Offshore News Digest for Week of October 10, 2005

GLOBAL BUSINESS

BAHAMAS FINANCIAL SERVICES PLATFORM SHAKY

Following the 2000 debacle when the financial services sector found itself blacklisted by bureaucrats hiding behind a forest of acronyms, the Bahamas financial services sector has been attempting to shed the burden of being considered no more than a mere haven for tax evaders by creating new products and establishing legislative regimes designed to encourage best practices. Through the coordinated efforts of the Bahamas Financial Services Board, several pieces of legislation were enacted. The regulatory regime – The Central Bank, Registrar of Insurance Companies, The Registrar General – was expanded to reflect the new realities.

Not withstanding all the effort, a body of opinion holds that the sector’s underlying structure precludes the hoped for expansion and development driving the sector’s efforts to become a major player. Dr. Gilbert Morris notes that “back office is important but it is not financial services.” It is the result of financial services, he said at a recent presentation at George Washington University.

But this was not always the case. A retired banker who was active in the financial sector between 1979 and 1989 said that although the majority of the 300 to 400 banks were primarily back office operations, there were about 30 to 40 banks in which Bahamians and non-Bahamians alike traded and dealt in the foreign exchange and securities market. The banker noted that today the sector, from what he has been able to observe, is primarily back office operation with little or no trading. Dr. Morris observed that the current underlying “structure of the system” sees “financial services professionals becoming more and more certified to no real end.”

Tax expert Marshall Langer said that stakeholders as well as the relevant government agencies had to take the initiative and go forward to demand what the sector wanted. “You can’t wait for the French or the Germans to come with a list of demands [about the structure of your tax regime],” he said. “You have to go and find those countries you can negotiate with and also get them to agree to assist you, for instance, in being removed from the blacklists.”

Bahamas resident charged in U.S. with bribing Azerbaijan officials.

U.S. federal prosecutors last week charged a Bahamas resident, along with two other men, with participating in a scheme to bribe senior government officials in Azerbaijan over lucrative oil privatization deals. The accused men, Viktor Kozeny, a Czech national, and two U.S. citizens, Frederic Bourke and David Pinkerton, faced a 27-count indictment handed down by a federal grand jury in Manhattan. U.S. Attorney Michael Garcia said Kozeny was arrested Wednesday in the Bahamas, where he is a resident, while the other two defendants voluntarily surrendered to FBI agents in Manhattan on Thursday.

The indictment alleges that the three men were involved in making corrupt promises and payments totalling millions of dollars to top Azerbaijani officials with influence over the privatisation of state-run firms.

Bahamas government to do a survey of the financial services institutions.

The government has decided to secure PricewaterhouseCoopers to do a survey of the Bahamas’ financial services institutions, the Minister of Financial Services and Investments Allyson Maynard Gibson announced to a gathering of financial professionals. The information is expected to be used to review the existing 5-year strategic plan that has been crafted for the sector. The minister made the announcement at the Bahamas Financial Services Board’s tax symposium on ways to use this particular vehicle to drive wealth management. The summit attracted a range of highly skilled international experts.

PWC noted in one of Wealth Management Survey for 2005 that knowledge of how taxation affects international and domestic affairs is surprisingly low and will need to be improved dramatically if client expectations are to be met. Specifically, it mentioned that the knowledge of international tax matters stands at 5% of the client relation managers being very competent and 22% being competent. But the survey found that in three years time, institutions expect that the number of their client relation managers that are very competent will triple and those that are competent will increase to 36%.

PWC is considered a global market leader for tax services and assists businesses, individuals and organizations with tax strategies, planning and compliance. Minister Maynard Gibson acknowledged that the legislative environment plays a key role in ultimately attracting individuals to an international financial center. She pointed to recently legislative changes related to the now risk-based anti-money laundering regime, the creation of foundations, purpose trusts and the new Investment Funds Acts and the private trust companies legislation that is in circulation.

27,000 people living below poverty line in Bahamas, report says.

An estimated 27,000 people or 9.3% of the country’s population represent the face of Bahamian poverty, according to a report commissioned by government officials. Minister of Social Services and Community Development Melanie Griffin revealed those details in the House of Assembly, while giving a brief overview of The Bahamas Living Conditions Survey 2001. The first of its kind for the country, the 188-page survey determined that the minimum amount of money needed to purchase adequate low-cost meals with allowances for non-food needs was estimated at $7.84 per person, per day. This translates into an annual poverty line of $2,863 per person.

This figure is slightly higher than the recent estimate of $2,752 for Barbados and significantly lower than the U.S. estimate of $4,525. The poverty line represents the minimum expenditure necessary for an individual to satisfy basic needs over a specific reference period, officials say. The cost is estimated in two stages, the first takes into account the minimum expenditure needed to purchase a nutritionally adequate diet, while the second takes into account the minimum required cost of non-food items like clothing and shelter. The sum of these two estimates equals the poverty line. According to local statisticians, 40% of the budget is spent on housing and 27% on food.

The survey indicates that for poor households, this proportion is higher, largely because a higher proportion of the budget is spent on food. Slightly more than 2,000 households were randomly selected throughout the country to participate in the survey. According to the survey, by regional standards, the food ratio amongst poor Bahamian households is extremely low. Non-poor households are more likely to own their home (58%), whilst poor families are more likely to rent (41%), live rent free (10%) or rent a government home (6%).

Based on the results of the survey, about 95% of non-poor households either own or rent their homes privately, compared to only 82% of poor households.

RESERVE BANK OF AUSTRALIA WARNS OF “MELTDOWN” OF GLOBAL FINANCIAL SYSTEM

Further rises in oil prices, the collapse of a major bank or an unexpected jump in inflation could be all it takes to send the increasingly fragile global financial system into meltdown. The RBA warned that the current calm in financial markets could be the prelude to a storm that could wreak havoc in the world economy. The RBA believes the boom in markets for shares, bonds and housing in many countries is unsustainable. The warning came as share prices in Australia reached a new high point, while a rush to invest in Australian bonds is pushing down long-term interest rates. “The preconditions are in place for quite abrupt swings in sentiment and a disruptive snap-back in pricing,” the central bank says in its latest review of the health of the financial system.

And the RBA says a key measure of all the world’s share markets is now 62% higher than its 2003 nadir, with the biggest gains made in the riskiest markets. The bank says that financial markets have been acting on a belief that there will be no sharp changes in interest rates around the world. This has resulted in huge investments in government bonds. The belief that rates will remain stable has made investors more willing to borrow to buy shares and bonds.

And with long-term interest rates at historically low levels, investors in international financial markets – such as insurance companies, banks and superannuation funds – have been seeking out riskier assets that pay higher returns. The trend for people to borrow more heavily than before has extended to housing markets, which are still booming in many countries around the world. “The concern is that the increase in prices and leverage across a range of asset markets might be sowing the seeds for future problems,” the RBA says. “In many markets, there seems to be considerably more scope for asset prices to fall than to increase.”

FAR-LEFT PARTIES GET BOOT IN GENEVA ELECTIONS, POPULIST PARTY GAINS

A new populist party has gained ground in the cantonal elections in Geneva at the expense of far-left parties, which lost their place in parliament. But the vote was so tight that ballots are being recounted and Sunday’s results could be overturned. The big winner was the rightwing Geneva Citizens’ Movement (GCM), which gained more than 7.7% of the vote. The party, which was created only three months ago by dissidents from the rightwing Swiss People’s Party, can expect to have 9 seats in parliament.

Eric Stauffer, vice-president of the GCM, called the result “historic”, adding that his party would be aiming to attract more taxpayers to Geneva. While it says that it is neither to the left or right of the politicial spectrum, most commentators place the party on the far right. It made its presence felt during a recent federal vote by opposing the extension of a labor accord with the EU to the 10 new member countries.

The big loser of the weekend elections was the far left, which ran under two separate banners. The Leftwing Alliance was handicapped after some of its members defected to the Solidarités. Both parties fell slightly short of the 7% quorum needed to enter parliament. Green Party parliamentarian Antonio Hodgers said it was regrettable that many people who had voted for the far left would have no one representing them in the assembly. A recount is underway, leaving the far left hoping for a reprieve.

The more traditional parties, apart from the Greens, failed to make progress. The center-right Liberals, Radicals and Christian Democrats held on to their seats, giving them the largest voting block in parliament.

HONG KONG’S TSANG TO FOCUS ON ECONOMY IN FIRST POLICY SPEECH

Hong Kong Chief Executive Donald Tsang, who succeeded Tung Chee-Hwa in June, will use his first major policy speech to focus on economic and governance issues, political analysts said. Tsang, a civil servant whose career began under the city’s British rule which ended in 1997, will probably avoid the more contentious subject of increased democracy, the analysts said. Tsang was scheduled to speak at 11 a.m. in Hong Kong on October 12. Tsang, who was picked to replace Tung by a China-backed committee of 800 people, needs to produce economic growth and effective government while assuaging demands for full democracy, which China has said will not place before 2012.

Tsang may announce the privatization of the Hong Kong Airport Authority, or the sale of more of government-controlled subway operator MTR Corp., or that company’s merger with state-owned commuter rail operator Kowloon-Canton Railway Corp., Wong said at a press luncheon last week. The executive may not be too ambitious with his plans because he is serving out only the two years remaining of Tung’s term, with no guarantee China will tap him again for a full 5-year term.

Hong Kong’s economy grew 6.5 % in first half of the year.

The continued strong local consumption, the brisk financial market and the sustained favorable investment situation-all are benefited from the prosperity of the inland economy and the central government’s support to Hong Kong, the entire economy of Hong Kong is promising this year. Statistics released by the Hong Kong SAR (Special Administration Region) government show the rapid economic growth of Hong Kong. Following its achievement of a 6.2% substantial growth in the first quarter of this year, the region recorded a 6.8% economic growth in the second quarter and a 6.5% increase in the first six month of this year. Thus far, the local total output value of Hong Kong has kept rising for eight consecutive quarters.

In the second quarter of this year, benefited by continued global economic expansion and the sturdy growth of the hinterland’s foreign trade, Hong Kong’s commodity export has witnessed robust growth, registering a substantive rise of 11 percentage points on a yearly basis. The surge of offshore trade and the prosperity of tourism have entailed a marked 7.8% growth of labor export in the second quarter.

Full-scale economic expansion has further created job opportunities, Hong Kong’s total number of employees rose to a new high to reach 3.37 million people in July this year. The stock market and the housing market as a barometer of Hong Kong’s economy, present a favorable situation of steady upturn. Local economists hold that price index is benefited by increase in import commodities, the rapid rebound of retailing and catering businesses, the flourishing market condition – all of these stimulate Hong Kong’s domestic market demand to turn for the better.

Singapore extends growth run.

The economy of Singapore expanded at an annualized 3.2% pace in the third quarter, the Trade Ministry reported, following an 18% spurt in the previous three months. Growth was led by manufacturing, which accounts for a quarter of the $107 billion economy. From a year earlier, the economy expanded 6%, faster than the 5.2% in the second quarter, the ministry said. Singapore’s shipyards and oil-rig contractors are winning orders as record energy prices prompt companies to increase investment. Sales are also rising for drug companies and electronics makers. “Growth should accelerate next quarter and we expect the official forecast for the year to be raised,” said Euben Paracuelles, an economist at DBS Group in Singapore. “We are seeing signs of electronics improving.”

Continued economic growth and rising inflation may prompt Singapore’s central bank to stick to its policy of allowing a “gradual and modest” appreciation of its currency. The Monetary Authority of Singapore has maintained the policy since April 2004 as a stronger currency has helped to reduce the cost of oil and other imported goods.

Asians not participating in Asia’s investment boom.

International investors, it seems, cannot get enough of the great Asian growth story. Money continues to flow into the region’s financial assets, despite higher oil prices and U.S. interest rates. Yet Asian companies appear curiously reticent about joining the party. Eight years after Asia’s financial crisis and with solid growth forecast this year and next, one would expect businesses to be making big capital outlays to take advantage of the upturn. However, with the exception of China, they have not done so.

SHORTLIST FOR OECD POST TO BE WHITTLED DOWN

More than one of the six candidates in the race to become the next secretary-general of the OECD will be tapped on the shoulder this week and told that they have no chance of success. The six candidates were interviewed last week. But there is still no obvious frontrunner for one of the more difficult jobs in global economics. The OECD is an organisation in flux. Set up after World War II to distribute Marshall Aid money, it transformed in the 1960s into the international organization that aimed to improve the workings of the world’s most important economies.

Its cross-country analytical work is almost universally praised. But the 30 member countries no longer represent the most important economies in the world, the governance of the organization is renowned for its inefficiency, and bureaucracy is rife. With tight budgets, the OECD’s work is often spread too thinly over a huge variety of areas. All the candidates want a better focus, better organisation and better representation of global economic concerns.

But in interviews over the past month it was often difficult to get the six to move past the platitudes to the specifics of how the organization should change. The candidates’ job interviews took place in front of a panel of about 100 people. The formal criteria for the post included an ability to operate in the highest levels of government, experience in detailed economic policy, a track record of successful management and language skills.

Don Johnston, the outgoing secretary-general, suggested earlier this year that a Japanese candidate would be well suited to run the OECD, highlighting the importance of Asia to the global economy. But Sawako Takeuchi, Japan’s candidate, is widely seen as lacking the necessary credentials. Europe dominates the organization with 22 of the 30 seats, but neither European candidate is finding it easy to build a global consensus to support them. Many believe that Angel Gurría, a successful former Mexican finance minister, is in a strong position.

PASSPORTS MESS BECOMING YET ANOTHER MAJOR SCANDAL IN DOMINICAN REPUBLIC

Despite the interest which the Justice Ministry and the Immigration Agency have shown in the investigation of the scandal of the official passports obtained fraudulently by city councilpersons, it is becoming another major Government scandal. The scandals has done great damage reputation of the Dominican regime and despite that it is being investigated, the country is always left with the impression that it took place to a certain extent because of the lack of controls and because of the influence of politicians.

The official entity most involved is the Dominican Municipal League, whose ex-undersecretary Amaury Guzman has been arrested, and which is run as a separate “little government” and even has its “foreign minister”, the presidential aspirer Amiable Aristy Castro. But the Administration of president Leonel Fernandez is also being affected from the scandal, because it has shown a lack of controls for issuing the official passports in the Foreign Ministry.

That Italy now demands a visa from official passport bearers jeopardizes the reputation and causes the mistrust of the Foreign Ministry, mainly because a similar decision could be followed by other governments of Europe. For Italy, it is the second major scandal affecting its relations with the DR.

WORKING ON ORGANIC FARMS IN AUSTRALIA AND NEW ZEALAND

When I first decided to take an extended journey away from home, I knew I would be faced with the tiresome dilemma of what to do with all my stuff. I quickly decided that “stuff” was meaningless in the grand scheme of life. But I did not want to give it all up. I wanted to keep my favorite books, my practically new Swedish foam mattress, and all the things I had collected since college. I could not afford a storage unit (could barely afford to survive the 6 months I would be away). When I thought about it though, six months is nothing. I mean, I was not spending 7 years in Tibet. I was just going on a long vacation. With the problem of funding still looming over my head, the brilliant idea of compromise allowed me to sell some of my possessions, and ask friends and family to spare a corner in their basement to hold my precious valuables for safe keeping. Now I was ready with the money I earned from my garage sale, and all that I had left from my dreadful job after paying off school loans.

This trip was something I had been planning for years. I had done the drunken hostel circuit as well as the overpriced fly by the minute bus tour. This time I wanted to really travel and get to know the country’s culture, land, and people. I had about $2000 to last me 6 months which is nearly $10 per day after transportation costs. This did not bother me as I was not interested in souvenirs, fancy restaurants, or the like. I found a way to make it around Australia and New Zealand for the entire 6 months. I was able to cover more ground and experience more of what the countries had to offer than most locals. I found WWOOF.

Willing Workers on Organic Farms is an organization I joined before I left. It was after months and months of investigation that I decided this would provide an amazing opportunity to make my way around the world on a limited budget without any risks. There are many different worldwide volunteer and work/exchange programs out there. Finding the right one just takes some inquisitive research. The way WWOOF works is simple and makes perfect sense to me, as someone who wanted to avoid the high cost of friendly hospitality and customer service.

My genuine interest in organic food and lifestyle, combined with having an open mind to other cultures makes the work enjoyable to boot. The work and hours vary from place to place, but the underlying idea is that there are general organic principles practiced. I visited a number of places and my experiences varied from raking leaves for a half hour to leveling rock for 5 (the latter was short lived). There were cattle stations, chicken hatcheries commercial organic vegetable and fruit farms, organic cafes, kayak shops, surf shops, and dairy farms to name a few. I worked with hydroponic lettuce, with flowers, berries, bees, sheep, mud bricks, some landscaping and lots of weeds. I met some of the most interesting and fun-loving people from all over the world. I was not surprised, however, that in the whole 6 months I ran into only a handful of Americans. The plus side of that is I had a chance to negate some nasty stereotypes. Most people … especially those who travel, know they have to take the good with the bad. It is no different down under.

CENTRAL AMERICAN DEFENSE MINISTERS DISCUSS FORMING SECURITY FORCE

Creation of a regional peacekeeping force emerged as a key issue at a meeting of Central American defense and security ministers on how to confront threats ranging from drug trafficking to disease epidemics. U.S. Defense Secretary Donald Rumsfeld, host of the two-day meeting, said Central America is no longer beset by endless civil wars and political dictatorships that hampered the region for decades.

Officials representing Belize, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama are attending the meeting, along with observers from Colombia and Mexico. The high-level session follows U.S. ratification in August of the Central American Free Trade Agreement aimed at strengthening economic ties to a region that is home to 41 million people and has a total gross domestic product of about $88 billion. Guatemala’s defense minister, Gen. Carlos Humberto Aldana, said creation of the battalion-strength peacekeeping force would bring greater economic security and political stability. He suggested that it be ratified by treaty among the Central American nations and include specific financial and personnel commitments from each.

The force would be used for military peacekeeping missions but also for such things as rapid response to natural disasters. The U.S. military would not be directly involved but would have observer status, according to Pentagon officials.

NAFTA FRAYS AS CANADA, MEXICO ACCUSE U.S. OF FLOUTING RULES

Canada and Mexico are escalating their allegations that the U.S. is flouting the terms of the North American Free Trade Agreement in order to protect domestic producers. Canadians are dropping what Prime Minister Paul Martin called “the safe language of diplomacy” and spurning new negotiations on a dispute involving U.S. export limits on Canadian softwood lumber. Mexico is publicly supporting the Canadians in the lumber case as it pursues its own grievance over a long-running sugar trade dispute. The spats threaten to fray NAFTA, the landmark 1994 accord that set up the world’s largest trading bloc, and damage diplomatic relations with two of the U.S.’s closest allies.

S&P MAINTAINS BERMUDA GOVERNMENT’S FAVORABLE FINANCIAL RATINGS

Standard & Poor’s Ratings Services has affirmed its “AA” long-term and “A-1+” short-term sovereign credit ratings on Bermuda, reflecting the country’s record of prudent economic management. The outlook on the ratings remains stable. “Bermuda benefits from many years of good economic management, based upon policies consistent with its fixed exchange rate,” observed Standard & Poor’s credit analyst Lisa M. Schineller. “The fixed exchange rate, favorable macroeconomic policy mix, and well regarded tax and regulatory regimes will continue to attract the international business sector – particularly insurance – thus ensuring its continuance as the main engine of economic growth in Bermuda,” she added. According to Ms. Schineller, the government has the fiscal and external flexibility to absorb a budgeted expansion in spending.

The general government deficit is projected to rise to 2.5% of GDP in 2005-2006 from less than 1% of GDP in recent years. According to S&P, Bermuda remains a global leader in the reinsurance segment and this has helped offset a secular decline in tourism. GDP growth is projected at 2.5-3% in 2005 and 2006, after registering 3% growth in 2004.

TAXES

HOW TO LEAVE YOUR TAXES BEHIND WHEN YOU MOVE

If you are planning to move or if you have homes in more than one state, watch out. States are getting ever more creative about collecting income tax from people who have any ties to their territory. Even states without income taxes are getting into the act, with sales- and use-tax audits. Upping the stakes in the residency wars. Many states’ estate taxes, invisible and painless until a 2001 change in federal law, have since become real burdens because the federal estate tax credit that used to be available to offset them is now gone. What makes residency particularly tricky is that each state has its own set of rules.

Here is how to leave a state – and its taxes – behind.Just moving out of your old state is not enough. You need to show you have cut your old roots and planted new ones elsewhere. “It used to be you could just change your driver’s license and register to vote in your new state and the domicile fairy spread her dust,” says New York tax lawyer Mark Klein. “Now auditors say anyone can fill out a piece of paper; you have to really change your lifestyle to overcome the burden of proving residency.” That means you should not double dip. Minnesota physician Roger Dreyling filed as a nonresident, claiming he was domiciled in state-income-tax-free Alaska. But he continued to claim the “homestead” property tax break on the Minnesota house where his wife remained. And while he got an Alaska driver’s license, he kept his “surrendered” Minnesota license and used it to get cheaper resident fishing and hunting licenses there. A judge concluded that Dreyling merely “went through the motions of trying to establish a domicile [in Alaska] to avoid his Minnesota tax liability” and that the center of his family, business and social life remained in Minnesota.

STEVE FORBES RETURNS TO NEW HAMPSHIRE WITH FLAT TAX BOOK

Flat tax advocate and magazine publisher Steve Forbes will not run for President in 2008, but he said he intends to make a new version of his decade-old proposal to scrap the current tax code a key part of the debate. Forbes, a Republican, said he “will be agitating for the cause” during the campaign, “and if there’s a good candidate, for the candidate.”

Forbes was promoting his new book, Flat Tax Revolution: Using a Postcard to Abolish the IRS. In his book, Forbes repeats many of the same arguments he first brought to national attention when running for President in 1996 and 2000. He said a flat tax would create “a stupendous economic and investment boom.” He has added what he says are success stories in Russia, several other formerly communist Soviet states, and Hong Kong. A major tax cut and simplification plan has also succeeded in Ireland, and similar proposals are under strong consideration in central and eastern European countries.

He said he has amended his proposal to give each taxpayer a choice of moving to the flat tax or staying with the existing system. “This way you pick whichever one is lower,” he said. “Most people will find the flat tax is lower and so they’ll go with that.” Forbes’s plan calls for a 17% tax on income after what he calls “generous exemptions”. Adults would take a $13,200 standard exemption. Families would receive a $4,000 exemption for each child or dependent and a refundable tax credit of $1,000 for each child age 16 or younger. Under the plan, a family of four would pay no federal income tax on its first $46,165 of income, and the exemption for a two-parent family with four children would be $65,930.

Forbes said he is counting on “citizen agitation” to convince Capitol Hill politicians of both parties to look to the flat tax. With other nations adopting a flat tax, “we’d better get our act together,” Forbes said. “My own feeling is that it’s going to happen in five years, and if the Republicans don’t seriously move on this in the next two or three years, I think an entrepreneurial Democrat or two is going to run in ‘08 on tax simplification and just steal the issue from the Republicans.”

Dutch economic advisors call for flat tax revolution.

Holland’s Council of Economic Advisers has officially recommended to the Dutch Parliament this weekend that it adopt a flat tax. The news deals a fresh blow to UK Chancellor Gordon Brown, who claimed at the Labour Party conference that only a fringe group of Estonian neo-conservatives are interested in the idea.

The council of leading Dutch economists argued that the change is necessary to boost incentives to work and improve labor market participation rates. To achieve as low a tax rate as possible, current systems of tax deductions would have to be slashed, including mortgage interest deductibility. The advisory body was established by the lower house earlier in the year to look at ways of stimulating the struggling Dutch economy. The advisers argue that a flat 40% rate would be possible, thanks to an injection of €5 billion from mortgage changes and €2 billion from greater taxation of over-65s. The proposal differs from the more usual flat tax proposals espoused by free-marketeers, which usually also involve very low tax rates and huge tax cuts. Under the Dutch plan, those over 65 would end up paying more tax under the plan, a potentially politically damaging result.

The most enthusiastic supporters of a flat rate in the Netherlands are members of the liberal Peoples Party for Freedom and Democracy (VVD), but even it is against ending mortgage deductibility. The Christian Democratic Appeal (CDA), which leads the current coalition, agrees that tax rates are too high but is so far resisting a wholesale flat-tax. James Auger, economist at Global Insight, said, “The proposals look unlikely to become reality, but they should spur momentum towards a more limited overhaul of the tax system.”

Flat tax helping overturn Marx’s “progressive” income tax.

In a news report, The Wall Street Journal notes that tax competition is encouraging countries to adopt pro-growth flat tax systems. Most interesting, the article states that nations grow faster with a flat tax and that the so-called progressive income tax is a Marxist invention.

Wall Street Journal praises global flat tax revolution, condemns pro-harmonization bureaucracies such as the OECD.

The mainstream press is finally discovering the flat-tax movement that has been sweeping Europe. It must be painful to credit an idea associated with the likes of Milton Friedman and Steve Forbes, but reality cannot be ignored forever. … By our count, this brings to 11 the number of nations with a single-rate, postcard tax system. More dominoes are expected to fall in the next few years: Bulgaria, Croatia and Hungary are also preparing to feed their thousands of pages of tax code into the shredder in favor of lower, flatter rates. A flat-tax proposal was debated as part of Poland’s recent election campaign. And one of the countries that started it all, Estonia, plans to lower its rate one more time, to 20% from 24%, which was down from the initial flat rate of 26%. Lithuania hopes to go to 24% from 33%. … In response, even Old Europe has had to consider tax reform, lest its economies become increasingly uncompetitive.

Rather than catching the flat-tax wave, France, Germany and Italy have been attempting to stop it by outlawing tax competition through international entities, such as the OECD, the EU and UN. … The best way to get more taxes out of rich people is to generate more rich people, and then give them more incentive to report their income by keeping tax rates low. … Last year the Internal Revenue code achieved a new Olympic record for complexity, with nine million words – 12 times the length of the King James Bible. High tax rates and mindless tax complexity are an economic ball and chain.

HARRIET MIERS ENABLED ABUSIVE TAX SHELTERS?

Harriet Miers’s Texas law firm, Locke Liddell, was investigated by the Senate Permanent Subcommittee on Investigations for agreeing to write favorable tax opinions for clients regarding Ernst & Young tax schemes that are now under criminal investigation.

In August 2005, accounting firm KPMG LLP agreed to pay $465 million in fines and cooperate with federal authorities to avoid criminal prosecutions for popular tax schemes that were aggressively marketed in 1999-2000. Rival accounting firm Ernst & Young remains even today under federal grand jury examination for similar slick tax avoidance schemes, often marketed in conjunction with banks, during the same period of time. Law firms such as Locke Liddell provided the missing link in the marketing package, a legal tax opinion written for the client prospects affirming that the deal was legitimate and would survive IRS scrutiny.

Evidently, in 1999 and 2000, Harriet Miers and her Locke Liddell firm were involved in promoting tax avoidance schemes that now have come under federal investigation. In May 2004, the U.S. Attorney for the Southern District of New York initiated a federal grand jury investigation of Ernst & Young “regarding its sale of tax shelters to corporations and wealthy individuals to escape or reduce federal taxes,” as characterized by the Feb. 8, 2005, report of the Senate Permanent Subcommittee on Investigations. This criminal inquiry is still ongoing.

Supporters of Harriet Miers have suggested that her professional experience managing Locke Liddell compensates for her lack of judicial experience with constitutional law. Pursuing that argument, Miers’s supporters now face the additional hurdles of demonstrating that Miers fully understood her responsibility as co-manager of the firm to oversee the firm’s professional activities.

COMPANIES PAYING LARGER SHARE OF TAX BILL, SAYS OECD

Companies are paying a larger share of the tax raised by industrialised countries than at any time since the 1960s, the OECD said. Over the past decade, the average share of corporate income tax in the tax mix has increased by more than one percentage point to reach the 9% level of the 1960s. The upwards trend goes some way to counter governments’ concern about the potential erosion of their corporate tax base as a result of tax avoidance and tax competition. But there are large variations between countries, with Germany raising just 4% of its tax revenues from corporation tax while Luxembourg raises 19%.

The OECD’s latest Revenue Statistics also showed that social security contributions have taken over from personal income taxes as the single largest revenue source for industrialised countries. Overall, the figures suggest that the tax burden has stopped rising this decade, following a significant rise in the tax-to-GDP ratio in the second half of the 1990s. Across the OECD, the tax-to-GDP ratio fell marginally in 2003 to 36.3%, from 36.4% in 2002, and from a peak of 37.1% in 2000. These changes reflected the impact of fluctuations in the economy and lower rates of taxation on personal and corporate income. The OECD average corporate tax rate fell from 33.6% in 2000 to 29.8% in 2004, while the average top personal income tax rate fell from 47.1% to 44%.

The contribution of personal income tax has shrunk from 30% of total taxes in the early 1980s to 25% today. The resistance of voters to further tax increases and concern about the potential economic damage caused by high tax rates were possible explanations, the OECD said. Large variations exist between countries in the share of personal income taxes to total revenues, ranging from 11% in the Slovak Republic to 53% in Denmark. Social security contributions accounted for 26% of total tax revenues by 2003, up from 18% in 1965. The OECD said this seemed to be linked to the pressure for higher spending on benefits, resulting from higher unemployment, ageing populations and expanded health care programmes. Consumption taxes have risen from 14% of the total tax take in 1965 to 19% in 2003.

U.S. GOVERNMENT PANEL URGES RESTRICTIONS ON CERTAIN TAX BREAKS

Two of the nation’s most popular tax breaks – for home mortgage interest and employer-paid health insurance – should be narrowed, a federal panel appointed by President Bush suggested. The panel’s recommendations will be made in a report scheduled to go to the Treasury Department by November 1. In addition, the panel will recommend giving all Americans who pay taxes the opportunity to deduct charitable donations, even if they do not itemize their tax returns. The most far-reaching proposal previously endorsed by the panel is the elimination of the alternative minimum tax, which would affect 20 million taxpayers next year unless changes are made. But the panel is charged with making revenue-neutral changes, so it must propose raising as much money as the AMT repeal would lose.

Because Bush launched the bipartisan panel, its proposals will carry great weight with the White House, Treasury Department and Republican-controlled Congress. But changing tax law is traditionally one of the most difficult things Congress does, and the short time left before Congress adjourns this year makes it unlikely tax overhaul will be taken up before next year. The real estate and health insurance lobbies have consistently fought proposals to trim tax breaks for mortgages and health insurance. “We’re now talking about the deductions and credits that were so sacrosanct 20 years ago that Ronald Reagan wouldn’t touch them,” said Clint Stretch, tax policy director for Deloitte & Touche.

Wiping out the AMT is a popular move, but cutting popular deductions and exemptions to pay for it is not. Panel members acknowledged that some of their proposals may face trouble at the White House or in Congress. “We’ve got to make bold recommendations without regard to the politics of them,” said John Breaux, the panel’s vice chairman and a former Democratic senator from Louisiana. “The politics will be debated for a long time.”

Options for tax reform.

The U.S. tax system remains terribly complex and inefficient. The number of pages of federal tax rules has increased 48% in the past decade. The complex alternative minimum tax will hit about 35 million households by the end of the decade if not repealed. The high-rate U.S. corporate income tax is under growing pressure as global investment capital has become more mobile.

This study looks at possible changes to address those problems. It identifies three goals for tax reform: simplification, efficiency, and limited government. The latter goal focuses on tax code features such as visibility and equal treatment that cultivate an understanding of the high cost of government.

This study examines reform options including a flat tax, a national retail sales tax, and a savings-exempt tax in reference to those goals. It also proposes a new option: a “dual-rate income tax”. This revenue-neutral option would convert the individual income tax to a two-rate system that eliminates most deductions and credits and allows nearly all families to pay tax at a low 15% rate. A 27% rate would kick in for earnings above $90,000 (single) and $180,000 (married).

To promote growth, the maximum individual rate on dividends, interest, and capital gains would be 15%. The corporate tax rate would be dropped to 15% and interest made non-deductible. These changes would equalize and cut the combined top income and payroll tax rates on wages, dividends, interest, and small business income to just under 30%, compared with between 35 and 45% under current law. The dual-rate tax plan would retain the standard deduction, an expanded personal exemption, and the earned income tax credit. The plan would create a simpler and more efficient taxcode within the structure of today’s system.

ASSET PROTECTION

PANAMANIAN LAW REGULATING LAND OWNERSHIP ON ISLANDS PROPOSED

I received a call from a friend and developer asking if I was aware of a new law #132 being considered in the assembly having to do with the Rights of Possession in islands. I had heard about the law but did not know the particulars. He shared with me that a number of foreign investors and locals in Bocas del Toro were very upset with the proposed law and would be demonstrating this week. K.C. was concerned about the ramifications of a “Land Grab” headline from an international prospective and so was I. Several Internet sites had already run stories pointing out the negative ramifications to property holders if the law were enacted. I made a call to several individuals in Bocas del Toro and was told that “everyone was very upset and felt that the government was making this new law in order to bring in big moneyed developers who could take their land leaving them no recourse.”

I made a call to the commerce department and spoke to the Vice Minister Jose Manuel Paredes and he immediately set up a meeting for me the next day with the Director National de Catastro y Bienes Patrimoniales, Dr. Colamarco. n the meeting, Dr. Colamarco made a presentation in which he explained the history of rights of possession, an overview of the proposed law and the reasoning behind it. The presentation was over an hour and quite in depth, but I have provided a summary of the presentation (DOC format file) to touch on some of the most important points.

It is important to note that the proposed law is in the first round of debate in the assembly and must go through three. There have been a number of modifications and will be some more changes before it will be clear as to the entire provisions of the law. If the law is enacted it will take another 30 days or so to write the regulations governing the law.

HEDGE FUNDS ARE HEADED FOR A LOT MORE TRANSPARENCY, AND NOT BEFORE TIME

Forget the leadership squabbles at the Labour and Conservative party conferences. The best story in the British press this weekend was of a deal-happy hedge-fund manager who spent £36,000 ($64,000) in a London bar in a single evening, including a £3,000 tip for the bemused waitress. It is not the amount spent that leaves people amazed, eye-catching though it was. It is that he was apparently so nice.

What is it about hedge funds? If lawyers had not already taken all the worst jokes, hedge-fund folk would certainly be contenders. The high-paid managers of these lightly regulated investment pools are blamed for everything from the high price of oil to the crumbling of corporate governance. Yet they are looking anything but omnipotent these days, as rumbling scandals combine with so-so performance to turn many traditional investors off hedge funds before newer institutional fans are firmly committed to them.

The long-running financial soap opera that is Bayou Funds finally hit peak ratings last week, as the group’s founder and finance director pleaded guilty in a New York court to persistently cooking the books. Investors are still whistling for most of the $300+ million they put in. Though the Bayou case is the biggest hedge-fund investigation to come before the SEC in five years, it was never more than a years-long fraud perpetrated by a well-connected Louisiana wide-boy. It matters to the world at large mainly because various experts who should have known better (J.P. Morgan, for example, whose Spinnaker Fund was invested in Bayou) apparently did not.

Potentially more worrying, though no wrongdoing has been proven, are allegations about two other fund groups, Man Group and Gamco Investors, for these sit at the heart of the fund-management establishment. With Gamco Investors, the man who masterminds the publicly quoted fund-management group, Mario Gabelli, is being sued by two of his original backers who own stakes in the private company that controls Gamco. Unhappy because they have not ended up with marketable shares in a public company whose share price has trebled since 1999, they allege that Mr. Gabelli and the private firm’s other directors are “guilty of looting the assets of the company, breaching their fiduciary duties to its shareholders and oppressing its minority shareholders.” Mr. Gabelli says that they have treated everyone fairly.

But these brouhahas in the heart of hedgeland are the least of its problems. In a universe of perhaps 8,000 funds, it is not unusual to find a handful of bad apples and another, bigger bunch whose procedures are not all they should be. More worryingly and more generally, growth is slowing sharply. What seems to be happening in Europe, anyway, is that the rich private clients who for years have been practically coterminous with hedge funds are losing enthusiasm for the genre. Meanwhile, the investing institutions that were expected to come rushing in for higher yields have yet to do so in bulk.

More may be at work here than undistinguished returns. After all, protection of capital in bad markets and good – not stratospheric returns – is a large part of what hedge funds are supposed to be about. They are prized for adding stability to portfolios, for being uncorrelated with mainstream markets and for minimising risk through diversification. There are increasing doubts these days as to how much most hedge funds are really doing that – about whether, in short, hedge funds are hedging.

Several relatively recent studies reach disturbing conclusions. The first is that hedge funds overall – even those that define themselves as “market-neutral” – are more correlated with equity markets than used to be thought, and that different strategies are also more correlated with each other than they look. So much for diversification. Another conclusion is that because many hedge-fund investments are relatively illiquid, the way in which they are periodically priced tends to “smooth” returns and hence make funds appear less risky than they are. So much for fancy risk-reward measures such as Sharpe ratios. A final conclusion is that hedge funds are now big enough and intertwined enough with banks to be a new source of risk to the financial system as a whole.

As investors and supervisors are beginning to ask tougher questions, a little more transparency is about to hit this famously murky corner of the financial world. Just as mutual funds, the investment growth story of the 1980s, were eventually forced to divulge more information, hedge funds will be too. Most hedge-fund investment advisers will be required to register with the SEC by next February, though they will not be reporting anything like the information that mutual funds provide. The most useful sort of disclosure will emerge from the market itself. Morningstar and Lipper are among those interested in rating individual hedge funds, though the difficulties are considerable. One wonders how they will rate the fund that Richard Breeden, former head of the SEC itself, is rumoured to be starting.

Hedge fund faces questions about what happened to money of investors.

At a time when several hedge funds have run into trouble, questions are now being raised about a once high-flying fund after investors were not able to find out what had happened to their money. Calls to the offices of the fund, Wood River Partners LP, in San Francisco and Ketchum, Idaho, and to its manger, have not been returned, lawyers for investors say. The SEC has begun an investigation of the fund, according to one person briefed on the inquiry.

Wood River was promoted to investors as a long-short equity fund, meaning it could buy stocks and hold them or bet that a company’s stock price would fall. It was founded in 2003 by John Whittier, a former media and telecommunications analyst with Donaldson, Lufkin & Jenrette. In a letter, dated Feb. 28, 2005, Mr. Whittier indicated that Wood River had net returns of 4.6% for the first two months of the year, compared with a drop of 0.7% in the S.& P. 500 stock index and a 5.7% decline in Nasdaq composite index. Hedge fund marketers who had spoken with Mr. Whittier this summer indicated the fund had performed well in April, a month that had been very difficult for many hedge funds. According to the same letter, the hedge fund posted a 22.8% net gain in 2004, compared with a 9.0% gain in the S.& P. 500 and an 8.6% gain in Nasdaq.

Another fishy hedge fund.

Ketchum, Idaho, is the kind of place where people tend to know each other. Close to the Sun Valley ski resort, the tony town of 3,873 boasts several Wall Street refugees who manage money for wealthy neighbors and clients elsewhere. Yet few residents say they know John Whittier, a 39-year-old money manager who moved to the area about five years ago and opened an office for his fledgling hedge-fund firm, Wood River Capital Management, named for the picturesque river that runs through Ketchum.

Investors in Wood River’s funds apparently did not know much about Whittier, either. The ex-stock analyst at investment bank Donaldson, Lufkin & Jenrette presented himself as a savvy stock trader overseeing hundreds of millions of dollars for investors. Marketing materials for his flagship fund trumpet 25% returns in the first eight months of this year, a period when the stock market was basically flat. But some investors got nervous and tried – unsuccessfully – to get their money back late last month when Whittier’s big bet on an obscure Silicon Valley stock slumped badly, say investors’ lawyers. The firm stopped answering its phone. Last week, Wood River’s offices in downtown Ketchum were locked and apparently unoccupied.

The full picture of what unfolded at Wood River is not yet in focus. Whittier and others at the firm remain incommunicado. But the case clearly illustrates the perils of a secretive sector of the investment industry flooded in recent years by institutions and wealthy individuals hungry for outsize returns. Other potential danger signs included Whittier’s self-proclaimed transformation from low-profile analyst to would-be investment seer. Financial industry veterans fear Wood River will not be the last of its kind to fizzle.

TAXING TIMES FOR OFFSHORE U.K. SAVERS

Life is becoming more difficult for expatriate savers with money in offshore bank or building society accounts in places such as the Channel Islands and the Isle of Man. Not only are interest rates moving down again, but since the European Savings Directive came into force on July 1, many savers will find tax has been deducted at source from their next interest payments.

In theory, the directive, which is designed to stamp out tax evasion, should have little effect on ordinary savers, says Jonathan Spring-Rice, assistant sales director at the offshore services division of Towry Law, an independent financial adviser. “It should not make any difference to the amount of tax people pay,” he says. “Residents of most countries should already have been declaring their worldwide income to their relevant tax authorities.” But there is little doubt that there are offshore savers who, in the past, either misunderstood or ignored the rules. They will have to adjust to the new regime. Mr. Spring-Rice explains, “If savers’ accounts are in countries that opt to tax at source, such as the Channel Islands and Isle of Man, they can either accept those deductions or apply to have interest paid gross. In that case there will be an exchange of information and the details of their interest are passed to the tax authorities in their country of residence.”

Where withholding tax is applied, it will start at 15% for the first three years and gradually rise to 35% by 2011. Both Mr. Spring-Rice and Steve Travis, manager of the international personal financial planning division at The Fry Group, recommend that savers opt for exchange of information rather than tax deduction at source. Mr. Travis says, “It will ensure that savers do not pay more tax than necessary.”

They should also take this opportunity to review their savings accounts. Most British expats prefer to leave their savings in the Channel Islands or the Isle of Man because they feel more comfortable with the British system, but they need to remember the nasty habit of UK banks and building societies of introducing new competitive accounts and leaving rates on old accounts to stagnate.

UK’S Offshore Fraud Project group flexes its information collection muscles.

Neither the use of offshore jurisdictions as a way of mitigating UK tax nor the attractiveness of such jurisdictions, by reason of these countries’ independence and general culture of secrecy, particularly banking secrecy, are recent phenomena. Recently, the international focus, by entities such as the OECD and the EU, has largely been on the issue of secrecy. These bodies argue that a culture of secrecy impedes tax authorities’ ability to collect the “right amount of tax” and enables money derived from tax evasion to be sheltered from recovery. However, they do accept (albeit in some cases reluctantly) that there is a place for nil-tax jurisdictions, and offshore tax planning in the world.

There have been a number of legislative developments, particularly the EU Savings Directive, which suggest that the provision of information from many offshore jurisdictions may soon become routine. However, in the UK, the Offshore Fraud Project Group (OFPG) – which has calculated that about £250 billion has been derived from tax evasion or “unacceptable avoidance” committed in the UK and has been invested in “tax haven” locations – of HM Revenue and Customs (HMRC) has recognized that it already possesses a powerful weapon that it can use to gather offshore information – s20(8A) of the Taxes Management Act 1970 (TMA). Section 20(8A) enables HMRC to obtain information from third parties without naming the taxpayers to whom the notice relates.

The power was introduced primarily for the purpose of enabling the Inland Revenue to obtain information from sponsors of tax avoidance schemes with regard to their clients. Until recently, this power was used only rarely, and almost never for that purpose. Recently, however, it has started to be used by the OFPG to obtain, for example, records relating to credit cards funded from offshore bank accounts held by UK resident and UK domiciled taxpayers.

One of the restrictions on the ability of HMRC to obtain documents by service of a s20(8A) notice is that this power is circumscribed by the stipulation that only documents which are in the “possession or power” of the particular person need be delivered. Intuitively, that appears uncontroversial. However, the terms are not defined in the taxing statutes, and there is little relevant case law. In the first part of the article, an analysis of the terms is provided. In the second part, some examples of when documents would, or would not, have to be disclosed are set out.

HAVEN SENT

Offshore jurisdictions are frequently characterized with clumsy stereotypes of secretive tax havens awash with shady goings-on. It may therefore prove easy for the casual observer to forget that a majority of those locations most commonly described in such terms operate under legal models based – to varying, but nevertheless significant – degrees on the legal system of England and Wales. Correspondingly, commercial law firms operating in these vibrant legal marketplaces are frequently required to turn to members of the English Bar to resolve those cases heard under English law in a wide variety of alternative jurisdictions.

Indeed, a number of leading commercial sets are actively marketing their offshore expertise, dispatching clerks overseas to islands stretching from the Channel Islands to the Caribbean, in a bid to forge links with the leading law firms in each jurisdiction. Despite the considerable variations in legal and taxation regimes, there remain certain key criteria that can be used to identify those at the top of their trade – not least of which is the ability to grasp the unique intricacies of each particular jurisdiction.

PRIVACY

FBI FILES THROW AN UNUSUAL SPOTLIGHT ON THE MOST FAMOUS

The Beach Boys. Frank Sinatra. Liberace. Sonically, the trio shared little – from the California group’s soaring harmonies to Sinatra’s saloon singing to Liberace’s marshmallow soft vocals. But their offstage antics were music to the ears of the FBI, where all three became the subject of muckraking files in the Washington headquarters. The portfolios contain innuendo and allegations, with the occasional revelation thrown in.

The Beach Boys’ penchant for psychedelic drugs and Sinatra’s alleged sex parties with President John F. Kennedy are old news. But who knew of Liberace’s fondness for gambling? The file on Wladziu Valentino Liberace reports that the rhinestone-worshipping Las Vegas entertainer was betting with a bookie in blue-collar Buffalo for years.

Celebrities and criminals, rock stars and mobsters – scores of high-profile Americans have their very own FBI file, a bold-faced universe rife with dirt and scandal. It is no surprise that gossip columnists such as Walter Winchell turn up as sources. The files chronicle mass marketer Walt Disney and mass murderer Ted Bundy, comic genius Groucho Marx and cosmic genius Albert Einstein. There are reports of canoodling (although the FBI prefers “extramarital affairs”), heavy boozing, mob ties, drug use and the rest of the requisite dish.

The FBI also kept a file on The FBI – the long-running television show starring Zimbalist. The real FBI, according to memos, had casting control over its video incarnation. Both Bette Davis and Robert Blake were banned from appearing. Davis was bumped as an alleged communist sympathizer. Blake, recently acquitted of killing his wife, was brushed off after expressing his opinion that “killers aren’t at fault, society is,” according to a memo.

PASSPORTS GO HIGH-TECH

A new high-tech passport era is dawning. Starting toward the end of this year and progressing through next, the new generation of passports issued by the U.S. State Department will be electronic. E-passports, as they are called, are not to be confused with airline e-tickets, which are merely a piece of paper. E-passports will look much the same as today’s machine-readable passports with the familiar gold-embossed blue cover. But the e-passports will contain an electronic chip with uniquely encoded biometric information (a facial photograph) embedded into the back cover. The encoded chip will duplicate the information that is on the passport’s data page – digitized photo, name, birth date, place of birth, nationality, etc. With today’s thin technology, the chip will not add any detectable thickness to the cover.

The U.S. and 27 visa waiver countries – mainly Western European nations along with Australia and Japan that reciprocally do not require visas of American citizens – are in the vanguard of the electronic passport era. In 2002, the U.S. enacted the Enhanced Border Security and Visa Entry Reform Act, which required these countries to issue biometric passports by October 27, 2006. The International Civil Aviation Organization, which sets international standards for passports as well as customs and immigration matters, called for a chip that could store a digital photo, iris scan and fingerprint. The U.S. passport will carry only a digital photo, while other countries might add a fingerprint.

Developing a secure e-passport has not been without snafus. The biggest problems have centered on privacy issues caused by the way the ICAO specs were presented, according to Neville Pattinson, of Axalto, an Austin, Texas-based technology firm developing an e-passport. He said that someone with the right apparatus could electronically “skim” information from the passport from one to two feet away without the user knowing. He also said there is the remote possibility somebody with an antenna and receiver 30 feet away could eavesdrop by intercepting data transmitted by radio waves between a reader at an airport check-in counter and a passport. “We’ve introduced security technology to deal with both of those attacks,” Pattinson said.

ROAD TO SECURE U.S. DRIVERS’ LICENSES LOOKS CHAOTIC

The U.S. has embarked on a massive effort to create a secure digital driver’s license system by early 2008 but some experts warn that the plan may be hugely expensive and lead to chaos. Congress passed the Real ID Act last May and gave states three years to implement it. It laid out minimum national standards for licenses, which will have to include a digital photo, anti-counterfeiting features and machine-readable technology.

States will have to verify all documents presented to support license applications, such as birth certificates, Social Security cards and utility bills, with the issuing agency, and will be required to link their license databases so they can all be accessed as a single network. States will also be required to verify that a person applying for a license is in the country legally. They will have the option of issuing a separate credential to illegal aliens so that they will still be able to drive. All but 11 states now require that drivers licenses be issued only to citizens or legal residents, but many do not verify applicants’ identities.

“This law has the potential for huge bureaucratic and technical problems,” said Cheye Calvo of the National Conference of State Legislatures. “This law was written by people who didn’t take the time to understand how these things are done and didn’t even hold any congressional hearings,” he said. Supporters say the act was necessary because several of the hijackers who attacked New York and Washington on Sept. 11, 2001, had obtained licenses fraudulently which they then used to board planes.

Calvo wonders if the act can be implemented at all. “Whether states will be able to verify so many millions of documents at all, much less in a timely manner, is in question,” he said. Meanwhile, Hispanic groups, immigrant advocacy organizations, civil liberty and privacy groups still hope to derail the act, perhaps through litigation, or by creating a groundswell of opposition that will force Congress to modify or repeal part of the law.

PRIVATE DATA BROKERS PLAY GROWING ROLE IN CRIMINAL INVESTIGATIONS

For the good of homeland security or other law enforcement use, would most Americans give their Social Security and driver’s license numbers, among other personally identifying information, to the FBI or other law enforcement agencies? The fact is, Americans release such information daily, whether they mean to or not. Send a package via FedEx and it usually gets there on time. End of story, right? Wrong.

FedEx keeps people’s personally identifying information in a database and makes it available to the FBI for homeland security purposes. Furthermore, a growing number of data aggregators – otherwise known as data brokers – collect citizens’ personally identifying information and sell it for profit. Among the organizations buying this information are law enforcement agencies, which increasingly turn to the private sector for help with improving intelligence and aiding criminal investigations.

“Thirty years ago, we were concerned about the big, bad federal government and what it was doing,” said Lee Strickland, director of the Center for Information Policy at the University of Maryland and former Central Intelligence Agency analyst. “Now it’s really the commercial entities, and not just the data aggregators, but any company.” Data aggregators such as ChoicePoint, LocatePLUS and Seisint – which was acquired in 2004 by LexisNexis – collect information from a multitude of public and private source, and assemble dossiers on many, if not most, Americans. Then they sell that information to government agencies, such as 50 different Massachusetts police departments and the Florida Department of Law Enforcement (FDLE), which use it for everyday law enforcement investigations.

LAW

THE POLICE STATE IS CLOSER THAN YOU THINK

Police states are easier to acquire than Americans appreciate. The hysterical aftermath of September 11 has put into place the main components of a police state. Habeas corpus is the greatest protection Americans have against a police state. Habeas corpus ensures that Americans can only be detained by law. They must be charged with offenses, given access to attorneys, and brought to trial. Habeas corpus prevents the despotic practice of picking up a person and holding him indefinitely.

Americans may be unaware of what it means to be stripped of the protection of habeas corpus, or they may think police authorities would never make a mistake or ever use their unbridled power against the innocent. Americans might think that the police state will only use its powers against terrorists or “enemy combatants”. But “terrorist” is an elastic and legally undefined category. When the President of the U.S. declares, “You are with us or against us,” the police may perceive a terrorist in a dissenter from the government’s policies. Political opponents may be regarded as “against us” and thereby fall in the suspect category. Or a police officer may simply have his eye on another man’s attractive wife or wish to settle some old score.

The PATRIOT Act has given the police autonomous surveillance powers. These powers were not achieved without opposition. Civil libertarians opposed it. Bob Barr, the former U.S. Representative who led the impeachment of President Clinton, fought to limit some of the worst features of the act. But the act still bristles with unconstitutional violations of the rights of citizens, and the newly created powers of government to spy on citizens have brought an end to privacy.

The prohibition against self-incrimination protects the accused from being tortured into confession. The innocent are no more immune to pain than the guilty. The prohibition against torture has been breached by the practice of plea bargaining, which replaces jury trials with negotiated self-incrimination, and by sentencing guidelines, which transfer sentencing discretion from judge to prosecutor. Plea bargaining is a form of psychological torture in which innocent and guilty alike give up their right to jury trial in order to reduce the number and severity of the charges that the prosecutor brings. The prohibition against physical torture, however, held until the invasions of Afghanistan and Iraq. Everyone is disturbed about this barbaric and illegal practice except the Bush administration. It will be a short step from torturing detainees abroad to torturing the accused in U.S. jails and prisons.

In the Anglo-American legal tradition, law is a shield of the accused. This is necessary in order to protect the innocent. The accused is innocent until he is proven guilty in an open court. There are no secret tribunals, no torture, and no show trials. Outside the Anglo-American legal tradition, law is a weapon of the state. It may be used with careful restraint, as in Europe today, or it may be used to destroy opponents or rivals as in the Soviet Union and Nazi Germany.

When the protective features of the law are removed, law becomes a weapon. Habeas corpus, due process, the attorney-client privilege, no crime without intent, and prohibitions against torture and ex post facto laws are the protective features that shield the accused. These protective features are being removed by zealotry in the “war against terrorism”. The damage terrorists can inflict pales in comparison to the loss of the civil liberties that protect us from the arbitrary power of law used as a weapon. The loss of law as Blackstone’s shield of the innocent would be catastrophic. It would mean the end of America as a land of liberty.

MAJOR BUSINESS GROUPS SPLIT WITH BUSH ADMINISTRATION OVER PATRIOT ACT

President Bush’s push to extend the Patriot Act is drawing fire from a sector that is normally on his side. Six business groups, including the U.S. Chamber of Commerce and the National Association of Manufacturers, are urging Congress to limit that power. They fear the government could get hold of industry secrets and spy on their customers and employees. One amendment they want would require federal agents to prove a link between the records they seek and terrorism. Another would allow people to challenge orders that are “unreasonable” or “oppressive”. The business groups also want to remove gag orders that prevent people from even discussing warrants issued under the Patriot Act.

Trade groups speak out against Patriot Act.

As legislators meet this month to hammer out details for extending controversial provisions of the USA Patriot Act, corporate America finally has found a voice, albeit a quiet one, with which to speak out against the act’s more intrusive surveillance powers. Manufacturers, real estate companies, financial institutions and many others want Congress to restore checks and balances on the government’s power to demand sensitive customer records. Booksellers and librarians have fought to rein in the expanded police powers since the USA Patriot Act was made law, but until now the rest of corporate America remained silent.

What concerns businesses most is the potential for skyrocketing costs in complying with records searches and the growing threat of litigation in other parts of the world where privacy laws are more stringent, six trade groups in Washington told the chairman of the Judiciary Committee. The groups expressed fear that trade secrets and other proprietary information can be too easily obtained and disseminated.

While this possibility is no different today than it was when the Patriot Act was passed, businesses are now less reluctant about taking a stand for fear of seeming unpatriotic, said Susan Hackett, senior vice president and general counsel for the ACC, in Washington, which represents corporations’ in-house lawyers.

Editorial: Senate Patriot Act provisions superior to House’s.

When Congress hastily passed the anti-terrorism Patriot Act only six weeks after the 9/11 attacks, it did not pay enough attention to needed curbs on government powers. Both chambers now have passed legislation that improves on the original bill, but the superior Senate version should ultimately be the one sent to the president for signing. Both versions make permanent 14 of 16 provisions set to expire at the end of this year. The other two provisions have been challenged by civil libertarians from the start:

• The so-called library-records provision allows government to seize information from employers, schools, physicians and just about any one else who keeps records. The judicial-review standard is weak, and your doctor is barred from telling you that your files have been taken.

• The other provision permits “roving wiretaps” – which apply to a person rather than a phone number – without requiring assurance that the suspect is using the device monitored.

The Senate bill will sunset both of these in 2009. The House bill includes a 10-year sunset on the same records and roving-wiretap provisions and much weaker restraints on government power. Lawmakers negotiating the bill’s final version should keep in mind the need to protect constituents from overzealous law-enforcers. The Senate bill better safeguards the privacy and civil rights of law-abiding Americans.

SWISS BANK DEALINGS WITH CUBA UNDER SCRUTINY

A House subcommittee will investigate Cuba and Iran’s dealings with the Swiss banking giant UBS in search of possible money laundering, Miami Rep. Ileana Ros-Lehtinen said. The Cuban-American Republican made the announcement after a meeting with UBS Vice President Bob Gramm, a former Texas senator, produced no new information on the bank’s deals with Cuba.

“It was more of the same, more delays, more unkept promises,” she said. Ros-Lehtinen said the investigation will be carried out by the House Subcommittee on Oversight and Investigations, which has the power to subpoena bank documents. The subcommittee is part of the House International Relations Committee. UBS was already fined $100 million in May of 2004 for violating an agreement with the U.S. Federal Reserve that allowed UBS clients – except countries under U.S. sanctions – to swap old dollar bills for new ones. Cuba funneled $3.9 billion through UBS between 1996 and 2003.

UBS spokeswoman Christina Walton said the Fed has “never suggested or charged UBS with any actions … that had anything to do with money laundering.” Cuba says the money was legitimately obtained, mostly through the tourism industry. Walton said UBS no longer conducts any business with Cuban officials or residents in Cuba. “We conduct our business in the U.S. in strict adherence to local laws, and in the U.S., UBS follows U.S. laws as they relate to Cuba.” However, she added that UBS was a global institution that facilitated “simple, third-party payment transactions on behalf of non-U.S. residents in Cuba. That is the business we are exiting.” This includes remittances sent to the island by Cubans outside the U.S., or payments to foreign businesses operating on the island.

THE LAW MOST LIKELY TO KILL YOU

As many as 1 out of 3 people who have died from disease in the last 40 years did so needlessly because of a single law passed by Congress in 1962! Here is my “insider” story. For 19 years, I was a research scientist with the Upjohn Company, a mid-sized pharmaceutical company. I once joked that we were so busy complying with superfluous regulations, we had little time to discover new drugs. Unfortunately, it is no laughing matter.

In 2003, enough studies had been published on the 1962 Kefauver-Harris Amendments to estimate the true cost of these FDA regulations. Researchers had long suspected that they had thwarted innovation, driven up drug prices, and delayed the introduction of life-saving pharmaceuticals. Prior to the passage of these Amendments, the FDA primarily regulated only drug safety. The Amendments gave the FDA authority over drug manufacturing, advertising, animal studies, and the design of clinical trials. The result was predictable: the time it took to take a drug from the laboratory to the market went from 4½ years to 14½ years. Because patent life was 19 years or less, manufacturers had insufficient time to recover their costs before a drug went generic. In 1984, Congress passed the Waxman-Hatch Act, which partially restored the patent years destroyed by regulation. The act estimated that regulations were responsible for a whopping 84% of the 14½-year development time. Prior to 1962, about 15% of the development time was consumed by regulatory requirements.

The amendments might have saved, at best, 7,000 lives. In contrast, many more died waiting the extra 10 years for life-saving drugs. According to my calculations, about 4.7 million people died over the last 40 years while the life-saving drug they needed was tied up in regulatory red tape! Unfortunately, that is just the beginning. The amendments have destroyed at least half of the industry’s innovative capacity, preventing some life-saving drugs from ever reaching the market. The death toll from losing half of our innovations from 1962 to 2003 is somewhere between 4 and 16 million people depending upon the assumptions used. Adding the 4.7 million deaths due to an extra 10 years of development time suggests that as many as one out of three people who died of disease since 1962 may have done so needlessly.

The 1962 Kefauver-Harris Amendments may very well be the deadliest law that Congress ever passed.

HOW TO STOP TERRORISM FINANCING

The fourth anniversary of the Sept. 11 attacks means the United States has now been engaged in the global campaign against radical Islamic terrorism longer than it was involved in World War II. In any conflict, challenges emerge and strategies and tactics shift. The ability to adapt often determines the victor. Al-Qaida and its affiliates have constantly refined their methods to achieve their aims. Unfortunately, the global intelligence and law enforcement communities cannot be as nimble. The sluggish responses of bureaucracies still scrambling to implement basic reforms has led, in part, to a growing, bipartisan consensus that new strategies are needed for the next phase in confronting global terrorism.

One of the areas most in need of fresh ideas is the campaign to cut off the terrorists’ money flow. Our current tactics draw largely on the campaign against drug cartels’ money-laundering operations developed in the 1980s – a strategy that relies heavily on regulation of the formal financial system, with intelligence working playing a secondary role. This is not getting the job done. Funding for terrorism is the opposite of money laundering. Drug traffickers take rivers of illicit money and make it appear legitimate. Terrorists take funds generated by legitimate charities and businesses and divert a small portion of it to illicit purposes. This “reverse money laundering” is much more difficult to trace and almost impossible to legislate against.

The current strategy has serious flaws. Foremost, the new reporting requirements are flooding the regulatory institutions with paper. Yet with few resources to handle the new inflow of reports, agencies are not able to examine information in a timely manner. Too much information is as damaging as too little. The current strategy also largely ignores strong evidence that al-Qaida and its allies have not relied on the formal financial sector for many years. Instead of using banks, they have turned to informal channels such as the age-old hawala money transfer system; trade in gemstones, gold and other commodities; and financial networks based in offshore tax havens.

Instead of relying on national and multilateral regulatory tools, the focus must shift to developing targeted human intelligence. No regulation can deter or detect small sums of money going to individuals. Only intelligence on such movements will make any difference. By shifting resources from regulation to intelligence, we have a chance to understand the changes in al-Qaida’s strategies and adopt a more flexible, realistic response to the terrorist money flows.

A leftist wants government to declare all out war on “dirty money”.

Estimated at $1 trillion per year, dirty money is any that is illegal in origin, movement or use. It has three components: criminal, corrupt and commercial. Commercial dirty money is the most easily overlooked. Revenue vanishes illegally from a company’s books, beyond the reach of governments, employees and relatives. Tax evasion is an important incentive; indeed, many companies have whole departments dedicated to “transfer pricing”, a means to shift profits from country to country, regularly skirting laws around the globe. A Russian company bought oil in Russia at $10 per metric ton and resold it to its own subsidiary in Europe at $120 per metric ton, illegally enriching the owners. The ill-gotten gains were stashed in bank accounts in Cyprus and stripped Russia of millions in much-needed currency.

All three components of dirty money have the common motivation to get rich secretly. Whoever is hiding wealth, for whatever reason, uses the same bag of tricks to accomplish the deed. Shell banks, offshore tax-havens, dummy corporations, mis-priced invoices, fake transactions and disguised accounts all shield dirty money from scrutiny. Dirty money is hardly a victimless crime. The home countries are robbed of resources that otherwise could fuel economic growth, fund essential services and infrastructure, and feed and educate their citizens. Dirty money leads to violence, poverty and instability, thus taking advantage of already weak countries and leaving the poor even more vulnerable.

Criminals and corrupt officials and corporate leaders certainly deserve their fair share of the blame. However, they do not feed the system alone. American laws have left open legal loopholes to a torrent of dirty money. Treasury Department officials have admitted privately that 99% of dirty money deposited in the U.S. goes undetected, a figure that jibes with estimates by their foreign counterparts. Before 2001, Congress shied away from passing anti-money legislation with any teeth. The simplest explanation for this is that we like the money that flows into the U.S. The result is U.S. laws specifying some 200 crimes that can lead to a money-laundering charge if committed domestically, and a mere 15 applicable crimes if committed abroad.

The first step to mopping up terrorist assets is to address dirty money in all its forms at the same time. This requires laws that criminalize all 200 kinds of dirty money, whether it comes from within the U.S. or from abroad. The 2001 USA PATRIOT Act gave additional anti-money laundering tools to government agencies fighting terrorist financing. But if the U.S. intends to get serious about combating the problem, it must broaden its aim to the whole of dirty money and arm government agencies with the resources and laws they need to succeed.

U.K. ANTI-TERROR LAWS “COULD BE UNLAWFUL”

The government’s plan to detain terror suspects for up to 90 days without charge could be struck down by the courts as a breach of human rights, its own official anti-terror watchdog warned last night. The concerns raised by Lord Carlile QC are believed to reflect reservations privately voiced by the attorney general, Lord Goldsmith, to Tony Blair and Charles Clarke as they finalised the anti-terror legislation published yesterday.

The plan to extend the maximum period under which police can hold terror suspects without charge from 14 days to three months is the most controversial element of the legislation. Lord Carlile, the independent reviewer of the operation of the terror laws, said yesterday that the 90 days maximum was probably a “practical and sensible option” to meet the real problems faced by the police in investigating such cases. Under yesterday’s bill the police will have to apply to a district judge for a week-by-week extension up to 90 days.

But he warned that much stronger judicial control than the equivalent of a magistrates court was needed if the proposal were not to be struck down by the courts on human rights grounds. If necessary the judge should even have the power to order his own investigations. The Home Office minister Hazel Blears said the legislation was compatible with human rights law, and it had been signed off as such by the home secretary. She argued that giving a judge powers to direct the police investigation would amount to a major shift in UK law.

Do not try to push us around, lord chief justice tells Labour government.

The government should not attempt to browbeat judges over its new anti-terrorism laws, the new senior judge in England and Wales warned. The lord chief justice, Lord Phillips of Worth Matravers, said judges were not in conflict with the government but said that it would be “wholly inappropriate” for a politician to try to put pressure on them. His strong defence of the judiciary’s independence comes after Tony Blair, speaking recently on the subject of treating suspected terrorists, said the “rules of the game” were changing.

The clash over human rights and national security will play itself out over the autumn, when senior judges are asked to approve the deportation of terror suspects to Algeria and other countries with poor human rights records. Four appeal court judges have already warned anonymously they “won’t buckle” by just rubber-stamping the “no torture” deals struck with foreign governments.

The statement yesterday by Lord Phillips, in his first media briefing since taking over from Lord Woolf, makes plain that he will support senior judges who insist it is their job, not that of ministers, to interpret the law. “Occasionally one feels that an individual politician is trying to browbeat the judiciary, and that is wholly inappropriate. We are all trying to do our job to the best of our abilities,” he said at the Royal Courts of Justice. “I’m taking up this office at a time when it is said in various quarters that judges are in conflict with the government. They are not. Judges are in conflict with no one. The judiciary has a clearly defined role, which is to apply the law as laid down by parliament,” said Lord Phillips.

OPINION & ANALYSIS

CHRISTOPHER COLUMBUS, HERO AND VILLAIN

If a schoolchild graduates with only one date committed to memory, it is likely to be 1492, the year “Columbus sailed the ocean blue.” A really good student may even be able to reel off the names of his three ships. But common knowledge – and consensus – stops there. In recent years the Columbus story has darkened, with the once-heroic explorer turned into a conqueror guilty of rape and genocide. But Columbus’s accomplishments have always been remembered differently by every generation in the land he found, even as his life – apart from that fateful moment 513 years ago today when he stepped ashore in the New World – remains clouded in obscurity. Who is Columbus today?

The recorded history of his life is a tissue of conjecture and foggy reminiscence, and centuries of Americans have filled in the blanks as best suited their times. Much of what is known about him comes from unreliable sources. He kept a log of his first voyage west, but it has since been lost. All that remains is a summary by the Spanish priest Bartolome de las Casas, who had little nautical knowledge and garbled many passages. Columbus’s son Ferdinand helped revive his flagging reputation with a biography in the 1530s, but Ferdinand was only 17 when his father died, and he waited years to record his memories. Columbus himself shares blame, as he himself spun contradictory and frankly untrue accounts of his life. No one can say for sure even where and when he was born (he avoided admitting his age), although most evidence points to Genoa and the summer or fall of 1451.

Columbus has been constantly reinvented since the birth of the U.S. to mirror our evolving national identity. During the anti-British years after the Revolution and War of 1812, he replaced the Englishman John Smith as the country’s premier explorer. During the age of Manifest Destiny, he morphed into the original expansionist, his sins justifying the government’s conquest of Native Americans. By the Gilded Age he was a pioneering trader, and as the U.S. amassed its first colonies it looked to him as the first American empire builder. Italian and Spanish immigrants deemed him their patron saint.

Columbus’s modern detractors wonder how anyone can forget his misdeeds and enjoy a holiday in his name, but in fact Americans have always ignored the parts of the Columbus story they did not like. Expansionists had to overlook the fact that he never set foot in North America, Gilded Age nativists that he was Italian, Italians his allegiance to Spain, and supporters of religious freedom that he sailed for the king who sponsored the Inquisition.

Arguments rage today about whether he even “discovered” America, since not only did people already live here, but Europeans – evidence particularly supports the Vikings – had been here before. But it is inarguable that he was the first to record his findings and make possible ongoing follow-up trips, and so his voyages, unlike those of earlier explorers, acquainted the people of Europe with the existence of the New World. In so doing, he opened the door to European settlement of the Americas – and all the devastation, innovation, and reinvention that came with it.

LAWLESSNESS IN NEW ORLEANS: TRUTH OR FICTION?

Did you have doubts about some of the news reports emanating from New Orleans last month? Did you suspect that some reports were unbelievable or exaggerated? Did you doubt that the city rapidly descended into a Hobbesian world of brutal, unforgiving, lawless, looting, mayhem and violence? If so, there is a good chance your suspicions were correct. A BBC News article reports that “officials say many of the accounts were probably false or greatly exaggerated,” and that “New Orleans police confirm they have had no official reports of rapes or murders in the days after the city was catastrophically flooded.”

The knowledge that comes out of disaster studies contrasts sharply with common myths about disasters that are perpetuated by the media and often by government officials. The odds are that the reports of rape and murder in New Orleans were exaggerated. The odds are that looting was more than average, but understandable given the circumstances present. The odds are that most ordinary people from all walks of life behaved lawfully. The odds are that the media provided entertainment as usual, not in the interest of accuracy or social responsibility but for audience. We already know that many government officials behaved incompetently and ineptly. The odds are that some behaved criminally.

10 SHOTS AT CHE GUEVARA

Che Guevara fans are preparing to commemorate one more anniversary of the revolutionary’s death, which took place 38 years ago at the Yuro ravine in Bolivia. It is an appropriate time to address 10 myths that keep Guevara’s cult alive. The last time I visited the Museum of Modern Art in New York, an American student wearing a Che Guevara T-Shirt and a beret caught my eye. I asked him politely what exactly he admired so much about that man. Here are the 10 reasons he mentioned – and my response.

BUSH’S SATANIC VERSES

George W. Bush was under orders from God to invade Iraq. That is what he told the Palestinians, according to Palestinian Prime Minister Mahmoud Abbas, who describes what transpired during his first meeting with the American president in June 2003. According to Abbas, Bush told the Palestinian leaders, “God told me to strike at al-Qaeda and I struck them, and then he instructed me to strike at Saddam, which I did, and now I am determined to solve the problem in the Middle East. If you help me I will act, and if not, the elections will come and I will have to focus on them.”

Unlike your typical secular liberal, I am not one to snark at any mention of a divine entity, be it Jehovah or Phoebus Apollo. Instead, I wonder, how does Bush know the voice he is hearing is God’s? God, it seems to me, is the strong, silent type. It is the Other Guy who is a bit of a chatterbox, always whispering in people’s ears, trying to get them to do cool-but-forbidden stuff, tempting and flattering them at the same time. If Bush is hearing voices in his head, then I fear we ought to be very worried, because it is either the delusions of a dry alcoholic, or something far more sinister.

If Bush thinks God Almighty wants him to “stay the course”, then that explains his imperviousness to facts, his fanatic certitude, when it comes to Iraq, and foreign policy in general. His most recent speech, delivered in front of that most useless – and dangerous – of government agencies, the National Endowment for Democracy, exemplifies the sort of worrisome dogmatism that seems to animate him. It is worth trying to understand what, exactly, is going on here, if only because we want to know how and why we are being led to ruin and utter damnation.