles and antitank systems.

The authority abandoned its earlier reservations about cellphone service, agreeing that the benefits of allowing 911 and other calls during emergencies outweighed the costs and the risk of a phone-detonated bomb. It invited carriers to submit proposals by Oct. 12. The winning bidder, which would receive a 10-year license, would have to pay for the installation of the wireless network and would be required to disable all calls at the authority’s request. It is not clear how long installation, which will cover 277 of the 468 stations, will take.

The surveillance and cellphone strategies, together with a police campaign begun last month to check riders’ bags and packages, are a step toward what some critics have long said cannot be done – putting the nation’s largest transit system under constant watch, and fortifying it with enough obstacles to deter potential terrorists. A handful of subway riders interviewed at Times Square expressed strong support for electronic surveillance.

A useless, intrusive P.R. display.

The U.S. response to the July 7 terrorist bombings of the London tube system has been predictable: more hasty security measures. On July 21, police began conducting random searches of bags and packages carried by people on the New York city subway. Those who refuse to be searched are not allowed to ride. According to Mayor Michael Bloomberg, “These kinds of security measures are necessary.” But any security measure must pass two litmus tests. First, it must be proven to be effective. Second, it must not violate constitutional rights. Mayor Bloomberg’s “necessary” security falls down on both counts.

The odds of catching a would-be subway bomber are not very good. New York’s subways carry about 4.5 million passengers on the average weekday, according to the MTA. If on any given day there were a single terrorist riding the subway, and half the passengers were carrying some sort of bag, the probability of finding him or her during any particular search using a truly random search pattern would be about one in 2.25 million. Such odds are only slightly better than winning New York’s Mega Millions lottery (about one in 175 million). Even multiplied by thousands of intrusive searches that is a poor bet – and that assumes terrorists are too dim to adapt by, say, strapping bombs to their bodies.

Random searches on the subway are as useless as random searches of airline passengers at the gate – a practice that fortunately has been eliminated by the Transportation Security Agency after TSA administrator James M. Loy decided it was a “stupid rule”. The spectacle of security personnel patting down grandmothers and toddlers deserved the ample ridicule it generated. Furthermore, the procedure netted exactly zero terrorists. It is also rather telling that British authorities are not instituting random searches on the London tube system – a testament to the fact that doing so would be ineffective and cripple a transportation system that moves seven million people daily.

Aside from the futility of random searches, Bloomberg’s panacea ought to be rejected because the Fourth Amendment of the U.S. Constitution guarantees the right of the people to be “secure in their persons, houses, papers, and effects against unreasonable searches and seizures.” Without probable cause – such as someone fitting the physical description of a suspected terrorist – a random search of subway passengers is the antithesis of the Fourth Amendment. That amendment is already in the intensive care unit thanks to the numerous exceptions made in the name of the war on drugs, as well as some of the provisions of the USA PATRIOT Act. If Mayor Bloomberg’s measures are adopted nationwide, the prohibition against unreasonable searches will be in danger of expiring entirely.

BATTLE ESCALATES OVER PASSENGER DATA

The Homeland Security Department is making another push to get personal data on airline passengers in an effort to keep terrorists off flights. The lobbying effort comes months after the House and Senate, concerned about invading privacy , gave preliminary approval to a measure that would ban the department from tapping into credit reports, court files, shopping histories and other personal information for one year. Homeland Security Secretary Michael Chertoff wants Congress to scrap the pending ban so the government can make passenger information “more complete and accurate” when it compares names with those of suspected terrorists, according to department spokesman Russ Knocke.

Chertoff is likely to face a tough battle in Congress. The ban has the support of key members of both political parties, including Sen. Judd Gregg, R-N.H., chairman of the House Appropriations subcommittee on homeland security. Sen. Patrick Leahy, D-Vermont, a leading privacy rights advocate in Congress, said that “it would be a mistake” to remove the ban. “Our privacy rights need more watchdogs, not fewer,” Leahy said. “Data banks offer powerful tools for security screening, but they also raise privacy dangers.”

Passenger names are now checked by airlines against a government no-fly list, which excludes classified information about terrorists. Since early 2003, Homeland Security officials have sought to take over the process and add in-depth passenger background checks. The idea has sparked outrage from privacy advocates such as former Republican congressman Bob Barr, who labels it a government intrusion into “very personal data”. Concerns over privacy last year helped kill a similar plan to check passenger backgrounds.

Babies on board.

Anyone who has been trapped in an aircraft with a crying infant knows that they can be little terrors. But terrorists? Hardly likely. It turns out, though, that infants have been stopped from boarding planes at airports throughout the country because they have the same names as potential terrorists on government watch lists. Some families with unfortunately named infants have missed their flights as a result, according to the Associated Press. This is, of course, ridiculous. But it also reflects the unthinking zealousness that has characterized some of the post-Sept. 11 bureaucratic and inflexible approach to security.

This latest development, though, underscores a deeper problem that persists with airport security nearly four years after the terrorist attacks: The passenger screening system remains a mess. Homeland Security Secretary Michael Chertoff acknowledged as much in a speech last month. “We are still dependent upon a pre-9/11 technology system to conduct the most elementary form of terrorist screening – matching names against watch lists,” he said. The list, he said, “is not fully automated for aviation screening, and it yields an unacceptably high number of false positive identifications, which drains our security resources and imposes a burden and inconvenience on passengers.”

The elementary, common-sense solution outlined by Mr. Chertoff – linking up the names on the no-fly list with more precise identifying information such as date of birth – would, as the secretary says, “dramatically reduce the number of cases where travelers are delayed for questioning.” But that task has turned out to be enormously complicated. There are huge technological hurdles to surmount, as well as legitimate privacy concerns to be considered. While the nation awaits Secure Flight, perhaps in the meantime Mr. Chertoff could move further in the direction of Sensible Flight.

LAW

PASSENGERS WITH PULL

You knew it would come to this. A “staff memo” to the Transportation Security Administration’s (TSA’s) new director recommends that politicians and others of Leviathan’s acolytes be exempted from screening at airports. Meanwhile, UPI reports that we “ordinary passengers” will continue to be wanded, questioned, groped, ordered about and insulted.

Hard to believe, in a democracy as dedicated to fairness and equality as ours, that the TSA sees two classes of citizens out there. The first consists of those who work for government and who are therefore credible, honest, responsible, and safe. These folks would never launch a fiery raid, complete with CS gas and tanks, on 90 religious Americans. Thus, we can trust them not to blow up a plane. They would not shoot a 14-year-old boy in the back while killing his dog and his mother, either. Obviously, they pose no threat to their fellow passengers. They do not lie about weapons of mass destruction, nor do they authorize unconstitutional wars that slaughter thousands while enriching Leviathan’s friends. American aviation should welcome these saints as valued customers.

Then there are the rest of us. We cannot be trusted to do much of anything any more, whether it is something as complex as educating our children or as simple as boarding a jet without detonating a bomb. Even our babies are suspect. Those unfortunate enough to share a name with someone on the government’s “No-Fly List” are prohibited from flights. Such a coincidence is easier than you might suppose because about 100,000 people have landed on that list. Thus the TSA has proposed allowing not only airline pilots but “members of Congress,… Cabinet members, state governors, federal judges, high-ranking military officers, and people with top-secret security clearances” to skip the long lines and humiliation of the checkpoints.

The TSA is an agency in crisis, and its directors come and go with the frequency of rats from the proverbial sinking ship. Edmund Hawley, recipient of the “staff memo”, is the fourth American in as many years to head the TSA. In exchange for treating his fellow citizens as potential terrorists, he enjoys a lavish office – the TSA decorated its headquarters with $500,000-worth of artwork and silk plants – and parties at which the cheese alone costs $500. We terrorists pay for all this, of course. It is important to keep the money flowing at an agency with such sumptuous tastes, and the TSA knows who is buttering its bread – or, in this case, cutting its cheese. Congressmen are unlikely to continue voting the agency funds when its screeners harass them rather than pregnant women. The only significant change the “staff memo” advises is rescuing from the TSA’s clutches the politicians who control its budget. And that should surprise no one.

It is no fun being on the no-fly list.

Mary Doyle is in a spot. There are things she can do about it, but doing those things will not mean she is out of that spot. If that sounds like government doublespeak, bingo. Read for yourself, from the Transportation Security Administration’s Web site: “Please understand that the TSA clearance process will not remove a name from the Watch Lists.” I know Doyle, a mother of three sons who lives with her very nice family. Her youngest son just graduated from high school with my middle child. She is one of those go-to-every-football-game moms. I know her well enough to vouch that she has no business on a government list of people considered to be possible threats to anyone. Mary Doyle a terrorist? Puh-leeeze.

Doyle, who has spent her life in California and Washington, has no clue why another Mary Doyle is on a list. With her Irish name, Doyle guesses it has something to do with the Provisional Irish Republican Army. The paramilitary organization, known as the IRA, has long used terror tactics in its quest for a reunited Ireland. All Doyle knows is that “the first weekend in March, all five of us were flying to California. We tried to check in online, and it wouldn’t let me.”

At Seattle-Tacoma International Airport, Alaska Airlines would not let her see a ticket agent. Instead, a TSA official took the family’s identification and went down a hallway. Three times, the official returned with questions. “When I asked, ‘OK, what’s the problem?’ he said it was a computer glitch,” Doyle said. “He didn’t tell us what it was.” They took that trip. Doyle did not find out until April, at the start of another trip, that she was the “glitch”.

For now, she is stuck in long lines at airports, “behind every person who has 20 pieces of luggage. … It’s a different world, but there’s got to be a better way. You’re traveling with this uncertainty, and made to feel guilty for something you haven’t done.”

CAN CITIZENSHIP BE ABOLISHED?

As the British government begins to draft a new antiterrorism law to strip naturalized citizens of their nationality if they “engage in extremism”, it may be instructive look at the meaning of citizenship – and of governments’ attempts to take it away. When St. Augustine wrote in the fourth century of a citizen, he meant simply a person who lived in the city as opposed to a peasant who lived in the country. In today’s world, citizenship is a legal concept intricately tied to another legal concept, that of the nation-state.

Before 1967, the U.S. Congress had a long history of enacting laws that defined acts for which one would lose one’s citizenship – including voting in a foreign election, serving in a foreign army, marrying a foreign man, desertion in wartime, residing abroad with an intent to evade the draft, being convicted of treason, advocating overthrow of the government and becoming a citizen of another country. The tipping point in the U.S. was the case of Clemente Perez, born in Texas in 1909, who moved with his parents to Mexico when he was 10. In 1953, he was arrested in San Francisco as an illegal alien. Claiming that he was American by virtue of his birth in Texas, he sued to obtain a declaration of his U.S. citizenship. The 14th Amendment says that any person born in the U.S. is a U.S. citizen, but the government argued that by voting in Mexico in 1946, he had expatriated himself. In 1958, by a 5-to-4 vote, the Supreme Court agreed.

In a famous dissent, Chief Justice Warren wrote that “Citizenship is man’s basic right, for it is nothing less than the right to have rights.” Nine years later, again by a 5-to-4 vote, the Supreme Court reversed itself and adopted Warren’s position, acknowledging that while Americans can give up their citizenship, the government cannot take it away. Since 1967, the State Department has stopped expatriating U.S. citizens on the basis of their behavior, though it still contends that it can expatriate if evidence shows that the individual intends to give up citizenship. As a practical matter, the department has stopped expatriating U.S. citizens unless they declare before a consular officer that they want to give up their nationality.

In the EU, meanwhile, the concept of citizenship has been considerably diluted. While it still matters for voting and for holding some offices, it has ceased to be a factor for most employment and travel. The methods by which citizenship is acquired are hardly fair or simple. The principal methods – birth and parentage – are both subject to qualifications. The complexity leads one to ask if the whole citizenship concept could not be abandoned. In effect, this is what happened in the early 19th century among individual American states and is presently happening within the EU.

Yet two obstacles make the abolition of citizenship a questionable option. If citizenship is the “right to have rights” and it is abolished, then what becomes the source of legal rights? And in many countries, citizenship is enmeshed in social and psychological identity.

TREATY GIVES CIA POWERS OVER IRISH CITIZENS

U.S. investigators, including CIA agents, will be allowed interrogate Irish citizens on Irish soil in total secrecy, under an agreement signed between Ireland and the U.S. last week. Suspects will also have to give testimony and allow property to be searched and seized even if what the suspect is accused of is not a crime in Ireland. Under “instruments of agreement” signed last week by Justice Minister Michael McDowell, Ireland and the U.S. pledged mutual co-operation in the investigation of criminal activity. It is primarily designed to assist America’s so-called “war on terror”.

The deal was condemned yesterday by the Irish Council for Civil Liberties (ICCL) as "“an appalling signal of how the rights of Irish citizens are considered by the minister when engaging in international relations.” The ICCL said it appeared to go far beyond even what has been agreed between EU countries. Although the Department of Justice insists that the arrangement merely updates existing agreements, it goes much further. The U.S. may ask Irish authorities to track down people in Ireland, transfer prisoners in Irish custody to the U.S., and to carry out searches and seize evidence on behalf of the U.S. Government. It also allows U.S. authorities access to an Irish suspect’s confidential bank information. The Irish authorities must keep all these activities secret if asked to do so by the U.S.

EU-USA NEGOTIATING EXTRADITION AND MUTUAL LEGAL ASSISTANCE AGREEMENTS IN SECRET

In August last year Statewatch published a leaked first draft of the proposed agreement between the EU and the USA on judicial cooperation (link here). This has now become two separate agreements, one on extradition, the other on “mutual legal assistance” (joint EU-US investigation teams, surveillance and the exchange of information on suspected persons).

Here we examine the latest drafts, which were put before the EU Justice and Home Affairs Council on 28 February. The Ministers decided to suspend negotiations with the USA in order to allow national parliaments to be consulted (at least those in France, UK, and Germany). The European Parliament has not been consulted. The suspension is because of the U.S. demand to be treated as a member of the EU when it comes to extradition (that is, under the European arrest warrant which removes formal legal appeals).

Tony Bunyan, Statewatch editor, comments: “These draft agreements between the EU and USA have far reaching implications for both criminal justice and democratic standards in the EU. The secrecy surrounding the negotiations and exclusion of parliaments is unacceptable in a democracy. Statewatch is publishing these texts with the aim of fostering much needed public debate.

“Where extradition is concerned, it is almost unthinkable that the USA should be demanding the extradition of someone from EU without having to provide evidence demonstrating the case to answer.

“In the case of the proposed mutual legal assistance treaty, there are no limits on surveillance, the exchange of intercepted telecommunications data or undercover joint EU-US investigative teams. Nor are there meaningful limits on the use of evidence in relation to potential death penalty charges or ‘special courts’ like those proposed for the Guantanamo detainees.

“If these draft agreements had been subject to meaningful parliamentary scrutiny and public debate, it is hard to believe that proposals so devoid of protections for suspects and defendants would have resulted.”

WE NEED THICKER SKINS

On the August 24 Today show, a segment was aired on the plight of Dr. Terry Bennett, a folksy-looking, middle-aged physician practicing in Rochester, New Hampshire. Seems Dr. Bennett told an obese patient that she needed to lose weight, and as a result he has been under investigation for over a year by New Hampshire’s attorney general and its state board of medicine. Reading between the lines, my impression is that the doctor said something like, “Look, you’re five-feet-seven and 250 pounds. If you don’t lose weight, you’re going to find yourself in the same boat as all the other obese women out there, all alone and unwanted. Men your age don’t like fat women. You need to start dieting.”

Does this really merit a year-long investigation from two government agencies? The woman was 100 lbs. overweight and already suffering from diabetes and other weight-related health issues. Was the doctor wrong in trying to frighten his apparently unconcerned patient into medically desirable – perhaps even medically necessary – corrective action? Dr. Bennett stated that his comment was part of an “entire litany” of reasons why his patient needed to lose weight, and that he wrote a letter of apology to her once he understood her agitation. As he correctly noted, this should have ended the matter. The letter of apology was not good enough for this aggrieved woman, however, and apparently she complained to as many government authorities as would listen. Two state investigations have gone on for an entire year – seriously, what more could be involved other than interviewing the doctor and his patient?

What a waste of time and taxpayers’ money – but I suppose the New Hampshire government do-nothings consider this a major do-something. What is next – a lawsuit if I insult your family pet? Sorry, people. You need to get thicker skins.

OPINION & ANALYSIS

THE “WAR ON TERROR”

It is getting stranger, I tell you. Riding the subway from Vienna Station to Franconia-Springfield, at every stop the woman driving the train said in an over-elocuted voice, “A-ten-tion, customers. This is a Metro Safety Tip. Pay attention to your surroundings. Look up from your newspapers and blackbirds [it sounded like, though nobody seemed to be carrying any sort of bird at all] every now and then. Report suspicious activity to Metro employees immediately.” Then – I can’t stand it: “Let’s be pre-pared, not scared.” Nobody paid the slightest attention to these motherish admonitions. I wondered how much safer Metro Safety Tips made us. Obviously any terrorist with the brains of a pencil eraser would be sure not to look suspicious, and if he did nobody would notice.

There is something unconvincing about so many of these terrorism preventives. Yet they are everywhere. The papers carried stories about New York’s random searches of passengers on the subway, for example. Washington’s subway was pondering the same idea. Random searches? If you randomly search every fiftieth passenger in rush hour, you have a two percent chance of catching a terrorist. Now that makes me feel safe. “Random”? Who are they kidding? The searches will not be random. They will be searches of whoever the searchers feel like searching. Quite irrationally, officials said that anyone who did not consent to being searched could simply leave. This obviously would include terrorists, who would walk out and go the next station. That is, we will search everybody except those we are looking for.

When I was on the police beat, cops had to have probable cause to search anyone. This was defined as “an articulable reason for believing that a specific person was committing a specific crime.” Carrying a bolo knife and a severed head meets that standard. I am not sure that riding a subway is adequately suspicious. New York’s searches seem to establish the principle that local jurisdictions can search, with no reason at all, anyone aboard public transit – buses, subway, trains, ferries. Why not people within 50 feet of governmental buildings, in crowded places thought attractive to terrorists, or on sidewalks? And of course if they find illegal paraphernalia of a non-terrorist persuasion, such as drugs, or cigarettes without a tax stamp, they will arrest the bearer. Soon it will be pirated CDs. The police will naturally use “random” searches to conduct fishing expeditions.

It is curious that an entire system of constitutional protections can be dismantled just by ignoring it. I would have thought it more difficult, but it is not. How much of this drama is actually intended to reduce the prospect of terrorism? Some of it, perhaps. Many view this largely pointless circus as a deliberate attempt to impose – the phrase is getting wearisome – a police state. I do not know, not being privy to the councils of the mighty. But much of it to me looks like the anti-boredom efforts of officious dim-witted bureaucrats who desperately want meaning in their lives. A little terrorism is at least exciting, gets the juices running.

FOUR AMENDMENTS AND A FUNERAL

A month inside the house of horrors that is Congress.

It was a fairy-tale political season for George W. Bush, and it seemed like no one in the world noticed. Amid bombs in London, bloodshed in Iraq, a missing blonde in Aruba, and a scandal curling up on the doorstep of Karl Rove, Bush’s Republican Party quietly celebrated a massacre on Capitol Hill. Two of the most long-awaited legislative wet dreams of the Washington Insiders Club – an energy bill and a much-delayed highway bill – breezed into law. One mildly nervous evening was all it took to pass through the House the Central American Free Trade Agreement (CAFTA), for years now a primary strategic focus of the battle-in-Seattle activist scene. And accompanied by scarcely a whimper from the Democratic opposition, a second version of the notorious USA Patriot Act passed triumphantly through both houses of Congress, with most of the law being made permanent this time.

Bush’s summer bills were extraordinary pieces of legislation, broad in scope, transparently brazen and audaciously indulgent. They gave an energy industry drowning in the most obscene profits in its history billions of dollars in subsidies and tax breaks, including $2.9 billion for the coal industry. The highway bill set new standards for monstrous and indefensibly wasteful spending, with Congress allocating $100,000 for a single traffic light in Canoga Park, California, and $223 million for the construction of a bridge linking the mainland an Alaskan island with a population of just 50.

It was a veritable bonfire of public money, and it raged with all the brilliance of an Alabama book-burning. And what fueled it all were the little details you never heard about. The energy bill alone was 1,724 pages long. By the time the newspapers reduced this Tolstoyan monster to the size of a single headline announcing its passage, only a very few Americans understood that it was an ambitious giveaway to energy interests. But the drama of the legislative process is never in the broad strokes but in the bloody skirmishes and power plays that happen behind the scenes.

To understand the breadth of Bush’s summer sweep, you had to watch the hand-fighting at close range. You had to watch opposition gambits die slow deaths in afternoon committee hearings, listen as members fell on their swords in exchange for favors and be there to see hordes of lobbyists rush in to reverse key votes at the last minute. All of these things I did – with the help of a tour guide.

“Nobody knows how this place is run,” says Rep. Bernie Sanders. “If they did, they’d go nuts.” After a month of watching him and other members, I get the strong impression that even the idealists in Congress have learned to accept the body on its own terms. Congress is not the steady assembly line of consensus policy ideas it is sold as, but a kind of permanent emergency in which a majority of members work day and night to burgle the national treasure and burn the Constitution. A largely castrated minority tries, Alamo-style, to slow them down – but in the end spends most of its time beating calculated retreats and making loose plans to fight another day. Taken all together, the whole thing is an ingenious system for inhibiting progress and the popular will. The deck is stacked just enough to make sure that nothing ever changes. But just enough is left to chance to make sure that hope never completely dies out. And who knows, maybe it evolved that way for a reason.

WARNING: YOU ARE UNDER MARTIAL LAW

The title of this article is what the notice read on the morning of May 4, 1970 – it sat largely unread in the mail boxes of Kent State University students. Later that day, four students were murdered when the Ohio National Guard opened fire on a hillside filled with students – some protesting, some watching, others merely changing classes. Whether or not you are old enough to remember the tragedy at Kent State, please pay attention to this history. As we head into the age of aggressive protests, the police response is becoming more violent, such as in Saturday’s actions in Pittsburgh, Pennsylvania and Salt Lake City, Utah. In Pittsburgh, protestors marched the wrong way up a one-way street to close down an army recruiting office. Police used both tear gas and tasers to subdue the protestors, and one 68-year-old woman was even bitten by a police dog – she was also arrested. In Salt Lake City, a crowd of 1,500 was tear gassed from helicopters.

This is a war against war. This is a war to end all wars – as the saying goes. We are on the side that is not armed. But just like the students at Kent State a few short years ago, if our right to protest is denied we have little choice other than to assert ourselves. If we are brutalized, we must fight it in the courts, call Congress, and insist that the brutality come to light in the media before it is allowed to progress to even more severe levels.

DEATH BY PR

In War Made Easy: How Presidents and Pundits Keep Spinning Us to Death, Norman Solomon demolishes the myth of an independent American press zealously guarding sacred values of free expression. Although strictly focusing on the shameless history of media cheerleading for the principal post-World War II American wars, invasions and interventions, he calls into question by implication the idea of the press as some kind of institutional counterforce to government and corporate power.

The utter idiocy of many of the examples he has compiled in this impeccably documented historical review will be familiar to readers who follow the news on the Internet. They achieve fresh impact because of the way Solomon has organized and analyzed them. War Made Easy should really be subtitled “War reporting doesn’t just suck, it kills.” It makes you feel like demanding a special war crimes tribunal for corporate media executives and owners who joined the roll-up to Shock and Awe as non-uniformed psywar ops. To be sure, this would raise the issue of whether or not following orders might suffice for the defense of obedient slaves such as Mary McGrory who performed above and beyond the call of duty. “He persuaded me,” she gushed the morning after Powell spoke at the United Nations. “The cumulative effect was stunning.”

Solomon demonstrates how this kind of peppy pre-war warm-up degenerates into drooling and heavy breathing once the killing begins. As if observing a heavy metal computer game, the pornographers of death concentrate on the exquisite craftsmanship and visual design of the murder machines, and the magnificence of the fiery explosions they produce. Skepticism only emerges when it is clear that a given war is not going well, Solomon observes. Otherwise, the media mostly report the war the way the government tells it. They become, in effect, merely another psychological warfare asset.

War Made Easy is a definitive historical text that belongs in every serious library as an indispensable record of the real relationships among government authorities and media outlets. The book should be required reading for journalists and journalism students. It will dispel many illusions about the true reach of freedom of the press and replace them with a much more appropriate and healthier professional cynicism.

TERROR, UTOPIANISM AND THE POLITICIZATION OF SCIENCE

Nearly one hundred years ago, C.K. Chesterton wrote that the problem with people who have lost faith is not that they believe nothing but that they believe anything. Paraphrasing him, we might say as well that the problem with people who have lost faith is not that they fear nothing but that they fear everything. It makes sense. Faith comprises at least these three basic attitudes: 1.) We cannot have and therefore should not aspire to superhuman knowledge and power; 2.) There are certain things – reality, truth, freedom, justice and other intellectual and moral values – which we have to accept even if their respectability cannot be proven scientifically; 3.) Despite our obvious limitations we are capable of dealing with the problems of existence in this world.

Arguably, science was born of that faith. However, to appreciate the argument it is important to distinguish between faith and belief. “Belief”, in this context, stands for the stories or myths by means of which people learn (or learn not) to have faith. There are, of course, many systems of belief that inspire faith – different mythological packages may contain the same basic truths – although some undoubtedly are more effective than others in this respect. Unfortunately, some people are unable or unwilling to deal with the mythologies that constitute either their own or others’ beliefs. They cannot handle myths. They will not be bothered with the effort to separate the truths the myths contain from the events they relate. Hence, their only option is, either to believe the stories as literal reports, or to reject their truths on no other ground than that all or some of the facts in the stories never happened.

Whichever side they choose, they are bound to disparage the notion that myths may have objective truth value even if they are wholly or in part works of imagination rather than historical records. The unraveling of the alliance between science and faith stems from this inability to tell faith from belief and science from belief in science. Believers on both sides came to accept the notion that faith and science were deadly enemies. Rather than a vital support in a world full of uncertainties, science worshippers imagined that faith was the cause of our uncertainties. By promoting that view as the essence of enlightenment they insinuated a far more radical message: We shall not be able to cope with the problems of life unless we dare to raise ourselves to the position formerly occupied by no man (or, as their opponents prefer to say, by God). Then and only then shall we be masters of the universe, possessing the knowledge we need to control everything and to achieve full emancipation from every source of frustration and fear. The zealots could not contribute much to the advance of science, but they certainly felt up to jeering what they saw as its enemy.

There was a tiny little problem with their position. The control over everything includes the control over people, and that makes it rather interesting to know whether we shall be among the controllers or among the controlled.