Offshore News Digest for Week of May 1, 2006

GLOBAL LIVING & BUSINESS

FINDING LIFE AND PROPERTY IN TRINIDAD

After five years of being back at school and working three jobs, I felt my life had lost all meaning when finally divorce left me financially and emotionally destroyed. I had honestly given up, but heck, if I was going to die it was not going to be in busy San Francisco with people rushing 24/7, it was going to be on a tropical island. So in March, I left San Francisco and landed 10 hours later in Port of Spain, Trinidad and Tobago. While in transit my heart beat fast and my stomach quivered with fear of the unknown. As I made my way through customs, I was stopped at the checkpoint by a woman, with ebony skin and wide eyes who asked me for my passport. She smiled a smile of genuine warmth and we struck up a short conversation. I guess it is all just a part of being on an Island – a little slower, a little warmer … a little more human.

The first few months of my new life went quickly and busily. I rented an apartment for about $100 per month in south Trinidad in charming Princes Town, a place with about 25,000 people. It was in the country but a mere 20 minutes from San Fernando, the second largest city in Trinidad and another hour from the capital. It was quiet, no traffic, but people were friendly, while, if I craved it, city life was only minutes away! There were fruit stands sprinkled everywhere and fresh fish and vegetable markets a short walk away from where I was staying. Day by day, I found my health returning to me. My mental outlook began to improve along with my body. After a while fatigue disappeared. I had not felt this good in years … come to think of it I had never, ever felt this good! I even took a part time job as a high school counselor and was enjoying myself so much that I forgot why I came here in the first place. As a result, my plan drastically changed from coming here to die to coming here to “make a comeback!”

After four months I was in the best shape of my life and developed a social network of dear friends and family. Now that I look back at my life, I see how I let myself become consumed with the American culture of fast food and fast living and obsessed with performance, achievement, status and the collection of material objects. All the things that I thought I needed (which ran me into the ground and almost killed me) I no longer wanted. I came to a point where the simple things were all that mattered … family, friends, health and a sense of community and home. Now that I had been rejuvenated, I was determined to create and sustain the life I wanted in the Caribbean. My first task was to look at housing and real estate around the island.

I discovered that it is legal for a foreigner to own a home in Trinidad but that the price of land and property drastically changes from one part of the Island to another. In the capital of Trinidad you can pay $800,000 for a home or live closer to the beach (about 45 minutes away) and pay as little as $50,000 for a two story, four bedroom, two bathroom house. I almost lost my mind when I found out how low the prices could be. I personally bought a 6,000 square foot lot in a new development in Princes Town for $8,500, 20 minutes from the beach! No smog, congestion or stressful living! The cost of living is about a third less than in the USA. A big plus for living in a climate that is tropical and warm all the year round. In my opinion Trinidad has the best of both worlds, slow island life with access to 21st century amenities.

WILL THE PANAMA BOOM GO BUST?

I am frequently asked if I think the boom, taking place in Panama may come to a bust. In an interview this weekend with a reporter from Reuter’s news service, the reporter pointed out that he lives in Panama City and notices that the buildings mostly have no lights on after dark. Does this indicate that speculators are purchasing the buildings and there is no one really living in them? Are the many new buildings being constructed right now going to be empty? Are speculators rather than real buyers who want to live in them driving the construction boom in the city?

According to SkyScraperPage.com there are 149 buildings under construction and 32 new ones proposed in Panama City. With the already 75 buildings built, this will make Panama just behind Mexico City as the city in Latin America with the most skyscrapers. With only 600,000 people living in the city it makes it by far the most buildings per capita of any city in Latin America. What is driving this frenzy of building and is it sustainable?

First, a little history. Up until two years ago all of the buildings in the city were being constructed for the local market. The local market consisted of small 100-150 square meter apartments for the growing middle class and large luxury apartments of between 350 and 800 square meters for the wealthy class of Panamanians, mostly built in Punta Paitilla and Balboa Avenue. The market prices were $750-$1000 a meter depending on the location and size. With the moving of the regional airport, from Paitilla to Albrook, it made available, in the heart of the city some very strategic and valuable land now named Punta Pacifica. This is where a great deal of development has taken place over the last 5 years. There are many new high rise buildings most of which were originally designed for the local wealthier families who now wanted to move from Punta Paitilla to the latest properties in Punta Pacifica right next door. These building are just now being completed and local families are moving into some of them. Along with the new high rise apartments has come a new shopping mall along the lines you would find in most high-end neighborhoods in the U.S. There has also been a new hospital with an alliance with the well-known Johns Hopkins name.

The success of foreign developers with projects like Valle Escondido, Decameron and a few others marketing exclusively to the foreign market has been instrumental in bringing the worlds attention to Panama as a retirement or second home destination. The local developers began to see a change in buyers from local to foreigners almost overnight. The projects along the beach noticed that they too began receiving foreign home buyers and they quickly changed their marketing focus from the small and limited local market to the large and seemingly unlimited foreign one. In a blink of an eye the towers being built in the city began advertising their products to foreigners as well and they began to see success. Until the recent announcement of the Trump Tower and the Spanish projects of Palacio Bahia and Faros de Panama local developers were building all of the residential towers. Now these developers are changing not only their market focus but also they are changing their products. They are sizing down to under 250 meters, offering open floor plans and eliminating maid’s quarters to cater to the tastes of North Americans.

Property prices are increasing for a number of reasons. First and foremost is the cost of construction, which has increased dramatically over the last year. Material prices along with labor, building fees, energy and taxes have all played a part in increasing the price of the products. Another cost factor is demand, and that is the big question people are asking. Is this real demand or speculation by investors who have no intention of taking possession of the properties? The answer is that probably speculators are buying 70% of the units. That does not mean there will be no buyers at the end of the day. The fact is that speculators also create the final demand that is needed to keep the boom going.

I believe speculators are very important to the success of the building boom. Early on there was not much in the way infrastructure in Boquete and few retirees could see the vision I had for the future of the project and the town. The speculators could see the potential and were willing to gamble for a reasonable gain. Without the speculators, who are not so averse to taking risk, it would have been very difficult for the project to succeed. As more projects are built in the area the risk for the developers and their bankers are significantly lowered. They can charge prices that eliminate the speculators as the market demand sets the value of the properties. The Boquete model of speculators as middlemen is now taking place in Panama City.

Almost everyday I am enlightened to a new project and a new group of investors who want to risk and speculate on Panama. Build it and they will come! Panama really is going through a major boom and barring a world economic catastrophe, the bird flu or a dictator taking over, I believe this is one big boom that will not go bust!

LARGEST CRUISE LINER YET BUILT SETS SAIL

The 160,000-tonne Freedom of the Seas, set sail from Southampton on Wednesday bound for its official naming ceremony in New York. The Finnish-built ship has 15 decks with more than 1,800 state-rooms for up to 4,375 passengers, and is 339 meters (1,112 feet) long. Freedom’s facilities include a family water park, a full-size boxing ring and an onboard surfing pool with its own wave machine which simulates surfing a 10-foot-high ocean wave moving at 20 mph.

The giant ship belongs to the Miami-based Royal Caribbean shipping line. Freedom will initially cruise to Mexico, Grand Cayman and Jamaica. Cruising is a booming industry. According to the New York-based Cruise Lines International Association, the number of people who took cruises in the first nine months of 2005 increased 6% from a year earlier to 8.35 million. Freedom will not be the world’s biggest liner for long, however. Royal Caribbean is planning a 220,000-tonne behemoth for 2009, code-named Genesis, which will carry up to 5,400 people and be 1,180 feet long.

WHAT RULES A PRESIDENT’S POPULARITY?

U.S. electoral history shows that when the stock market is rising, reflecting a positive social-mood trend, voters tend to maintain the incumbent leader. When stocks collapse, the leader is thrown out in a landslide or by other means. Though the instances are rare, there are no exceptions to this rule. Voters do not appear to care which party is in power at such times. They just throw whomever they perceive to be in charge, and his party, out of power.

National leaders always make things worse for themselves by (1) claiming credit when the economy does well, thereby implying that it is their fault when it does not, and (2) vowing to enact economy-boosting measures when the economy weakens, thereby supporting the fiction that they can control it, which puts their opponents in a position to claim that those policies failed.

A leader does not control his country’s economy, but the economy mightily controls his image. When the economy contracts, that image suffers, and the voters throw him out. This is true of elected rulers all over the earth. For an instructive case in point, study the fortunes of U.S. president Richard Nixon, who won a second term in a landslide in late 1972 at a major top and was hounded from office less than two years later as the Dow suffered its largest decline since 1937-1938. Or consider [the current president’s father] George H. Bush, who enjoyed record presidential approval ratings in 1991 yet lost the election just a year later amidst the deepest slid in S&P companies’ earnings since the 1940s.

If there is a deflationary crash, the incumbent leader of your nation, no matter how popular he is early in his term will not win re-election if stock prices are much lower on election day. The financial and economic decline during his term and the defeat that follows will not be primarily his fault, though the majority will insist that they are. If the decline is a drawn-out affair, more than one successive leader could suffer defeat at its hands.

High gas prices while Nero fiddles?

People who hear me say in speeches that the markets and the economy affect the election of the leader more so than vice versa invariably gasp in incredulity. In the U.S., Republicans say, “How can you say that Ronald Reagan’s conservative policies cannot be credited for the economic improvement of the 1980s, which led to 8 out of 10 years of expansion?” To which I reply, “Then do you also credit Franklin Roosevelt’s liberal policies for the economic improvement of the 1930s, which led to 11 out of 12 years of economic expansion?” (You can switch these lines when a Democrat asks you the question.) Or more poignantly, “Do you credit Adolf Hitler for the dramatic economic upturn in Germany after he assumed power in 1933?”

What is really happening is that these leaders got into power because the people, despairing over their depression, demanded the ouster of the incumbents. The trend turned, and the new leader got the credit. Sometimes, voters at market bottoms do elect leaders with better economic policies. Usually, they do not. Conversely, leaders in power during financial collapses are rarely directly at fault. Usually, years of mismanagement by others set the stage. The leaders in power at the time, though, always appear inept, because they take actions designed to “help the economy,” which fail, or they decline to take actions and are blamed for fiddling while Rome burns. Regardless of what they do or do not do, the public blames them and their party and kicks them out.

THE DOHA JOKE

Does anyone remember that at the last meeting of the World Trade Organization the trade representatives of the participating countries made a formal commitment to reach a final deal on cutting agricultural and industrial tariffs and subsidies by April 30th of this year? Well, the deadline just passed and the Doha Round of global trade talks – as the multilateral negotiations are called – is not making any progress.

In fact, the Doha Round, created to advance global growth and development by lowering trade barriers, has not made any meaningful progress since its launch in the traumatic, post-9/11 days of November of 2001. Whatever (little) progress there has been in trade liberalization since the talks began has come from bilateral agreements. For the past five years, the Doha Round negotiations have continued all over the world, including four major international gatherings in Cancun, Geneva, Paris, and Hong Kong. Yet, the best one can say about these meetings is that both rich and poor countries have become pretty sophisticated at appearing to be making concessions they are not really making at all. If the talks remain stalled, there will be major complications, such as the “fast-track” authority that currently allows the President of the U.S. to negotiate trade deals without interference from Congress, due to expire a year from now. And it is unlikely to be renewed considering the isolationist and protectionist mood of a large part of the body politic in this country.

Bureaucrats tend to make things hard to understand for us commoners, but what is at stake is extremely simple. Poor countries want to export more farm products to rich countries that currently protect their farmers and rich countries want to export more manufactures and services to poor countries that currently hamper their access. In between, there are those, like China, who side with the rich countries on industrial matters (they want to build cars in developing countries) and with the poor countries on agricultural issues (they want fewer obstacles for their exports to the EU), but want to keep some of their own trade barriers.

Both rich countries and poor countries have been playing games with each other, as well as with the public. Rich countries are offering to eliminate 97% of their tariffs, which sounds wonderful – except that the remaining 3% accounts for a huge portion of their markets. Poor countries in return are offering to open their markets to foreign investment under clearer guidelines, but insisting on retaining subtle restrictions that will amount to maintaining the current situation. As if this were not enough, the EU does not even have a consensus position on international trade. For example, France, where the farm lobby is particularly strong, does not agree with the common EU position on tariff elimination, which France considers too generous.

The great challenge in world trade is not to make imports more expensive but less expensive. Domestic protection is what stands in the way. A rich country like the U.S. should not be forcing its citizens to pay twice as much as the rest of the world for the sugar they consume. A poor country like Brazil should not be forcing its citizens to pay more for the cars it manufactures by placing trade barriers on cars imported from China. In a rational world, every country would simply eliminate its trade barriers and subsidies unilaterally. In the real world, we tend to complicate matters so much that we eventually need to create a labyrinth like the Doha Round global trade talks in which we keep going around in circles without finding a way out. All we need to do is stop treating trade negotiations as if they were part of a war settlement in which each country seeks to aggrandize its territory at the expense of everybody else. In matters of trade, the more territory you concede – that is, the less protection you maintain – the bigger the size of your country’s power.

TAXES

STUDIES CONFIRM TAX PLAYS CRUCIAL ROLE IN MULTINATIONALS’ INVESTMENT DECISIONS

Taxes play an important role in the location and investment decisions of multinationals, according to two new research papers. According to one study based on data from a number of OECD countries, conducted out of the University of Warwick, taxation has a substantial impact on the investment behaviour of U.S. multinationals. Specifically, it found that a ten percentage point fall in the effective average corporation tax rate in a host country (such as the UK) would increase inward investment by U.S. multinationals by 60% in the short-term, and would increase the capital stock owned by U.S. multinationals in the host country by 15%. The study distinguishes two types of decisions made by multinationals – where to locate new activity, and, having chosen the location, how much to invest. The results suggest that it is the location decision which is affected by corporation tax. Conditional on the location, the size of investment is not responsive to corporation tax.

A second study, out of the University of Munich, examined whether other taxes affect foreign direct investment. Examining confidential data from the Bundesbank on German multinational companies, it confirmed that corporation tax affected the location decisions. However, surprisingly, it also found that sales taxes and VAT had a significant effect on investment outside Germany. The study concluded that on average, countries which reduced their tax revenue from sales taxes and VAT by 1% of GDP would see an increase in investment by German multinationals of 12%. It also found that R&D tax credits have a significant impact, and that increasing income taxes on skilled labor tended to deter investment.

EUROPEAN RETAILER RAIDED BY KOREAN TAX INSPECTORS

Foreign investors will have been dismayed to learn that South Korean tax inspectors have raided the Seoul office of French retail group Carrefour following the company’s announcement last week that it was selling its Korean operation and withdrawing from the country. A Carrefour employee told the national KBS TV network that, “There was an internal broadcast, telling us all to keep our computers on, desk drawers open and leave the office.” It is believed that the tax collectors are looking for evidence that Carrefour allegedly received goods free of charge from subcontractors and in doing so avoided taxes. Carrefour, which operates 32 hypermarkets and 24 shopping malls in Korea, had ex-VAT sales in the country of €1.43 billion in 2005.

Carrefour says that the divestment of its Korean operation is part of a wider effort to withdraw from insufficiently profitable or non-core activities. An increasing number of foreign companies have been put under the spotlight recently for alleged tax crimes, most notably U.S. funds Lone Star and Newbridge Capital. Despite the growing perception that the Korean tax authorities are carrying out a witch hunt against profiteering foreign investors, Vice Minister of Finance and Economy Kwon Tae-shin has insisted that the government welcomes foreign investment.

South Korean lawmakers approve tax on foreign investors.

The South Korean parliament has approved a new measure which aims to prevent offshore-based foreign firms from avoiding taxes on income made in the country. Under a proposal due to come into effect in July, a withholding tax will be imposed on the South Korean gains made by investors based offshore under certain conditions, such as when the company has owned shares in a domestic firm for more than six months. Foreign investors will then be able to apply for refunds, if eligible under South Korean law.

The move comes amid a national outcry at the huge tax-free profits being made by certain foreign companies which snapped up distressed assets on the cheap in the aftermath of the Asian finacial crisis in the late 1990s. “The revision is to prevent tax evasion in international deals by clearly stating that taxes will be imposed on actual profit earners in international transactions,” a parliamentary statement explained. “The revision will help reduce tax evasion in international deals by improving transparency in taxation.”

IRS DRAWS MORE FIRE OVER TAXPAYER PRIVACY

Further objections were raised at a Senate hearing last week against an IRS plan that would make it easier for tax preparers to sell taxpayers’ private financial records to telemarketers and other third parties. “The IRS should not be an accomplice in selling taxpayer information,” Senator Patty Murray (D-Washington) told IRS Commissioner Mark Everson. “Taxpayers deserve more privacy, not less.”

In March, the IRS proposed changes to its privacy policy that would modernize procedures for tax preparation firms to sell an individual’s tax records to third parties. However, while a firm would need to get a taxpayer’s signature, Murray noted that many Americans may not realize they are signing away their privacy rights. “What consumer really wants to have their dinner interrupted by a telemarketer who’s looking at a copy of their private tax return?” Murray asked. “I hope the IRS will take a fresh look at these regulations and provide an outright prohibition on this information being shared with anybody.”

The IRS disputes the notion that its proposals on the use of taxpayer information by tax preparers would reduce privacy protections. “What we are trying to do here is have a balanced approach,” Everson responded. “This piece of the law has been in effect for over 30 years, but the world has changed since that time. I guess the better question is whose information is it? Is it the taxpayer’s information or is it the government’s information?” The IRS claims that the proposed rule change would “strengthen taxpayers’ control over their tax information now in the hands of tax preparers or tax software companies.”

WITHHOLDING TAX ON DEATH ROW IN THE EU

An opinion issued by an advisor to the European Court of Justice could strike another blow to the tax raising powers of national governments in the EU if taken up by the court. According to Advocate General Leendert Geelhoed, a withholding tax imposed by the French government on dividends transferred to a parent company located in the Netherlands is “quite patently discriminatory” against non-resident taxpayers, because dividends destined for a French parent would attract no such tax.

The ramifications of the Denkavit case could reverberate across the EU if the ECJ agrees with the AG’s non-binding decision, which it tends to do. Most countries impose withholding taxes on dividend and interest income to prevent income destined for another territory from leaving untaxed, and accountants are expecting a flurry of retrospective claims from companies for overpaid tax potentially spanning two decades, with the final total likely to reach billions of euros. Peter Cussons of PricewaterhouseCoopers was quoted as saying that a judgment along the lines of the opinion would be “another nail in the coffin of fiscal sovereignty. … Withholding tax is on death row.”

A decision against the French government in the Denkavit case would be especially welcomed by Europe’s pension fund industry, which has argued that governments tend to discriminate against foreign pension funds by taxing them more heavily.

CONGRESS REACHES AGREEMENT ON EXTENDING TAX CUTS, STOP-GAP AMT RELIEF MEASURE

Congressional Republicans have agreed in principle to a $70 billion package of tax cuts which includes extensions to President George W. Bush’s cherished investment tax cuts for an additional two years, while also providing for a stop-gap measure to thwart the growing reach of the Alternative Minimum Tax. The agreement, reached among the Republican members of a joint House-Senate conference committee, would ensure that the 15% tax rate on most capital gains and qualifying dividends will continue until the end of 2010. Under current legislation, these tax cuts are due to expire at the end of 2008.

President Bush has been stepping up the pressure on Congress to include the tax cut extensions in the tax reconciliation bill by warning that lawmakers stand to preside over an effective tax increase that would be devastating for the U.S. economy. The bill has been bogged down in Congress for months as House and Senate lawmakers differed over the composition of the bill. Without any change in the tax law, the number of taxpayers subject to the AMT would increase 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”. Also included in the agreement are important provisions that would extend a tax holiday on the foreign trading profits of financial services firms until the income is repatriated, and allow small businesses to continue to write off investments worth up to $100,000 through 2008 and 2009.

EUROPEAN COURT RULES U.K. WENT TOO FAR IN COUNTERACTING TAX AVOIDANCE

A landmark ruling by an Advocate General of the European Court of Justice in the “Cadbury Schweppes case” appears to have dealt another blow to the tax raising powers of the UK government, although accountants believe that the ruling could represent a rare “win win” situation for companies and the tax authorities. Advocate General M. Leger stated that UK legislation on Controlled Foreign Corporations (CFCs) goes beyond what is necessary to counteract wholly artificial tax avoidance. According to Leger, a low tax rate is as legitimate a factor in a company’s decision as to where to establish a subsidiary as other business considerations such as cost of labor, and infrastructure.

Cadbury Schweppes is arguing that the UK’s CFC legislation infringes European law by penalizing companies that take advantage of low tax rates in other EU countries. Specifically, Cadbury is challenging the UK government’s decision to tax profits earned by its Cadbury Schweppes Treasury Services (CSTS) and Cadbury Schweppes Treasury International (CSTI) subsidiaries based in Ireland, which levies one of the lowest rates of corporate tax in Europe at 12.5%.

While Leger’s opinion appears to support the company’s position, he also acknowledged that it was reasonable for EU member states to introduce a presumption of tax avoidance in certain circumstances given widely differing tax rates across the EU, and the ease with which companies can relocate across national boundaries. Leger believes that the burden of proof must fall on the parent company to show that it has legitimate operations when establishing in a low tax jurisdiction, as opposed to merely setting up what he termed “letter-box” companies.

“[Leger’s] Opinion is hugely significant for the way business operates in the EU,” Chris Morgan, Head of the EU Law Group at KPMG, observed. “Assuming that the ECJ follows this Opinion, companies will be able to enjoy far more freedom in establishing commercial operations in low tax jurisdictions.”

MORE THAN $10 BILLION IN FOREIGN GOVERNMENT WITHHOLDING TAXES GOES UNCLAIMED

Tax-reclamation firm GOAL Group says that $10.5 billion of global investors’ rightful returns from their foreign shares and bonds were wasted in the latest financial year, because withholding tax on dividends and income is not being properly reclaimed. This represents around a quarter of all withheld tax on foreign securities. The UK cross-border investment community chalked up the second highest losses behind the U.S., with investors missing out on $1.2 billion. On average, lost returns through unreclaimed tax have escalated by over 80% since 2003.

Income earned on foreign securities attracts a withholding tax in the country of origin, but a portion of that tax may be reclaimed by custodians on behalf of their clients. It is now estimated that the global market for withholding tax reclamation services by custodian banks is worth around $860 million. Many leading custodians have already recognized the market opening represented by effective tax reclamation services, both for their foreign market clients and as an interbank services opportunity. But with around 25% of reclaimable withholding tax still unreclaimed every year, there is a clear opportunity for custodians to increase the scope and efficiency of reclamation services.

Losses have increased substantially since GOAL’s last market analysis in 2003 because foreign shareholdings are becoming more popular with fund managers. According to statistics from the IMF and from global stock exchanges, the market capitalization of global equities rose 39% between 2001 and 2004, whereas the value of cross-border equities investments rose 67% over the same period. Cross-border shareholdings have therefore risen at nearly double the market rate. In parallel, dividend yields have become a highly scrutinized element of investors’ portfolios, with consequent pressure on fund managers to maximize this element of return.

GOAL is a privately owned software and outsource service company and an industry leader in providing solutions to automate and optimize the reclamation of withholding tax on cross-border securities dividend income and royalties.

IRISH TAX REVENUES CONTINUE TO BEAT TARGETS

The latest set of figures released by Ireland’s Department of Finance show that tax revenues continue to run ahead of targets set down in the budget, with the booming housing market causing a windfall of stamp duty receipts. Tax receipts for the four month period to the end of April 2006 totalled a little over €12.8 billion, €400 million more than forecast in the budget, and €1.8 billion more than the amount of tax collected in the corresponding period in 2005. This contributed to a surplus of €497 million for the first four months of 2006, compared with a €1.2 billion deficit for the first four months of last year.

Stamp duty revenues made a significant contribution to the tax haul, with the Exchequer collecting over €1 billion from property transactions, compared with €722 million in the first four months of 2005. However, income tax receipts were running just below target at a little under €3.6 billion. Value added tax receipts, at €4.4 billion, also undershot the government’s forecast, falling short by €100 million. Ireland’s healthy business environment ensured that corporate tax revenues came in €145 million above target at €943 million.

SEC AND IRS EXPLORE MORE COMPANY TAX REPORTING

Christopher Cox, chairman of the U.S. Securities and Exchange Commission, has revealed that he and IRS chief Mark Everson have informally discussed the idea that company tax information should be released alongside earnings data. Addressing an audience at the Society of American Business Editors and Writers, Cox stated that he and Everson had mulled over the idea as a way of improving the quality of corporate data available to investors, while addressing the mismatch between what companies report to the SEC and what they tell the IRS. However, he was keen to stress that there are no proposals on the issue in the pipeline, calling the dialogue between himself and Everson “intellectual R&D”.

While Everson has previously floated the idea of side-by-side company reporting, such a proposal is likely to be hugely controversial, and raise questions of taxpayer privacy. Currently, the U.S. Tax Code prohibits the disclosure of taxpayer information, except in very limited circumstances. Nonetheless, Everson believes that the full or partial release of corporate taxpayer data would likely improve compliance.

ASSET PROTECTION / LEGAL STRUCTURES

SAVE TAXES BY GOING OFFSHORE

Around this time of year, you might be a little depressed when you think about the big check you just sent to the IRS. So, do something about it! And while you are at it, why not add an offshore flavor to your tax savings? Consider the following ideas, which can help you cut next year’s tax bill a minimum of 10% and, if you are willing to live outside the U.S., by 90% or more.

Begin by doing all those things you know you “should” do, like loading up your IRA, pension plan or 401(k) to whatever contribution limits apply. If you contribute only $10,000 for 2006, you could easily save $4,000 or more next April 15. (Incidentally, your IRA is a great way to fund foreign investments, and is one of the only ways U.S. taxpayers can safely invest in offshore mutual funds.) Or, consider buying life insurance, variable annuities and other tax-deferred investments from a foreign insurance company. You will not get a tax deduction when you buy them, but the income from them grows free of U.S. tax. These are the easy savings. While you will save no additional taxes using these techniques compared to investing only in the U.S., you will have access to a world of investments that are difficult or impossible to buy in the U.S.

If you want to save even more in taxes, think about starting an offshore business. Let us say you form a U.S. company that owns and operates a Web site that sells handmade rugs in Guatemala. The most tax-efficient way to operate a small business like this in the U.S. is probably with an LLC or an S-corporation where all income is attributed to the business owners, and none to the business itself. Instead of forming this business in the U.S., you might form it in low-tax Panama and operate it through a Panama IBC. To save taxes in the U.S., it must be a genuine Panamanian business. So, you pay someone in Panama – perhaps a secretary or accountant – an annual salary to operate the business. You pay yourself a dividend (upon which you will pay tax). You keep the remaining profits offshore as retained earnings. If the business meets some stringent requirements, the most important of which is that you do not manage the enterprise yourself, all the retained earnings can be tax-deferred.

Of course, most start-up businesses need hands-on management. So if you really want to make this strategy pay off, you will need to move offshore to a country like Panama that does not impose income tax on foreign income. In that case, you can manage the business and legally defer U.S. taxation on the profits, provided that your company: (1) Is engaged in an active trade or business, (2) operates entirely outside the U.S., (3) does not buy products or services from U.S. persons or companies related to you, and (4) does not generate U.S. source income, or, if it does, that income is not “effectively connected” to a U.S. trade or business. These requirements are not difficult to meet if you are living offshore and the business income is mostly from non-U.S. sources. The tax picture gets even more favorable when you consider U.S. citizens living offshore can receive a salary of up to $80,000 free of U.S. tax, plus an additional $80,000 for their spouse.

Naturally, the IRS knows these strategies, both for tax savings in offshore investments and offshore businesses. To begin with, there are complex reporting requirements with which you must comply, and hiring offshore tax experts to do the required accounting can be expensive. And over the years, the IRS has persuaded Congress to erect a series of roadblocks to these offshore tax savings. So go offshore, but get professional advice before you do.

LABUAN POISED TO BECOME MAJOR OFFSHORE PLAYER

The Labuan International Offshore Financial Centre has recorded another year of strong performance, with expansion in all sectors in 2005, and the jurisdiction remains well positioned to become a major player in the world of offshore business and finance, according to the annual report of regulatory body LOFSA (Labuan Offshore Financial Services Authority).

With 2006 marking LOFSA’s 10th year, the regulator says that growth of offshore companies has been steady in Labuan since 1996, with a continuous inflow of approximately 500-600 companies being incorporated annually. In 2005, the number of offshore companies registered in the Labuan IOFC rose by 532, bringing the total of registered offshore companies to 5,152 as at end-December 2005. Of these, 3,067 were operating companies. The offshore companies originated from almost 80 countries, reflecting the international stature of the Labuan IOFC.

LOFSA’s broad goal is to develop Labuan IOFC as an “out-out” regional offshore financial center by 2010. The focus is to increase the percentage of non-resident ownership of offshore companies and non-resident business to 70% from the present 50%. The number of offshore companies operating in the Labuan IOFC is expected to grow at least 10% per annum. Capital market activities will also be further encouraged. Growth in corporate advisory services for cross-border merger and acquisition exercises and passive investment transactions and its ancillary funding requirements will be given emphasis. Promotion of Islamic finance will remain a core agenda, to support the overall effort to develop a comprehensive Islamic financial system in Malaysia and to position itself as an international Islamic financial center.

CAYMAN ISLANDS GOVERNMENT HIKES FEES FOR OFFSHORE AND DOMESTIC ENTITIES

Cayman Financial Secretary Kenneth Jefferson announced in last week’s budget statement that a number of fees affecting entities in both the offshore and domestic sectors will be increased from the start of the next financial year to raise additional revenue for the government. The revenue measures are scheduled to take effect on 1st July 2006 – the start of the upcoming financial year.

The Caymans is also to introduce a new tiered rate of stamp duty for real estate purchases and lower duty rates for Caymanians. Following the post-9-11 economic downturn, the Cayman government lowered stamp duty to 5% from 9%. However, Jefferson announced that in certain areas of the country, this rate will be increased to 7.5%. The higher rate will apply to certain parcels of property along the West Bay Road corridor and certain parts of George Town, Jefferson explained. Elsewhere in the Islands the current rate of 5% will be increased to 6%. The Government will also seek the introduction of a special rate of 4% stamp duty in respect of property bought by Caymanians, although the special rate will not apply to the parcels of property now subject to the 7.5% rate. In addition to the special 4% rate for Caymanians, further concessions are to be offered to nationals acquiring property for the first time. It is expected that the changes in the rates of Stamp Duty will generate a net additional revenue of $6 million during the 2006/7 financial year.

REAL ESTATE BUBBLES: YOUR HOUSE, YOUR COFFIN

Charles Mackay would have included American home ownership as a teaser for his next edition of Extraordinary Popular Delusions And The Madness Of Crowds if he lived during our time. “Mankind’s Extraordinary Popular Delusion Number 8,437 : The early 2000’s housing bubble”. Never mind the over-mentioned speculative buying dangers of the boom, let us pop this balloon with the pin of common sense.

Before you shun me for disrespecting the quintessential American dream, hear me out. Taking stock of my credentials – a master’s degree in architecture, a seasoned real estate agent and investor, and a self taught homespun economist – you would think I favor buying into traditional cookie-cuttered suburban shoeboxes for dwellings or investments. Nothing could diverge further from the truth. No, this is not a dissertation on suburban sprawl and its consequential environmental raping. While I admit, a shred of tree hugger exists inside of me, it is more a financial warning than anything else. As a real estate agent, I grovel on my knees at the confessional. I have sinned by helping people buy homes which are not only dangerous for human occupation, but support predatory banking institutions that subscribe to government fiat currency dogma and easy credit. But I continue sinning, first for the sake of feeding my family, and second, since no superior product exists at a competitive price.

A man’s home is his castle, right? Picture yourself in my native central plains of southernmost tornado alley. Imagine a box framed out of termite food, or oversized match sticks. Castles originated as strongholds for protection. Shoot a bullet or a wind-fed, supersonic two by four through your home’s walls and see if you would use it as a fortress. The fact remains, our houses are fragile coffins. Or, as architects would say – using technical terms – built of crap.

But enough of the physical pragmatics. Let’s talk money. To say that wood frame homes are evil because home builders produce a cheap product for fast profits would be contrary to free market principles. We still buy them. Why? Because they are cheap. In our “I want it now” day and age of easy credit, the masses have fallen prey to the amortization wolves. (Heavens above! Buying a house and paying for it – in full – with hard earned savings? Who has ever heard of such a preposterous idea? Thanks for the low interest rates, Mr. Fed.)

And if affordability is not an issue for you, here is food for future thought. Thinking of sinking money into property for the sake of preserving your wealth’s value during times of inflation? Ever heard of eminent domain? Contrary to herd-mentality thinking, you can only keep that which you can defend. Keep an eye on our ever fattening police state. Example: As part of the Patriot Act, title companies often ask our clients to sign Homeland Security identity verification forms during closings. It is only a matter of time before we all get profiled as suspects who go against the politically correct grain. Ask any pre-Castro Cuban what happened to their hard earned property after January 1 of 1959 – confiscated by the state, kids. See if that adds up to liquidity when you need to cash out on a real estate deal, especially during a crisis.

Just think of the billions currently invested in America’s matchboxes, and all of them subject to both natural disaster and democratic mob rule. Did you hear that “popping” noise?

PRICEWATERHOUSECOOPERS OPENS FIRST OFFICE IN ST. KITTS AND NEVIS

PricewaterhouseCoopers, one of the “big four” accounting firms, has officially opended its doors in the Caribbean jurisidction of St. Kitts and Nevis. Mr. Charles Walwyn, the Kittian-born PwC partner in charge of the new office, has stated that the company intends to offer a full range of audit, tax, advisory and corporate services to local businesses, individuals and foreign investors in St. Kitts and Nevis. Mr. Walwyn said that, “We follow the business and we have been doing a substantial amount of work here in recent times from our offices in Antigua. If we want to continue to serve our clients here, we have little choice, but to follow them.” Mr. Walwyn also observed that there is a favorable investment climate in the jurisdiction and the “timing seems to be very much appropriate.”

BARCLAYS ORDERED TO COUGH UP OFFSHORE ACCOUNT INFO TO HM REVENUE AND CUSTOMS

In a ruling handed down by the Special Commissioner, Barclays Bank was ordered to furnish HM Revenue and Customs with details of offshore accounts held by its customers, in order to assist the tax authority in clamping down on tax evasion. The Special Commissioner explained that he had found in favour of HMRC because “the information that it has already obtained raises serious questions that merit investigation and cannot be investigated by any other means.”

The tax authority has welcomed what it called a “landmark decision”, stating that, The action is about fairness and about creating a level playing field for all taxpayers. HMRC will continue to ensure that all monies located offshore are lawfully taxed.” Although the ruling concerned information held by Barclays, HM Revenue and Customs is now expected to pursue other financial institutions for customer data.

ID THEFT IS THE FASTEST-GROWING U.S. CRIME

Identity theft can be as simple as a drug addict rooting through trash or stealing mail, and as high-tech as e-mail scams, bogus Web sites, miniature cameras and illicit digital scanners secreted at an ATM. Regardless, the crime has become the fastest-growing in the U.S. Last year, 10 million Americans fell prey to misappropriated credit cards, bank accounts and Social Security numbers. According to various researchers, that is at least a 30% increase over the 7 million ID theft victims of just three years ago. “I’ve never seen a crime take hold and grow like this,” Kirk Jorgensen, chief deputy to the Utah Attorney General’s Office, told a identity theft symposium. “And it is so easy; it literally doesn’t take a rocket scientist.”

He recounted that a methamphetamine-fueled gang of white supremacists recently ran one ID theft ring that wreaked havoc in northern Utah. “They weren’t the brightest people on the block … yet they had one heck of an operation [that was] committing crimes up and down the Wasatch Front.” Although eventually broken up, the ring’s longevity was aided by its crimes being investigated as isolated incidents in each of several cities. FBI Special Agent Matthew Miller said such lack of interagency cooperation helped spawn the Identity Theft Task Force, made up of dozens of government and law enforcement agencies. The resulting sharing of resources and data has led to 190 cases, more than 150 grand jury indictments and 126 convictions and sentencings in the past year and a half. Although the FBI’s primary interest initially was to thwart ID-stealing terrorists, Miller says the task force has found the crime spreading into organized criminal enterprises linking white supremacists, street gangs and drug addicts.

One division is tasked with stealing mail or breaking into cars to snitch visible wallets or purses. Credit cards and personal information is gleaned, from which a second unit – computer-savvy graphics artists – craft counterfeit checks, Social Security cards, driver licenses and other documents. Miller, the victim of ID theft twice in recent years, said the third level is made up of pretenders who use the identities to attempt to access their victims’ bank accounts, charge purchases or make cash withdrawals, or set up bogus identities using others’ stolen Social Security numbers.

Increasingly, real Social Security numbers and accounts are being created, or purloined, by undocumented workers to circumvent employers’ efforts to certify their legality, said Ronald Engleby, special agent in charge of the SSA’s Office of the Inspector General in Utah. “I’ve been a victim and my wife has been a victim [of ID theft],” he said. In his case, a delivery service lost documents containing sensitive financial information, while his wife’s credit was highjacked after a corporate laptop was lost. 98% of Social Security-related ID theft cases involve people who use their own names but invent or steal their numbers. Two percent involve perpetrators using the numbers to assume their victims’ identities to “rape and pillage their credit.”

Lack of collaboration between federal agencies can add further to the suffering of law-abiding Americans. Engleby noted that the IRS routinely finds Social Security number discrepancies, but instead of investigating the agency goes after the real number-holders for alleged unreported income. Tax collection notices are sent, refunds garnished. Engleby tries to help victims clear their names, but it takes time. In the interim, the ID thieves continue to use the number to buy cars, take out mortgages and file bankruptcies that destroy their victims’ credit. Various studies show that in addition to the tens of billions of dollars in losses financial institutions face, ID theft victims will spend at least 600 hours trying to repair their backgrounds.

PRIVACY

THE STORY OF PGP

Introducing PGP & GPG: Email for the Practical Paranoid by Michael W. Lucas.

Encryption is an old science, and as computers became more and more powerful, the number of people working with encryption grew and grew. Phil Zimmermann combined some common encryption methods to produce the software he dubbed Pretty Good Privacy, or PGP. The ideas behind PGP had been known and understood by computer scientists and mathematicians for years. Zimmermann’s real innovation was in making these tools usable by anyone with a home computer. A friend of Zimmermann’s distributed PGP as widely as possible in an effort to make military-grade encryption widely available before a proposed restictive law could take effect. Their activism contributed to the demise of anti-encryption legislation.

Zimmermann, a long-time antinuclear activist, believed that PGP would be of most use to dissidents, rebels, and others who faced serious risks as a consequence of their beliefs – in other words, to many people outside as well as inside the U.S. Zimmermann originally wrote PGP in boring old everyday text (or “source code”) and and had the text published in book form. Although many books on cryptography did have export restrictions, Zimmermann could get an export permit for his book of source code. Thus, people all over the world were able to get the instructions to build their own PGP software. They promptly built the software from those instructions, and PGP quickly became a worldwide de facto standard for data encryption. As you might guess, the U.S. government considered this tactic merely a way to get around munitions export restrictions. Zimmermann and his supporters considered the book speech, as in “free speech” and “First Amendment”. The government sued, and over the next three years Zimmermann and the administration went a few rounds in the courts.

This lawsuit turned Zimmermann into something of a hero in the computer community. Many people downloaded PGP just to see what all the fuss was about, and quite a few of them wound up using it. Zimmermann’s legal defense fund spread news of the PGP lawsuit even further. In congressional hearings about encryption, Zimmermann read letters he had received from people in oppressive regimes and war-torn areas whose lives had been saved by PGP, contributing greatly to the public awareness of how valuable his work had been. Ultimately it became obvious that the courts firmly believed that the First Amendment trumped State Department regulations, and the State Department and subsequently the government dropped the suit. This not only saved them some time, money, effort, and humiliation at that moment but also prevented a legal precedent deeming encryption generally exportable. If a future administration desires, it can bring this issue back to the courts in more favorable circumstances against some other defendant.

Today, PGP Corporation is a major player in the world of cryptography and information security, providing PGP software for many different platforms, from PCs to handhelds and even Blackberry phones. PGP Corporation software secures everything from email to instant messages to medical records. PGP is a commercial product, and PGP Corporation provides a whole range of related support services. We are going to cover the basic version, the PGP Desktop. Because PGP is a typical commercial product, you are expected to pay for it.

GnuPG – referred to simply as GPG by many people – is a freely available implementation of the OpenPGP standard that was released to the public in 1999 by the German developer Werner Koch. It is available for both Windows and Unix-like computers (including Mac OS X). Because GnuPG conforms to the OpenPGP standard, it can be used to communicate with people using any other OpenPGP-compliant software. “Freely available” means that you can get for free. You also get access to all the source code used to create the program, which is not directly useful to many readers but is vital to those who can do something with it. There are several reasons why a person or organization might choose to purchase PGP rather than use the free GnuPG, or vice versa, including ease of use, support, transparency, and supported algorithms. All these reasons make the choice of encryption software very situation-dependent. Take a look at your options and pick the right tool for you.

HEAD OF U.S. VISITOR TRACKING PROGRAM WANTS GLOBAL ID SYSTEM

The head of the Homeland Security Department’s visitor tracking program called for the creation of a “global ID management system” to make travel easier while enhancing security. Jim Williams, director of the US VISIT program within DHS, told attendees of the National Business Travel Association’s annual meeting he is aware of the plight of the business traveler. Even he, despite his senior position in the department, once found himself temporarily unable to board a plane because he shared the name of an individual on a terrorist watch list, he said.

Williams said he wants to join forces with several DHS agencies to develop a global identification system that would cut wait times, reduce government fees for travelers, fight illegal immigration and, perhaps paramount, better defend nations from terrorists. The US VISIT chief, who already oversees identity inquiries for nearly every visitor who enters the U.S., said a worldwide identification system will better link nations in the fight against terrorism. In his speech, he likened al Qaeda operatives and sleeper cells – including the ones that attacked on 9/11 – to “submarines” that must surface to kill. “In order for them to do what they want to do, they have to travel.” He did not specify when, or how, the proposed global program would be implemented.

Williams suggested that a biometrics identification system might be used to better track travelers to the U.S. A similar program is being tested in Great Britain, where such physical characteristics as fingerprints or iris scans are being tied to national identification cards. Proponents say it can cut the odds of success for immigration fraud. Any program that can successfully ease both financial burdens and wait times for travelers will be welcomed with open arms, said Hank Roeder, vice president of global operations for the National Business Travel Association. A TSA official declined to comment, saying the agency has no knowledge of the proposed plan.

THEY REALLY DO NOT LIKE REAL ID IN NEW HAMPSHIRE

Database was a dirty word at a rally to oppose New Hampshire’s participation in a national identification card system that would digitally catalog personal information. More than 100 people – some dressed as Nazis, others wearing three-cornered hats – gathered on the State House lawn. Though the group’political leanings spanned the spectrum, they agreed that the system is a bad idea, citing identity theft, Big Brother and the violation of the U.S. Constitution. “We have to decide … if we’re going to stand by like sheep as they brand us,” said Carol Shea-Porter, a Rochester Democrat (who was not in costume) running for Congress against Republican Jeb Bradley.

Known as Real ID, the card system would require motor vehicle officials to more thoroughly screen people applying for driver’s licenses, issue licenses that contain anti-fraud precautions such as computer chips, and create a database with digital copies of drivers’ birth certificates and other identifying documents. Anyone flying on an airplane, opening a bank account or entering a federal building would need to have the national ID card or a passport. Congress passed the Real ID Act last year, and New Hampshire and Kentucky were offered grants to test the program. All states must comply by 2008. But the New Hampshire House voted last month to refuse to do so, calling the program “contrary and repugnant” to the Constitution. Now it is up to the Senate to decide whether to take the federal grant money and overhaul the state’s licensing system or not.

At the rally, speakers urged the Senate to buck the new law, comparing the U.S. to Nazi Germany and warning against everything from a police state to the start of the apocalypse. The Rev. Garrett Lear, known as “the Patriot Pastor” for his knowledge of the Constitution and colonial dress, told the crowd the Real ID system is contrary to the liberty-for-all wishes of the founding fathers, many of whom were Christian. Katherine Albrecht, a consumer advocate and leader of the anti-Real ID movement, read a chapter from her book, Spychips, about how the government plans to track people through product ID tags. She said that in the wrong hands, a national identification system could have disastrous effects. It is like “putting a noose around your neck and hoping the government doesn’t pull the rope,” she said. “You could think you’re giving the rope to Mother Theresa but find yourself looking into the eyes of Adolf Hitler.”

To illustrate that point, Lauren Canario and Jim Johnson of Winchester, members of the Free State Project, dressed in Nazi beige and stood watch over a mock guard shack at the edge of the lawn. To pass through the fake gate to the free popcorn stand and rally ahead, passersby had to say “F U”. “You can’t get by without cursing the Nazis,” said Canario, who was holding a sign that read “Say Yahvol to Real ID”.

POWER SURGE: THE CONSTITUTIONAL RECORD OF GEORGE W. BUSH

In recent judicial confirmation battles, President Bush has repeatedly – and correctly – stressed fidelity to the Constitution as the key qualification for service as a judge. It is also the key qualification for service as the nation’s chief executive. On January 20, 2005, for the second time, Mr. Bush took the presidential oath of office set out in the Constitution, swearing to “preserve, protect and defend the Constitution of the United States.” With five years of the Bush administration behind us, we have more than enough evidence to make an assessment about the president’s commitment to our fundamental legal charter.

Unfortunately, far from defending the Constitution, President Bush has repeatedly sought to strip out the limits the document places on federal power. In its official legal briefs and public actions, the Bush administration has advanced a view of federal power that is astonishingly broad, a view that includes: (1) A federal government empowered to regulate core political speech – and restrict it greatly when it counts the most: in the days before a federal election. (2) A president who cannot be restrained, through validly enacted statutes, from pursuing any tactic he believes to be effective in the war on terror. (3) A president who has the inherent constitutional authority to designate American citizens suspected of terrorist activity as “enemy combatants”, strip them of any constitutional protection, and lock them up without charges for the duration of the war on terror – in other words, perhaps forever. And (4) A federal government with the power to supervise virtually every aspect of American life, from kindergarten, to marriage, to the grave.

President Bush’s constitutional vision is, in short, sharply at odds with the text, history, and structure of our Constitution, which authorizes a government of limited powers.

LAW

FEDS DROP BOMB ON ELECTRONIC FRONTIER FOUNDATION LAWSUIT AGAINST AT&T

The federal government intends to invoke the rarely used “State Secrets Privilege” – the legal equivalent of a nuclear bomb – in the EFF’s class action lawsuit against AT&T that alleges the telecom collaborated with the government’s secret spying on American citizens. The State Secrets Privilege is a vestige from English common law that lets the executive branch step into a civil lawsuit and have it dismissed if the case might reveal information that puts national security at risk. The assertion severely darkens the prospects of the EFF’s lawsuit, which the organization had hoped would shine light on the extent of the Bush Administration’s admitted warrantless spying on Americans.

The government is not admitting, however, that AT&T aided the National Security Agency in spying on American’s phone calls and internet communications. “[T]he fact that the United States will assert the state secrets privilege should not be construed as a confirmation or denial of any of Plaintiffs’ allegations, either about AT&T or the alleged surveillance activities,” the filing reads. “When allegations are made about purported classified government activities or relationships, regardless of whether those allegations are accurate, the existence or non-existence of the activity or relationship is potentially a state secret.” The Justice Department has not formally invoked the privilege yet. The complete paperwork justifying the government’s decision will be filed by May 12.

FBI SEEKS INFORMATION WITHOUT COURT OK

The FBI secretly sought information last year on 3,501 U.S. citizens and legal residents from their banks and credit card, telephone and internet companies without a court’s approval, the Justice Department said last week. It was the first time the Bush administration has publicly disclosed how often it uses the administrative subpoena known as a National Security Letter, which allows the executive branch of government to obtain records about people in terrorism and espionage investigations without a judge’s approval or a grand jury subpoena. The disclosure was mandated as part of the renewal of the Patriot Act.

The FBI delivered a total of 9,254 NSLs relating to 3,501 people in 2005, according to a report submitted to Democratic and Republican leaders in the House and Senate. In some cases, the FBI demanded information about one person from several companies. The numbers from previous years remain classified, officials said. The department also reported it received a secret court’s approval for 155 warrants to examine business records last year under a Patriot Act provision that includes library records. However, Attorney General Alberto Gonzales has said the department has never used the provision to ask for library records.

CONGRESS READIES BROAD NEW DIGITAL COPYRIGHT BILL

For the last few years, a coalition of technology companies, academics and computer programmers has been trying to persuade Congress to scale back the Digital Millennium Copyright Act. Now Congress is preparing to do precisely the opposite. A proposed copyright law would expand the DMCA’s restrictions on software that can bypass copy protections and grant federal police more wiretapping and enforcement powers. The draft legislation, created by the Bush administration and backed by Rep. Lamar Smith (R-Texas), already enjoys the support of large copyright holders such as the Recording Industry Association of America. “The bill as a whole does a lot of good things,” said Keith Kupferschmid, vice president for intellectual property and enforcement at the Software and Information Industry Association. “It gives the (Justice Department) the ability to do things to combat IP crime that they now can’t presently do.”

During a speech in November, Attorney General Alberto Gonzales endorsed the idea and said at the time that he would send Congress draft legislation. Such changes are necessary because new technology is “encouraging large-scale criminal enterprises to get involved in intellectual-property theft,” Gonzales said, adding that proceeds from the illicit businesses are used, “quite frankly, to fund terrorism activities.” The bill is a far-reaching medley of different proposals cobbled together. One would, for instance, create a new federal crime of just trying to commit copyright infringement. Such willful attempts at piracy, even if they fail, could be punished by up to 10 years in prison. It also represents a political setback for critics of expanding copyright law, who have been backing federal legislation that veers in the opposite direction and permits bypassing copy protection for “fair use” purposes. That bill, introduced in 2002, has been bottled up in a subcommittee ever since.

But one of the more controversial sections may be the changes to the DMCA. Under current law, distributing or trafficking in any software or hardware that can be used to bypass copy-protection devices is generally prohibited. (That section already has been used against a Princeton computer science professor, Russian programmer Dmitry Sklyarov and a toner cartridge remanufacturer.) Smith’s measure would expand those civil and criminal restrictions. Instead of merely targeting distribution, the new language says nobody may “make, import, export, obtain control of, or possess” such anticircumvention tools if they may be redistributed to someone else. “It’s one degree more likely that mere communication about the means of accomplishing a hack would be subject to penalties,” said Peter Jaszi, who teaches copyright law at American University and is critical of attempts to expand it.

Even the current wording of the DMCA has alarmed security researchers. Ed Felten, the Princeton professor, told the Copyright Office last month that he and a colleague were the first to uncover the so-called “rootkit” on some Sony BMG Music Entertainment CDs – but delayed publishing their findings for fear of being sued under the DMCA. A report prepared by critics of the DMCA says it quashes free speech and chokes innovation. Jessica Litman, who teaches copyright law at Wayne State University, views the DMCA expansion as more than just a minor change. “If Sony had decided to stand on its rights and either McAfee or Norton Antivirus had tried to remove the rootkit from my hard drive, we’d all be violating this expanded definition,” Litman said.

CHINESE DISSIDENT JAILED, ASSIST TO YAHOO

Yahoo has been cited in a Chinese court decision to jail a dissident internet writer for 10 years for subversion in 2003 – the fourth such case to surface implicating the U.S. Internet giant. Wang Xiaoning, born in 1951, was convicted of the charge of “incitement to subvert state power” after e-mailing electronic journals advocating a multi-party system, the New York-based watchdog Human Rights in China (HRIC) said in a statement. Wang’s journals, called Democratic Reform Free Forum and Current Political Commentary, included essays written under his real and pen names and by others advocating democratic reform.

Evidence cited in the verdict included “information provided by Yahoo Holdings (Hong Kong) Ltd. stating that Wang’s ‘aaabbbccc’ Yahoo Group was set up using the mainland China-based e-mail address bxoguh@yahoo.com.cn.,” HRIC said. Yahoo Holdings also confirmed that the e-mail address ahgq@yahoo.com.cn, through which Wang sent messages to his Yahoo Group, was a China-based account, it said. But the verdict did not indicate whether Yahoo Holdings or Yahoo China – which is now operated by mainland China-based Alibaba.com – provided specific information regarding Wang’s identity, the watchdog said. Pauline Wong, a spokeswoman for Yahoo Hong Kong, said she did not have any details about Wang’s case.

CAYMAN JUDGE REBUFFS U.S. RECEIVER’S REQUEST IN HEDGE FUND LIQUIDATION CASE

A Cayman Islands judge has reaffirmed the principle that the laws and courts of the jurisdiction will govern the liquidation of a Cayman incorporated company when it is wound up. Last month, Judge Henderson threw out an attempt by Clark Hodson, a U.S. court-apointed receiver, to take over the liquidation of PAAF, a hedge fund registered in the Cayman Islands and regulated by the Cayman Islands Monetary Authority (CIMA). PAAF collapsed in 2005 after the discovery of a substantial trading loss, which had been hidden from investors.

Hodgson had argued that a liquidation in the Cayman Islands would serve no practical purpose and would mean a duplication of effort, delay and increased costs. He also called for the distributions made to investors to be carried out in accordance with U.S. law. However, commenting on the case, Rob Gardner and Guy Locke of offshore legal firm Walkers observed that, “It is an overriding principle of Cayman law that, when a Cayman incorporated company is wound up, the laws and Courts of this jurisdiction will govern the liquidation. This principal was resoundingly reaffirmed by Judge Henderson in the matter of Philadelphia Alternative Asset Fund Limited. There is a line of English and Cayman Islands’ cases which provide for the recognition of receivers … However, none of these authorities provide for recognition, in the Cayman Islands, of a foreign appointed receiver of a Cayman Islands’ incorporated company.”

Receiver appointed for Bayou hedge fund’s onshore assets.

Jenner and Block has been appointed as the federal equity receiver charged with seeking recoveries for defrauded investors who invested approximately $450 million in the Bayou hedge fund, which collapsed last year. Jenner & Block partner Jeff J. Marwil will have complete and exclusive control over all of the domestic, onshore Bayou entities’ assets, including causes of action to recover funds for defrauded investors. His duties will include the identification of Bayou creditors, the pursuit of legal actions for the benefit of defrauded investors, the marshalling of assets, and the eventual distribution of recovered sums to creditors, including defrauded investors. It is alleged that almost since Bayou’s inception in 1996, the funds operated as a massive financial sham and Ponzi scheme, in which investors were lured to to invest approximately $450 million, subsequently pilfered by Bayou’s founders.

Samuel Israel III, the founder and chief executive officer of Bayou, and the firm’s CFO Daniel Marino surrendered to justice last October and waived their right to have the trial heard by a federal grand jury. Both men went into hiding after Israel wrote to investors last summer telling them that the Bayou hedge fund was closing and that their money would shortly be returned – a promise that Bayou failed to honor. Bayou used a phony accounting firm to audit its financial statements, which, according to federal prosecutors, contained glaring errors. One entity, Bayou Superfund, reported assets of $192 million and trading gains of $27 million at the end of 2003, when in reality it had a value of $53 million and had lost $35 million.

Mr. Marwil expects to coordinate and cooperate with the receiver appointed in the criminal cases of Bayou’s former executives in administering more than $100 million of forfeited assets, and the liquidators appointed in the Cayman Islands to administer affiliated Bayou offshore entities. Mr. Marwil is also serving as the receiver in another investor fraud case.

OPINION & ANALYSIS

MOVIE CRITICS AGHAST AT DIRECTOR WHO ACCURATELY PORTRAYS PRE- AND POST-CASTRO CUBA

Andy Garcia blew it big-time with his movie The Lost City. He blew it with the mainstream critics that is. Almost unanimously, they are ripping a movie 16 years in the making. In this engaging drama of a middle-class Cuban family crumbling during free Havana’s last days, in which he both directs and stars, Garcia insisted on depicting some historical truth about Cuba – a grotesque and unforgivable blunder in his industry. Now he is paying the price. Earlier, many film festivals refused to screen it. Now many Latin American countries refuse to show it. The film’s offenses are many and varied. Most unforgivable of all, Che Guevara is shown killing people in cold blood. Who ever heard of such nonsense? And just where does this uppity Andy Garcia get the effrontery to portray such things? The man obviously does not know his place.

And just where did Garcia get this preposterous notion of pre-Castro Cuba as a relatively prosperous but politically troubled place, they ask? All the Cubans he portrays seem middle class? Where in his movie is the tsunami of stooped and starving peasants that carried Fidel and Che into Havana on its crest, they ask? Where are all those diseased and illiterate laborers and peasants my professors, Dan Rather, CNN and Oliver Stone told me about, ask the critics? Garcia – that cinematic bomb-thrower – has seriously jolted the Mainstream Media’s fantasies and hallucinations of pre-Castro Cuba, of Che, of Fidel, and of Cubans in general. In consequence, the critics are unnerved and disoriented. Their annoyance and scorn is spewing forth in review after review.

You are better off attempting rational discourse with the Flat-Earth Society but nonetheless I will try to dispel the fantasies of pre-Castro Cuba still cherished by America’s most prestigious academics and its most learned film critics. I will even stay away from those “crackpots” and “hotheads” in Miami. In place of those insufferable “revanchists” and “hard-liners” I will use a source generally esteemed by liberal highbrow types, the United Nations. Here is a UNESCO report on Cuba circa 1957: “One feature of the Cuban social structure is a large middle class,” it starts. “Cuban workers are more unionized (proportional to the population) than U.S. workers. The average wage for an 8 hour day in Cuba in 1957 is higher than for workers in Belgium, Denmark, France and Germany. Cuban labor receives 66.6 per cent of gross national income. In the U.S. the figure is 70 per cent, in Switzerland 64 per cent. 44 per cent of Cubans are covered by Social legislation, a higher percentage then in the U.S.”

In 1958 Cuba had a higher per-capita income than Austria and Japan. Cuban industrial workers had the 8th highest wages in the world. In the 1950’s Cuban stevedores earned more per hour than their counterparts in New Orleans and San Francisco. Cuba had established an 8 hour work-day in 1933 – five years before FDR’s New Dealers got around to it. Add to this one month’s paid vacation. The much-lauded (by liberals) Social-Democracies of Western Europe did not manage this until 30 years later. And get this Maxine Waters, Barbara Walters, Andrea Mitchel, Diane Sawyer and the rest of you feminist Castro groupies – Cuban women got three months paid maternity leave. I repeat, this was in the 1930’s. Cuba, a country 71% white in 1957, was completely desegregated 30 years before Rosa Parks was dragged off that Birmingham bus and handcuffed. In 1958 Cuba had more female college graduates per capita than the U.S.

The Anti-Batista rebellion (not revolution) was staffed and led overwhelmingly by college students and professionals. Unemployed lawyers were prominent (take Fidel Castro himself.) The makeup of the “peasant revolution’s” first cabinet, drawn from the leaders in the Anti-Batista fight was 7 lawyers, 2 University professors, 3 University students, 1 doctor, 1 engineer, 1 architect, 1 former city mayor and Colonel who defected from the Batista Army. A notoriously “bourgeois” bunch as Che himself might have put it. By 1961 however, workers and campesinos (country folk)-made up the overwhelming bulk of the anti-Castroite rebels, especially the guerrillas in the Escambray mountains. Who ever heard of poor country-folk fighting against their benefactors Fidel and Che?

Before Castro, Cuba took in more immigrants (primarily from Europe) as a percentage of population than the U.S. And more Americans lived in Cuba than Cubans in the U.S. Furthermore, inner tubes were used in truck tires, oil drums for oil, and styrofoam for insulation. None were cherished black market items for use as flotation devices to flee the glorious liberation while fighting off Hammerheads and Tiger Sharks. The Communist apparatchiks Garcia depicts in his movie incarcerated and executed a higher percentage of their countrymen in their first three months in power than Hitler and his apparatchiks jailed and executed in their first three years.

Andy Garcia shows it precisely right. In 1958 Cuba was undergoing a rebellion not a revolution. Cubans expected political change, not a socio-economic cataclysm and catastrophe. But I fully realize such distinctions are much too “complex” for a film critic to grasp. They prefer boneheaded clichés. In their reviews we see – in all its classic splendor – the Mainstream Media’s thundering and apparently incurable stupidity on matters Cuban.

THE COST OF LIVING IS CHEAP

The cost of living is cheap. How do I know this? The proof is everywhere, for those who will see it. Bag ladies prove it every day. So do the poor, homeless veterans, and street people of all ages. Many are living on the street by accident, others by choice, but somehow they still manage to survive for years, even in the harshest of climates. These people have no home, no food, no income, no pension, no IRA, no health insurance, and no savings, yet they live on. How do they do it? They have learned to adapt to the worst of living conditions no matter what they were accustomed to before adopting their current lifestyle.

Some of them are also mentally ill, but most will never seek treatment, let alone receive it. Others would adamantly refuse to change their chosen lifestyle even if you paid them to do it. For this group, personal choice prevails. Anything else, by definition, is something less than freedom. This group understands that truth and no one has any moral justification to attempt to persuade its members to alter their lifestyles, as long as they are adults who have freely chosen them. This group knows just how cheap the cost of living really is, at least in terms of dollars. The other costs of living on the street (health, injury, disease, victims of crime, longevity, etc.) can be substantial, but they go with the territory.

What is expensive is the cost of living the way you would like to live. Many people work two jobs just to keep up appearances, or to keep their heads above water, or to maintain a certain lifestyle – one that they really cannot afford and would probably be much better off without – but who am I to judge the free choices of others? The problem is that in many cases these choices are far from free. They are often products of “something for nothing” thinking, the “free lunch” mentality of the State, and the “money from thin air” magic of the Fed. Easy credit, interest-only loans, refinancing, and artificially low interest rates all exacerbate the problem, resulting in millions of supposed adults who spend like drunken sailors on liberty, instead of saving for a rainy day.

These people are living a lie. They are all one paycheck from poverty, wondering why they just cannot seem to make it work. They would be much better off if they first selected a simple lifestyle that will make them happy and then determine how much it will cost. A simple lifestyle is not only much less expensive, it offers valuable free time for other enjoyable and inexpensive pursuits like thinking, reading, writing, walking, shooting, and fishing. Thoreau would agree completely. Once a simple lifestyle is chosen, a budget can be constructed. The possibilities leap out at you once you realize that a large nest egg is not required. The key is simply having sufficient cash flow to support your chosen lifestyle. How you achieve this is up to you.

WHO CARES?

Does anybody in America care that freedom, liberty and privacy are being diluted, diminished and destroyed? Or that government is running up some of the biggest deficits in annual spending, foreign trade and national debt ever recorded? Or that America has become a de facto world empire that already is in decline? Kevin Phillips’s new book, American Theocracy: The Peril and Politics of Radical Religion, Oil, and Borrowed Money in the 21st Century, puts together an amazing array of historical, religious, economic and political data to argue that the U.S. is about to join its imperial predecessors on the downhill slide – Rome, Spain, the Netherlands and Britain.

Phillips says the alarming signs are everywhere from the desperate attempt to retain oil sources by invading Iraq, to the “theocrats” seizing the Republican Party, to the evolution of the U.S. economy in which the production of valuable, manufactured goods has been replaced by a massive funny-money system of finance and, most ominously, government and private debt. The scope of this book is massive and his analysis reads like a warning. Phillips sketches a future bankrupted nation by a web of religious, energy and debt that leaves America, the world’s remaining superpower, all but helpless before emerging powers such as China, well before 2050.

An examination of empires in world history (Rome, Spain, Holland, and the United Kingdom), shows an identifiable progression from expansion, to dominance, to maturity and to what seems like inevitable decline. In that latter stage, governments and most people rarely see what is coming. Those who do can profit from their foresight. Phillips traces the imperial journeys of each of these empire nations. He goes back centuries and compares those historic events to the current situation in the U.S., the present world imperial power. Phillips examines many aspects of each nation’s imperial progress, politics, economics, religion, industry, finance and war. Although I do not agree with all of the author’s conclusions, you will come away fascinated with these disturbing past parallels. It is an eye opener – and not a pretty picture for Uncle Sam and Americans.

Phillips notes that two economic predictors of imperial end times are, (1) marked declines in a nation’s manufacturing and industrial capacity and, (2) an increase in what he calls “financialization” as all sorts of intangible financial services replace tangible production. In 2005, 45% of all corporate profits came from financial services and only 7% from manufacturing. And a lot of these modern “financial services” consist of little more than creating new forms of debt, then pushing all those debt papers around while collecting fees for doing nothing really productive.

In the declining years of the Spanish, Dutch and British empires, virtually the same patterns developed as we now see in the U.S. Similarities with the current dilemma of the U.S. include a huge national debt, major and continued deficit spending, worrisome huge trade imbalances and a decline in the value of the imperial nation’s currency. Sounds familiar, does it not? And yet another reason to consider offshore as the place for your financial haven.

THE GREAT CONSERVATIVE HOAX

Jacob Heilbrunn, writing in the Washington Monthly, uses various criticisms that leading conservatives have made of Bush to proclaim a new “conservative crackup”. In the course of his narrative, he rehearses the same old ho-hum history of postwar American conservatism, tells the same old story of how intriguing it is that conservatives are upset with the person they put into power, and then comes to the same old conclusion, that conservatism is deluded, and that we should all be leftists like him.

Yawn. So why am I writing about Mr. Heilbrunn’s article? To answer his final question: Who would have thought that, at the peak of the conservative movement’s political success, its founding fathers would recoil from the Frankenstein’s monster they created and end up as troubled heretics? Who would have thought? Anyone who follows these birds on a regular basis. They land on the telephone wires of power whenever the opportunity presents itself, and then they fly away when they fear an electric shock is coming. American conservatives can always be counted on to denounce a lame-duck president of their own party who is sinking in the polls. They worked hard to make Bush president, refrained from criticizing his egregious policies for years, focused all their ire on a mythically powerful left, and now that things are not working out so well, they bail out.

The conservatives denounce their presidents for the same reason that the left denounces Stalin. They want to evade responsibility for the results of the policies imposed by monsters that they themselves created. When the left does this, we know not to take it too seriously. If you give the state the right to expropriate all private property, you cannot be too surprised when dictators take over. Similarly, when the whole of your intellectual enterprise has been wrapped up in celebrating the nation-state and its wars, condemning civil liberties, casting aspersions on religious liberty, and heralding the jail and the electric chair as the answer to all of society’s problems, you cannot complain when your policies produce tin-pot despotic imperialists like Bush. You have no intellectual apparatus with which to beat them back.

The problem with American conservatism is that it hates the left more than the state, loves the past more than liberty, feels a greater attachment to nationalism than to the idea of self-determination, believes brute force is the answer to all social problems, and thinks it is better to impose truth rather than risk losing one soul to heresy. It has never understood the idea of freedom as a self-ordering principle of society. It has never seen the state as the enemy of what conservatives purport to favor. It has always looked to presidential power as the saving grace of what is right and true about America.

For my part, I am hoping that the whole conservative movement will go down in flames with the decline and fall of the Bush administration. The red-state fascists have had their day and instead of liberty, they gave us the most raw and stupid form of imperial big government one can imagine. They have given America a bad name around the world. They have bamboozled millions. They have looted and bankrupted the country. They have killed tens of thousands. If they do not crack up on their own, we must do what we can to discredit them and their ideology forever.

War and Faith

Bush is in big trouble. He is not my idea of a conservative, but he is the conservative liberals deserve. They have brought him on themselves, and I have no pity for them. Without them, he would not have been possible. For them to complain he is violating the Constitution is a joke for the gods. Whom do they think he learned from? Who has been teaching us that the Constitution is a “living document” that keeps “evolving”?

Still, they are right about Bush, and the polls suggest that the voters agree with them in a general way. The idea that the country is evenly divided between “red” and “blue” states appears unlikely to survive this fall’s elections. The day after his reelection Bush pledged to spend his political capital, and for once he has kept his promise. It is gone. Bush may leave office as the most unpopular president since Harry S. Truman. Though Truman is now widely regarded as a “great” president, this was far from the case in 1952, when he decided not to bother seeking another term. Truman’s undeclared war in Korea was dragging on endlessly. He was usurping powers in defiance of the Constitution. The public was sick of him. Many were calling for his impeachment. So it is with the incumbent.

Opposition to Bush has erupted in an unexpected quarter. The military feels he has bungled the Iraq war and fears he is planning even more disastrous military action against Iran, not ruling out a nuclear attack. Meanwhile, several retired generals – who presumably reflect the sentiments of many active officers who do not feel free to pipe up yet — are calling for the removal of Defense Secretary Donald Rumsfeld. Rumsfeld is the pinup boy of the neoconservatives, who feel such criticism of him verges on “mutiny”, “revolt”, and “sedition”. These officers do not want to lose the war. Their whole point is that Rummy’s conduct of the war is bringing defeat. But the suspicion grows that they think the war was misconceived in the first place, and that their real target is not Rummy, but Bush.

Both Bush and Iranian President Ahmadinejad, for all their piety, seem to think they are acting on behalf of the Almighty. Since they have clashing conceptions of the divine will, at least one of them may be mistaken. But Bush and Ahmadenijad and millions of others share one article of faith – faith in the state. That is, faith in the authority of organized force, and ultimately faith in war. Indeed, how many modern people can shake this faith? Very few, I am afraid. Many men who cannot believe in God find it nearly impossible to imagine society without the state – the threat of force. The more the state demands of us, the more harm it does, the more inconceivable life without it seems to become. Sometimes I think our coins should bear the legend, “In Caesar we trust.”

SOME INTERESTING FACTS ABOUT HOME SCHOOLING

The government education establishment appears to have given up trying to portray home schoolers as the religious-right fringe and as hillbillies who do not have the capacity to educate their own children. It is clear that home-schooled children outperform government-schooled children on achievement tests, so some still try to claim that home-schooled children are not well socialized. All such claims have been disproved in recent years. Additionally, home-schooling statistics reveal a few interesting surprises.

First, the achievement numbers. On standardized tests nationwide, home-schooled children on average hover around the 80th percentile in all subjects. (Be advised that such numbers are murky – many states and districts that report that home-schooled children perform at or above the 80th percentile also report that government-schooled children perform around the 60th percentile. Although I have not researched it extensively, I have yet to find a school district that reports that its own students are scoring below the 50th percentile, but about half of all districts must. At any rate, they all report that home schoolers are 15 to 30 points stronger than victims of government schools.)

Next, the racial statistics. While white people make up 65% of the population, they make up 75% of home schoolers. This should not be terribly surprising, as evangelical, libertarian Christians gave birth to the home-schooling movement, and most such folks are white. Here is the interesting part: While most minorities in government schools do worse than white children on standardized tests, among home-schooled children the differences disappear – black, Latino, and white home schoolers all do about the same. Guessing at cause and effect from snapshot statistics is risky, but two possibilities seem strongest, and both probably contribute. (1) Home-schooling families are self-selected, and the students and families with the least intellectual potential are the least likely to attempt home-schooling. (2) Government schools still do not treat black and Latino students exactly as they treat white ones.

With regard to socialization, even the government has admitted that home-schooled children at least develop all the social skills they need. This has been known for years. Agencies other than the government have uniformly found that home-schooled children are better socialized, and become adults who are far more active in their communities.

What sorts of folks home school? We know they are from all racial/ethnic groups, their average income is slightly below the median (probably because most of them are two-parent families with only one parent employed outside the home), and the parents’ educational attainment tends to be above average. Why families choose to home school seems obvious by now – the education is better, the children are safer, and parents can teach values and theology that are forbidden in government schools. One of the many reasons I plan to home school is that I expect to have energetic children, and I refuse to allow the government to chemically sedate them against my wishes.

Home-schooling is cheap. Government schools nowadays spend an average of $5000 per student per year. Home-schooling families spend an average of $600. Another surprise: There is little correlation between spending and achievement among the home-schooled, just as among the government schooled. Heck, if you are knowledgeable enough, all you need is pencil and paper, like Socrates. Finally, as to whether home-schooling requires immense time, effort, and expertise of parents, Jeff Tucker’s point bears repeating. With decent curricula, the children mostly educate themselves. And the children enjoy it – they are drawn to it instinctively. The curricula are available all over the Internet, in forms ranging from hardcover textbooks to fee-based online instruction.

There is every reason to home school, and only one reason not to. Unless you are an extremely energetic parent who needs little sleep, home-schooling requires a two-parent, one-income household. Unless the extra material goodies are more important to you than your children, you should home school. Otherwise, frankly, you should not have children. The upbringing of a child is more sensitive and important than just about anything else anyone could ever do. Doing it well for your children should mean more than anything else in the world, and home-schooling is the best way to do it.