Wealth International, Limited

Offshore News Digest for Week of April 10, 2006


Note:  This week’s Financial Digest may be found here.

Global Living & Business Taxes Asset Protection / Legal Structures Privacy Law Opinion & Analysis

GLOBAL LIVING & BUSINESS

PANAMA CITY: FINAL FRONTIER FOR REAL ESTATE VALUE

Avoid US real estate. That is the word from one of the world’s premier real estate moguls, Tom Barrack, Chairman and CEO of Colony Capital. Barrack has earned a fortune in real estate during his career, buying distressed properties at bargain prices and selling them after prices soar. Barrack believes the U.S. offers poor values in most regions today. Miami and San Diego are the most expensive and therefore ripe for big declines. The 58-year-old real estate titan is now selling his U.S. holdings because he is afraid a real estate bust is coming as construction and labor costs continue to soar.

One of the greatest real estate bargains left on this side of the hemisphere is still Panama City. Whereas amateurs continue to speculate in red-hot “bubble” markets across the American coastline, Panama City is truly one of the greatest real estate investment deals of the decade. As a regular visitor to Panama since 2000, I can tell you that the skyline is reminiscent of Miami at night – with all the glitter and hype of an international city. Buildings continue to shoot up across the city, including downtown Panama City, Latin America’s regional hub for commercial banking. Modern condominiums are lavishly finished with the finest Italian marble and sell for just a fraction compared to the ballooning levels of real estate prices in the U.S., Canada and the European Mediterranean sun-belt.

Panamanian real estate was hit hard early this decade following America’s departure on December 31, 1999, when the U.S. control of the Panama Canal reverted to the Panamanian government. The resultant transfer led to a real estate glut following the withdrawal of U.S. forces. Panama’s economy barely grew from 2000 to 2003, while the rest of Central America and most of Latin America saw strong gross domestic product growth on the heels of booming raw materials prices. But starting in 2004, construction activity has sprawled across the city's impressive landscape. In 2005, Panama’s economy grew a healthy 6.4% with revenues rising on all fronts.

As the city continues to draw yield-hungry investors and bargain-seeking residents, Panama City is quickly becoming the next “big” thing for international real estate investors. Compared to other popular Central American countries like Costa Rica and Nicaragua, Panama offers far more value and superior modern infrastructure. In a global environment of mostly inflated asset values and prime real estate located on beachfront property, Panama is the bargain of the decade. For value investors, Panama is the best bang for your real estate buck in this decade.

Link here.

MINNESOTA BUSINESSPEOPLE FLOCKING TO COSTA RICA

When Wayne Bishop visited Costa Rica 12 years ago, he was wowed by the country’s natural beauty, but he was even more taken aback by its investment potential. “If you had any entrepreneurial nose, you could see the raw opportunity there,” he said. “Most developments have been mom-and-pop operations. … There’s an opportunity for them to be properly planned, Western style.” So Bishop, co-founder of Minneapolis architecture firm Walsh Bishop, spent the next several years looking for land on which he could build a Western-style resort. In 2000, he and some co-investors, including the Marvin M. Schwan Charitable Foundation in St. Louis, broke ground on the first phase of Peninsula Papagayo, a project anchored by a golf course and a 210-room, five-star luxury hotel. That is just a fraction of the investment he and several other Minnesotans have made, or will make, in the Central American country. “I’ve been inundated with calls from Minnesotans that have land and are looking for my advice,” said Bishop, who sold his interest in Papagayo to the Schwan Foundation and is working on several additional Costa Rican developments of his own.

The relatively small country has become a popular vacation spot, and visitors are coming back to Minnesota enchanted, just as Bishop did. Word of what he and other entrepreneurs are doing in Costa Rica has spread, prompting more investment. One draw is the sheer number of U.S. citizens expected to move to Costa Rica. Bishop said he has heard the U.S. government say it anticipates 1 million Americans will retire in Costa Rica during the next 10 years. Others, like Bishop, say they simply become enchanted when they visit for pleasure. Even though it is a fraction of the size of Brazil, Costa Rica claims to have more rain forests and species of birds and animals. There are many cultural differences between Minnesota and Costa Rica, he said, but for the most part, business is done the same way. People are educated and they do business “above board”.

Potential developers need to consider that the Costa Rican government is active in protecting the environment. It limits the height of hotels along the coast so it does not become another Miami or Cancun. Ecological tourism is the biggest contributor to the country’s GNP, and officials want to protect that. But it is not just developers pushing into the country. A Minnesota-based mortgage company is setting up shop down there, Bishop said. Other service companies will likely do the same as the Minnesota contingent there grows.

Several Minnesotans are partners in a macadamia-nut business in Costa Rica. While the business started in 1989, investors say it is coming out of its shell. [Uug!] The group of investors – there are about 80 today – bought the macadamia plantation, called Finca La Anita, to save it from loggers and to employ a village of about 350 people nearby. Finca la Anita is not yet profitable. It takes awhile to get such an operation up and running. Macadamia seeds must spend two years in a nursery before they are planted, and it takes another five years before trees yield nuts.

Link here.

CARIBBEAN BRACED FOR ANOTHER HURRICANE SEASON

Meteorological experts are predicting that 2006 will be another active hurricane year for the Caribbean, which has been battered by severe storms in each of the previous two years. The TSR (Tropical Storm Risk) April forecast update for Atlantic hurricane activity in 2006 continues to anticipate an active season at a high probability level. Based on current and projected climate signals, Atlantic basin and U.S. and falling tropical cyclone activity are forecast to be about 50% above the 1950-2005 norm in 2006. Worryingly, TSR, a UK-based academic institution, believes there is an 80% probability that activity will be in the top one-third of years historically. TSR is predicting that there will be eight Atlantic hurricanes in 2006, four of which will develop into “intense” hurricanes. TSR accurately predicted that 2005 would also be an active hurricane season. The season was the longest on record, finishing on January 6, and was also the most damaging season on record, causing insured losses of $50 billion, according to TSR’s figures.

Link here.

NEW YUKOS VP ARRESTED DAYS AFTER APPOINTMENT

Embattled oil company Yukos’s new vice-president was arrested on charges of embezzlement and money laundering. Mr. Vasili Aleksanyan was appointed by Steven Theede, CEO, on 1 April 2006 and his appointment was unanimously ratified by the Board of Directors on 4 April 2006. Just days after this appointment he finds himself under arrest and remanded in custody. While Yukos has paid billions to the state in back taxes, and was forced to auction off its main production unit, Yuganskneftegaz, at a knock down price to help reduce its crippling debts, the company still owes the government more than $10 billion of a tax bill which eventually totaled approximately $30 billion.

The former chief executive of Yukos, Mikhail Khodorkovsky, now languishes in a Siberian jail after being found guilty on multiple counts of tax evasion, fraud and money laundering following a highly politicized show trial which many observers believe was a demonstration of power by the Putin government. Mr. Khodorkovsky’s lawyer Mr. Amsterdam, who was expelled from Russia last autumn, commenting on the arrest of Mr. Aleksanyan had this to say: “I condemn the arrest in the strongest possible terms. Western nations have no right to wring their hands over this latest assault over the rule of law because it is they who have tacitly legitimized this assault against the rule of law in Russia. It is the Western banks who made a pact with the devil to force Yukos into bankruptcy and then be first in line for the spoils.”

Link here.

ANTIGUA TO DEFY U.S. OVER WTO GAMING RULING

The U.S. has apparently told Antigua that it will take no action to comply with the WTO’s ruling on the U.S. vs. Antiguan gaming dispute. The WTO’s deadline expired last week. The ruling by the WTO Appellate Body in April 2005 upheld one of Antigua and Barbuda’s complaints over U.S. prohibitions, which prevented U.S. banks and major internet search engines from doing business with gambling firms on the island. U.S. federal laws bar the placing of bets across state lines by electronic means, preventing Antiguan online gambling companies from accessing U.S. customers. The U.S. had asked for and was given a year in which to take remedial action, but in fact the only legislative action taken in the U.S. is the reintroduction of a bill which would worsen, not improve the situation of offshore gaming sites.

Whatever the law says, the reality is that U.S. punters are estimated to be behind up to half of the $12 billion a year wagered in cyber casinos. Antigua-based operators are thought to account for 25% of this turnover. Mark Mendel, Antigua’s counsel, based in El Paso, Texas, says that Antigua plans to impose compensatory trade sanctions against the U.S. under WTO rules. Putting tariffs on U.S. exports would only harm Antigua, but Mendel points out that lifting U.S. patent and copyright protections in Antigua would permit a manufacturing wave of knockoff products such as music CDs and DVDs. He says that WTO once granted similar patent waivers as compensation in a case involving Ecuador.

Link here.

Costa Rica: The Internet’s Las Vegas

It is more than 2,000 miles away from Las Vegas or Atlantic City, but if you place a bet on the Internet, odds are it will end up being processed in Costa Rica. There, on the night of the NCAA basketball championship game, the bets were pouring in to BETonSPORTS.com. The Costa Rican-based company, by our estimates, took in 100,000 wagers that game alone.

This small Central American country has become a new capital for Internet gambling. More than 200 companies have set up shop here. The biggest attraction? They do not have to pay taxes on profits they earn outside the country. They are also out of reach of U.S. authorities, who say companies like BETonSPORTS.com are in violation of the U.S. Wire Act by taking bets online illegally. Not everyone agrees. “I say I’m not,” says David Carruthers, BETonSPORTS.com’s CEO. “If I was doing this in the United States, it would be illegal. But I’m not.” How many calls does the company get on an NFL Sunday? “About 60,000,” Carruthers says.

Internet gambling has become a $12 billion global business. BETonSPORTS.com is even traded on the London Stock Exchange. Among its biggest investors are blue-chip U.S. firms Fidelity, Morgan Stanley and Goldman Sachs. But the U.S. government has gone after the support system for Internet gambling. For example, it has forced eBay’s PayPal unit to pay $10 million for processing payments to offshore companies. “But I will tell you, it’s very, very difficult to enforce (U.S.) law in jurisdictions that don’t respect United States statutes,” said Rep. Jim Leach, R-Iowa, who is leading a push for tougher laws.

“If you ban online gaming, all you’re going to do is drive this activity into the hands of undesirables,” Carruthers said. “And that’s very, very dangerous.” For now, in the poker game for Internet gambling’s exploding market, Costa Rica is holding a winning hand.

Link here.

GHANA PLANS TO BECOME INTERNATIONAL FINANCIAL CENTER

Ghana’s president has said that the government is committed to transforming Ghana into an international financial services center. President Kufuor said that he believed this was now possible because of macro-economic stability, investor confidence and a upbeat business climate. The president believes these features, as well as good governance, will help Ghana to stand out as the best-suited country to provide financial services to the whole of Africa. “Doing Business in 2006”, a recent World Bank survey, placed Ghana as the easiest place to do business in Africa. Being designated as best in protecting investors, paying taxes and enforcing contracts in the sub-region has led the World Bank to recognize that Ghana has the potential to house a regional finance hub.

Link here.

OFFSHORING THE OFFSHORERS: INDIA HEARS FOOTSTEPS

India reaped new fortunes in its recent rise as an outsourcing powerhouse. But now India hears footsteps: China, the Philippines, Hungary, the Czech Republic and several Latin American countries are luring offshore outsourcing jobs as well. The surprise? Some of India’s offshoring giants are offshoring themselves, fueling the next round, and U.S. firms are joining in. Indian outsourcer Tata Consultancy Services has opened offices in Budapest, Hungary and Hangzhou, China. Last year it acquired a 1,300-employee outsourcer in Chile, and it plans to add 1,500 to the 485 people at its Brazil arm. “Several years ago we decided the India-centric model had to change. We needed to offer seamless delivery from around the globe,” says Subramanian Ramadorai, chief executive.

In the 1980s outsourcers in India did low-rung jobs such as data entry and some software development. In the 1990s they expanded by doing larger software projects and by taking over whole IT systems and back-office functions such as accounting for U.S. and European corporations. Now they draw a bead on more sophisticated services – engineering, research and development, and designing auto parts, sections of aircraft wings and chips for wireless services. Other countries are moving up the ladder, too. SPI Technologies, a firm in the Philippines, is hiring lawyers and law professors to do analysis for a large U.S. legal research outfit.

The global expansion is here to stay. Spending on offshore information technology services will nearly triple in six years to approach $60 billion by 2010, says research firm Gartner. Engineering design “will be the next big wave of global sourcing options” in manufacturing, the firm says, predicting that spending on outsourced R&D and engineering will grow 10-fold in the same period. More broadly, offshore employment in IT, banking and six other areas will have doubled between 2003 and 2008 to 1.2 million jobs, says McKinsey Global Institute. India still is a hot spot. U.S. firms EDS, Accenture, Keane and Convergys are doubling (or tripling) their outsourcing staffs in India in the next few years. IBM says it, too, is adding staff there. Even with annual wage inflation of 15% to 20%, U.S. companies can hire well-educated Indians for $10,000 or less a year, one-fourth the cost of an entry-level worker in the U.S.

The result of this global shift? “Better services and lower costs,” says Atul Vashistha, chief executive of Neoit, which advises companies on what and where to outsource. “Five years ago when I called an airline, I used to wait 15 minutes for them to answer my call,” he says. In the offshoring era, with people in countries like Jamaica and India answering such calls, that happens a lot less.

Link here.

SWISS CITIES OFFER BEST QUALITY OF LIFE FOR EXPAT WORKERS

Switzerland has emerged as the country with the highest quality of living in a survey designed to help governments and multinational companies place employees on international assignments. According to the annual World-wide Quality of Living Survey by Mercer Human Resource Consulting, Zurich ranks as the world’s top city for quality of living, scoring 108.2 – marginally ahead of Geneva which achieved a score of 108.1. The analysis covers more than 350 cities which are assessed on an evaluation of 39 separate criteria including political, social, economic and environmental factors, personal safety and health, education, transport, and other public services. Cities are ranked against New York as the base city, which has an index score of 100.

Link here.

TAXES

EUROPE LEADS THE RACE TO CUT CORPORATE TAX

Company tax rates across Europe are being driven steadily down by a combination of competition among EU member states for jobs and capital, and economic liberalization, according to a survey by KPMG, the professional services firm. Average corporate tax rates in the EU fell by 0.28% to 25.04% in 2005, thanks to rate cuts in six EU member states including France, Greece and the Netherlands. This compared with average rates of 28.31% for the OECD countries, 28.25% for Latin America and 29.99% in the Asia Pacific region. In the UK, the rate was unchanged at 30%.

The countries with the highest tax rates were Japan with 40.69% and the U.S. with 40%. Lowest was the Cayman Islands with a corporate tax rate of 0%. Of the 86 countries surveyed, the majority had either kept their tax rates unchanged since 2004, or had reduced them. The largest reductions were in Barbados (-5% to 25%), Albania (-3% to 20%), Israel (-3% to 31%) and India (-2.9% to 33.66%). Countries reporting significant increases were the Dominican Republic (+5% to 30%) and the Philippines (+3% to 35%).

Loughlin Hickey, Global head of KPMG’s Tax practice, stated that a low tax rate does not necessarily mean a low tax burden, and national tax burdens can vary significantly regardless of the headline corporate tax rate. “Effective tax burdens can vary significantly depending on the attitude of governments and their tax authorities to corporate taxpayers, ranging from aggressive policing to actively promoting business collaboration. Clarity and certainty in the application of tax laws is a rare, but much prized commodity," he noted.

Link here. German government mulls corporate tax cuts – link.

IRS EYEING EXECUTIVE PAY

The Securities and Exchange Commission is not the only regulator taking a closer look at executive compensation. The IRS will be scrutinizing executive pay this tax season too, as part of its continuing effort to force more companies to treat fringe benefits as wages for income and employment tax purposes. In 2004, the IRS launched a pilot program to investigate 24 companies already under audit to gauge their level of compliance with executive compensation rules. The test group fared poorly, and, as a result, executive pay became “an area for agents to focus on,” says an IRS spokesperson. Since then, the agency has released tax guidance in the form of a 2005 memo called an “audit technique guide”, and continues to keep a watchful eye on how companies book executive bonuses and perks. This year is no exception.

The IRS will not only be looking at high-profile items, such as stock option expensing and no-cost loans this year. Agents will be looking into more mundane areas, such as life insurance for spouses, club memberships, and transfer of company property, says Douglas Rogers, an executive with specialty insurer Capital Risk Partners. He should know. Until he left the IRS in January, Rogers was the director for Penalties and Interest, the department that assures fines are assessed, and interest calculated, consistently. Rogers explains that the IRS does not care about “how much” a company pays its executives. Rather the emphasis is on what form the pay takes, and how the payment is characterized in terms of an expense deduction, as well as its effect on withholding and other payroll taxes. Based on his 32 years of experience with the agency, Rogers worked up a list of compensation perks that may not seem unusual or controversial, yet may pique the interest of agents focused on uncovering compensation violations. Below are Rogers picks.

Link here.

IRS COLLECTIONS ROSE 10.7% IN 2004, TO $830.4 BILLION

The IRS has announced the release of its latest issue of the Statistics of Income Bulletin, which shows that in 2004, Adjusted Gross Income (AGI) rose for the second year in a row, increasing by 8.9% to $6.8 trillion. The SoI Bulletin includes an article on preliminary data from individual income tax returns for 2004. The largest component of AGI, salaries and wages, increased 6.0% to $4,977.9 billion, while net capital gains rose 53.2% to $442.1 billion. Taxable income increased 10.6% to $4.6 trillion. For 2004, taxpayers filed 132.4 million U.S. individual income tax returns, an increase of 1.4% from the 130.6 million returns filed for 2003. Total income tax revenue increased 10.7% to $830.4 billion, and total tax liability increased 10.5% to $870.3 billion.

Link here.

U.S. LAWMAKERS ABANDON TAX CUT NEGOTIATIONS, WHICH WOULD HAVE INCLUDED AMT RELIEF

Republican lawmakers have abandoned their attempt to push through a $70 billion tax cut package after House and Senate negotiators failed to reach agreement on the provisions of the bill ahead of the April Congressional recess. The postponement of the talks means that lawmakers will not be in a position to approve important provisions such as extending the capital gains and dividend tax cuts for an additional two years, nor put in place an Alternative Minimum Tax “patch” before the April 17 tax filling deadline, as had been hoped. The investment tax cuts are due to expire at the end of 2008.

If left to expire, the top tax rate for capital gains would increase to 20%, and dividends would be taxed at marginal tax rates as high as 39.6%. Failure to agree a final tax cut bill also means that millions more middle-class Americans will be dragged into the AMT net this year. A temporary provision, effective through 2005, increased the AMT exemption amounts to $40,250 for a single taxpayer, and $58,000 for a married couple filing a joint return. Beginning in 2006, the AMT exemption amounts declined to $33,750 for a single taxpayer, and $45,000 for a married couple filing a joint return. Without any change in the tax law, the number of taxpayers subject to the AMT would increase by 20.4 million (from 5.5 million in 2005 to 25.9 million in 2006). However, the Administration has stated its intention to find a longer-term solution to the AMT problem within the context of “fundamental tax reform”.

Link here.

AUSTRALIA’S TAX BURDEN AMONG OECD’S LOWEST, CLAIMS TREASURER

Australian Federal Treasurer Peter Costello has claimed that a recently commissioned study into Australia’s relative tax competetiveness shows that the country is on of the most lightly taxed members of the OECD. Costello announced the report conlcudes that, with an overall tax to GDP ratio of 31.6%, Australia is “a low tax country by comparison with other developed economies.” Australia has the eighth lowest tax burden of the 30 OECD countries, the report stated. The study’s aim was to identify areas where Australia both leads and lags its international trading competitors. “Australia’s mix between direct and indirect taxation is in line with other OECD countries, although the composition differs,” observed Costello.

Australia is one of only eight OECD countries that does not levy any wealth, estate, inheritance or gift taxes. Costello also noted that some of the countries that have a lower tax burden than Australia, notably Japan and the U.S., run very large fiscal deficits. “The biggest structural difference between Australia’s tax system and those in other countries is our absence of social security contributions,” Costello continued. Costello said that Australia’s direct taxation of individuals and payroll is 14% of GDP, which is the fourth lowest in the OECD. Australia’s top marginal personal tax rate of 48.5% is slightly higher than the OECD average of 46.7%, while the threshold for the top marginal rate is slightly lower than the average for the OECD, according to the report.

Link here.

Australia to cut tax regulations page count By 31%.

The Federal Treasurer of Australia, Peter Costello, has released draft legislation containing proposals to repeal more than 4,100 pages, or almost one-third, of redundant and inoperative provisions from Australia’s tax legislation. The release of the exposure draft follows a report by the Board of Taxation which identified inoperative provisions in the 1936 and 1997 Income Tax Assessment Acts. In announcing the release of the draft legislation, the Treasurer said the exposure draft is a major step to reducing the complexity of tax laws, as it proposes the reduction of income tax legislation by more than 31%.

Link here.

NEW ZEALAND GOVERNMENT USHERS IN “FAIRER” INVESTMENT TAX REGIME

New Zealand is to introduce a fairer regime for taxing domestic investors who invest in New Zealand and overseas, which will mean a tax cut of NZ$110 million (US$67 million) a year from next April, Finance Minister Michael Cullen and Revenue Minister Peter Dunne announced. “We want a system that doesn’t encourage investors to favor investing overseas over investing in New Zealand,” the two ministers noted in a joint statement. “We are removing distortions which favor sophisticated direct investors over those who choose to invest through managed funds and unit trusts.” The minister stressed that the new tax regime does not amount to a “money grab by the government” and will cost about NZ$110 million a year in foregone tax revenue.

Currently, lower-income savers are taxed at 33% on their savings even though their correct rate may be 19.5%. This creates a significant tax disincentive for lower-income savers to use managed funds in order to have access to a diversified range of investments. Those whose tax rate is 39% will continue to have their savings taxed at 33%. Capital gains on New Zealand and Australian shares held via a vehicle like a managed fund will no longer be taxed. This will increase the gains for those who choose to invest in these types of vehicles and offset the advantage of those who invest directly in NZ and Australian shares because they are only taxed on dividends. Both these measures put managed funds on an equal footing with direct investors.

Link here.

U.S. GOVERNMENT HIGHLIGHTS TAX ENFORCEMENT EFFORTS

The U.S. has continued its “vigorous” efforts in the criminal and civil courts against people who engage in tax fraud and other forms of non-compliance with federal tax laws, the Department of Justice announced. Since 2001, the DoJ says that the government has successfully prosecuted hundreds of tax cheats and promoters of abusive tax schemes and has sought and obtained civil injunctions to stop the promotion of tax scams and the preparation of false and fraudulent tax returns. These enforcement efforts have been “significantly increased” during the past year and the DoJ highlighted some notable success for the Tax Division in bringing to book some large corporations, such as KPMG, which was ordered to pay fines, restitution and penalties in August 2005, and HVB, Germany’s second largest bank, which entered a deferred prosecution agreement for its role in facilitating tax shelters marketed by KPMG. In 2006, the DoJ has also won significant court victories against users of tax shelters such as Corporate Owned Life Insurance (COLI), contingent liability tax shelters and “lease stripping” shelters.

During 2005, the DoJ’s Tax Division authorized prosecutions against 1,256 defendants for tax crimes such as concealing income and assets through trusts, shifting assets offshore, and claiming fictitious deductions. This is an increase of more than 43% over the 877 defendants authorized for prosecution in 2001. Since January 2001, the Justice Department has sought and obtained injunctions against more 170 tax return preparers and promoters, including 66 since January 2005, and it expects to obtain many more throughout the year. “Our injunctions suits enable us to stop the harm caused by the promotion of tax fraud schemes and the preparation of false tax returns,” added O’Connor. “By taking action, we minimize the number of people who get caught up in these schemes and help to assure that everyone abides by this essential duty of citizenship – the duty to pay tax.”

Abusive shelters for large corporations and high-income individuals have cost the federal treasury more than $10 billion annually, according to Treasury Department estimates.

Link here.
Ernst And Young has become the latest “Big Four” accounting firm accused of selling dubious tax shelters – link.

ASSET PROTECTION / LEGAL STRUCTURES

ON THE QUESTION OF GOLD CONFISCATION

I have gotten a flurry of emails on and off about confiscation of gold and or silver bullion. My position is to be in physical assets in your possession, not much in electronic or stock accounts. The philosophy also includes a paid-off house, and other real assets in your possession. The premise is that physical possession is key when markets are crashing or illiquid, and if you have possession, you do not have to worry as much about getting your hands on your money by having to sell it into such a market. You do not have to worry about frozen accounts in a financial crisis – you already have your hands on it. To me, possession is not only “9 tenths of the law,” it is the best protection period.

Now about confiscation. The U.S. had gold confiscation in the 1930’s during the Great Depression. We had gold and silver coin currency in circulation, i.e., a gold dollar. The U.S. instituted mandatory conversion of gold dollars into fiat dollars, i.e. they wanted all the gold coin $U.S. currency back in the hands of the U.S. government. Ultimately, they only got a relatively small fraction of it back. The rest was hoarded in the U.S. and abroad. Safe deposit boxes were also attached by the U.S. government, and citizens were allowed to keep about $100 of gold coin, the rest was confiscated (converted into paper dollars) by the government. This is a scary proposition. When depositors went in to open their boxes, they were not permitted to do this in privacy, but in the attendance of a government agent, who would buy any gold from you with U.S. dollar paper money.

At that time, one of the motivations for collecting the gold coin was that the U.S. wanted to deficit spend during the depression to stimulate the economy and do government hiring programs that proliferated under Franklin D. Roosevelt. When we had gold coin, that restricted the government’s ability to deficit spend, so that was one major reason why the gold U.S. coin was confiscated by law. They were also afraid of gold hoarding, i.e., flight out of the U.S. currency, and so gold bullion was also confiscated. There is one major difference between today and then. We do not have gold U.S. coin currency now, so one of the prime motivations to confiscate gold in the 1930s is not at work today. The other risk, however, that of flight out of the U.S. dollar into gold hoarding, still remains in effect.

To get around flight out of the dollar, the major issue to the U.S. government would have to focus on is the currency markets because they have the size and liquidity to do the job. The US government would probably institute foreign exchange restrictions, i.e., freezing the conversion of electronic accounts into other currencies. That is, accounts already denominated in US dollars would probably be forced to stay in U.S. dollars. The amount of gold bullion available is a very, very small fraction of the total assets available for a change out of U.S. dollars. Foreign currencies would be the prime objective for converting out of the U.S. dollar, and gold would be a very small part of this equation. Therefore, I do not see gold being the main target of foreign exchange restrictions as it was in the 1930s. However, the U.S. can indeed confiscate anything they feel threatens the stability of the U.S. dollar with laws already on the books.

Electronic gold accounts would be a major target of these foreign exchange restrictions, however. These are liquid alternatives to U.S. dollar accounts, but again, the size of these things is literally a drop in the ocean of U.S. dollar accounts worldwide. The only real way that U.S. dollars could be washed in a currency crisis would have to be into other foreign currencies that have the size and liquidity to be able to handle the volume of U.S. money that would seek haven. The gold stocks, the gold ETFs and gold bullion are a minute fraction of the market size and liquidity that would have to be available. If we were to consider the actual gold bullion in the hands of private individuals, that gold would just become unavailable for any U.S. dollar price until the dollar either stabilized or crashed into nothingness. As a matter of fact, I believe that gold bullion in general will become unavailable for any dollar price in the event of a serious dollar crisis.

What is my point? Gold bullion is not going to be a feasible alternative to flight out of the U.S. dollar because there is not enough of it to make a market. The U.S. would have to institute currency exchange restrictions like Argentina did a few years ago, where they prevented people from taking out pesos (allowed a very low monthly withdrawal), and froze bank accounts. Now, it is possible that the U.S. would seek to get the gold bullion from the citizenry, but that would not be the major source of pressure on the dollar in a real crisis. I do believe, however, that larger gold depositories would be subject to freezes or attachments. Also, I do not foresee that having these depositories out of the country is going to do much. The U.S., Japan, and Britain are very closely aligned monetarily, and will cooperate in a real USD crisis and lock up large gold depositories under their jurisdictions. It is my opinion that a few hundred or few thousand ounces in one’s personal possession will be a very small issue to the U.S. government.

There is another issue. Since gold is non-traceable, it is possible that the U.S. government would seek its control for security issues. In fact, is some speculation that some large gold ETFs are vehicles of choice for non-legal money. That is not the ETF’s fault, but it does put a spotlight on them in this regard. It may be possible that transacting in gold bullion would be too dangerous in a security alerted world. In that case, gold would have to just be kept for a later time, and not spent.

Link here.

FANTASY ISLAND: IS TINY CYPRUS YOUR COMPANY’S NEXT TAX HAVEN?

When Slobodan Milosevic died in his jail cell in March, he left behind an $800 million mystery. Between 1992 and 2000 the Serbian strongman spirited at least that amount, much of it in cash, out of the former Yugoslavia, according to papers filed at the war crimes tribunal in The Hague, Netherlands. The money was loaded onto an airplane and flown 1,000 miles to a small airport in Larnaca, Cyprus. Why there? Because, says an alleged co-conspirator and courier, the tiny Mediterranean island was “a passage to the world.”

Where did the money go from there? Court papers say Milosevic and co-conspirators set up eight Cypriot front companies, including one registered by the law firm of Tassos Papadopoulos, the nation’s current president. (Pambos Ioannides, head of Tassos Papadopoulos & Co., admits the firm opened a holding company called Southmed but strenuously denies it was set up on behalf of Milosevic or his regime.) These outfits allegedly set up some 250 bank accounts in Cyprus and Greece, and funneled money to more than 50 countries, including Liechtenstein, Luxembourg and Switzerland. Much of it was used for purchases from military supply businesses in the U.S., Russia and Israel. At least $3.5 million went to a company called Aviatrend, run by reputed Russian arms dealer Valeri Tchernyi. What happened to the rest is anyone’s guess.

Once part of the Byzantine Empire, Cyprus is a great place to make things disappear. This nation, population 740,000, has long been a way station for rogues and scoundrels, where officials have traditionally been willing to look the other way. Just 150 miles from Beirut, closer to the Middle East than to Europe, Cyprus has been a mecca for cigarette smuggling, money laundering, arms trading – allededly even terror financing, according to a post-Sept. 11 congressional hearing. The site of secret meetings between Israelis and Palestinians, it has also been a refuge for Russians transporting wealth of immense size and dubious provenance.

So it may come as a shock that Cyprus is now selling itself as the next tax haven for corporate America, a Delaware on the Mediterranean. As in Luxembourg or the Cayman Islands, businesses can cut their tax bills by setting up a holding company without any physical assets. To prepare for its entry into the EU in May 2004, lawmakers enacted legislation to strengthen anti-money-laundering rules, require greater transparency in business dealings and discourage tax evaders. U.S. officials agree that Cyprus has come a long way in cleaning up its act. People entering or leaving the country to declare currency or gold bullion worth $15,500 or more. Banks must report large cash deposits and suspicious transactions, and bank officials may be held personally liable if their institutions scrub clean dirty money. U.S. Treasury officials also say that Cyprus is likely to have money-laundering problems for some time. For American companies, though, there are still obvious attractions. Cyprus offers the lowest corporate tax rate in the EU, 10%, as well as a bevy of tax breaks and 33 international treaties to prevent double-taxation.

If you want dirty business, look at the Turk-occupied north, say Cypriot authorities. A potentially charming tourist destination, this slice of the island has been racked by embargoes and years of ethnic anger, making it all but impossible for sizable in – launched when the island’s divisions seemed at an end – and a dearth of upscale hotels, Western banks and amenities. The void is filled by casinos, some two dozen of them, owned by Turkish mainlanders and essentially unregulated. Some 500 “finance institutions” that give loans are also unregulated, and a 2004 U.S. State Department report says northern Cyprus has become a conduit for narcotics trade between Turkey and Britain as well as a destination for money launderers.

Link here.

NEW TERM LIFE POLICIES GIVE BACK THE PREMIUMS YOU PAID – IF YOU LIVE LONG ENOUGH

Brandon Cook, a Houston technology consultant, father of two and husband of one, was in the market for $1 million of life insurance. Obvious choice? A 30-year level payment term policy, one with a premium that is guaranteed not to rise but which builds no cash value whatever. For a male nonsmoker of Cook’s age (31), such coverage is available for $1,090 a year. But you put in all this money and at the end of 30 years have nothing to show for it. The traditional answer to this dilemma is an entirely different kind of policy called whole life. A $1 million policy would build a very significant cash value after 30 years, but whole life is immensely more expensive. The answer, for Cook, was a baby step toward whole life called return-of-premium term insurance. At the end of 30 years the buyer, if he is still alive, gets all his premiums returned, without interest. If he dies before then, his beneficiary gets the $1 million but no return of premiums.

Cook likes the ROP insurance because it allows him, even while he protects his family, to bet on his own health. Odds are that Cook will win this bet. The chance that a man his age will die by age 61 is only 5%. The ROP policy that Cook bought, from Genworth Financial (formerly part of GE) is costing him $1,671 a year. In effect, with the Genworth policy Cook is buying straight term worth $1,090 and also contributing $581 a year toward a savings account. If he lives, he will have put $17,430 into this virtual savings account. The account will turn into a check for $50,130 in the year 2036. That is not a bad investment return. It comes to 6.3% a year, better than Cook could get on a Treasury bond.

How can Genworth be so generous? One reason is that it gets a modest benefit by dint of paying little or nothing on the investments to those people who collect on the underlying term policy – that is, who die before age 61. For the unfortunate one who gets flattened by a bus, the return on the investment side of the Genworth policy is a negative number. Add this risk into the equation and Cook’s expected return from the rop option is something shy of 6.3%.

The second reason Genworth can offer a good deal is that a lot of young buyers will sooner or later let their term policies lapse. When they do, they walk away from some or all of the virtual savings account. Genworth pockets a good chunk of whatever is in the account. People let policies lapse for a variety of reasons, including divorce, lack of financial discipline and a desire to switch to a different kind of life insurance. The lapse rate on conventional term policies is in the neighborhood of 5% a year. It is too soon to know what ROP lapse rates will be, but presumably they will be something less than 5% – you would have to be a fool to let a 30-year ROP policy lapse in year 25. Lapses are the great, dirty secret of the life insurance industry. Lapses keep profits up and prices low for all kinds of life insurance. Return-of-premium policies work best for people who are young, healthy and disciplined. An applicant who is older and not in perfect health is likely to discover that standard term insurance is a better bargain.

Favorable tax treatment is one of the big selling points of life insurance, and it is not absent for ROP buyers. Go back to the 31-year-old who gets a check for $50,130 when he turns 61. An economist would tell you that it should be, but life insurance has a privileged place in the tax code, and it appears that the ROP refund check will be scot-free. The insurance industry argues – and the IRS will probably agree – that the policy buyer is merely getting back the $50,130 he put into the policy. The no-tax policy, however, is not enshrined in IRS regulations. As with all insurance that builds future value, you should buy an ROP policy only from an insurer with a rating of A+ or better from AM Best. If the insurer goes bust in year 29, you will not get your money back.

Link here.

“NIGERIAN” SCAMS LEAD WAY AS INTERNET FRAUD TOTAL SOARS

Americans lost a record amount of money to Internet fraud last year, with the infamous Nigerian scam nabbing the largest sums from individuals, according to new federal crime statistics. Americans reported losing an all-time high of $183 million to Internet fraud in 2005, up 169% from $68 million the previous year, the Internet Crime Complaint Center reported recently. Law enforcement agencies suspect many victims do not report the crimes and actual losses are likely higher.

Internet auction fraud accounted for 62% of the 97,076 Internet fraud complaints that the ICCC referred to law enforcement agencies for investigation last year. In a typical case of auction fraud, the victim buys goods or services through an online auction such as eBay but never receives the merchandise after making payment. The reverse also occurs, where the victim ships goods to a buyer but never receives payment.

But the highest individual losses were racked up by Nigerian scams, a seemingly preposterous confidence game that nonetheless proves highly successful for criminals. The Nigerian scams accounted for the highest losses per incident of any Internet-related financial crime in 2005 with an average loss of $5,000,up 60% per incident over the rate in 2004. There are many variations on the theme, but the general outline is familiar. A purported African official sends an unsolicited email saying he needs your help in transferring millions of dollars from the account of an African dictator. You will receive a sizable percentage by helping him do so. The thief cons the recipient into transferring “transaction costs” upfront to consummate the fictitious deal. Of the Nigerian scam criminals who could be traced, 71% lived in the U.S. Nigeria accounted for the next highest portion, 7.9%.

Link here.

CAYMAN ISLANDS HOSTS U.S. LAW SCHOOL OFFSHORE COURSE

Case Western Reserve School of Law – located in Cleveland – recently held an offshore course for the second year in the row in the Caymans which is designed to give a foundation on the offshore sector. Professor Craig Boise and Professor Andrew Morris brought 21 students. Professor Morris said the reason why they chose Cayman to do the course was because it was a leading offshore center, which had a reputation for legitimate transactions. “We realized there has been a lot of growth in the offshore sector and when we began to do our research we saw that was very little was done to train students about these kinds of transactions,” said Professor Morris. “We saw opportunities in the job market over other law students to know about offshore transactions.” Professor Morris added that because of the emphasis on relationship in business it was helpful for students to meet a number of contacts in the banking, insurance, legal and regulatory sectors.

Link here.

ST. KITTS HAS BEGUN TO REAP THE BENEFITS OF FOUNDATION ENABLING ACT

Country was one of the first common law Caribbean jurisdictions to pass Foundations legislation.

St. Kitts has begun to reap the benefits of the Foundation Act, passed by the National Assembly in 2003. Director of Marketing and Development in the St. Kitts Financial Services sector Shawna Lake said registration began in late 2004 and there are currently 153 foundations listed in the registry. Mondaq – a leading publisher of legal, regulatory and financial commentary and information to the worldwide business community – said “St. Kitts is an emerging superstar – with brightly shining, very favourable asset protection legislation.” Lake said the Foundations “actually have being doing very well” as St. Kitts was one of the first common law Caribbean jurisdictions to pass Foundations legislation.

Foundations are actually a civil law entity or creature and the equivalent of the foundation in a common law jurisdiction is usually the trust, where someone holds property, the legal title to property in trust for a beneficiary. “With foundations, the foundation itself is a separate legal entity, which is governed by councillors, almost like a board of directors of a company, and the foundation actually holds the legal title of property and manages the property which is vested in the foundation by the founder (who is the equivalent of the grantor/settlor in a trust) for and on behalf of the named beneficiaries of the foundation. Lake claimed that the Foundation is a more structured and organized way of managing that asset for and on behalf of beneficiaries with the founder being able to maintain some measure of control.

Link here.

UPROAR AT U.K. CHANCELLOR’S TRUSTS CRACKDOWN

One might have been forgiven, at the end of the Chancellor’s recent presentation of his Budget Speech, for thinking that inheritance tax had remained relatively unscathed. However, the grim news was not in the speech but part of the press releases which later revealed that a radical inheritance tax change was being made. Starting March 22, 2006, all gifts to trustees of any type of trust (interest in possession and accumulation and maintenance included) will trigger an attendant charge to inheritance tax of 20% (known as the lifetime rate), payable by the trustees. These trusts are usually set up by parents who wish to pass on assets free of tax while preventing them from being squandered. Similarly all such trusts will carry a periodic 10 yearly charge of 6% on the value of the trust fund which is in excess of the threshold (£285,000). Further charges will be made when the trust assets are passed to a beneficiary.

Leading tax lawyers have launched a stinging rebuttal of the Government’s claims that its crackdown on inheritance tax will affect only a tiny number of families. Tax experts claim “virtually every will in the country” will have to be rewritten. The claim was challenged by Dawn Primarolo, the Paymaster General, who insists the numbers affected “make up only a tiny fraction of the wealthiest top 1% of the population.”

Typically, the trusts allow children to draw an income from an asset until they reach 25, when they acquire the capital. The Government claims the schemes are used illegitimately to avoid paying inheritance tax, and denies by taking action against the trusts it will cause wide disruption. The budget change would force parents to rewrite their wills so their estates were handed over when the children were only 18. The increased taxes have been introduced without consultation and without warning. Other experts feel that this represents the first stage of treating all gifts during a lifetime, including gifts to individuals and not just trusts, as being liable to inheritance tax.

Link here.
The Society of Trust and Estate Practitioners criticizes UK Treasury over trusts changes – link.

PRIVACY

PANAMANIAN BANKS KEEP YOUR SECRETS SAFE

U.S. banks are notorious for selling your financial information to the highest bidder. And laws like the USA PATRIOT Act now require your assets be frozen if a computer decides you have committed a “suspicious transaction”, for actions as innocuous as suddenly paying off your credit card bill – or failing to pay it off. And wealthy people in many countries, particularly in Central and South America, often become victims of extortion, kidnapping or other crimes if details of their financial activities fall into the wrong hands.

Things are different in Panama. Panamanian bank secrecy laws are among the world’s toughest. Sections 84, 85 and 86 of the Banking Act of 1998 prohibit banks from revealing account information to non-bank employees only to specified authorities in the course of a criminal prosecution. This applies to all employees, consultants and external auditors. Any breach of this confidentiality may be subject to a fine of up to $100,000. The victim of such a breach is also free to bring civil and potentially criminal charges against persons who breach this duty.

These laws have not gone unnoticed by the network of global busybodies who claim to be keeping the world safe from criminals, terrorists and tax evaders. Just a few days apart in June 2000, the FATF and the OECD placed Panama on the FATF’s money laundering blacklist and the OECD’s harmful tax competition blacklist. They threatened various sanctions to blacklisted nations, including the possibility of being banished from global money transfer networks. A principal demand from the FATF was that Panama lift bank secrecy laws in money laundering investigations. In turn, the OECD demanded Panama begin disclosing information on the bank accounts of foreign nationals to their respective home tax authorities.

Panama’s response to both initiatives was masterful. To get off the FATF blacklist, it brought in outside experts to rewrite its money laundering law to insure that truly dirty money could be tracked down and eradicated from the financial system. It beefed up customer identification procedures, instituted an office to track laundered money and enacted a law requiring the reporting of certain cash transactions exceeding $10,000. Panama was subsequently removed from the FATF blacklist.

Panama did not give in to the OECD either. Instead, it engaged in a public relations full-court press against it. Panama pointed to the hypocrisy of exempting financial centers such as the U.S., and UK from the harmful tax blacklist, when independent studies had shown these countries were engaged in the same practices the OECD condemned. Unlike so many other offshore jurisdictions that surrendered to the OECD, Panama hinged its cooperation on all jurisdictions – whether members of the OECD or not – being dealt with on an equal footing. Since the largest member of the OECD is the U.S., which engages in a variety of tax practices the OECD brands “harmful”, it seems unlikely Panama will cooperate with the OECD in any meaningful way for the foreseeable future.

Panama maintained a similar attitude when EU bureaucrats tried to convince Panamanian officials to embrace the EU Savings Tax Directive, which provides for interest payments earned by EU nationals in EU bank accounts to be reported to home country tax collectors. When Austria, Switzerland and Luxembourg were exempted from the information exchange provisions of the Directive, Panama scorned the hypocrisy in this arrangement and again refused to participate in it. The U.S. has not been much more successful than the OECD or EU. Short of invading Panama, which it did in 1989, the U.S. simply does not have strategic leverage over Panama.

The bottom line is that in spite of immense outside pressure, Panama has vigorously defended its bank secrecy laws, and is likely to continue to do so in the future. As with any bank secrecy law in today’s world, if you are suspected of committing a crime, and investigators know where to look, Panama will cooperate. Of course, with the USA PATRIOT Act in effect, there is no bank secrecy law in the world that can prevent the U.S. from trying to strong-arm a foreign bank into disclosing information about a depositor. Not to mention U.S. laws require U.S. persons to disclose foreign bank accounts if their assets exceed $10,000. But it is comforting to know that Panama is one of only a handful of the world’s countries that has consistently resisted weakening privacy and asset protection laws in response to outside pressure.

Link here.

ANONYMITY ON A DISC

To many privacy geeks, it is the holy grail – a totally anonymous and secure computer so easy to use you can hand it to your grandmother and send her off on her own to the local Starbucks. That was the guiding principle for the members of kaos.theory security research when they set out to put a secure crypto-heavy operating systems on a bootable CD – a disc that would offer the masses the same level of privacy available to security professionals, but with an easy user interface.

It is a difficult problem, entailing a great deal of attention to both security details and usability issues. The group finally unveiled their finished product at the Shmoo Con hacker conference, with mixed results. Titled Anonym.OS, the system is a type of disc called a “live CD” – meaning it is a complete solution for using a computer without touching the hard drive. Developers say Anonym.OS is likely the first live CD based on the security-heavy OpenBSD operating system. OpenBSD running in secure mode is relatively rare among desktop users. So to keep from standing out, Anonym.OS leaves a deceptive network fingerprint. In everything from the way it actively reports itself to other computers, to matters of technical minutia such as TCP packet length, the system is designed to look like Windows XP SP1. “We considered part of what makes a system anonymous is looking like what is most popular, so you blend in with the crowd,” explains project developer Adam Bregenzer of Super Light Industry.

Booting the CD, you are presented with a text based wizard-style list of questions to answer, one at a time, with defaults that will work for most users. Within a few moments, a fairly naive user can be up and running and connected to an open Wi-Fi point, if one is available. Once you are running, you have a broad range of anonymity-protecting applications at your disposal. But actually using the system can be a slow experience. Anonym.OS makes extensive use of Tor, the onion routing network that relies on an array of servers passing encrypted traffic to permit untraceable surfing. Sadly, Tor has recently suffered from user-base growth far outpacing the number of servers available to those users – at last count there were only 419 servers worldwide. So Tor lags badly at times of heavy use. Between Tor’s problems, and some nagging performance issues on the disc itself, Banks concedes that the CD is not yet ready for the wide audience he hopes to someday serve. “Is Grandma really going to be able to use it today? I don’t know. If she already uses the internet, yes.”

Experts also say Anonym.OS may not solve the internet’s most pressing issues, such as where repressive governments – like China – monitor their population’s net access, and censor or jail citizens who speak out against the government. Ethan Zuckerman, fellow with Harvard’s Berkman Center for Internet and Society, works extensively with international bloggers and journalists, many of whom live under constant threat from their own governments. He see Anonym.OS as a blessing for some – but not for those at the greatest risk. “Rebooting isn’t often an option,” explains Zuckerman, who would like to see anonymity solutions move toward minimally invasive strategies like the TorPark, a USB key that allows access to a Tor-enabled browser without rebooting, and private proxies matched up one by one with dissidents.

But kaos.theory members say Anonym.OS is just the first step in making anonymity widely available. Future versions, they say, may run on a USB keychain. Additionally, they plan to implement Enigmail to allow encrypted e-mail for Thunderbird and Gaim Off-the-Record, which allows users to use instant messaging without their logs being tied to them.

Link here.

AT&T SUED OVER NATIONAL SECURITY AGENCY EAVESDROPPING

The Electronic Frontier Foundation filed a class-action lawsuit against AT&T, accusing the telecom company of violating federal laws by collaborating with the government’s secret, warrantless wiretapping of American citizens’ phone and internet usage. The suit (PDF file), filed by the civil liberties group in federal court in San Francisco, alleges AT&T secretly gave the NSA access to two massive databases that included both the contents of its subscribers’ communications and detailed transaction records, such as numbers dialed and internet addresses visited. “Our goal is to go after the people who are making the government’s illegal surveillance possible,” says EFF attorney Kevin Bankston. “They could not do what they are doing without the help of companies like AT&T. We want to make it clear to AT&T that it is not in their legal or economic interests to violate the law whenever the president asks them to.”

One of AT&T’s databases, known as “Hawkeye”, contains 312 terabytes of data detailing nearly every telephone communication on AT&T’s domestic network since 2001, according to the complaint. The suit also alleges that AT&T allowed the NSA to use the company’s powerful Daytona database-management software to quickly search this and other communication databases. That action violates the First and Fourth amendments to the Constitution, federal wiretapping statutes, telecommunications laws and the Electronic Communications Privacy Act, according to the complaint. The suit, which relies on reporting from The Los Angeles Times, seeks up to $22,000 in damages for each AT&T customer, plus punitive fines.

The lawsuit comes a little more than a month after The New York Times reported that in 2001, President Bush ordered the NSA to begin warrantless monitoring of Americans’ overseas phone calls and internet usage. The administration defends the eavesdropping program, saying it is only targeting communications to and from suspected terrorists, that government lawyers review the program every 45 days and that Congress authorized the president to track down 9-11 co-conspirators, thereby giving the president the ability to bypass wiretapping laws. Some Senators, along with civil libertarians and former government officials, counter that the wiretaps are simply illegal and that wiretapping warrants can be acquired easily if the government has probable cause to believe an American is affiliated with terrorists. The government is not named in the lawsuit, though it is already being sued by the American Civil Liberties Union over the surveillance program.

Link here.

Suing Ma Bell to stop NSA wiretapping: Back to the future?

Last week the Electronic Frontier Foundation, together with one of the country’s biggest class action law firms, filed a motion for a preliminary injunction in their lawsuit against AT&T for its role in carrying out the NSA’s warrantless surveillance program. The suit itself alleges that the U.S. government’s so-called “Terrorist Surveillance Program” is in fact not focused on terrorists but rather is a “vast fishing expedition” directed at everyone in America – a data mining program using voice recognition software and the NSA’s vast array of computers to scan every phone call entering or exiting the U.S.

But unlike the suit we have filed, Center for Constitutional Rights v. Bush, the named defendants in EFF’s suit are not government officials. Instead, EFF is suing a private party – AT&T – which supposedly enthusiastically helped the government carry out this illegal surveillance. Whereas our suit asks the court to order that the program stop, EFF’s also seeks damages against AT&T. And the damages are potentially enormous. The suit is a class action on behalf of the millions of AT&T subscribers, and the statute making this kind of surveillance illegal (the Foreign Intelligence Surveillance Act, FISA) also provides for minimum damages – $100 per day per person – plus punitive damages. Because the allegation is essentially that every single AT&T international call or data transmission over the last four years was intercepted by the NSA with the active assistance of AT&T, the damages could add up to hundreds of millions of dollars.

In searching for parallels to this wonderfully audacious suit – an attempt to stop government lawbreaking by seeking not a court order against the officials responsible but a multi-million dollar jury verdict against their private-sector co-conspirators – I find myself looking back two centuries. Very few Americans today can name one Supreme Court case (Bush v. Gore? Brown v. Board?) let alone one case (People vs. Orenthal J. Simpson?) but in colonial times, most of America could name two cases decided across the Atlantic – Wilkes v. Wood (1763) and Entick v. Carrington (1765). Both dealt with issues less momentous than who would be the next president or whether public schools could continue to be segregated. Instead, they were about the far-less-sexy question of how broad a search warrant could permissibly be.

Link here. Gonzales suggests legal basis for domestic eavesdropping – link.

A pretty good way to foil the NSA.

How easy is it for the average internet user to make a phone call secure enough to frustrate the NSA’s extrajudicial surveillance program? We took Phil Zimmermann’s newest encryption software, Zfone, for a test drive and found it is actually quite easy, even if the program is still in beta. Zimmermann, the man who released the PGP e-mail encryption program to the world in 1991 – only to face an abortive criminal prosecution from the government – has been trying for 10 years to give the world easy-to-use software to cloak internet phone calls. On March 14, Zimmermann released a beta version of the widely anticipated Zfone. The software is currently available only for OS X (Tiger) and Linux, though a Windows version is due in April.

The open-source software manages cryptographic handshakes invisibly, and encrypts and decrypts voice calls as the traffic leaves and enters the computer. Operation is simple, and users do not have to agree in advance on an encryption key or type out long passcodes to make it work. Would-be beta testers must provide Zimmermann with an email address – seemingly an odd requirement for a privacy product, but the process itself was painless, and an email with a download code arrived immediately. In our test, Zfone installed easily and quickly on OS X, though there were some mild hitches in actually getting it to work.

Zfone is designed to work with VoIP clients that use the industry standard SIP protocol, and has been tested with clients such as X-lite, Free World Dialup and Gizmo Project. Using Zfone did not add any noticeable latency or distortion to calls made with Gizmo Project. Once it is up and running, you are simply talking on the phone. But make no mistake. To eavesdroppers, Zfone is anything but routine. The protocol is based on SRTP, a system that uses the 256-bit AES cipher and adds to that a 3,000-bit key exchange that produces the codes callers can read off to one another. It has been submitted to IETF for approval as an internet standard, and by most accounts is strong enough to defy even the most sophisticated code-breaking technologies, from a hacker’s packet sniffer to the acres of computers beneath Ft. Meade. That makes Zfone the “most secure telephone system anyone has ever used,” according to PGP Corporation’s CTO Jon Callas, who worked with Zimmermann on the protocol.

Primarily, Zfone is competing with the built-in crypto that comes with Skype, which is closed-source, uses its own proprietary protocols, and employs its own encryption scheme – which, significantly, is not available for inspection and peer-review (though some have evaluated it and others purportedly cracked it anyway). Those are all troubling signs for a security system. But as a standard element in Skype’s popular VoIP software, this unproven crypto has already achieved a market penetration that will likely elude Zimmerman’s system. So as nice as it is, unless Zfone is adopted by mainstream VoIP providers, it will probably occupy the same limited market niche as the hyper-secure PGP program that ruffled so many government feathers over a decade ago. PGP did not become standard email fare outside of the community of geeks, cypherpunks and those with special privacy needs, like human rights workers and people living in countries where the government routinely spies on its citizens without oversight. Fortunately for Zimmerman, there are a lot more of us these days.

Link here.

WIRETAPPING ON THE INCREASE IN EUROPE

In Europe, Big Brother is listening – and being allowed to hear more and more. Since the September 11 attacks and the terrorist bombings that followed in Madrid and London, authorities across the continent are getting more powers to electronically eavesdrop, and meeting less apparent opposition than President Bush did over his post-9/11 wiretapping program. As part of a package of EU anti-terrorism measures, the European Parliament in December approved legislation requiring telecommunications companies to retain phone date and Internet logs for a minimum of six months in case they are needed for criminal investigations.

In Italy, which experts agree is the most wiretapped Western democracy, a report to parliament in January by Justice Minister Roberto Castelli said the number of authorized wiretaps more than tripled from 32,000 in 2001 to 106,000 last year. Italy passed a terrorism law after the July 7 subway bombings in London that opened the way for intelligence agencies to eavesdrop if an attack is feared imminent. Only approval from a prosecutor – not a judge – is required, but the material gleaned cannot be used as evidence in court. Similar laws have been approved in France and the Netherlands or proposed elsewhere in Europe, leading to fears by some that the terrorist threat is giving authorities a pretext to abuse powers.

The use of hidden microphones in criminal investigations is routine in Italy, but a Swedish government proposal to permit such taps has drawn sharp opposition from civil liberties advocates. Still, the complaints are relatively muted compared to the criticism that has arisen in the U.S. Congress and among civil liberties groups over the Bush administration’s surveillance operations. After the Sept. 11 attacks Bush granted intelligence officers the power to monitor, without court approval, international calls and e-mails between people in the United States and suspected terrorists overseas. The Center for Constitutional Rights and the American Civil Liberties Union filed lawsuits saying court approval was required by law.

Italy’s long tradition of electronic snooping goes back to its fight against the Mafia. Wiretapping has yielded two recent intelligence coups for Italian authorities. After one of the men wanted in the London bombings slipped out of Britain, Italian authorities tracked his cell phone, recorded his conversations and traced him to an apartment in Rome. But Italian law enforcement officials have criticized the U.S. wiretapping powers for bypassing the special court set up to deal with intelligence matters.

In a 2003 report, the Max Planck Institute for Foreign and International Criminal Law in Germany put Italy at the top of the European wiretapping list followed by the Netherlands, using figures published by governments or information from parliamentary debates. Hans-Jorg Albrecht, one of the authors of the report, said wiretaps are much more common on the European continent than in Britain or the U.S., where he said there is a more “institutionalized mistrust in the relationship between civil society and a state-organized judiciary.” He said research showed that wiretaps are often used to support weak cases and seldom help to achieve a guilty verdict. “The more wiretaps are used, the lower the conviction rates.” Nevertheless, the Dutch secret service, known by its acronym AIVD, has gained vast powers since 9/11, following the 2004 murder of filmmaker Theo van Gogh by a Muslim extremist who claimed a film he made insulted Islam.

Link here.

LAW

SUING THE FEDS? YOU MIGHT HAVE TO WAIT A DECADE OR TWO FOR YOUR MONEY

Patience may be a virtue, but Frank P. Slattery is through being virtuous. 13 years ago he sued the federal government for breach of contract after his thrift, Meritor Savings Bank, was seized by the feds, a casualty of the S&L crisis. Since then his case has seen the inside of a courtroom just 54 days, yet it has still managed to generate 3,000 trial exhibits, 86 motions and 25 volumes of pleadings, thanks to what he calls government stall tactics. When the U.S. Court of Federal Claims in February finally ordered the feds to pony up $371 million in damages, Slattery, 68, did not pop any champagne corks. “They’ll appeal, we’ll counterappeal, they’ll drag this thing on, as they’ve always done,” he sighs.

Slattery is not kidding. Successor to the Philadelphia Savings Fund Society, Meritor was among at least 122 banks persuaded by the former Federal Home Loan Bank Board, along with the FDIC, into assuming net liabilities, totaling $20 billion, of failed thrifts. In return the FDIC promised to relax capital requirements and let the banks use a paper asset called “supervisory goodwill”. But the cozy deal imploded in 1988, when the FDIC, under pressure from Congress, raised Meritor’s minimum capital requirements. A year later Congress barred supervisory goodwill altogether, labeling it an accounting gimmick. Meritor, left on the hook for the $796 million debt it took on when it acquired Western Savings Bank in 1982, began its death spiral. Meritor was finally seized by the FDIC in 1992. Slattery, one of the bank’s largest shareholders, sued the next year.

There is little legal doubt that the feds screwed up. Numerous courts, including the Supreme Court, have found, as Justice David Souter wrote in 1996, that the government cannot simply “shift costs of legislation onto its contractual partners.” But the feds have done just that by prolonging litigation over the damages. It is not paying interest on awards, so it “has no reason whatsoever to give up,” says Slattery lawyer Thomas Buchanan. Burying plaintiffs in appeals seems to work. So far 36 plaintiffs have withdrawn their cases and another 33 are still awaiting court decisions on damages. The feds have shelled out $649 million in damages on 30 closed cases, which amounts to just six cents on the dollar originally awarded, boasts a Department of Justice spokesman (who otherwise declined comment).

Link here.

SMOKING BUDDIES

As a blanket of snow fell over Washington, D.C. on January 25, 2004, executives from Philip Morris, Brown & Williamson, Lorillard and R.J. Reynolds Tobacco gathered for a meeting with a representative from the Pennsylvania Attorney General’s office and staff members from the National Association of Attorneys General. No, it was not an occasion for the prosecutors to outline charges against tobacco companies. On this occasion the cigarette sellers and the state lawyers were all on the same side. They were plotting together against smaller cigarette companies. The 1998 settlement of tobacco litigation called for the big tobacco companies to hand over 40 cents a pack to state treasuries. The states could use the money to lecture their citizens not to smoke or, if they preferred, to build roads or pay teacher pensions or do anything else they wanted. Over the 25-year course of the agreement the money going to the states was supposed to add up to at least $200 billion.

One little problem. What was to stop upstart cigarette companies from undercutting the big companies that settled the tort case? The newcomers would not owe the 40-cent tort fee because they had not signed the agreement and had committed no tort. Indeed, they did not even exist at the time that the big tobacco companies were, according to the lawsuit, misleading the public about the risks of smoking. Every pack sold by an upstart cigarette manufacturer takes 40 cents out of the states’ honeypot and takes a profitable sale away from an older company. Ever since they settled their case, the states and the established tobacco companies have worked hard to limit competition from small fry.

Link here.

FINANCIAL SERVICES REGULATORS IN OFFSHORE FINANCIAL CENTRES PUBLISHED

New publication provides detailed, consistently presented information for over 100 institutions.

Research and Markets has announced the addition of Financial Services Regulators in Offshore Financial Centres to their offerings. Rapid growth in financial services regulation in many countries has led to demand for high quality data about agencies and institutions involved in national and international regulatory systems and explanation of the legal context in which they operate. It covers organizations with regulatory responsibilities, whether primary or secondary, for the banking and financial services industry on both national and international levels. Data provided for each institution include Scope of Regulation, Legal Basis, Financing, Key Personnel and Organizational Structure, Histor, Current Regulatory Developments, Regulatory Objectives, Activities and Implementation, Measures to Ensure Compliance, Accountability, Complaints and Redress, Relationships with other Regulatory Bodies, and Principal Publications. The information provided for each regulatory body has been reviewed by a leading law firm in each jurisdiction.

Link here.

COURT RULING COULD MAKE JAPAN A MONEY-LAUNDERING HAVEN

A surprise court ruling that found a former employee of the Hong Kong unit of Credit Suisse not guilty of knowingly assisting a group affiliated to gangsters launder money, is causing concern among experts. “If this ruling is followed, it’ll mean there’s no need to inspect financial institutions in regard to their possible involvement in money laundering,” former Mizuho Bank branch manager and writer Go Egami said. “Japan could be turned into a money-laundering haven by professionals at foreign financial institutions.”

Susumu Kajiyama dubbed the “loan-shark king”, concealed ¥9.4 billion yen he raised through illegal loans in bank accounts in Hong Kong and Switzerland in the form of discount bank debentures. Although the former employee of the Swiss banking giant was involved in the transactions, the Tokyo District Court said in its ruling last month, “It can’t be shown he knew the money was earned through crime.” Under guidelines on cracking down on money laundering by financial authorities in Japan and Hong Kong, the depositing of a large amount of discount bank debentures is to be viewed as an act of possible money laundering. The court, however, said, “Such deposits can be viewed as a way of hiding assets, but there is no direct link between such deposits and money laundering.”

The basis of the judgment differs substantially to the strict policies against money laundering in place in Europe and the U.S. Financial institutions are advised to immediately report suspicious transactions to their respective governments. About 20 years ago, a major U.S. bank was fined $500,000 for accepting a $1.2 billion deposit by a well-known crime organization after it failed to run checks on where the money had come from. Although the bank did not recognize the money had been amassed illegally, its failure to investigate how the money had been earned led the judiciary to determine that the bank had intentionally ignored where the money had come from and it was therefore guilty of negligence. Since the ruling, U.S. financial institutions have been active in reporting suspicious transactions. In Britain, financial institutions are penalized if they do not report a suspicious transaction and if it is found to be crime-related – regardless of whether the institution could have reasonably known the money transacted was earned through crime. Financial institutions in Hong Kong are similarly regulated.

Money laundering is illegal in Japan, and financial institutions are required to file reports on suspected money laundering to the authorities. However, the latest ruling sends a message that financial institutions will not be charged unless they clearly recognize cash to be deposited has been earned illegally. Prosecutors appealed the ruling to the Tokyo High Court, and experts are eager to hear the high court’s ruling.

Link here.
Cook Islands still on FATF monitoring list – link.

PINOCHET WINS PARTIAL COURT VICTORY ON HIDING ASSETS OFFSHORE. TAX EVASION CHARGES STAND

Former Chilean military dictator Augusto Pinochet has won a partial victory in court after two charges relating to secret offshore bank accounts were dismissed, although the court ruled that charges of tax evasion should stand. Judges ruled that charges of falsifying passports should also stand. The tax evasion charges stem from the discovery by U.S. investigators in 2004 that Pinochet had stashed up to $27 million in secret offshore accounts.

The former army general, who seized power in a coup d’etat in 1973 and ruled Chile until 1990, is said to have evaded taxes by hiding money in various foreign banks accounts, including in the Bahamas, the Cayman Islands, Columbia, Germany, Panama, Spain, the U.K. and the U.S. He is also accused of using false passports to open bank accounts, submitting a fake government document to a foreign bank and filing a false report on the size of his assets. However, the prosecution failed to press home charges of falsifying Defence Ministry documents and false declaration of assets. Nonetheless, Pinochet’s defense team have welcomed the court’s decision, and are confident that the remaining charges will also be dropped. They argue that the former leader had earned the money legitimately, and had chosen not to report the foreign accounts to avoid political persecution. His accusers contend that the most likely source of Pinochet’s income was commissions earned from arms manufacturers for buying and selling weapons.

Link here.

OPINION & ANALYSIS

BUSH’S BOGUS THEORY OF ABSOLUTE POWER

The Bush administration has a theory to explain why the Founding Fathers secretly intended for the president to have boundless power. Even though the new “unitary executive theory” is nowhere in the Constitution, White House officials continually invoke it to justify scorning federal law. The fact that the administration is getting away with this charade symbolizes how docile much of the American media and political opposition have become. As part of the deal to renew the Patriot Act, Bush administration officials agreed to provide Congress more details on how the new powers were being used. However, Bush reneged in a “signing statement” quietly released after a heavily hyped White House signing ceremony on March 9. The crux of the “unitary executive” is that all power rests in the president, and that “checks and balances” are an archaic relic. This is the same “principle” the Bush administration invoked to deny Congress everything from Iraqi war plans to the records of the Cheney Energy Task Force. When he was White House counsel, Alberto Gonzales spoke of a “commander-in-chief override” to justify scorning the Anti-Torture Act.

The Bush administration’s sense of entitlement is obvious from the ongoing controversy over warrantless National Security Agency wiretaps of Americans. Such wiretaps are clearly prohibited by the 1978 Foreign Intelligence Surveillance Act. Yet Bush declared that he is entitled to order such wiretaps because of the inherent authority of the presidency. The administration’s attitude toward both the law and Congress was stark in the responses recently delivered to congressional questions on the scope and nature of the NSA warrantless wiretap program. The basic answer to almost all the questions was, “None of your business.”

At this point, Americans can only guess which laws Bush feels obliged to obey. According to Newsweek, Steven Bradbury, head of the DoJ’s Office of Legal Counsel, recently informed the Senate Intelligence Committee that Bush could order killings of suspected terrorists within the U.S. Americans cannot expect to have good presidents if presidents are permitted to make themselves czars. The “unitary executive” theory is simply another in a long series of intellectual cons crafted to trample freedom. The sooner that it is tarred and feathered and ridden out of Washington on a rail, the safer Americans’ remaining rights will be.

Link here.

AUSTRIAN BANK SCANDAL: WHEN SOCIALISTS PLAY WITH MONEY

A major banking scandal is rocking the Austrian political elites – left and right. A bank owned by the Socialist trade union – The Bank für Arbeit und Wirtschaft AG, BAWAG, or, in English, “Bank for Employment and Commerce” – (which is close to the Socialist Party SPÖ, currently in opposition) loses billions in shady hedge deals while the union strike fund evaporates in the Caribbean and the bank gets implicated in a corruption case in Israel. Meanwhile the bank is financed by the European Investment Bank (EIB), and an Austrian Finance Ministry official (married to the Socialist ex-chief of the bank) ignores a crucial report and is appointed to the Executive Board of the European Central Bank (ECB). The Conservative Finance Minister claims to know nothing – after just having sold the Government-owned Post Office Savings Bank (PSK) to the socialist bank. Welcome to Austria, presently presiding the EU council of ministers.

Austria in truth has never recovered from the shock of the artillery bombardment of the Karl-Marx-Hof at the center of “Red Vienna” in 1934 by the Christian Social conservative predecessors of the Austrian People’s Party. The elites now justify to themselves that they have to do everything to avoid such a crisis ever again, but a high price has to be paid in terms of corruption (or at least a good appearance of it) and contempt for a normal democratic process with an effective opposition. And the Austrian state presently has other threats than communists within. The time of the unbreakable “Social Partnership” of the Chamber of Workers, the Trade Unions Federations and the Chamber of Economics should be long gone. Ironically, it is self-serving and no longer serves the interests of society or of ordinary Austrians outside the elites.

If the BAWAG affair comes to be seen as “business as usual in Austria,” Vienna could loose its place in banking as the mini-Frankfurt-on-the-Danube. Even as the BAWAG scandal broke, it was revealed that the Hypo Adria Alpe Bank has run up €328 million in losses in a mere two weeks of foreign exchange trading, prompting descriptions in the Austrian press of “third-world standards”. Surely this Austria is not the same country as the one holding the Presidency of the EU! In reality, Austria is an all too accurate mirror of the “social partnership” model that is also practiced by the European institutions.

Link here.

LOBBIES INFLUENCE, NOT MAKE, U.S. FOREIGN POLICY

For about two decades after World War II, a powerful coalition of U.S. Congressmen, publishers, businessmen and military generals operating close to the highest levels of government in Washington tried to ensure that the United States would not recognize “Red China” and would continue backing Taiwan (the Republic of China) with its goal of ousting the communist regime in Beijing. The coalition included figures such as Republican Senator Richard Nixon, Henry Luce, the publisher of the Time and Life magazines, his wife Clare Boothe Luce and renowned author Pearl Buck. Indeed, the common perception in Washington was that the so-called “China Lobby” was politically invincible and that no U.S. president would dare challenge it by taking steps to establish ties with the People’s Republic of China.

I was reminded of the “China Lobby” when I was attending an event in Washington last week where the main topic of discussion was a controversial study (PDF file) by two noted American political scientists who allege that the Israel Lobby exerts enormous influence on U.S. foreign policy in the Middle East by tilting it in a pro-Israel direction. The two scholars – Professors John Mearsheimer of University of Chicago and Stephen Walt of Harvard University – argue in their report, “The Israel Lobby” (which was published in a condensed version in the London Review of Books), that the powerful lobbying group, the American Israel Public Affairs Committee (AIPAC), as well individuals operating in the bureaucracy, think-tanks and editorial pages are responsible for the pro-Israeli slant of U.S. policy-making and of the American media. “The United States has a terrorism problem in good part,” they say, “because it is so closely allied with Israel, not the other way around.”

The study ignited very strong reactions not only in the media and academic circles but also among many bloggers who criticize the authors for questioning the loyalty of American Jews who support Israel and for perpetuating anti-Semitic stereotypes. Harvard law professor Alan Dershowitz called the study “paranoid and conspiratorial” while military historian Elliot Cohen described it as “anti-Semitic” in an op-ed article in The Washington Post. Indeed, following some of this bashing of the two scholars, one would have to conclude that they had authored a sequel to Hitler’s Mein Kampf. This kind of criticism is unfair and, in a way, malicious.

Israel and its political lobby in the U.S. are political entities that promote the specific interpretation of the political concept of Jewish nationalism (Zionism) that is not shared by most of the Jews who do not live in Israel and by more than 25% of Israeli citizens who are not Jewish. Whether an American citizen supports close ties with Israel depends on whether he or she perceives that to be in line with U.S. interest and/or values and not on whether he or she is pro- or anti-Semitic. So if Prof. Mearsheimer and Prof. Walt have concluded that Israel is pursuing policies that run contrary to U.S. interests and/or values, raising that as part of public discourse is as legitimate as if they two would be criticizing U.S. ties to France or Japan. Similarly, the Israel Lobby should not be treated any differently than other domestic or foreign interests, including those of Saudi Arabia. One has the right to challenge any critic of Israel or its lobby by challenging the criticism on its merit and not by applying “negative stereotypes” to the critic.

Unlike many of the critics of Prof. Mearsheimer and Prof. Walt, I have actually read their study and cannot find any flaw with their argument that the Israel Lobby in the form of AIPAC, not unlike the old “China Lobby”, is a very powerful player with enormous political and financial resources that exerts a lot of influence on the executive and legislative branches when it comes to U.S. policy towards Israel and in the Middle East. I also agree in general with their observation that there is a very influential pro-Israeli community in the U.S. that includes many influential Jews and non-Jews (including many Christian evangelists). It seems to me that Israel and its supporters in America should be proud over their success in mobilizing so much support for that country. That explains why so many foreign countries envy Israel and try to model their lobbying efforts in Washington after Aipac and its satellites. To put it differently, you cannot have it both ways. If Coca-Cola succeeds in becoming the most popular soft drink in America, it cannot then bash those who point to that fact by accusing them of exhibiting “anti-Coca-Colaism”.

Moreover, the two authors are correct in pointing out the role of neoconservative ideologues and policy-makers, most of whom would describe themselves as supporters of Israel, in driving the U.S. into the war in Iraq and the costly Imperial-Wilsonian project in the Middle East. Many of these neocons accept as an axiom that what is good for Israel is good for America and vice versa. Prof. Mearsheimer and Prof. Walt, like many other analysts, insist that American and Israeli interests are not always compatible. There is no doubt that U.S. support for Israel has been responsible for much of the Arab hostility towards Washington. But it is the U.S. intervention in the region in its totality – support for Israel AND the alliance with the pro-American Arab regimes – that is responsible for the current anti-American sentiment in the Arab world.

From a more balanced perspective, the Israel Lobby is no more responsible for current U.S. policies in the Middle East than the China Lobby was responsible for U.S. policies in East Asia in the 1950s and 1960s (which were then driven mostly by Cold War-era strategic considerations). Powerful lobbies can only operate and thrive in the context of existing consensus in Washington over the U.S. national interest. When that consensus changes, any lobby, even the most powerful one, loses its influence and its relevance. U.S. presidents have resisted the power of the Israel Lobby in the past when it came to crucial decisions like selling arms to pro-American Arab countries or to pressing Israel to make concessions as part of the peace process.

That President George W Bush and his top foreign policy aides have decided to adopt the neocon agenda has to do with their perception of U.S. national interests and not the power of the Israel Lobby or, for that matter, American Jews. And if and when President Bush or another U.S. president decides to change policies in the Middle East based on calculation of American interests – for example, by launching an opening to Iran – even the most powerful lobby in Washington would not be able to prevent him or her from doing that.

Link here.

THE LORD AND LEVIATHAN

They were made of iron, with a square head and a tapering shaft. They were somewhere between 7 and 9 inches long, lay one along your open hand, and it would stretch from the tip of your thumb to the end of your little finger. Now feel along the back of your wrist, until you come to the space between the ulna and the radius. That is where soldiers would have driven them into your flesh, impaling you to a wooden cross.

These iron spikes symbolize the state. Forget its disguise of bright banners, marble monuments, and deceptively soaring rhetoric. In the end, government comes down to three nails, one in either arm and the third pounded through the crossed feet. Leviathan has assumed many shapes through the ages, some blatantly brutal (military dictatorship, communist regime) and some less obviously so (democracy, republic). But beneath the trappings lies the essence – force. Force and, perforce, cruelty. Both are Hell’s hallmarks.

Those nakedly confront us each Holy Week when we remember that while our sins and the infinite love of Almighty God put Jesus Christ on that cross, Leviathan actually hammered home the nails. And in that ultimate, unspeakable crime, the beast exposed its Satanic nature for all time.

We tend to think of Christ’s crucifixion in a vacuum, as though the denizens of Hell worked overtime inventing this horror solely for the Son of God. Instead, crucifixion was the favored method of execution for many ancient governments. Consider what this says of Leviathan. It is not enough for the beast to kill, to thrust a human being out of time and into eternity. The object is to strip him of all sensibility and grace, to turn him from a creature little lower than the angels into a shrieking scrap of butchered meat, to inflict as much agony as possible over as many hours – even days – as possible.

Christ’s outpouring on the cross is first and foremost our reconciliation with God. But it also teaches us precisely what Leviathan is – lessons that reveal to everyone, Christian or not, the identity of the beast’s master.

Link here.
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